Today I’d like to begin my coverage of ClearPoint Neuro (NASDAQ:CLPT). CLPT is a “platform”, or as I like to think of it, a “picks and shovels” play in biotech. Its flagship product is a suite of tools to help precisely guide surgeons performing brain surgeries in an MRI setting and secondly to assist clinicians in accurately delivering drugs into the brain. But it is now in the process of expanding the core technology to help navigate in optical and CT (computed tomography) settings as well.
The company’s revenue model relies on obtaining recurring revenue from disposables, i.e., it follows the razor / razor blade model. Here is a slide from the most recent investor presentation illustrating this.
And this slide helps visualize CLPT’s flagship product suite:
The company has its hardware installed in about 60 neurosurgery centers in North America and Europe.
Moreover, it is growing in Europe as some of its clients begin conducting clinical trials at sites there. Here’s a snippet from the most recent earnings call discussing this:
Then moving on to your second question, from a geographic standpoint, I think if you look at what we placed in the first quarter, there were two in the United States, two in Europe. I would still expect there to be more placements in the United States this year than Europe but I think placements will take place in both locations, as we continue to gain some interest on our current products and as the number of our pharma partners begin clinical trials across Europe, that’s driving placements to some hospitals that have never used ClearPoint before.
“Four Pillars” Strategy
CLPT has given what it calls a “four pillar” roadmap to explain its go-to-market strategy. This strategy consists of (in chronological order of emphasis):
- The biologics and drug delivery segment. CLPT’s technology is used to precisely deliver drugs into the brain. It is less demanding than surgery but is still a significant improvement over previous methods.
- Neuro navigation for deep brain stimulus and the installation of brain-computer interfaces.
- Laser ablation for the removal of tumors and lesions.
- Global expansion of all three previously listed treatments.
The slide below shows some use cases of each of these four pillars as well as indicating where they are on the clinical pathway. For me this is a critical slide as it shows the breadth of programs and indications that CLPT is already involved in. Moreover, the market potential of several of these indications can approach or exceed $1B.
These latter points were highlighted during the most recent earnings call (with my emphasis):
If you add up the global opportunities across all of our current and future product lines, the results are quite impressive. Today, we are actively working directly or through partnerships on more than 35 different indications which is estimated to include more than one million new patients diagnosed each year. If those one million plus patients were all treated with ClearPoint’s enabling technology, the potential market is in excess of $12 billion annually. These markets, of course, will take time to develop but the sheer number of partnerships and opportunities we have today has diversified ClearPoint in a way that many individual therapy technologies cannot. We have many ways to win and to positively impact a large number of patient lives.
Key Advantage – Customer Persistence
The biggest reason I like CLPT is that it has a very strong moat, viz. that when any company uses its products as part of any procedure that will need FDA approval, CLPT’s products become part of the package that is submitted to the FDA. Changing to another vendor would thus mean re-testing and re-submitting to the FDA, a costly and timely exercise that every company would seek to avoid. Thus, once CLPT is chosen by a partner, barring completely dismal execution, CLPT will be part of the process indefinitely.
And here is a sampling of the partners CLPT currently has on its books:
Moreover, the company is continuing to sign up new partners as discussed on the most recent earnings call (with my emphasis):
[O]ur Biologics and Drug Delivery team continued to add additional partners and services here in the first quarter, increasing our total partner list to approximately 45. Over the past two years, we have been adding partners at a rate of more than one per month and believe that there is still a significant number of potential partners in neuro and spine that can benefit from ClearPoint’s hardware, software and cannulas. As expected, each new partner brings new revenue, particularly early-stage service revenue which grew 75% in the quarter.
Cash and Cash Burn
From the company’s latest 10-Q, we see that it has about $54M in net current assets and a quarterly cash burn of about $4.3M. As such the company doesn’t need to raise money in the near future, though it might have to before it becomes cash-flow positive. In future articles (when there’s a little more revenue history available) I plan to model future cash flow in order to come up with a target price, but for now it’s comforting to know the company is not in a cash bind.
Since 2013, CLPT has been growing continuously both in terms of number of procedures per year and annual revenues.
I believe that revenue growth will accelerate, not so much from new partners, but by substantially increased revenues at existing partners. This is because as any partner advances through its clinical process, the number of procedures increases significantly (think of the sample size of patients in a Phase I trial vs. the number of patients in a Phase III trial). The company alluded to this factor in its most recent earnings call (with my emphasis):
As a reminder, a key part of our strategy is to start working with our biologics partners well before they treat their first patient, so that we build relationships and familiarity with our products throughout the entire drug development process. Growth in this segment will continue from four primary sources: one, the addition of new partners and new indications into our portfolio to provide additional shots on goal and additional sources of revenue. Two, the addition of new services that we can provide to partners and become a more valuable provider to these companies that need our specific device expertise. Three, the progression through the development cycle from consulting to bench testing to preclinical testing to clinical trials to commercialization, each progression creating larger revenue opportunities for ClearPoint. And finally, number four, new creative ways to partner with pharma through co-development, milestones and potential royalties in the future. If we can continue to grow on all four of these axes, this will be a very exciting and diversified platform business for us.
The only reason I’m not rating CLPT a “strong buy” is that valuation metrics don’t scream “buy”. In fact, Seeking Alpha currently rates CLPT a D- on valuation (though the company scores substantially higher on all other factor grades).
Here’s SA’s summary of valuation (with the stock trading at $13.58):
The two biggest risks for CLPT are:
- The need to eventually raise money, which may or may not happen at the current stock price.
- That its partners fail to advance their products in the clinic. This latter risk, while very real, is somewhat mitigated by the breadth of CLPT’s partnerships.
CLPT has a compelling product line with a razor / razor blade revenue model that has been consistently growing. It has large addressable markets in front of it with a strong and broad partnership base. Most importantly, the nature of the FDA approval process provides the company with a strong moat.
As a result, and despite a high current valuation, I am long the stock and may add further. Once there is more revenue and cash flow information available, I hope to follow this article up with a detailed cash flow model to arrive at a long-term price target on the stock.