ClearPoint Neuro ($CLPT)

Thoughts on ClearPoint Neuro

Background

ClearPoint Neuro CLPT 0.00%↑ has built something of a cult following across the ethos of the X ‘fintwit’ community. Intrigued by the interest, I’ve spent some time digging through their last few 10-Q’s and listening to quarterly calls with CEO Joe Burnett and team. My personal thesis: I do see a thematic flywheel materializing and note that the next few years might prove to be a pivotal point in which this early stage commercializing medical device company begins to generate significant operating leverage.

Full Year 2023 Results

For 2023 revenues were $23.95M, up $3.4M or 17% from 2022 - pretty paltry growth for a company which trades at ~6X EV/2023 Sales and has never turned a quarterly profit. However as you peel back the layers, a distinctly more bullish thesis might be unfolding before our eyes, that of a stabilizing-margin, high-moat, flywheel effect playing out for ClearPoint across its two primary business segments.

Lets dig into the two primary operating segments as ClearPoint defines them:

Functional Neurosurgery & Navigation

FNN “primarily consists of disposable product commercial sales related to cases utilizing the ClearPoint system.” Segment success is a function of hospital partners and replacing incumbent offerings with a superior product; current use cases consist of “(a) the insertion of deep brain stimulation electrodes, biopsy needles, and laser catheters; and (b) the infusion of pharmaceuticals into the brain.” - Additional product offerings coming down the pipeline are the 2024 full market release of the SmartFrame OR Stereotactic System and 1.5 tesla LITT sometime thereafter.

More on LITT here:

The segment disappointed in 2023, finishing the year with $8.5M in revenues, down $600k or -7% from 2022 despite adding a number of hospital partnerships throughout the year (more on that in a moment). Reasoning given for the topline regression were the pausing of co-development program with a brain computer interface partner.

Despite the recent underperformance - the segment seems to have a number of tailwinds which could positively impact 2024:

1. Hospital Partnerships - At 2023 year end, ClearPoint counted 75 hospital partners for FNN product offerings; which has accelerated meaningfully with 8 additions in Q1FY24. To give perspective, ClearPoint added 8 hospital partners in all of 2023. However, across these partnerships today, a meaningful concentration of segment revenues come from their top 5 customers:

   “Our five largest hospital customers account for approximately 27% of our functional neurosurgery navigation revenues.”

   To me, this implies significant untapped upside to be captured as relationships continue to expand with existing hospital partners and customers realize the value of ClearPoint offerings vs. their incumbent competitors.

   Of course, the continued expansion of partnerships will be an important catalyst within the segment into the future. However, equally critical is the present opportunity to execute upon installment initiatives and further customer penetration through expansion of current relationships with partners.

2. Gross Margin Contribution - Growth in this area is meaningful to the operating leverage thesis. I estimate FNN achieves the strongest gross margins out of its’ operating segments today (I estimate 70% GM in 2023 and on a forward basis). Assuming the execution of additional installs, rollout of new product offerings, and expansion of current hospital partnerships, I forecast a modest return to growth to $9.5M for the segment (+12%) in 2024 contributing ~$6.7M in gross profits.

   

Biologics & Drug Delivery

BDD is primarily “focused on partnerships in the biologics and drug delivery space, supporting our customers from the earliest stages of their research through their clinical study and commercialization process.” ClearPoint boasts 50+ pharma partners today, working hand in hand with partners on the optimization of delivering therapies with pinpoint precision to targeted areas within the brain. The inherent moat lies within the intertwining of ClearPoints partnership model with their drug partners, wherein ClearPoint products are built into the regulatory approval process alongside each drug partner therapy. Additionally, the business collects service & license fees along the way as drug partners move through their respective regulatory processes, with fees increasing exponentially as partners move through each stage of approval. This model creates a capital-light ‘heads I win, tails I don’t lose’ dynamic for ClearPoint in which they are well compensated throughout the regulatory process with an opportunity for significant upside in the event of partner therapy approval. Listen to Joe discuss this point from the Q1FY24 call,

“First, we have reduced the success risk by having multiple shots on goal both across indications and across partners. We are currently active in more than 35 different disease states, meaning even if just a few of the diseases we encounter are solved, it could have a significant impact on our current revenue. Similarly, we have created redundancy within these indications, meaning we often have multiple partners looking to treat the same disease and do not need every partner to be successful, only one or two per indication. In this sense, we may be viewed as an attractive [ETF] of neuro biotechnology companies where we are diversified across both partners and diseases, but we also do not bear the capital risk of having to fund these expensive clinical trials, limiting our downtime.”

The segment soared in 2023, finishing the year with 49% revenue growth to $13.6M, driven by services and license fees as count and scope of partnerships with biologics partners continue to expand. Q1FY24 was much of the same with a blistering 61% YoY growth in the quarter. While the segment growth has been remarkable, these result could just be the tip of the iceberg. For 2024 I estimate ~32% growth to $18M for the segment driving $10.8M in gross profits assuming steady state continued partnership expansion & realized manufacturing efficiencies. The upside caveat to note with regards to this assumption is such that any forecast of this segment goes out the window provided one meaningful biologics partnership clears the hurdle of regulatory approval; In such a case, the biologics business would experience multiples of revenue growth within the segment, depending on the therapy.

Among the most immediately near term shots on goal for ClearPoint is its partnership with PTC Therapeutics PTC 0.00%↑ whose drug, Upstaza, has completed BLA submission with the FDA. Notably, Upstaza is already approved and in-use today as a leading therapy for AADC in Europe, the UK, and Israel. As noted, quantifying the impact here of approval/commercialization of partnered therapeutic programs makes sense to estimate on a case-by-case basis, however ClearPoint does guide towards the total opportunity noted within slide 11 of its investor presentation.

Full Year 2024 Forecast

Following a strong Q1 where we saw 59% gross margins on a heavy contribution from its lowest margin segment, I estimate $30.5M in full year revenues generating gross profits of ~$18.7M, (61% GM).

Given the recent raise, the balance sheet is now well capitalized with $35.4M in cash exiting Q1 and a quarterly burn rate of $(3.8)M. Going forward, I expect quarterly burn to decrease sequentially each quarter as Joe and team noted the operating team in place has sufficient capacity to support the further expansion of each business segment without adding meaningful headcount from here.

As such, I expect full year 2024 cash burn in the range of $(12-15)M and a cashflow positive organization by the end of 2025 with meaningful upside in the event that one or more biologics partners are successful in achieving regulatory approval.

This is not investment advice. The author holds a meaningfully long position in ClearPoint Neuro CLPT 0.00%↑.

All quoted lines within from ClearPoint Neuro FY2023 & FY2022 10Q’s:

https://ir.clearpointneuro.com/news-events/press-releases/detail/1113/clearpoint-neuro-reports-first-quarter-2024-results

https://ir.clearpointneuro.com/news-events/press-releases/detail/1106/clearpoint-neuro-reports-fourth-quarter-and-full-year-2023

https://ir.clearpointneuro.com/news-events/press-releases/detail/1082/clearpoint-neuro-reports-fourth-quarter-and-full-year-2022