- The marijuana tailwind has been great for the entire sector, but the most well-known companies got there for a reason. These teams not only caught the marijuana tailwind but have also executed well to capture the upside - it all comes down to quality operations and management
- It hasn’t received the same level of attention, but the neurology sector is seeing a similar tailwind. That’s culminated with a number of companies coming to the public markets with new medical devices that are pioneering a whole new approach to treating disorders associated with the brain and nervous system – like NVTR, NVRO, and ECOR. This is an immense $6 billion market opportunity in the coming years, and these companies are commanding big market valuations as a result
- Among them, one of the companies that just went public is Nexeon Medsystems (NXNN). They’re doing sales from their manufacturing business to the tune of around $8 million annually, which looks great next to the company’s $12 million market capitalization. Compared to the P/S multiple of some of their peers at 4-5X sales, the company could be significantly undervalued trading at less than 1X sales, and in 2019 they’re looking for their first regulatory approval in the $1.2 billion deep brain stimulation market
As marijuana has been legalized across Canada and parts of the U.S. in the last few years, marijuana stocks have performed well. But there's a transition underway, from story stocks and high-flying valuations to executing on sales. Aurora Cannabis (ACB) and Canopy Growth Corp (CGC) both reported huge quarters, some of their first since joining the big boards as US-listed equities. There are dozens of cannabis and related public companies today, but these and only a few others are the standout successes in size and awareness. Why? The common thread is proven management teams with deep insight into the underlying science and a record of running companies well in the past. In a sense, they're just repeating their success, this time with an amazing sector-wide tailwind that is driving both sales and investor interest in the space.
The same potential tailwind is happening in a much less well-known vertical. As our understanding of the brain has improved in the last ten years, scientists have figured out that we can modulate, stimulate, and depress specific areas with precision to affect health disorders and our capabilities. For example, stimulation can be a very effective treatment for Parkinson’s disease and epilepsy. Elon Musk has already started Neuralink, a company with the explicit goal of merging the human brain and electronics. Visionaries are coming up with all sorts of outlandish approaches to modulating the human brain to benefit humanity.
This is finally reaching the public markets in the form of some well-received new public companies: ElectroCore (ECOR) raised $75 million in a U.S. IPO last spring that valued the company at almost $400 million based on their newly approved gammaCore device that can treat the pain of headaches with a slight electrical current. Greatbatch (private) spinoff Nuvectra Corporation (NVTR) has a market value of $350 million based on their neurostimulation device Algovita for pain. Nevro Corp. (NVRO) is a $1.3 billion company based on their neurostimulation products for pain relief.
Like cannabis, the companies that emerge among neurostimulation tech will be those with management teams that can execute and take advantage of the secular tailwind. Nexeon Medsystems (NXNN) may be one of these. The company has a growing, revenue-generating medical device manufacturing business, doing work for established device companies globally. They're developing a couple of their own products and plan to seek FDA and European approvals in 2019 - a big inflection point for the company. With a successful management team and only $12M in market value for the stock, NXNN could be a top issue for 2019 and the upside possibility immense compared to their larger more well-known peers.
The Research Tailwind Fueling Companies Like Nexeon
Both invasive and noninvasive approaches to modulating the nervous system are seeing huge research efforts from the health care and tech industries alike. Some approaches are helping reduce chronic pain - noninvasively it's worth noting - while others are even helping severely paralyzed people improve their quality of life. It's helping people with neural prosthetics and artificial limbs get their sense of feeling back, and brain-machine interfaces are even cropping up. Facebook (FB) is reportedly working on technology to allow someone's thoughts to turn into writing on a computer.
One of the earliest and most successful applications has been in movement disorders, helping people with epilepsy find relief from seizures. Deep brain stimulation (DBS) involves tiny electrodes implanted in the brain coupled with a pulse generator to modulate the brain tissue that may be the source of the seizures or movement problems. It works very well in some patients, though is often limited by the invasiveness of the technology.
Research from Markets and Markets peg this global neuromodulation market at $6.20 Billion by 2020, growing at a CAGR of 11.2%.
The onslaught of entirely new therapeutic options for modulation devices has led to a host of public markets entrants like Nevro, ElectroCore, Nexeon, and Nuvectra.
Nexeon Going Undiscovered Yet Management Is Generating Revenue Already
Nexeon is the smallest of these companies, and may actually have the biggest upside potential of these newly public companies based on the steep discount to their peers. At $6 per share, NXNN is a $10 million company, barely a blip compared to the addressable market for its forthcoming products.
This is a revenue-generating company. Nexeon owns a medical device manufacturer called Medi-Line that generated $7.66 million in sales during the nine months ended Sept. 30, 2018. That's rare for such a small company, and it asserts expertise in the field. CEO William Rosellini has deep experience in the neurology field as a 15 year veteran, and R&D lead Luc Van Immerseel, Ph.D. was core to the development of Viant’s predecessor Synapse through CE approval. With enhancements to allow better sensing and directional stimulation for Viant, the product offering could be compelling compared to less adjustable products on the market.
Important Events Coming for NXNN In Next 12 Months, Worth 4X Based on Peer Analysis
In 2019, the company will bring its first proprietary device, a Deep Brain Stimulation product with some key advantages over older technology called Viant, to both Europe via a CE Mark and FDA via the PMA process. The company expects to file for the first in the third quarter, and the latter during Q4 of 2019. First, however, they will release results from an important pilot study of their other product, an auricular Vagus Nerve Stimulator (aVNS) for potential use in opioid withdrawal. A feasibility program should have data in the first quarter of 2019 according to the company's most recent investor deck.
By early 2020, NXNN hopes to have received a European CE Mark for their Viant solution (a clearance to market the device), followed by a FDA clearance in Q3. Importantly, Viant's clinical-grade platform was originally utilized by GlaxoSmithKline (GSK) as part of a joint venture with Google (GOOG) some years ago, offering top-notch validation of the technology.
The company has gone unnoticed since listing publicly, but with the market for these devices growing and the company bringing their own first products to market soon, that could change rapidly and the $10 million valuation might not last. Nuvectra (NVTR) recently announced preliminary 2018 revenue of around $53 million. The company has a $250 million market valuation recently, for a price-to-sales ratio for the public stock of about 4.5X. At the same 4.5X price-to-sales ratio for Nexeon, this could be a $40 million company, substantially higher than today if they can execute well and receive the same kind of valuation metrics based on sales.
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