Brainsway IPO Is A Major Bet On New Treatment

Israeli company Brainsway Ltd. (OTCPK:BRSYF), a biotech company which aims to cure depression and other brain diseases, has announced plans to go public on the NASDAQ. Nasdaq announced that Brainsway “filed on Monday with the SEC to raise up to $30 million in an initial public offering.” The company filed confidentially in November and has been on the Tel Aviv stock exchange since 2007, where Reuters reports that it has a market cap of ₪382.24 million ($103 million.)

This IPO will not be launching anytime soon. This is especially so as the SEC has not formally approved this IPO and will not until the U.S. government shutdown ends according to CNBC. But by a biotech company’s standards, there is quite a lot to like about Brainsway. While there is still discussion about whether Brainsway’s treatment will work over the long term, it has received FDA approval and thus offers a marketable product unlike many biotech IPOs. There are some financial concerns, according to cloud experts, but Brainsway is a much more appealing investment than many of its competitors.

Will TMS work?

Brainsway does not sell pills or gene therapy, but instead markets a medical device which uses Deep Transcranial Magnetic Stimulation (TMS) to treat depression and OCD. The fundamental question about this IPO is whether you believe TMS is a true alternative to drugs and psychotherapy, or is just a passing fad.

As the Mayo Clinic details, TMS uses magnetic fields to stimulate nerve cells in the brain to improve symptoms of depression. The theory is that electromagnetic currents can activate neurotransmitters which can help improve production of glucose and serotonin. Serotonin underproduction in particular has been figured to be a key cause of depression.

The idea of depression being cured with magnets may sound absurd, but TMS is not a new treatment. The first TMS devices were approved by the FDA in 2008 for NeuroStar, and the side effects of the treatment are limited to headaches and sometimes scalp discomfort. There are some concerns about whether TMS can fix depression over the long term as serotonin levels revert back to their old levels, and the treatment is only prescribed for those who have not been helped by medication or psychotherapy. But at the very least, Brainsway is working with a treatment which has shown to produce results.

Investors may worry about how Brainsway will compete against TMS treatments on the market, and Brainsway argues that its treatments are superior with its Deep TMS system. In its SEC report, Brainsway highlights advantages such as the fact that its electromagnetic coil or H-Coil is in contact with a much larger area of the patient’s head. Brainsway argues that its unique system “is capable of stimulating deeper and broader areas of the brain.”

But at the same time, Brainsway admits that its treatment is far from a sure thing. In its pivotal trial depression, patients had a positive response of just 38.4%, which while statistically significant compared to the sham placebo is lower than may be liked. Treatments for OCD “demonstrated statistically significant response and partial response rates of 38.1% and 54.8%” respectively.

TMS will thus almost certainly be a secondary treatment for such brain diseases, limiting the potential market. But Brainsway is pushing ahead with further clinical tests to see if Deep TMS could be used to help with smoking cessation and PTSD. Brainsway and Deep TMS may not be psychiatrists’ first choice to fight mental disorders, but it has a safe, reliable product which has potential applicability for those unable or unwilling to take medication.

Brainsway’s Finances

Since Brainsway has an established product, it is not totally dependent on outside funding like many biotech IPOs are. The company reported $7.4 million in revenue in the first nine months of 2017 followed by $11.6 million in the first nine months of 2018, representing revenue growth of 56%. Brainsway has made a gross profit, though net losses in the first nine months of 2017 and 2018 have stayed at around $4.3 million.

However, Brainsway’s cash numbers are less impressive. Brainsway had $14.5 million in cash on December 31, 2017, which then decreased to $10.6 a year later. The company has had consistently negative cash flow going back to 2016, which was only interrupted by a December 2017 funding round which raised ₪30 million.

A Competitive Biotech Market

As noted above, Brainsway is a much better prospect than the typical biotech IPO which promises to have a drug developed which might be profitable in the next three to five years. But does that make it a good prospect? The answer to that is a little bit harder.

On one hand, Brainsway has a reliable, marketable product. It is finding ways to expand its reach, whether by looking for alternative treatments for its product or using flexible pricing models to increase market acceptance in clinics or with psychiatrists. Its revenue is rising and the fact that it has a revenue at all sets it apart from most biotech IPOs. On the other hand, Brainsway has negative cash flow, a limited market as its product will not be psychiatrists’ first choice to fight depression, and faces competition from already established TMS companies as well as other anti-depression treatments.

Brainsway will not be going public for a while, especially if this shutdown continues to drag out for a long time, and we cannot say for certain if it is a good investment until we know its planned valuation. But in its upcoming roadshow, Brainsway needs to show how it will stand up to competition and increase market share.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.