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ClearPoint Neuro is a medical device company that is a pioneer in real-time MRI-guided neuronavigation
Massive market size for different conditions provides headroom for exponential revenue growth
Razor/Razor Blade Model provides customer stickiness and could improve the company's business fundamentals
System use volume is expected to recover following a recovery from COVID-19
DCF-based fair value estimate of USD26.20 (WACC of 7.69% and terminal growth rate of 3%)
ClearPoint Neuro is a medical device company, incorporated in 1998. It develops and commercializes products for performing minimally invasive surgical procedures (MISP) in the brain and heart under magnetic resonance imaging (MRI) guidance. The company is headquartered in Irvine, California, and has 65 US patents issued. In its early years, it largely focused on building an intellectual property portfolio. Since 2003, its focus has shifted to building out commercial applications for technologies developed in prior years.
Neuronavigation with Intraoperative MRI
Neuronavigation systems display real-time (intraoperative) or preoperative images of the patient’s brain for the purpose of guiding the surgeon’s surgical instrument to a specific target within the brain. In neurosurgery, target regions can be located deep within the brain and can be as small as a few millimeters in diameter. This calls for the need for precision to avoid damaging adjacent areas responsible for important neurological functions, such as memory or speech, or penetrating blood vessels which can lead to a life-threatening hemorrhage.
Conventionally, the patient’s skull is imaged preoperatively and the preoperative image is used to guide the surgeon when performing surgery. This leads to errors in the alignment due to brain shift caused by gravity, head position, fluid drainage, use of drugs, swelling of brain tissue, or more during surgery. As a result, there are often discrepancies between preoperative data and actual patient anatomy. A lot of adjustments have to be made during the operation and it is not uncommon for the procedure to last six or more hours.
Magnetic resonance imaging (MRI) guidance uses magnetic fields to produce images of the patient’s brain in real-time during the operation. Surgeons will also be able to see the placement of surgical instruments in the patient’s brain and monitor any changes in real-time. This allows for more accurate guidance and hence safer and shorter procedures.
ClearPoint’s business can be split into 2 arms: (1) Neuronavigation for neurosurgery at hospitals, and (2) Biologics and Drug Delivery for pharmaceutical and biotech companies.
Hospitals make use of the ClearPoint system to perform functional neurosurgery. Pharmaceutical and biotech companies, also known as “partners”, are developing methods to deliver a wide variety of molecules to targeted brain tissue and would need to bypass the blood-brain barrier for the treatment of a variety of disorders. These partners have to undergo FDA-mandated clinical trials before their products or methodology is ready for commercialization. While significant uncertainty exists, ClearPoint can expect to share in their commercial success through the use of their products and services in delivering Partners’ therapies.
1. ClearPoint System
The ClearPoint System is a neuronavigation system that provides real-time MRI guidance. It allows surgeons to see in real-time the target site within the brain through MRI, guide the surgical instrument to the site, deliver the therapy, and monitor for adverse events and complications in real-time.
The video below provides a clear overview of how the ClearPoint System works:
The ClearPoint System consists of the (1) hardware, (2) software, and (3) disposables.
The ClearPoint reusable hardware includes a head fixation frame that immobilizes the patient’s head during the procedure, a computer workstation, and an MRI-compatible in-room computer monitor to view images of the patient’s brain.
The ClearPoint software runs on the workstation and is used to guide the physician in all aspects of a ClearPoint procedure, including surgical planning, device alignment, navigation to target, procedure monitoring, and report generation at the conclusion of the procedure.
Disposable components are built around the SmartFrame disposable trajectory frame. The SmartFrame trajectory frame is what is fixed to the patient’s skull after a small hole has been created. A hand controller is then attached to the SmartFrame (right image) which allows for precise adjustment of the trajectory such that the insertion of the intervention device matches the path mapped by the Clearpoint Software.
The Clearpoint System can be used to treat neurological diseases including movement disorders such as Parkinson’s disease, essential tremor and dystonia; psychiatric disorders such as major depression, obsessive compulsive disorder, Alzheimer’s disease; and brain tumors, such as glioblastoma multiforme. As such diseases progress, drugs become less effective in treating the patient, calling for the need for local therapies. Such local therapies involve the insertion of a catheter, probe, or electrode into a target region of the brain. These target regions are typically located deep within the brain and can be as small as a few millimeters in diameter. This calls for the need for precision to avoid damaging adjacent areas responsible for important neurological functions, such as memory or speech, or penetrating blood vessels which can lead to a life-threatening hemorrhage.
2. SmartFlow cannula
The SmartFlow cannula is compatible with the ClearPoint system. It is an MRI-compatible thin tube used for the injection of drugs directly into the brain or for the removal of fluids from the brain. It is a single-use disposable device used largely in clinical trials.
This video shows how the SmartFlow cannula can be used with the ClearPoint System.
In 2010, the ClearPoint system received 510(k) clearance in the US for general neurosurgical interventional procedures. The SmartFlow cannula for drug delivery is predominantly investigational in the US. In the EU, the ClearPoint system and Smartflow cannula received CE marking approval in 2011 and 2018 respectively. This means that the ClearPoint system is legally approved for use in the US and EU.
Key Revenue Streams
(1) Disposables and service revenue from functional neurosurgery
(2) Disposables and service revenue from biologics and drug delivery
(3) Capital equipment and software sales to hospitals and partners
The company has had a strong case volume and revenue growth in the last seven years. The number of cases grew by ~5x from 163 cases in 2013 to 801 cases pre-pandemic in 2019. Revenue in all three segments has also grown substantially with Functional Neurology growing by ~3x from 2014 to 2019 and Biologics and Drug Delivery growing by ~8x from 2014 to 2020 despite the COVID-19 pandemic.
The company’s gross margin increased from 54% in FY2016 to 71% in FY2020. The company is currently operating profit negative (making operating losses) due to its high R&D expense, and SG&A expense.
Stock Price Movement
The chart above shows the company's stock price movement relative to different events.
ClearPoint competes in the minimally invasive neurosurgical systems market. According to Research and Markets, the global minimally invasive neurosurgical systems market was valued at US$417.7m in 2019 and is anticipated to reach US$1,237.6m by 2030, growing at a CAGR of 11.8%. Factors contributing to the industry’s growth include a preference for safer options than open surgical procedures and the increasing accuracy and affordability of minimally invasive options. Another key growth driver is the growing incidence of neurological disorders like movement disorders, psychiatric disorders, brain tumors and more. According to the Global Health Data Exchange, the global burden of neurological disorders, measured by the absolute number of disability-adjusted life-years (DALY; the sum of years of life lost [YLLs] and years lived with disability [YLDs]) increased from 68.7 million in 2000 to 97.7m years in 2019. This trend can be attributed to growing global populations and life expectancy as the prevalence of major disabling neurological disorders steeply increases with age.
Even though ClearPoint has only received clearance to market its products in the United States and the EU thus far, we believe that it has the potential to expand internationally when it achieves sufficient production capabilities as treatments for neurological diseases are largely universal.
Currently, ClearPoint is the only provider of MRI-guided neuronavigation systems in the market. There are 2 key ways in which real-time images of the patient’s brain can be generated:
While the MRI produces the most detailed images of the patient’s brain and can be used to obtain real-time images right before incisions or holes are made on the patient’s skull, it requires more expensive and much larger machinery than an ultrasound.
The table below provides a comparison of ClearPoint along with key competitors that the company highlighted in its annual report.
Neuronavigational can be done using both preoperative images of the patient brain taken before the surgery as well as real-time images. The latter provides more accurate imaging as brain shift can cause discrepancies between preoperative data and actual patient anatomy. This in turn enhances the safety of the procedure as a whole.
The key advantage of ClearPoint’s system is that it utilizes MRI to obtain real-time images of the patient’s brain. Unlike ultrasound, MRI is able to give surgeons a clear image of the patient’s brain without making any incisions of holes in the skull. The scan depth of ultrasound probes is rather shallow and can only work after the operation has begun as it cannot give a clear image through the skull. Therefore, MRI imaging gives the most precise guidance for minimally invasive neurosurgeries while ultrasound probes work better for high-intensity surgeries where constant monitoring is needed like craniotomy (where part of the skull is removed to access the brain) to remove brain tumors, blood clots or foreign objects. However, accessibility might be an issue as the ClearPoint system requires an MRI suite, limiting their target customers to only hospitals with existing MRI suites.
In later stages of neurological diseases, the effectiveness of treatment via a systemic approach, such as the prescription of oral medication, decreases significantly. As such the medical community has been on the search for new “local” or non-systemic therapies to treat these patients.
We believe two observations may be made when a procedure moves to a minimally-invasive approach: (i) the number of patients who are eligible for these procedures grows significantly; and (ii) surgeons come to rely on an imaging modality to facilitate live image guidance to see inside the body in place of visualizing anatomy in an open procedure. Stereotactic neurosurgery incorporates imaging to help surgeons see through the patient’s skull
Market Sizing: ClearPoint Neuro estimates that there are 400-500 functional neurosurgery centers worldwide with surgeons on staff with the capability to perform the type of MRI-guided minimally invasive neurosurgical procedure described.
US Market: ClearPoint believes that are more than 55,000 potential neurosurgical procedures per year in US which ClearPoint systems can be used as a navigational platform for functional stereotactic neurosurgery, which includes:
- Electrode Placement (ClearPoint system provides real-time visualization of placement of Deep-Brain Stimulation (DBS) electrodes, which they believe will drive growth in number of potential procedures)
- Brain Tumour Biopsy (Biopsy needle to reach brain tumour and accurately acquire a representative sample of the tumour)
- Gene therapy and drug delivery in the brain
Thesis 1: Massive Market with its Full Potential Yet to be Fully Unleashed
The ClearPoint system is currently used predominantly in functional neurosurgery for two procedures to treat three neuro disorders:
1) Deep Brain Stimulation
2) Laser Ablation
Within these existing applications, ClearPoint estimates that the current total addressable market in the United States is USD432m and is expected to experience high growth. With revenue totaling just USD12.8m in 2020, ClearPoint has less than 3% share in these markets and is only just starting to gain a foothold.
Deep brain stimulation (DBS) is a neurosurgical procedure involving the implantation of electrodes in certain brain areas that will generate electrical impulses to control abnormal brain activity. It is an established treatment for people with movement disorders like Parkinson’s disease and Epilepsy. Researchers are currently exploring if the same method can be used to treat other conditions from depression to obsessive-compulsive disorder (OCD). Should DBS be approved as a treatment for these other conditions, ClearPoint could see a massive growth in its addressable market.
According to our back-of-the-envelope calculations accompanied by our assumptions, we arrived at a market size of USD254,850,000 for ClearPoint Neuro in the US Deep Brain Stimulation market alone. In calculating the market size for new treatments, we have applied a discount rate according to the current clinical trial stage each treatment is at.
Our rudimentary calculations derived a USD180 million market size for CLPT for laser ablation in the United States alone. Our estimates are conservative when contrasted with ClearPoint’s estimates of $270 million and $90 million for the Laser Interstitial Thermal Therapy (LiTT) for Epilepsy and Tumors respectively.
Compared with CLPT’s USD6.3 million revenue for its Functional Neurosurgery segment in FY2020, we believe the estimated over USD400 million combined market size for CLPT represents an enormous revenue growth headroom for the company. We also note that our calculations only included patient populations in the United States and expansion into other geographies could provide further room for revenue growth in the Functional Neurosurgery segment.
Biologics and Drug Delivery
In the Biologics and Drug Delivery segment, the ClearPoint system and the SmartFlow cannula is used by several pharmaceutical companies to deliver drugs and biologics under such companies’ clinical trials. We believe current sales levels only represent a fraction of ClearPoint’s full potential in this market given that current levels are derived only from the sales of services related to customer-sponsored clinical trials and of related disposable products.
According to ClearPoint Neuro, the indications for which the ClearPoint system can be used add up to a USD1.5 bn opportunity. As of 31 December 2020, ClearPoint is partnered with approximately 25 pharmaceutical and biotech companies, representing a 25% yoy growth from 2019. ClearPoint’s current partners include reputable pharmaceutical companies such as PTC Therapeutics, Neurocrine Biosciences, Voyager Therapeutics, Sio Gene Therapies, BlueRock Therapies, LysoGene, and Charles River. ClearPoint also identified another 75 potential partners, which they are actively reaching out to.
We see plenty of optionality in this model as ClearPoint shares in the commercial success of partners through the use of its devices in delivering Partners’ therapies. We believe ClearPoint’s respectable number of partners and potential partners significantly increases the chances of one or more of ClearPoint’s partners clearing clinical trials and successfully commercializing their products, directly leading to an increase in demand for ClearPoint’s products.
Thesis 2: Razor and Blade Model provides stickiness and improving business fundamentals
Disposables Drive Recurring Revenue Stickiness
The company’s razor and blade model provides a sticky business. According to our estimates, revenue from CLPT’s disposable products as a percentage of total revenue has grown from ~83% in FY2016 to ~88% in FY2020. We believe that this high and growing recurring segment provides a firm support for CLPT’s total revenue.
The stickiness of CLPT’s disposable segment is demonstrated in 2020 where revenue from sales of disposables continued to rise by ~19% despite a fall in reusable hardware and software sold attributed to the postponement of capital expenditure activities by many hospitals due to the COVID-19 pandemic.
Exponential Increase in Total Revenue Expected as Reusable Hardware and Software Sales Increases
We also opine that as capital expenditure on ClearPoint’s reusable hardware and software increase, revenue from the company’s disposable would increase exponentially. This is evident from the higher CAGR, for both the last four years and five years of Disposables revenue to the CAGR of Reusables revenue. As a result, we believe that CLPT’s recurring revenues (disposables segment), and hence total revenue, will continue to increase exponentially as the number of reusable hardware and software sold increases.
Prospective Margin Expansion as Share of Disposables Increase
While the company does not disclose its gross margins by disposables and reusable hardware and software, our simple analysis reveals that gross margins have improved by ~17.1 percentage points (ppt) when the share of disposables revenue as a percentage of total revenue increases by 5.5ppt. We believe that this is highly indicative of the higher margins for disposables compared to reusable hardware and software. Combined with our expectations of a higher revenue contribution from the disposables segment, we anticipate an increase in the company’s gross margins in the years to come.
Thesis 3: COVID-19 Recovery play: Elective Procedures Expected to Recover Following COVID-19 Recovery
Pause in Elective Surgeries
ClearPoint Neuro experienced strong Pre-COVID 19 growth (21% procedure volume CAGR and 28.5% functional neurosurgery sales CAGR) from 2013-2019 due to greater adoptions of ClearPoint’s system.
The COVID-19 pandemic has resulted in the pausing or even postponement of elective surgeries in the US and ClearPoint Neuro has not been spared. According to the company’s FY2020 annual report, elective surgical procedures represented ~80% of its system case volume. In 2020, there was a 15% fall in number of cases and an 11% fall in functional neurosurgery sales, which the company mainly attributed to COVID-19, from 801 cases in 2019 to 682 cases in 2020.
While the US has been quite badly hit by COVID-19, the number of new cases seemed to have peaked and appears to be stabilizing.
The US fares relatively well in terms of inoculation rates and vaccine population coverage. According to Bloomberg, the vaccination rate in the US is 3,127,038 doses per day, on average. At this pace, Bloomberg estimates that it will take another three months to cover 75% of the population. More supply is also on the way and drug makers have promised to deliver enough shots to fully vaccinate more than 300 million people by the end of June 2021, which is more than enough for every adult.
At the same time, we are also beginning to see recovery in hospital facilities with the number of people that are hospitalized as a result of COVID-19 in the US falling below 50k (~45.8k as of 20 April 2021) from its peak of more than 100k.
Since the fall in the number of cases where the ClearPoint system was used was mainly attributed to the COVID-19 pandemic, we opine that given a strong recovery from the COVID-19 situation in the US, the number of ClearPoint system usage cases will recover and continue to experience high growth. Coupled with our belief that more hospitals will resume their purchases of ClearPoint’s reusable hardware and software as the COVID-19 situation improves, we believe total revenue figures will continue to grow exponentially.
Based on our Excel financial model, which is accessible to our Snowball Community members for download [sign up here], we derived a fair value/share of USD26.20 using a Discounted Cash Flow analysis (DCF) with the Gordon Growth Method as our primary valuation method. This represents a possible upside of 26% from the last closing price of USD20.83. We supported our valuation with a DCF using the Exit Multiple Method, which yielded a fair value/share of USD25.06.
- Applied WACC of 7.69% derived from the Capital Asset Pricing Model with 6.79% cost of debt and 7.74% cost of equity.
- Terminal growth rate of 3.0%
- FY2025 EV/EBITDA exit multiple of 10.6x, which is the median peer EV/EBITDA multiple
- Levered Beta of 1.31
The tables above show CLPT’s sensitized fair value in our Exit Multiple Method and Gordon Growth Method DCF computations.
Risks and Catalysts
Inadequate reimbursement from third-party payors
In the United States along with many countries, healthcare providers rely on third-party payors like government payors, such as Medicare and Medicaid, and private payors to cover all or part of the cost of medical devices used in procedures.
In the United States, coverage for procedures which utilizes ClearPoint products in hospital inpatient setting falls under Part A of the Medicare program. Under Medicare Part A, Medicare will categorize each patient according to their condition and other patient data and procedures performed. It then reimburses acute care hospitals a fixed amount based on the classification, regardless of the actual cost of procedures, items and services that the patient’s condition requires. Hence, acute care hospitals are incentivized to lower costs by utilizing devices that will reduce the length of inpatient stays, decrease labor or otherwise cost less.
Up till now, Medicare law prohibits hospitals from paying physicians to assist in controlling the costs of hospital services. Hospitals have traditionally stocked supplies and devices requested by physicians and have limited ability to restrict physicians’ choice of products and services.
However, outstanding legal issues surrounding the Affordable Care Act could result in increased coordination between hospitals and physicians and alignment of financial incentives to control hospital costs. Reforms may lead to voluntary reductions in the array of choices currently available to physicians with respect to diagnostic services, medical supplies and devices, which could result in hospitals reducing the overall number of vendors from which they purchase supplies, equipment and products. The Affordable Care Act remains subject to pending legal and constitutional challenges in the United States Supreme Court. The Court has yet to issue its opinion, and it is difficult to say for certain what the decision will be. However, any cuts in operating costs or reduction in reimbursements may deter healthcare providers from purchasing ClearPoint’s devices.
High Customer Concentration
In 2020, one pharmaceutical customer, for whom ClearPoint provides clinical services in support of the customer’s clinical trials and earns a quarterly fee, accounted for 28% of ClearPoint’s total revenue. ClearPoint’s five largest hospital customers also account for ~36% of our functional neurosurgery navigation revenues. Because of ClearPoint’s current customer concentration, its revenues could fluctuate due to a reduction or delay in its biotechnology and pharmaceutical customers’ clinical trials, or in orders from any of the company’s significant hospital customers.
COVID-19 worsening especially in the United States
As mentioned in our third thesis, COVID-19 has led to a sharp fall in elective procedures and consequently the use of the ClearPoint system for its Functional Neurosurgery segment. Although we believe that the risk of a deterioration is not high, any resurgence in the number of new cases and hospitalization due to COVID-19 could prolong the ClearPoint system's use in elective surgery.
Competitors with Deep Pockets
ClearPoint faces competition from many large, well-known companies like Medtronic, Abott, and more. These companies have long histories and strong reputations in the medical space. Many of them also have substantially more financial, manufacturing, marketing and technical resources than ClearPoint. ClearPoint will be under pressure should these companies decide to enter into the intraoperative MRI-guided neuronavigational space with their own products.
Additionally, while ClearPoint presents the best-in-class neuronavigation system, there exists many substitutes for the ClearPoint system. As presented in the “Industry Overview” section companies like Brainlab, Medtronic, Zimmer and FHC also offer devices and systems for use in conventional stereotactic neurosurgical procedures. Within the Deep Brain Stimulation space, both St. Jude Medical and Boston Scientific received FDA clearances for use of their DBS systems in an MRI setting for the treatment of epilepsy, competing directly with ClearPoint.
Results for Customer-sponsored clinical trials utilizing ClearPoint’s Products
ClearPoint’s customers for its Biologics and Drug Delivery segment consist of pharmaceutical and biotech companies that are developing methods to deliver a wide variety of molecules, genes or proteins to targeted brain tissue or structures that would need to bypass the blood-brain barrier for the treatment of a variety of disorders. This is a novel area in which commercialization must be preceded by FDA-mandated clinical trials. Currently, the recurring revenue (from Disposable Products and Services) from the Biologics and Drug Delivery segment only amounts to USD200k per partner. We believe that any one of ClearPoint’s partners reaching commercial success (passing all phases of clinical trials) will significantly boost the use of ClearPoint’s products and services in delivering its partner’s therapy.
Improvement in the COVID-19 Situation in the United States
The United States has been doing relatively well in terms of inoculation rates and securing vaccines. We believe that further vaccine approvals, fall in COVID-19 cases, and fall in COVID-19 deaths, especially in the United States would provide patients with more confidence to return to hospitals to undergo elective surgeries for refractory conditions, driving the use of the ClearPoint system.
Successful Entry into Europe
In late 2020, ClearPoint Neuro started leveraging on the CE Marks for its ClearPoint system and SmartFlow cannula by establishing an initial presence in Europe for product sales and clinical advisory services. While it is still early to determine the success of the company’s foray into the foreign market, a successful entrance could mean a significant increase in key performance indicators such as case volume, active surgical centers, and number of Biologics and Drug Delivery Partners. A successful entrance could therefore potentially improve the company’s top and bottom line significantly.
The current closing price of USD20.83 presents an attractive entry opportunity into a medical device company that could potentially improve different minimally invasive surgical procedures in the brain. We see significant upside given the enormous market size, its superior razer and razer-blade model, and given that COVID recovery seems to be underway in its primary market the United States.
We would also like to highlight that the current fair value derived only accounts for ClearPoint’s existing applications in DBS and laser ablation. In the medium to long term, ClearPoint has plans to enter new markets with its products such as the biopsy market, launch a robotic system that further increases the accuracy of insertions, expand its suite of product offerings to include devices that can be used in normal operating rooms and more. There are many optionalities stemming from these new use cases that can open up multi-million dollar markets for ClearPoint.
Thank you for reading,
Elena and Shawn
Disclaimer: We are short CLPT $20 July 16 puts. This article is not an investment (buy/hold/sell or otherwise) recommendation, this is only for educational and discussion purposes. This article is not tailored to the specific circumstances of any reader. I/we/The Snowball do/does not purport to be in the business of providing financial advice and the contents of the article should not be regarded as such.