1H 2013 Financials. Depression Test FDA Filing Expected Very Soon
By Brian Marckx, CFA
Brain Resource (OTC Markets:BRRZY) / (ASX:BRC.AX) filed their mid-year report for fiscal 2013 ending December 31, 2012. Revenue was well below our estimate as a result of less than expected Treatment Prediction Research revenue, the recognition of which is tied to progress of the iSPOT clinical studies. However, the lower revenue was partially offset by substantially lower than modeled operating expenses as BRRZY implemented a cost-efficiency program in late 2012 when it became apparent that revenue would come in relatively soft. As a reminder, and important to understand, is that Treatment Prediction Research revenue has no effect on cash flow (although the related expenses do effect cash flow) as this line item is simply recognizing unearned revenue (i.e. - cash already paid to BRRZY) as the trials progress or reach milestones.
The company continues to forge ahead with the iSPOT trials, clinical analysis, and the regulatory approval package for their depression test, introduction of new products, increasing their customer base and utilization related to their existing product suite including their flagship MyBrainSolutions, and with awareness building efforts. Particular recent highlights include the signing of several new high potential clients, analysis completed on the first 1,000 patients for the depression test, launch of the ADHD portal, and again being recognized by SharpBrains as one of the top five market leaders in brain health.
And as we detail below, awareness of the importance of brain health and Brain Resource's role in that effort continues to increase significantly which should bode well for the company's long term future, particularly now that they are nearing commercialization of their depression test.
See here for our full 19 page report on Brain Resource.
1H 2013 Results
Revenue for the first half of fiscal 2013 was $1.8 million, down from $2.1 million from the same period in 2012 and lower than our $3.0 million estimate. Similar to the 6/30/2012 period, the bulk of the yoy decrease and difference relative to our estimate was lower Treatment Prediction Research revenue. As a reminder, BRRZY was paid upfront (in 2007) by their collaboration partner for the iSPOT studies, which was recorded as unearned income. This unearned income then bleeds through to Treatment Prediction Research revenue - so this revenue "miss" is largely immaterial from a fundamental outlook perspective as it will be earned in future periods (we model all of the remaining $4.3MM to be earned through fiscal 2014).
While not to the extent of the miss on Treatment Prediction Research revenue, the other revenue line items also came in softer than our estimates and were lower on a yoy comparison. Brain Training products (MyBrainSolutions, MyCalmBeat) revenue fell 6% yoy to $219k and was lower than our $354k estimate while Clinical Decision revenue was down 10% to $218k and less than our $265k estimate. BRRZY noted that some employers had deferred some health-care spending as they awaited results of the U.S. presidential election which impacted Brain Training revenue. And while Clinical Decision revenue was relatively soft due to swings in foreign exchange, the lower revenue did not reflect demand for the products as related report volumes were actually up 5%.
As noted, BRRZY implemented some cost-efficiency initiatives in late 2012 to help offset softer revenue. Operating expenses were just $2.2 million, down slightly from $2.3 million in the year earlier period but well below our $2.8 million estimate.
Net income and EPADR were ($1.16) million and ($0.06) compared to our ($316)k and ($0.02) estimates, almost all of the difference relating to Treatment Prediction Research revenue.
BRRZY exited fiscal 1H 2013 (12/31/2012) with $5.1 million in cash and equivalents, down from $9.2 million at 6/30/2012. For the most recent six-month period, cash used in operating and investing activities was $1.64 million and $1.25 million, respectively. In 1H 2013 BRZZY also repaid $1.16 million of the borrowings from the JV ($2.1 million remains o/s).
BRRZY is beefing up its cash balance with a recent agreement to sell of 3.33 million ordinary shares through a private placement to Och-Ziff Capital Management (which also owns Brain Resource convertible bonds) for AUS $0.30/share. BRZZY expects to add to this AUS $1 million capital raise with subsequent stock sales in the near future.
<> Data Analysis Complete on First 1,000 Patients: BRRZY completed data analysis on the first 1,000 patients for its depression treatment test. The company had previously reported that the iSPOT-D had enrolled 1,800 patients and analysis was underway on the first 1,000. The most recent news that data analysis is now complete on the first 1,000 patients is a significant milestone. Importantly, the company notes that while they can not release specifics on the data as they prepare a manuscript for publication, the results "have shown that our test is able to predict, with clinically meaningful sensitivity and specificity, treatment response to the three most commonly prescribed antidepressants (escitalopram, sertraline, and venlafaxine)."
<> FDA Filing for Depression Test: BRRZY notes in the current half-year report that they are on track for a de novo filing for the depression test with the FDA. If acceptable as a de novo filing, FDA turn-around could be as quick as 90 days following the submission.
As a reminder on the background of the depression test, anticipated FDA filing and our assumptions regarding both; BRRZY had initially hoped to file for FDA clearance (de novo) of a depression test by the end of calendar 2012. The test is designed to predict who is most likely to respond to one of the three most widely prescribed antidepressants (the active ingredients in Lexapro, Zoloft, and Effexor). In late October 2012 BRRZY, following further discussions with FDA, updated this timeline noting that they planned on spending more time on their pre-IDE supplement in order to provide more detail in the regulatory submission. In late January the company noted that they expected to be able to make the FDA filing by the end of February 2013 - this has been only slightly pushed back as they finalize the package - and now they are shooting to have this filed within the next few weeks.
We note that our outlook and financial model had reflected a more conservative timeline based on our original assumptions that a PMA regulatory pathway (as opposed to de novo, which would likely be less rigorous and less time consuming than PMA) may be required and assumed launch of the product sometime in 2014. As such, BRRZY's previous update which pushed their expected de novo filing back from 2012 to 2013 did not (and still does not) impact our outlook or model. Work also continues on a genomic depression test. As a reminder, Brain Resource hopes to combine a genetic assay (BRRZY had been in discussions with a partner to develop an assay) with their cognitive iSPOT test depression test which will form the basis for a companion diagnostic to aid physicians with prescribing decisions of depression drugs as well as with pharmaceutical companies to aid in drug development. The company is currently in discussions with third-party payers and pharmaceutical companies in regards to eventual commercialization of both of these tests. BRRZY hopes to provide a further update on these two products in the near future.
BRRZY is also making initial preparations for the launch of its depression test, which includes raising additional capital to help support the marketing, sales and awareness-building efforts as well as to pursue regulatory approvals outside of the U.S.
<> Patents Filed: BRRZY filed four provisional patents in the U.S. related to the depression treatment test. These relate to a cognitive test, a genomic test, a psychophysiology test, and a white matter diffusion tensor imaging test.
<> 10 New Large U.S. Customers / Utilization Increasing: BRRZY added 10 new U.S. employer and large distribution client contract for its MyBrainSolutions platform. These include Cerner, Cornerstone of Recovery, Marsh Insurance, HelpNet EAP, LifeMap-Cambia and Self Health Network. BRRZY also notes that they currently have a pipeline of about 70 companies that they have ongoing dialogue with, any of which could presumably turn into contracted customers in the near future. As we've noted in the past, beefing up their customer base was a key goal for the company.
BRRZY continues to see increasing interest in their current suite of products. Site log-ins of their brain training products are up 70%, MyBrainSolutions has now been used more than 4MM times (up from 3.5 million through 6/30/12), and their backlog of potential customers continues to grow. Fueling this growth is increased utilization as well as growth in the user-base, which has increased by approximately 114k since July 2012 to about 500k in total currently.
<> ADHD Product Launched: BRRZY launched their new online ADHD management tool during the Health 2.0 conference in San Francisco in October. The product is designed to help manage ADHD in children and includes MyBrainSolutions for Parents, which focuses on assessing the child's strengths and limitations and PoweringUp, which is directed at the child and is designed to enhance attention, concentration and memory. The product received wide media exposure upon its introduction, was also highlighted at the 24th Annual International Conference on ADHD in San Francisco in November, and was rolled out with a $39/month subscription fee (initially discounted).
<> Recognized Again By SharpBrains: SharpBrains, the leading independent research firm covering the emerging field of brain training and brain health, again recognized Brain Resource as one of the top five market leaders in brain health. Along with CogState, Emotiv, Lumos Labs and NeuroSky, SharpBrains (www.sharpbrains.com) named Brain Resource as a pioneer and leader in brain health in its 211-page report entitled Transforming Health with Digital Tools to Assess, Monitor and Enhance Cognition Across the Lifespan: The Digital Brain Health Market 2012-2020. See here… http://bit.ly/ZJnc43 for our 12/6/2012 Investor Note explaining more about the SharpBrains recognition.
<> Spin-Off of Brain Health Solutions: BRRZY moved its brain health and fitness business into a wholly-owned entity called MyBrainSolutions, Inc. The company is exploring a spin-off of the business to investors whereby BRRZY would retain a portion of the interest in the business. We read this as an interest by the company to spend more time and resources on the iSPOT depression and ADHD diagnostic tests, which has long been considered the long-term growth driver of the company. With the depression test nearing commercialization, this seems like an opportune time to do just that. The company notes that they hope to announce more regarding the potential spin-off in the coming months. We currently continue to model the business as a wholly-owned portion of BRRZY until there's a definitive sale likely.
<> Awareness Building: Awareness of the importance of brain health and brain training continues to grow. BRRZY is actively engaged in this effort which has recently included the company's CEO of U.S. Operations, Dr. Greg Bayer authoring articles and being interviewed and quoted in various media including an online interview by Huffingpost (HuffPost Live) related to Tech Game Changers at the Consumer Electronics Show (CES 2013) in January (Savannah DeVarny, BRRZY's VP of Product Marketing also participated in this interview), authoring an article in Health 2.0 in February titled The Role of Digital Brain in Supporting Addiction Treatment and Recovery, and authoring a blog in the Huffington Post in January titled The Brain: On the Frontline of Digital Health in the Workplace (also related to CES 2013). Other recent media pieces which highlight the importance of brain health and Brain Resource's leading role in that effort include an article in Human Resource Executive Online titled Is Brain Health the Next Big Thing in January 2013, an article on FoxNews.com in October titled Computer games at work improve mental well-being, memory, in September articles in both CNNMoney (Companies turn to brain games to tackle work stress) and the San Francisco Chronicle (New tests help patients choose most effective prescription drug), and in August on article on Bloomberg.com (Brain Scans Seek Best Drug Match for Depression Patients) to name just a few.
Maintaining Outperform Rating
We have made some slight adjustments to our financial model following fiscal 1H 2013 financial results. We are maintaining our Outperform rating. Our price target has moved from $3.50/EPADR to $3.20/EPADR.
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