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Edited Transcript of BRIN.TA earnings conference call or presentation 26-Aug-19 12:00pm GMT

Q2 2019 Brainsway Ltd Earnings Call

Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Brainsway Ltd earnings conference call or presentation Monday, August 26, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hadar Levy

Brainsway Ltd. - CFO & COO

* Yaacov Michlin

Brainsway Ltd. - CEO & President

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Conference Call Participants

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* Craig William Bijou

Cantor Fitzgerald & Co., Research Division - Research Analyst

* Jayson Tyler Bedford

Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst

* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

* Robert A. Yedid

LifeSci Advisors, LLC - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Brainsway Second Quarter 2019 Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Bob Yedid. Please go ahead.

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Robert A. Yedid, LifeSci Advisors, LLC - MD [2]

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Thank you, Summer. I'd like to welcome all of you to Brainsway Limited's Second Quarter 2019 Conference Call. With us today are Brainsway's Chief Executive Officer, Yaacov Michlin; and Chief Financial Officer, Hadar Levy. They will provide an overview of the company's business activities and developments for the second quarter. (Operator Instructions)

Before I turn the call over to Yaacov and Hadar, I would like to remind you that this conference call, including both management's prepared remarks and the Q&A session, may contain projections or other forward-looking statements regarding future events or the future performance of Brainsway, including, but not limited to, any statements relating to commercial plans or activities, financial projections, clinical studies, R&D plans and/or anticipated time lines.

When used in this call, the words anticipates, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to Brainsway are, as such, a forward-looking statement. These statements are only predictions, and Brainsway cannot guarantee that they will, in fact, occur. Brainsway does not assume any obligation to update that information.

Investors are cautioned that all forward-looking statements involve risks and uncertainties which may cause actual results to differ from those anticipated by Brainsway at this time. Additional risks concerning factors that could cause actual events, results or achievements to materially differ from those contained in the forward-looking statements are found in the company's registration statement on Form F-1 and in other filings with the Securities and Exchange Commission.

Today, the company issued a press release announcing its financial results for Q2. So participants in this call who have not already done so can find this release on Brainsway's website as we provide a summary of the results on this call.

With those prepared remarks, it's now my pleasure to turn the call over to Brainsway's Chief Executive Officer, Yaacov Michlin. Yaacov?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [3]

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Thank you, Bob. Welcome to Brainsway Second Quarter 2019 Earnings Call. We entered the second half of the year with growth and strong confidence in our business. I will focus my remarks today on what is driving the growth in our business and review the catalysts anticipated from our pipeline.

I would like to begin with a very brief reminder of Brainsway business, our Deep TMS technology and key targeted markets. Our Deep TMS system has FDA clearance for major depressive disorder, or MDD, and marketing authorization for obsessive-compulsive disorder, or OCD, and outside the U.S., we have CE Mark for additional indication.

Our Deep TMS system has demonstrated clinical efficacy in MDD and OCD, is well tolerated and has the potential to address a wide variety of psychiatric, neurological and addiction disorders. We believe that our Deep TMS technology has significant key advantages over available focal TMS solutions, including greater depth, extensive neuron activation and deep and bold treatment.

A significant market opportunity exists for our FDA-cleared indication. Based on market estimates, there are 16 million MDD U.S. adult patients. We estimated over 3 million U.S. adults who suffer from MDD do not reach remission after trying 3 to 4 antidepressant drugs and have private or public insurance coverage. There are about 2 million OCD U.S. adult patients. Of those, we estimated about 400,000 OCD adult patients are considered treatment resistant and looking for a different solution other than drugs and cognitive and behavioral treatments. We, at Brainsway, continue to work to gain insurance coverage in the U.S. for OCD therapy.

As a reminder, in the second quarter, we completed a successful NASDAQ IPO with gross proceed of over $30 million and began trading on the NASDAQ on April 17.

Let's turn to our key results for the second quarter. We are very pleased with our second quarter results. We installed 40 Deep TMS systems. In addition, 30 Deep TMS OCD coils were shipped to current and new customers as we reached the total of 115 OCD coils shipped as add-on helmets to our Deep TMS system to current and customers. I'm reminding you that Brainsway received FDA marketing clearance in this indication only in August 2018.

We drove quarterly record revenue of $5.7 million, a robust increase of 53% over the second quarter of 2018. Moreover, we enjoyed a substantial increase of 43% in the recurring portion of the revenues. These recurring revenues demonstrate the benefit of the Brainsway business model, in which a significant portion of our Deep TMS customers enter into a lease or risk-sharing arrangement with a minimum annual payment that generates recurring revenues over a 3- to 4-year period. This recurring revenue provides greater predictability for our growth, and we believe it offers investors greater visibility of Brainsway results.

While our CFO, Hadar Levy, will review our financial results in greater detail, you will note an increase in our operating expenses year-over-year in the second quarter. This is primarily due to the investments we are making in the future growth of our business as planned and established as goals in our recent U.S. IPO. We added a net of 5 new sales reps in Q2 when compared with Q2 of 2018, including 1 in Germany, along with additional logistics and training personnel to work with our customers. We plan to add 3 new sales reps in Q3 of this year.

A key part of our strategy is that we intend to accelerate our growth by increasing the size of our sales force and enhancing our marketing activities globally. We also continue to ramp up our R&D activities, which I will detail shortly.

Next, though, I would like to discuss another important growth driver for us, building clinical evidence for Deep TMS for key publication. In the second quarter, results of our pivotal study demonstrated that Deep TMS showed a significant clinical benefit compared to sham in treating OCD as an adjunct therapy in an approximately 100-patient clinical trial were published in the American Journal of Psychiatry. These OCD patients previously had insufficient response to pharmacological therapy or had failed or had insufficient response to cognitive behavioral therapy.

Deep TMS achieved a 38% response rate among patients after 6 weeks of treatment, which was statistically significant improvement over the only 11% achieved by the sham group. And a 45% remission rate was achieved after an additional 4 weeks of follow-up without treatment, which is also statistically significant, greater than the 17% achieved for the sham group.

More recently, a third-party study demonstrated that Deep TMS plus standard medication was significantly more effective at generating remission rates and reducing depression level among MDD patients compared with standard medication alone was published in the Journal of Psychiatric Research. This was actually the third head-to-head randomized controlled trial of its kind comparing Deep TMS, focal TMS and medication in depression patients. A total of 228 patients were randomized to either 4 weeks of Deep TMS or standard TMS, each in conjunction with standard pharmacotherapy or to a control group treated with pharmacotherapy alone. There were 72, 75 and 81 patients in each arm of the study, respectively. The remission rate for Deep TMS was nearly 60%; for standard TMS, it was about 43%; and both were statistically significantly higher than the control group, which was only 11%.

Published studies such as these 2 are critical in order to continue building a growing body of clinical evidence regarding the efficacy of the treatment with our Deep TMS in MDD and OCD. We intend to leverage this published data in multiple ways, including to drive usage of Deep TMS and in our interactions with payers in regard to reimbursement.

With that, I would like to provide a brief update on our efforts to expand into additional territories, including the Far East. We entered into exclusive distribution agreements with Unison Healthcare Group, among the largest distributor of medical equipment in Taiwan, and Prime Medix, a provider of safe and innovative health care solution in the Philippines. These agreements follow other recent distribution agreements for Deep TMS in South Korea and Thailand as well as the receipt of regulatory clearance in Japan. Additionally, Brainsway terminated its distribution agreement with its Israeli distributor and we have started selling directly to customers in Israel.

Furthermore, with our first salesperson in Germany and agent in the European Union, together with our ability to sell our new-generation stimulator in Europe, we expect continued growth in Europe.

An update about changes in our U.S. management team. Hadar Levy, our CFO, joining me for this call, will relocate to the U.S. and assume the additional role of Chief Operating Officer. This newly created position of COO, located in the U.S., is expected to enhance the alignment of our global organization and support the next phase of Brainsway growth in the U.S., which is our largest market.

Joseph Perekupka, Senior Vice President of Sales and Operation for North America, has notified us that -- of his intention to resign from Brainsway, effective October 15, and he has agreed to stay on until that time to assist in the transition. We would like to take this opportunity to thank Joe for the role he played in our activities in the U.S. and on behalf of the entire Brainsway team, we wish Joe well in his future position.

Moving on to our next planned indication for Deep TMS, let's review our robust clinical pipeline. First of all, smoking cessation. We announced the completion of target recruitment in the second quarter. We have just reached the goal of 165 patients completing treatment for smoking addiction in our randomized double-blinded multicenter study. Final results are expected in Q4.

Secondly, PTSD. Recruitment is proceeding nicely. Interim results expected by year-end 2019 as planned.

Opioid abuse. We are working with the FDA in an effort to initiate this study following the selection of Brainsway by the agency as part of its innovation challenge and receipt of a breakthrough device designation by the FDA.

Last, multiple sclerosis. We continue working towards initiating a multicenter study to treat fatigue symptoms in multiple sclerosis patients with Deep TMS and hope to file an IDE soon.

Our research and development activities are also focused on developing a multichannel stimulator and closed loop stimulator with real-time EEG reading capabilities, and we hope to start selling the first closed-loop devices for research purposes in the near future.

I will now pass the call on to Hadar, our CFO, for a detailed review of the second quarter financials. Hadar, please?

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Hadar Levy, Brainsway Ltd. - CFO & COO [4]

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Thanks, Yaacov. We are extremely pleased with our financial performance in the second quarter of 2019, as strong demand for our Deep TMS system continues to drive top line growth.

Our total revenue in the second quarter was $5.7 million, a substantial 53% increase over the prior year quarter. Of that, $3.2 million was recurring lease revenue, which represented an outstanding 43% increase in recurring revenue over the prior year quarter and accounted for over 57% of our total revenues.

During the quarter, we saw our active installed base increase to 456 Deep TMS systems, which represented an increase of 40 systems for the first quarter of 2019.

During the second quarter, we shipped 30 Deep TMS OCD coils. We have now reached to a total of 115 OCD coils as add-on helmet to our system since having received marketing clearance less than a year ago, back in August 2018.

Gross profit for the second quarter of 2019 was $4.3 million, an increase of $1.4 million from $2.9 million during the second quarter of 2018. Gross margin for the second quarter of 2019 was 76%, which is slightly lower than the second quarter of 2018, with a gross margin of 77%. The modest change in the gross margin was a result of increasing our service and operation costs as a result of higher sales.

Research and development expenses for the quarter were $2.4 million compared to $1.3 million in the same period in 2018 due to the continued development of our Deep TMS technology, including conducting clinical trial for treatment of posttraumatic stress disorder, smoking cessation and other brain disorders.

Sales and marketing expenses for the second quarter were $3.3 million, an increase of $1.4 million over the period -- prior year. The increase was primarily driven by an expansion of the sales force and enhanced marketing activities.

General and administrative expenses for the quarter were $1.4 million as compared to $700,000 for the same period in 2018. The increase was driven by increased costs associated with becoming a public company in the U.S. They are typical in nature of companies listing on the NASDAQ and were expected by our team.

Total operating expenses for the second quarter totaled $7 million compared to $3.9 million in the second quarter of 2018.

For the second quarter ended June 2019, we incurred a net loss of $3.5 million or $0.17 per share as compared to $1.8 million or $0.12 per share for the 3 months ended June 30, 2018.

And moving to the balance sheet. We ended the second quarter with cash and cash equivalent of $27.6 million compared to $7.7 million at March 31, 2019. Cash usage during the quarter was in line with our expectation after the completion of the company's U.S. IPO, which generated $26.3 million in net proceeds. Following our $3.3 million debt repayment, we have no debt.

Once again, we are enthusiastic about our strong balance sheet and believe that our substantial cash position will allow us to expand our sales and marketing effort further to drive additional adoption of the Deep TMS system, continue to invest in R&D in order to add new indication and move toward profitability.

That concludes my remarks concerning our financial highlights. I'll now turn the call back over to Yaacov.

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Yaacov Michlin, Brainsway Ltd. - CEO & President [5]

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Thank you, Hadar. To summarize our performance in the second quarter and recent highlights, 53% growth in revenues, 40 Deep TMS systems installed, 30 OCD coils shipped, we are expanding sales force and territories, growing clinical evidence of the effectiveness of our therapy and key progress achieved in advancing our clinical pipeline. Moreover, we are well supported by a strong balance sheet with cash and cash equivalents of over $27 million as of June 30, 2019, securing our future growth plans.

Thank you very much. And I now turn it to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Craig Bijou.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [2]

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Congrats on a strong quarter. I know you guys don't provide guidance, but just wanted to see if you guys could help us think about what we should expect from a revenue perspective in the second half. If I look at over the last few -- 4 quarters, you've increased revenue sequentially by roughly $500 million -- or sorry, $500,000 on average each quarter. So is that the right way to think about the cadence of Q3 and Q4 from a revenue perspective?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [3]

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Thank you, Craig, for the question. As you know, we are not providing at this stage specific guidance as to revenue, but as I mentioned in the call, the structure of our lease agreements and the focusing on what we call the fixed lease annual fee and risk share model with an annual minimum fee allows certain visibility. And obviously, we have -- I think we are positioned well in terms of the additional territories outside of the U.S. to grow also the revenues in terms of the direct sales. However, at this stage, we are not giving specific guidance on revenues, so I cannot relate to the number.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [4]

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Okay. So it sounds like OCD didn't contribute much revenue during the quarter. And correct me if I'm wrong there. But now that you have 115 helmets out there, I just wanted to know how should we start to think about the utilization of those systems? Or how should we think about that utilization today where it could go? And then the timing of any revenue contribution from OCD, specifically?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [5]

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So this is a great question. As you know, when we are shipping in OCD, in most cases, we are charging a relatively small amount for the treatment of a small number of patients upfront. But other than that, it's a totally risk-share model concept. As I mentioned in our call, we just got the approval in August. Since then, we managed to install -- ship 115 coils, which we see as a great achievement. We see continuous growth of the usage of the OCD, but obviously, there, we expect that the boost will come following the receipt of the reimbursement by the insurer. We are working hard to get this. In the next coming weeks, we will open a center to assist our clinics to file for the reimbursement. I guess that the big ramp-up will happen when we'll have the first insurer approving reimbursement for OCD.

Other than this, we are doing some marketing effort, and I think the publication in the American Journal of Psychiatry and the growing clinical evidence and the good result at our clinics that are using OCD are achieving is helping us to grow the use of our device, and we are optimistic about the potential of this indication. And I think we are well positioned to the growth in OCD.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [6]

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Great. That's helpful. One more for me. I was hoping that you guys could provide a little bit more color on the departure of Joe, your Head of Sales. So what steps are you taking to ensure a smooth transition there? And how should we think about any potential disruption to the sales force or just sales in general?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [7]

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Okay. It's a great question. So first of all, Joe has been with us for about 4 years since actually, the start of the structure of the current organization in the U.S., and we appreciate what he did with us and for us.

Both me and Hadar, we are traveling a lot to the U.S. Hadar Levy, our CFO, that is now becoming also the COO, is very much familiar with the activities in the U.S. The salesperson and the sales team, we are in close touch with the clients. And maybe more importantly, I think we managed to build a very strong team in place in the U.S. We have a manager of the sales in the East Coast and we have a manager of the sales of the West Coast and we have a strong marketing person in the U.S. So although we regret any departure, but I think as for the organization, I think it -- we should handle it hopefully smoothly, and we don't expect any issues. We are going to expand the team in the U.S. in the near future. So we are continuing the growth.

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Operator [8]

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And our next question comes from the line of Jayson Bedford.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [9]

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Wanted to just follow up on the OCD line of questioning. The units that you sold in the quarter, I'm just curious. Of the 30, how many were to new customers versus your current installed base? And again, just as a follow-up to that, when you look at your large installed base that don't have OCD helmet today, is reimbursement the primary source of pushback there?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [10]

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So to your first question, first of all, thank you, Jayson. So it's about 50-50 in terms of new customers and current customer in the split of the 30 additional OCD coils. As to the main reason of why certain customers are not ordering the OCD, there are some clinics that are not treating OCD at all, there are psychiatrists that are not dealing with OCD. This is the situation. However, we think that the major driver is the existence of reimbursement, and we believe that once reimbursement will be granted, then not only that we will see a substantial increase in the use, but also, I think we will ramp-up the pace of new shipments and installations.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [11]

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Okay. That's helpful. You mentioned a new stimulator, a Next-Gen stimulator in Europe. Can you just talk about the features and benefits of that system and when that may be launched in the U.S.?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [12]

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Okay. So thank you for the clarification. So it's just the -- it's the -- actually, we launched this new stimulator in the U.S. a few months ago after FDA clearance, but we didn't have the approval in Europe yet. So now it was actually clear, so we are also starting selling the new stimulator. But it's not a new product, it's the product that we have been selling in the U.S. in the last month.

Just to mention, it's our own stimulator. It's very robust in its technical capabilities. It allows a smooth exchange between the coil, and it positions us very well for the future for the additional features that we are working, the linkage to the EEG, the multichannel. So we have -- I don't want in this Investor Call to get into this -- the technical specification, but we think this is a top stimulator compared to what is currently in the market.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [13]

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Okay. That's a helpful clarification. In terms of the sales reps, I think you said you added 5 relative to this time last year. Did you add many reps in the second half of last year? I'm just wondering what was the increase from the beginning of the year.

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Yaacov Michlin, Brainsway Ltd. - CEO & President [14]

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So just to add to this, we -- as we said when we were on the road for the IPO and also we mentioned it in to the IPO, we expanded the sales force relatively in a slower pace before we raised the money on the NASDAQ. Now as I mentioned, only in Q3, we are going to add 3 more salesperson and we will continue to grow also in Q4. So obviously, now we accelerated to a pace of growth. And as we mentioned before, our plans is if you compare to 2018, so towards mid to end of 2020, we want to double our sales force in the U.S.

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Jayson Tyler Bedford, Raymond James & Associates, Inc., Research Division - Senior Medical Supplies and Devices Analyst [15]

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Okay. Last one from me, just on gross margin. It always seems to be a little bit softer in 2Q, at least relative to 1Q, at least the last couple of years. Do you expect gross margin to improve off of this level going forward?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [16]

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I would say, first of all, we have only 1% difference, and there are 2 factors working in different direction. For example, the OCD usage will -- probably is expected to increase our gross profit. However, and it should be mentioned, the agreement that I mentioned in the Far East, obviously, the selling prices in these territories might be lower than what we are selling in the U.S. So this will work as a counter effect. So I cannot now predict what will be the impact. So there are 2 factors working in 2 opposite directions.

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Operator [17]

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And our next question comes from the line of Jeffrey Cohen.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [18]

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So could you give us a little further detail and color as far as the Q4 results for the readout of the smoking cessation study? How might we see that in the public domain? Do you expect that at a conference or in a journal or as a press release? And could you also comment as well on PTSD with the year-end interim results?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [19]

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So as I mentioned, I think the great achievement in this perspective is we completed treatment of 165 completers and this is the -- was our target goal for the study. It will probably take us weeks to months to open -- analyze the result, clean the data and publish the result. I guess that what we're currently planning to do is to issue a PR and to set a call like this right after. I cannot expect now what will be the timing of this, but this is the plan.

As for the PTSD, because it's an interim result, we might do the same depending on the robustness of the data. And so these are 2 interesting news that I hope both will work in the positive way that are expected during Q4.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [20]

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Okay. Got it. And could you further expand upon your commentary regarding the -- you expect to file an IDE? What was that indication? Could you remind us, please?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [21]

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Yes. We had very interesting feasibility result from a group of researcher in the Charité in Berlin that showed a good result with our system in treating fatigue symptoms of multiple sclerosis patients. Based on this good result and based on the concept and -- behind it, I would not get into the details here and the mechanism of action of it, we decided to go for a more robust pivotal study. So I mentioned that we expect in the next weeks to file an IDE to launch this pivotal study in multiple sclerosis.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [22]

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Okay. Got it. And what was the update today on opioid abuse as far as clinical work?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [23]

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We have discussions back and forth with the FDA. August delayed us a little bit on both sides because of the vacations. And we have a very nice interaction with the FDA. I do hope that we will agree on a protocol in the coming weeks, and we will announce it and be able to file an IDE and move forward also with this important study.

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Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [24]

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Okay. Got it. And then lastly from me. Could you talk a little bit about Japan, the current status and what you could expect over the coming months as far as the regulatory environment and partnerships?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [25]

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Yes. So we have a strong distributor in Japan, a company called CMI. Actually, I went on a road trip and met with them and the other distributor just recently. We got the PMDA approval early this year. In general, the Japanese authorities granted like national reimbursement for TMS. We are working with our distributor in Japan that the reimbursement will apply also to Brainsway. I hope it will happen in the next months and then our distributor is totally equipped and ready, and we are ready to a full commercial launch of our product in Japan just after the inclusion of us under the national reimbursement.

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Operator [26]

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And our next question comes from the line of Steven Lichtman.

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Unidentified Analyst, [27]

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This is David on for Steve. Just following on the Japan comments. Do you have any -- could you provide any color on how we should model the impact of that opportunity for the rest of 2019?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [28]

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I'm not -- honestly, it was hard to hear you. Can you please repeat the question?

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Unidentified Analyst, [29]

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Yes. Just following on the Japan comments, could you provide any color on how we should model the revenue impact from that for the rest of 2019?

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Yaacov Michlin, Brainsway Ltd. - CEO & President [30]

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I don't see any practical impact of Japan on our revenues for 2019.

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Unidentified Analyst, [31]

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Okay.

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Yaacov Michlin, Brainsway Ltd. - CEO & President [32]

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The launch is expected towards the end of the year and then the impact will start in 2020.

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Operator [33]

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There are no more questions at this time. Please continue.

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Yaacov Michlin, Brainsway Ltd. - CEO & President [34]

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Okay. So thank you very much. In closing, we had a very strong quarter and we believe that we are well positioned for continued growth in the future.

I would like to thank you all very much for joining today's call and look forward to our next call. Thank you very much.

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Operator [35]

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Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.