Description

We believe shares of CLPT offer an asymmetrical investment opportunity with minimal downside from here and multiple paths to a 3-5x return. Exacerbated by the recent downturn in shares of unprofitable companies, limited sell-side coverage and a small institutional holder base, shares in CLPT are down 20%+ for the year making this an opportune time to discuss this investment.

Based near San Diego, CA, produces and sells the ClearPoint system and disposables, used in over 60 medical centers across the US and Europe. CLPT enables neurosurgeons to operate in an MRI suite using real-time guidance to ensure precision. CLPT has developed special stereotactic frames and tools that are safe for use in an MRI suite and compatible with both CLPT and MRI software allowing neurosurgeons to visualize every step of a procedure. These frames and tools are disposable, which drives revenue based on number of procedures.

Developed over a decade ago, the primary uses of the ClearPoint system are for placement of deep brain stimulation (DBS) electrodes and for laser therapy/ablation in which a special heated probe is used to destroy diseased brain tissue. DBS, primarily used for patients of Parkinson’s disease has traditionally been placed by surgeons in an operating room, with the patient awake to ensure the electrodes are in the precise location. One major benefit to using the CLPT system is the patient can be asleep during the procedure, increasing patient comfort and tolerability for the procedure, while ensuring precise delivery.

We believe DBS placements make up more than 50% of CLPT frame sales, yet CLPT holds less than 10% market share. The 90%+ of remaining procedures are still performed in the operating room (OR), while the patient is awake and without the need for dedicated operating MRI suite. Additionally, the learning curve of performing a surgery in the MRI suite requires time and new training. Through our research, we found that a factor in determining how a neurosurgeon performs a DBS placement is based on where they were trained. Those trained using traditional operating systems tend to follow that method through their careers. Even those classically trained surgeons who adapt CLPT may only use it as an option for particularly nervous patients who refuse an awake brain procedure. Surgeons trained on CLPT system from the get-go tend to use CLPT as a standard, even if they move to a different hospital system. While a slow process, more and more neurosurgeons are being trained with a CLPT system, which we believe will lead to CLPT DBS procedure sales outpacing the current ~10% growth rate of the overall industry.

CLPT maintains a larger market share in laser therapy for epilepsy (also used for certain types of brain tumors). While a smaller overall market than DBS, CLPT has 30% market share in laser therapy and cases are growing by over 20%/year. CLPT is well positioned for sustained growth in this end market. Moreover, CLPT plans to market a new ablation laser in 2022 which will triple its market value opportunity. With so many surgeons already using CLPT for navigation, we are optimistic laser sales could become a meaningful contributor to sales growth in the coming years. We expect 2022 DBS and laser procedure segment sales of ~$12m in 2022 and for the segment to at least double by 2025 with significant profitability.

Aside from the above, the DBS and laser markets have potential for exponential growth that are not considered in our estimates. The current value of the DBS electrode market is ~$750m. New technologies within DBS for Parkinson’s disease could drive that to more than $3b in the coming years. Boston Scientific recently received FDA approval for its DBS product to be used in patients with essential tremor, officially opening a new $2b market opportunity (some doctors were already using DBS for essential tremor in off-label usage). Boston Scientific is also working on DBS solutions for Alzheimer’s and stroke victims, markets that are each worth over $5b. While still years away, the success of any of these new indications would increase the opportunity for CLPT sales by multiples.

The second core business for CLPT is drug delivery and biologics. There are currently more than 100 gene therapies in pre-clinical or clinical trials that require delivery to a precise location within the brain. As of Q3 2021, over 40 commercial and academic partners with over 60 programs are working with CLPT using either the ClearPoint system for delivery, ClearPoint cannula, or both. The opportunity for CLPT is two-fold. First, as therapies progress through the clinic, CLPT will capture significant revenues by selling products for testing, services for study design and workflow. In clinical trials, CLPT frames or cannula will be used and typically, as a therapy progresses, CLPT will generate more revenues. We expect that solely from customer uses in the clinic and trials, CLPT will grow drug delivery and biologics revenue from ~$10m in 2022 to ~$25m by 2025. This division also leads to the second major revenue growth opportunity; therapy approval, which is the true upside for the company.

If any of these therapies receive regulatory approval, they are likely be delivered through CLPT procedures. The market opportunity here is multiple billions of dollars, although individual therapies have varying market sizes. For example, a therapy approved for Huntington’s disease could drive CLPT revenues of $100M+, while a gene therapy for Parkinson’s could be north of $1b. Additionally, approved therapy that uses CLPT cannula in trials will need to use the same for commercialization, further tying CLPT to its customers. In the next few years therapies that could gain FDA approval are moderate sized opportunities for CLPT, between $5-70m of annual revenue. These large-scale opportunities would not see approval until 2025 at the earliest. However, even a few moderate approvals would drive CLPT revenues towards or above the $100m mark, at which point we’d expect north of 50% EBITDA margins. With a current enterprise value of $165m, CLPT stock would likely increase by 3-5x. The nearest approval, a drug for the rare pediatric disease AADC, may get approved as soon as 2022 and would likely drive $5-10m in annual revenue for CLPT.

There are numerous other embedded opportunities at CLPT. The company has a partnership with Blackrock Neuro, a leader in in brain computer interface technology (BCI). These are computer chips implanted into brains of paralyzed patients to help restore certain functions. Blackrock recently received FDA Breakthrough Device designation and is aiming to commercialize its product in 2022. While we expect this to be a slow launch and first-generation products will not require MRI navigation, Blackrock and BCI represent a further $1b+ revenue opportunity for CLPT. Additionally, CLPT plans to release a stereotactic frame for the operating room in 2022, in an attempt capture some of the 90% market share for DBS procedures. CLPT is also collaborating with Philips on a new brain model software and with D&K Engineering on a robotic solution for both the operation room and MRI suite.

CLPT is led by Joe Burnett, a former executive at Philips. Joe joined Philips when it purchased Volcano Corp, a catheter-based imaging company for $1b. Joe played an integral role in building up Volcano and we understand the acquisition has exceeded internal expectations at Philips. CLPT has a deep bench with many executives coming from Philips. Our research suggests CLPT has a strong team with proven execution for new product development and commercialization.

The beauty of ClearPoint’s opportunity sets lie in the fact that the company has no binary exposure to a singular drug approval or singular trial outcome. However, these varying outcomes in turn make it difficult to model and value the company. The current market cap is ~$205m and they have ~$40m of net cash. Cash burn is about $12m/annually, although we expect this to come down as the company has little need for an expanded expense base.  Our view is there is a path to $50m of revenue in 2025 without any partners receiving regulatory clearance for a drug, of which the pipeline represents the potential for $1b+ in revenue.  At the $50m revenue run rate, we’d expect the company to post $10m+ of pre-tax income. In a more likely scenario, the company is generating revenues closer to $100m and posting EBITDA of $50m, leading to shares being 5x higher. However, the most likely scenario is that sometime prior to 2025 the company is taken out by a larger MedTech company, likely at a signficant premium to reflect the potential for exponential growth in the future.

Catalyst

New partnerships, existing partnerships moving further into clinical trials, existing partnerships receiving regulatory approval, new product successes

One potential near-term catalyst could be the release of preliminary 2021 revenue and 2022 guidance. Typically released around the JPM Healthcare conference, CLPT has not provided any information thus far in 2022. We believe this is on the account of the Covid Omicron uptick which likely slowed elective surgeries in late December and all of January. While a short-term revenue headwind, we don't believe this impacts CLPT at all mid to longer-term, but maybe weighing on the stock. However, it is also possible investors are being too pessimistic on the near-term and when the company does finally give an update shares may see a relief rally. Again, whatever the issues are around elective procedures in the near-term is of no major importance to our thesis.