Nexstim: An ace up the sleeve

Nexstim surprised the market positively by announcing a planned collaboration in Alzheimer’s disease, which is a new area for the company. It is only a letter of intent, but the plans seem to be quite advanced. We raise our forecasts in anticipation of the signing of the actual agreement and the related sizeable returns in Nexstim’s size class. We reiterate our Accumulate recommendation and raise our target price to EUR 4.0 (was 3.0).

The new opening planned in Alzheimer’s disease starts with a Phase 3 trial and may continue for a long time

Nexstim and the new partner Sinaptica Therapeutics have signed a letter of intent for exclusive cooperation in the treatment of Alzheimer’s disease. The worldwide partnership is a 10-year exclusive arrangement renewable in 3-year increments. Based on the plan, Nexstim develops, manufactures and supplies a system based on existing products and solutions to Sinaptica, to be used first in a pivotal Phase 3 trial scheduled for 2025. This first stage of the collaboration will last about 2 years, includes the delivery of 20 systems and is worth 6 MEUR for Nexstim. This sum consists of a signing fee, milestone payments and system sales. During the study, Nexstim also expects recurring revenue based on the use and maintenance of the system. The letter of intent is not binding, so implementation of the plan is not absolutely certain at this point.

Sinaptica's brain stimulation therapy for Alzheimer’s disease has resulted in excellent Phase 2 results. The device has also been granted FDA Breakthrough Device designation. The Phase 3 trial aims at FDA approval and commercialization of the system in the US. We believe this would be the first TMS treatment approved for Alzheimer’s disease. After Phase 3, the plan is that Nexstim develops, manufactures and supplies a commercial system for the treatment of Alzheimer’s disease to Sinaptica.

We raise our forecasts based on the letter of intent, but also consider the risks

In the absence of an actual agreement, the revenue related to the project is not yet certain. However, the plans are well underway and we believe that an agreement is likely to be reached. We raise our revenue forecasts by 11-14% for 2024-2026. In euros, growth is 33% less than the announced 6 MEUR, so that the uncertainty related to the agreement is considered. Our earnings forecasts also rise clearly, as development-related payments and system sales have very high margins. We expect that project implementation only requires moderate investments from Nexstim.

The valuation is moderate despite the share price rise

Our valuation is based on EV/S multiples and the DCF model. Nexstim's 2024e EV/S is 3.0x and decreases to 2.1x in 2025. The multiples have increased slightly, which is acceptable considering the improved outlook. We still find the multiples moderate relative to the company’s potential, although visibility for growth materializing is low. The DCF model gives the share a value of EUR 4.0 after a forecast hikes and the drop in the cost of capital reflecting the lower financing risk. We feel the share is reasonably priced relative to growth and profitability expectations and the risk/reward ratio is sufficiently attractive to reiterate the positive recommendation.