Licensing period for Nexstim's technology starting?

Translation: Original comment published in Finnish on 05/02/2024 at 7:46 am EEST

Nexstim’s partner Magnus Medical announced the launch of its new TMS system on Tuesday. The two companies have a technology licensing agreement, under which Magnus Medical will pay Nexstim license fees for five years starting from the commercialization of the system. The release indicates that the licensing period may be starting but no official confirmation has been received. The period beginning would mean that license income would start earlier than our current forecast (starting from H1’25) and thus raise our forecasts for the coming years slightly. We will update our view of the stock as more information on the significance of the news becomes available.

Licensing period starting included in our estimates from 2025

Nexstim announced the licensing agreement in early 2022, when the company also received a signing fee of 3.5 MEUR. The agreement includes a five-year licensing period during which we believe Nexstim will receive licensing fees from Magnus Medical based on system sales. Magnus Medical's new system based on accelerated TMS protocol was granted FDA 510(k) approval earlier than we expected in September 2022. On the other hand, the launch of the system has taken longer than we expected and Nexstim recently estimated in connection with its 2023 financial statements that the licensing period might not start this year. In our forecasts, we have assumed that the payments will start in H1’25. However, now it seems that the licensing period could start earlier. This still needs confirmation from Nexstim, however.

License fees will be a significant source of income for Nexstim in the coming years

Nexstim's business has still been loss-making on an annual level. Profitability and positive cash flow are also uncertain this year. Nexstim and Magnus Medical have estimated that the total license fees to Nexstim would be approximately 13 MEUR over a five-year period. If the license fees were to materialize in the size class envisaged by the companies, they would provide a significant income source for Nexstim. Cash flows would also enable Nexstim to strengthen its core business during the licensing period. This would help the company to stabilize profits for when the licensing period ends and payments eventually cease. However, the forecasting risk associated with the payments is high, as there is no external visibility to the level and timing of total payments.

There are still questions about short-term financing

Due to the negative cash flow from operating activities, the risk related to further capitalization and increased number of shares in Nexstim has been elevated. License fees would provide significant relief, which would help reduce the financial risk and the stock's risk profile. Even if the initial accumulation of license fees would be slow, Nexstim’s ability to arrange undiluted bridge financing for the share improves as the outlook for the license fees is confirmed.