Brain Ablation Dependency And Regulatory Delays Will Challenge Neuromodulation Expansion Yet Long-Term Potential Remains

Catalysts

About NeuroOne Medical Technologies

NeuroOne Medical Technologies develops and commercializes thin film electrode and RF ablation systems for neurological and pain management indications.

What are the underlying business or industry changes driving this perspective?

• Although the partnership with Zimmer Biomet and minimum purchase commitments provide a clearer near term revenue base, continued dependence on a single large distributor for brain ablation limits pricing power and bargaining flexibility. This could cap revenue growth and constrain long term margin expansion.
• While expanding indications into epilepsy, facial pain and lower back pain aligns with rising global demand for minimally invasive neuromodulation, each new application requires regulatory clearance and clinical validation that could be delayed or fail to translate into adoption. This may slow revenue acceleration and push out earnings improvement.
• Although the spinal cord stimulation and basivertebral nerve ablation programs target a multibillion dollar chronic pain market, the company must compete against entrenched large device manufacturers with deeper commercial resources. This competition could compress net margins as selling and marketing costs rise to gain share.
• While the drug delivery and combined diagnostic therapeutic platform taps into a growing need for precision brain therapies, the long development timelines, uncertain partner economics and potential trial failures could limit near term licensing income and delay operating leverage in earnings.
• Although rising gross margins and reduced operating expenses show improving cost discipline as procedure volumes grow, the need to scale manufacturing, secure ISO 13485 certification and build out international commercialization could reintroduce cost pressures and temper future net margin gains.

Assumptions

This narrative explores a more pessimistic perspective on NeuroOne Medical Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming NeuroOne Medical Technologies's revenue will grow by 36.4% annually over the next 3 years.
• The bearish analysts are not forecasting that NeuroOne Medical Technologies will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate NeuroOne Medical Technologies's profit margin will increase from -80.5% to the average US Medical Equipment industry of 12.9% in 3 years.
• If NeuroOne Medical Technologies's profit margin were to converge on the industry average, you could expect earnings to reach $2.2 million (and earnings per share of $0.04) by about December 2028, up from $-5.3 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 51.0x on those 2028 earnings, up from -5.5x today. This future PE is greater than the current PE for the US Medical Equipment industry at 30.1x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Long term dependence on Zimmer Biomet for minimum purchase commitments and licensing revenue concentrates commercial risk, so any renegotiation, non renewal or underperformance by this distributor could slow revenue growth and reverse recent improvements in gross margin and earnings.
• The company is pursuing multiple new indications in pain management and drug delivery that are still at preclinical, animal study or early regulatory stages, and if these programs are delayed, fail in trials or do not gain adoption, the long term addressable market may not translate into the expected increase in revenue and operating leverage in earnings.
• Management is counting on expansion into large chronic pain and international markets, but entrenched competitors, pricing pressure and the need to obtain ISO 13485 certification and foreign regulatory approvals could limit future procedure volumes and compress net margins.
• Recent revenue growth, licensing income and gross margin gains have been achieved off a small base and supported by an oversubscribed capital raise, so if growth normalizes, new capital is harder to access or operating expenses rise to support broader commercialization, the net loss could widen again and weigh on earnings.
• The pipeline in drug delivery and spinal cord stimulation depends on partners and unproven compounds that remain in development, so setbacks in partner funding, regulatory pathways or clinical outcomes could reduce high margin licensing opportunities and constrain long term growth in revenue and net margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for NeuroOne Medical Technologies is $1.45, which represents up to two standard deviations below the consensus price target of $2.23. This valuation is based on what can be assumed as the expectations of NeuroOne Medical Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $3.0, and the most bearish reporting a price target of just $1.45.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $16.8 million, earnings will come to $2.2 million, and it would be trading on a PE ratio of 51.0x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $0.58, the analyst price target of $1.45 is 59.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.