ElectroCore ($ECOR): Amazing Product meets Amazing Management

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ElectroCore is a fascinating dig into what happens when good management combines with a great product. Growing revenue at nearly 70% y/y and a gross margin of 86% (and increasing) it’s an extremely interesting case of what happens when a great CEO combines with a great product. My fund has owned for about 1.5-2 months now, but it is starting to pick up steam so I thought I should release this article a little early.

What does ElectroCore do?

ElectroCore is a biotechnology company with a specific interest in non-invasive vagus nerve stimulation (“nVNS”). The devices they have are as follows:

• gammaCore: An FDA approved device to treat cluster headaches and migraines by stimulating the vagus nerve in the neck. Their first approval was in 2017. This is a prescription only device. The cost of the device (without insurance) is $600 every 3 months.

• TAC-STIM: This is essentially gammaCore but in a much more rugged and tough (dare I say badass) encasing. This is primarily made for the military and specifically the Air Force special Forces. The cost is $10,000 per device and it is MIL Spec’d (meaning it has a logistical designated part number and supply chain for the military). It is also being tested for performance enhancement capabilities (discussed more in depth later).

• Truvaga: This device is their direct to consumer (via truvaga.com) vagus nerve stimulator. They have two options, Truvaga Plus and Truvaga 350. These devices are meant for general health and wellness and have shown very positive signs of improvements in mood, stress levels, sleep quality, energy levels, calmness, relaxation, and happiness. In clinical studies this impact was shown in over 50% of people within a week and 70%-90% of people after a month. .

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Looking at reviews on their websites and reddit, it seemed many individuals also used Truvaga for less intense headaches and migraines with success (this is not something that Truvaga/ElectroCore claims to do and is merely an observation I have made). I could barely find any bad reviews for either device except some individuals saying gammaCore was too intense so they went to Truvaga and that worked for them.

• Truvaga 350 was the first Truvaga device introduced and it allows for 350 sessions. There is no app required and it lasts approximately 6 months (two sessions per day is recommended). This device costs $300: https://www.truvaga.com/product/truvaga/

• Truvaga Plus is their newest device and will most likely be their most popular direct to consumer product. This device is app enabled, can recharge, and has unlimited sessions. The device costs $500. I know numerous individuals who have tried this product and love it. One individual that I suggested this to liked the product so much that they were gracious enough to buy one for me (it comes in tomorrow), which is a testament to how great this product is: https://www.truvaga.com/product/truvaga-plus/

What is Vagus Nerve Stimulation?

So I am now assuming that I have piqued your interest, so now we get to dive into the real fun part of this which is the science. 

What is the Vagus Nerve? (Taken Verbatim from the Truvaga Website)

The vagus nerve is the longest and most complex cranial nerve in your body, wandering from the brain to your abdomen. Some might say it’s your body’s natural superpower, since it plays a crucial role in many bodily functions, including digestion, heart rate, immunity, and stress.

One of the essential functions of the vagus nerve is to balance your nervous system. It does this by regulating your “fight or flight” and “rest and digest” responses within the sympathetic and parasympathetic areas of your nervous system.

The sympathetic nervous system is responsible for the "fight or flight" response and increases alertness, energy, heart rate, and more. The parasympathetic nervous system is responsible for the "rest and digest" response, decreasing alertness, and blood pressure in addition to helping with calmness, relaxation, and digestion. 

When the vagus nerve is working properly, your body is in balance. However, when we feel stressed or anxious, this is a sign that our “fight or flight” response (sympathetic system) is overworked, and the “rest and digest” function (parasympathetic system) hasn’t been keeping up to rebalance the nervous system properly.

What does Vegus Nerve Stimulation do?

Stimulating the vagus nerve activates the parasympathetic nervous system, which regulates mood, digestion, the immune response, and cardiovascular function, primarily working to sustain balance. When the nervous system is in balance, these functions work harmoniously, allowing the body to operate more efficiently, having many positive effects on our health.

Vagus nerve stimulation also affects the levels of crucial neurotransmitters in the brain, such as serotonin, generating an improved ability to address emotional and physiological symptoms, leading to an improved overall wellbeing.

How does ElectroCore stimulate the Vagus Nerve?

Unlike prior nVNS stimulators, which required an implanted device via surgery, ElectroCore focuses on Transdermal application through handheld devices. This is done via a patented technology (215 patents) where Truvaga and gammaCore both generate a proprietary signal developed to provide transcutaneous stimulation of the vagus nerve on the side of the neck. The low-voltage electric signal consists of five 5000 Hz pulses that are repeated at a rate of 25Hz.  The waveform of the electrical pulses is approximately a sine wave with a peak voltage limited to 24V when placed on the skin and a maximum output AC current of 60mA1

Clinical Results of gammaCore

The FDA has approved gammaCore on 6 indications which include:

• The preventive treatment of migraine headache in adolescent (age 12 and older) and adult patients.

• The acute treatment of pain associated with migraine headache in adolescent (age 12 and older) and adult patients.

• Adjunctive use for the preventive treatment of cluster headache in adult patients.

• The acute treatment of pain associated with episodic cluster headache in adult patients.

• Treatment of hemicrania continua and paroxysmal hemicrania in adult patients:

Migraine Efficacy

One of the FDA approved indications is for the treatment of Migraines. This is a summary of the migraine efficacy, by giving a brief highlight of each of their studies:

• Users experienced an average of a 25% reduction in migraine days.

• Roughly 35% of patients had a greater than 50% reduction in the intensity of their headaches (compared with 23% for the sham device)

• gammaCore provided improved relief vs sham at 30, 60, and 120 minutes (in 30 minutes and 60 minutes the patients reporting improvements was more than double the sham device)

• 75% of patients who were pain-free at 2 hours were also pain-free at 24 hours

• Almost half of the patients treated with gammaCore reported mild or no pain at 120 minutes for more than 50% of all treated headaches

• gammaCore reduced pain intensity over 3x greater than sham at 60 minutes and over 6x greater at 120 minutes

Cluster Headache Efficacy

The first indication they were FDA approved for was cluster headaches. gammaCore is the first and only therapy FDA-cleared for the prevention of cluster headache. gammaCore is also FDA-cleared to acutely treat the pain associated with episodic cluster headache. This is a summary of the cluster headache efficacy, by giving a brief highlight of each of their studies:

• Weekly attack frequency at the end of the randomized phase decreased by 40% from baseline with Standard of Care (SoC) + gammaCore and increased by 1% with SoC alone, representing a 41% therapeutic benefit of gammaCore.

• During the randomized phase, the SoC + gammaCore group had a 57% decrease in the frequency of acute medication use.

• Significantly more episodic cluster headache patients responded with gammaCore for the first treated cluster attack vs those receiving sham (response = reporting “mild pain” or “no pain” at 15 minutes)

• Among episodic cluster headache patients, significantly more episodic cluster attacks treated with gammaCore were pain-free at 15 minutes vs those treated with sham

• Episodic cluster headache patients treated with gammaCore also had a significantly greater mean reduction in the duration of the treated attacks vs those treated with sham, who had an increase in attack duration.

• Episodic cluster headache patients treated with gammaCore also reported significantly greater reduction in pain intensity at 15 minutes vs those treated with sham.

Basically to summarize, the gammaCore is a great treatment for migraines but it’s in its own class of efficacy to treat cluster headaches. This will be important to note later as we discuss the business more in depth and the path forward later.

TAC-STIM and Performance Enhancements

The US Air Force requested a specially made gammaCore device (which they also suggested to management that they charge $10,000 per device) for the US military (basically just gammaCore in a more rugged casing), that also allowed it to be classified as a general wellness device (meaning no prescription necessary). ElectroCore responded with the TAC-STIM. The Air Force has taken this device and are performing numerous performance enhancing tests/studies free of charge. Most of these studies are confidential and/or classified and management isn’t able to discuss these studies anymore than what the Air Force chooses to publicly release. So far, the results seem to be pretty fantastic. This device is not marketed as a gammaCore device and merely has a “wellness” device:

“Proudly made in the USA, TAC-STIM™ is a transdermal vagus nerve stimulator (tVNS) that enhances human performance by improving memory retention, attention, and mood, accelerating training, and decreasing fatigue.”

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Drone Pilot Studies

TAC-STIM improved target identification accuracy and change detection accuracy without affecting speed of target identification. Benefit was retained up to 90 days post-stimulation. As you can see in the charts below, there is a significant improvement (nearly 30% improvement it seems) in these drone operators identification and accuracy.

Cognitive Skill during Sleep Deprivation:

Long-lasting benefit for multitasking activities. Active group performed significantly better on the psychomotor vigilance test. TAC-STIM-treated participants reported less fatigue and more energy. The difference between the nVNS group in performance from 0100 (1am) to 1000 (10am) is incredible. The subjective mood difference was immediately more impactful and seemed to sustain a much better mood for much longer.

Drone Operator Mood and Performance during Training

Active group demonstrated improved Full Motion Video-related tasks. TAC-STIM boosted mood ratings; trainees were significantly more energetic and more able to perform training tasks. As you can see the charts below, their mood rating was on a different level of improvement and their Full Motion Video callouts were much more stable and improved.

Language Recall

Arabic recall rate was significantly improved with TAC-STIM. Users experienced enhanced acquisition of a difficult vocabulary. The improvements on language learning are fairly significant especially when you look at recall accuracy.

Truvaga Wellness Studies:

Truvaga was created as a direct to consumer general wellness device. There have been 2 independent studies done on Truvaga (that I could find, I am sure there are more). One with 34 participants and one with 39 participants. Based on a 30-day in-home use test by an independent third-party research firm, Truvaga Plus helped its users improve sleep, focus, stress, energy, and mood.

39 participants were instructed to use the Truvaga Plus product at home twice a day for 30 days to assess the product's benefits, efficacy, and overall user experience. Self-assessment evaluations were reported after 7 and 30 days. After 30 days, users reported the following:

39 Patient Study Results/34 Patient Study Results:

• 82%/94% felt calmer

• 82% felt mentally healthier

• 77%/82% felt more alert

• 77%/85% felt more relaxed

• 74% felt they sleep better

• 74%/91% felt their mood improved

• 67%/77% had more energy

• 88% felt less anxious

Truvaga and gammaCore websites suggest that you use it once in the morning and once at night for 2 minutes for wellness and preventative purposes, but the Air Forces studies show that they use TAC-STIM for ~6 minutes in some of their studies before doing whatever task is required by the participants. Truvaga’s website also says it’s safe to use it 24 times per day. This is not health advice or a suggestion, just merely an observation.

Brief Company Timeline

The company was founded in 2005 by J.P. Errico, along with a group of collaborators including Dr. Peter Staats (Chief Medical Officer), Steven M. Rosenberg, Thomas J. Errico, and Corey McGowan. The CEO from the beginning of the company until 2016 was J.P. Errico, who stepped down to begin progress towards commercialization of the gammaCore device.The company was FDA approved in 2017 and went public in 2018. The company hired Francis R. Amato as CEO (an ex-Merck executive) and things never truly got started for the company. Over the course of 4 years (2016-2019), the company had $2.4m in annual revenue, $45m-$55m in operating expenses, and gross margins of 35%-50%. Clearly Mr. Amato never quite grasped that he didn’t work at Merck anymore and spent money like there was no tomorrow. His poor leadership eventually led to him getting replaced by Dan Goldberger.

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Dan started slow by initially getting costs under control by slashing operating expenses nearly in half. He also turned a heavy emphasis on the VA/Government and has since introduced the Truvaga device and TAC-STIM with the Air Force. Since he has taken over, in the following 4 years Dan has overseen a revenue increase of nearly $20m with a 69% CAGR in revenue while still maintaining a steady fixed G&A structure. Part of the initial revenue issues is that Big Pharma owns the migraine field and the company was having a very hard time making headway in the migraine industry. Dan doesn’t believe that they will ever be able to outcompete big pharma which is part of the reason they targeted the VA system and why they ramped focus on cluster headaches where they have much less competition. The good news is they are now building momentum in both migraines and cluster headaches just as there is a chance of increased label expansion in 2025. The business now has a clear strategy for the next 10-12 years where they will have full patent protection.

Looking Ahead

Other Indications via Grant Funded Studies

Currently the company is undergoing numerous studies for gammaCore which includes breakthrough treatment designation for PTSD (there has already been a study done on PTSD with gammacore for memory and attention with success), Addiction, and strokes. These studies are being funded by grants and don’t impact the company’s balance sheet at all. These studies finish (respectively) in early 2025, mid 2025, and early 2026. Once the studies have been completed the FDA have presented a roadmap that could mean only 6 more months beyond each study for label expansion. I questioned Dan on if they would begin to try to treat other mental or extreme anxiety as I know that PTSD has similar psychotherapeutic treatments as OCD and severe depression and he noted that’s an area they have already identified as exploring further once they get the PTSD results back in early 2025.

There are numerous indications that the company is looking for in expanding their label:

“We are considering several additional medical indications for our nVNS technology which are being studied in several investigator-initiated trials, or IITs. These indications include, post-traumatic stress disorder, opioid use disorders, symptoms of Parkinson's disease, stroke, concussion, attention, nausea, mood, fatigue and memory retention among others.”

Another study (with small impacts) comes from the NFL who are examining gammaCore’s impact on alleviating concussion symptoms for players.

Tipping Point in the VA

Currently the company has 6,000 patients within the VA (Veteran Affairs) system and Dan believes they are beginning to hit a tipping point in this area. They are no longer the new guy on the block and believe they can continue to scale very quickly. If they get additional indications for PTSD (where competition is much less fierce) this will only be able to increase their scale into the VA system. The same applies for indications in addiction and strokes. This tipping point can be seen in the recent revenue growth which is going parabolic.

It is also likely that their Lovell Sales will continue to pick up steam. From their Annual Report in March:

Kaiser Network will follow the same game plan as the VA

The Kaiser pipeline is the next area that they are now planning to move into and they plan to follow the exact same game plan as the VA. This will be a much faster scaling process if they are able to snag indications for PTSD and strokes. I would expect a much faster scale into the Kaiser system than what we saw with the VA system after 2025 due to both experience and new indications.

Truvaga Plus is just getting started

Although we might see some cannibalization of gammaCore sales it is unlikely to be impactful as Truvaga plus begins to scale significantly. The company plans to post the product on Amazon next year (they run sales based on their own website based on when Amazon runs their site-wide sales such as prime day and cyber monday) and as word gets out for how great the device is we can expect this to eventually begin to really make a large contribution in the topline. Truvaga Plus is in the very early stages of commercialization (Released in April 2024) and I believe is a much better consumer proposition as compared to the Truvaga 350 (Released in July 2023). Again, they don’t advertise it as a migraine relief but I have seen numerous reviews stating that they felt headache and/or migraine relief, which could cause cannibalization of gammaCore sales but could further push this as a complete wellness product that users haven’t experienced before (I am not a medical professional).

I questioned Dan on possibly creating a more masculine product (I have gotten feedback from individuals that the name sounds like a vaginal product or they asked if there are less feminine looking casings). Dan said that is something the company is already aware of and since the circuit board and app are all universal for Truvaga, changing the casings would be fairly simple. He is also hoping to get Special Operation “testimonials” as well. This product is only doing a few hundred thousand in sales (and scaling rapidly) but I think it could become a serious force for the company as word gets out about how great it is. I cannot stress enough how few bad reviews I saw on this product (you can also always buy it yourself!). I think if they marketed this as a performance enhancing product, you could see a strong male audience as well.

There is little chance that this product will be sold to brick and mortar retailers.

A little side note: If you’re a college student or an overworked employee who utilizes “all-nighters” and you see the performance statistics from TAC-STIM it’s gotta make you think this would be a fantastic tool in the arsenal, as well as mental health improvements. I think this might be a college influencer away from going huge with that demographic.

UK and Further Expansion

The company is selling well in the UK and is picking up steam but their focus will remain on the US. Their UK is sold via the National Health Service (NHS) which is a shrinking part of their business as TAC-STIM has begun to swell in sales. The UK is 10% of sales but, in spite of that, there is a low likelihood in the near future of pushing products out globally. If the US begins to scale and profitability and cash flows begin to come in we could see an expansion to other global markets in the far out future.

Cool podcast to listen to the leading prescriber of gammaCore in the UK discuss the device with a cluster headache patient:

Insider Ownership

Insiders own roughly 25% of the company and Dan (CEO) owns ~4% of the company. In the last raise insiders were $6m of the $8m dollars raised. This conviction has been continued throughout the past year and the insider buying is extremely telling. Dan seems to think that dilution going forward should be fairly minimal due to externally funded studies and profitability inflection going forward.

Competition

Their main competition is Cefaly. Cefaly is a medical device designed to help prevent and treat migraines. It is a neurostimulation device that works by delivering electrical impulses to the trigeminal nerve, which is believed to play a significant role in migraine headaches. The device is worn on the forehead using an adhesive electrode, and these impulses are thought to help reduce the frequency, intensity, and duration of migraines.

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Cefaly is sold OTC and is much more accessible to consumers. I have understood that their product works great but is more painful and more obnoxious to use (it’s a headband) than ElectroCore products. Despite the increase in pain, management is still working on how to differentiate their product vs Cefaly which I think going towards performance and general wellness will be the correct direction. 

Some knockoff brands have popped up for Truvaga but management will most likely enforce their patents to ensure their IP is protected. This will be something that I would expect once profitability is achieved early next year.

Valuation, Profitability, and Sales Growth

Balance Sheet

The balance sheet looks great due to numerous rounds of dilution. I am not worried about any financial cliff in the near future. There is a possibility that if profitability is delayed we could see another dilution but I think we have enough cash to get there and Dan is hellbent on getting it to profitability. Overall with little future dilution expected and the past dilutive event, their balance sheet is in great shape.

Revenue Growth and Cash Flow

The company is currently growing very heavily in the VA system and it wouldn’t be shocking to see that trend continue. If they are able to get gammaCore indication expansion on the label for PTSD and Drug Addiction, then I think we could see sales possibly (somehow) accelerate from their current 70% CAGR. 

Before we dive into the valuation. I would just like to preface by saying that it’s absolutely ludicrous. 

To show you how ludicrous it is, let's set up the following scenario: 

• All indication studies fail

• Revenue slows to 50% CAGR for the next 5 years then 20% for the next 5 years (see table below). This is outrageously unlikely with Truvaga barely impacting the top-line and the VA sales seem to be accelerating.

• Dan is under the impression that G&A will stay fairly fixed (and could possibly even shrink) but sales expenses will probably scale slightly along with sales so we’ll assume SG&A keeps growing at its current rate of roughly 10% per year. 

• Due to them only selling via prescription and their online channels, their inventory has been fairly lean thus fair and I believe Dan will be an astute manager of their inventory if Truvaga takes off in sales. Since we aren’t working with brick and mortar we will assume working capital isn’t a massive issue.

• We’ll also make the assumption that they will maintain their current 85% gross margin for the foreseeable future.

• We’ll assume a steady $4.5m in R&D expenses.

• Out last assumption is that there will be no benefit from Net Operating Losses (NOLs)

It should be noted that ElectroCore (ECOR) trades at a $50m market cap and a $40m enterprise value with a very low chance of extreme dilution over the next 12 months. We’ll create a crude DCF based off of this (they operate with almost no capex). See the below table:

I usually don’t take out a DCF (10% discount rate) because obviously small changes can make a big difference in valuation. But I think we have a pretty good idea of the next 5 years of growth so let's assume sales completely stop after the next 5 years. See the below table where sales growth stops:

I am obviously being extreme in my revenue assumptions and the assumption that SG&A would continue to expand by 10% if sales growth were to stall out. I am also being extreme by excluding NOL’s. But my point was to show that this company is outrageously undervalued at their current market cap by an absurd margin. 

Dan has said that the expectation is for profitability in the 1st half of 2025 or around $8.5m in revenue per quarter. This is already ahead of my crude DCF seen above. This should stop future dilution and remove that risk from the company. I also don’t see revenue slowing down anytime soon and I don’t think there’s any reason to doubt management on this (remember they are putting their money where their mouth is).

Their gammaCore product (which is on an incredible path of its own) is setting up a very solid safety margin for the company to continue and push off their Truvaga direct to consumer product which could heavily increase the upside for the company. The extreme gross margin and extreme sales growth should lead to an absurd valuation which I don’t 100% know what it should be. As I am sure my readers are used to, I will estimate a valuation and adjust that valuation as the company surprises us. 

In a fairly conservative valuation (which won’t sound conservative at all) the company should probably trade around 6x-8x fw revenue (~$40m for 2025 based on Dan’s forecast of cash flow positive in the first half of 2025) which would be around a $240m-$320m market cap (which would be around $23/s-$30/s fully diluted). This obviously seems very low in comparison to our DCF’s but there are so many assumptions and it’s probably just best to play this safe and not overestimate the growth in our valuation. As they deliver on profitability and we get a better idea of dilution there is a very real chance this company continues their 70%+ revenue growth and could deliver a possible $1b valuation (or higher) at some point over the next 5 years. That is not a remotely far fetched possibility, but for now let's settle out our $200m valuation and adjust as management executes.

Risks

Overstated TAM within the VA

There is a chance that the TAM in the VA isn’t as big as management expects which could lead to a rapid slowdown in growth. If

Lack of Truvaga Sales

Currently Truvaga is only a few thousand in sales but uptake could be very slow. This could lead to a lower top-line impact than expected after gammaCore sales slow due to scale. Truvaga should help continue to push sales higher after gammaCore scales in the future. If this isn’t realized we could see a significant slowdown in growth in 5-7 years. This would push the present value down considerably.

Failure of Indication Expansion

If studies for gammaCore indication expansion fail the device would have to continue to rely on their ability to scale in the migraine field. This is a much more competitive field and it could cause their growth prospects to be much lower than anticipated. Although this is the most likely risk, it is the least impactful as they have already shown an ability to build momentum in the migraine and cluster headache field.

The Air Force decides it will not utilize TAC-STIM

This seems extremely unlikely based on the performance studies of gammaCore along with the fact that the Air Force has already begun shipping it to deployed individuals. Dan suggested we look at this as a free lottery ticket but I believe the odds to be much higher than a lottery ticket. I think this is the lowest odds risk.

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Buyout

If management sells the company too early we could see a major loss of value in the company which could severely impact our final returns and the risk reward. I think management is extremely competent and I believe this risk is low to nil.

Conclusion

ElectroCore has 3 great products that are all beginning to build significant momentum. I believe the CEO has corrected the ship and is rapidly pushing them towards cash flow positivity. This will be critical in the rerating of the company’s valuation. Dan expects to hit cash flow positive in the 1st half of next year which implies revenue near $40m for 2025. This is an incredible growth rate that I believe has the ability/potential to somehow increase as Truvaga Plus begins to scale rapidly and they begin to really utilize their experience in selling gammaCore in both the Kaiser network and the VA network. TAC-STIM seems to be picking up some momentum and with a $10k price tag it only takes a relatively few individuals for this product line to start skyrocketing in impact (with 25 people you get $250k in revenue to show how easily the TAC-STIM line can grow). It’s really hard to see any of their risks coming to fruition outside of a failure of their grant-funded studies (which is that even technically a risk or just more upside?). Anyways make sure you check out truvaga plus for yourself (or ask your doctor what they think of gammeCore):

https://www.truvaga.com/product/truvaga-plus/

Disclaimer: The author of this idea and his Fund have a position in securities discussed at the time of posting and may trade in and out of this position without informing the reader.

Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC and CSA filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author and funds the author advises may buy or sell shares without any further notice.

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