ElectroCore Gives a Masterclass on M&A for Christmas

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I was driving home on Tuesday night when I got an email from Rob Fink, the investor relations rep that represents ElectroCore, with the following subject line: “electroCore to Acquire NeuroMetrix (NURO)”. My immediate reaction was that with the recent run up in price that I was about to experience a classic dilutionary acquisition with poor ROI. I pulled into the nearest gas station to read what I assumed was news that was going to crater the stock.

I was wrong.

Dan Goldberger and his team at electroCore have put on a masterclass in their most recent acquisition. Essentially they are buying the devices, inventory and assets for free (slightly more than free but not much) from NeuroMetrix which can then plug and play into their VA pipeline perfectly.

What is the realistic cost of this whole acquisition?

It is worth a max royalty of $500k a year for two years (I would be more than happy if the company had to dish out this entire cost), small amount of transactional costs, incremental sales costs (again I would love to see lots of this), and the cost to train their current sales force and onboard one or two individuals. I would guess the total cost of this entire acquisition outside of the royalty and incremental sales is under $1mm. According to Dan this won’t impact FCF timeline in any serious capacity. The current cash burn from Quell shouldn’t impact the electrocore business as they will be able to remove most of these costs by integrating into their current business model.

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Why would NURO shareholders agree to this deal?

NURO shareholders will get $9mm in cash for a company that is burning $6mm a year and trading at $8mm currently. This includes all transaction costs. It also does not include their divestment of DPNCheck. It’s highly likely NURO would require more dilution within the next two years to cover costs. They are just breaching into the the VA system but only have approval in two hospitals (whereas gammaCore is in 150+). This means they are nowhere near profitability and shareholders no longer have to stomach this long and painful journey. Instead they come out with a decent profit.

I feel optimistic as both boards unanimously approved and one of NURO’s largest shareholders recently put a new member on the board (before this vote).

What device does NURO bring to the table?

Their biggest product is their Quell Fibromyalgia. It is a thin wearable medical device that is inserted into a soft band, a disposable electrode is attached and then the band is placed on the upper calf.

This is a better description of what the device does straight from their website:

Quell Fibromyalgia is an advanced, non-invasive, nerve stimulation device that is covered by 27 issued U.S. utility patents. It is the only wearable neurostimulator that is enabled by a custom designed microchip that provides flexible, precise, high-power nerve stimulation in a form factor the size of a credit card. Quell utilizes position and motion sensing to automatically adjust stimulation for an optimal patient experience both day and night. The device supports Bluetooth^® low energy (BLE) to communicate with the Quell Fibromyalgia app, which is available for iOS (including Apple Watches) and Android mobile devices.

The innovative Quell system is personalized to meet user needs and is smart enough to adjust therapy to changes during sleep and can even compensate for changes in the weather. Users have the option to personalize and manage their therapy discreetly via the Quell Fibromyalgia app, which offers therapy utilization, sleep and fibromyalgia severity tracking.

Their current indications for the Quell device are for the following:

• Fibromyalgia

  • Fibromyalgia symptoms include pain throughout the body that has lasted for at least three months. Often, the pain is described as a constant dull ache. Fatigue, is another key symptom along with memory issues. This is more common in women than men.

• Chronic lower extremity pain

They have numerous emerging indications that electroCore could capitalize on as well:

• CIPN (chemotherapy-induced peripheral neuropathy). Will discuss further later on.

• Chronic low back pain

• Chronic overlapping pain conditions

• Covid

The company recently got approval into the VA system which will allow for a much faster integration via electroCore’s current sales infrastructure. Quell is essentially one of only a couple devices that is FDA cleared to treat chronic pain. Currently there is no OTC commercial product for Quell but they used to have one. This is something that electroCore will probably try to capitalize on in the future by possibly utilizing their Truvaga brand and relaunching the product. Quell is doing roughly $1mm in annual run rate and is growing 150% y/y.

What is the Opportunity?

Currently 77,000 individuals in the VA have Fibromyalgia and this would essentially be their TAM based on current indications. But Dan made the key point that they want to focus on pain management. This population would be massive in the VA system. 33% of the VA report consistent chronic pain and 10% report severe chronic pain. This is a population of 170k for severe chronic pain and ~500k for consistent chronic pain. The current TAM is extremely large and it seems they have sold around 2,000 devices (some of which include their direct to consumer business which is no longer selling). This means they have covered less than 2.6% of the Fibromyalgia market in the VA (assuming that all devices sold were in the VA system, which isn’t the case, it’s for conservative estimates) and it’s less than 1.2% of all individuals with severe chronic pain in the VA.

Currently Quell gross margins are in the mid 30s and Dan plans on changing/increasing the current price structure (currently $250). I would expect the cost of each device to increase substantially. I also believe there will be a more recurring structure added into the device. As the device scales we should also see some economies of scale (NeuroMetrix is currently experiencing this). Unlike gammaCore (which is “refilled” every 3 months), the only recurring charge for the Quell device is the electrodes that must be replaced every month (currently growing 13% y/y) for $30 (this is probably low margin pricing). The app is currently free and I expect that this could change to a recurring charge to further increase gross margin and add a recurring aspect to the device. My speculation is that I assume we could see gross margins increase into the 50%-70% range but Dan has not given guidance on this.

CIPN

Their current trial on CIPN is wrapping up and they plan on submitting for label expansion in the back half of this year. If electroCore chooses to pick this up, they would have to go through the labeling costs. This market could be extremely lucrative.

For those of you who don’t know CIPN is nerve damage that occurs from chemotherapy. It impacts essentially every extremity in the body. After one month of finishing chemo, nearly 70% of chemo patients get CIPN, although this reduces overtime to around 30% at 6 months or greater. Approximately 56,000 new veterans receive chemotherapy each year, but 450,000 at any given point are receiving cancer treatment. This is a TAM of 300,000 individuals and 135,000 individuals who need treatment on a long term recurring basis after chemo.

Overall their prescription market by 2025 will have an overall TAM of around $100mm in the VA if we assume their current pricing structure stays in place. This could be much larger if they increase pricing substantially. If they are able to grow this in the Kaiser market then it’s obviously much larger. It’s hard to overstate the ROI they could receive on this acquisition.

Direct to Consumer

The company used to sell a DTC device called Quell 2.0. It had decent reviews (4.0+ on Amazon) but poor costumer service and poor marketing for chronic pain led to an FTC lawsuit in 2020 for claiming FDA clearance for chronic pain (which hadn’t occurred) as well as other deceptive claims. This led to $4mm in refunds being handed out in 2020. They didn’t receive their first FDA indications until 2021. The Quell 2.0 device also seemed to have poor quality assurance.

All of these issues seem like they should be fixed fairly rapidly if electroCore were to release this device DTC again. electroCore’s customer service is fantastic and I’ve only heard great things about them for Truvaga. I also believe Dan is one of the best operators I’ve dealt with and I trust him to run the company with integrity (although the device does have FDA approved indications now) as well as with better quality assurance.

What exactly is the science and tech?

Quell is worn in a strap that wraps around the upper calf, sending electrical pulses through the skin to the sensory nerves that in turn signal the brain to trigger the body’s natural pain relief response, blocking pain signals throughout the body. It is similar conceptually to TENS (transcutaneous electrical nerve stimulation), but developed in a wearable form and is more sophisticated, stronger, and optimized for nerve pain. It can be worn for long periods of time, including during sleep. While the device is worn around the leg, it can relieve chronic pain throughout the body (i.e., back pain, foot pain, etc.). It even works in both legs when worn on a single leg, and can be worn 24/7, if desired.

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“Treatments” come in 60-minute on/off intervals, and the battery life display conveniently shows how many treatments are left (for example; 75% battery, 15 treatments). Quell can last for up to 50 hours before needing to be plugged in to recharge, though the average user gets around 35 hours of battery life – this comes out to about six days between charges on average.

There are two treatment modes: NeuroMetrix describes the standard stimulation as a “comfortable constant vibration,” whereas the new stimulation feels like a “gentle pulse”

Their website has a great video for users to understand more about the device.

Conclusion

Dan and the electroCore team hit a homerun with this acquisition. There is almost no cash outlay and an extreme amount of upside if this gets integrated into their current sales structure appropriately. They have very little at risk here and the acquisition is a homerun for both NURO 0.00%↑ shareholders to capture a decent amount of upside (who receive probably $10mm+ in cash by the time it’s all said and done) and ECOR 0.00%↑ shareholders.

I think we could see this turn into a similar size to the gammaCore business in the long run. We are still a long ways from that but Dan is setting the company up for success with this fantastic acquisition.

This is the type of acquisitions shareholders can only dream of. Now we will just have to wait and see what shareholders of NURO think about this.

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