By Brian Marckx, CFA
2012 ANNUAL REPORT FILED
Brain Resource (OTC Markets:BRRZY) (ASX:BRC.AX)
filed their annual report for fiscal 2012 ending June 30, 2012 on August 27th. There were no material surprises in the financials. The annual report also indicates the company has made meaningful operational progress on several fronts, including with building the customer base of its existing suite of products, with nearing FDA regulatory submission of their iSPOT depression and ADHD tests, publishing additional papers and data on iSPOT, and with building their pipeline. We have only made some minor tweaks to our model following fiscal 2012 results. Our Outlook, outperform rating and U.S. $3.50 per ADR price target all remain intact.
2H 2012 Results
Revenue for the second half of fiscal 2012 was $1.66 million, down from $1.83 million from the same period in 2011 and lower than our $2.09 million estimate. Importantly, the bulk of the yoy decrease and difference relative to our estimate was lower Treatment Prediction Research revenue. As a reminder, BRRZY was paid upfront (in 2007) by their collaboration partner for the iSPOT studies, which was recorded as unearned income. This unearned income then bleeds through to Treatment Prediction Research revenue - so this revenue "miss" is largely immaterial from a fundamental outlook perspective as it will be earned in future periods (we model it will be earned in 1H 2013).
Much more meaningful was that revenue from Brain Training products (MyBrainSolutions, WebNeuro, MyCalmBeat) in the six month period increased 28% yoy to $205k, in-line with our $240k estimate. As this represents the company's current suite of products, revenue growth (which was +108% for the full-year), is an obvious positive. BRRZY notes that there are now 16 corporate customers using their Brain Training products covering 200k lives, up from just 100k at the end of calendar 2011. Usage statistics also continue to grow rapidly. In addition, the company cites 80 corporate customers (which BRRZY estimates cover 11MM lives and could be worth up to $18MM in annual revenue) are currently kicking the tires on these products and they think 28 (covering ~4MM lives worth up to an estimated $6MM in annual revenue) of these have a 50% or better likelihood of contracting.
Operating expenses (excluding gain in fx) were $2.67 million, about 9% higher than our $2.52 million estimate, mostly due to higher than modeled insurance and professional fees.
Net income and EPADR were ($1.14) million and ($0.06) compared to our ($319)k and ($0.02) estimates, most of the difference relating to Treatment Prediction Research revenue.
BRRZY exited fiscal 2012 with $9.2 million in cash and equivalents, down from $13.6 million at 12/31/2012. For the six months ending 6/30/2012, cash used in operating and investing activities was $1.9 million and $1.7 million, respectively. In 2H 2012 the company also repaid $735k of the $4 million of borrowings from the JV.
- FDA Filings For iSPOT: the highlight of the highlights is that Brain Resource, following a meeting with FDA in late June whereby the agency indicated they will consider a "de novo" pathway, expects to submit for FDA approval of an iSPOT depression test by the end of calendar 2012 and an ADHD test in 2013. Assuming BRRZY hits these timelines and does not need to follow the much more rigorous PMA pathway (PMA is still incorporated as an assumption in our model), the tests could potentially be on the market ahead of our prior projection (sometime in calendar 2014). We will update our assumptions if and when we think our launch projections are conservative (which is highly predicated on the regulatory pathway). This could provide some upside to our model. BRRZY notes in the annual report that they now have a genetic test for depression in development. As a reminder, Brain Resource hopes to combine a genetic assay (BRRZY had been in discussions with a partner to develop an assay) with their cognitive iSPOT test which will form the basis for a companion diagnostic to aid physicians with prescribing decisions of depression drugs.
- iSPOT Publications: BRRZY continues to publish iSPOT papers which should help drive awareness and communicate the clinical significance of the tests leading up to the respective launches. Along with three papers that have already been published, there's another 11 in various stages of the publication process, including 1 about to be published.
- New ADHD (JV Product) Launch In October: the ADHD product that BRRZY is developing under the JV with Och-Ziff Capital Management is currently being evaluated with focus groups and is expected to launch in October, commensurate with our prior expectations.
- Growth In Brain Training Products: as noted, BRRZY is seeing increasing interest in their current suite of products. Site log-ins of their brain training products are up 70%, MyBrainSolutions has now been used more than 3.5MM times (up from 2 million through 6/30/11), and their backlog of potential customers continues to grow. Fueling this growth is increased utilization as well as growth in the user-base, which has increased by approximately 28% from about 50k to 64k over the last 6 months. BRRZY also notes relative to their brain training products that that they have commenced a "successful pilot program with one of the world's largest health IT providers" - presumably meaning this company could become a customer in the near-term. We continue to model a substantial ramp in revenue from these products in fiscal 2013, particularly in the second half.
- Marketing / Awareness Efforts: BRRZY has been active with increasing awareness of their brain training products through print and electronic media placements. The company also continues to attend key industry events and make presentations.
- Pipeline Growing / Expanding Geographic Markets: BRRZY is now looking to extend beyond just depression and ADHD with iSPOT and expects to commence an iSPOT anxiety (dubbed "iSPOT-X") study in 2013, potentially expanding their already broad target markets to the ~28 million Americans that suffer from anxiety. BRRZY is also now looking to expand outside the U.S. and into other geographic markets for their diagnostic tests and noted in the annual filing that they will be working to gain regulatory approval to launch into parts of Europe, including the U.K., Germany, France and Holland.
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