Nexstim: Disagreements over license agreement

Nexstim announced on Wednesday that it had disagreements regarding a license agreement with Magnus Medical. We understand that the issue relates to differences of opinion as to whether or not Magnus Medical has used technology licensed from Nexstim in its new TMS system. As a result of the increased uncertainty regarding license fees, we halve our forecast for revenues for the five-year license period. Reflecting our estimate changes, we lower our target price to EUR 3.40 (previous EUR 4.00) and our recommendation to Reduce (previous Accumulate), as our estimate of the stock's return potential remains insufficient in relation to the risks.

Disagreements over technology licensing

Nexstim announced a technology licensing agreement with Magnus Medical in February 2022. According to the announcement, the companies expect total license fees of approximately 17 MEUR, of which approximately 3.5 MEUR have already been paid in advance. Thus, depending on exchange rates, an estimated amount of about 13.5 MEUR is still remaining, which was expected to be realized during the 5-year royalty period. The technology licensed is related to Nexstim's therapy system (NBT), with certain restrictions. Nexstim e-field modeling and application software are not included in the license. According to the press release, Magnus Medical has informed Nexstim that it uses a third-party solution in its product, which would not be covered by the contract.  This has led to a disagreement over the use of the licensed technology. We believe that the third-party solution mentioned may possibly be related to the news about Magnus Medical's collaboration with two other TMS providers (news here and here). Nexstim will continue to collect information on the system launched by Magnus Medical. Nexstim also said it is planning next steps to protect its financial interests and intellectual property rights according to the agreement.

We halve our royalty forecast due to increased uncertainty

In our view, the disagreement raises risks to the realization of royalty income. We have applied a safety margin to the modeling of license income, as described in our extensive report. In our forecasts, the royalty fee level has been
11 MEUR. We now assume that half of our estimated licensing income will be achieved, which means a total decrease in revenue of 5.5 MEUR during the license period (our forecast for the license period has been 2025-2029). We also estimate that it will take time to resolve the issue, so we are moving the start of royalty income forward by a year to 2026. There may also be costs associated with resolving the issue, but due to the lack of visibility, we are not modeling the potential costs at this time. The biggest impact of the reduced forecasts is in 2028-2029, as we have expected payments to be concentrated towards the end of the period. On the positive side, we estimate that a possible termination of the agreement would also lead to the removal of the business restrictions defined in the agreement, which could open up new markets for Nexstim in the US.

Return potential remains unsatisfactory in an uncertain situation

Our valuation is based on EV/S multiples and the DCF model. Nexstim's 2024e EV/S is 2.8x and decreases to 2.1x in 2025. The multiples are moderate relative to the profitability potential. On the other hand, the medium-term growth outlook has taken a hit, lowering the acceptable multiples. The visibility for the materialization of growth remains low. Based on our DCF model, the share’s value is EUR 3.4 after the forecast downgrade. In our view, the stock is broadly priced correctly and we do not see any significant upside for the stock at this point in time. The return potential is therefore insufficient in relation to the risks.