Small Caps | May 17 2012
– Brain Resource has world's largest brain function database
– Commercial options are being developed
– Bell Potter sees the company as a pioneer in certain markets
– Rates Brain Resource as a Buy
By Chris Shaw
Brain Resource ((BRC)) is based in San Francisco in the US and has the world's largest database of brain function. The company is now benefiting by creating value from this database through commercial products in areas such as the diagnosis and management of mental disorders and the maintenance of brain fitness.
Bell Potter notes a number of commercial products are now growing revenue for Brain Resource, to the extent the group has been EBIT (earnings before interest and tax) positive since FY09. Despite this, the stock continues to trade around its 2001 IPO price of 25c per share.
The main products of Brain Resource are WebNeuro, a clinical decision support product, and MyBrainSolutions, which is a suite of brain training solutions. Bell Potter notes both are web-based and highly scalable.
WebNeuro is a clinical decision support product used to evaluate patients for depression and ADHD. Once a client completes an online suite of tasks Brain Resource's processing centre issues a report, with the company being paid for each report issued.
Bell Potter estimates there is a US$2 billion market for WebNeuro's use in depression in the US alone. Support for the product likely given it provides an evaluation for which healthcare payers will reimburse and boosts practice work flow efficiencies for clinicians.
The idea behind MyBrainSolutions is that by exercising the brain through games and activities, individuals can boost memory and attention while increasing 'positivity' and reducing stress. Aside from individuals, MyBrainSolutions is becoming increasingly attractive to businesses looking to get more productivity from employees and in Bell Potter's view this addresses a US$300 million market that continues to grow quickly.
The potential of MyBrainSolutions has already been identified, Bell Potter pointing out Brain Resource has signed Aetna as a distribution partner. Discussions are also underway with three other potential Managed Care distributors.
Offering a potential boost to both major products is the iSPOT (International Study to Predict Optimised Treatment) trial. Bell Potter points out this will be the world's largest trial to predict response to depression and ADHD, while also potentially offering a new treatment and response prediction engine.
If iSPOT is successful WebNeuro would transform from a decision support tool to a depression and ADHD diagnostic and treatment response prediction engine. This would significantly boost the value of the product in the view of Bell Potter. With this in mind, Brain Resource is seeking US FDA approval this year, while preparations are under way for the next iSPOT studies on other psychiatric disorders.
This should ensure growth in WebNeuro continues as Brain Resource develops the product to address new disorders and treatment options. Bell Potter also suggests regulatory drivers such as the need for health plans above a certain size to provide coverage for mental health services should also drive increased use of the product.
To reflect this Brain Resource is employing more sales people in the US to market WebNeuro, while adding new functionality such as account management.
Future developments for Brain Resource include the establishment of an ADHD web portal via a partnership with Och-Ziff, as at present there is nothing in the online space that provides parents with all the information needed to help manage a child's condition. Given the ADHD drug market is rising, drug developers are also likely to find such a site useful in the view of Bell Potter.
Given the expectation of a strong increase in WebNeuro business from FY13, Bell Potter expects solid earnings growth for Brain Resource from FY13. Forecasts in earnings per share (EPS) terms stand at 1.9c this year and 5.1c in FY13, rising to 13.6c in FY14.
This is enough for Bell Potter to derive a base valuation for Brain Resource of $0.79, rising to $1.18 under more optimistic assumptions. Price target has been set at $0.85. Given a market capitalisation for Brain Resource of less than $20 million at present there is little in the way of comparative figures as none of the brokers in the FNArena database offer coverage on the company.
The upside potential for Brain Resource is enough for Bell Potter to rate the stock as a Buy.
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