ClearPoint Neuro, Inc. (NASDAQ:CLPT) Q4 2022 Earnings Call Transcript

ClearPoint Neuro, Inc. (NASDAQ:CLPT) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Greetings, and welcome to the ClearPoint Neuro Fourth Quarter and Full Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. Comments made on this call may include statements that are forward-looking within the meaning of securities laws. These forward-looking statements may include, without limitation, statements related to anticipated industry trends, the company’s plans, prospects and strategies, both preliminary and projected; the size of total addressable markets or the market opportunity for the company’s products and services and management’s expectations, beliefs, estimates or projections regarding future results of operations.

Actual results or trends could differ materially. The company undertakes no obligation to revise forward-looking statements for new information or future events. For more information, please refer to the company’s annual report on Form 10-K for the year ended December 31, 2021, and the company’s quarterly report on Form 10-Q for the 3 months ended September 30, 2022, both of which have been filed with the Securities and Exchange Commission and the company’s annual report on Form 10-K for the year ended December 31, 2022, which the company intends to file with the Securities and Exchange Commission on or before March 31, 2023. All of the company’s filings may be obtained from the SEC or the company’s website at www.clearpointneuro.com. I will now turn the call over to Joe Burnett, Chief Executive Officer.

Joe Burnett: Thank you, Maria, and thank you to all of the investors and analysts on today’s call for being a part of the ClearPoint vision and journey. Our mission and our priority is to help restore quality of life to patients and their families who are suffering from some of the most debilitating neurological disorders imaginable. In the fourth quarter and full year 2022 we have continued to make progress across our four pillar growth strategy, including biologics and drug delivery, functional neurosurgery navigation, therapy and access products and in achieving global scale. We are excited to continue this momentum into 2023, where we again expect more than 20% growth and further progress in all four of those same growth pillars.

I will now turn the call over to Danilo D’Alessandro, our CFO, to review our financial performance in the fourth quarter and full year 2022, after which I will add some additional detail to our four pillar growth strategy moving forward. Danilo?

Danilo D’Alessandro: Thank you, Joe, and thank you all for joining us today. Let me start by looking at the full year 2022 results. ClearPoint Neuro total revenues were $20.6 million for the year ended December 31, 2022, which represents a 26% increase over revenue of $16.3 million in 2021. Our revenue is made up of three components: functional neurosurgery navigation and therapy, biologics and drug delivery and capital equipment and software. Functional neurosurgery navigation revenue consists of commercial sales of disposable products and services related to cases utilizing the ClearPoint system to deliver medical device therapy to the intended target. This revenue segment increased 13% to $9.1 million for the year 2022, up from $8.1 million in 2021.

Biologics and drug delivery revenue includes sales of disposable products and services related to customer-sponsored preclinical and clinical trials utilizing our products. Biologics and drug delivery revenue increased 34% to $9.1 million in 2022, up from $6.8 million in 2021. This increase was due to both an increase in commitments by our current partners and new pharmaceutical partners. Capital equipment and software revenue, consisting of sales of ClearPoint reusable hardware and software and related services was $2.3 million for the year 2022, a 61% increase compared to 2021. Gross margin for the full year 2022 was 66% compared to 68% in 2021. This decrease was due primarily to an increase in indirect labor costs in 2022 as compared to 2021 as well as an increase in excess and obsolete inventory reserves.

Research and development costs were $10.9 million for the year 2022 compared to $9.3 million in 2021, an increase of $1.6 million or 17%. The increase was due primarily to increases in personnel costs, including share-based compensation expense of $1.4 million due to growth in headcount and a $0.1million increase in regulatory fees. Sales and marketing expenses were $9.4 million for the year 2022 compared to $7.2 million in 2021, an increase of $2.1 million or 30%. This increase was primarily due to increases in personnel costs, including share-based compensation expense of $1.5 million, resulting from increase in headcount in our clinical and marketing teams, increases in travel expenses of $0.3 million and increases in marketing activities of $0.2 million.

General and administrative expenses were $9.6 million for the year 2022 compared to $8 million in 2021, an increase of $1.6 million or 20%. This increase was due primarily to increases in personnel costs and share-based compensation of $1.5 million; IT costs of $0.3 million, insurance costs of $0.2 million, offset by a decrease in bad debt expense of $0.3 million. Net interest expense for the year 2022 was $0.1 million compared to $1 million in 2021 due to the conversion into equity of two tranches of convertible debt in May 2021 and November 2021. Additionally, interest expense was partially offset by higher interest income in 2022 as a result of the increasing interest rates and the company’s investment in U.S. government debt securities.

I will now turn to the fourth quarter 2022 results. Total revenues were $5.2 million for the 3 months ended December 31, 2022, an increase of 21% over $4.3 million in the fourth quarter of 2021. Functional neurosurgery and therapy revenue increased 7% to $2.3 million for the fourth quarter of 2022 from $2.1 million for the same period in 2021. Biologics and drug delivery revenue increased 37% to $2.3 million in the fourth quarter of 2022 from $1.7 million in the same period in 2021. The increase was predominantly due to a 79% increase in biologics and drug delivery service revenue partially offset by a slight decrease in product revenue. Capital equipment product and related service revenue increased 25% to $0.6 million for the fourth quarter of 2022, as compared with $0.5 million in the same period of 2021 due to an increase in the placement of ClearPoint Capital and software.

Gross margin was 64% for the fourth quarter of 2022 compared to a gross margin of 77% for the fourth — for the same period in 2021. The decrease in gross margin was due primarily to higher overhead expenses and inventory reserves. Operating expenses for the fourth quarter of 2022 were $7.8 million compared to $7.3 million for the fourth quarter of 2021. The increase was mainly driven by the increase in headcount across the organization and share-based compensation. The fourth quarter operating expenses include a onetime year-to-date reclassification of $1.9 million to classify share-based compensation in the same income statement line items as the cash compensation paid to those employees rather than in general and administrative expense. With respect to our cash position at the end of December 2022, we held cash, cash equivalents and short-term investment balances of $37.5 million compared to $54.1 million at the end of 2021.

Our cash decrease resulted primarily from our operating cash needs. Net cash flows used in operating activities for the year ended 2022 were $16.2 million, an increase of $3.5 million from the year ended 2021. The increase in operating cash need was primarily driven by $4.4 million in additional inventory purchases to mitigate any risk to our supply chain. In the fourth quarter, our cash burn was approximately $3 million, the lowest quarterly cash burn since Q1 2021. I’d like to turn the call back to Joe.

Photo by Piron Guillaume on Unsplash

Joe Burnett: Thanks, Danilo. 2022 was a successful year for our team across our four pillar growth strategy, which has remained in place for the past 5 years and headlined by record revenue of $20.6 million and 26% growth. Over the past 2 years, we have solidified our leadership team with amazing hires and operations, finance, legal, quality, regulatory, preclinical and clinical research using the funds available from our capital raise back in early2021. We now have the foundation to drive scale and productivity with the expectation that sales will start to outpace expense growth in the years ahead. Now let’s break that progress down into our four growth pillars. First, our biologics and drug delivery team continued to add new pharma partners and services throughout 2022.

At present, we currently have more than 50 active partners in this space and have been able to maintain the pace of approximately one new partner added each month. We continue to expect that biologics and drug delivery will be one of our fastest-growing segments as we have prepared for growth along three major axes. First, we will continue to add new partners in 2023 as we have not yet achieved even 50% of the partnerships where we believe our technology can help their platform. Second, we continue to add new services, expanding the menu of available projects that our team has the capability to provide to these partners. And third, we expect the majority of our partners to continue to progress through the regulatory pathway from bench to preclinical and eventually clinical trial and commercialization.

At present, we do expect the initiation of multiple clinical trials through our partnerships this calendar year. Now as a reminder, if one partner were to use ClearPoint for our entire portfolio of products and services, that represents approximately an $8 million to $10 million in revenue potential over a 5-year period. Multiply that opportunity times our 50 plus partners and that is potentially a few hundred million in addressable market before any drug product is even commercialized. This is a primary driver as to why we feel our company can achieve cash breakeven without the requirement of any meaningful revenue from approved and commercialized drugs. Speaking of commercialization, our team achieved a very significant milestone in 2022 in the co-labeling in Europe for our SmartFlow cannula with the very first neuro gene therapy approved anywhere in the world Upstaza made by PTC Therapeutics.

The approved labeling of this drug includes the requirement of using our cannula when dosing patients and is the result of robust preclinical and clinical testing data that continues to be collected today. While commercialization of other drugs will take some time, I cannot stress the importance and the potential if many, if not all, of our partners eventually achieve regulatory clearance with similar co-labeling with our devices. For our second pillar of growth, let’s now turn to functional neurosurgery navigation. Many of the challenges we saw in 2020 and 2021 persisted into 2022, contributing to an elevated cancellation and postponement rate for elective procedures, including flu and COVID infections, staffing shortages and supply chain issues contributing to equipment back orders and delayed repairs.

Now while we invested in additional inventory and did not experience any substantial supply shortages, we are still only the navigation portion of the procedure and a backorder for another company’s therapy product can also contribute to a cancellation for a ClearPoint procedure. That being said, we still see strong demand for our navigation products where we placed a record 11 new systems in 2022. In fact, here in 2023, we have already installed three systems year-to-date and believe we will place a total of at least 10 systems this calendar year keeping us on track to achieve 100 systems by 2025. And when we do perform an installation, new sites are getting a much more advanced solution in 2023 as we achieved multiple FDA clearances for new hardware and software, including ClearPoint version 2.2 software, Array version 1.1 software, Maestro segmentation tools, inflection head frames and more.

A first experience with ClearPoint today is very different than years ago. The ability to accelerate to two procedures a day is driving our surgical efficiency faster than ever. We expect additional submissions and potential clearances this year in 2023 and believe with the size of our software and data scientist teams that we can deliver a cadence of at least one new software release each year for the foreseeable future. We also expect FDA submission in 2023 for two additional hardware offerings, including our Orchestra Head Fixation Frame and the Smart Brain Cortex, which will be used for the implantation of brain computer interfaces to the cortical surface of the brain, primarily in clinical trial. For pillar #3, therapy and access devices, we achieved a major milestone in 2022 with the FDA clearance of the Prism Laser Therapy System marking the first therapy product in our portfolio.

Initial experience with Prism has been positive with early cases now performed in the United States and in Europe. We expect to remain in a limited market release with relatively modest revenue in 2023, while we continue to gain experience with the product and prepare marketing and training materials to highlight the advantages of the Prism Laser System. We then expect to move to a full market release in 2024 after receiving FDA clearance for the 1.5 Tesla scanner labeling to our product. Finally, our fourth pillar of growth, achieving global scale, has made great progress as well. As previously mentioned, we have signed a lease for a new 20,000 square foot manufacturing and development facility in Carlsbad, California, where we expect to be fully operational and producing product by the end of 2023.

This facility will serve as a product showcase for pharma partners, will be designed for improved product and manufacturing flow and eventually margin improvements in the years ahead. We believe the capacity of the site will support the next 5 to 10 years of growth from a production standpoint in addition to adding new testing and preclinical services to support our 50 plus pharma partners. Our expansion outside the United States has continued with a total of 10 OUS sites now installed and ready to do cases. In 2023, we expect between 50 and 100 cases will be performed in non-U.S. hospitals, which again is crucial for winning contracts with pharma partners outside the U.S. that want to run clinical trials on their home field. For 2023, we continue to expect revenue in the range of $25 million to $27 million for the year, representing growth between 21% and 31% year-over-year.

Revenue in Q1 will likely be in the range of $5 million to $5.5million and subsequent quarters growing more rapidly based on our capital sales pipeline, laser therapy revenue and timing of preclinical services, which are going to contribute more in the second half of 2023. From a cash standpoint, Danilo mentioned, we ended the year at $37.5 million in cash and short-term investments. Based on our current projections, we expect our operational cash burn in 2023 to improve slightly compared to 2022 as we see an inflection point more in 2024, where revenue will outpace expenses and our new manufacturing facility will be up and running. In the near-term, similar to 2022, we expect a comparable cash flow seasonality and of a larger cash burn in the first half of 2023 when one-time annual expenses like bonuses, corporate fees and insurance are paid, followed by a slower cash burn in the second half of 2023.

As we look at timing for what cash breakeven looks like for the company, we have run a number of scenarios. Based on our current projections, we feel that as a company, we can achieve cash breakeven when we get to the milestone of 50 hospitals each doing 50 cases a year or on average, one case per week at these 50 centers of excellence. This combined with capital sales and service assumption at those 50 hospitals, and modest growth in our preclinical services would deliver approximately $50million in revenue and support operational cash breakeven. The good news is that we are already installed at approximately 70 centers around the world and will add approximately 10 additional this year so that we have the installed base to support this next phase as our portfolio fills out.

At a single hospital, if we can get 30 DBS cases a year, 15 laser cases a year and 5 biologics and drug delivery clinical trial patients each year, then that is a credible path to the volume we need to achieve. Again, this would require only one day a week of MRI or operating room time, which is reasonable and can be supported by the portfolio of products that we certain to have — certain — that we expect to have available by 2025. Our internal projections and expectations support us achieving an operational cash breakeven by the fourth quarter of 2025 and a full year cash breakeven in 2026 if our strategy holds and barring any significant disruptions to patient demand, inorganic investments or delays to our planned product launches. We believe to have line of sight to this milestone and importantly, don’t need massive patient demand increases or even commercial approval of large gene and cell therapy indications in that time frame.

With that, I would like to open up the call to any questions that you might have.

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Q&A Session

Operator: Our first question is from Frank Takkinen with Lake Street Capital Markets. Please proceed with your question.

Frank Takkinen: Perfect. Thanks. Hey, I wanted to start with one on the comment about multiple clinical trials likely to launch at some point this year. Maybe talk a little bit more through those and how it relates to the total revenue potential of a partner in what stage those clinical trials may be in, and how that could affect the model as we look at 2023?

Joe Burnett: Sure. Yes. Thanks for the question, Frank. Yes, so if you think about 2023 and some of the trials that our partners have communicated the schedules for to us and again, we are going to keep who the partners are confidential, just to make sure we are respecting our agreements that we have. But what I can tell you is that some of these trials will start — will continue, I would say, in the rare childhood genetic range of things, which as we’ve seen with our partner, PTC, often requires a less rigorous clinical trial protocol, meaning that you can follow a BLA process and submit data without necessarily a pivotal study or a randomized controlled study or something like that. So we do expect some of those to start here in 2023.

However, we also expect the initiation of much larger potential indications for studies like Parkinson’s disease and more adult disorders, which will include a longer clinical trial pathway. However, it will also include a larger number of patients that need to be enrolled to show that. I think as we’ve discussed in the past, some of the Phase II and Phase III trial design that we’ve seen in the past to show full efficacy and be required by the FDA, could include as many as 200 patients in those trials. And in some of these particular studies, we can contribute anywhere from $10,000 to even $20,000 or more per patient. So an individual clinical trial that’s probably run over a couple of years, could contribute anywhere from $2 million to $4 million just with one of those pivotal trials.

So we do expect the initiation of hopefully a couple of those larger indications to happen sometime in 2023.

Frank Takkinen: And as a follow-up directly to that, how much of that is baked into the guide right now where would one of those trials kicking off in 2023 be upside to the guidance?

Joe Burnett: I would say that we’ve very little in the guidance at this point. I mean our guidance is a range, right? So we’ve said $25 million to $27 million. So I would say the high-end of the range would include more patients being enrolled. But at the low end of the range, I’d say it’s very small. It’s almost like the assumption that a few patients will be enrolled by the end of the year for some of these trials. So it’s really not meaningful and does present some upside.

Frank Takkinen: Okay. That’s helpful. And then I wanted to shift over to the laser. Curious how many centers you have tested that laser in the initial commercial launch at this point? And how has the feedback been versus the competing lasers on the market?