NeuroPace, Inc. (NASDAQ:NPCE) Q1 2024 Earnings Call Transcript

NeuroPace, Inc. (NASDAQ:NPCE) Q1 2024 Earnings Call Transcript May 12, 2024

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Operator: Good afternoon and welcome to NeuroPace’s First Quarter 2024 Conference Call. As a reminder, this call is being recorded. I would now like to turn the call over to Jeremy Feffer from LifeSci Advisors for a few introductory comments. Please go ahead.

Jeremy Feffer: Good afternoon. Thank you for joining us for NeuroPace’s first quarter 2024 financial and operating results conference call. On today’s call, we will hear from Joel Becker, Chief Executive Officer, and Rebecca Kuhn, Chief Financial Officer. Earlier today, NeuroPace released financial results for the first quarter ended March 31st, 2024. A copy of the press release is available on the company’s website at neuropace.com. Before we begin, I would like to remind you that throughout this call, we will make statements that include forward-looking statements within the meaning of federal security laws, which are made pursuant to the safe harbor provisions of the Private Security Litigation Reform Act of 1995. Any statements made during this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements.

All forward-looking statements, including those around NeuroPace’s projections, business opportunities, commercial expansion, market conditions, clinical trials, and those relating to our operating trends and future financial performance, expense management, estimates of market opportunity, and forecasts of market and revenue growth are based on current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For more detailed descriptions of the risks and uncertainties associated with our business, please refer to the risk factors sections of our public filings with the SEC, including our recent annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 5, 2024, and our quarterly report on Form 10-Q for the quarter ended March 31, 2024, to be filed with the SEC, and any other reports that we may file with the SEC in the future.

This conference call contains time-sensitive information, which we believe is accurate only as of this live broadcast on May 8, 2024. NeuroPace disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. And with that, I will now turn the call over to NeuroPace’s Chief Executive Officer, Joel Becker. Joel?

Joel Becker: Thank you, Jeremy, and good afternoon, everyone. I will start out today’s call by reviewing our performance in the first quarter and key business priorities for the remainder of 2024, before turning the call over to our CFO, Rebecca Kuhn, to present the details of our financial performance for the quarter ended March 31, 2024, which will be followed by a Q&A session. Let’s get started. We are pleased with the start to 2024, reporting total revenue of $18.1 million for the first quarter, up 25% compared to the same period last year. Revenue for the quarter included strong year-on-year growth contributions from sales of the RNS System and DIXI Medical SEEG products, and contribution from our strategic biotechnology collaboration.

Over the past year, we have worked to find a balance between investing in top-line growth and maintaining strong financial discipline across our business. We are proud of the success we have achieved on both of these fronts. The first quarter was another example of this, as we held our cash burn to $7.6 million, which included increased payments for variable compensation as a result of our strong operating performance. We are also pleased to have recently extended the maturity date of our term loan to September 30, 2026, further increasing the company’s financial flexibility. With those high-level comments about the quarter providing an overview for today’s update, let me now dive into some of the details that helped drive this performance.

As we review the results and performance of the business in the first quarter of 2024, we are, and will remain, focused on execution of growth opportunities in our current target market, which is estimated to be approximately $2 billion annually, that offers significant near-term opportunities for growth in treating patients at comprehensive epilepsy centers in the U.S., while also investing in and executing on our longer-term strategy to expand our reach beyond these Level 4 centers and bring NeuroPace’s total market opportunity to more than $55 billion. Our objective is to help close the treatment gap for drug-resistant epilepsy patients by expanding access to RNS therapy through increasing adoption and utilization in Level 4 centers, expanding referrals to and implants outside of Level 4 centers, and expanding indications for RNS therapy, including to generalized epilepsy in patients.

Progress was made on this strategy in Q1, as we remain laser-focused on increasing adoption of the RNS System. One of the metrics we used to measure this progress is total active prescribers, and while we will not quantify this number, we were pleased to see this metric continue its upward trajectory and achieve an all-time high in the first quarter. We also made significant progress in hiring and training field representatives under the previously announced incremental expansion of our commercial organization. These new representatives are now moving through our in-depth training and education program. We expect the majority of these representatives will complete these activities in the first half of the year and begin to be signed off and able to engage in independent field activities in the second half of the year.

We expect that these representatives will also begin to have an impact on the second phase of our long-term strategy, expanding access to RNS therapy beyond Level 4 centers. Pilot program activities have begun in targeted areas, including professional education activities such as webinars, symposia, and peer-to-peer programs. This is accompanied by additional commercial activities, such as the initiation of digital social media awareness programs, center contracting activities, and the placement of representatives in targeted geographies. While it is still early in the rollout of these programs, and they did not have a material impact on our results in the first quarter, we have begun to see both implant-related activity as well as the identification of additional patients in need of Phase 2 monitoring and referral to Level 4 centers.

Additionally, the sales representatives that we have added are primarily focused in geographies where we have identified Project CARE center expansion opportunities, along with supporting geographies where we have been experiencing revenue growth in our RNS and DIXI product lines. We look forward to updating you further on these activities as they progress. Finally, the third phase of our RNS strategy is based on expanding the approved indications for the RNS System. This effort is currently focused on the pivotal NAUTILUS study, in which all implants are complete and the trial is in the follow-up phase. We believe that the strong interest in this study is further evidence of the significant unmet need that exists for patients with drug-resistant idiopathic generalized epilepsy.

As a reminder, the NAUTILUS trial requires evaluation of a primary safety endpoint and an effectiveness evaluation 12 months post-implant. If approved, our RNS System would be the first device with an FDA-approved indication for generalized epilepsy. This study has the potential to represent a highly meaningful market expansion opportunity. In addition to the success our commercial team has had with our RNS System, we also continue to see revenue growth from our exclusive partnership with DIXI Medical to market and sell their diagnostic electrodes and related products for epilepsy. This is a highly complimentary offering to our RNS System, which provides our sales team with an additional opportunity to call on physicians at the CECs. Lastly, we are pleased with the strategic collaboration we entered into with the biotechnology company in the fourth quarter of 2023, which completed an important additional milestone in the first quarter of 2024.

We believe this groundbreaking collaboration is another example of the value our RNS System can provide through its proven ability to collect and analyze data, which is then used to generate insights that can help inform treatment strategies. With that as an overview of our operational progress, let me now turn the call over to Rebecca to review our financial results for the first quarter of 2024. Rebecca?

Rebecca Kuhn: Thank you, Joel. NeuroPace’s revenue for the first quarter of 2024 was $18.1 million, representing growth of 25% compared to $14.5 million for the first quarter of 2023. This growth was primarily driven by increased sales of our RNS System. We also generated meaningful revenue growth from sales of DIXI Medical products. Replacement implant revenue continued to decline compared to the same period last year and represented approximately 4% of total revenue. Gross margin for the first quarter of 2024 was 73.6% compared to 71.7% in the first quarter of 2023. Our gross margin for RNS products improved due to the increase in units produced and sold as our fixed manufacturing overhead costs were spread over more units.

A collaboration with a biotech company also made a contribution to our gross margin in the first quarter of 2024. The increase in gross margin was partially offset by the lower gross margin from distribution of DIXI Medical products. R&D expense in the first quarter of 2024 was $5.8 million compared with $5.3 million in the same period of 2023. This increase was primarily driven by an increase in personnel-related expenses. SG&A expense in the first quarter of 2024 was $15.1 million compared with $13.4 million in the prior year period. This increase was primarily due to personnel-related expenses largely driven by the increase in our commercial team, as well as severance costs due to personnel changes. Total operating expenses in the first quarter of 2024 were $20.9 million compared with $18.7 million in the same period of the prior year.

Consistent with recent quarters, operating expenses as a percentage of revenue were lower for both R&D and SG&A expenses relative to the prior year period. This performance reflects our focus on driving revenue growth while also effectively managing our operating expenses and cash. We continue to focus on finding the appropriate resource allocation to balance these objectives which we expect to continue throughout 2024. Loss from operations was $7.5 million in the first quarter of 2024 compared with $8.3 million in the prior year period. We recorded $2.3 million of interest expense in the first quarter of 2024 compared to $2 million in the prior year period. Net loss was $8.9 million for the first quarter of 2024 compared with $10.4 million in the first quarter of 2023.

As discussed previously, we have maintained a disciplined expense management strategy resulting in cash burn in the first quarter of 2024 of $7.6 million compared to $9.8 million in the first quarter of 2023. As a reminder, the first quarter of the fiscal year tends to be our highest cash burn quarter of the year primarily due to the timing of compensation-related payments. Our cash and short-term investments balance as of March 31, 2024 was $58.9 million. Our long-term borrowings totaled $58 million as of March 31, 2024. We announced today that we finalized an agreement with our lender to extend the final maturity of our debt by one year to September 30, 2026. We believe this extension further improves our overall financial position. Regarding annual guidance for 2024, we continue to expect our total revenue to be in a range of $73 to $77 million, an increase of approximately 12% to 18%.

This growth is expected to be mostly driven by an increase in sales of our RNS System with growth from sales of DIXI Medical products continuing to make a meaningful contribution. We expect our gross margin to be in a range of 72% to 74% for 2024, although we may see small variability due to fluctuations in the proportion of DIXI Medical revenue to overall revenue and other factors. We expect operating expenses for 2024 to range between $80 million and $84 million, including approximately $12 million in stock-based compensation, a non-cash expense. I would now like to turn the call back over to Joel for closing remarks. Joel?

Joel Becker: Thank you, Rebecca. At NeuroPace, we are focused on the opportunity to help close the treatment gap for drug-resistant epilepsy patients by expanding access to RNS therapy. I look forward to continuing to execute on our growth strategy and to updating you on our progress throughout 2024. This concludes our prepared remarks. I would now like to turn the call over to the operator, who will open the call for questions.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Mike Kratky from Leerink Partners. Please go ahead.

Mike Kratky: Hi, everyone. Thanks for taking our questions. Can you just provide some additional color on what assumptions are being factored into your current guidance range at this point based on the commercial experience you saw in 1Q? I know it’s maybe a little bit difficult to answer, but how is the product-level revenue that you saw in 1Q between RNS and DIXI really helping to shape any changes that you might be seeing from here? Thanks.

Joel Becker: Thanks, Mike. That’s a great question. So, excuse me, pardon me. As we said in our prepared comments, we saw really good contributions across product lines here from a year-on-year growth perspective. And so when we look at that, we take that into account as we think about the rest of the year, as well as then a number of the activities that we mentioned that we have underway, whether that’s the organizational expansion or the care activities or traction with prescribers. So we roll all that into how we’re thinking about the year. Obviously, there’s some headwinds there, as well, that we talked about in terms of the replacement cycle, in particular, being something here, particularly in the first half of the year.

But when we take all that together, we feel like the guidance that we maintained with our comments today and that we issued a couple of months ago really represents our best view for what we expect for the business to generate in revenue here through the rest of the year with, again, good performance and contribution from both sales of – initial sales of the RNS Systems, as well as with DIXI.

Mike Kratky: Understood. And maybe just one follow-up to that. You had a nice beat in 1qand ultimately maintained the same guidance range for the year. Can you just confirm whether there was anything that you saw so far in Q2 that’s giving you pause about potentially raising the guidance range or really a lot of the same factors that were being considered initially?

Joel Becker: Just as you mentioned, we were here not too long ago talking about Q1. And we’re here today talking about Q1 and that quarter and guidance for the year. And really, when we set the guidance and when we maintain and confirm that guidance, it’s with the full view of Q1 and then everything else that we’ve seen as we look forward to the rest of the year. So it really is a combination of both what we saw here at the beginning of the year and that we had contemplated, as well as then when we look at all those different factors going forward through the remainder of the year. We’re, again, excited about a number of the opportunities here in front of us with a couple of noted headwinds, as well.

Mike Kratky: Got it. All right. Thanks very much.

Joel Becker: Thanks, Mike.

Operator: Thank you. And your next question comes from the line of Frank Takkinen from Lake Street Capital Markets. Please go ahead.

Frank Takkinen: Great. Thanks for taking the questions. Congrats on a solid start to the year. I was hoping to follow up on your comment about new prescribers, Joel. I know you said you’re not going to quantify that, but I was hoping maybe you could give a little bit more color on where those prescribers are from and what I mean are they existing sites with new users who are now using the technology or are they new sites? And then just give us the kind of refresh on how those typically scale up.

Joel Becker: Great question, Frank. And, yeah, we were excited to see the new prescriber numbers there and the way that has been tracking in that metric. So the way that we look at that, it’s the number of prescribers that have been associated with an initial RNS implant over the past 12 months. And so when we look at those and kind of look at where the prescriber is coming from, it’s a combination of adoption within both current as well as new centers. So we see them coming from both. But given the nature of where we’re at today, a lot of it is increased adoption within current centers. So we get new users and expansion of adoption of users within centers in which we’re present today. But there’s also a component of new users in new centers as well.

Frank Takkinen: Okay. And then the second half of that, just thinking about how the new users are ramped up, what’s the training process like and how do you think about when they start to do as many procedures maybe as the overall average prescriber?

Joel Becker: Yeah, a great question. And so as you might imagine, when you have a new user, it can take a little bit for them to ramp up. And so just as we do with all new customers, we really start with the foundations and the basics of RNS and neuromodulation therapy in their practice and then how they can incorporate it into their practice and scale that up. So we have a well understood and reproducible training and implementation model there for both understanding where RNS fits in their practice as well as how to scale it up in terms of patient selection and how to manage those patients. And so we really work to take people through that education process and adoption process in really a described fashion that we’ve developed over time here.

Frank Takkinen: Okay. Perfect. And if I could just sneak maybe one more in on the biotech agreement, congrats on the milestone achievement. Can you quantify whether or not you received a milestone payment with that and what portion of the $3.7 million total contract value that was?

Rebecca Kuhn: Sure, Frank. We’ll try and give you a little more color. So just as a reminder, the total payments and revenue over the anticipated nine quarters of the collaboration is up to a total of $3.7 million. So that occurs over time. The payments and the revenue have some variation. It’s not terribly [ph] dramatic. So we’re not going to give you specifics, but yes, there are payments that are received along the way and, of course, revenue recognized along the way. So I hope that’s helpful.

Frank Takkinen: That’s perfect. Thanks for taking the questions.

Joel Becker: Thank you, Frank.

Operator: Thank you. And your next question comes from the line of Vik Chopra from Wells Fargo. Please go ahead.

Vik Chopra: Hey, good afternoon. Thank you for taking the questions and congrats on a nice quarter. I also had a follow-up question on guidance. You had a pretty nice gross margin beat. Maybe just some additional color on what drove that. Why not raise the gross margin guide for the year and maybe just help us think about it for the year? And then I had a follow-up, please.

Rebecca Kuhn: Sure. So our gross margin, Vik, increased year-over-year largely due to the increase in units, RNS units produced and sold. That means that our fixed overhead costs are spread over a larger number of units. So we continue to see nice leverage there. We did see some contribution from our biotech collaboration. And, you know, as is always the case, the gross margin then is reduced. Our gross margin has been reduced by the lower gross margin from DIXI.