NeuroPace, Inc. (NASDAQ:NPCE) Q3 2023 Earnings Call Transcript

NeuroPace, Inc. (NASDAQ:NPCE) Q3 2023 Earnings Call Transcript November 6, 2023

NeuroPace, Inc. beats earnings expectations. Reported EPS is $-0.28, expectations were $-0.39.

Operator: Ladies and gentlemen, greetings and welcome to the NeuroPace, Inc. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Irina Ridley, Chief Legal Officer. Please go ahead.

Irina Ridley: Good afternoon. Thank you for joining us for NeuroPace’s third quarter 2023 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 third quarter ended September 30, 2023. 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 securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities 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.

A close-up of a high-tech medical device, representing the company’s cutting-edge products.

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, the impact of COVID-19 on our business and prospects for recovery, 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 a more detailed descriptions of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our public filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 2, 2023 and our quarterly report on Form 10-Q for the period ended September 30, 2023 to be filed with the SEC as well as any 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 November 6, 2023. 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 Irina, and good afternoon everyone. As you saw in the press release, we issued earlier today we had a strong third quarter, marked by strong year-over-year revenue growth and operating execution. The fundamentals of our business are well established. And I look forward to updating you on several meaningful milestones which we believe will drive future growth. On today’s call, I will provide highlights from the third quarter of 2023, and review our key business priorities for the remainder of 2023 and into 2024. I will then turn the call over to our CFO, Rebecca Kuhn, to present the details of financial performance for the quarter before opening the call to Q&A. Total revenue for the third quarter was $16.4 million, representing growth of 47% compared to the prior year, and as anticipated, down 1% compared to the second quarter of 2023 as we experienced flight seasonality and a reduction in the number of replacement procedures.

As we complete transition to the newer, longer lasting battery device. Strong year-over-year performance was again primarily driven my initial implant growth within comprehensive epilepsy centers, or CECs, both through increased utilization and adoption by prescribers and by implants over our RNS system and our NAUTILUS study. We also continued to see increasingly higher transduction, from our partnership with DEXI Medical. As expected, replacement RNS implant revenue continues to decline now at approximately 3% of total revenue. We believe that replacement revenue will become a tailwind once more the newer devices with the longer lasting battery life begin to reach end of service. In light of our Q3 results, we are raising full year 2023 revenue guidance to a range of $62.5 million to $63.5 million, up from $59 million to $61 million said last quarter, and up from the $50 million to $52 million range we communicated at the start of the year.

We were also pleased with our gross margin performance improvement to 74.5% in Q3, up from 71.4% in the prior year period, and 72.5% in Q2 2023. As volumes increase, and the costs are allocated across more units, we expect gross margin for 2023 to be between 71% and 73%, up from 70% to 72% as previously communicated, We remain committed to disciplined expense management. And this in combination with revenue growth and gross margin performance, along with the impact of timing of collections from our customers, has resulted in cash burn of $2.2 million in the third quarter of 2023 compared to $4 million in the second quarter of 2023. Again, without compromising revenue growth, and with the continued focus on our key priorities. Well, we believe Q3 cash burn was the result of several factors, we’re pleased with the result and we’ll continue our efforts to manage expenses as we focus on profitability.

Based on our current cash burn rate, we now believe that we have sufficient capital to fund our planned operations into 2026. I would now like to turn your attention to our operating achievements, which we expect will have a meaningful impact on our near and longer term growth prospects. There were a number of significant operating achievements in the quarter, which reinforce our continued focus on demonstrating strong execution in the business. We saw our first implants of the RNS System in the community setting as part of the initiation of our pilot activities for our Project CARE program. We also took significant steps in streamlining patient care, particularly important as we expand into the community through FDA approval of our Tablet Remote Monitor, and the launch of the nSight platform.

And we remain on track to complete enrollment in our NAUTILUS trial in Q1 2024, to expand our indication into generalized epilepsy. We’d like to start with our Project CARE expansion. We have been focused on refining our strategy for launching our commercial efforts into the community and are expecting full launch of our pilot program with a group of community customers in the first half of 2024. We have seen significant interest in these efforts and some of these pilot customers have been eager to advance quicker through the process. As a result, we’re happy to announce our first implants at the RNS System in the community setting with this initial group of pilot customers. The patients and plant are doing well and we’re pleased that we’re now able to bring RNS Therapy, not only to the additional 1,800 epileptologist and an expanded group of functional neurosurgeons.

But most importantly, to the indicated patients who would or could not have been referred to a Level 4 Center for Treatment, we will continue to be thoughtful and targeted in these expansion efforts. It is also important to note alongside our initial work with these community centers, we have remained focused on ensuring appropriate patients are referred to Level 4 CECs for further diagnosis and treatment. We believe that as a result of the work we’ve started to do in the community, additional patients have already been identified for referral into Level 4 centers. Our expansion into the community demonstrates the benefits both locally and more broadly with expanding access to RNS Therapy. We’re excited by the opportunity to close the treatment gap and plan to provide additional updates as our efforts continue.

Next, we are pleased with our continued progress in enrolling patients into our NAUTILUS trial. And we remain on track to complete enrollment in Q1 2024. As we look to grow and scale our business, we are focused on delivering a product that is not only clinically superior, but also user friendly, both as it relates to our patient and clinician user groups. With that in mind, as you may have seen, we’ve recently introduced two new product enhancements designed to streamline the RNS experience. We launched our enhanced nSight Data Management system in Q3, with overwhelmingly positive clinician feedback. We also recently launched our new tablet remote monitor or TRM ahead of schedule. The TRM and nSight launches enable important advancements in the efficiency and ease of use of the RNS System.

We believe that delivering a quality product that is easy to use across a variety of stakeholders and is supported by world class data will enable us to further grow and scale. We are committed to continuing to deliver product improvements that streamline care, making it easier for physicians to deliver optimal care to their patients. As our financial results for the quarter suggests, we saw continued momentum around our efforts to make our RNS System available to more patients living with drug resistant epilepsy. We believe this is a critical time to focus on transforming the ways in which epilepsy care is delivered to patients. We are focused on the International league against epilepsy or ILAE guidelines, which state that once a patient has tried and failed to medications, they should be referred for additional treatment, even if surgical intervention is not appropriate.

We believe RNS fits exactly in that category. This has and will continue to help drive our strategy, which involves expanding utilization of our RNS System among existing clinicians and CDCs, increasing adoption of our RNS System by additional clinicians at CECs and in the community and expanding patient indications for our RNS System. With that, I will now turn the call over to Rebecca, to review our strong third quarter financial results. Rebecca?

Rebecca Kuhn: Thank you, Joel. NeuroPace’s revenue for the third quarter of 2023 was $16.4 million, representing growth of 47% compared to $11.2 million for the third quarter of 2022 and down 1%, compared to $16.5 million in the second quarter of 2023 as seasonality and a decline in replacement revenue played a role in our sequential performance. Our strong Q3 results were primarily driven by increased adoption and utilization of our RNS System by physicians and treating new patients. We also continue to generate meaningful revenue from DIXI Medical Products. The placement implant revenue continued to decline again this quarter, as anticipated and represented approximately 3% of total revenue. Gross margins for the third quarter of 2023 was 74.5% compared to 71.4% in the third quarter of 2022, and 72.5% in the second quarter of 2023.

Our gross margin increased primarily due to the increase in RNS products produced and sold. As our fixed manufacturing overhead costs were spread over more units. The increase in RNS gross margin was partially offset by the lower gross margin for distribution of DIXI Medical Products. Total operating expenses in the third quarter of 2023 were $18.2 million, compared with $18.2 million in the same period of the prior year. Consistent with prior quarters this year, operating expenses as a percentage of revenue were lower for both R&D and SG&A. We maintained our focus on appropriate resource allocation and cash management and remain committed to effectively managing our operating expenses without compromising revenue growth. R&D expense in the third quarter of 2023 was $4.8 million, compared with $5.6 million in the same period of 2022.

This decrease was primarily due to a decrease in expenses for clinical studies, and an increase in grant funding, which reduces our research and development expenses. SG&A expense in the third quarter of 2023 was $13.4 million, compared with $12.6 million in the prior year period. This increase was primarily due to an increase in personnel related expenses, driven by an increase in sales based variable compensation as a result of the increase in revenue compared to the prior year period. We also increase in revenue compared to the prior year period. We also had an increase in sales, sales support and marketing expenses, including expenses associated with distributing DIXI Medical products. These increases were partially offset by reduced general and administrative expenses, primarily outside services and insurance.

Loss from operations was $6 million in the third quarter of 2023, compared with $10.2 million in the prior year period, We recorded $2.2 million in interest expense in the third quarter, compared to $1.9 million in the prior year period. Net loss was $7.3 million for the third quarter of 2023, compared with $11.8 million in the third quarter of 2022. Our cash and short-term investments balance as of September 30, 2023, was $61.3 million. Our long-term borrowings totaled $55.9 million as of September 30, 2023, with the full principle due on September 30, 2025. As Joel mentioned, we are raising full year 2023 revenue guidance to a range of $62.5 million to $63.5 million, up from a range of $59 million to $61 million that we set on our Q2 earnings call.

We expect that revenue growth will be supported mainly by increases in initial implants and revenue from the sale of DIXI Medical Products. Replacement of substantially all of the prior generation iOS devices still anticipated to be completed by the end of 2023. As previously indicated, the decline we have experienced in replacement revenue is anticipated to revert once the newer longer lasting devices introduced in 2018, again to reach the end of their battery life. We are increasing our gross margin guidance to 71% to 73%, up from 70 to 72%. We may see variability in our gross margin due to fluctuations in the proportion of DIXI Medical revenue to overall revenue and other factors. We are updating our guidance for operating expenses to $75 million to $76 million, reducing the upper end of the range.

Operating expenses are expected to include $9 million to $10 million in noncash expenses. Our cash burn in the third quarter of 2023 was $2.2 million, a continued improvement over $4 million in the second quarter of 2023. Based on our current cash burn rate, we now believe that we have sufficient capital to fund our planned operations into 2026. I would now like to turn the call back over to Joel for closing remarks.

Joel Becker: Thank you, Rebecca. Overall, we enter the final quarter of 2023 well-positioned to build on this positive momentum. We are encouraged by the higher utilization we’ve seen among our CEC customers, excited about the initial implants in and are focused on beginning to drive adoption among community centers, pleased with our progress in enrolling patients into our NAUTILUS trial and are happy with the important product development advancements we have brought to the market to streamline patient care. In short, by continuing to extend our reach to an expanding number of CECs, epileptologist and neurosurgeon, streamlining utility and enriching data value, we continue to establish an ever stronger foothold at the forefront of drug resistant epilepsy treatment.

Additionally, and importantly, we remain focused on and are executing with operating discipline, as demonstrated by ongoing strong cash management through revenue growth, gross margin performance, and operating expense execution. Our balance sheet remains strong, providing us ample runway to execute on our commercial, clinical and operating strategy. To reiterate, based on our current cash burn rate, we are comfortable extending our cash guidance to fund our planned operations into 2026. Positioning us for continued strong momentum into 2026, positioning us for continued strong momentum for the rest of the year 2024 and beyond. Lastly, I would like to address the questions we and other members of the Medtech community have fielded relative to GLP-1 exposure.

Let me be clear that epilepsy does not have any correlation to obesity or body mass index. And we do not believe that either our target patient populations, or our RNS System, as a technology platform, are impacted in any way as a result of the GLP-1 class of drugs. This concludes our prepared remarks. I would now like to turn the call over to the operator who will open the call for questions. Operator?

See also 5 Best Home Connected Fitness Equipment and 20 Countries with Highest Black Population outside Africa.

Q&A Session

Operator: [Operator Instructions] Our first question is from Vik Chopra with Wells Fargo. Please go ahead.

Vik Chopra: Hey, good afternoon, and thanks for taking the questions. Congrats on a great quarter. Maybe just two for me here. So just in the performance, I think you talked about initial implant in the quarter, maybe just some additional color or what growth in initial implants. Was it primarily driven by utilization within existing centers? Or there’s something else you call out, and then I had a follow-up, please.

Joel Becker: Hi, Vik. Thank you for the question and appreciate you being on with us today. Yes, the short answer, sorry there, I kind of — I started in a little bit early. It really is in initial implant utilization. And that’s where the preponderance of the growth has been for RNS in the quarter.

Vik Chopra: Great. And then maybe one for Rebecca, given where we are in the year, just maybe highlight some potential headwinds and tailwinds to keep an eye out for 2024 as it pertains to the top line. Thanks for taking my questions.

Rebecca Kuhn: Vik, we are not guiding to 2024 and really can’t comment on what to expect in 2024 just yet. So I think we’ll just have to ask you to hold that question, until we get a little further down the road.

Operator: Hi, Vik, this is the operator. Do you have any more questions?

Vik Chopra: No, that’s — I’m okay. Thank you.

Operator: Thank you. Our next question is from the line of Michael Polark with Wolfe Research. Please go ahead.

Michael Polark: Good afternoon. Thank you for taking the question. First one on the push into the community. Joel, I heard your comment about looking appropriate. Patient selection is important. Appropriate patients will be referred to Level 4 centers. I’m just curious kind of what would drive that decision at the patient level? What patients are appropriate to treat in the community versus move to the higher level centers. So that’s part one of this question. And then part two is your CARE program. I guess I’m just curious what — what’s different about this in terms of the level of support you’re providing to the community practitioners versus what you’re already doing at the Level 4 CECs?

Joel Becker: Thanks for the question, Mike — both the questions. With regard to patient populations as we push into the community, there are a number of patients who — or types of patients rather who can be treated well in the community. And really those that just need the Phase I monitoring and don’t need to be referred back for Phase II monitoring. So focal patients who are drug resistant to who only need to go through Phase I monitoring are good candidates for being treated in the community. And then, yes, as I mentioned, we have seen — even already, even with the early work that we’ve done, patients being identified as folks go through and look at the populations that they’re managing in the community for patients. They do think are good Phase I candidates, than other more complex patients that they feel like will need additional monitoring and additional types of therapy support that then can be referred back to a Level 4 center.

In the past, those patients may not have been identified as candidates for RNS therapy, because they didn’t have — the local center really didn’t have a relationship with or an ability to refer back into a Level 4. They’re both in terms of making the connection for where people should be sent to get that kind of therapy and then ensuring that they have a good path back for managing that patient as well. So both with regard to the type of patient and the type of underlying disease, and whether they can be too well in the community through Phase I monitoring as well as in the identification of more complex patients and the establishment of relationships back for referrals, those are things that we are doing in the community. Admittedly, we are just getting started here.

So I’m not going to say too much about the full efforts here just yet, Mike, because it really is, we are getting started with the program, and there are some centers who’ve moved a little bit faster than others, and we’ll have more to say about the CARE program as we look to launch the full pilot over here in the first half of ’24. But those are some of the early returns that we’re seeing.

Michael Polark: For the follow-up, I’m curious, I mean, I appreciate the comments and discipline around operating spending. I imagine you still have to invest to drive growth here and penetration within your centers. So as you look out into ’24 and ’25, I’m not asking for guidance per se, but do you envision still creating more sales territories to kind of grow the business or maintaining the number of territories you have and putting more field support within those territories to promote the depths? I’m just curious how you’re thinking about the field organization over the next couple of years and balancing the breadth versus depth dynamics. Thank you so much.

Joel Becker: Thank you, Mike. Another great question. And we will say more about it here as we get further into the CARE program, but a couple of things I can give you. One, we had, as you may recall, we’ve previously commented that we have invested in some of the breadth of our organization here previously. And so we had expanded the sales force — the sales force from a territorial perspective and added some of those resources earlier last year. And those folks have been coming through the training pipeline and are now beginning to be able to contribute out into the field more fully. And so as a starting point, we’re going to be looking to use a lot of that capacity. We are — as I mentioned previously, we are going to be very focused and targeted in these initial efforts as well.

And that’s part of what we are going to be learning in the pilot program is what types of support is required? Is it more of the prospecting and identifying the right target centers and the patient populations, or is it more on the clinical support side? So that will read then on your question of do we need more breadth or do we need more depth? Or is it an optimized combination of both with the organization that we have today. And so that’s a lot of the exercise that’s going on now and we’ll be going on in the pilot, but we are looking at both of those things, both how can we appropriately expand or extend our reach, so that we can get to those targeted centers, both utilizing the resources we’ve got today and then thinking about what the resourcing model needs to look like as well as what level of clinical support do centers need in the community.

But we are particularly excited about the program, and really looking forward to getting going with the pilot here in the first half of ’24. Again, we’ve gotten really great feedback from a lot of these early centers and a lot of enthusiasm for RNS therapy and being able to access those patients. And so more to come on it, but that’s where we are at currently.