NeuroPace, Inc. (NASDAQ:NPCE) Q4 2022 Earnings Call Transcript

NeuroPace, Inc. (NASDAQ:NPCE) Q4 2022 Earnings Call Transcript March 2, 2023

Operator: Good afternoon, and welcome to NeuroPace’s Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating the question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Trip Taylor, from the Gilmartin Group, for a few introductory remarks.

Trip Taylor: Thank you, operator. Good afternoon, and thank you for participating in today’s call. Joining me from NeuroPace are Mike Favet, CEO; and Rebecca Kuhn, CFO. Earlier today, NeuroPace released financial results for the fourth quarter and full year ended December 31, 2022. A copy of the press release is available on the Company’s website. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the 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.

All forward-looking statements, including those around NeuroPace’s business opportunities, 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, market opportunity, revenue outlook, and commercial expansion are based upon 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 section of our public filings with the SEC, including our quarterly report on Form 10-Q for the quarter ended September 30, 2022, and our annual report on Form 10-K for the year ended December 31, 2022, 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 March 2, 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 Mike.

Michael Favet: Thanks, Trip. Good afternoon, everyone, and thank you for joining us. Today, I will highlight our fourth quarter performance and update you on the priorities we are intending to focus on in 2023, before turning the call over to Rebecca to detail the financial results and opening the call to questions. Before we begin, I want to highlight our key accomplishments from a productive 2022. In our first full year as a public company, we drove meaningful adoption of our RNS System, increasing utilization within the comprehensive epilepsy centers, or CECs, and adding more implanting centers. We also became the exclusive U.S. distributor of the stereo EEG products produced by DIXI Medical. This provides us with not only an additional revenue stream through our established sales channel, but also visibility into patients being worked through the diagnostic process who are potential candidates for RNS Therapy.

We also made meaningful progress toward expanding the RNS indication, specifically through our NAUTILUS pivotal study for primary generalized epilepsy. We accomplished all of this while reducing cash burn in the second half of 2022 to approximately $15 million compared to approximately $23 million in the first half of 2022. I will provide more color on these accomplishments and how they position us well for 2023 and beyond. Starting with our fourth quarter performance, total revenue for the fourth quarter was $12.8 million, representing growth of 16% compared to the prior year period and 15% compared to the third quarter of 2022. This was primarily driven by increased adoption of our RNS System, evidenced by strong initial implant revenue of $9.8 million, representing growth of 15% compared to the prior year period and 7% sequentially.

This was coupled with revenue contribution from the distribution of DIXI Medical products, which was slightly ahead of expectations at $1.6 million in our first quarter selling this product line. We believe epilepsy monitoring unit, or EMU, patient volumes remained stable throughout the fourth quarter with no significant disruption since the first quarter of 2022. As a reminder, diagnostic evaluation in the EMU is the initial step in evaluating treatment options, including the potential use of RNS. Stability in the EMU supports the pipeline of interventional therapy candidates, including candidates for RNS Therapy. We continue to execute commercially in the normalizing operating environment one that we do not believe has yet returned to pre-pandemic levels and have been successful in driving physician and patient awareness of the clinical benefit and differentiated features of our RNS System.

As a result, we are seeing a trend of increasing utilization, meaning that more patients are getting the benefit of RNS Therapy. Considering this momentum, we expect total 2023 revenue of $50 million to $52 million compared to $45.5 million in 2022. Our growth will be driven primarily by increasing RNS utilization within CEC and a full year of selling the DIXI Medical products. Growth in these areas will be offset by declining replacement implant revenue as the remaining first-generation devices reach end of service and are replaced by our second-generation device with a nearly 11-year battery life. Commercially, our priority is to increase utilization of the RNS System. Our strategy concentrates on three objectives: one, expanding patient selection; two, managing the patient pipeline; and three, driving adoption of the RNS system by additional prescribers and additional implanting centers.

To expand patient selection, our team is focused on physician education. Our goal is to increase physician awareness of the benefits of the RNS System for all indicated focal epilepsy patient subgroups. The RNS System is highly versatile, with the ability to position leads throughout the brain and customize detection and stimulation in a way that allows treatment of a full range of focal epilepsy onset locations. We have compiled compelling clinical evidence showing the differentiated benefits of RNS Therapy across these patient subgroups, and we are working to ensure these data are understood by more physicians. We believe this will help inform deeper integration of RNS system into their treatment algorithms for a broader set of patients. We are also working to close the treatment gap by guiding epileptologists and neurosurgeons to evaluate more drug-resistant epilepsy patients or interventional therapy so that more of their patients can realize the life-changing benefits provided by RNS Therapy.

Our next objective is to actively manage every level of the patient funnel. We believe that identifying and educating potential RNS patients earlier in their treatment journey is critical for increasing RNS utilization. At the top of the patient funnel, we are adding weeds using direct-to-consumer efforts, and through our field team working within the CECs, including through our work in the EMUs with the DIXI Medical stereo EEG products. We utilize nurse navigators who help guide these patients lead through the diagnostic process. We also provide patient education on the RNS System through our commercial team and a network of patient ambassadors. We believe that our efforts to manage the patient pipeline from end to end will be a key factor in increasing RNS therapy utilization.

As a reminder, we are the exclusive distributor of DIXI Medical stereo EEG lead, which is the diagnostic device used to determine where epileptic seizures originate. Most RNS patients and most surgical resection and ablation patients in the United States are being localized with stereo EEG before intervention. Distribution of these products is not only an incremental revenue stream, but is providing the opportunity for earlier patient engagement, where we believe we can have a greater impact and a stronger voice explaining the benefits of the RNS system. Q4 was our first quarter distributing the DIXI Medical products, and we are encouraged by our early progress. We are confident this partnership will have a positive impact on the RNS patient pipeline.

Third, we believe that driving adoption by additional prescribers and bringing on new implanting centers will also contribute to our overall growth. The sales force expansion completed in 2022 has enabled and will continue to enable this team to cover a greater portion of the market, and we intend to leverage that to introduce our RNS system more broadly. These three commercial objectives are designed to increase utilization of the RNS System and CECs and support our initial implant revenue growth in 2023. I will now provide an update on replacement revenue. As expected, in the fourth quarter, replacement revenue was $1.4 million, which represents a decline of 44% compared to the prior year period. As of December 31, 2022, there were 56 patients being actively treated with first-generation RNS devices.

We do not plan to provide this metric going forward as we do not expect it to represent a material part of our business in 2023. We continue to expect quarterly replacement revenue to sequentially decline through the year as the remaining first-generation devices are replaced with the second-generation device with a longer-lasting battery. We believe that we will have completed the transition process by the end of 2023. Moving to our clinical trial updates. Generalized epilepsy continues to be our top clinical priority. In 2022, we initiated enrollment in our NAUTILUS study. The NAUTILUS study is designed to evaluate the safety and efficacy of the RNS System for the treatment of primary generalized epilepsy. We intend for the results from this study to support a PMA supplement to expand the RNS System indication.

I am pleased to report that all 25 participating sites are now active and are seeking to enroll patients in the study. We also continue to make good progress on the NIH-funded feasibility study for patients with Lennox-Gastaut syndrome, a type of symptomatic generalized epilepsy. Generalized epilepsy represents a meaningful market expansion opportunity. 40% of drug-resistant epilepsy patients have generalized epilepsy, and diagnosis of these patients is simpler and faster than for focal epilepsy. We believe that RNS Therapy represents the optimal intervention for these patients as resection and ablation are not applicable for generalized epilepsy, and there is no FDA-approved neuromodulation therapy for this indication. To wrap up, as I look back on 2022, I can proudly say that we have been able to make significant progress across our business.

We drove increased RNS system utilization. We expanded our field team and optimized our commercial process. We successfully initiated distribution of DIXI Medical Products for stereo EEG. We made important progress towards expanding our indication into generalized epilepsy by beginning enrollment in the NAUTILUS study and the LGS study. We did all of this while reducing our cash burn to approximately $15 million in the second half of 2022. With over $77 million of cash available at the end of 2022, at this burn rate, we would have more than two years of available capital. Collectively, these accomplishments have positioned NeuroPace well for 2023 and beyond. With that, I will now turn the call over to Rebecca to detail the fourth quarter and full year financial results.

Copyright: nimon / 123RF Stock Photo

Rebecca Kuhn: Thanks Mike. NeuroPace’s revenue for the fourth quarter of 2022 was $12.8 million, representing growth of 16% compared to $11 million for the fourth quarter of 2021 and 15% sequentially compared to $11.2 million in the third quarter of 2022. In the fourth quarter, revenue from initial implants grew 15% to $9.8 million compared to $8.5 million for the fourth quarter of 2021. Sequentially, initial implant revenue in the fourth quarter grew 7% compared to the third quarter. The increase in revenue was largely due to an increase in initial implant procedure. Revenue from replacement implant was $1.4 million compared to $2.5 million in the fourth quarter of 2021. We continue to expect replacement implant revenue generally to decrease through the end of 2023 until we have completed the transition to the second-generation device.

This means that we expect revenue only from replacements of our second-generation devices after this year. We expect this will be a growth driver for our business when more of the second-generation devices reach into battery life and are ready for replacement. Gross margin for the fourth quarter of 2022 was 69% compared to 73% in the fourth quarter of 2021. The decline in gross margin relative to the prior year period was primarily due to distributing DIXI Medical products, which have a lower gross margin than our core RNS business. The fourth quarter of 2022 was our first quarter distributing DIXI Medical products, and we expect gross margins to generally increase from that level. Total operating expenses in the fourth quarter of 2022 were $18.7 million compared with $17.1 million in the same period of the prior year.

Operating expenses in the fourth quarter, including onetime costs associated with the DIXI Medical partnership launch, increased by 3% compared to the third quarter. As expected, operating expenses for our core RNS business decreased slightly in the fourth quarter compared to the third quarter. We plan to continue to focus on initiatives to optimize operating expenses through 2023. R&D expense in the fourth quarter of 2022 was $5.1 million compared with $5.3 million in the same period of 2021. The decrease in R&D expense was primarily driven by a decrease in personnel-related expenses. SG&A expense in the fourth quarter of 2022 was $13.6 million compared with $11.7 million in the prior year period. The increase in SG&A was primarily driven by DIXI Medical partnership launch expenses and personnel-related expenses.

Loss from operations was $9.9 million in the fourth quarter of 2022 compared with $9 million in the prior year period. We recorded $1.9 million in interest expense in the fourth quarter compared to $1.9 million in the prior year period. Net loss was $11.1 million for the fourth quarter of 2022 compared to $10.7 million in the fourth quarter of 2021. Our cash and short-term investments balance as of December 31, 2022, was $77.4 million and our burn rate in the second half of the year was approximately $15 million compared to approximately $23 million in the first half of the year. Our long-term borrowings totaled $52.9 million as of December 31, 2022, with the full principal due on September 30, 2025. Now turning to our outlook for 2023. For 2023, we expect revenue to range between $50 million and $52 million.

Growth will be supported mainly by increases in initial implants and revenue from the sale of DIXI Medical products. As discussed, replacement revenue is expected to decline this year. Gross margin for 2023 is expected to be between 69% and 71%, potentially a slight improvement from the 69% generated in the fourth quarter, which was our first full quarter with DIXI Medical revenue contribution. As a result of the distribution agreement for the DIXI Medical partnership, that revenue produces a lower gross margin than our base business. Fluctuations in the proportion of DIXI Medical revenue to overall revenue will create small variability in our quarterly gross margins. Operating expenses for 2023 are expected to range between $75 million and $77 million, including $11 million to $12 million in noncash expenses.

Lastly, it is important to highlight that our cash burn rate for the second half of 2022 was approximately $15 million. We were able to reduce our cash burn in the second half of the year compared to the first half of the year because of the spending discipline and cost controls we implemented starting in the middle of the year. We intend to maintain that level of discipline in 2023. Given our cash balance at year-end of 2022 and our ongoing efforts to reduce our burn rate, we do not believe we will have a need to raise capital in the next 12 months. This concludes our prepared remarks. I would now like to turn the call back over to the operator, who will open the call for questions.

See also 10 Best Stocks to Buy for High Returns and 12 Biggest Port Terminal Operators in the World.

Q&A Session

Operator: And our first question comes from Michael Polark from Wolfe Research. Your line is now open.

Michael Polark: Maybe to start. Curious, Mike, for your assessment of the top of the funnel. It sounds like the last nine months of 2022 were steady in terms of EMU admissions, and that’s obviously a good leading indicator for new patient implants. To what extent — to what do you attribute this? And then kind of how durable and consistent can it be from here? And I guess the other angle to this question is, do you think there’s any element of catch-up the last nine months of 2022? The extended COVID disruption might have precluded patients from engaging in the system. Do you think that’s contributing abnormally to what you saw in the back half of the year? Or do you think we’re kind of we’re at a stable steady state, and this is a level of new admissions that can be sustained in ’23?

Michael Favet: Great. Thanks for the question, Mike. So jumping into the stability that we’ve seen in the market over the last three quarters or so. Largely, I attribute that to having not — we have not had any significant COVID-related disruptions since Q1 of last year. The market has been relatively stable from that perspective, and that’s allowed centers to be able to get back to a new normal for patients coming through the epilepsy centers. We don’t — we don’t believe that the epilepsy centers are all the way back to pre-pandemic levels yet, primarily because of staffing limitations that some of the hospitals have had. So we’re not getting COVID disruptions, but there are staffing challenges that some of these centers have had.

I haven’t seen what I’ll call a surge of makeup that’s coming through the centers. It’s really allowing them to get back to a flow of patients that are coming through the centers. And given that we’re not back to pre-pandemic levels yet, at least we believe that we’re not, and the hospitals are working to bring in the staffing,. I do expect, over time, there’s an opportunity for that volume to increase. And then historically, prior to the pandemic, most of the growth, the volume of patients coming through the epilepsy centers, was driven by more epilepsy centers being created. And I’m starting to hear out in the community that there’s more activity around that again, where centers are hiring an epileptologist looking to bring in surgeons to be able to create new epilepsy centers, which provides another opportunity for the market to grow overall.

So, I think stability, no significant COVID disruptions, and that’s put us in a position to be able to show the share gains that we’ve been able to make within the EMU, more of the patients coming through the EMU being treated, not being offset by declines in the number of patients coming through these centers.

Michael Polark: Helpful. And maybe for the follow-up part of the hook with DIXI was more upstream visibility into this funnel. And I guess, I know it’s early days with this distribution agreement. But kind of what are you learning with DIXI? And then is that helping you manage the flow and funnel and identify patients better?

Michael Favet: Yes. Like you said, early days. So we’re now like a quarter and a half or so into the U.S. distribution of the DIXI product. And so far, it’s been very much what we had anticipated. The synergy with our field organization is very strong. And so our ability to be able to support and sell that product to our commercial organization, I feel very good about. And the early — I’m going to call them more anecdotes than broad spread evidence, but the early anecdotes are consistent with that hypothesis where we’re able to get better insight into what is happening in the flow of patients through the epilepsy centers, how many patients are coming through the Phase 2 studies that lead to therapies like the RNS system implant, and then being able to use that to provide more sales opportunity — selling opportunities to be able to get a higher percentage of those patients moving on to the RNS System.