NeuroPace Q3 2023 Earnings Call Transcript

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November 6, 2023

There are 10 speakers on the call.

Operator

Ladies and gentlemen, greetings, and welcome to the Nairopais Inc. 3rd Quarter 2023 Earnings 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 conference is being recorded.

Operator

It is now my pleasure to introduce your host, Irina Ridley, Chief Legal Officer, please go ahead.

Speaker 1

Good afternoon. Thank you for joining us for Neurocase's Q3 2023 Financial and Operating Results Conference Call. On today's call, we will hear from Joel Becker, Chief Executive Officer and Rebecca Coon, Chief Financial Officer. Earlier today, NeuroPace released financial results for the Q3 ended September 30, 2023. A copy of the press release is available on the company's website at neuropace.com.

Speaker 1

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 for performance are forward looking statements. All forward looking statements, including those around Neurocase'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-nineteen on our business and prospects for recovery, expense management, Estimates of market opportunity and forecast 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.

Speaker 1

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 annual report on Form 10 ks 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 quarter 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. Neurocase 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?

Speaker 2

Thank you, Irina, and good afternoon, everyone. As you saw in the press release we issued earlier today, we had a strong Q3, 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 Q3 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 and A. Total revenue for the Q3 was $16,400,000 representing growth of 47% compared to the prior year and as anticipated down 1% compared to the Q2 of as we complete transition to the newer longer lasting battery device.

Speaker 2

Strong year over year performance was again primarily driven by initial implant growth within comprehensive epilepsy centers or CECs both through increased utilization and adoption by prescribers and by implants of our RNS system in our Nautilus study. We also continue to see increasingly higher contribution from our partnership with Dixie 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 of 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 $62,500,000 to $3,500,000 up from $59,000,000 to $61,000,000 set last quarter and up from the $50,000,000 to $52,000,000 range we communicated at the start of the year.

Speaker 2

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% 70 3%, 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 $2,200,000 in the Q3 of 2023 compared to $4,000,000 in the Q2 of 2023, again without compromising revenue growth and with the continued focus on our key priorities. While 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.

Speaker 2

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 updated Ncyte 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.

Speaker 2

We have been focused on refining our strategy for launching our commercial efforts into the community and are expecting full launch The patients implanted are doing well and we are pleased that we are now able to bring RNS Therapy not only to the additional 1800 epileptologists 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.

Speaker 2

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 2 new product enhancements designed to streamline the RNS experience. We launched our enhanced insight data management system in Q3 with overwhelmingly positive clinician feedback.

Speaker 2

We also recently launched our new tablet remote monitor or TRM ahead of schedule. The TRM and Incyte 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 Streamline Care, making it easier for physicians to deliver optimal care to their patients. As our financial results for the quarter suggest, We saw continued momentum around our efforts to make our RNS system available to more patients living with drug resistant epilepsy.

Speaker 2

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 2 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 CECs, 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 Q3 financial results. Rebecca?

Speaker 3

Thank you, Joel. Neuropace's revenue for the Q3 of 2023 was $16,400,000 representing growth of 47% compared to $11,200,000 for the Q3 of 2022 and down 1% compared to $16,500,000 in the Q2 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 in treating new patients. We also continue to generate meaningful revenue from Dixie Medical Products. Replacement implant revenue continued to decline again this quarter as anticipated and represented approximately 3% of total revenue. Gross margin for the Q3 of 2023 was 74.5% compared to 71.4% in the Q3 of 2022 72.5% in the Q2 of 2023.

Speaker 3

Our gross margin increased primarily due to the increase in R and S products produced and sold as our fixed manufacturing overhead costs were for distribution of Dixie Medical Products. Total operating expenses in the Q3 of 2023 for $18,200,000 compared with $18,200,000 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 and D and SG and 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 and D expense in the Q3 of 2023 was $4,800,000 compared with $5,600,000 in the same period of 2022.

Speaker 3

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 and A expense in the Q3 of 2023 was $13,400,000 compared with $12,600,000 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 had an increase in sales, sales These increases were partially offset by reduced general and administrative expenses, primarily outside services and insurance. Loss from operations was $6,000,000 in the Q3 of 2023 compared with $10,200,000 in the prior year period.

Speaker 3

We recorded $2,200,000 in interest and $0.15 in the Q3 compared to $1,900,000 in the prior year period. Net loss was $7,300,000 for the Q3 of 2023 compared with $11,800,000 in the Q3 of 2022. Our cash and short term investments balance as of September 30, 2023 was $61,300,000 Our long term borrowings totaled $55,900,000 as of September 30, 2023, with the full principal due on September 30, 2025. As Joe mentioned, We are raising full year 2023 revenue guidance to a range of $62,500,000 to $63,500,000 up from a range of $59,000,000 to $61,000,000 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 Dixie Medical Products.

Speaker 3

Replacement of substantially all of the prior generation RNS devices is still anticipated to be completed by the end of 2023. As previously indicated, the decline we have 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 Dixie Medical revenue to overall revenue and other factors. We are updating our guidance for operating expenses to $75,000,000 to $76,000,000 Reducing the upper end of the range. Operating expenses are expected to include $9,000,000 to $10,000,000 in non cash expenses.

Speaker 3

Our cash burn in the Q3 of 2023 was $2,200,000 A continued improvement over $4,000,000 in the Q2 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.

Speaker 2

Thank you, Rebecca. Overall, we entered 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 our focus 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, epileptologists and neurosurgeons, 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.

Speaker 2

Our balance sheet remains strong, providing us ample runway 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 for the rest of the year 2024 and beyond. Lastly, I would like to address the questions we and other members of the med tech community have fielded relative to GLP-one 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-one class of drugs. This concludes our prepared remarks.

Speaker 2

I would now like to turn the call over to the operator, who will open the call for questions. Operator?

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. Our first question is from Vik Chopra with Wells Fargo. Please go ahead.

Speaker 4

Hey, good afternoon and thanks for taking the questions. Congrats on a great quarter. Maybe just 2 for me here. So just on the performance, I think you talked about initial implants Maybe just some additional color on what drove growth in initial implants, was it primarily driven by utilization within existing centers Or is there something else you'd call out? And then I had a follow-up, please.

Operator

Hi,

Speaker 5

Vic. Thank you for the question and I appreciate you being on with us today. Yes, the short answer story there, I kind of I started in a little bit early. It really is an initial implant utilization And that's where the preponderance of the growth has been for R and S in the quarter.

Speaker 4

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

Speaker 6

Vic, we're 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

Operator

Hi, Rick. This is your operator. Do you have any more questions? No, that's I'm okay. Thank you.

Operator

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

Speaker 7

Good afternoon. Thank you for taking the question. First one on the push into the community. Joel, I heard your comment about look appropriate, patient selection is important, appropriate patients will be referred to level Or centers. I'm just curious kind of what would drive that decision at the patient level?

Speaker 7

What patients are appropriate to treat in the community versus Move to the higher level centers. So that's part 1 of this question. And then part 2 is your CARE program. I guess I'm just Curious 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?

Speaker 5

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 To or types of patients rather who can be treated well in the community and really those that just need the Phase 1 monitoring And don't need to be referred back for Phase 2 monitoring. So focal patients who are drug resistant to Who only need to go through Phase 1 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 I do think are good Phase 1 candidates. Then 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.

Speaker 5

In the past, those patients may not have been Then 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 there both in terms of making the connection for where people should be sent To get that kind of therapy and then ensuring that they'd 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 treated well in the community through Phase 1 monitoring as well as in the identification of more complex patients in the establishment of relationships back for referrals, Those are things that we're doing in the community. Admittedly, we're 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're getting started with the program and there are some We've moved a little bit faster than others and we'll have more to say about the CARE program as we look to Launched the full pilot over here in the first half of twenty twenty four, but those are some of the early returns that we're seeing.

Speaker 7

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 'twenty four and 'twenty five, 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.

Speaker 5

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. 1, We had as you may recall, we have previously commented that we have invested in some of the breadth of our organization here previously. And so we had expanded 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.

Speaker 5

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

Speaker 2

of what we're going to

Speaker 5

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 will be going on in the pilot. But we're 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 and both utilizing the resources we've got today and then thinking about what the resourcing model needs to look like as well as then What level of clinical support do centers need in the community?

Speaker 5

But we're particularly excited About the program and really looking forward to getting going with the pilot here in the first half of twenty twenty four. 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 Those patients, and so more to come on it, but that's where we're at currently. Thank you.

Operator

Thank you. Our next question is from the line of Frank

Speaker 8

I was hoping we could go a little bit deeper into initial implants. I heard your comments that was a driver of growth, but maybe if could speak about the market, are you gaining market shares, the market returning to growth, is there maybe some Dixie informing the funnel that's driving better initial implants, Pockets of power users emerging or just anything you can really share with us to get a little better feel for what is the underlying growth driver of initial implants?

Speaker 5

You bet. Thanks, Frank. So, as I mentioned, we really did see good strength Within the initial implant patients or product segment and a lot of it coming from Increased utilization within core centers. And so We're seeing a lot of good utilization within those core centers and seeing Expanded, adoption as well within those centers. So both usage rates as well as adoption rates Inside of that core group of centers is what really has been one of the primary drivers.

Speaker 5

And I think it really gets to One of our key areas of focus, which is how do we take and expand the way people are thinking about Utilizing the RNS system inside of their patient populations. So getting people to think about RNS more broadly from where they Perhaps had originally been thinking about a very specific set of patients inside of focal refractory Population to expanding those patient populations either through targeted stim in other areas or network stimulation or combination Therapy, really just expanding the utilization as well as the adoption inside of those core centers. So That has been helpful in driving growth for sure. And then we have been getting benefit out of and we've seen Good growth out of Dixie as well and have been seeing where in certain centers we do get further vertical integration and visibility into that patient Pipeline and population of patients that can inform how people are thinking about RNS therapy. So That's the primary, is the utilization and adoption within those core groups of centers And expanding the way RNS is used, but then also seeing vertical integration into some and further up the pipeline in some centers as well.

Speaker 8

Got it. That's good color. And then maybe to speak about seasonality a little bit. I heard the comments around Q3 is Typically a little seasonally slower. So maybe talk a little bit about regular seasonality patterns into Q4 and how you Incorporated that into the implied guidance for the Q4?

Speaker 5

Yes, we did see some seasonality insofar as that we do see Clinicians and institutions take some vacation over the summer. We did see that in Some centers, we also see where Q4 does have some seasonality as it relates to Thanksgiving and the Christmas holidays, AES, the biggest conference of the year is also in Q4. So Those are some of the dynamics along with then the declining The minimum contribution we expect from replacement revenue here in Q4 given calendarization of replacement revenue as well. So Those would be some factors that we'd point to as we think about the way Q4 is shaping up.

Speaker 8

Got it. And then maybe one last quick one, just a clarifier. I think I heard replacements is down to 3 Percent of revenue, I didn't hear the distinction of whether or not it was 3% of Q3 or 3% of year to date or It's a trailing 12 months, what is that 3% based off

Speaker 5

of? Rebecca, you maybe want to Sure.

Speaker 6

Frank, that 3% approximately 3% Revenue was a Q3 number. So replacement revenue was about 3% of our total revenue in the 3rd quarter.

Speaker 8

Perfect. That's great. Thanks for taking the questions and congrats again.

Speaker 5

Thanks Frank.

Operator

Thank you. Our next question is from Robbie Marcus with JPMorgan. Please go ahead.

Speaker 9

Hi. This is actually Lily on for Robbie. Thanks for taking the question. Could you talk through the trends that you're seeing At the top of the funnel in terms of EMU volumes and how that's translating to RNS implants, it seems like most end markets are basically atorabovepre pandemiclevels and you had a good quarter. So do you think that same trend applies to you?

Speaker 9

And how are you thinking about the environment into Q4 and 2024?

Speaker 5

Thanks for the question, Lily. Yes, I think we're seeing the pipeline as good and consistent and strong. We had a really strong quarter off of what was an all time high for the company. And so I think speaking to pipeline and both strength of pipeline as well as consistency of the pipeline, those are That's a really good data point, the strength of the top line that we had. And we've continued to see strength in the pipeline In Q3 and well, I think we've previously commented and I would just reiterate, we don't know that Pipeline volumes are necessarily all the way back to levels where we were Seeing not only the throughput through the EMUs return, but also then EMU expansion, We're seeing really good throughput in pipeline in the EMUs.

Speaker 5

Still not quite sure we're seeing that same level of EMU expansion, But very good and consistent market dynamics from an RNS perspective. And so I think we feel bullish there. And when we look at what we see in terms of initial implant growth and the distribution of that implant growth, what we see in terms of Dixie And the Dixie growth that we've been seeing and then when you combine that with now the pilot starting in care, The product launches that we've had with N Sight as well as the tablet that are going to help us scale with efficiency, We really feel like from a product and market perspective, we're really well positioned, for the rest of 2023 as well as into 2024. And Something that I haven't mentioned, on top of all those things, we've made a lot of progress here With a number of things we've been working on internally, including sales leadership structure and the direct Line of sight that gives us to execution, some changes we've made there. We're also working on and assessing Our sales compensation structure to ensure that we're properly set up here to really Incent consistent growth in the business.

Speaker 5

And so I think we feel really good about pipeline as well as the way that Where we're positioned for execution here both with markets and products in our own organization.

Speaker 9

Great. Thank you. And as a follow-up, it sounds like growth is coming primarily from Growing utilization in existing accounts. So if that's the case, how should we be thinking about the trajectory of new center adds? And where do you think penetration stands within the total center opportunity?

Speaker 9

Thanks so much.

Speaker 5

Yes. It's a great question. And we of course continue to look to add additional centers, but we've got a strong penetration across The level 4 centers in most cases today. So our focus has really been expanding adoption within the centers and Expanding utilization within current customers. So that's where our focus has been and where we're seeing most of the growth come Expanding adoption and utilization within that core group of centers versus necessarily needing to add A lot of additional level 4 centers given the penetration that we have within those groups.

Speaker 3

Great. Thank you.

Speaker 5

Thank you. Thank you.

Operator

As there are no further questions, I would now hand the conference over to Joel Becker, CEO for closing comments.

Speaker 5

Thank you. Yes, I would just thanks everybody for being on the call today. Thanks for the questions. I would just close with Another really good strong quarter here with the year on year revenue growth of 47 Increasing guidance with the range going up from 62.5% to 63.5% from 59% to 61% where we were. Again, consistent revenue performance coming off an all time high for the company with OpEx control and cash management and Some good operating execution on a number of core initiatives as well.

Speaker 5

I think with both the near term initiatives Of our penetration within the Level 4 centers, the expansion opportunities with Dixie and the recent product launches We've had the way the care expansion is setting up for us with initial implants started and the Pilot here in the first half and the sense of urgency and level of focus that we've got on execution within the business. On top of all that being on track with our Nautilus enrollment completing in Q1 and expanding us into the IgE population, We feel like we're really well positioned here for the rest of 2023 and into 2024 To take advantage of increasing RNS access into the 1,200,000 patients that are drug resistant In the United States today, our target market is 30,000 patients. So 50,000 a year in level 4 centers in the Focal population inside of that and here with the actions that we're talking about with the direction of the business and the strategy that we're taking in a short period of time With these activities, we're positioning ourselves to expand from that 30,000 to the 1,200,000 of drug resistant populations of patients in the U. S. So again, I think we're really well positioned and we're really focused on Demonstration of execution that show how we're moving on that strategy.

Speaker 5

So appreciate everybody being part of the call today and thanks for your time.

Operator

Thank you. The conference of NarrowPace Inc. Has now concluded. Thank you for your participation. You may now disconnect your lines.

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