NeuroPace Q1 2023 Earnings Call Transcript

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May 4, 2023

There are 6 speakers on the call.

Operator

Afternoon, and welcome to NeuroPACE's First Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. We will have the facility a question and answer session towards today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Tripp Taylor from Gilmartin Group for a few introductory comments.

Operator

Thank you, operator. Good afternoon and thank you for participating in today's call. Joining me from NeuroQace are Mike Fabbitt, CEO and Rebecca Coon, CFO. Earlier today, NeuroQace released financial results for the Q1 ended March 31, 2023. A copy of the press release is available on the company's website.

Operator

Before we begin, I would like to remind you that management will make statements During this call 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. All forward looking statements, including those around Neuro Case's business opportunities, 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, market opportunity, revenue outlook and commercial expansion 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.

Operator

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 March 31, 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 May 4, 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.

Speaker 1

Thanks, Tripp. Good afternoon, everyone, and thank you for joining us today. Today, I will highlight our Q1 performance and provide an update on our key business priorities I will then turn the call over to Rebecca to detail the financial results before we open the call to questions. To begin, our strong commercial and operational execution led to record revenue in the Q1. Total revenue was $14,500,000 representing growth of 27% compared to the prior year period and 13% compared to the Q4 of 2022.

Speaker 1

The strong performance was driven by increased utilization of the RNS system within comprehensive epilepsy centers or CECs And contributions from our Dixie Medical distribution partnership, which began in the Q4 of 2022. As expected, replacement implant revenue continued Decline compared to prior quarters and now represents less than 10% of total revenue. With our continued focus on expense management, We increased revenue in the Q1 without a corresponding increase in expense compared to the Q4 of 2022. Based on the strong underlying fundamentals of our business, we now expect full year 2023 total revenue of $52,000,000 to $54,000,000 up from our original expectation of $50,000,000 to $52,000,000 Growth in 20 23 will continue to be driven primarily by increasing utilization of the RNS system within CECs, coupled with our 1st full year selling Overall, I am pleased with the progress we have made with our strategy and I'm happy to see Our customers Reported that Epilepsy Monitoring Unit or EMU patient volumes have remained stable over the last year. While we continue to believe that patient volumes are not all the way back to pre pandemic levels, they continue to show signs of improvement.

Speaker 1

Now I will discuss our commercial objectives in more detail. To increase utilization of the RNS In support our initial implant revenue growth in 2023, our strategy concentrates on 3 objectives: 1, expanding patient selection 2, managing the patient pipeline and 3, driving adoption of the RNS system with new prescribers and additional implanting centers. Our Q1 2023 results demonstrate That awareness of the clinical benefits of the RNS system is growing as we continue to develop a strong presence amongst epileptologists and neurosurgeon customers. We remain focused on highlighting the need to close the treatment gap so that more of their patients can realize the life changing benefits provided by our products. Specifically, our team continues to educate physicians on the benefits of the RNS system and the importance of providing advanced treatment to their drug resistant epilepsy patients.

Speaker 1

As we share and discuss the clinical evidence that supports expanding patient selection criteria to the full scope of RNS Systems indication, we are seeing improvements in utilization. We are working to actively manage the patient pipeline within the CECs. We are identifying and educating potential RNS patients at an earlier stage in their treatment journey, which we believe is crucial to increasing RNS system adoption. Our patient education and marketing programs enable us to convert more patient leads to RNS system implants. Patient leads are being identified through our field team working with the CECs and through direct to consumer campaigns.

Speaker 1

We leverage NeuroPACE Nurse Navigators to guide the patients in our pipeline through the diagnostic process. Additionally, our team along with a network of Ambassadors provide in-depth patient education on the benefits of our RMS system. We are very pleased with the results of the first 2 quarters distributing the Dixie Medical stereo EEG products in the United States. This product line is driving additional revenue through our commercial team and has enabled us to identify and interact with potential RNS candidates earlier in their patient journey. As a reminder, stereo EEG electrodes are used to Most RNS patients and most surgical resection and ablation patients in the United States are being localized with stereo Over time, we believe that we can grow the revenue from Dixie Medical products by leveraging our large HEPLFT focused commercial team to convert competitive accounts and leverage this product line to accelerate adoption of our RNS system.

Speaker 1

We are making good progress in our efforts to increase the number of implanting centers and prescribing physicians. With our expanded field team, we are calling on additional CECs and increasing the number of prescribing physicians. Improving patient access to care by increasing the number of providers utilizing the RNS system It's an important part of our effort to close the treatment gap. We are doing this by expanding professional education programs and through the work of our field team. Moving to our clinical trial updates.

Speaker 1

We continue to make strong progress on our top clinical priority, the expansion into generalized epilepsy. As a reminder, this represents a meaningful market expansion opportunity as approximately 40% of drug resistant epilepsy patients have generalized epilepsy. Diagnosis of these patients is simpler and faster than for focal epilepsy because it does not require advanced diagnostics and there are a few treatment options because resection and ablation are not applicable and no neuromodulation therapy is approved for this patient group. Enrollment of the approximately 100 patients in the Nautilus study is on track to be completed in the Q1 of 2024. As a reminder, the primary endpoint is evaluating the safety and efficacy of the device at a 1 year follow-up evaluation after implantation.

Speaker 1

We intend for the results from this study to support a PMA supplement to expand the RNS system indication to include the treatment of primary generalized epilepsy. Additionally, our NIH funded feasibility study for patients with Lennox Gastaut syndrome, a type of symptomatic generalized epilepsy, Continues to progress as planned. We look forward to potentially providing an optimal solution for an unmet need amongst this patient population. To summarize, we are off to a great start for the year executing across the entire business. Increasing utilization of the RNS system at CECs Growth and initial implant revenue and our team is gaining traction with the distribution of the Dixie Medical stereo EEG products.

Speaker 1

We are invigorated by the increasing utilization trajectory and remain focused on ensuring patients receive the care that they need. Our Nautilus pivotal study for primary generalized epilepsy and the NIH study for Lennox Gastaut syndrome are progressing as planned. We successfully accomplished all of this while continuing to improve our cash burn trajectory. We believe our recent achievements keep us well positioned With that, I will now turn the call over to Rebecca to review our Q1 financial results.

Speaker 2

Thanks, Mike. NeuroPACE's revenue for the Q1 of 2023 Was $14,500,000 representing growth of 27% compared to $11,400,000 For the Q1 of 2022 13% sequentially compared to $12,800,000 in the Q4 of 2022. The strong performance was primarily driven by increased utilization of our RNS system and by contributions from our Dixie Medical Distribution Partnership. We experienced higher replacements than anticipated in the Q1, But as expected, replacement implant revenue continued to decline compared to prior quarters and now represents less than 10% of Total revenue. Gross margin for the Q1 of 2023 was 72% compared to 73% in the Q1 of 2022 and 69% in the Q4 of 2022.

Speaker 2

The decline in gross margin relative to the prior year period was primarily due to a change in product mix with the inclusion of Dixie Medical products, which have a lower gross margin than our core RNS products. During the Q1 of 2023, We also had higher than anticipated sales attributed to Dixie Medical. Over time, we That gross margins will generally increase as volumes increase and fixed overhead is allocated over more units. Total operating expenses in the Q1 of 2023 were $18,700,000 compared with $18,000,000 in the same period of the prior year. In the Q1 of 2023, Operating expenses as a percentage of revenue were lower for both R and D and SG and A.

Speaker 2

We plan to continue to focus on initiatives to optimize operating expenses through 2023. R and D expense in the first Quarter of 2023 was $5,300,000 compared with $5,600,000 in the same period of 2022. The decrease in R and D expense was primarily driven by a decrease in personnel related expenses and clinical study expenses. SG and A expense in the Q1 of 2023 was $13,400,000 compared with $12,400,000 in the prior year period. The increase in SG and A was primarily driven by personnel related expenses and expenses associated with distributing Dixie Medical products, partially offset by reduced expenses for general and administrative outside services.

Speaker 2

Loss from operations was $8,300,000 in the Q1 of 2023 compared with $9,800,000 in the We recorded $2,000,000 in interest expense in the 1st quarter compared to $1,800,000 in the prior year period. Net loss was $10,400,000 for the Q1 of Our cash and short term investments balance as of March 31, 2023 was $67,600,000 Our long term borrowings totaled $53,900,000 as of March 31, 2023, with the full principal due on September 30, 2025. Now turning to our outlook for the remainder of That total revenue for 2023 to range between $52,000,000 $54,000,000 up from $50,000,000 to $52,000,000 We expect that revenue growth will be supported mainly by increases in initial implants and revenue from the sale of Dixie Medical Products. We continue to expect that we will complete the replacement of substantially all of Prior generation RNS devices by the end of 2023. With more replacement implants than anticipated in the first Quarter, replacement revenue is expected to sequentially decline at a rate slightly faster than we anticipated earlier in the year.

Speaker 2

Replacement implant revenue will become a growth driver when the newer longer lasting devices introduced in 2018 We continue to expect our gross margin for 2023 will be between 69% 71%. Our quarterly gross margins may experience small variability due to fluctuations in the proportion of Dixie Medical revenue to overall revenue and other factors. We continue to expect operating expenses for 2023 to range between $75,000,000 and $77,000,000 including $11,000,000 to $12,000,000 in non cash expenses. Our cash burn in the Q1 of 2023 was $9,800,000 a substantial reduction from our cash burn of $12,400,000 in the Q1 of 2022. Our cash burn is Typically highest in the Q1 of the year, primarily due to the timing of compensation related expenses.

Speaker 2

1st quarter spending included approximately $3,000,000 of expenses, primarily compensation related that are unique to the Q1. 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

Thank you. At this time, we will conduct the question and answer session. Our first question comes from Robbie Marcus from JPMorgan.

Speaker 3

Hi. This is Rohan on for Ravi. How is it going? Thanks for taking the question. I guess I had a couple.

Speaker 3

The first one is focused on guidance. So guidance coming up by about $2,000,000 which is essentially About $2,000,000 was essentially the beat in the quarter. So this implies a step down in revenues for the balance of the year. Would you be able to comment on just how you're thinking Quarterly revenue contribution moving forward and the cadence, especially just given the commentary around the patient funnel kind of stabilizing and I'm assuming getting better as the year progresses.

Speaker 1

Great. Thanks, Rohan. Appreciate the question. A couple of comments, first about the quarter and then getting into your question about guidance. So we're really happy with the performance overall, Strength across all parts of the business.

Speaker 1

For the forecast as we go forward, we continue to expect that Revenue from initial implants will grow through the course of the year. We've been able to make great progress Here in the Q1, continuing ops and success that we were able to build off of in the second half of twenty twenty two, so that general trend of increasing implant additional revenue as we move through the year. For Dixie Medical, we had a really strong quarter in Q1. It's still a relatively new business And we're still projecting as we go forward that we'll be building off of the base that we Talked about in Q4, the revenue from Q4 with marginal increases and incremental increases off of that base. We did better than that in the Q1, We're not including in any guidance changes to that.

Speaker 1

So as we get more time working with the Dixie Medical product, We'll have better confidence around that. The guidance that we're providing is really based on where we started with that business in the Q1 of last year. And then specifically about replacement implant revenue, we had a strong quarter in the first quarter with We generated about $1,200,000 of revenue in 1st quarter from replacement implants. That is from earlier device replacements in the year than what we had 5 when we started off and the result of that is while the total number of replacement devices and the implant revenue that we expect to generate from that For the year, it will be the same as before because there's a higher proportion of that in the Q1 that will result in less Revenue in the second through the 4th quarters, because of the total volume of those older devices that are still needing to be replaced. So overall, again, strength across all aspects of the business, continuing to expect growth in initial implant revenue as we move through the quarter, And then not banking into our guidance any changes in the general trajectory of the Dixie Medical product.

Speaker 1

While that came in Higher than we expected in the Q1, really happy with that, but it's not we're not banking that into the guidance that we're providing.

Speaker 3

Got it. Thank you. That's really helpful. The other question I had was just around the generalized epilepsy indication. It seems like you're making really good progress Towards Nautilus and

Operator

I guess it would just

Speaker 3

be helpful if you can remind us what the market opportunity is here down the line and when we could potentially see kind of A contribution pending approval.

Speaker 1

Yes. Thank you for that question as well. I I'm really, really encouraged by, one, the start that we've had to the Nautilus study, getting that study up and running, I mean the importance that I believe that that's going to have for our business over time. As a reminder, generalized epilepsy represents about 40% of the patients that have Drug resistant epilepsy, so it's a very large market opportunity. And compared to focal epilepsy, there are even fewer treatment options For these patients that have generalized epilepsy, receptive procedures and ablative procedures, which are the most commonly done interventions for focal epilepsy are not applicable for And there are currently no neuromodulation therapies that are indicated for generalized epilepsy.

Speaker 1

So very much an undertreated Patient population is the reason we were able to get the breakthrough device designation from the FDA for this group. Additionally, the diagnostic process to identify patients that have generalized epilepsy is easier and faster And for focal epilepsy, so large patient population, very much an unmet need, with a lack of treatment options for these DRE patients and an opportunity to get more patients treated more quickly with a simpler diagnostic, simpler faster diagnostic process. In terms of timing, we had announced last quarter that we expect to have enrollment completed in that trial in the first Quarter of next year, that continues to be the expectation. We announced a couple of months ago that we had all of the sites, the 25 sites On board and starting to enroll patients and there's a tremendous amount of enthusiasm from the investigator group. And so we're off to a good start continuing to believe that we're tracking well to have that completion.

Speaker 1

As a reminder, the study itself has a 1 year follow-up And so building off of that Q1 of 2020 For completion of enrollment, the follow-up period and then a PMA supplement on the other side of that. So you can kind of figure out The timeline associated with the VIC continue to be tracking well to that timeline.

Operator

Great. Thank you so much. Thank you. Our next question comes from Frank Taconan from Lake Street Capital Markets.

Speaker 4

Hey, thanks for taking the questions and congrats on all the progress in the quarter. I wanted to dive a little deeper into the Kercenter trends, could you maybe take us into what really drove the growth in the quarter? And I'm kind of thinking of 2 levers. Was it new centers coming on board and starting Treat patients or was it existing centers starting to treat more patients and improving their utilization run rate?

Speaker 1

Thanks, Frank. The growth we saw in the Q1 was primarily driven from utilization, more patients Being treated within the comprehensive epilepsy centers that, than they treated in 2022, Primarily coming from that. We did get off to a faster start in the year with more centers and prescribers. So that was a contribution as well. So there was contributions from both utilization increase and sensor increase.

Speaker 1

But as we expected, The bulk of that coming from increased utilization.

Speaker 4

Very good. Good color. Thanks. And then on Dixie, I know one of the primary Attractions to the distribution agreement was getting color into the patient funnel and I think you referenced it at a High level in the prepared remarks, but could you maybe talk to how that is playing out versus your expectations and how your sales force is maybe leveraging some of that Information to convert patients to RNS versus competitive technologies?

Speaker 1

We're 2 quarters now into the distribution agreement. I'm really pleased with how that product fits into What we're selling within our team. We've been able to have good success using the team that we've got established, large Epilepsy focused field team calling on these epilepsy centers. We've had some success with account conversions to be able to grow that business. But as you mentioned, one of the key strategic drivers for us in doing this was to have better visibility earlier to patients working Through the diagnostic process that lead to an RNS implant.

Speaker 1

And while it's still early, a couple of quarters in, the Strategy and the basic rationale behind the deal is really coming together nicely. We are getting headcounts that are using the Dixie product. We have good examples of the visibility that that provides understanding what they're doing in the diagnostic what those centers are doing in the diagnostic process and being able to have that be helpful Not just in generating revenue for Dixie, but also pulling that through into performance for RNS and an increased adoption of the RNS system. So no numbers specifically that go along with that, but feel very good about the two pillars of that deal, more Competitive conversions, the ability to drive more revenue through our field team and the visibility and pull through that we think that that will provide for the RMS business as well.

Speaker 4

Perfect. I'll stop there. Congrats again on the progress. Thanks.

Operator

Thank you. Our next question comes from Michael Poulart from Wolfe Research. Michael, please go ahead. Hey, good afternoon. Thank you.

Speaker 5

If you said it, I missed it. I want to be precise on The revenue for the three lines, I heard $1,200,000 of replacement. I heard Dixie over performed, but I didn't hear a number. And so I don't know precisely what new patient revenue was. Can I get the Dixie number or just kind of can we go through the three lines individually?

Speaker 5

I didn't see them in the

Speaker 1

The revenue for the quarter overall had meaningful growth From Q4 of last year for both the RNS initial implants and for Dixie Medical, Both of those pieces grew significantly from Q4 of 2022 into Q1 of 2023. We haven't broken out specifically the amount of growth for Dixie and the amount of growth for the RNS implants, Primarily for competitive reasons as we're just being very conscious of what that means within the space. But as you're putting together your models, Primarily, the increase was coming from initial implant revenue, but very close with that growth from the Dixie Medical product and then the revenue from replacement implants coming in at $1,200,000 which was a decrease from Q4 of last year as expected by more revenue in the Q1 than what we had anticipated based on the timing of when in the year those Replacements were happening.

Speaker 5

Fair enough. Our problem spreadsheet got a little harder, but enough to work with. Thank you. Follow-up question is, look, early days on Dixie, it sounds like so far so good on a number of levels. I'm not asking for specifics, but are there other things like this that you could do and drop in the bag to leverage your commercial platform?

Speaker 5

Again, is there potentially a pipeline that you think about and consider? Or was this a one off opportunity and behind it unlikely anything else.

Speaker 1

Thanks for the question, Mike. I'm not going to give a Specific answer to that other than to say, we're always looking for where there are good fits, strategic fits for the business. That made a lot of sense for us for many reasons that we've talked about for the Dixie product. And when we saw that, we went after that aggressively to be able to get that into our product mix. We continue to monitor that.

Speaker 1

If there's another opportunity that's like that, we would be I'm very opportunistic around that, but there's nothing that I can talk about of specifics that are active or things that we're pursuing there.

Speaker 5

Understood. Thank you.

Operator

I would now like to turn it back to Neuroface for any closing remarks.

Speaker 1

Yes. Thanks for the comments. Really Happy to record the results from the Q1. Lots of strength for us across the business with all aspects Of our revenue coming in very strong for the quarter and what that means for us, continue to see differentiation We continue to be reminded of the benefit of responsive neurostimulation with the approach that we're taking there being a differentiated outcome versus The other approaches, there's new data that continue to come out on a regular basis. There's a study in neurology that was published recently that really highlights The challenges associated with side effect profiles and efficacy with other duty cycle kind of approaches and Really the benefits of responsive neuromodulation within this space.

Speaker 1

And so looking forward to getting more of the patients with drug resistant epilepsy And focal epilepsy treated, the work that we're doing to expand into generalized epilepsy and the progress there. I mean, really appreciate everybody's

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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