NeuroPace Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 5, 2024

There are 12 speakers on the call.

Operator

Good afternoon, and welcome to New York Paces 4th Quarter and Year End 2023 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Jeremy Feffer from LifeSci Advisors for a few introductory comments.

Speaker 1

Good afternoon. Thank you for joining us for NeuroPACE's 4th quarter year end 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 Q4 year ended December 31, 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 or performance are forward looking statements. All forward looking statements, including those around Neuropace's projections, business opportunities, commercial expansion, market conditions, clinical trials and those relating to our operating trends and future financial performance, expense management, estimates of market opportunity and 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 recent quarterly reports on Form 10Q, annual report on Form 10 ks for the year ended December 31, 2023, to be filed with the SEC and any other reports that we may file with the SEC in the future. This conference call contains time sensitive information, which we believe is accurate only as of this live broadcast on March 5, 2024. NeuroPace disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward looking statements, whether because of new information, future events or otherwise. And with that, I will now turn the call over to Neuropace's Chief Executive Officer, Joel Becker. Joel?

Speaker 2

Thank you, Jeremy, and good afternoon, everyone. As you saw in the Q4 press release issued earlier today, the Neuropace team has continued to execute on our strategy and delivered another strong quarter to cap off what has been an outstanding year. Revenue for the Q4 was $18,000,000 a 41% increase compared to the same period last year. For the full year 2023, we reported total revenue of $65,400,000 a 44% increase over 2022. As we look back to where the company was just a year ago, we've continually raised the bar and exceeded expectations.

Speaker 2

I am proud of everyone on the team and all that was accomplished in 2023 and look forward to capitalizing on this momentum in 2024. With that, let me step back and provide some additional color around what drove our top line results in the Q4 and full year 2023. I will then review our key business priorities for 2024 before turning the call over to our CFO, Rebecca Coon, to present the details of financial performance for the quarter year ended December 31, 2023, which will be followed by a Q and A session. In 2023, we developed and worked to execute our 3 part strategy to expand access to and increase adoption and utilization of RNS therapy for drug resistant epilepsy patients that support our current near term and medium term growth plans across existing and new groups of clinicians as well as patients. These plans are aligned with the International League Against Epilepsy or ILAE, which published new guidelines in 2022 stating that once a patient has tried and failed 2 medications, they should be referred for additional treatment even if surgical intervention is not appropriate.

Speaker 2

We believe RNS fits exactly in that category. Turning to our 3 part strategy for expanding access to and developing the market for our RNS system. The first part of our strategy, which is in motion now, is focused on the Level 4 Comprehensive Epilepsy Centers or CECs and is aimed at driving adoption across clinicians and expanded therapy utilization by current prescribers under what we call the modern RNS story. This approach aims to stimulate our existing base of customers at level 4 epilepsy centers through education and support on how RNS can be used to treat a broad range of patients with drug resistant focal epilepsy through traditional focal stimulation approaches, treatment with a network stimulation approach and utilization of RNS as a hybrid therapy with surgery, meaning either in conjunction with surgery or by utilizing RNS to help inform a subsequent surgery. The modern RNS story also involves highlighting the improvements in ease of use and efficiency we have made with the RNS platform.

Speaker 2

We are pleased with the momentum of these efforts within our Level 4 centers and it has driven much of our RNS system growth in 2023. The second part of our strategy, which we call Project Care will be an area of focus in 2024 and provides an opportunity to expand access to our RNS system outside of Level 4 CECs. This expanded access has the potential to allow for appropriate patients who could not or would not have been referred to a Level 4 center for care to be treated closer to home and also provides the opportunity for patients to be identified and referred to Level 4 centers. This new approach is now possible due to the FDA approval of a PMA supplement in 2023, which opened our ability to access the approximately 1800 additional epileptologists and the remaining functional neurosurgeons to prescribe and implant the RNS system within the currently approved labeled indication. We are planning to initiate this pilot program outside of VOVAL4 centers during the first half of twenty twenty four and some of these activities have begun.

Speaker 2

While early in our process of initiating pilot program activities, we have been pleased with the interactions with a number of our initial target centers regarding the potential for appropriately indicated patients to be treated locally as well as in the identification of potential RNS patients who should be referred to Level 4 centers for evaluation. In support of the growth that we have seen with the RNS system in Level 4 centers as well as in order to ensure the proper support for project care, we have begun making incremental additions to our sales and support teams and are pleased with the skill sets and experiences of the representatives we have hired and that we are seeing express interest in joining the neuropace team. The 3rd phase of our RNS strategy is based on expanding the improved indications for the RNS system. This effort is currently focused on the pivotal Nautilus study, which completed enrollment and subsequently the number of implants required for FDA submission during the Q4 of 2023. We believe that the pace of enrollment and implants in the study reflects the significant unmet need that exists for patients with drug refractory idiopathic generalized epilepsy.

Speaker 2

As a reminder, the Nautilus trial requires evaluation of a primary safety endpoint and an effectiveness evaluation 12 months post implant. If approved, our RNS system would be the 1st device with an FDA approved indication for generalized epilepsy. The study has the potential to represent a highly meaningful market expansion opportunity. Additionally, in 2024, we plan research and development work on software tools leveraging our data and AI analysis capabilities designed to both enhance clinical insights as well as patient support efficiency and ease of use. As we take a deeper look at our financial and operating performance for the Q4 of 2023, revenue growth was primarily driven by sales of our RNS system.

Speaker 2

The growth from new RNS system sales was partially offset by continued decline of RNS replacement implant revenue. As I've mentioned on previous calls, we expected this decline to occur as most patients with the older version of the RNS device have already had their devices replaced with the newer version. Also, we continue to see revenue growth from our exclusive partnership with Dixie Medical to market and sell their diagnostic electrodes and related products for epilepsy. As a reminder, these products are used to determine where epileptic seizures originate. Physicians use this information to target interventional treatments at the seizure source, including with our RNS system.

Speaker 2

While we do not plan to break out revenue components on an ongoing basis, the contribution from the Dixie partnership to our top line performance remains at approximately 15% of total revenue. This is a highly complementary product offering to the RNS system that leverages our existing commercial team and customer base and provides earlier visibility into the pipeline of patients that may be appropriate candidates for RNS therapy. As we review our performance, we continue to be pleased with the progress made in 2023. The strategy we put in place is focused on clinician and patient needs and leverages our differentiated technology and organization. As a result, we have been able to execute our commercial strategy while maintaining disciplined expense management resulting in cash burn in the Q4 of 2023 of $3,400,000 compared to $7,900,000 in the Q4 of 2022.

Speaker 2

With regard to the new opportunities we've recently announced, we have entered into a first of its kind strategic collaboration with a biotechnology company, which will leverage our RNS systems unique biomarker monitoring and data analysis capabilities. The collaboration will evaluate biomarker changes in currently implanted RNS system patients that have enrolled in the biotech company's Phase 2a proof of concept trial of its product candidate. We believe this groundbreaking collaboration is another example of the value that our RNS system can provide through its proven ability to collect and analyze data, which is then used to generate insights that can help inform treatment strategies. We expect to receive total revenue from this collaboration of approximately $3,700,000 The agreement is broken out into 4 phases through the Q4 of 2025 with certain milestones correlating to each phase, the majority of which are planned to be completed prior to the end of 2024. Now turning to 2024.

Speaker 2

The NeuroPace team and I will continue to focus on increasing revenue growth, gross margin improvement and operating expense management. Currently, we are expecting to report between $73,000,000 $77,000,000 in revenue for the full year 2024, which represents a 12% to 18% increase in revenue compared to 2023, driven by execution of our strategies. We look forward to keeping you apprised of our progress. With that, I will now turn the call over to Rebecca to review our Q4 and 2023 financial results along with some additional detail around our 2024 financial plans. Rebecca?

Speaker 3

Thank you, Joel. NeuroPace's revenue for the Q4 of 2023 was $18,000,000 representing growth of 41% compared to $12,800,000 for the Q4 of 2022 and approximately 10% compared to $16,400,000 in the Q3 of 2023. This growth was primarily driven by increased sales of our RNS system. We also generated meaningful revenue from sales of Dixie Medical products in our 1st full year of serving as Dixie Medical's exclusive U. S.

Speaker 3

Distributor. Dixie contributed a small amount of revenue to the Q4 of 2022. Replacement implant revenue continued to decline compared to the same period last year and represented approximately 4% of total revenue. Gross margin for the Q4 of 2023 was 75.2% compared to 68.8% in the Q4 of 2022 and 74.5% in the Q3 of 2023. Our gross margin for the quarter increased primarily due to the increase in R and S products produced and sold as our fixed manufacturing overhead costs were spread over more units.

Speaker 3

The increase in R and S gross margin was partially offset by the lower gross margin from distribution of Dixie Medical products. R and D expense in the Q4 of 2023 was $5,400,000 compared with $5,100,000 in the same period of 2022. This increase was primarily driven by an increase in personnel related expenses. SG and A expense in the Q4 of 2023 was $13,200,000 compared with 13 point $6,000,000 in the prior year period. The decrease in SG and A was primarily due to a decrease in insurance and outside services expense, partially offset by an increase in personnel related expenses.

Speaker 3

Total operating expenses in the Q4 of 2023 were $18,600,000 compared with $18,700,000 in the same period of the prior year. This decrease reflects our focus on finding the appropriate resource allocation to effectively manage our cash, which we are committed to continuing as we move into 2024. Our key focus is on maintaining a balance of managing our operating expenses without compromising revenue growth. Loss from operations was $5,100,000 in the Q4 of 2023 compared with $9,900,000 in the prior year period. We have recorded $2,200,000 of interest expense in the Q4 compared to $1,900,000 in the prior year period.

Speaker 3

Net loss was $6,200,000 for the 4th quarter of 2023 compared with $11,100,000 in the Q4 of 2022. Our cash burn in the Q4 of 2023 was $3,400,000 Our cash and short term investments balance as of December 31, 2023 was $66,500,000 Our long term borrowings totaled $57,000,000 as of December 31, 2023 with the full principal due on September 30, 2025. As we look ahead, we expect full year 2024 revenue to increase by approximately 12% to 18% to a range of $73,000,000 to $77,000,000 We expect this growth will be mostly driven by an increase in sales of our RNS system with growth from sales of Dixie Medical products continuing to make a meaningful contribution. We expect our gross margin to be in a range of 72% to 74% for 2024, although we may see small variability due to fluctuations in the proportion of Dixie Medical revenue to overall revenue and other factors. We expect operating expenses for 2024 to range between $80,000,000 $84,000,000 including approximately $12,000,000 in stock based compensation and non cash expense.

Speaker 3

I would now like to turn the call back over to Joel for closing remarks. Joel?

Speaker 4

Thank you, Rebecca. We are very excited by

Speaker 2

the progress we've been making over the past year at neuropace. We believe that our strategy is clear and that our opportunities are compelling. Consistent with our 2024 guidance, we believe we are positioned to achieve 2024 revenue of between $73,000,000 to $77,000,000 and are also positioned to accelerate our growth in the future as these opportunities develop. 2024 will be a year focused on the execution of this strategy and the entire NeuroPACE team is committed to advancing each of its elements to deliver on their potential and to drive long term growth and profitability. 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 Your first question comes from Frank Tantekhagenen from Lake Street Capital Markets. Your line is now open.

Speaker 5

Great. Thanks for taking the questions. Congrats on all the progress. I was hoping to start with 1 on the guide for the year. Obviously, you guys had a very nice year in 2023 with 44% growth and did a nice job of keeping expectations in check throughout the year.

Speaker 5

Looking forward, looking at 12% to 18% growth looks like pretty solid growth, but I was curious if there's an element of conservatism baked into that just as we're early in the year and understanding the market dynamics for 2024. And what are some of the elements that are assumed on the low end of the guidance range and some of the elements assumed on the high end of the guidance range?

Speaker 4

Hello, Frank. Thank you and thanks for that question. So, our guidance, as you said, for 2024 is $73,000,000 to $77,000,000 which implies double digit growth for the business, the midpoint there of 75%, 15% growth and we're comfortable with that guidance. We are obviously at the beginning of the year with our guidance and there are a number of opportunities. I talked about them in my comments here in front of us.

Speaker 4

We feel like we've got a clear and compelling strategy with the Modern RNS story. We're excited about Project Care. We're underway with our incremental sales force expansion. So we think those are all opportunities in front of us. We've also there are also challenges in the year, but we're excited about 2024.

Speaker 4

We sit here in March. We're excited about 2024 and the strategies and plans that we've got for the year. Some considerations when we think about the growth in the year and some things within the range there, but kind of some things as we think about as you mentioned, 'twenty three versus 'twenty four. 23, our growth was primarily driven by sales of the RNS system. It was also bolstered by having a full year of distribution of Dixie Medical products there compared to we only had 1 quarter with Dixie Q4 in 2022 where that only contributed $1,600,000 in revenue.

Speaker 4

And so that's that bolstered 2023. And then, we obviously had the replacement volume dynamic that we've talked about really more in the first half of twenty twenty three the second half of twenty twenty three, but that being a factor as well and then some of the implants associated with the Nautilus trial as well. Those factors were all considered in setting our guidance for 2024. And despite a number of those dynamics, results in plans for the double digit growth in the business. So we think we've got some clear opportunities in front of us that we're excited about and we think portend well and then some challenges to overcome as well, but we've ruled that all into the guidance as well.

Speaker 4

I would just mention too, I think and this wasn't specifically what you asked Frank with regard to 2024, but just you asked a question that kind of to give some perspective around the business. I would also add that as we talk about 2024, we're here at a point in time. It's obviously a very important point in time and we're executing around it. But I'd also like to point out, as I mentioned in my earlier comments as well, where we're positioned in the business, I think as we look into the future. When we look at the business, we're a leader in the space.

Speaker 4

We've got differentiated technology and data, growth in our core business and our distributed products, market development plans here initiated with Project Care. Our indication expansion plans for the RNS system with idiopathic epilepsy with Nautilus And then the incremental expansion of the commercial organization that I mentioned along with demonstrating operating discipline in a strong cash position. So we think as we look into the future, we believe this positions us to accelerate our growth as well. And I guess just to kind of get a little bit of a head of steam up there, but with regard to closing out talking about 2024 again, so as you mentioned we're comfortable with the guidance for 2024. We're here at the start of the year.

Speaker 4

We think there's a number of really good opportunities in front of us as well as some challenges, but we're excited about the year and the plans that we've got for the year. And I've tried to make the point in the past what I'm focused on, what the team is focused on, I think what people have seen from us is that we're in the business delivering consistent repeatable results and that's what we're focused on and executing around.

Speaker 5

Got it. That's great color. I appreciate all of that. Maybe just as a follow-up on the sales organization, heard the comments a couple of times in response as well as the prepared remarks about adding a few incremental sales reps. Can you level set us where that sales organization stands today and how you're thinking about adding?

Speaker 5

Is it new territories? Are you splitting territories? Or any other color you can provide about the incremental sales rep additions? Thank you.

Speaker 4

That's a great question. Thank you, Frank. So I think we've talked about previously, there's really a couple of phases here to the commercial organization expansion. We've talked about that I'd want to highlight here. We've talked about in the past that we actually had previously invested in our commercial organization as well.

Speaker 4

So actually in 2022, we had done some hiring and some commercial organization expansion for which those folks have been going through training and are now getting out into the field and beginning to hit their stride. So we've got that kind of that first wave of commercial investment that we had done previously. And now, we are underway with the hiring here that we're talking about today, the incremental expansion of the sales organization. And it's really focused both on to support the ongoing growth that we've seen in the core business as well as to support in anticipation of the initiation of our activities for Project CARE and the sites that will be outside of Level 4 centers.

Speaker 5

Got it. That's good color. Thanks for taking the questions.

Speaker 6

Thank you, Frank.

Operator

Your next question comes from Vik Chopra from Wells Fargo. Your line is now open.

Speaker 7

Hey, good afternoon and thanks for taking the questions. Congrats to a solid end to the year. So I had 2, I'll start with the first one. You described some of the initial activities with regards to Project Care. Can you maybe describe them in a little bit more detail?

Speaker 7

And what's planned for the rest of the year? And then I had a follow-up.

Speaker 4

You bet. Hello, Vic, and thank you for that question. So with regard to Project Care, while we're early here in the process, we have begun to initiate some pilot program activities, including initial outreach to targeted centers, some of the contracting and various approval activities as well as some of the professional education as well as more site specific initial training activities. It is still early, but a number of those types of activities are underway with some of these centers.

Speaker 7

Got it. We'll keep an eye out for the details, I guess. And for my follow-up question, congrats on the cash burn for Q4. I'm just wondering how we should think about that for 2024? Thank you.

Speaker 4

Rebecca, would you like to start out there and then I can add some commentary as well?

Speaker 8

Sure. So with regard to our cash burn, as Joel mentioned, we reduced it to $3,400,000 in the 4th quarter. We've shared previously that we do see some fluctuations quarter to quarter, but generally we've reduced it considerably throughout the year. We're not going to specifically give you numbers for next year, but you can go through our guidance and come up with a pretty good idea of expectations. And so I think we'll leave it at that.

Speaker 8

Anything you would add, Joel? Nope. Okay. Great.

Speaker 4

Anything further there, Vic?

Operator

Your next question comes from Mike Crafty from Leerink Partners. Your line is now open.

Speaker 6

Hi, everyone. Thanks very much for taking our questions. Another one on your initial revenue guidance for 2024. Can you just provide some additional color on much of the RNS revenue growth is coming from overall epilepsy market growth for neuromodulation systems versus growth from incremental market share you're expecting to gain this year?

Speaker 4

Thank you, Mike. That's a great question. I think from what we've seen the way I'll address that maybe is talk a little bit about pipeline and what we're seeing from a market dynamics perspective. So we have seen we've discussed previously and we have seen where we do think that the patient pipeline and the market availability associated with patients in that pipeline has been strengthening. And we feel like if the pipeline isn't all the way back, it's mostly all of the way back.

Speaker 4

We maybe aren't seeing quite the level of expansion in some of the EMU capacity that we had been seeing pre pandemic. It harken back all the way to those days, but those market dynamics. But we do feel like the patient pipeline is solid and has been demonstrating good consistency there. So we feel like market conditions for patient pipeline have been good. With regard to competitive dynamics, I think we feel like we're in a very good competitive position.

Speaker 4

It's a little bit hard to get into the specifics of the details of the market share calculations because competitor our main competitors don't specifically break out their epilepsy numbers in a way that we could make an apples to apples comparison. But I think with regard to market dynamics, we feel like we're in a strong position as it relates to both clinical data as well as the technology differentiation and feel like we're in a good position from a competitive dynamic perspective there.

Speaker 6

Got it. Yes, I appreciate the color there. And then maybe just a separate one, another one on Project Care. I mean, I realize it's early innings, but what metrics are you going to be paying attention to internally that will help give you a sense of how meaningful this initiative is going to be for driving additional revenue growth over the next few years?

Speaker 4

That's a great question, Mike. Thank you. And it really gets to the point of the approach that we're taking from a market development perspective and that's really taking that targeted approach to the initiation of activities allows us to evaluate and really learn from how we interact with and the way that we start and scale these centers. I think we have a pretty good idea, but I think we're also going to learn a lot in scaling up these centers that will give us some of those leading indicator metrics for the types of things to watch for everything from what are the targeting criteria that we think have resulted in centers that are particularly responsive, pardon the pun. What are the underlying referral networks and patient populations that we should be looking for that translate into a pipeline of patients.

Speaker 4

What are some of the indicators from a contracting and economic committee approval that we can look to see what the health of the process looks like. And so really the pilot is intended to allow us to do some of that diligence, confirm or correct some of our targeting assumptions and then develop that kind of a dashboard just as you say from a metrics perspective for, which centers are have the profile that are the ones that we want to be targeting and spending time with. I would mention of note and while it is early innings, one of the things that we have learned and then we've begun to see is that, as some of the early centers have been out, we've been engaged with them and they've been out going through the contracting process and beginning to go through the training and onboarding process and have begun to identify patients that might be treated well locally. We've also begun to see in a number of these centers that in addition to those patients, the identification of patients, the kind of uncovering of patients that were out outside of Level 4 centers that are patients who could be referred back for further evaluation in Level 4 centers as well.

Speaker 4

So we've begun to see centers identify patients that can be treated locally as well as uncover patients that can be referred back in. And so both of those things really go to our strategy of increasing access to RNS therapy through the CARE program. So that's been an interesting and welcome dynamic to watch and see start to take shape in some of those centers there. But hopefully that gives you a little bit of color on process and metrics for how we're thinking about approaching these centers and what we hope to take from the initial pilot phase here.

Speaker 6

Understood. Really appreciate all the color.

Speaker 4

Thanks, Mike.

Operator

Your next question comes from Robbie Marcus from JPMorgan. Your line is now open.

Speaker 9

Hi, this is actually Lily on for Robbie. Thanks for taking the question. Is there anything you can share on how we should be thinking about cadence for 2024? Do you expect seasonality to be similar to what we saw in 2023? And looking at Q1 specifically, I think The Street was at $17,200,000 So is that a fair place to start?

Speaker 9

Thanks so

Speaker 4

much. Thank you, Ashley. Rebecca, if you maybe want to start out here and I'll follow on with anything.

Speaker 8

Sure. Thanks, Lily. We're providing guidance for the year. We're not going to provide guidance for the quarters. But as you mentioned, we have seen some seasonality in our business in the past, in particular over the summer months as people take vacations.

Speaker 8

I think that's pretty common. We have kind of interesting dynamics in the Q4 where in addition to holidays that everybody experiences, we also have our major medical meeting, the AES Annual Meeting that takes people out of physicians away from their offices for a number of days, a nice long weekend. From our perspective, of course, we spend we have expenses associated with our attendance there. But so I think that gives you some sense of seasonal trends. And at this point, no reason really to think that they are different from the prior year.

Speaker 4

Yes. I'd support all of that. Actually, the only things I might add there would be a little bit of commentary around patient dynamic seasonality. A lot of times when we talk seasonality, we've got a number of different factors that can come into play there. You can have clinician seasonality, you can have kind of health plan and insurance seasonality as well as then you can have kind of patient dynamics of seasonality.

Speaker 4

We have not traditionally really seen kind of a health plan dynamic and or a patient kind of beta around seasonality. Most of these patients have been under evaluation and been on their journey of epilepsy therapy for a number of years. And so kind of a monthly free variation one way or the other hasn't been something that at least traditionally we've seen. As Rebecca said, the seasonality that she called out there tends to be mostly clinician based seasonality with some dynamics of course that you traditionally see around people having surgery around the holidays and those kinds of things. But those tend to be pretty consistent year to year as well.

Speaker 4

So that's maybe just a little additional color around some seasonality. Hopefully that helps.

Speaker 9

Great. Thank you. And then just another follow-up on guidance. Is there any color you can share on what's really driving the growth in 2024? Is it new center adds from Project Care, growing utilization, ASP, some mix of those dynamics?

Speaker 9

So how would you break that down?

Speaker 4

It's a great question. And we considered all of that as we put the guide together. We do anticipate both RNS as well as Dixie Growth to really drive the growth in the business in 2024. And while it is early with regard to project care and we're not calling out specific units and implants and growth associated with care. I would say that we're just getting started here with the initiation of activities at the beginning of 2024.

Speaker 4

And we do expect that as we move through the year, we would see those activities expand in scope as well as potential impact as we move through 2024. If there's anything else there, Ashley, operator, next question.

Operator

Your next question comes from Michael Pollard from Wolfe Research. Your line is now open.

Speaker 4

Good evening. Thank you. One topic, multi parter.

Speaker 10

This pharma collaboration, I'm interested in learning a bit more. I think 3 sub questions. 1, what's the revenue from this considered in 2024 guidance? 2, are there more things like this out there to do? Or is this kind of a one off?

Speaker 10

It seems interesting. I suspect where there's one, there's multiple. What does that longer term opportunity look like? And then 3, I guess another financial part. Do you consider this pretty high margin revenue?

Speaker 10

I would think so. It sounds like kind of a fee for service and I suspect you're also getting paid for the implant. So just curious the financial profile of this type of revenue? That's it for me. Thank you so much.

Speaker 4

Thank you, Mike. Great question. We considered really all the different pieces in the business as we thought about guidance for 2024, including Rapport. And when we think about the opportunities that are out there, we do think that so we're excited about this. I'm sure we'll learn a lot here in the collaboration with them.

Speaker 4

We're really pleased with how that has gone and how that is going. But we think that it really highlights a key part of the RNS system, which we take every chance we can to talk about and I think sometimes doesn't get quite the billing that it should from a differentiation perspective is, we are uniquely able to monitor, record and then analyze data of brain activity. And increasingly, our ability to analyze that information, we feel like has the potential to provide insights both for our core business as well as in other areas here potentially like rapport. So we do think that we have a fundamental point of differentiation here in capability in that monitoring, recording and analyzing of data that really can open up a number of different opportunities for us here, whether that's increased insights and efficiency in our core RNS business or other ways that we can leverage it outside of the RNS business that are that have a potential to be interesting and important to us. We think that's a fundamental point of differentiation.

Speaker 4

With regard to margin, Rebecca, you want to chime in there?

Speaker 8

Sure, absolutely. So Mike, as you mentioned, we derive essentially service revenue from the agreement. As we've shared, we expect that it will be approximately $3,700,000 over the course of the agreement, which started in the Q4 of 2023 and is expected to continue through 2025. The patients that enroll in the study are patients that already have the INS system implanted. So our revenue is really the service revenue that we derive from that arrangement.

Speaker 8

And so it's data from the implanted devices, analysis and support by our team here. There is some incremental expense, yes, associated with it. But I think that kind of gives you a general flavor for the economics of the deal.

Speaker 1

Thank you.

Speaker 4

Thanks, Mike.

Operator

Your next question comes from Dhruv Ranieri from Morgan Stanley. Your line is now open.

Speaker 11

Hi, Joel. Hi, Rebecca. Thanks for taking the questions. Maybe just to go back to guidance. I know it's been touched on a few times, but I was just hoping that you could help put a finer point on what you're building in for underlying new implant growth for 2024.

Speaker 11

Because when I look back at 2023, some of the numbers that you gave, new implant growth was probably close to 50% year over year. You also kind of talked about that you're absorbing some of the RNS implants from the NOLIS trial there. So just to help us kind of parse out like what's being built in from an underlying utilization or new account metric perspective for your 2024 guide for RNS?

Speaker 4

S? Thanks Drew. That's a great question. We do see underlying growth here from RNS implants and really being driven off of the modern RNS story strategy that we had talked about. We see growth coming from initial implant sales from RNS as well as growth from Dixie.

Speaker 4

So we see growth across both of the product lines. And as I mentioned, when you see the growth that's in the guidance, that growth has to overcome the impact of the Nautilus implants in 2023, the net change of the further diminishment of the replacement units and then that Dixie impact of full year distribution. So, we do see growth. We do see growth across both product lines. We see growth across both those product lines that results in the double digits that we've got here in the guide.

Speaker 4

We're not breaking it out product line by product line. But we do see strong growth from

Speaker 5

both of

Speaker 4

the product lines making up the point here in the guidance and needing to overcome some of those dynamics from 2023. I know that's not a full minute answer to the specifics of maybe you want me to do a calculation for you for how we get there, but those are some of the ins and the outs, the underlying organic growth rate associated with

Speaker 1

adoption and utilization in our

Speaker 4

core centers. And then the adoption expand adoption and utilization as well as initiate activities for Project Air and expansion of Dixie revenue than kind of being offset by some of those other dynamics that I mentioned.

Speaker 11

Okay. But bottom line, you're feeling good about growing off like around the $52,000,000 you did in initial implants for 2023?

Speaker 4

We see initial implant revenue from RNS systems as an area of growth for us in 2024.

Speaker 11

Okay, great. And then just on Dixie and I appreciate you're not going to give us like the all the finer detail that we all desire. But just as you are thinking about 2024, just give us a sense of are you expanding Dixie with existing customers? Have you kind of really spread that out around all the accounts that you had just for R and S? And I guess I'm just trying to get a sense of like where you are in the commercial progress distribution progress for the product line?

Speaker 11

Thanks for taking the questions, Joel.

Speaker 4

Thank you, Drew. And it's another great question. And with regard to Dixie, I think we see opportunities really across the product line with Dixie. And by that I mean, I think we see opportunities to through service and support and through talking with centers about the modern approach to managing epilepsy patients and the use of RNS, Phase 2 monitoring being an important part of that. And so deepening the growth of SEEG electrode use in Level 4 centers is an opportunity for us to grow that part of our business even with current customers, 1.

Speaker 4

2, we absolutely see the opportunity for us to expand the base of our customer footprint. One of the opportunities associated with the distribution deal like this one is of course to leverage our commercial organization and we do feel like there is an opportunity to both competitively as well as then in introducing, SCG electrodes into Level 4 centers, an opportunity for us to expand the footprint of the technology as well. And so we've been really pleased with the progress that we've made with Dixie, but I also see opportunities in a number of different kind of vectors there to leverage the distribution relationship in our organization to broaden the adoption and utilization at Dixie as well as with RNS.

Speaker 11

Thanks,

Speaker 4

Joel. Thank you.

Operator

There are no further questions at this time. Speaker, please continue.

Speaker 4

Thank you. And thank you everyone for joining the call tonight. Thank you for the time and for your interest in and support of neuropace. We look forward to and are excited about 2024 and continuing neuropace's mission of transforming the lives of patients living with debilitating seizures. Thanks to all.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect.

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Earnings Conference Call
NeuroPace Q4 2023
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