ClearPoint Neuro, Inc. (CLPT) Q1 2022 Earnings Call Transcript

Greetings and welcome to the ClearPoint Neuro, Inc. First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. Comments made on this call may include statements that are forward-looking within the meaning of securities laws. These forward-looking statements may include, without limitation, statements related to anticipated industry trends, the Company's plans, prospects and strategies, both preliminary and projected and management's expectations, beliefs, estimates or projections regarding future results of operations. Actual results or trends could differ materially. The company undertakes no obligation to revise forward-looking statements for new information or future events. For more information, please refer to the Company's annual report on Form 10-K for the year-ended December 31, 2021 which have been filed with the Securities and Exchange Commission and the Company's quarterly report on Form 10-Q for the three months ended March 31, 2022 which the Company intends to file with the Securities and Exchange Commission on or before May 16, 2022. All the Company's filings may be obtained from the SEC or the Company's website at www.clearpointneuro.com. I would now like to turn the call over to Joe Burnett, Chief Executive Officer. Please go ahead.

Thank you, Rob and thank you to all of the investors and analysts on today's call. Your support is important for the entire ClearPoint team, as we remain focused on restoring quality of life to patients and their families, who are suffering from some of the most debilitating neurological disorders imaginable. ClearPoint had a strong start to 2022 with record revenue of $5.0 million in the first quarter, representing 25% growth year-over-year. This revenue growth was achieved despite continued disruptions due to COVID infections, hospital staffing shortages and supply chain constraints which have become everyday events. Our team successfully installed four additional clinical systems in the quarter which is more than we placed in all of 2021 showing capital purchases and placements are starting to return post-COVID. Additionally, we made progress across our pipeline of new products and partnerships which I will provide a more detailed update on, as we walk through our four pillar growth strategy a little bit later on the call. But first, I will turn this call over to Danilo, our CFO, to review our financial performance in the quarter. Danilo?

Thank you, Joe and thank you all for joining us today. Looking at the first quarter 2022 results, total revenue was $5 million for the three months ended March 31, 2022 and $4 million for the first three months of 2021 which represents 25% growth versus the first quarter of 2021. Our revenue is made up of three components: Functional Neurosurgery Navigation Therapy, Biologics and Drug Delivery and Capital Equipment and Software. Functional Neurosurgery Navigation revenue consists of commercial sales of disposable products and services related to cases utilizing the ClearPoint system to deliver medical device therapy to the proper target. This revenue segment increased 17% to $2.2 million for the first quarter, up from $1.9 million in the first quarter of 2021. Biologics and Drug Delivery revenue includes sales of disposable products and services related to customer-sponsored preclinical and clinical trials utilizing our products. Biologics and Drug Delivery revenue increased 30% to $2.2 million in the first quarter, up from $1.7 million in 2021. This increase was fueled by a 75% increase in Biologics and Drug Delivery service revenue. Capital Equipment and Software revenue, consisting of sales of ClearPoint reusable hardware and software and of related services increased 41% to $0.6 million for the first quarter from $0.5 million for the same period in 2021, following our new installations in the first quarter. ClearPoint Neuro achieved a gross margin of 65% on net sales for the first quarter of 2022, in line with the gross margin recorded in the first quarter of 2021. Research and development costs were $2.5 million for the three months ended March 31, 2022, compared to $1.6 million for the same period in 2021, an increase of $1 million or 62%. The increase was due primarily to increases in personnel costs of $0.3 million, following our growth in headcount and a product development cost of $0.7 million, both resulting from our efforts to expand the applications of our technological platforms. Sales and marketing expenses were $1.8 million for the first quarter, an increase of $0.3 million compared to the same period in 2021. General and administrative expenses were $2.7 million for the first quarter compared to $1.7 million for the same period in 2021, an increase of $1 million or 65%. The increase was due primarily to increased share-based compensation of $0.6 million and personnel costs of $0.3 million, both attributed to increases in headcount. Net interest expense for the three months ended March 31, 2022, was $0.1 million compared to $0.3 million for the same period in 2021 due to the conversion into equity of two tranches of convertible debt in May 2021 and in November 2021. With respect to our cash position, as of March 31, 2022, we held cash and cash equivalent balances of $49.7 million compared to $54.1 million, as of December 2021. I'd like to turn now the call back to Joe.

Thanks, Danilo. As I mentioned earlier, it was important for ClearPoint to get off to a good start here in 2022 and we did exactly that in the first quarter with record revenue and installs despite challenges with Omicron transmission, hospital staffing shortages and supply chain delays. We also made significant progress across our development pipeline and added a number of new product and pharma partnerships. Now, let's break that progress down into our four growth pillars. First, our Biologics and Drug Delivery team continued to add additional partners and services here in the first quarter, increasing our total partner list to approximately 45. Over the past two years, we have been adding partners at a rate of more than one per month and believe that there is still a significant number of potential partners in neuro and spine that can benefit from ClearPoint's hardware, software and cannulas. As expected, each new partner brings new revenue, particularly early-stage service revenue which grew 75% in the quarter. As a reminder, a key part of our strategy is to start working with our biologics partners well before they treat their first patient, so that we build relationships and familiarity with our products throughout the entire drug development process. Growth in this segment will continue from four primary sources: one, the addition of new partners and new indications into our portfolio to provide additional shots on goal and additional sources of revenue. Two, the addition of new services that we can provide to partners and become a more valuable provider to these companies that need our specific device expertise. Three, the progression through the development cycle from consulting to bench testing to preclinical testing to clinical trials to commercialization, each progression creating larger revenue opportunities for ClearPoint. And finally, number four, new creative ways to partner with pharma through co-development, milestones and potential royalties in the future. If we can continue to grow on all four of these axes, this will be a very exciting and diversified platform business for us. We continue to believe that a commercial gene therapy could be achieved in Europe later this year and we expect that more information should become available in the coming months. An initial therapy approval will be an important milestone for the entire biologics community, as regulators continue to define appropriate and achievable pathways to commercial availability. Now moving to our second pillar, our Functional Neurosurgery business also showed growth of approximately 17%. We believe that this number could have been higher in the first quarter and it was impacted by a six-week disruption in case volume, primarily in January and the first half of February, although our March case volume was our highest monthly total in our history. Our cancellation and postponement rate remains at historic highs, as daily COVID testing for patients, surgeons, staff and even our own employees routinely identifies a key party to the procedure as COVID positive. When a patient shows up at the day of their surgery, they're administered a COVID test. If they test positive, the procedure is postponed regardless of whether they are asymptomatic or vaccinated. Similarly, if a surgeon tests positive, they could be sidelined for weeks postponing all procedures during that time. Unfortunately, we believe this higher postponement rate will continue for the foreseeable future as long as this COVID testing remains a significant requirement. On the bright side, we did place four new systems here in the first quarter and expect those sites to all perform their first cases in Q2, a couple of which have already become active. We see this as a positive sign that hospitals are once again committing to capital purchases and importantly, allowing new technologies and vendors access to the hospital for installation and training. From a pipeline standpoint, we did recently achieve FDA clearance for the ClearPoint Array 1.1 software which now includes an important preplanning module to facilitate more efficient planning and data transfer. The Array system is ClearPoint's first foray into the operating room environment. Here, we are going to walk before we run as we focus first on hybrid operating room MR suite and we will move into full operating procedures in 2023 and beyond. We had originally planned to do our first cases with the 1.1 software version in the second half of 2022, so this approval came a bit early versus our projected internal timeline. We have continued development across the rest of our pipeline as well, including the 2.1 ClearPoint software, the Maestro Brain Model, the Orchestra multitrajectory head frame, our co-developed MER system in collaboration with BlackRock and our robotic-assisted system called Revolution in partnership with D&K Engineering. We feel that we have an exciting cadence of new and improved products over the next few years which will continue to demonstrate ClearPoint as one of the true innovative companies in the neurosurgery space. Our previous timelines remain intact and we continue to expect first cases of ClearPoint 2.1 and Maestro software here in 2022 and Orchestra, MER, Revolution and our brain-computer interface navigation system sometime in 2023. While the team is doing what we can to keep these timelines intact, we do recognize the risk introduced by the global supply chain prices on raw materials and components. So far, we have been successful in finding solutions to keep projects on track. But as you have heard from many firms and hospitals, there are issues that arise almost daily and our team spends an inordinate amount of time firefighting, qualifying new materials and suppliers and making sure that supplying products for current patients is still the number one priority. For our third pillar, our therapeutic products and access devices, we have continued our development progress and remain on schedule for our previously communicated timelines again. The ClearPoint exclusive laser ablation system that is in development with CLS in Sweden continues to make progress and has been submitted to the FDA for review. We remain on track for our first human cases to be performed later this year. We have received our first inventory of access drill solutions from adeor and expect to enter a full market release of the operating room version of the drill in 2022. Similarly, we remain on track to evaluate prototypes of the MRI conditional version in 2022 with an estimated first clinical use sometime in 2023. Access technologies, like our partnership with adeor, are important across our entire portfolio, as they are designed to make procedures faster and more predictable, enabling more and more centers to perform two procedures a day in the same MRI suite or the same operating room. It is also important to note that the majority of our investment into the navigation system mentioned at Pillar 2 applies to Biologics and Drug Delivery, as well as our therapy products. That's the beauty of a platform strategy as much of the investment is applied across many indications, including biologics, deep brain stimulation, laser ablation catheter placement, biopsy, brain-computer interfaces and perhaps even more in the future. This is crucial from a training standpoint as well. Every biopsy case, laser ablation case or DBS case that a hospital does with ClearPoint today is, in fact, training and preparing them to do biologics and brain-computer interface cases in the future. Finally, our fourth pillar of achieving global scale has made progress as well. Our quality system has been successfully updated to be compliant with the new European MDR rules that went into effect in May of the past year. This is not a small task and has been daunting enough to some companies that they have decided not to sell certain products in Europe under these new regulations. We believe our quality system and knowledge is the strength and something that helps us differentiate ourselves in the eyes of our pharma and our device partners. We have been successful thus far in securing additional inventory ahead of the supply chain backlog that are very real and very challenging. We have used our existing capital to purchase materials ahead of time, particularly raw materials which you can see by the expansion of inventory investment on our balance sheet today. Our cash burn for the quarter was approximately $4.5 million, leaving us with a balance of just under $50 million at the end of Q1. And at present, we do not have plans to raise any significant capital this year. If you add up the global opportunities across all of our current and future product lines, the results are quite impressive. Today, we are actively working directly or through partnerships on more than 35 different indications which is estimated to include more than one million new patients diagnosed each year. If those one million-plus patients were all treated with ClearPoint's enabling technology, the potential market is in excess of $12 billion annually. These markets, of course, will take time to develop but the sheer number of partnerships and opportunities we have today has diversified ClearPoint in a way that many individual therapy technologies cannot. We have many ways to win and to positively impact a large number of patient lives. At this point, we are adjusting our full year 2022 revenue guidance to between $21.0 million and $22.0 million, up from $20 million to $22 million which was previously announced. We do expect further growth versus our Q1 results and think it's appropriate to increase the lower end of the range to reflect that. Our revenue guidance of $21 million to $22 million does include the impact of certain risks. First, we assume that the effect of any new COVID-19 variant will have a modest impact on elective procedures that is somewhat transient and lasts for a month or two. Second, we assume that supply chain issues persist but that no meaningful back orders or supply issues take place to our customers for our products or for the therapeutic partner's product. Finally, the geopolitical issues in Europe are very difficult to predict relative to travel, new installations, material costs, hospital overcrowding, etc. So that risk is really not understood at this point and, therefore, not included in that guidance. With that, Rob, I would love it if you could open up the call to any questions.

Absolutely. Our first question comes from Frank Takkinen with Lake Street Capital Markets. Please proceed with your question.

Hey, thanks for taking my questions. Congrats on the progress really impressive in a tough environment.

Thanks, Frank.

I wanted to start with Array 1.1. How should we be thinking about the commercial launch? Will it begin as a demo in the early days before transitioning to a more aggressive launch in the latter half of the year? Could you elaborate on that product and the significance of the 1.1 clearance?

Sure, there are basically three or four phases we see for this product line. The first phase involves rolling out the new preplanning module, which early users in our limited market release have requested, to the existing sites equipped with Array, currently a small number across the United States. This includes some preclinical partners like Charles River that are already using the tool. As we verify the installation process, early usage, compatibility, and data transfer, we anticipate a quick transition to a full market release of Array for targeted accounts, such as IMRIS accounts with hybrid operating room MRI suites, allowing for the movement of the MRI magnet during procedures. The procedure integrates other navigation tools alongside Array and captures final images when the MRI magnet is brought into the room. This second phase is expected to encompass a full market release for MRI accounts or hybrid MRI operating rooms, planned for the second half of this year. The third phase, scheduled for 2023, will involve procedures that use other navigation systems with our hardware, adapting the current Array version for optical or CT navigation. Looking ahead to 2024, we plan to introduce a fully CT-guided version using our proprietary software, in collaboration with Philips on a next-generation Maestro Brain Model that will function with both CT and MRI data. By 2024, we aim to offer three distinct options for deep brain stimulation guidance: an optical navigation system with our hardware, a CT navigation solution combining our hardware and software, and the existing MRI version compatible with any MRI suite. I hope that clarifies things.

For my second question, I would like to ask about capital equipment placements. It's encouraging to see an increase in placements this quarter. Can you share your expectations for capital placements for the remainder of 2022? Additionally, what is included in the guidance for that line item?

We have allocated about $2 million for capital equipment placements, which includes service contracts for that equipment. We charge between 12% and 14% annually for these service contracts, contributing approximately $600,000 to $700,000. Additionally, around $1.3 million to $1.4 million will come from new capital placements. This figure tends to vary a lot in our guidance due to its unpredictability. Our priority is to complete the installations and help users become familiar with the technology. The timing of capital purchase orders can fluctuate, depending on whether they come in after the evaluation period or at the beginning of the next quarter. Therefore, estimating the exact timing is challenging, but we're generally looking at around $2 million for the year in this segment.

Perfect. Okay, that’s helpful. I’ll stop there. Congrats, again, on all the progress.

Great. Thanks, Frank.

Our next question comes from Marc Weisenberger with B. Riley Securities. Please proceed with your question.

Yes, thanks. Good afternoon. And just following up on the last question. I think prior to the pandemic, you were on pace to maybe add six to eight new centers of excellence per year, four to start the year is pretty strong. Could you talk about the dynamics around the timing of those adds and the geography? Was there anything that might have resulted in pull forward? And then, as you think about the high-volume centers in the U.S. that aren't currently using the ClearPoint system, how many are still out there? And kind of what's the strategy and expectation for them to adopt ClearPoint?

Sure. I'll address the first question. You're correct that we are on track to have the largest placement quarter or year in our history. This is partly because we are being recognized as an essential component in the future of neurosurgery. Whether it’s for deep brain stimulation and laser ablation now, or the potential of brain-computer interfaces, Biologics and Drug Delivery, or new applications for DBS and laser ablation, there is a growing recognition that even if ClearPoint isn't used for every case, it’s a technology worth being familiar with and having accessible. Demand is increasing as awareness grows about ClearPoint's future capabilities. Another favorable factor is the catch-up element, where hospitals that have been eager to utilize ClearPoint have been delayed in accessing new technology due to prioritizing current patients and renovations. However, this is beginning to change, leading to a resurgence of interest in new capital projects. On the downside, one main challenge we face, which is not exclusive to ClearPoint, is the concerns surrounding cybersecurity. Hospitals have new questionnaires and requirements that apply broadly, complicating negotiations to clarify that certain requirements do not pertain to us, as we are not a cloud service provider. This can draw out the process, taking anywhere from a week to potentially never resolving. Regarding your second question about geography, in the first quarter, we placed two systems in the United States and two in Europe. I expect more placements in the U.S. than in Europe this year, but we will still see activity in both regions as interest in our current products grows and pharma partners begin clinical trials in Europe. This often means that hospitals will want to start with simpler cases before conducting their first trial patient. This helps them get accustomed to using our technology effectively in various applications.

And then, any notable changes in the case mix in the Functional Neurosurgery segment this quarter. Could you quantify maybe the impact you think Omicron had in the quarter? And then should we expect those deferrals to kind of be pushed in? Is it more likely 2Q or 3Q?

Yes, hopefully, we see a return in Q2. There are always additional factors to consider, such as access to the MRI magnet, as a few hospitals are replacing their MRIs and not performing procedures in Q1, making it difficult to determine when they will resume. The key issue is that the majority of patients postponed due to COVID or staffing shortages typically do not delay for too long, but there is a risk that they may never receive the surgery. Ideally, this delay lasts only two to three weeks. Unfortunately, it disrupts our operations and cost structure since we have clinical specialists traveling to manage these cases, which is quite challenging when a patient cannot proceed on the scheduled day. Overall, we anticipate that most of these cases will return in Q2 and Q3, unless we encounter another variant like Omicron.

I have a question regarding the early-stage BDD revenue, which you mentioned grew by 75% year-over-year in the quarter. Can you provide an estimate of what percentage this growth represents of the total BDD revenue? Additionally, how do you typically see the progression of those cohorts over time? Should we anticipate any moderation from those customers in the second or third quarter as they adjust to their purchases?

Yes. As that number continues to grow, which I believe is nearing 50%, we are getting closer to the point where services and actual products sold to pharmaceutical partners or for clinical trials intersect. There is some variability in that, and I can provide examples where a pharmaceutical partner might conduct a significant benchtop study, requiring 200 cannulas for compatibility or flow testing. These one-off instances can contribute to some fluctuations. However, as we add more partners, we expect to see greater consistency on a quarter-to-quarter basis, which should also reflect consistent growth. Typically, our first year with a pharmaceutical company involves getting to know each other, providing some consulting services, and handling a few catheters for basic benchtop tests. If the partnership is successful, we anticipate continued growth year after year. Our strategy is to engage with 45 partners in this pipeline, with each growing slightly each quarter, which will enable broader developments. All of this is pre-commercialization, covering areas such as bench testing, preclinical testing, compatibility testing, and Phase I through III pharmaceutical trials, all of which can be profitable components of our business before any drug is commercialized.

Great, very helpful. Thanks for taking the questions. And congrats on a very strong quarter.

Thanks, Marc.

We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Joe Burnett for closing comments.

Thanks, Rob and once again, thank you to everyone interested and being a part of this team's journey here at ClearPoint. We recognize the challenging global environment that we are all forced to live in today. And we assure you that we are going to help patients around the world as best as we possibly can by keeping our heads down, staying focused and executing against our four pillar growth strategy to develop products that truly improve the quality of life for our patients and for their families. Good night, everyone.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.