Conference Transcript - NPCE 2026-09-08

Speaker 3

All right, good morning. My name is Ross Osborne. I'm on the MedTech team at Wells Fargo. This morning we have Neuropace, and from the company we have the CFO, Patrick Williams, and the head of investor relations, Scott Schaefer. Thanks for being here. Thank you. Good morning. So jumping right in, Neuropace has consistently highlighted the significant underpenetration of the drug-resistant epilepsy market. Where do you believe the largest barriers remain today? Diagnosis, referral patterns, physician awareness?

Speaker 1

I think it's a little bit of all of it you know at the end of the day the product has been on the market for a little over 10 years neuromodulation is clearly an area we describe it as the the next frontier in terms of medical device and medicine and so if you think about the number of patients that are out there there's about 3.6 million people in the United States that suffer from epilepsy about 1.2 million of them are drug resistant but only about 75,000 or so will actually make it to what we call a level 4 comprehensive epilepsy center and of that 75 amount 15,000 will actually get some sort of medical intervention and so it's an extremely under penetrated market and so where we see the the biggest opportunity is the ability to continue to drive within those level four CECs and get more adoption within each account. But at the same time, trying to increase not only the number of patients that go to a level four, but also the number of patients that eventually go and get some sort of neuromodulation. And I think a big part of it is awareness. I think when we hear stories about patients that have suffered from epilepsy for years, decades, one of the first things you ever hear them say is, I wish I knew about these options sooner. And so I'm sure we'll talk about IGE and some other things and some of the adoption dynamics. But I would say overall awareness within the patient community needs to be higher as well as within the physician community. And so we're beginning to start that.

Speaker 3

Great. Maybe while we're here, walk through Project Care, how that's going, what else remains for you guys to do?

Speaker 1

Yeah. So we started probably maybe over almost two years ago. and so the the thought of behind that was to focus on how do we get more awareness in the channel especially out in the community setting and so I mentioned this concept of a level four comprehensive epilepsy center a level four CEC and so for patients to get to there there's only about 250 of those across the United States so if you are not in a major metropolitan area or further away than how do we how do we get you right how does a doctor be able to advise you on what your options are and at the same time we started project care and the concept behind that was more in the community setting we haven't broken it out as much in terms of you know the number of patients we see and I think that gets down to what we're seeing is really the adoption dynamics related to the indication we have today right now we're indicated for adult focal epilepsy Most of those patients, just because of the nature of that disease state, they do require to go to a level four because they require a full workup, including what we call a stereo EEG at the end of phase two is what we call it. Fairly invasive, time-consuming step in order to identify where exactly the epilepsy is happening within the brain. And so as we think about other expanding indications, which I know we'll talk about, we think the adoption dynamics here will be much more favorable. and that's where Project Care could really take off because we'll be able to potentially bypass that Phase II SEG, and that'll be a big driver, we believe, of adoption and awareness as we go forward. Great.

Speaker 3

Before we get to IGE, maybe walk through R&S, your system, and how that differentiates from other offerings on market.

Speaker 2

Yeah.

Speaker 3

Do you want to take that one, Scott?

Speaker 2

Sure. It is a neurostimulator cranial implant that is continuously monitoring, recording, and analyzing each patient's individual physiology. And in doing so, allows the patient to have tailored therapy and lead placement exactly where the seizure onset or the seizure network is focused, which allows personalized therapy over time, which you see in our clinical data, which we believe is best in class, as well as the data that's generated from the device. So like I said, it's continuously monitoring, recording each patient's EEG patterns. And over time, that allows the physician to better understand lead placement as well as their individual disease state, which you see also in our clinical data that allows our results to get better as the therapy gets tailored.

Speaker 3

Great. And then over time, is there a role for different nerve modulation devices within epilepsy? Whether that's focal or generalized? Or do you see R&S taking most of the share?

Speaker 1

Yeah, so maybe just tell everyone what the other options are within the competitive space. and so the largest shareholder uh is a vagus nerve stimulation known as vns which is uh levanova has that and then a similar type of brain stimulation uh is medtronics dbs deep brain stimulation um that is a pectoral implant as well we're a cranial implant uh and then uh what i would call where the where the other medical device with a neuromodulation rns uh and then the fourth option would be a medical innovation intervention which is usually some sort of section and so look we probably you know people can look at our numbers we're probably you know less than depending on the the quarter right 15 to 20 percent of that overall 15 000 that are happening in a year in terms of patients and we believe that there's clearly a market share opportunity for us to continue to take market share most of the revenue that you see from The largest shareholder in Levinova with VNS is related to the replacement cycle. Their battery, depending on maybe every three, four years, our battery lasts closer to 10 years. And so because of that, most of the implants you see from us are all initial. And we probably have less than 10% of our overall revenue generated by replacement revenue. That will become a tailwind for us as we move forward each and every year. uh the more rns we place today becomes a replacement down the road great um let's discuss nodal's trial um so you've disclosed receiving a letter from the fda that your application was not approvable the current state um maybe before we discuss the data would you walk through your aspirations and ige why that market opportunity is interesting for neurophase yeah so i talked a little bit taking a step back on the opportunity of the market of the 1.2 million patients that are drug resistant or just overall epilepsy we view that about 60 percent of that is what we call focal epilepsy of that 60 percent again we're only indicated for adults so 18 plus years of age probably 20 percent of that market is below the age of 18. so if you do the quick math there that's about our addressable market is about 48 percent of the overall market the indicated expansion through the nautilus clinical trial we did is for idiopathic generalized epilepsy we did submit for both adult and pediatric we can talk about sort of where the steps are and move around with that we see that market is about 20 percent of the overall epilepsy market and then the remaining 20 percent to get you that 60 20 20 that remaining 20 is a little bit more niche you've got some things like LGS, Leningasto, and some other more niche type disease states within epilepsy. And so the nice thing about IgE and the idiopathic generalized epilepsy is it's predominantly adult. You tend to present symptoms of that in your teens. By the time you go through your journey of pharmacological, et cetera, you're usually over 18 years of age by the time you get to deciding to do a medical intervention. The other thing is about that disease state and those patients are, they are very cognitively functioning. And so someone in here could have IgE and we don't even know it. As I mentioned, because it onsens later on in your teens, your brain is essentially developed and everything else. And you're a functioning person. You just have epilepsy every now and then you're not exactly sure why and so we believe the adoption dynamics related to ig are going to be very very favorable not only from patient advocacy because they'll be able to speak for themselves but we believe also the fact of the matter is you can bypass as i mentioned before potentially going to a level four cec getting a phase two workup is what we call it and the rationale behind that is we will be we have two leads in our system you will be sticking those two leads are placing them in the neural network of the brain or the thalamus area as opposed to now with the adult focal by design the focal epilepsy requires a little bit of a combination of both one lead will go on the surface of the brain foci and then the other one will go into the neural network and so again a little bit more straightforward I think the physicians will appreciate that they don't really have to guess about where they put that that that lead on the surface of the brain and so we think those adoption dynamics will be very, very favorable and we will be the only FDA approved device for IGE.

Speaker 3

Maybe let's walk through the data we've seen today. So you missed your primary efficacy endpoint, you hit the safety endpoint, but you did meet your secondary efficacy endpoint. How significant is the secondary efficacy endpoint? Does the clinical community appreciate you guys hitting that while missing the primary?

Speaker 1

I'll let Scott take it.

Speaker 2

Well, just to hit the last part first, the clinical community reaction has been very positive. We've discussed and talked with a number of the investigators as well as discussed out in the field. Everybody's very excited about the data, just for everybody else. Our 18-month data showed a 77 percent median seizure reduction, and we announced a couple of weeks ago that that had improved to 100 percent at 24 months so median seizure reduction data is very robust as well as the safety data very robust as well highly statistically significant.

Speaker 3

And then can we walk through the move from 77 percent to 100 percent? I don't know if it's clear to everyone in terms of the patient population who actually made it to 100.

Speaker 1

Yeah and so we did a clinical trial as we talked about and we've been giving readouts as we go through the short answer is it we we put the two-year data out the 24-month data not every patient received 24 months of stimulation but the number is between 23 months and 24 months and the reason for that is many of the patients crossed over from the sham into the active very quickly as that was the design trial and so it's also one of the reasons why unfortunately we we missed the primary efficacy endpoint which was timed a second general tonic clonic seizure. That is the major seizure that we track. The great news is that, much like our focal indication when we did the original clinical trial and got approved back in 2014, and then we did a post-approval study on that, you saw increases in median seizure reduction over time. And so if you look at year one of the original trial for focal, I think it was around 44 percent. By the time we got to year 10, we were up in the high 60s, 70s. And then in the post-approval study you can see year one year two and year three were phenomenal with year three being closer to 82 percent median seizure reduction and so as we talked about IGE Scott just went through it but at year 18 months here one and a half we were at 77 and now we're at 100 percent median seizure reduction so clearly the product does very well clearly the product right now under the IGE indication is even showing better efficacy clinical efficacy than with a focal patient and I think there's a combination of a few things there one is we're we're smarter the clinicians are smarter we fine-tune that the the product a little bit and the teachings around that and the other thing is what I mentioned before there's there's just less variability in terms of where you place the leads and so because of that it's pretty straightforward you place the leads in the neural network And clearly with epilepsy, placing the leads in the neural network helps stimulate, detect and stimulate at the same time and prevent that major catastrophe, which is a general tonic-clonic seizure.

Speaker 2

There was also some other data that we collected, 30% reduction in seizure-related injury events, over 40% reduction in rescue med use.

Speaker 1

So from a quality of life perspective, the device has a very meaningful impact. and the FDA came back requested additional information on the disease state broadly but also from your clinical trial where do you guys stand in gathering that for the FDA yeah so I'll spend a little bit of time on this because I think this is probably the the hottest topic that we get the question on and so what's today beginning of September so in kind of mid-July I guess I'll call it late July we did have a conference call we received a letter from the FDA related to our submission, and the letter said we are not approvable. And so we talked about that quite a bit on the earnings call recently, and I'll give you the high points. And so I encourage everyone to listen to the words that we chose to communicate to everyone. We did meet the primary safety endpoint, as I said before. There were some questions in the letter related to underrepresented populations. I talked a little bit about the adult versus the pediatric or under 18. We had people that didn't enroll that were under the age of 18, but we didn't have a lot of them. And so the FDA commented and said, we think this is an underrepresented patient population. I'll talk about, you know, potential pathways for that. The other concern they had or question they had was around what we'll call subpopulations. And so I talked about this concept of a general tonic-clonic seizure or a GTC it's the frequency and so they split out and they looked at people that were having more than x amount let's say two seizures a month versus those are having less than two and the FDA had questions statistically around well what's driving the overall population is one sub-population driving the results and that we saw they did ask for the 24-month date as well which we have seen since provided so through all of that we did get a not approvable letter and the encouragement of the FDA. In fact, they, you know, again, we chose our words carefully, they strongly recommend recommended that we go through a process called an SIR, or a Submission Information Request. And what that does is it allows for a collaborative back and forth with the FDA. And so we do have what's called a breakthrough device designation. And so that allows a little bit more connection and collaboration with the FDA. We have submitted the SIR, and so we did that not too long ago the FDA then has about 21 days or exactly 21 days to respond to us to assign a meeting and what we're saying right now is that we expect that meeting to occur by early to mid Q4 and so probably the next data point for everyone will be our Q3 earnings call which will be in early November and that'll probably be where we can give an update in terms of where we're at again we have active communication with the FDA we've spoken to them since this I think the key takeaways for everyone is that we were not denied we believe that there is a pathway to get an IGE approval we are not giving up on any single subpopulation at this point although we will admit that the pediatric for instance might be an area that we would need to work out with the FDA whether that's a post-approval type study maybe it's another trial that we have to go through maybe it's doing real-world evidence but at this point we want to submit and continue to drive for all patients no matter what their frequency is and we will continue to have those conversations and that'll be part of this SIR meeting again that we anticipate will happen in early to mid Q4 okay and what are the outcomes or potential outcomes of the SIR meeting yeah so I think we'll go through the full spectrum everything goes not so well and they say well you know based on what you're saying that we will not approve and deny at that point that could require a whole new clinical trial and everything else we do not expect that to be an area of where we'll go down clearly we have a good meeting and everything gets approved we also think that there will likely not be a high probability on everything getting approved I mentioned again such as the underrepresented population with pediatrics so it's probably somewhere in between and I think that's why we got the encouragement from the FDA to have this collaborative exercise with them and and process with the submission information request and so some people have speculated well could you get a narrowed indication yeah they may say hey you know what pediatrics is off the table focus on adult again our position is we want to make sure that we get a broader indication no matter how many seizures you have but a potential would be that they come back and say, well, we're going to approve you for only X amount of patients that have, you know, two or more seizures a month. That's not dissimilar to the original approval we got way back when in 2014. You know, in our minds, would it hurt adoption? Probably around the edges a little bit, but not a ton, because the reality of the matter is any sort of approval will be beneficial for us again this is a neuromodulation device that is not approved for any IGE will be the first one out there and perhaps there's a way to work out expanded approval as we go through a post-approval study but again we think that this is a viable path the communication with the FDA has been strong very collaborative and we believe that we will get an approval The timing of such, I think some people said, well, we could expect to see an IGE approval. Again, they could put us back and call it a major amendment when we submit, and that could restart what we call the 180-day clock. You start doing the math on that, and based on, I said, a meeting in early to mid, you do 180 days on that. You're looking at a Q1 to Q2 2027 approval then.

Speaker 2

And just to put a finer point on it, our current expectation is that we have data to support the overall clinical population and what was represented in the trial, both from a seizure frequency perspective. So I don't want anybody to get the sense that, you know, we're going in with any kind of let's narrow the indication. Our expectation is that it will be for the full patient population.

Speaker 1

Yeah, it was clear to us as we looked at the letter that there's been turnover in the FDA, for sure. And we had some new statisticians that were involved. There was a new director involved, and we've talked about that. And so I think for us, as we read through the letter and had the ensuing conversations, this is about getting together and making sure that all areas of the FDA are on board. and we do not at this point have to run any more clinical trials or any anything like that so this is simply just explaining how we see the data and comparing it to them and the last thing I would leave you with is that one of the things that we talked a lot about and what the FDA encouraged us to talk about was clinical meaningfulness and that really takes into account the totality of what does it mean to live with IgE as a patient and if you can reduce a seizure frequency clearly if you look at absolute values and someone's having 10 seizures a month and you take them from 10 to two that's a great outcome right and the absolute value of course is eight but if you're having two seizures a month and you take them from two to one or two to 0.5 you know the absolute value obviously isn't as compelling the percentage may be a little bit less than the other one I gave. But what we wanted to do and what the FDA encourages to do is talk about that clinical meaningfulness. And so there is an opportunity for us during the SIR meeting to present the patient's point of view, to present the physician's point of view on this. And I think that's where you start talking about the benefit to the patient, because we clearly do have very, very compelling secondary endpoints that we talked about. And, you know, we sometimes, I'll take this from our CEO we equate it as an analogy to car accidents right if I could tell you that you could have one less car accident a month and you were having two which is not great would you take it and most people like of course I would and that's what we talk about when we say clinical meaningfulness and so we did talk a lot about that during the FDA call we did in late July and then during our earnings calls subsequently and I think that's an important factor that people need to take into account and uh we're excited to get in front of the fda uh and and talk through this great um okay so assuming 4q approval what does the commercialization pathway look like next year should we expect meaningful revenue yeah i would call it's not a binary it's going to be a ramp up and the reason for that is our profile of our insurance profile for payers is about 50 percent of them are private pay. About 20 percent is split between Medicare, traditional Medicare and Medicaid. And then the other 30 percent is advantage plans with Medicare and Medicaid which kind of work like private pay. And so for the private payers specifically they are on coverage cycles that are not based on their yearly annual but they're not all at the same time. And so you know some are in May, some are in November, some are in March or whatever. And so we have put into place the good news is the delay we're all ready to go and so we have to submit what's called payer dossiers we already have approval for adult focal and the new approval for the expanded disease state of ige it'll be the same reimbursement coding the same drg the same cpt code so all we need to do is to convert the private payers coverage policy to include ige patients or not to exclude them depending on how they have the wording and so we have a whole plan in place on there and what we've talked about it is going to be a bit of a ramp up and so we would say that after one year we will be through all the private payers and we should be able to have them all on board clearly reimbursement is important as part of the adoption dynamics and so the way that I've been describing it is you know that first six months depending on when we get the approval and when the coverage policies come in will be highly dependent on getting that insurance coverage and then months seven, eight, and nine will start ramping up. It's going to be a bit of a hockey stick, right? Because you're going to bring them all on board. And then certainly months 10, 11, and 12, we would expect to have most of the insurance covered at that point. And so, or the coverage policies changed. And at that point, we would have cycled through and that we should be in a good spot from that standpoint. In terms of all the infrastructure, anything else we need to do? Nothing else we need to do. We have enough sales of people out in the field. We've got enough support.

Speaker 2

It's the same call point, as I mentioned before. so we'll get a lot of leverage from what we have in place today and again we were expecting approval earlier this year and so all of those things are in place and ready to go for us one thing on the reimbursement that i would add is that the published peer-reviewed evidence is obviously very important to go to the payers with and we had our 18-month nautilus data published in epilepsy not too long ago quite a bit ahead of expectations so we're ready to go from that perspective yeah Great.

Speaker 3

And then maybe post broader payer coverage, how should we think about the ramp relative to focal? Can it go twice as fast, given it's an easier diagnosis process? You have project care in addition to an established base, one and a half times, any rough math there?

Speaker 1

Yeah, so I've talked about it a few times, and I use this phrase right, adoption dynamics. The adoption dynamics for IgE are clearly more favorable across a number of areas. I talked about the patients being able to advocate for themselves they tend to be a little bit more self-sufficient and don't they still depend on a network of support but many of them you know live on their own and may not be driving as much for obvious reasons but they are they're pretty functioning they can go to work and things of that nature and so I think that's one adoption dynamic the physician side of it as we mentioned before you have the ability to potentially bypass the level four CEC and so we are clearly need to work with the the the health care provider community on that but our position is that you do not need to go through a phase two to do that and so that should open it up to the community setting and everything else and then finally the adoption dynamics with with our product you know the beautiful thing about our product is it provides a ton of data right and and that's something that we believe is a clear differentiator and so the ability to have you know the closed loop system that detects and monitors and we have over 27 million EEGs now is important because what that is going to allow us to do over time is to be able to eventually get to a point where we can use artificial intelligence machine learning etc to help the patients and the physicians to get to their end point quicker. And so again with the placement of the leads being in the thalamus or the neural network, that's much more straightforward. The doctors I believe will have more confidence in when they're treating an IgE patient. And then when you enable that with some of the things that we're doing now, might as well hit it now, is that we just recently launched what we call our ECOG assistant. And ECOG assistant allows a doctor to look at thousands and thousands of screens and lines of ECOG data, but then what it does is it filters it down and says here are the 50 or 60 that potentially matter right for that patient and that's all based on again machine learning that we have in the background in the 27 million cogs we're also looking to launch remote care and so we'll be filing that with the FDA by the end of this year we mentioned that what remote care will do is again thinking about a patient in the community setting or not next to a level 4 cc it doesn't really they could be in a major metropolitan and also it's going to give them the ability for the doctor to be able to read their ECOGs in a remote capacity. They don't have to come in into the office to be able to to read those that that data point and programming exactly that's the important part of it is that the programming of it and so to be able to program that and as we talked about over time we see very strong improvement as a patient and their doctor work on finding that exact setting for them. And then over time with the AI and everything else, we'll be eventually going to auto enablement, auto detection, and that'll be a really big part of it. And so we will get to the point where it's a little bit of a set it and forget it. And I think right now, all of those things will help us increase the adoption dynamics, and that's what we're excited about.

Speaker 3

What about on the pricing side of things? Does it make sense? I think you guys have been growing 150 to 200 basis points on price. But adding on all the AI capabilities, is it to serve for attractiveness, or do you think you can start charging higher prices?

Speaker 1

I think you can expect us to continue to have the moderate, call it a couple, 150, 200 basic points of pricing every year. We'll clearly watch what reimbursement does with CMS and sort of stay in line with that. In terms of either charging a different price for IGE, do not see that happening. We're still very underpenetrated, and so if anything, we will look to try to increase reimbursement for the accounts in the physician community. And at the same time, when we think about pricing and some of the other things we're doing like AI, ECOG assistant or remote monitoring, we see that as being able to not so much monetize that portion of it, but monetize the overall market share ability of taking market share. We're still at a very small market share, as I said before. You know, we get access to the 20% of IGE patients in the 1.2 million that are drug resistant. You know, we see that the opportunity to make this easier, increase adoption dynamics is much better than just trying to get a little bit on ASP in the near term.

Speaker 2

The economic value of an implant, you know, if making it easier to use or identifies patients easier, makes the procedure easier, makes it easier to manage more efficiently. I mean, if a center does one or two additional implants, I mean, the revenue from that would far exceed probably any SAS revenue that we could do. So our focus is on maximizing the economic value of the core implant.

Speaker 1

And we're, our gross margins are low 80% right now. So we guided 82 to 83% on a non-GAAP basis. And so still, you know, very strong ASPs and very strong gross margin. And so we're happy with those. And so for us, it's really all about driving additional market share and hopefully one day expanding the market as well.

Speaker 3

Any questions from the audience? All right, if not, I think the focus is primarily on IGE and your ability to get that notification. but Focal continues to perform well. Entering the year, we thought about R&S growth about 20%. We're looking at 21 to 23 exiting the year. Consensus is that 22% for total revenue growth. How should we think about 27? Is R&S moving from 20 to low 20% growth? Yeah. Upside from there.

Speaker 1

So this year we did not include in our guidance anything related to IGE. And I think that's important for everyone to remember. The other thing is we've talked about with our current indication that we would expect to grow around 20% for the distant future. And so the last time we talked about was going through 2027 because that was really part of our long-range plan. We now have the delay, what we'll call it, on IGE, though not in our numbers. I know some of the street models have probably put IGE in 2027. So a little early for us. We've got to see what the timing is. I would encourage people to not include IGE in their 2027 right now until we give a number. And the big part of that is what we talked about earlier is we need to know when the approval is going to happen. And then when that cycle happens with the private payers and bringing them on board. Clearly, if it happens earlier in 2027, then we'll be able to get through the private payers cycle. If it's a little bit later, then it's just going to take a little bit longer. And so we will clearly give color and guidance around what those numbers look like once we get approval and we have a better understanding of that. But still a little early right now.

Speaker 2

It's the same guidance philosophy as when we enter 2026, right? If we have it, we'll include it. If we don't yet, we'll wait.

Speaker 3

What about on the cash flow side of things? You alluded to your strong gross margin, but we started thinking about 27 as the kind of inflection point to achieving cash flow, break even, exiting the air. How much of that was driven by IGE? When you establish LRP, is it still achievable?

Speaker 1

Yeah, and so it is. I think really we have demonstrated the ability to generate cash. We've done that in a couple quarters, including free cash flow. Ultimately for us, we believe that we're valued on growth and taking market share. And so I think everyone would agree with that. And certainly our investor base that we have today. But at the same time, we want to be prudent and smart about it. when we figure out where we can grow more market, we will obviously invest in those areas. And we've done quite a bit of that on the sales and marketing side already. And so I won't back away from what we said before, which was exiting 2027 at a cashflow breakeven. That wasn't contingent on getting an IGE approval. And as I said, we've demonstrated it. So for us, again, it's all about it's a super under penetrated market. We're going to be the only neuromodulation device that can do We've got a lot of great stuff happening with what we'll call AI, with our ECOG. I like to call it AI assistant. And then also with remote monitoring, and then more to come on that. And then, of course, we have a strong foundation, which is the focal side of it. And so I think those are the three takeaways for everyone is, you know, good foundation, expanding TAM, and new products coming on that should help with adoption.

Speaker 3

Great. Patrick, Scott, thanks for being here.

Speaker 1

Appreciate it. Thank you.