Earnings Call Transcript - NPCE Q1 2024

Operator, Operator

Good afternoon, and welcome to NeuroPace's First Quarter 2024 Conference Call. As a reminder, this call is being recorded. I would now like to turn the call over to Jeremy Feffer from LifeSci Advisors for a few introductory comments. Please go ahead.

Jeremy Feffer, LifeSci Advisors

Good afternoon. Thank you for joining us for NeuroPace's First Quarter 2024 Financial and Operating Results Conference Call. On today's call, we will hear from Joel Becker, Chief Executive Officer; and Rebecca Kuhn, Chief Financial Officer. Earlier today, NeuroPace released financial results for the first quarter ended March 31, 2024. A copy of the press release is available on the company's website at neuropace.com. 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 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. 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 annual report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 5, 2024, and our quarterly report on Form 10-Q for the quarter ended March 31, 2024, 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 May 8, 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?

Joel Becker, CEO

Thank you, Jeremy, and good afternoon, everyone. I will start out today's call by reviewing our performance in the first quarter and key business priorities for the remainder of 2024 before turning the call over to our CFO, Rebecca Kuhn to present the details of our financial performance for the quarter ended March 31, 2024, which will be followed by a Q&A session. Let's get started. We are pleased with the start to 2024, reporting total revenue of $18.1 million for the first quarter, up 25% compared to the same period last year. Revenue for the quarter included strong year-on-year growth contributions from sales of the RNS System and the DIXI Medical SEEG products, as well as contributions from our strategic biotechnology collaboration. Over the past year, we have worked to find a balance between investing in top line growth and maintaining strong financial discipline across our business. We are proud of the success we have achieved on both of these fronts. The first quarter was another example of this as we held our cash burn to $7.6 million, which included increased payments for variable compensation as a result of our strong operating performance. We are also pleased to have recently extended the maturity date of our term loan to September 30, 2026, further increasing the company's financial flexibility. With those high-level comments about the quarter, provide an overview for today's update, let me now dive into some of the details that help drive this performance. As we review the results and performance of the business in the first quarter of 2024, we are and will remain focused on the execution of growth opportunities in our current target market, which is estimated to be approximately $2 billion annually that offers significant near-term opportunities for growth in treating patients at comprehensive epilepsy centers in the U.S., while also investing in and executing on our longer-term strategy to expand our reach beyond these Level 4 centers and bring NeuroPace's total market opportunity to more than $55 billion. Our objective is to help close the treatment gap for drug-resistant epilepsy patients by expanding access to RNS therapy through increasing adoption and utilization in Level 4 centers, expanding referrals to and implants outside of Level 4 centers and expanding indications for RNS therapy, including to generalized epilepsy patients. Progress was made on this strategy in Q1 as we remain laser focused on increasing adoption of the RNS system. One of the metrics we use to measure this progress is total active prescribers. And while we will not quantify this number, we were pleased to see this metric continue its upward trajectory and achieve an all-time high in the first quarter. We also made significant progress in hiring and training field representatives under the previously announced incremental expansion of our commercial organization. These new representatives are now moving through our in-depth training and education program. We expect the majority of these representatives will complete these activities in the first half of the year and begin to be signed off and able to engage in independent field activities in the second half of the year. We expect that these representatives will also begin to have an impact on the second phase of our long-term strategy, expanding access to RNS therapy beyond Level 4 centers. Pilot program activities have begun in targeted areas, including professional education activities such as webinars, symposia and peer-to-peer programs. This is accompanied by additional commercial activities, such as the initiation of digital social media awareness programs, center contracting activities, and the placement of representatives in targeted geographies. While it is still early in the rollout of these programs, and they did not have a material impact on our results in the first quarter, we have begun to see both implant-related activity as well as the identification of additional patients in need of Phase II monitoring and referral to Level 4 centers. Additionally, the sales representatives that we have added are primarily focused in geographies where we have identified project care center expansion opportunities along with supporting geographies where we have been experiencing revenue growth in our RNS and DIXI product lines. We look forward to updating you further on these activities as they progress. Finally, the third phase of our RNS strategy is based on expanding the approved indications for the RNS System. This effort is currently focused on the pivotal NAUTILUS study in which all implants are complete, and the trial is in the follow-up phase. We believe that the strong interest in this study is further evidence of the significant unmet need that exists for patients with drug-resistant idiopathic generalized epilepsy. 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 first device with an FDA-approved indication for generalized epilepsy. This study has the potential to represent a highly meaningful market expansion opportunity. In addition to the success our commercial team has had with our RNS system, we also continue to see revenue growth from our exclusive partnership with DIXI Medical to market and sell their diagnostic electrodes and related products for epilepsy. This is a highly complementary offering to our RNS System, which provides our sales team with an additional opportunity to call on physicians at the CECs. Lastly, we are pleased with the strategic collaboration we entered into with a biotechnology company in the fourth quarter of 2023, which completed an important additional milestone in the first quarter of 2024. We believe this groundbreaking collaboration is another example of the value 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.

Rebecca Kuhn, CFO

Thank you, Joel. NeuroPace revenue for the first quarter of 2024 was $18.1 million, representing growth of 25% compared to $14.5 million for the first quarter of 2023. This growth was primarily driven by increased sales of our RNS System. We also generated meaningful revenue growth from sales of DIXI Medical products. Replacement implant revenue continued to decline compared to the same period last year and represented approximately 4% of total revenue. Gross margin for the first quarter of 2024 was 73.6% compared to 71.7% in the first quarter of 2023. Our gross margin for RNS products improved due to the increase in units produced and sold as our fixed manufacturing overhead costs were spread over more units. Our collaboration with the biotech company also made a contribution to our gross margin in the first quarter of 2024. The increase in gross margin was partially offset by the lower gross margin from distribution of DIXI Medical products. R&D expense in the first quarter of 2024 was $5.8 million compared with $5.3 million in the same period of 2023. This increase was primarily driven by an increase in personnel-related expenses. SG&A expense in the first quarter of 2024 was $15.1 million compared with $13.4 million in the prior year period. This increase was primarily due to personnel-related expenses, largely driven by the increase in our commercial team as well as severance costs due to personnel changes. Total operating expenses in the first quarter of 2024 were $20.9 million compared with $18.7 million in the same period of the prior year. Consistent with recent quarters, operating expenses as a percentage of revenue were lower for both R&D and SG&A expenses relative to the prior year period. This performance reflects our focus on driving revenue growth while also effectively managing our operating expenses and cash. We continue to focus on finding the appropriate resource allocation to balance these objectives which we expect to continue throughout 2024. Loss from operations was $7.5 million in the first quarter of 2024 compared with $8.3 million in the prior year period. We recorded $2.3 million of interest expense in the first quarter of 2024 compared to $2 million in the prior year period. Net loss was $8.9 million for the first quarter of 2024 compared with $10.4 million in the first quarter of 2023. As discussed previously, we have maintained a disciplined expense management strategy, resulting in cash burn in the first quarter of 2024 of $7.6 million compared to $9.8 million in the first quarter of 2023. As a reminder, the first quarter of the fiscal year tends to be our highest cash flow quarter of the year primarily due to the timing of compensation-related payments. Our cash and short-term investments balance as of March 31, 2024 was $58.9 million. Our long-term borrowings totaled $58 million as of March 31, 2024. We announced today that we finalized an agreement with our lender to extend the final maturity of our debt by one year to September 30, 2026. We believe this extension further improves our overall financial position. Regarding annual guidance for 2024, we continue to expect our total revenue to be in a range of $73 million to $77 million, an increase of approximately 12% to 18%. This growth is expected to be mostly driven by an increase in sales of our RNS System with growth from sales of DIXI 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 DIXI Medical revenue to overall revenue and other factors. We expect operating expenses for 2024 to range between $80 million and $84 million including approximately $12 million in stock-based compensation, a noncash expense.

Joel Becker, CEO

Thank you, Rebecca. At NeuroPace, we are focused on the opportunity to help close the treatment gap for drug-resistant epilepsy patients by expanding access to RNS therapy. I look forward to continuing to execute on our growth strategy and to updating you on our progress throughout 2024. This concludes our prepared remarks. I would now like to turn the call over to the operator who will open the call for questions.

Operator, Operator

Your first question comes from the line of Mike Kratky from Leerink Partners.

Michael Kratky, Analyst

Can you just provide some additional color on what assumptions are being factored into your current guidance range at this point based on the commercial experience you saw in 1Q? I know it's maybe a little bit difficult to answer. But how is the product-level revenue that you saw in 1Q between RNS and DIXI really helping to shape any changes that you might be seeing from here?

Joel Becker, CEO

Thanks, Mike. That's a great question. As we said in our prepared comments, we saw really good contributions across product lines from a year-on-year growth perspective. When we look at that, we take that into account as we think about the rest of the year and also take into consideration a number of activities that we have underway, such as the organizational expansion or the care activities or traction with prescribers. So we incorporate all of that into our outlook for the year. Obviously, there are some headwinds, particularly with the replacement cycle, especially in the first half of the year. However, when we take all that together, we feel like the guidance we maintained with our comments today and that we issued a couple of months ago really represents our best view of what to expect for the business in generating revenue throughout the remainder of the year, with solid contributions from both RNS systems as well as DIXI.

Michael Kratky, Analyst

Understood. And maybe just one follow-up to that. You had a nice feat in 1Q and ultimately maintain the same guidance range for the year. Can you just confirm whether there was anything that you saw so far in 2Q that's giving you pause about potentially raising the guidance range or whether it’s a lot of the same factors that were being considered initially?

Joel Becker, CEO

So just as you mentioned, we were here not too long ago talking about Q1, and now we're discussing Q1 and guidance for the year. When we set the guidance and when we confirm it, it's with a full view of Q1 and everything we've seen as we look forward through the rest of the year. It’s a combination of what we've observed so far as well as various factors moving ahead. Again, we are excited about many opportunities with some noted headwinds.

Operator, Operator

Your next question comes from the line of Frank Takkinen from Lake Street Capital Markets.

Frank Takkinen, Analyst

Congrats on the strong start to the year. I was hoping to follow up on your comment about new prescribers, Joel. I know you said you're not going to quantify that, but I was hoping maybe you could give a little bit more color on where those prescribers are from. Are they existing sites with new users who are now using the technology, or are they new sites? And then just give us a refresh on how those typically scale up?

Joel Becker, CEO

Great question, Frank. Yes, we were excited to see the new prescriber numbers there and the way that has been tracking. So the way that we look at that is the number of prescribers that have been associated with an initial RNS implant over the past 12 months. These new prescribers come from a combination of both adoption within current and new centers. Given where we're at today, much of it is increase of adoption within current centers. We get new users and also see expansion of adoption within centers in which we are present today, but we also have component from new users and new centers as well.

Frank Takkinen, Analyst

Okay. And then the second half of that, just thinking about how the new users are ramped up? What's the training process like? And how do you think about when they start to do as many procedures maybe as the overall average prescriber?

Joel Becker, CEO

Yes, that's a great question. As you might imagine, when you have a new user, it can take a little bit for them to ramp up. We start with the foundations and basics of RNS and neuromodulation therapy in their practice, and then help them understand how to incorporate it into their practice and scale it up. We have a well-understood and reproducible training and implementation model for understanding where RNS fits in their practice as well as how to scale it up in terms of patient selection and how to manage those patients. So we work to take people through the education and adoption process in a described fashion that we've developed over time.

Frank Takkinen, Analyst

And then if I could just sneak maybe one more in. On the biotech agreement, congrats on the milestone achievement. Can you quantify whether or not you received a milestone payment with that? And what portion of the $3.7 million total contract value that was?

Rebecca Kuhn, CFO

Sure, Frank. We'll try and give you a little more color. Just a reminder, the total payments and revenue over the anticipated nine quarters of the collaboration is up to a total of $3.7 million. These payments and revenue have some variations. It’s not terribly dramatic. So we're not going to give you specifics, but yes, there are payments that are received along the way and, of course, revenue recognized along the way. So I hope that's helpful.

Operator, Operator

Your next question comes from the line of Vik Chopra from Wells Fargo.

Vikramjeet Chopra, Analyst

Congrats on a nice quarter. I also had a follow-up question on guidance. You had a pretty nice gross margin beat. Maybe just some additional color on what drove that? Why not raise the gross margin guide for the year? And maybe just help us how to think about it for the year? And then I had a follow-up, please.

Rebecca Kuhn, CFO

Sure. Our gross margin increased year-over-year, largely due to the increase in units produced and sold. That means our fixed overhead costs are spread over a larger number of units. We continue to see nice leverage there. We did see some contribution from our biotech collaboration. The gross margin was, as always, reduced by the lower gross margin from DIXI.

Vikramjeet Chopra, Analyst

And then the follow-up question I had was on Project CARE. Maybe just help us understand where you are with the pilot programs and what metrics you'll be providing for us to track the progress?

Joel Becker, CEO

Thank you, Vik. That's a great question. So just in terms of the specifics of some programs, we're initiating them really in two buckets of activities. One is in professional education activities. We've taken a targeted approach here to the initiation of activities with the pilot program. Within those targeted accounts, we're initiating professional education programs, including educational symposia and webinars. We have engaged in professional education activities on topics regarding RNS as a neuromodulation therapy. So these centers learn about patient selection, management, reimbursement, and establishing this as part of their program. Additionally, we track and measure everything from the timing of contracting and throughput, to education process completion, and patient identification and movements toward implants. We also look at referrals for patients in need of monitoring or additional implants. That gives you a framework for how we manage it internally.

Operator, Operator

Your next question comes from the line of Robbie Marcus from JPMorgan.

Lilia-Celine Lozada, Analyst

This is Lily on for Robbie. Anything you can share on how we should be thinking about cadence for this year? Any puts and takes that we should be keeping in mind for the second quarter through fourth quarter? I think for the second quarter, the Street was at about $18.2 million; is that sort of a fair place to be? And then I had a quick follow-up.

Joel Becker, CEO

Lily, thank you for the question. We're not guiding quarterly, but I could comment a little bit and then invite Rebecca to also comment on the balance of the year. In the past we’ve mentioned that we don’t see the traditional calendarization and cadence that is observed in some businesses. However, we do see some seasons associated with summer vacations and holiday slowdowns around the end of Q2 and beginning of Q3, especially related to customer vacation times. Another key period is between Thanksgiving and Christmas during which the American Epilepsy Society meeting occurs. So there may be some impact in the second half of Q4. Different times bring unique situations that may influence the overall continuity of growth in our business, so these are the main cadence considerations for us.

Lilia-Celine Lozada, Analyst

And then just on replacement revenues. I think I heard you mention that you expect those headwinds to be strongest in the first half of the year. So should we expect those headwinds to moderate in the second half and beyond? Any color on how you're thinking about that line item growing would be helpful.

Rebecca Kuhn, CFO

Yes, for the year as a whole, we do expect that the trend in reduced replacement revenue will continue, but that it will be more pronounced in the first half of the year and likely to be less so in the second half. That's basically what we've shared before and our continued belief.

Operator, Operator

Your next question comes from the line of Ross Osborn from Cantor Fitzgerald.

Ross Osborn, Analyst

Congrats on the progress. So in terms of your patient population, I would be curious to see if you're seeing any traction with the hybrid use case of your RNS offering for patients that have undergone surgery?

Joel Becker, CEO

That's a great question. We think of that patient population as part of our focus on what we call telling the modern RNS story. Traditionally, it seemed that the patient identification for treatment was often seen as an either/or scenario regarding surgery or RNS. However, in reality, about 20% of patients are ideal candidates for resection and RNS is not mutually exclusive. In fact, we have examples where prior resection procedures have taken place after initial RNS placement which informed further decision-making around resection and led to improved outcomes. So, we do see the hybrid approach as a key component of modern RNS, and we actively engage in discussions around patient selection with our prescribers.

Ross Osborn, Analyst

And then in terms of CARE, you mentioned implant activities are accelerating. Is it fair to assume that we should see revenue coming into the model during the second quarter? Or should we be thinking more second half of this year?

Joel Becker, CEO

Yes, I think we’re seeing implant activities underway and also referrals for patients who need to go to Level 2 or Level 4 centers for Phase II monitoring. We expect that our pilot program activities and the impact of our representatives will grow throughout the year, especially in the second half.

Operator, Operator

Your next question comes from the line of Michael Polark from Wolfe Research.

Michael Polark, Analyst

I just have one topic on DIXI. It's kind of more than annualized into the model now. We had a good steer as to how big it was when you did the deal. I'm not asking for the disclosure in the quarter or the guidance for the year. But I am asking about what is the long-term expectation for the DIXI product itself? Do you expect to grow this? Is this a focus of your sales force? Or is it likely to run at this level?

Joel Becker, CEO

While I won't comment specifically on guidance for the next three years, I will share some perspective on DIXI expectations, which are based on our strategy behind having the product in our portfolio. We've seen strong clinical response and customer utilization, which leads us to believe that DIXI will continue to grow as part of our story. We see the use of SEEG as a growing trend in comprehensive epilepsy centers during Phase II monitoring, and we also believe we can develop that market by leveraging our presence in centers with robust neuromodulation offerings. Our goal is to grow both DIXI and RNS while improving our share in areas where SEEG is currently being used.

Operator, Operator

Your last question comes from the line of Drew Ranieri from Morgan Stanley.

Andrew Ranieri, Analyst

Maybe just on your R&D strategy, I understand NAUTILUS is wrapped up, it's in follow-up now. R&D spending has ticked up over the last few quarters, but maybe just talk to us about what else you're spending your money on from a clinical development standpoint or even just a product development standpoint?

Joel Becker, CEO

That's a great question. As mentioned, we’re investing in clinical research alongside product research and development. The NAUTILUS study represents a significant investment as well as the Lennox-Gastaut study. Additionally, I didn't touch on this earlier, but we've also invested in AI and data monitoring and management initiatives. Ultimately, the goal is to balance our investments in critical long-term development alongside efficient execution of commercial strategies. We're increasing our R&D expenditures while maintaining strong expense control.

Andrew Ranieri, Analyst

And maybe just one on the procedure environment and diagnostic funnel environment in general. Anything you're seeing in the first quarter and into the second quarter? And anything you'd highlight?

Joel Becker, CEO

Thank you, Drew. We have seen a strong pipeline of patients and consistency in what individual centers report. The pipeline looks robust and consistent.

Rebecca Kuhn, CFO

No. I think we’re pleased with the pipeline that we've tracked. We see normalized EMU volumes and trends that are positive.

Operator, Operator

Thank you. There are no further questions at this time. Mr. Joel Becker. Please proceed.

Joel Becker, CEO

Thank you, everyone, for listening to our Q1 2024 call today. As I mentioned earlier, here at NeuroPace, we're excited about and focused on the opportunity to help close the treatment gap for drug-resistant epilepsy patients by expanding access to RNS therapy. We look forward to executing on our growth strategy and updating everyone on our progress throughout 2024. Thank you.

Operator, Operator

Thank you. This concludes our conference for today. Thank you all for participating. You may all disconnect.