Earnings Call Transcript - NPCE Q3 2024

Operator, Operator

Greetings and welcome to NeuroPace’s Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Jeremy Feffer, Investor Relations. Thank you, sir, you may begin.

Jeremy Feffer, Investor Relations

Good afternoon. Thank you for joining us for NeuroPace’s third 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 third quarter ended September 30, 2024. A copy of the press release is available on the Company’s website, neuropace.com. Before we begin, I’d like to remind you that throughout this call we will make statements that include forward-looking statements within the meaning of the 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. 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 latest 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 September 30, 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 November 12, 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 third quarter as well as providing additional insights around our key business priorities for the remainder of the year before turning the call over to our CFO, Rebecca Kuhn, to present the details of our financial performance for the quarter ended September 30, 2024, which will be followed by a Q&A session. Let’s get started. We are very pleased with the performance of the business in the third quarter of 2024 as we generated record revenue, delivered on track gross margins, and demonstrated disciplined operating expense management, as we continue to execute against our multi-phase growth strategy. For the third quarter of 2024, we reported total revenue of $21.1 million, an increase of 28% compared to the same period last year. Revenue growth for the quarter included contributions from sales of the RNS System and DIXI Medical SEEG products, with the majority of the year-over-year growth coming from sales of the RNS System. This Q3 2024 performance was driven by execution in a number of areas across the business. With regard to the top line, we continued to demonstrate execution of the first part of our strategy of increasing adoption and utilization of RNS Systems in Level 4 centers and increased the number of active prescribers of RNS therapy to record levels. Adding to RNS System growth, we began to see a meaningful increase in the number of implants at centers that are part of our Project CARE pilot program and in the number of referrals for RNS implants from these centers to Level 4 Comprehensive Epilepsy Centers (CECs). We also continued to expand the market penetration and utilization of DIXI Medical products, which contributed to our revenue growth in Q3. In the middle part of the income statement, we delivered a gross margin that was on track with our target range. And when combined with a disciplined investment strategy in our key growth and development priorities, we reduced our cash burn to $1.8 million for the quarter. Combined with opportunistic use of our ATM facility, our cash balance increased in the quarter from $55.5 million at the end of the second quarter to $56.8 million at the end of the third quarter. We believe that our current cash position is sufficient to fund operations for the foreseeable future. We also focused on leveraging and developing our organization to increase our level of current performance as well as prepare for the significant opportunities in front of us. The placement of additional sales representatives in the U.S. has helped build momentum in the launch of the Project CARE program this year, which has contributed to our revenue growth over the past several months, while also increasing our field capacity so that we will be well-positioned to take advantage of the multiple market development and indication expansion opportunities to come. Additionally, given the significant opportunities in the business, we’ve also been focused on strengthening our leadership team. We recently announced the hiring of new senior leaders including Katie Keller to lead our Marketing function; Brett Wingeier to lead our Research and Development team; and Amy Treadwell to head up Human Resources. I would like to take a moment to touch on each valuable new team member’s background. We are excited to now have Katie Keller leading our Marketing function. Katie brings specific experience in the neurostimulation market and expertise in market development that position her well to manage our market development efforts around key strategic initiatives, namely: expansion of the CARE program, planning for the launch of our indication expansions, guiding our direct-to-patient outreach and digital marketing efforts, and working with our research and development team on our product pipeline. We are pleased to welcome Brett Wingeier back to NeuroPace to lead our Research and Development team. With his significant experience and expertise in neuromodulation and medical device development, Brett is uniquely well-suited to oversee the exciting work underway to both enhance the efficiency and ease of use of the RNS System and to amplify our focus on device and data innovation to continue to advance our technology leadership position. Most recently, we appointed Amy Treadwell as Vice President of Human Resources. Amy brings an impressive track record of success in healthcare and technology roles, and she will be instrumental in helping us continue to build an engaged, high-performing culture to support our growth. We continue to make progress in the quarter on the third phase of our growth strategy, expanding the approved indications for the RNS System. The primary focus for this element of our strategy is the NAUTILUS study. As previously mentioned, all implants are complete, the trial is in the patient follow-up phase, and remains on track to complete the required one-year follow-up in Q1 2025. As a reminder, if approved, our RNS System would be the first device with an FDA-approved indication for idiopathic generalized epilepsy. We were also pleased to submit positive three-year safety and effectiveness data from our ongoing five-year prospective post-approval study of the RNS System in adults with drug-resistant focal epilepsy. We look forward to publishing and presenting the full study results pending the expiration of a publication embargo. With that as an overview of our operational progress in Q3, let me now turn the call over to Rebecca to review our financial results for the third quarter of 2024. Rebecca?

Rebecca Kuhn, CFO

Thank you, Joel. Our team has continued to make tremendous progress in executing against our strategy. The reach we now have through a network of physicians educated, trained and prescribing RNS therapy is extraordinary compared to just a couple of years ago and will play a key role in closing the treatment gap by driving broader adoption and utilization of our system. For the third quarter of 2024, NeuroPace’s revenue was $21.1 million, representing growth of 28% compared to $16.4 million for the third quarter of 2023. Revenue growth was primarily driven by increased sales of our RNS System; excluding the contribution from NAUTILUS study cases in the third quarter of 2023, RNS sales grew by 36%. We also continued to generate meaningful revenue growth from sales of DIXI Medical products. Gross margin for the third quarter of 2024 was 73.2% compared to 74.5% in the third quarter of 2023. Gross margin continues to be in line with our target range of 72% to 74%. R&D expense was $5.8 million in the third quarter of 2024 compared with $4.8 million in the same period of 2023. This increase was primarily driven by an increase in personnel and program expenses for product development, including AI software and next-generation device platform projects and clinical studies. SG&A expense was $13.9 million in the third quarter of 2024 compared with $13.4 million in the prior year period. This increase was primarily due to an increase in sales and marketing personnel-related expenses, partially offset by a decrease in general and administrative expenses. Total operating expenses were $19.7 million in the third quarter of 2024 compared with $18.2 million in the same period of the prior year, representing growth of 8% with revenue growing by 28% for the quarter. We demonstrated strong operating leverage resulting from our focus on driving revenue growth while also effectively managing our operating expenses and cash. We plan to continue to focus on balancing these objectives. Loss from operations was $4.2 million in the third quarter of 2024 compared with $6 million in the prior year period. We recorded $2.2 million of interest expense in the third quarter of 2024 compared to $2.2 million in the prior year period. Net loss was $5.5 million for the third quarter of 2024 compared with $7.3 million in the third quarter of 2023. As discussed previously, we have maintained a disciplined expense management strategy, resulting in cash burn in the third quarter of 2024 of $1.8 million compared to $2.3 million in the prior year period. In the third quarter of 2024, we paid coupon interest expense entirely in cash, whereas in the prior year quarter $0.7 million of interest was paid in kind by increasing the principal of our debt. If we adjust cash burn for this difference, the year-over-year improvement was even greater. Our cash and short-term investments balance as of September 30, 2024 was $56.8 million, an increase of $1.3 million compared to the end of the prior quarter. In the third quarter of 2024, we opportunistically raised $2.9 million in net proceeds under our ATM facility, resulting in an overall increase in our cash and short-term investments balance. Our long-term borrowings totaled $59.3 million as of September 30, 2024. As a reminder, the final maturity of our debt is September 30, 2026. Regarding annual guidance for 2024, we now expect our total revenue to be in a range of $78 million to $80 million, an increase of approximately 19% to 22% over 2023. 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 some small variability due to fluctuations in the proportion of DIXI Medical revenue to total revenue and other factors. We expect operating expenses for 2024 to range between $80 million and $84 million, including approximately $10 million in stock-based compensation and non-cash expense. I would now like to turn the call back over to Joel for closing remarks. Joel?

Joel Becker, CEO

Thank you, Rebecca. We are pleased with the rate of revenue growth, demonstration of financial discipline and execution of operating priorities during the quarter. The momentum in the quarter is the result of the hard work that’s been taking place over the entire year, and we are focused on building on it further through the end of the year and beyond. Before we end today’s call, I want to call attention to two upcoming events. First, we will be at the upcoming 78th American Epilepsy Society Annual Meeting which is taking place in Los Angeles from December 6th through the 10th. We are very excited by the data that will be presented during the meeting, including several investigator-sponsored and initiated studies. We invite any of you attending the show to stop by and visit us at booth 2119. As we get closer to the meeting date, we plan on issuing additional details about our poster presentations and presence at AES. Second, we are planning to host an Investor Day in New York during the first quarter of 2025 with more details to come. I look forward to updating everyone on our continued progress through the fourth quarter of 2024 and into 2025. 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, Operator

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from Frank Takkinen with Lake Street Capital Markets. Please proceed with your question.

Frank Takkinen, Analyst

Great. Thanks for taking the questions. Congrats on the really solid results. Maybe I’ll start with just a bigger picture one, Joel, you’ve been on board obviously for a number of quarters now and execution has been really solid. But as you look back at the previous quarters, maybe just parse out where you feel the primary growth is coming from in the core RNS growth. Is it the Project CARE initiative? Is it market share taking? Is it expanding the market? And then maybe touch on kind of the durability of where that primary growth is coming from.

Joel Becker, CEO

Great. Thanks for the question, Frank. Nice to hear from you. So yes, if we look back over the past number of quarters and frankly if we look at this quarter, it’s really a matter of executing the strategy that we’ve laid out. So as you know, three key planks in our strategy. One, increasing adoption and utilization within our core Level 4 centers, two, expanding site of service beyond the Level 4 centers and increasing access to RNS for people who are outside of Level 4 centers, and then three, expanding indications. If we look at where we’re seeing growth, it’s both adoption as well as utilization within the Level 4 centers. So as I mentioned in my prepared comments, we’re seeing an increase in the number of prescribers. It has been great to see. We continue to increase that number, and we’re seeing broader adoption of the RNS System and driving utilization within that group of customers. I think there’s some expansion of RNS from a market development perspective as well as share. We’re starting to see some meaningful contributions from the site of service in the work that we’re doing on the CARE side. So I think we’ve got a good diversification of some of those growth drivers that’s now starting to come to fruition and it’s something we’ve been working on over the past number of quarters.

Frank Takkinen, Analyst

Got it. Okay. That’s helpful. And then maybe asking about sales reps. I think last quarter you called out some of your newly hired reps had completed training and they’re placed in geographies where you identified expansion opportunities outside of the Level 4 centers. Maybe touch on that cohort of reps and then talk about any hiring plans that you have as you think about the next couple quarters and years.

Joel Becker, CEO

It’s a great question. Thanks for remembering that, Frank. Yes, we did talk about that the initial tranche of that sales force expansion group that we had talked about earlier in the year had completed training and was being released to independent activities. That’s happened, and we can point to places where we believe we’re seeing increased growth both in support for current RNS business as well as in geographies that we just didn’t have what we wanted from an intensity of coverage perspective previously and now do. There’s a certain component of that that’s part of CARE as well. It’s been great to see those folks hitting the ground running and beginning to add both capacity to the commercial organization as well as impact. That’s been great. With regard to further hiring plans, we’re not discussing that specifically today, other than to say that we continue to stay opportunistic around hiring where we can take advantage of growth opportunities that we see and are being mindful about hiring and organizational expansion in preparation for some of the opportunities that we see coming down the road with further CARE expansion and indication expansion efforts, pending successful clinical studies as well.

Frank Takkinen, Analyst

Got it. That’s helpful. Thanks for taking the questions.

Joel Becker, CEO

Thank you, Frank.

Operator, Operator

Our next question comes from Mike Kratky with Leerink Partners. Please proceed with your question.

Mike Kratky, Analyst

Hi, everyone. Thanks very much for taking our questions. Can you help unpack some of your comments on the Project CARE pilot program and how that’s impacting your contribution to growth? Just between the traction you’re seeing among the 1,800 epileptologists outside of Level 4 centers versus any kind of uptick you’re seeing in patient referrals. Where’s that growth really coming from?

Joel Becker, CEO

Thanks, Mike, appreciate the question. From a CARE program perspective, we’ve really been in the pilot phase and have started to expand that pilot in the second half here of 2024. It’s been gratifying here in the third quarter to begin to see a meaningful contribution from that program. We’re really seeing contribution both from implants within these centers as well as then referrals back into Level 4 centers. Referrals then further bifurcate in two directions. One, we expected that when you’re out in the community, we found that we were uncovering patients that needed Phase 2 testing and would get referred back to the Level 4 centers. We are seeing that. But we’re also seeing that CARE centers who either aren’t quite ready to do implants yet or in some cases want to be programming centers will refer patients to a Level 4 center to be implanted and then get the patient back and manage them while the program is getting spun up, or they want to do the patient management rather than necessarily the implants as well. We’re seeing both implants and referrals and it’s really encouraging to see that begin to inflect in Q3.

Mike Kratky, Analyst

Got it. Yes, I appreciate the color. And maybe just as a follow-up, you posted a really nice revenue beat in 3Q. Solid sequence growth versus the second quarter. It looks like the updated guidance isn’t building in too much additional credit beyond your prior guidance for the fourth quarter. So are you seeing any specific headwinds you’d call out so far this quarter? Maybe just walk us through what would get you to the lower end of that guidance range from 4Q.

Joel Becker, CEO

Thanks, Mike. Another excellent question. If we just talk about the growth of the business and the rest of the year guidance, first of all, we were really pleased with the top line momentum that we demonstrated in the third quarter with a particularly strong growth rate of 28%. More broadly, if we look at the first half of 2024, the business grew by 21%. At the midpoint of our raised and increased guidance here, that would also deliver 21% growth for the second half of the year. Despite increasing comps in the second half of 2024, we see the fundamentals of the business as strong. The updated guidance for the second half and for the full year shows that growth is expected to remain above 20%. We may have quarter-to-quarter variability, but we feel good about the momentum in the execution of the business as well as the opportunities that are in front of us. We’re focused on top line growth as the most important thing, but we also believe that with our current projections we have the cash to fund our operations for the foreseeable future.

Mike Kratky, Analyst

Awesome. Thanks you all.

Joel Becker, CEO

Thanks, Mike.

Operator, Operator

Our next question comes from Robbie Marcus with JPMorgan. Please proceed with your question.

Unidentified Analyst, Analyst

Hi. This is actually Rohin on for Robbie. Thanks for taking our question and congrats on a nice quarter. So I appreciated the commentary you gave on just RNS driving the bulk of sales growth today. And I just wanted to get a sense for how you’re thinking about this trend versus DIXI over time and maybe some preliminary color you can provide on kind of growth contribution into 2025?

Joel Becker, CEO

Thank you. Thanks for that question. Yes, we did call that out and I just want to emphasize that we’ve got growth across product lines and that’s the goal. The significant majority of the growth came from RNS, and that’s where a significant majority of our growth is going to come. Given the magnitude of that business and the opportunities, that’s in no way to slight the opportunity associated with DIXI. We are really pleased with the growth there too. But the majority of the growth here arose from RNS. It’s great to get that growth across product lines to deepen relationships and vertically integrate in the diagnostic process mix.

Unidentified Analyst, Analyst

And then I guess a follow-up to the previous question just around OpEx and expectations for leverage down the P&L. Obviously, SG&A came in lower than our expectations and it was a modest 4% growth year-over-year, as you mentioned. And I know that you kept OpEx guidance unchanged for the balance of the year, but is there anything that you can call out specifically in the third quarter that drove the better leverage? And this implies kind of from buyer math, low-to-mid teens OpEx growth in the fourth quarter. Is there any specific reason why we shouldn’t see this kind of single-digit OpEx growth continue for the balance of this year and beyond?

Joel Becker, CEO

I’ll ask Rebecca to put some color around that. One thing I would mention is that within SG&A, we’re investing in sales while we’re being efficient on G&A. But Rebecca, could you add more about OpEx expectations and any color in the quarter?

Rebecca Kuhn, CFO

Sure. To add a bit more color, we grew R&D expense by about $1 million year-over-year or 20%. We’re clearly making investments in programs that we believe will help drive revenue growth both in the near term and over a longer time horizon. We’re also bolstering our sales and marketing activities, but as Joel mentioned, those are offset by lower G&A expenses. We continue to realize efficiencies in G&A operating as a public company. It’s been an ongoing focus to drive efficiency in that area. I would say Q3 expenses can tend to be a little lower versus other quarters and in Q4, we have our AES Annual Meeting, which can contribute to somewhat higher OpEx in the fourth quarter.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Our next question comes from Vik Chopra with Wells Fargo. Please proceed with your question.

Vik Chopra, Analyst

Hey, good afternoon and congrats on a nice quarter. Thank you for taking the questions. So I had one follow-up on your Q4. Obviously, you had a pretty big beat in Q3 and that would imply a sequential step down in dollars in Q4, which hasn’t been the case traditionally. Is there something that you would call out? Maybe pull forward or any impact from hurricanes? Or is it just management conservatism? Just trying to get a better handle on that. And then I had a follow-up, please.

Joel Becker, CEO

Hi, Vik, thanks for the detailed and thoughtful question thinking about the quarters. We really can’t see anything indicating a borrowing or any kind of a pulling forward of cases from Q4 to Q3. There may have been some at the hospital level, but we can’t point to anything at this point. It’s been difficult for us to know all the individual schedule nuances. Growth was strong in Q3, and it was great to see. It’s important to note that there’s also the AES Annual Meeting in early December, which impacts the entire field. We expect that there will be some effect regarding the number of days available in Q4 alongside the normal holiday scheduling. Our guidance accommodates all these factors. Again, we expect the business to continue growing at 20% or more in the second half of 2024.

Vik Chopra, Analyst

Okay, thank you. And then my follow-up question, you’re starting to see some impact from Project CARE, which you called out for Q3. But as we think about our models for next year, how should we think about the impact from Project CARE in 2025? Thank you.

Joel Becker, CEO

Thanks, Vik. I appreciate your focus on CARE. We see CARE and the expansion of service opportunity in 2025 as critical for continued growth and expansion of the business. The strategy of increasing access to RNS therapy has three key components: increasing adoption and utilization within the Level 4 centers, which is predominately the business and growth we’re currently seeing; expanding site of service and continuing to expand pilot activities; and incorporating CARE more fully across the field organization and our customer group in 2025. We intend to expand these efforts and expect CARE to contribute positively in 2025.

Operator, Operator

Our next question comes from Ross Osborn with Cantor Fitzgerald. Please proceed with your question.

Ross Osborn, Analyst

Hi, congrats on the quarter and thanks for taking our questions. So starting off sounds like Project CARE is starting to take off nicely. Would you provide some color on what you are hearing from new accounts outside of Level 4 centers on the level of difficulty or ease they're having when launching their programs?

Joel Becker, CEO

Thanks, Ross. Yes, we’ve discussed this previously. Accounts vary in terms of their readiness along the spectrum. Some accounts are quite experienced in functional neurosurgery as well as their epilepsy programs and may have people with prior RNS experience from other institutions or their training. For those, the learning and implementation process is relatively quick. However, others may be part of the target program because they have a robust epilepsy population or are in areas with less RNS penetration from a Level 4 perspective. For those centers, it can take longer to ramp up. We are finding that our approach and flexibility in the program really allow centers to integrate RNS into their practices in different ways, depending on their readiness.

Ross Osborn, Analyst

Okay, great. And then, any update on R&D projects for software tools using AI and data analysis?

Joel Becker, CEO

Thanks for asking. Yes, we did mention in our discussion around investment and operating expenses in the quarter the work we’re doing with AI software tools and data development as well as next generation platform work. We’re particularly excited about a lot of that work underway. We believe it’s important to communicate this and plan to do so during our upcoming Investor Day. We want to provide insights into our market, product, and clinical development pipelines. We expect this to accelerate the trajectory of the business.

Ross Osborn, Analyst

Okay, great. Looking forward to the Investor Day. Congrats again on the quarter.

Joel Becker, CEO

Thank you, Ross.

Operator, Operator

Our next question comes from Michael Polark with Wolfe Research. Please proceed with your question.

Michael Polark, Analyst

Good afternoon. Thank you. Can I ask on the Investor Day timing, would you have us think about that as something that could align with maybe an initial top line view of the NAUTILUS trial?

Joel Becker, CEO

It’s a good question, Mike. There are a number of factors to consider regarding timing. We’re trying to align it with a number of business activities. Depending on where we are with the study and NAUTILUS, we’ll coordinate accordingly. More information to come on dates shortly.

Michael Polark, Analyst

Appreciate that. For my follow-up, I want to ask about the two smaller revenue lines, replacements and this pharma collaboration on replacements. The question is just I know the numbers are very small here. What does that curve look like in 2025 off of a low base? Could replacement revenue be up? Or would you have us think about similar zip code to where it currently is? And then on pharma collaboration, I know we know the lifetime value of that arrangement. My question's been on timing. Is it linear, is it kind of smooth, quarter-to-quarter over the expected period, or has it been a little bit lumpy? I want to make sure we don’t have tough comps on that, say in next year versus this year. Thank you so much.

Joel Becker, CEO

Thanks, Mike. I’ll ask Rebecca to address those items. She’s closely monitoring our replacement cycle as well as the revenue recognition side for the collaborations.

Rebecca Kuhn, CFO

Sure. With regard to replacement revenue, we believe that really all of the prior generation devices have been replaced. And we’re seeing the beginning of current generation devices being replaced. Some of that is opportunistic, but we can at least say that we’ve reached the trough. We’re not going to go too far in predicting 2025 but we can confirm that we’re at the end of that downturn. Regarding pharma revenue, it is relatively small. We expect up to $3.7 million over nine, perhaps nine-plus quarters. While there are some fluctuations, they aren’t dramatic.

Michael Polark, Analyst

That was helpful. Thank you.

Joel Becker, CEO

Thanks, Mike.

Operator, Operator

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Joel Becker for closing comments.

Joel Becker, CEO

Thank you. Thanks everyone for joining us today. We’re pleased with the strong revenue growth of 28% in the third quarter. We’re pleased with where we’re at from a guidance perspective and what we’re seeing in the second half of the year as well, with growth in excess of 20% continuing along with demonstrated operating expense leverage, reductions in cash burn, and projections that our current cash position can support our operating activities for the foreseeable future. We’re excited about all that and the fundamentals of the business, as well as the nature and trajectory of the opportunities that we see in front of the business as well. Thanks for your interest and support of NeuroPace. We look forward to keeping you up to date on the execution of the strategy as we progress and hope to see you either at AES or our upcoming Investor Day. Thanks again. Good afternoon.

Operator, Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.