NeuroPace, Inc. (NASDAQ:NPCE) Q1 2024 Earnings Call Transcript

NeuroPace, Inc. (NASDAQ:NPCE) Q1 2024 Earnings Call Transcript May 12, 2024

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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: 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 31st, 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 security laws, which are made pursuant to the safe harbor provisions of the Private Security 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 forecasts 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 sections 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: 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 DIXI Medical SEEG products, and contribution 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 providing an overview for today's update, let me now dive into some of the details that helped 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 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 in 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 used 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 2 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 complimentary 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 the 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. With that as an overview of our operational progress, let me now turn the call over to Rebecca to review our financial results for the first quarter of 2024. Rebecca?

Rebecca Kuhn: Thank you, Joel. NeuroPace's 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.

A collaboration with a 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 burn 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 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 non-cash expense. I would now like to turn the call back over to Joel for closing remarks. Joel?

Joel Becker: 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.

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