Q3 2021 Neuropace Inc Earnings Call
Excuse me. This is operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on hold thank you for your patience.
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Good afternoon, and welcome to Euro basis third quarter earnings Conference call.
At this time, all participants are in listen only mode.
There will be facilitating a question and answer session towards the end of today's call.
Remainder of this call is being recorded for replay purposes.
I would now like to turn the call over to Matt backfill from the Gilmartin group for a few introductory comments.
Thank you operator, good afternoon, and thank you for participating in today's call joining me from neuro paced, our mics added CEO and Rebecca Cohen CFO earlier today Neuro pace released financial results for the quarter ended September 32020.
One copy of the press release is available on the Companys website before I begin I would like to remind you that management will make statements. During this call 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 90 95 any statements made during this call that relate to expectations or predictions of <unk>.
Events results or performance are forward looking statements. All forward looking statements include those around aerospace's clinical trials and those relating to our operating trends and future financial performance FDA approvals the impact of COVID-19 on the business and prospects for recovery expense management expectations for hiring growth in our organization.
<unk> opportunity revenue guidance commercial expansion product performance and product pipeline development are based upon our 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 Securities Exchange Commission or SEC, including our quarterly reports on Form 10-Q filed with the SEC pursuant to rule four two for beef.
Four on August 12, 2021, as well as in your reports that may be filed with the SEC in the future.
This conference call contains time sensitive information, which we believe is accurate only as of the live broadcast on November 10th 2021, aerospace 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'll turn the call over to Mike.
Thanks, Matt Good afternoon, and thank you for joining us.
<unk>, a very strong second quarter.
We reported record initial implant revenue and continued momentum following our initial public offering we experienced COVID-19 related headwinds in the third quarter.
Early in the quarter, we saw unusual seasonality associated with increased patient and provider vacation demand.
Later in the quarter, we were negatively impacted when procedures, including initial rns system implant and EMU diagnostic procedures were postponed or delayed.
This was primarily a result of hospital restrictions on inpatient elective procedures due to the Delta variant hospital.
Hospital staffing shortages and patient reluctance to be in the hospital.
While initial implant revenues declined sequentially in the third quarter Im extremely proud of the neuro pace team's resiliency during this challenging and dynamic period.
Despite the recent COVID-19 headwinds, we did increase the number of active accounts and physicians in the third quarter.
As of November one 140 centers have completed an initial implant this year with additional sites scheduled to complete a procedure by the end of 2021.
We have also continued to improve product performance in ways that we believe are important for patient adoption and to make progress toward expanding indications and increasing the market opportunity.
It is important to point out that our year over year comparison may not be particularly helpful. Given the third quarter of 2020 was an entirely different environment, specifically in the third quarter of 2020, we experienced strong growth from cases that were rescheduled from the start of the pandemic, whereas in the third quarter.
2021, inpatient elective procedure volumes were significantly disrupted due to COVID-19.
Leading to implant procedures for our device being delayed beyond the third quarter.
While we believe that delta variance infection rates and hospitalizations have declined since the recent peak based on our estimates AMU patient volumes continue to remain below 2019 levels as they have throughout the pandemic.
We are confident in our ability to recapture postponed cases, but frequent and unpredictable searches and COVID-19 infection rates. In addition to staffing shortages risk averse patient behavior and hospital restrictions on elective procedures continue to impact the number of patients moving through the diagnostic process at Ccs.
Since our business is largely dependent on the MDU diagnostic evaluation, we believe our organic initial implant growth will be impacted and now expect growth to be in the low to mid 20% range annually until we emerge from these macro headwinds we continue to have a high degree of confidence in our ability to activate new.
Centers that drive utilization within those centers, but our previous initial implant growth assumptions were predicated on COVID-19 headwinds subsiding, resulting in a stable and growing IMU diagnostic patient funnel.
Next I would like to provide an update on the estimated battery life of the neuro stimulator, we have been selling since 2018.
We recently submitted a premarket approval application supplement to the FDA that if approved will allow us to claim an increase in the estimated battery life of this device under typical operating conditions to nearly 11 years.
This represents more than a two year increase from our currently approved labeling.
We believe that a longer battery life removes an important barrier for initial implants adoption and gives us a distinct competitive advantage over other neuromodulation devices for epilepsy.
Given the relatively young average age of our patients and a replacement rate of over 90%. This change brings significant benefit by reducing the number of required replacement procedures over a patient's lifetime.
We believe that providing an estimated service life of nearly 11 years with no recharging burden will enhance the patient experience, especially as we look to expand our indication into younger patients.
We believe that it will make us a more attractive treatment option compared to other neuromodulation devices with five to seven years of longevity potentially fueling future initial implant growth.
While the longer battery life is of significant benefit to our patients it will reduce replacement implant revenue in the coming years, including by approximately two to $2 $5 million in 2022.
Moving onto clinical updates today, we announced that we received <unk> approval for a pivotal study to expand our indication for drug resistant idiopathic generalized epilepsy.
Otherwise known as primary generalized epilepsy given.
Given the timing of this approval, we believe that we are in a favorable position to begin enrollment in 2022.
As a reminder, we received breakthrough device designation from the FDA for this indication earlier this year.
Additionally, we continue to make progress towards beginning enrollment in the IDE clinical study to expand our indication for drug resistant focal epilepsy to younger patients aged 12 to 17.
Lastly, our rns system was recently highlighted in a nature Medicine Journal article on October 4th title.
Closed loop, Neuromodulation and an individual with treatment resistant depression.
The article features a woman who became the first patient to be implanted with our rns system in an investigational study being conducted at UCSF to treat severe treatment resistant depression.
Similar to the therapeutic approach used for epilepsy patients treated with our rns system surgeons were able to calibrate and detect neural activity patterns that occur when a patient is becoming depressed.
Once detected power Rns system was used to deliver pulses of electrical stimulation to stave off depression.
This is the first known study of our device in this patient population.
While patient stories like this are encouraging it is important to note that any potential indication for depression is many years away.
That said, we continue to believe the rns system is a truly innovative neuromodulation platform that has the potential to be used to address a variety of diseases.
Before we move on to financial results I would also like to update you on a change in our board makeup.
As of November one we added Lisa on driving to the board, replacing a in Norton.
Lisa joins neuro pace with over 25 years of experience in both large and early stage Med Tech software and technology companies.
Currently we seek.
<unk> of <unk>, 33, and executive coaching and leadership development firm.
Which he founded in 2018 prior.
Prior to founding <unk> 33, she served as Chief marketing officer at St. Jude Medical which was acquired by Abbott in 2017.
We are excited to welcome Lisa to our board of directors actually brings a wide range of strategy product development and marketing leadership expertise.
<unk> breadth of experience in growing medical device businesses will be a valuable asset to narrow base as we continue to execute our commercial strategy.
I'd also like to thank Kevin for his service as a board member of Neuro base, Kevin was and.
<unk> to be a big supporter of an adviser to the company, which was especially beneficial during the execution of our IPO earlier this year.
In conclusion, our primary focus is to continue to grow revenue from initial system implants, and our current indication.
We intend to do this by expanding into all <unk> in the United States driving increased utilization at these centers enhancing referral pathways and investing in innovation to improve patient outcomes and ease of use we are also investing to expand our indications to younger patients with focal epilepsy patients with generalized epilepsy and explore.
Loring potential opportunities outside the United States.
Finally, we are supporting the early feasibility work such as the UCSF study on treatment resistant depression that could bring the benefits of responsive neuromodulation therapy to patients with other brain disorders.
With that I will turn the call over to Rebecca Neuro paces Chief Financial Officer.
Thanks, Mike.
As we compare our operating results and 2021 to 2020.
Important to note that 2020 with a very different environment.
Due to the initial impact of COVID-19 on our.
Our revenue and the changes in our operations and cost cutting measures we implemented as a result.
Nope cases revenue for the third quarter of 2021 with $10 3 million.
$12 8 million for the third quarter of 2020.
<unk> of 19%.
The decrease was primarily driven by a decrease in unit sales.
The comprehensive epilepsy centers or initial implant Christina Cheng.
In the third quarter revenue from the initial implants was seven 8 million.
<unk> of 15% over the third quarter 2020.
Third quarter initial implant revenue was significantly impacted by reduced procedure volume due to COVID-19, delta's bearing and head Brian.
And increased patient and provider.
Yeah.
Revenue from replacement implants, with $2 5 million, a decrease of 31% compared to the third quarter of 2020.
As Mike stated, we continue to expect replacement implant revenue generally to decrease for the next several years.
Can you just for the transition to device with a longer lasting battery.
Gross margin for the third quarter of 2021 was 72, 6% compared to 75, Christiane and the third quarter of 2020.
The decline in gross margin relative to the prior year was primarily due to an increase in certain costs as our manufacturing operations return to pre COVID-19 levels. Following COVID-19 related disruptions in 2020.
Total operating expenses in the third quarter of 2021 was $13 8 million compared with $10 7 million.
Same period of the prior year.
R&D expense in the third quarter of 2021 43.
$3 million compared with $3 7 million in the same period in 2020.
Increase in R&D expense was primarily driven by an increase in product development and clinical study expenses.
SG&A expense.
In the third quarter of 2021 was $9 4 million compared with $7 1 million in the prior year period.
The increase in SG&A was primarily driven by increased cost associated with operating as a public company.
And increased sales and marketing expenses.
Loss from operations was $6 2 million in the third quarter of 2021.
Compared to $1 2 million.
Near year period.
We recorded $1 8 million and interest expense in the third quarter compared to $2 8 million in the prior year period.
The reduction in interest expense is due to lower average debt balances in 2021.
<unk> 2020.
Net loss was $8 1 million for the third quarter of 2021, okay.
Q4 dollars 1 million in the third quarter of 2020.
Our cash and short term investments balance as of September 32021 was $123 3 million.
While our long term borrowings totaled $49 6 million.
Now I'd like to provide an update to our 2021 outlook.
While we are pleased to see elective procedure volumes beginning to recover in the fourth quarter following a challenging third quarter.
We remain cautious given near term uncertainty surrounding the severity and duration of COVID-19, and the potential impact on hospital physician and patient behavior.
Based on this.
Lowering our full year revenue guidance to be in the range of 44 million to $44 5 million.
Representing growth of seven 8% compared to full year 2020.
We now expect initial implant revenue to be in the range of $33 million.
$33 5 million.
Representing growth of 18% to 20% compared to full year 2020.
Lastly, <unk>.
Given the replacement revenue dynamics, Mike mentioned previously.
Anticipate replacement revenue to be approximately $11 million, representing a decline of 16% compared to full year 2020.
This concludes our prepared remarks, I would like to turn the call back over to the operator, who will open the call for questions.
Thank you.
If you would like to ask a question at this time. Please press Star then the number one on your telephone.
So with jewelry question press the pound key.
We ask each caller to please limit yourself to one question and one follow up.
Your first question comes from Robbie Marcus with Jpmorgan.
Oh, great. Thanks for taking the questions.
Maybe I'll start Mike.
I don't think you guys surprise.
Some of the commentary we heard from you in the quarter and what we've seen from from peers in the market in general that trends are a bit slower due to delta.
I was wondering if you had any sort of qualitative or quantitative comments on what the adoption and feedback has been like in areas in the country, where we've seen less of a delta impact.
Try and take that and overlay it for future trends.
Thanks Robby.
We havent done I would say specific analysis, putting hotspots of delta variance against the meeting where there is higher higher infection rates against what we're seeing part of that is because of the dynamics that we saw in Q3 related to COVID-19.
We had a number of different causes associated with them. Some of them are related to vacation schedules earlier in the quarter, which is independent of hotspots are not hot spots and then there is the staffing hospital staffing, which again was generally.
Dependent of the hotspots.
That said we have seen.
Things generally trending more positively as we've come out of the third quarter, So third quarter being impacted more significantly by the Delta variance, we've seen things moving in a positive direction, but still impacted.
To this day to some degree more in certain pockets.
And then also the limited missions on the patients coming through the <unk>, which has really been consistent throughout the pandemic, but got worse during Q3.
Got it.
Also really good news on the I'd start here for the breakthrough designation device in generalized epilepsy.
How do we think about the timelines here and maybe your competitive advantage and what Youre, hoping approved versus other devices for epilepsy.
Great results in Focalize, but just trying to maybe set baseline expectations for what we might see in a generalized population the benefits. Thanks a lot.
Yes. Thanks, Ravi we were very pleased to get the positive.
Spots back from the FDA on the IDE submission and really looking forward to carrying up that study to start enrollment next year.
A couple of comments that I would make about it one I had made previous comments about not having definitive answers to the length of follow up for that study. We know at this point that it's a one year follow up for the primary endpoint, which is an important driver of the amount of time, it will take to get through that process.
Primary endpoint is less than 100 patients that we need to enroll in the trial to be able to get to the primary endpoint and so those parameters now are defined and agreed to by the FDA.
The amount of time that it takes to enroll is going to be to a large degree a function of when we get started and so now with the recent news that we have the IDE approval. The team is gearing up efforts to go through site selection.
And then pizza and look forward to getting.
The first patients enrolled next year, and then doing everything we can do drive enrollment in the study.
I'll tell you that the interest from physicians is high about this there are no devices today that are indicated for treatment of generalized epilepsy, and so with that there is a lot of interest and participation.
Sites that are anxious to be able to get going and collect that information.
We're really excited about from a device standpoint, as the technology with responsive neuro stimulation being able to bring the ability to detect patient's specific brain activity in patients with generalized epilepsy record.
Diagnostic information about when those events are happening how they're trending over time.
Doing that in a patient population that we haven't otherwise been able to treat using network stimulation now.
Now by using network stimulation that unique aspect of the patient specific therapy. The recording is to go along with that the trending in the diagnostic information.
Really new and unique to this patient population and differentiated from anything else thats available for us it opens up a whole new part of the market.
Doesn't that doesn't have treatment options with our device today and again like I said a lot of a lot of interest from investigators to get going with us because it's a it's an underserved patient population.
Great color I appreciate it thanks a lot.
Your next question comes from drew <unk> with Morgan Stanley.
Hi, Mike and Rebecca Thanks for taking the questions.
Just through your prepared remarks.
You were mentioning.
<unk> talked about some color for 2022, I thought I heard you say new patient implant growth of 20% next year, and we should think about replacements being down about $2 5 million, which makes sense, but.
As you kind of look at the environment today, there's still clear uncertainty it sounds like there are some dynamics that are getting better.
But you continue to kind of call out the EMU.
Diagnostic headwinds, but just kind of what gives you confidence today that you are capable or the implant volume could achieve 20% growth in 2022, just given the backdrop of uncertainty today.
Yes. Thanks for the question drew so when we think about the market today the growth that we've been able to experience over the last 18 months that was all in the backdrop of.
EMU volumes down so since the beginning of the pandemic IMU volumes have been have been decreased and continue to be decreased and in spite of that we've been able to increase the number of centers and planning the device.
Utilization at those centers.
We're confident that that will continue.
As we move forward made some commentary about the number of centers year to date that are implanted the center, which is already more than implanted in all of last year.
So with that dynamic we've been able to grow the business we're confident.
And our ability to be able to do that there are some things that we're doing on the commercial side to increase patient awareness and activities around driving referral development through all of this.
The commentary about 2022 is to put into context that we do see that throughout 2021. We've had these reduced number of patients coming through the epilepsy monitoring unit that does have an impact on our business overtime because as we've discussed before it takes time for a patient coming into the EMU to work through.
All of the procedures to get to a definitive.
Scheduling of an rns device in Europe is device implant and so with those numbers down we know that thats going to continue and there's uncertainty around how long that is going to last as we all know.
And so I would say, we're being cautious about what that looks like for 2022, as we evaluate that but again very confident in our ability to grow the business in the low to mid twenties.
Provided based on the patients that are the centers that are coming online and the additional positions that are programming in prescribing the device.
And some important news that's coming out about increased longevity. So forth that we now will have positive dynamics in adoption.
Got it thank you and just as we think near term in the fourth quarter.
Clearly the fourth quarter implied guidance is a step up from third quarter, but.
Are you thinking that these are recaptured deferred procedures or are these kind of.
Novo implants, just any more color there. Thank.
Thank you.
Yes, they're most we believe that they are mostly to novo implants. So the dynamic that we saw in Q3.
More I would say hesitancy or cases that were not being scheduled as opposed to large numbers of cases that were on the calendar and pulled off of the calendar. We saw more of that in Q3 than we had seen in previous quarters, but most of the impact was cases, not being scheduled and so when we look into Q4.
Number of those patients we anticipate to be larger than in Q4 than in Q3, So incrementally.
Stronger performance overall in Q4 versus Q3, but again most of that coming from de novo patients coming through as opposed to large numbers of patients that were that were stopped and then rescheduled which was the dynamic we saw back in 2020.
At the beginning of the pandemic, we really this is more about new patients coming through.
Got it thanks for taking my questions.
Your next question comes from Danielle <unk> with SBB Leerink.
Hi, good afternoon, everyone. Thanks, so much for taking my question and congrats on growing.
Or.
Congrats on the quarter.
Just a question on <unk>.
The recent Covid dynamics.
The impact from staffing shortages and I'm just curious what you guys are seeing there at the Apple epilepsy centers as the season.
Now.
Hi, there.
You bring up an an important point that we have made important progress with getting codes added a couple of years ago for remote review of of the diagnostic information stored by our device and that is really helpful. On the follow up side.
So it was hospitals look at staffing for supportive clinics and the ability to be able to manage those the ability of our system to have diagnostic review that can be done remotely helps with that piece, but it doesn't directly address the staffing within the M U which is a different dynamic.
Okay, that's how salt and I'm, just gonna add generalized epilepsy. Just curious if you can talk about how we should think about timelines here.
You know I I didn't see I might've missed it but anything about trial design a number so not sure if that's available yet, but just curious what you can tell us for how we should think about feet of enrollment and when this could come to market. Thanks. So much.
Thanks, Thanks, Danielle So we haven't provided specific timelines yet associated with the study. We it's just recent news that we you know we just announced today that we got the idea approval and so with that moves us into the next up of getting center signed up and kind of going through all of that process to be able.
To start screening patients and in order to start enrolling we'll have better information on that as we get through that administrative part of the process to be able to actually began screening patients uhm I did it in the prepared remarks provide any comments about the make up of the study or the parameters of the study, but I in the queue and.
Hey, I did mention that we did get the I D approval for a study that has a one year follow up for the primary endpoint. That's what we proposed to the F D. A and they agreed with that and the number of patients that would be required to her that is required to be able to meet that primary endpoint is less than 100. So if we haven't provided specific numbers there but.
That's in line with what we had expected prior to this and again very pleased that we were able to get that tidy approved through the F. D. A.
Now gearing up internally to be able to support the kick off of that study.
Thank you.
As a reminder, in order to ask a question you will need to pass star one on your telephone.
Your next question comes from my Coke correct with bank.
Hi, good afternoon. Thanks for taking the question I'll follow the questioning there on generalized and Ah specifically.
Is this gonna be sham controlled or is this a single arm I'd be curious how the how it's structured.
Thanks, Mike, but with without getting into all of the details of the study. It is a randomized study randomized control study.
<unk> has a somewhat of a different design that allows for less impact for the patients that are randomized to two a sham therapy. So I'll follow up maybe at a <unk> at a later time, we can go into more specifics and I prepared to go into the details of the study design, but it is a a randomized sham control.
Trial, but a but a different approach to doing that than than what has been done for Dubai for most of my studies in the past.
If I can sneak into more hopefully brooklyn's if you set it I missed it on the adolescent.
Study has has enrollment started there or do you still expect to start earlier <unk> first patient by the end of this year what is the update on timing for the adolescent project.
Yeah. Thanks for the question I didn't specifically address that for the adolescent study word Nowaday point, where we have our first center or centers through all of the contracting and I R. B approvals and so we have the first patients that are being screened and look to be identified through that process.
There's more centers that are still going through the setup process and so the number of centres will be will be going up over time I didn't provide a specific guidance around when we expect that first patient to be enrolled but we're getting close to that point. So the the process the administrative process, which slowed down here through the third quarter is now.
Picking up speed again.
And the last one I I I <unk> I'm curious on the extended.
Or the submission for the extended battery life claim from eight to 11 years. It sounds like the product is the same you just have more information to support.
An average use that's longer than prior claim it.
I'm curious how <unk>.
What happened there what did you find is it as simple as that.
Initial claim was more conservative than you are more confident in an 11 or something else any color would be great. Thanks for taking the questions.
Yeah. Thanks for the question so that the battery life estimations. When the device was initially approved or based on models that we did assumptions and models that we did from the design of the from the design of the product.
Now we have more data on actual performance of the product being produced and so we <unk>.
Recently were able to complete that analysis that showed that the performance of the devices is better than the models that were used.
To create the initial approvals and so that is the information that we provided back to the F. D. A and the submission is the data on what the actual device performance is.
And then we're using that to be able to support an increase claim for the for the labeling. So it should should the FDA agree with that that would allow us to market the longer the longer longevity.
Thank you.
Yeah, I know if anything your questions at this time I'll go to any elevate to my comment further closing remarks.
Thank you all for your time today, and we hope we have provided you with an overview not only of our results, but it also our priorities.
We continue to go about achieving them, we look forward to many <unk> meeting many of you in the future at Investor in industry conferences.
As well as with individual meetings have a great day.
Okay. This concludes today's conference call. Thank you for participating in the amount of what's going on.
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