Q4 2022 Neuropace Inc Earnings Call
Speaker 1: The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 11.
Speaker 2: Good afternoon and welcome to New York PACE's fourth quarter earnings conference call. At this time, participants are on a listen-only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes.
Speaker 2: I would now like to turn the call over to Tripp Taylor from the Gilmartin Group for a few introductory remarks.
Speaker 3: Thank you, operator. Good afternoon and thank you for participating in today's call. Joining me from Neuropace are Mike Favet, CEO and Rebecca Kuhn, CFO . Earlier today, Neuropace released financial results for the fourth quarter in full year ended December 31st, 2022. A copy of the press release is available on the company's website.
Speaker 3: Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meeting of the federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Security's Litigation Reform Act of 1995. Any statements made during this call that relate to expectations or predictions of future events, results, or performance or for-
Speaker 3: revenue outlook, and commercial expansion are based upon 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.
Speaker 3: 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 quarterly report on Form 10Q for the quarter ended September 30, 2022, and our annual report on Form 10K for the year ended December 31.
Speaker 3: 2022 to be filed with the SEC as well as any reports that we may file with the SEC in the future.
Speaker 3: This conference call contains time-sensitive information, which we believe is accurate only as of this live broadcast on March 2nd, 2023. NeuroPACE disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements.
Speaker 3: whether because of new information, future events, or otherwise.
Speaker 3: And with that, I will now turn the call over to Mike.
Speaker 3: Thanks, Tripp. Good afternoon, everyone, and thank you for joining us. Today I will highlight our fourth quarter performance and update you on the priorities we are intending to focus on in 2023 before turning the call over to Rebecca to detail the financial results and opening the call to questions.
Speaker 3: Before we begin, I want to highlight our key accomplishments from a productive 2022. In our first full year as a public company, we drove meaningful adoption of our RMS system, increasing utilization within the Comprehensive Epilepsy Centers, or CECs.
Speaker 4: and adding more implanting thinners.
Speaker 4: We also became the exclusive US distributor of the stereo EEG products produced by Dixie Medical.
Speaker 4: This provides us with not only an additional revenue stream through our established sales channel, but also visibility into patients being worked through the diagnostic process who are potential candidates for RNS therapy.
Speaker 4: We also made meaningful progress toward expanding the RNS indication, specifically through our Nautilus pivotal study for primary generalized epilepsy.
Speaker 4: We accomplished all of this while reducing cash burn in the second half of 2022 to approximately $15 million Compared to approximately $23 million in the first half of 2022
Speaker 4: I will provide more color on these accomplishments and how they position us well for 2023 and beyond.
Speaker 4: Starting with our fourth quarter performance.
Speaker 4: Total revenue for the fourth quarter was $12.8 million, representing growth of 16% compared to the prior year period and 15% compared to the third quarter of 2022. This was primarily driven by increased adoption of our RNS system evidenced by strong initial implant revenue of $9.8 million.
Speaker 4: representing growth of 15% compared to the prior year period and 7% sequentially.
Speaker 4: This was coupled with revenue contribution from the distribution of Dixie Medical Products, which was slightly ahead of expectations at $1.6 million in our first quarter selling this product line.
Speaker 4: We believe epilepsy monitoring unit or EMU patient volumes remain stable throughout the fourth quarter, with no significant disruption since the first quarter of 2022.
Speaker 4: As a reminder, diagnostic evaluation in the EMU is the initial step in evaluating treatment options, including the potential use of RNS.
Speaker 4: Stability in the EMU supports the pipeline of interventional therapy candidates, including candidates for RNS therapy.
Speaker 4: We continue to execute commercially in the normalizing operating environment, one that we do not believe has yet returned to pre-pandemic levels, and have been successful in driving physician and patient awareness of the clinical benefit and differentiated features of our RNS system.
Speaker 4: As a result, we are seeing a trend of increasing utilization, meaning that more patients are getting the benefit of RNS therapy. Considering this momentum, we expect total 2023 revenue of $50 to $52 million compared to $45.5 million in 2022.
Speaker 4: Our growth will be driven primarily by increasing RNS utilization within CECs and a full year of selling the Dixie medical products.
Speaker 4: Growth in these areas will be offset by declining replacement implant revenue as the remaining first generation devices reach end of service and are replaced by our second generation device with a nearly 11 year battery life.
Speaker 4: Commercially, our priority is to increase utilization of the RNS system.
Speaker 4: Our strategy concentrates on three objectives.
Speaker 4: One, expanding patient selection. Two, managing the patient pipeline. And three, driving adoption of the RNS system by additional prescribers and additional implanting centers.
Speaker 4: To expand patient selection, our team is focused on physician education. Our goal is to increase physician awareness of the benefits of the R&S system for all indicated FOCAL EPLOPC patient subgroups.
Speaker 4: The Arna system is highly versatile with the ability to position lead throughout the brain and customize detection and stimulation in a way that allows treatment of a full range of both focal epilepsy and that locations.
Speaker 4: We have compiled compelling clinical evidence showing the differentiated benefits of RNS therapy across these patient subgroups, and we are working to ensure these data are understood by more physicians.
Speaker 4: We believe this will help inform deeper integration of RNS systems into their treatment algorithms for a broader set of patients.
Speaker 4: We are also working to close the treatment gap by guiding epilepsy and neurosurgeons to evaluate more drug-resistant epilepsy patients for intervention therapy so that more of their patients can realize the life-changing benefits provided by RNS therapy.
Speaker 4: Our next objective is to actively manage every level of the patient funnel. We believe that identifying and educating potential RNS patients earlier in their treatment journey is critical for increasing RNS utilization.
Speaker 4: At the top of the patient funnel, we are adding leads using direct to consumer efforts and through our field team working within the CECs, including through our work in the EMUs with the Dixie Medical Stereo EEG products. We utilize nurse navigators to help guide these patient leads through the diagnostic process.
Speaker 4: We also provide patient education on the RNS system through our commercial team and a network of patient ambassadors.
Speaker 4: We believe that our efforts to manage the patient pipeline from end to end will be a key factor in increasing RNS therapy utilization. As a reminder, we are the exclusive distributor of Dixie Medical Stereo EEG leads, which is the diagnostic device used to determine where epileptic seizures originate. Most RNS patients...
Speaker 4: and most surgical resection and ablation patients in the United States are being localized with stereo EEG before intervention.
Speaker 4: Distribution of these products is not only an incremental revenue stream, but is providing the opportunity for earlier patient engagement, where we believe we can have a greater impact and a stronger voice explaining the benefits of the RNS system.
Speaker 4: Q4 was our first quarter distributing the Dixie medical products and we are encouraged by our early progress.
Speaker 4: We are confident this partnership will have a positive impact on the R&M patient pipeline.
Speaker 4: Third, we believe that driving adoption by additional prescribers and bringing on new implanting centers will also contribute to our overall growth.
Speaker 4: The Salesforce expansion completed in 2022 has enabled and will continue to enable this team to cover a greater portion of the market and we intend to leverage that to introduce our R&S system more broadly.
Speaker 4: These three commercial objectives are designed to increase utilization of the R&S system and support our initial implant revenue growth in 2023.
Speaker 4: I will now provide an update on replacement revenue. As expected in the fourth quarter, replacement revenue was $1.4 million, which represents a decline of 44% compared to the prior year period. As of December 31, 2022, there were 56 patients being actively treated with first-generation RNS devices.
Speaker 4: We do not plan to provide this metric going forward as we do not expect it to represent a material part of our business in 2023. We continue to expect quarterly replacement revenue to sequentially decline through the year as the remaining first-generation devices are replaced with the second-generation device with a longer lasting battery. We believe that we will have completed.
Speaker 4: the transition process by the end of 2023.
Speaker 4: Moving to our clinical trial updates, generalized epilepsy continues to be our top clinical priority. In 2022, we initiated enrollment in our model of study.
Speaker 4: The Nautilus study is designed to evaluate the safety and efficacy of the RNS system for the treatment of primary generalized epilepsy.
Speaker 4: We intend for the results from this study to support a PMA supplement to expand the RNS system indication.
Speaker 4: I am pleased to report that all 25 participating sites are now active and are seeking to enroll patients in the study.
Speaker 4: We also continue to make good progress on the NIH-funded feasibility study for patients with Lennox-Gastaut syndrome, a type of symptomatic generalized epilepsy.
Speaker 4: Generalized epilepsy represents a meaningful market expansion opportunity. Forty percent of drug-resistant epilepsy patients have generalized epilepsy, and diagnosis of these patients is simpler and faster than prophogile epilepsy.
Speaker 4: We believe that RNS therapy represents the optimal intervention for these patients as reception and ablation are not applicable for generalized epilepsy and there's no FDA approved neuromodulation therapy for this indication.
Speaker 4: To wrap up, as I look back on 2022, I can proudly say that we have been able to make significant progress across our business.
Speaker 4: We drove increased R&F system utilization.
Speaker 4: We expanded our field team and optimized our commercial process. We successfully initiated distribution of Dixie medical products for stereo EEG. We made important progress towards expanding our indication into generalized epilepsy by getting enrollment in the model of study and the LGF study.
Speaker 4: We did all of this while reducing our cash burn to approximately 15M dollars in the second half of 2022.
Speaker 4: With over $77 million of cash available at the end of 2022, at this burn rate, we would have more than two years of available capital. Collectively, these accomplishments have positioned Neuropeis well for 2023 and beyond.
Speaker 4: With that, I will now turn the call over to Rebecca to detail the fourth quarter and full-year financial results.
Speaker 5: Thanks, Mike. NeuroPACE's revenue for the fourth quarter of 2022 was $12.8 million, representing growth of 16% compared to $11 million for the fourth quarter of 2021 and 15% sequentially compared to $11.2 million.
Speaker 5: in the third quarter of 2022.
Speaker 5: In the fourth quarter, revenue from initial implants grew 15% to $9.8 million compared to $8.5 million for the fourth quarter of 2021.
Speaker 5: Sequentially, initial implant revenue in the fourth quarter grew 7% compared to the third quarter.
Speaker 5: The increase in revenue was largely due to an increase in initial implant procedures.
Speaker 5: Revenue from replacement implants was $1.4 million compared to $2.5 million in the fourth quarter of 2021.
Speaker 5: We continue to expect replacement implant revenue generally to decrease through the end of 2023 until we have completed the transition to the second generation device. This means that we expect revenue only from replacements of our second generation devices after this year.
Speaker 5: We expect this will be a growth driver for our business when more of the second generation devices reach end of battery life and are ready for replacement.
Speaker 5: First margin for the fourth quarter of 2022 was 69% compared to 73% in the fourth quarter of 2021.
Speaker 5: The decline in gross margin relative to the prior year period was primarily due to distributing Dixie medical products, which have a lower gross margin than our core R&S business.
Speaker 5: The fourth quarter of 2022 was our first quarter distributing Dixie medical products.
Speaker 5: and we expect gross margins to generally increase from that level. Total operating expenses in the fourth quarter of 2022 were $18.7 million, compared with $17.1 million in the same period of the prior year.
Speaker 5: Operating expenses in the fourth quarter, including one-time costs associated with the Dixie Medical Partnership launch,
Speaker 5: increased by 3% compared to the third quarter. As expected, operating expenses for our core R&S business decreased slightly in the fourth quarter compared to the third quarter.
Speaker 5: We plan to continue to focus on initiatives to optimize operating expenses through 2023. R&D expense in the fourth quarter of 2022 was $5.1 million compared with $5.3 million in the same period of 2021.
Speaker 5: compared with $11.7 million in the prior year period.
Speaker 5: The increase in SG&A was primarily driven by Dixie Medical Partnership launch expenses and personnel related expenses.
Speaker 5: Loss from operations was $9.9 million in the fourth quarter of 2022 compared with $9 million in the prior year period.
Speaker 5: We recorded $1.9 million in interest expense in the fourth quarter compared to $1.9 million in the prior year period.
Speaker 5: Net loss was $11.1 million for the fourth quarter of 2022, compared to $10.7 million in the fourth quarter of 2021.
Speaker 5: Our cash and short-term investments balance as of December 31, 2022 was $77.4 million with our burn rate in the second half of the year was approximately $15 million.
Speaker 5: compared to approximately $23 million in the first half of the year.
Speaker 5: Our long-term borrowings totaled $52.9 million as of December 31, 2022, with the full principal due on September 30, 2025. Now turning to our outlook for 2023.
Speaker 5: For 2023, we expect revenue to range between $50 and $52 million. Growth will be supported mainly by increases in initial implants and revenue from the sale of Dixie Medical products.
Speaker 5: As discussed, replacement revenue is expected to decline this year. Gross margin for 2023 is expected to be between 69% and 71%.
Speaker 5: potentially a slight improvement from the 69% generated in the fourth quarter, which was our first full quarter with Dixie Medical Revenue contribution.
Speaker 5: As a result of the distribution agreement for the Dixie Medical Partnership,
Speaker 5: That revenue produces a lower gross margin than our base business.
Speaker 5: Fluctuations in the proportion of Dixie Medical revenue to overall revenue will create small variability in our quarterly gross margins.
Speaker 5: Operating expenses for 2023 are expected to range between $75 million and $77 million, including $11 million to $12 million in non-cash expenses.
Speaker 5: Lastly, it is important to highlight that our cash burn rate for the second half of 2022 was approximately $15 million.
Speaker 5: We were able to reduce our cash burn in the second half of the year compared to the first half of the year because of the spending discipline and cost controls we implemented starting in the middle of the year.
Speaker 5: We intend to maintain that level of discipline in 2023.
Speaker 5: Given our cash balance at year end of 2022 and our ongoing efforts to reduce our burn rate, we do not believe we will have a need to raise capital in the next 12 months.
Speaker 5: This concludes our prepared remarks. I would now like to turn the call back over to the operator who will open the call for questions.
Speaker 2: And thank you.
Speaker 2: And one moment, as a reminder to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And we do ask that you limit yourself to one question and one follow-up. Again, that's one question and one follow-up. And one moment for our first question.
Speaker 2: And our first question comes from Michael Pollark. For more research, your line is now open.
Speaker 3: Good evening. Thank you for taking the question. Maybe to start, curious, Mike, for your assessment of the top of the funnel, it sounds like the last nine months of 2022 were steady in terms of EMU admissions and that's obviously a good leading indicator for new patient implants.
Speaker 3: Thank you for taking the question. Maybe to start, curious Mike for your assessment of the top of the funnel, it sounds like the last nine months of 2022 were steady in terms of EMU admissions and that's obviously a good leading indicator for new patient implants.
Speaker 3: To what extent, you know, to what do you attribute this and then kind of how durable and consistent can it. Be from here, and I guess the other angle to this question is, do you think there's any element of catch up the last 9 months of 2022? You know, the extended COVID disruption might have.
Speaker 3: precluded patients from engaging in the system. Do you think that's contributing abnormally to what you saw in the back half of the year? Or do you think we're kind of in a state of crisis? We're at a stable steady state and this is a level of new admissions that can be sustained in 23.
Great, thanks for the question, Mike. Jumping into the stability that we've seen in the market over the last three quarters or so, largely I attribute that to having not, we have not had any significant.
COVID-related disruptions since Q1 of last year. The market has been relatively stable from that perspective, and that's allowed centers to be able to get back to a new normal for patients coming through the epilepsy centers.
We don't believe that the epilepsy centers are all the way back to pre-pandemic levels yet, primarily because of staffing limitations that some of the hospitals have had. So we're not getting COVID disruptions, but there are staffing challenges that some of these centers have had.
I haven't seen what I'll call a surge of makeup that's coming through the centers. It's really allowing them to get back to a flow of patients that are coming through the centers. And given that we're not back to pre-pandemic levels yet, or at least we believe that we're not, and the hospitals are working to bring in the staffing, I do expect over time there's an opportunity for that volume to increase.
And then historically prior to the pandemic, most of the growth of volume of patients coming through the epilepsy centers was driven by more epilepsy centers being created.
And I'm starting to hear out in the community that there's more activity around that again, where centers are hiring an epileptologist looking to bring in surgeons to be able to create new epilepsy centers, which provides another opportunity for the market to grow overall. So I think stability, no significant COVID disruptions, and that's put us in a position to be able to show
the share gains that we've been able to make within the MU, more of the patients coming through the MU being treated, not being offset by declines in the number of patients coming through these centers.
And maybe for the follow-up, part of the hook with Dixie was more upstream visibility into this funnel. And I guess I know it's early days with this distribution agreement, but kinda what are you learning with Dixie and is that helping?
you manage the flow and funnel and identify patients better. Thanks for taking the questions.
Yeah, like you said, early days, so we're now a quarter and a half or so into the US distribution of the Dixie product. And so far, it's been very much what we had anticipated. The synergy with our field organization is very strong. And so our ability to be able to support and sell that product through our commercial organization, I feel very good about.
And the early, I'm going to call them more anecdotes than broad spread evidence, but the early anecdotes are consistent with that hypothesis where we're able to get better insight into what is happening in the flow of patients through the epilepsy centers, how many patients are coming through.
the phase two studies that lead to therapies like the RNS system implant. And then being able to use that to provide more sales opportunities, selling opportunities to be able to get a higher percentage of those patients moving on to the RNS system. So early days, more anecdote than anything that I can say beyond that.
And our next question comes from
Frank Thickenen from Lake Street.
Capital market, your line is now open.
about the driver's growth here in the initial implants and in Dixie-Opsip by replacement. Maybe just walk through how you're thinking about low end versus top end, what needs to occur to hit the top end, what could happen to hit the bottom end and then what's kind of the upside scenario to what needs to occur to exceed the top end of the guide.
Great. Yeah, no, thanks, Frank. And looking forward to being able to execute this and again against this in 2023. As you stated, drivers of growth are initial system implants of the RNS system and indexy revenue being the growth drivers. The pieces that are behind that.
For the Dixie component, it's going to be about a combination of the market growth and how much share are we going to be able to take in that market. Feel very good about where we started the distribution of that product in the fourth quarter of last year, giving us a nice space to be able to build off of. For the NeuroPace, it's going to be about a combination of the market growth and how much share are we going to be able to take in that market growth and how much share are we going to be able to build off of.
which again is the significant majority of our revenue coming from that. There is an element of the range that comes from how fast the market recovers, does the market recover and how fast the market recovers. We're building into expectations that
The normalization that we've seen over the last three quarters continues through 2023. There's more upside with that if the market recovers more quickly, meaning it gets back to 2019 levels and gross from 2019 levels that provides Upside for us in the in terms of the range that we provided I'm in the other the other primary factors going to view about how fast can we increase
can we bring on? We're taking steps to be able to expand access to RNS system to more patients, more centers, and so that provides some of that range for revenue as well.
Okay, that's helpful. And then maybe for my second one on the generalized population, can you provide any update around the enrollment and if unable to give a specific patient numbers, maybe if you can share some goalposts around timing for enrollment completion expectations?
is that it's gonna take us on the order of a year from where we stand now to enroll the remaining patients in the nautilus study. We have really all efforts around being able to get that done as soon as we can, but expect that it's gonna be on the order of about a year.
to be able to get through that process. And then as a reminder, it's a one-year follow-up for the primary endpoint for that study. But very happy to be through the process of getting the sites online. A lot of excitement within the medical community about this. And so we were very pleased to be able to get the number and the quality of sites that we were able to participate in the trial. Perfect, that's good, Keller. Thanks for taking my questions. And thank you.
And one moment for our next question. And our next question comes from Robbie Marcus from JP Morgan. JP Morgan, your line is now open.
Hi, thanks. This is Alan on for Robbie. I had a quick one just on the trends you're seeing in the first quarter. You know, it sounds like you're seeing some good stability, but just curious to see what you're seeing so far in first quarter, and also just what that implies for seasonality going from 4Q to 1Q and through the balance of the year.
Yeah, what we've seen in the start of the first quarter has been consistent with what we've been seeing in the last three quarters, meaning that the epilepsy monitoring units have been normalizing over that period of time, those significant COVID-related disruptions in the epilepsy centers through the first couple months of 2023, which extends what we saw again in the last three quarters of 2022. Based onractive data from two recent rural districts in in-house vaccines, the police are never in contact with the Livestream out-of-house or other
That puts us in a nice position to be able to focus on the share gains within the epilepsy center to be able to have those come through. And, you know, overall, I think kind of a continuation of where we exited 2022 as we started into the first couple months of this year.
Got it. And then when we think about Dixie, it came in a little bit stronger in fourth quarter. We were thinking for 2023, roughly around a six million contribution. Is that still the right way to think about it? And any kind of color and cadence, you think about that as being more back end loaded. Thank you.
Yeah, the way that I think about the Dixie revenue, the fourth quarter was I think a good baseline for where we expect revenue for that business going forward. There's, I would say some growth potential that's so there is growth potential that's associated with it, but I would think about it as being able to build off of the $1.6 million revenue that we had in the fourth quarter. There wasn't anything that was abnormal about...
And thank you.
And one moment for our next question.
And our next question comes from Larry Beigleson from Wells Fargo. Your line is now open. Your line is now open.
Larry, if your lines on mute, could you please unmute it?
one moment please
And our next question comes from Vic Chopera from Wells Fargo. Your line is now open. Thank you for listening.
And our next question comes from Vic Chopra from Wells Fargo. Your line is now open. Hey, good afternoon. Can you hear me? Okay. Can you hear me?
Yeah, we can agree. Okay, so I'm not sure what happened. This is Vickin for Larry. So a couple of questions for me about your comments on the gross margins for 2023. But just help us understand how we should think about the cadence for 2023 given the 60 medical include.
and 71% in 2023. Some potential for upside based on what we saw in the fourth quarter.
Dixie obviously has a lower gross margin than our core R&S business.
Our gross margin will be influenced by the revenue mix between Dixie and our core business. We're not expecting anything unusual there as the year progresses. So really no.
no major fluctuations within that revenue mix. Okay, thank you. And then my follow up, Mike, I got your comments. But can you help us understand at what pace you expect to add new centers going forward in 2023? Thank you.
Thanks for the question. We finished last year, 2022, with 156 in-planning centers for the year, during the year. That was up from 150 centers the prior year. Most of the growth in our initial in-plant revenue last year came from increased utilization within those centers. As we head into 2023.
We're taking some steps to expand the opportunity for access to the RNS system within the United States and expect that we'll continue to add centers through the year so building off that 156 as we move through the as we move through the year. As we go forward, I expect I'll be able to provide some additional clarity about what that means in terms of number of centers by
expect that that's going to continue to be a driver for growth for us. That being said, primarily we're expecting the increase in adoption of the RNS system to come from increased utilization within the center. So we've got the space of 156 centers getting more patients being treated through those centers. But some things that we're working on to be able to make RNS available even more broadly within the U.S.
Drew Renari from Morgan Stanley . Your line is now open.
Hi, I'm Mike. I'll be back at a thanks for taking the question. Maybe just to put some math around 2023, but if I kind of take your comments on replacement revenue, I think you have 56 patients remaining. Your Dixie commentary, it looks like a new patient implant growth for the year might be in the high teens kind of given your initial...
more about just stability or do you need to see EMU visits get back to 2019 levels to truly kind of grow new patient implants at that growth rate.
epilepsy centers and get them treated with the R&S system. So the taking share of patients coming through the epilepsy centers that we've been talking about. With that said, there's obviously an impact of the market growth that can contribute and expect over time that that will contribute positively to that. And that's the, you know, with that, if we can get back to a point where epilepsy something exactly already happen. Then we're able to?? from the valve with a
So just being cautious, if you will, about what's happening within the market overall and understanding that there's a lot that we can and expect that we will do to be able to execute on taking share of patients coming through the MU, whatever that volume is.
Thank you, and maybe just two high-level questions, but you're talking about a lot of excitement on the Nautilus study and the potential there in generalized epilepsy. So maybe as you're having centers come online, having patients even interested, is it driving at all any halo effect, maybe on the focal side is more interest in epilepsy?
Yeah, thanks Drew. I think it's too early to comment any specifics about halo effects, but I will comment that some of the centers that are participating in the Nautilus studies are centers that are not doing a lot of RNS, not doing very much RNS with the focal epilepsy indication. And so that providing an opportunity for us to have a better understanding of what
with a broader set of clinicians talking about it and patients talking about the benefit of responsive neuromodulation. As we think about the impact of the Dixie medical revenue and where there could be other opportunities, I'm not going to comment on that specifically. We do have a top-end sales organization selling now Dixie products as well as the RNS system in the US.
And we'll be always creatively looking for how can we be able to be able to make most of it, but nothing specific that I would comment on for 2023.
And thank you. And I am showing no further questions. I would now like to turn the call back over to Mike for closing remarks.
Thank you all for your participation today. I look forward to talking to you again on our Q1 earnings or at upcoming investor conferences. Have a good evening.
This concludes today's conference call. Thank you for participating. You may now disconnect. The conference will begin shortly. To raise and lower your hand during Q&A, you can dial star 1-1.
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Good afternoon and welcome to NuroPace's fourth quarter earnings conference call. At this time, participants on a listen only mode. We'll be facilitating a question and an access session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Tripp Taylor from the Gilmorton Group.
NeroPace released financial results for the fourth quarter and full year ended December 31st, 2022. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meeting of the federal securities laws, which are made pursuant to the safe harbor provisions of the private securities litigation.
and those relating to our operating trends and future financial performance, the impact of COVID-19 on our business and prospects for recovery, expense management, market opportunity, revenue outlook, and commercial expansion are based upon 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 factor section of our public filing with the SEC, including our quarterly report on Form 10Q for the quarter-ended September 30, 2022, and our annual report on Form 10K for the year-ended December 31, 2022.
whether because of new information, future events, or otherwise. And with that, I will now turn the call over to Mike.
Thanks, Tripp. Good afternoon, everyone, and thank you for joining us. Today, I will highlight our fourth quarter performance and update you on the priorities we are intending to focus on in 2023 before turning the call over to Rebecca to detail the financial result and opening the call to questions. Before we begin, I want to highlight our key accomplishment.
from the productive 2022. And our first full year as a public company, we drove meaningful adoption of our RMS system, increasing utilization within the comprehensive epilepsy centers or CECs, and adding more implanting centers. We also became the exclusive US distributor of the stereo EEG products produced by Dixie Medical.
This provides us with not only an additional revenue stream through our established sales channel, but also visibility into patients being worked through the diagnostic process who are potential candidates for RS therapywe also made meaningful progress toward expanding the RS indication, specifically through our nautilus pivotal study for primary generalized ilepsy.
We accomplished all of this while reducing cash burn in the second half of 2022 to approximately $15 million compared to approximately $23 million in the first half of 2022.
I will provide more color on these accomplishments and how they physician us well for 2023 and beyond. Starting with our fourth quarter performance, total revenue for the fourth quarter was $12.8 million, representing growth of 16% compared to the prior year period, and 15% compared to the third quarter of 2022. This was primarily driven by increased adoption of our RNS system.
evidenced by strong initial implant revenue of $9.8 million, representing growth of 15% compared to the prior year period and 7% sequentially. This was coupled with revenue contribution from the distribution of Dixie Medical products, which was slightly ahead of expectations at $1.6 million in our first quarter selling this product line. We believe epilepsy monitoring unit, or EMU, patient volumes remain stable throughout the fourth quarter, with no significant disruption since the first quarter of 2022.
As a reminder, diagnostic evaluation in the EMU is the initial step in evaluating treatment options, including the potential use of RNS. Stability in the EMU supports the pipeline of intervention therapy candidates, including candidates for RNS therapy. We continue to execute commercially in the normalizing operating environment. One that we do not believe has yet returned to pre-fendemic levels, and it has been successful in driving position and patient awareness of the clinical benefit and differentiated features of our RNS system. As a result, we are seeing a trend of increasing utilization.
meaning that more patients are getting the benefit of RNS therapy. Considering this momentum, we expect total 2023 revenue of $50 to $52 million compared to $45.5 million in 2022. Our growth will be driven primarily by increasing RNS utilization within CECs in a full year of selling the Dixie Medical products.
Growth in these areas will be offset by declining replacement implant revenue, as the remaining first-generation devices reach end-of-service and are replaced by our second-generation device with a nearly 11-year battery life. Conversely, our priority is to increase utilization of the RNS system.
Our strategy concentrates on three objectives. One, expanding patient selection, two, managing the patient pipeline, and three, driving adoption of the RNS system by additional prescribers and additional planning centers. To expand patient selection, our team is focused on physician education. Our goal is to increase physician awareness of the benefit of the RNS system for all indicated FOCAL EPLUFC patient subgroups. The RNS system is highly versatile with the ability to position lead throughout the brain and customize detection and stimulation in a way that allows.
treatment of a full range of focal epilepsy on-set locations. We have compiled compelling clinical evidence showing the differentiated benefits of RNS therapy across these patient subgroups, and we are working to ensure these data are understood by more physicians. We believe this will help inform deeper integration of RNS systems into their treatment algorithms for a broader set of patients. We are also working to close the treatment gap by guiding epilepsy and neurosurgeons to evaluate more drug-resistant epilepsy patients for interventional therapy so that more of their patients can realize the life-changing benefits provided by RNS therapy. Our next objective is to actively manage every level of the patient's funnel.
As a reminder, we are the exclusive distributor of Dixie Medical Stereo EEG leads, which is a diagnostic device used to determine where epileptic seizures originate.
Most RNS patients and most surgical resection in the patient patients in the United States are being localized with stereo EEG before intervention. Distribution of these products is not only in incremental revenue stream, but is providing the opportunity for earlier patient engagement where we believe we can have a greater impact.
and a stronger voice explaining the benefits of the R&F system. T4 was our first quarter distributing the Dixie Medical products, and we are encouraged by our early progress. We are confident that partnership will have a positive impact on the R&F patient pipeline.
Third, we believe that driving adoption by additional prescribers and bringing on new implanting centers will also contribute to our overall growth. The Salesforce expansion completed in 2022 has enabled and will continue to enable this team to cover a greater portion of the market, and we intend to leverage that to introduce our R&S system more broadly.
These three commercial objectives are designed to increase utilization of the RNS system in CECs and support our initial implant revenue growth in 2023. I will now provide an update on replacement revenue. As expected in the fourth quarter, replacement revenue was $1.4 million, which represents a decline of 44 percent compared to the prior year period. As of December 31st, 2022, there were 56 patients being actively treated with first-generation RNS.
process by the end of 2023.
Moving to our clinical trial updates, generalized epilepsy continues to be our top clinical priority. In 2022, we initiated enrollment in our Nautilus study. The Nautilus study is designed to evaluate the safety and efficacy of the RNS system for the treatment of primary generalized epilepsy.
We intend for the results from this study to support a PMA supplement to expand the RNS system indication. I am pleased to report that all 25 participating sites are now active and are seeking to enroll patients in the study.
We also continue to make good progress on the NIH-funded feasibility study for patients with Linux Gistos syndrome, a type of symptomatic generalized epilepsy. Generalized epilepsy represents a meaningful market expansion opportunity. Forty percent of drug-resistant epilepsy patients have generalized epilepsy, and diagnosis of these patients is simpler and faster than Propogo epilepsy.
We believe that our NS therapy represents the optimal intervention for these patients. As a restriction, innovation are not applicable for generalized epilepsy, and there's no FDA-approved neuromodulation therapy for this indication. To wrap up as I look back on 2022, I can probably say that we have been able to make significant progress across our business.
We drove increased R&F system utilization. We expanded our field team and optimized our commercial process. We successfully initiated distribution of Dixie medical products for stereo EEG.
We made important progress towards expanding our indication into generalized epilepsy by getting enrollment in the Nautilus study and the LGS study. We did all of this while reducing our cash burn to approximately $15 million in the second half of 2022. With over $77 million of cash available at the end of 2022, at this burn rate, we would have more than two years of available capital. Collectively, these accomplishments have positioned Neuropeis well for 2023 and beyond.
With that, I will now turn the call over to Rebecca to detail the fourth quarter and pull your financial results. Thanks, Mike. No cases revenue for the fourth quarter of 2022 was $12.8 million, representing growth of 16%, compared to $11 million for the fourth quarter of 2021 and 15% sequentially compared to $11.2 million in the third quarter of 2022.
In the fourth quarter, revenue from initial implants grew 15% to $9.8 million compared to $8.5 million for the fourth quarter of 2021. So, clearly, initial implant revenue in the fourth quarter grew 7% compared to the third quarter.
The increase in revenue was largely due to an increase in initial implant procedures. Revenue from replacement implants was $1.4 million compared to $2.5 million in the fourth quarter of 2021.
We continue to expect replacement implant revenue, generally, to decrease through the end of 2023 until we have completed the transition to the second-generation device. This means that we expect revenue only from replacements of our second-generation devices after this year. We expect this will be a growth driver for our business when more of the second-generation devices.
reach into battery life and are ready for replacement. Gross margin for the fourth quarter of 2022 was 69% compared to 73% in the fourth quarter of 2021. The decline in gross margin relative to the prior year period was primarily due to distributing Dixie medical products which have a lower gross margin than our core RMS business. The fourth quarter of 2022 was our source.
time costs associated with the Dixie Medical Partnership launch increased by 3% compared to the third quarter.
As expected, operating expenses for our core R&S business decrease slightly in the fourth quarter compared to the third quarter.
We plan to continue to focus on initiatives to optimize operating expenses through 2023. R&D expense in the fourth quarter of 2022 was $5.1 million compared with $5.3 million in the same period of 2021. The decrease in R&D expense and the increase in operating expenses in the second quarter of 2021 was $5.5 million.
was primarily driven by a decrease in personnel related expenses. S-TNA expense in the fourth quarter of 2022 was $13.6 million compared with $11.7 million in the prior year period. The increase in S-TNA
was primarily driven by Dixie Medical Partnership launch expenses and personnel-related expenses. Loss from operations was $9.9 million in the fourth quarter of 2022, compared with $9 million in the prior year period. We recorded $1.9 million in interest expense in the fourth quarter, compared to $1.9 million in the prior year period.
Net loss was $11.1 million for the fourth quarter of 2022 compared to $10.7 million in the fourth quarter of 2021. Our cash and short-term investments balance as of December 31, 2022 was $77.4 million and our burn rate in the second half of the year was approximately $15 million compared to approximately $23 million.
in the first half of the year. Our long-term borrowings totaled $52.9 million as of December 31, 2022, with the full principal due on September 30, 2025. Now, turning to our outlook for 2023. For 2023, we expect revenue to range between $50 and $52 million. Growth will be supported mainly by increases in initial implants and revenue from the sale of Dixie Medical products.
As discussed, replacement revenue is expected to decline this year. First margin for 2023 is expected to be between 69% and 71%. Potentially a slight improvement from the 69% generated in the fourth quarter, which was our first full quarter with Dixie Medical Revenue Contribution. As a result of the distribution agreement for the Dixie Medical Partnership,
That revenue produces a lower gross margin than our base business. Fluctuations in the proportion of Dixie Medical Revenue to overall revenue will create small variability in our quarterly gross margins. Operating expenses for 2023 are expected to range between $75 million and $77 million, including $11 to $12 million in non-cash expenses.
Lastly, it is important to highlight that our cash burn rate for the second half of 2022 was approximately $15 million. We were able to reduce our cash burn in the second half of the year compared to the first half of the year because of the spending discipline and cost controls we implemented starting in the middle of the year.
We intend to maintain that level of discipline in 2023. Given our cash balance at your end of 2022 and our ongoing efforts to reduce our burn rate, we do not believe we will have a need to raise capital in next 12 months. This concludes our prepared remarks.
I would now like to turn the call back over to the operator who will open the call for questions. And thank you. And one moment as a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. Through a draw your question, please press star 11 again. Please stand by while we compile the Q&A roster and
We do ask that you limit yourself to one question and one follow up, again that's one question and one follow up and one moment for our first question. And our first question comes from Michael Polark from Wolf Research. Your line is now open. Take it evening. Thank you for taking the question. Maybe to start.
Curious Mike for your assessment of the top of the funnel. It sounds like the last nine months of 2022 We're steady in terms of a EMU admissions and that's obviously a good leading indicator for for new patient implants
To what extent, you know, to what do you attribute this and then kind of how durable and consistent can it be from here? And I guess the other angle to this question is do you think there's any element of ketchup the last nine months of 2022, you know, the extended COVID disruption might have.
precluded patients from engaging in the system. Do you think that's contributing abnormally to what you saw in the back half of the year? Do you think we're kind of, we're at a stable study state and this is a level of new admissions that can be sustained in 23?
Great, thanks for the question, Mike. So, jumping into the stability that we've seen in the market over the last three quarters or so, largely I attribute that to having not – we have not had any significant COVID-related disruptions since Q1 of last year. The market has been relatively stable from that perspective, and that's allowed centers to be able to get back to the market.
seen what I'll call a surge of makeup that's coming through the centers. It's really allowing them to get back to a flow of patients that are coming through the centers and given that we're not back to pre-pandemic levels yet or we seem to believe that we're not and the hospitals are working to bring in the staffing. I do expect over time there's an opportunity for that volume to increase and then historically prior to the pandemic most of the growth of volume of patients comes
no significant COVID disruptions. And that's put us in a position to be able to show the share gains that we've been able to make within the MU, more of the patients coming through the MU being treated, not being offset by declines in the number of patients coming through these centers.
helpful. And maybe for the follow-up part of the hook with Dixie was more upstream visibility and to this funnel, and I guess I know it's early days with this distribution agreement, but kind of what are you learning with Dixie and then is that helping you manage?
the flow and funnel and identify patients better. Thanks for taking the questions. Yeah, like you said, early days, so we're now a quarter and a half or so into the US distribution of the Dixie product. And so far, it's been very much what we had anticipated. This energy with our field organization is very strong.
And so our ability to be able to support and sell that product through our commercial organization I feel very good about. And the early, I'm going to call them more anecdotes, then broad spread evidence, but the early anecdotes are consistent with that hypothesis where we're able to get better insight into what is happening in the flow of patients through the epilepsy centers, how many patients are coming through.
the phase two studies that lead to therapies like the RNS system implant. And then being able to use that to provide more sales opportunities, selling opportunities to be able to get a higher percentage of those patients moving on to the RNS system. So early days, more anecdotes than anything that I can say beyond that, but very encouraged by Fenella.
all the sales energy as well as the impact that we think that's going to have for us on the pipeline. And thank you. And one moment for our next question. And our next question comes from Frank Tickenin from Lake Street.
Capitol Market. Should Lana's not open? Thanks for taking the questions and congrats on all the progress. Wanted to start with one on the guidance. I heard the comments loud and clear about the driver's growth here in the initial implants and in Dixia, except by replacement. Can you maybe just walk through how you're thinking about low end versus top end, what needs to occur to hit the top end, what could happen? There are fights happening, and I'mpost a separate question, a price that's by $kg.
that system and Dixie Revenue being the growth drivers. The pieces that are behind that for the Dixie component, it's going to be about a combination of the market growth and how much share are we going to be able to take in that market. Feel very good about where we started the distribution of that product in the fourth quarter of last year, giving us a nice space to be able to build off of.
And then for the for the NeuroPace RNS revenue, which again is the significant majority of our revenue coming from that. There is an element of the range that comes from how fast the market recovers, does the market recover and how fast the market recovers. We're building into expectations that.
The normalization that we've seen over the last three quarters continues through 2023. There's more upside with that if the market recovers more quickly, meaning it gets back to 2019 levels and gross from 2019 levels that provides Upside for us in the in terms of the range that we provided
And then the other primary factor is going to be about how fast can we increase the utilization within these centers. The primary driver of initial implants is how fast we grow initial implant utilization. And that's going to be effectiveness of commercial efforts and.
The work that we're doing to manage the pipeline for more patients coming through. The other factor that goes into that is how many new centers can we bring on. We're taking steps to be able to expand access of R&S system to more patients, more centers, and so that provides some of that range for revenue as well. Okay, the telephone. And maybe for my...
Yeah, thanks for the question. So I'm really excited to have brought all of the centers into that study at this point. So being able to really focus now as we go through 2023 on driving enrollment through those centers. But the expectation is that it's going to take us on the order of a year from where we stand now to enroll the remaining patients in the in the dodalist study.
for that study, but very happy to be through the process of getting the sites online. A lot of excitement within the medical community about this and those was, we were very pleased to be able to get the number and the quality of sites that we were able to participate in the trial.
Perfect, let's go to color. Thanks for taking my questions. Hey, and thank you. And one moment for our next question. And our next question comes from Robbie Marcus from JP Morgan. Elana's not open.
Hi, thanks. This is Alan on for Robbie. I had a quick one just on the trend you're seeing in the first quarter. You know, it sounds like you're seeing some good stability, but just curious to see what you're seeing so far in first quarter, and also just what that implies for seasonality going from 4Q to 1Q and under the balance of the year.
Yeah, what we've seen in the start of the first quarter has been consistent with what we've been seeing in the last three quarters, meaning that the epilepsy monitoring units have been normalizing over that period of time, those significant COVID-related disruptions in the epilepsy centers through the first couple months of 2023, which...
of where we exited 2022 as we started into the first couple months of this year.
Got it. And then when we think about Dixie, it came in a little bit stronger in fourth quarter. We were thinking for 2023 roughly around a six million contribution. Is that still the right way to think about it? And any kind of color and cadence, you think about that as being more back end noted? Thank you. Yeah. Yeah, the way that I think about the Dixie revenue, the fourth quarter was.
I think a good baseline for where we expect revenue for that business going forward. There's, I would say some growth potential, there is growth potential that's associated with it, but I would think about it as being able to build off of the $1.6 million revenue that we had in the fourth quarter. There wasn't anything that was abnormal about the fourth quarter, meaning it wasn't a stocking quarter, it was a continuation of the work that Dixie was doing when they were distributing directly in the US.
And our next question comes from Larry Beagelson from Wells Fargo. Larry, if your line's on mute, could you please unmute it?
One moment please. And our next question comes from Vid Chopra from Wells Fargo. Your line is now open.
Hey, good afternoon. Can you hear me? Yeah, we can hear you. Okay, so I'm not sure what happened. This is Vick in for Larry. So a couple of questions to me about your comments on the gross margins for 2023. But just help us.
Understand how we should think about the cadence for 2023, given the medical agreement and I had a follow up. Rebecca, you want to cover that?
Sure so we're looking for or expecting gross margin between 69 and 71 percent in 2023. Some potential for upside based on what we saw in the fourth quarter.
Dixie obviously has a lower gross margin than our core R&S business and our gross margin will be influenced by the revenue mix between Dixie and our core business.
We're not expecting anything unusual there as the year progresses. So really no major fluctuations within that revenue mix. Okay. Thank you. My follow-up mic I got your comment.
But can you help us understand at what pace you expect to add new centers going forward in 2023? Thank you. Yeah, thanks for the question. So we finished last year 2022 with 156 and planning centers.
for the year during the year that was up from 150 centers that the prior year. Most of the growth in our revenue, initial and flat revenue last year came from increased utilization within those centers. As we head into 2023, we're taking some steps to expand the opportunity for access to the RNS system within the United States and expect that we'll continue to add centers through the year. So...
pre-stetialization within the centers. We've got this base of 156 centers, getting more patients being treated through those centers. But some things that we're working on to be able to make our NS available more, even more broadly within the US.
And thank you. And one moment for our next question. Thank you.
And our next question comes from Drew Rennery from Morgan Stanley . Your line is now open.
Hi, I'm Mike. I'll be back at a thanks for taking the question. Maybe just to put some math around 2023, but if I kind of take your comments on replacement revenue, I think you have 56 patients remaining. Your Dixie commentary, it looks like a new patient implant growth for the year might be in the high teens kind of given your initial guide here. Here.
So just kind of curious, you've kind of talked about getting back to like load amid 20s in a normalized environment. Is that still the case? Do you think that you can do that in 2023? Is it more about just stability or do you need to see EMU visits get back to 2019 levels to truly kind of grow new patient implants at that growth rate?
Thanks for the question, Drew. We have a lot of opportunity to continue to take more of the patients coming through the epilepsy centers and get them treated with the RNS system. So the taking share of patients coming through the epilepsy centers that we have been talking about. With that said, there is obviously an impact of the market growth that can contribute and expect over time that that will contribute positive.
able to see that through the year. So just being cautious, if you will, about what's happening within the market overall and understanding that there's a lot that we can and expect that we will do to be able to execute on taking share of patients coming through the MU, whatever that volume is. Thank you. And maybe just two high level questions. But you're talking about a lot of excites.
epilepsy through R&S is growing. And then second, just with Dixie, how it's giving you another revenue stream, do you foresee any additional partnership opportunities in 23 to augment revenue? Thanks for taking the questions. Okay.
Yeah, thanks. Thanks, thanks, Drew. I think it's too early to comment any specifics about Halo FX, but I will comment that some of the centers that are participating in the Nautilus studies are centers that are not doing a lot of RNS, not doing very much RNS with the focal epilepsy indication. And so that providing an opportunity for us to have more punch time with them talking about.
the RNS system and the benefit that's there. I do think there is some halo effect back to the already approved indication within those centers. And so, I think it's all a good thing for us to have more talk points and more touch points with a broader set of clinicians talking about it and patients talking about the benefit of responsive neuromodulation. As we think about the impact of the Dixie medical revenue and where there could be other opportunities, I'm not gonna comment on that specifically. We do have...
a top-end sales organization selling now Dixie product as well as the R&S system in the US. We'll be always created and we're looking for how can we be able to be able to make the most of it, but nothing specific that I would comment on for 2023. Thanks for taking the questions.
You have a top-end sales organization selling now Dixie product as well as the R&S system in the US. We'll be always creatively looking for how can we be able to make the most of it, but nothing specific that I would comment on for 2023. Thanks for taking the questions. And thank you.
And I am showing no further questions. I would now like to turn the call back over to Mike for closing remarks. Great. Thank you all for your participation today. I look forward to talking to you again on our Q1 earnings or a upcoming investor competition. Have a good evening. This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you.