NeuroPace Inc. Q1 2023 Earnings Call
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 1095 any statements made during this call that relate to expectations or predictions of future events results or performance.
<unk> are forward looking statements.
All forward looking statements, including those around neuro cases business opportunities market conditions clinical trials and those relating to our operating trends and future financial performance the impact of COVID-19 on our business and prospects that recovery expense management market opportunity revenue outlook and commercial expansion 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 <unk>.
Our business. Please refer to the risk factors section of our public filings with the SEC, including our annual report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 2nd 2023, and our quarterly report on Form 10-Q for the quarter ended March 31, 2023 to be filed with the SEC.
SEC as well as any 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 four 2023, neuro pace 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 Mike.
Thanks, Tripp good afternoon, everyone and thank you for joining us today today I will highlight our first quarter performance and provide an update on our key business priorities for the year.
I will then turn the call over to Rebecca to detail the financial results before we open the call to questions.
We began our strong commercial and operational execution led to record revenue in the first quarter total.
Total revenue was $14 $5 million, representing growth of 27% compared to the prior year period, and 13% compared to the fourth quarter of 2022.
The strong performance was driven by increased utilization of the rns system within comprehensive epilepsy centers or <unk>.
Contributions from our <unk> medical distribution partnership, which began in the fourth quarter of 2022.
As expected replacement implant revenue continued to decline compared to prior quarters and now represents less than 10% of total revenue.
With our continued focus on expense management, we increased revenue in the first quarter without a corresponding increase in expense compared to the fourth quarter of 2022.
Based on the strong underlying fundamentals of our business. We now expect full year 2023, total revenue of $52 million to $54 million up from our original expectation of $50 million to $52 million.
Growth in 2023 will continue to be driven primarily by increasing utilization of the RMS system within cdc's, coupled with our first full year selling fixed medical products.
Overall I am pleased with the progress we have made with our strategy and I'm happy to see Apple apologist, recognizing the differentiated features and benefits of our RMS system.
Our customers reported that epilepsy monitoring unit or EMU patient volumes have remained stable over the last year.
While we continue to believe that patient volumes that are not all the way back to pre pandemic levels that continue to show signs of improvement.
Now I will discuss our commercial objectives in more detail.
Two increased utilization of the rns system and support our initial implant revenue growth in 2023, our strategy concentrates on three objectives.
One expanding patient selection to managing the patient pipeline and three driving adoption of the RMS system with new prescribers and additional implanting centers.
Our first quarter 2023 results demonstrate that awareness of the clinical benefits of the RMS system is growing as we continue to develop a strong presence amongst couple of apologists 10 neurosurgeon customers.
We remain focused on highlighting the need to close the treatment gap so that more of their patients can realize the life changing benefits provided by our products.
Specifically our team continues to educate physicians on the benefits of the RMS system and the importance of providing advanced treatment to their drug resistant epilepsy patients.
As we share and discuss the clinical evidence that supports expanding patient selection criteria to the full scope of rns systems indication, we are seeing improvements in utilization.
We are working to actively manage the patient pipeline within the Puc's.
We are identifying and educating potential rns patients at an earlier stage in their treatment journey, which we believe is crucial to increasing rns system adoption.
Our patient education, and marketing programs enable us to convert more patient leads to RMS system implants.
Patient leads are being identified through our field team working with the <unk> and through direct to consumer campaigns, we leverage neuro pace nurse navigators to guide the patients in our pipeline through the diagnostic process. Additionally, our team along with a network of rns patient ambassadors provide in depth patient education on the benefits.
Our Rms system.
We are very pleased with the results of the first two quarters distributing the Dixie medical stereo EEG products in the United States.
This product line is driving additional revenue through our commercial team and has enabled us to identify and interact with potential rns candidates earlier in their patient journey.
As a reminder, stereo EEG electrodes are used to determine where epileptic seizures originate.
Most of our MF patients and most surgical resection and ablation patients in the United States are being localized with stereo of EDG prior to therapeutic intervention.
Overtime, we believe that we can grow the revenue from <unk> medical products by leveraging our large couple FTE focused commercial team to convert competitive accounts and leverage this product line to accelerate adoption of our RMS system.
We are making good progress in our efforts to increase the number of implanting centers and prescribing physicians with our expanded field team, we are calling on additional cec's and increasing the number of prescribing physicians improve.
Improving patient access to care by increasing the number of providers utilizing the RMS system is an important part of our effort to close the treatment gap.
We're doing this by expanding professional education programs and through the work of our field team.
Moving to our clinical trial updates, we continue to make strong progress on our top clinical priority the expansion into generalized epilepsy.
As a reminder, this represents a meaningful market expansion opportunity is approximately 40% of drug resistant epilepsy patients have generalized epilepsy side.
Diagnosis of these patients is simpler and faster than for focal epilepsy, because it does not require advanced diagnostics and there are few treatment options, because because resection and ablation are not applicable and no neuromodulation therapy is approved for this patient group.
Enrollment of the approximately 100 patients in the Nautilus study is on track to be completed in the first quarter of 2024.
As a reminder, the primary endpoint is evaluating the safety and efficacy of the device at a one year follow up for evaluation after implantation.
We intend for the results from this study to support a PMA supplement to expand the rns system indication to include the treatment of primary generalized epilepsy.
Additionally, our NIH funded feasibility study for patients with Lennox <unk> syndrome, the type of symptomatic generalized epilepsy continues to progress as planned.
We look forward to potentially providing an optimal solution for an unmet need amongst those patient population.
To summarize we are off to a great start for the year executing across the entire business <unk>.
Increasing utilization of the RMS system at Cec's drove growth in initial implant revenue and our team is gaining traction with the distribution of the Dixie medical stereo EEG products, we are invigorated by the increasing utilization trajectory and remain focused on ensuring patients receive the care that they need.
Our Nautilus pivotal study for primary generalized epilepsy in the NIH study for Lennox <unk> syndrome are progressing as planned.
We successfully accomplished all of this while continuing to improve our cash burn trajectory.
We believe our recent achievements keep us well positioned for a successful 2023.
With that I will now turn the call over to Rebecca to review, our first quarter financial results.
Thanks, Mike.
Newer pieces revenue for the first quarter at 2023.
It was $14 $5 million, representing growth of 27% compared to $11 4 million.
The first quarter of 2022, and 13% sequentially compared to $12 8 million.
In the fourth quarter of 2022.
This strong performance was primarily driven by increased utilization of our rns.
And by contributions from our <unk> medical distribution partnership.
We experienced higher replacement than anticipated in the first quarter, but as expected replacement implant revenue continued to decline compared to prior quarter and now represents less than 10% of total revenue.
Gross margin for the first quarter of 2023 was 72% compared to 73% in the first quarter of 2020, Q and 69% in the fourth quarter of 2022.
A declining gross margin relative to the prior year period was primarily due to a change in product mix with the inclusion of <unk> medical products, which have a lower gross margin than our core <unk> products.
During the first quarter 2023, we also had higher than anticipated sales attributed to 16 medical.
Over time, we expect gross margins will generally increase as volumes increase and fixed overhead is allocated over more units.
Total operating expenses in the first quarter of 2023 were $18 7 million.
Compared with $18 million in it.
Same period of the prior year.
In the first quarter of 2023 operating expenses as a percentage of revenue were lower for both R&D and SG&A.
We plan to continue to focus on initiatives to optimize operating expenses through 2023.
R&D expense in the first quarter of 2023 was $5 3 million.
Compared with $5 6 million in the same period of 2022.
The decrease in R&D expense was primarily driven by a decrease in price and all related expenses and clinical study expenses.
SG&A expense in the first quarter of 2023 with $13 4 million compared with $12 4 million in the prior year period.
The increase in SG&A was primarily driven by personnel related expenses and expenses associated with distributing <unk> medical products.
Really offset by reduced expenses for general and administrative outside startup phase.
Loss from operations was $8 3 million in the first quarter of 2023, compared with $9 8 million in the prior year period.
We have recorded $2 million in interest expense in the first quarter compared to $1 8 million in.
In the prior year period.
Net loss was $10 4 million for the first quarter of 2023, compared with $11 5 million in.
In the first quarter of 2022.
Our cash and short term investments balance as of March 31, 2023 was $67 $6 million.
Our long term borrowings totaled $53 9 million.
As of March 31, 2023, with the full principal due on September 30th 2025.
Now turning to our outlook for the remainder of 2023.
We are increasing our revenue guidance and now expect total revenue for 2023 to range between 52 and $54 million up from $50 million to $52 million.
We expect that revenue growth will be supported mainly by increases in initial implants and revenue from the sale of <unk> medical products.
We continue to expect that we will complete the replacement of substantially all of the prior generation <unk> devices by the end of 2023.
With more replacement implants than anticipated in the first quarter.
Placement revenue is expected to sequentially decline at a rate slightly faster than we anticipated earlier in the year replacement.
Replacement implant revenue will become a growth driver when the newer longer lasting devices introduced in 2018 began to reach the end of their battery life.
We continue to expect our gross margin for 2023 will be between 69% and 71%.
Orderly gross margins may experience small variability due to fluctuations in the proportion of <unk> medical revenue overall revenue and other factors.
We continue to expect operating expenses for 2023 to range between $75 million and $77 million.
Including $11 million to $12 million in non cash expenses.
Our cash burn in the first quarter of 2023 was $9 8 million.
It is substantial reduction from a cash burn of $12 4 million in.
In the first quarter of 2022.
Our cash burn is typically highest in the first quarter of the year, primarily due to the timing of compensation related expenses.
First quarter spending included approximately $3 million of expenses, primarily compensation related that are unique to the first quarter here.
Okay.
This concludes our prepared remarks, I would now like to turn the call over to the operator, who will open the call for questions.
Thank you at this time, we will conduct a question and answer session.
As a reminder to ask a question you need to press Star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question comes from Robbie Marcus from fraud.
J P Morgan.
Okay.
Hi, This is Ryan on for Ravi How's it going thanks for taking the question.
I guess I had a couple the first one is focus on guidance, so guidance coming up by about $2 million, which is essentially a by $2 million was essentially the beat in the quarter. So this implies a step down in revenues for the balance of the year would.
Would you be able to comment on just how you're thinking about quarterly revenue contribution moving forward and the cadence, especially just given the commentary around the patient funnel.
Stabilizing and I'm, assuming getting better as the year progresses.
Great. Thanks, Ron appreciate the question.
Comments first about the quarter and then getting into your question about how about guidance. So we're really happy with the performance overall strength across all parts of the of the business for the forecast as we as we go forward. We continue to expect that revenue from initial implants will will grow through the course.
Of the year.
We've been able to make great progress here in the first quarter, continuing ops and success that we were able to build up in the second half of 2022.
So that general trend of increasing implant conditional implant revenue as we as we move through the year for Dixie Medical we had a really strong quarter in Q1, it's still a relatively new business for us and we're still projecting as we go forward that we'll be building off of the base that we talked about in Q4 the.
Revenue from Q4 with with marginal increases in incremental increases off of that base.
We did better than that in the first quarter.
Including in any guidance on changes to that so as we get more time working with the Dixie medical product.
We will have better better confidence around that the guidance that we're providing is really based on where we started with that business in the first quarter of last year, and then specifically about replacement implant revenue.
We had a strong quarter in the first quarter with more implants than we had anticipated more replacement of plants that we had anticipated we generated about $1 $2 million of revenue in the first quarter from replacement implants.
That is from earlier device replacements in the year than what we had thought when we started off in the results of that is while the total number of replacing.
Replacement devices in the implant revenue that we expect to generate from that.
For the year will be the same as before because theres a higher proportion of that in the first quarter that will results in less revenue in the second through the fourth quarters because of the total volume of those older devices that are still needing to be replaced so overall again strength across all aspects of the business continuing to.
Expect growth in initial implant revenue as we move through the quarter.
They're not banking into our guidance any changes in the general trajectory of the Dixie medical product.
<unk> came in higher than we expected in the first quarter really happy with that but it's not we're not baking that into that to the guidance that we're providing.
Got it. Thank you that's really helpful.
The other question I had was just around the generalized epilepsy indication. It seems like you are making really good progress towards Nautilus and I guess it would just be helpful. If you can remind us what the market opportunity is here down the line and when we could potentially see kind of a contribution pending approval.
Yes, thank you for that question as well.
I'm really really encouraged by wanting to start that we've had to the model that study getting that study up and running.
And the importance, but I believe that that's going to have for our business over time as a reminder, generalized epilepsy represents about 40% of the patients that have tried resistant epilepsy. So it's a very large market opportunity.
And compared to focal epilepsy, there are even fewer treatment options for these patients that have generalized epilepsy.
<unk> procedures, and ablative procedures, which are the most commonly done interventions for focal epilepsy are not applicable for generalized epilepsy and there are currently no neuromodulation therapies that are indicated for generalized epilepsy. So very much a undertreated patient population is the reason we were able to get the breakthrough device designation from the FDA.
For this for this group. Additionally, the diagnostic process to identify patients that have generalized epilepsy is easier and faster than for focal epilepsy. So large patient population very much an unmet need with a lack of treatment options for these patients.
An opportunity to get more patients treated more quickly with a with a simpler diagnostic simpler faster diagnostic process.
In terms of timing.
We had announced last quarter that we expect to have enrollment completed in that trial in the first quarter of next year and that continues to be the expectation. We had announced a couple of months ago that we had all of the sites 25 sites onboard and starting to enroll patients and theres a tremendous amount of enthusiasm from.
The investigator group.
So we're off to a good start continuing to believe that we're tracking well to have that completion.
A reminder, the study itself has a one year follow up for the primary endpoint after implantation of the device.
So building off of that first quarter of 2020 for completion of enrollment.
Follow up period, and then a PMA supplement on the other side of that so you can kind of figure out the.
Line associated with it they continue to be tracking well to that timeline.
Great. Thank you so much.
Thank you our next question.
Our next question comes from Frank <unk> from Lake Street.
Lake Street capital markets.
Hey, Thanks for taking the questions and congrats on all the progress in the quarter I wanted to dive a little deeper into the per center trends could you maybe take us into what what really drove the growth in the quarter and I am kind of thing kind of two levers was it was it new centers coming on board and starting to treat patients or was it.
Existing centers, starting to treat more patients and improving their utilization run rate.
Thanks, Frank the growth we saw in the first quarter was was primarily driven from utilization more patients.
Being treated within the comprehensive epilepsy centers that treat and then Dan they treated in 2022.
Primarily coming from that we did get off to a faster start in the year with more centers and prescribers.
So that was a contribute contribution as well. So there was contributions from both utilization increase and center increase but as we expected the bulk of that coming from increased utilization.
Very good.
Good color. Thanks, and then on Dixie I know one of the primary attractions to the distribution agreement was getting color into the patient funnel and I think you referenced it at a high level in the prepared remarks, but could you maybe talk to how that is playing out versus your expectations and how your sales force is maybe leveraging some of that information.
To convert patients to rns versus competitive technologies.
Two quarter worked towards two quarters now into the distribution agreement I'm I'm really pleased with how that products fits into what we're selling within our within our team we've been able to have good success using the the team that we've got established large uplifts epilepsy focused field.
Team on calling on these up OFC centers, and we've had some success with account conversions to be able to to be able to grow that business, but as you mentioned one of the key strategic drivers for us in doing this was to have better visibility earlier two patients working through the diagnostic process.
That lead to an rns implant and while it's still early a couple of quarters and the strategy and the basic rationale behind the deal is really coming together nicely.
We are getting at accounts that are using the Dixie product. We have good examples of the visibility that that provides understanding what they are doing in the diagnose what those centers are doing in the diagnostic process and being able to have that be helpful. Not just in generating revenue for <unk>, but also pulling that through into performance for RF.
Estimate increased adoption of the rns, it's Tom.
So no numbers, specifically that go along with that but I feel very good about the two pillars of that deal more competitive conversions the ability to drive more revenue through our field team and the visibility and pull through that we think that that will provide for the RMS business as well.
Perfect I'll stop there congrats on another progress thanks.
Thank you our next question comes from.
Michael <unk> from Wolfe research.
Michael Please go ahead.
Hey, good afternoon. Thank you.
Yes.
If you said it I missed it I wanted to be.
Precise on the revenue for the.
The three lines I heard $1 $2 million of replacement I heard Dixie over performed but I didn't hear a number.
And so I don't know precisely what new patient revenue was can can I get the Dixie number or or just kind of can we go through the three lines individually I didn't see them in the press release.
The revenue for the quarter overall had meaningful growth from Q4 of last year for both the rns initial implants and for Dixie medical both of those countries. Both of those pieces grew significantly from Q4 of 2022 and the Q1 of 'twenty.
23.
We haven't broken out specifically the amount of growth for <unk> in the amount of growth for the the rns implants, primarily for competitive reasons as we're just being very conscious of what that means within the within the space, but as you're putting together your models.
Primarily the increase was coming from initial implant revenue, but very very close with that growth from the Dixie medical product and then the revenue from replacement implants coming in at $1 2 million, which was a decrease from Q4 of last year as expected by more revenue in the first.
Quarter than what we had anticipated based on the timing of when in the year those those replacements are happening.
Fair enough.
Our problem stretch you got a little harder, but enough to work with thank you.
Follow up question is look it's early days on Dixie it.
Sounds like so far so good on a number of levels.
Im not asking for specifics but.
Are there other things like this that you could do and drop in the bag to leverage your commercial platform.
Again.
Is there potentially a pipeline that you think about and consider or was this was this a one off opportunity.
And behind it.
Unlikely anything else.
Thanks for the question, Mike I'm, not going to give a specific answer to that other than to say.
We're always looking for where there are good fit strategic fits for the business.
That made a lot of sense for us for many reasons that we've talked about for the for the <unk> product and when we saw that we went after that aggressively to be able to get that into our into our product mix.
We continue to monitor that if there's another opportunity like that.
We would be very opportunistic around that but there is nothing that I can talk about specifics.
That are that are active or things that were things that were pursuing there.
Understood. Thank you.
Now I'd like to turn it back to narrow face for any closing remarks.
Yes, I think thanks for the comments really happy to report the results from the first quarter lots of strength for us across the business with all aspects of our of our revenue coming in very strong for the quarter and what that means for us continue to see differentiation from our approach with responsive neuromodulator.
<unk> versus the other approaches that are available for these patients so trying to close that treatment gap and get more of these patients being treated and we continue to be reminded of the benefit of responsive neuro stimulation with the approach that we're taking there being a differentiated outcome versus the other approaches there's new data that continue to come out on a.
Basis or as I've studied in neurology that was published recently that really highlights.
The challenges associated with side effect profiles and efficacy with with other duty cycle kind of approaches and really the benefits of responsive neuromodulation.
Within this space until I'm looking forward to getting more of the patients with drug resistant epilepsy in focal epilepsy treated the work that we're doing to expand into generalized epilepsy and the progress there and really appreciate everybody's time today and hope you all have a great evening.
Oh.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Okay.
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Yes.
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