Q2 2023 NeuroPace Inc Earnings Call
Good afternoon and welcome.
In Europe second quarter 2023 earnings conference call.
A reminder, this conference is being recorded.
I'd now like to turn the call over to Irina.
Legal officer, and head of Investor Relations for a few introductory comments.
Good afternoon. Thank you for joining us for neuro cases second quarter 2023 financial and operating results conference call on today's call. We will hear from Joel Becker, Chief Executive Officer, and Rebecca Cohen, Chief Financial Officer.
We are today narrow case released financial results for the second quarter ended June 32023, a copy of the press release is available on the company's website at neuro cases dot com.
Before we begin I would like to remind you that throughout this call. We will make statements that include forward looking statements within the meaning of federal Securities laws, which are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Any statements made during this call that relate to expectations or predictions of future events results or performance are forward looking statements.
All forward looking statements, including those around neuro cases projection business opportunities commercial expansion 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 for recovery.
Expense management.
Estimates of market opportunity and forecast of market and revenue growth are based on current estimates and various assumptions.
These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those implied by these forward looking statements.
Accordingly, you should not place undue reliance on these statements.
For more detailed descriptions of the risks and uncertainties associated with our business.
Please refer to the risk factors section of our public filings with the SEC, including our annual report on Form 10-K for the year ended December 31st 2022 filed with the SEC on March 2nd 2023.
Our quarterly report on Form 10-Q for the period ended March 31, 2023 filed with the SEC on May 4th 2023, and our quarterly report on Form 10-Q for the quarter ended June 30th 2023 to be filed with the SEC as well as any reports that we may file with the SEC in the future.
Sure.
This conference call contains time sensitive information, which we believe is accurate only as of this live broadcast on August eight 2023.
<unk> 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 narrow cases, Chief Executive Officer, Joel Becker Stahl.
Thank you Irina and good afternoon, everyone.
It is my pleasure to be here with you today on my first quarterly earnings call with neuro pace.
I'm excited about and committed to advancing our company's mission to transform the lives of people living with epilepsy with rns therapy.
I am pleased with what I've seen in the solid underlying fundamentals of the business.
Excited by the opportunities that lie ahead.
And committed to leading neuro pace to deliver on our commitments.
Of consistent revenue growth.
Operating discipline.
The effective cash management.
I'm also very thankful for the opportunity to lead the talented and experienced team at neuro pace.
On today's call I will provide highlights from the second quarter of 2023.
And review our key business priorities for the remainder of the year.
I will then turn the call over to our CFO , Rebecca Kuhn to present, the details of financial performance for the quarter.
Before opening the call to Q&A.
I'm pleased to report total revenue was $16 $5 million representing growth of 62% compared to the prior year period, and 14% compared to the first quarter of 2023.
This strong performance was primarily driven by increased utilization of the rns system within comprehensive epilepsy centers or see he sees.
Revenue contribution from our partnership with Dixie medical to distribute their S. E. G electrodes in the United States and implants of our rns system in the Nautilus study.
As we've previously communicated replacement implant revenue continues to decline as we complete our transition to our second generation device with a longer lasting battery.
It now represents approximately 5% of total revenue and is expected to decline further in the second half of 2023.
Given the strong underlying fundamentals of the business, we are raising full year 2023 revenue guidance to range between $59 million and $61 million.
Up from 52 million to $54 million.
And from our original expectations of 50 million to 52 million.
At the start of the year.
I am committed to delivering consistent and repeatable operating results.
Look forward to updating you on our progress.
Yeah.
Through a disciplined and focused effort on expense management cash burn has been significantly reduced from $9 8 million in the first quarter of 2000 $23 million to $4 million in the second quarter of 2023.
Without compromising revenue growth.
Cash burn improvement was primarily driven by three components right.
Revenue growth gross margin improvement and expense management.
All of which will be key areas of focus as we continue to grow and scale the business.
We remain committed to ongoing financial discipline with a focus on appropriate resource allocation and expense management.
I now want to update you on the core elements of our business that comprises the rationale for our change in guidance before providing some initial thoughts on where I will be focused as I continue to dive deeper into the business.
Our commercial strategy is focused on closing the treatment gap for drug resistant epilepsy patients.
By expanding access to rns therapy.
Expanding access to <unk> therapy is comprised of expanding patient access to treatment with N C. He sees.
Expanding patient indications for the <unk> system.
And expanding the number of clinicians and centers with access to rns therapy.
With regard to <unk> and currently indicated patients the number of new rns system implants in the second quarter demonstrates that recognition of our rns systems distinct features and benefits continues to grow despite our belief that patient volumes and the uplifts he monitoring units or E. M use have not yet entirely.
We returned to 2019 levels and corresponding growth rates, we believe that patient volumes will continue to improve providing an even greater funnel of patients that could benefit from our rns system.
We have recently made changes to our sales leadership and as previously communicated have accelerated the growth of our commercial field organization.
The new members of our field organization are now moving through their training cycle and are beginning to be able to more fully contribute to our commercial efforts.
We look forward to demonstrating the impact to expanding rns therapy access that this expanded team can make over time.
Through our partnership with Dixie Medical we are identifying in their niche and educating additional perspective rns patients earlier in their treatment journey.
Additionally, our nurse navigators and patient ambassadors are working with patients that come into our funnel either through referral Dixie medical or through our direct to consumer campaigns.
To address patient questions or to testify firsthand as to the benefits of our rns system.
We believe that our clinician and patient education efforts as well as our marketing programs are contributing to the growth in initial implants and will lead to more patients being able to benefit from our rns system.
We have continued to be encouraged by the ongoing durability of our results as we have previously communicated not only has rns therapy demonstrated exceptional results in our regulatory clinical studies.
Rns patient real world outcomes were even better than those seen in the pivotal trial with patients achieving 82% median seizure frequency reductions at three years.
This seizure frequency reduction rate has not been seen in any published studies from our competitors. In fact, a recently published study from our competitors patient registry demonstrated substantially worse outcomes in real world patient populations.
And routine clinical practice that had been observed in their controlled clinical trial.
And reinforced concerns related to side effects of nonresponsive stimulation, such as memory impairment and depression.
We are also working to simplify and make the delivery of <unk> therapy more efficient.
In line with those efforts we were excited to launch in the third quarter, our updated insight software tool designed to improve patient care by enhancing efficiency of case and patient data management.
As an important part of our efforts to expand the populations of patients indicated for rns therapy, we remain on track with our plans to expand our rns systems indication into generalized epilepsy and expect to complete enrollment in our Nautilus trial in the first quarter of 2024.
We're also pleased to announce that we have completed implanting, our first cohort of patients in our ground breaking NIH funded feasibility study.
In Lennox <unk> syndrome, or lgs, a type of symptomatic generalized epilepsy.
As a reminder, approximately 40% of drug resistant epilepsy patients have generalized epilepsy.
Given the localization is not necessary diagnosis is typically easier and faster than for focal epilepsy.
Few treatment options exist for patients with drug resistant generalized epilepsy as resection and ablation are not appropriate for this cohort of patients and there are currently no neuromodulation therapies approved for this indication.
We believe that expanding into generalized epilepsy will be meaningful to both our business and our mission.
With regard to expanding clinician and site access to rns therapy in my first four weeks I have identified what I believe to be a significant opportunity that will be an important part of our strategy and our market development efforts going forward.
As a result of a PMA approval from the FDA that has expanded rns therapy site and clinician qualification requirements.
Neuro pace will now have the opportunity to target the additional approximately 1800 uplift colleges outside of level for CEC.
And the entire population of functional neurosurgeons.
Empowering them to provide the <unk> system is a much needed treatment option for their patients.
We believe that with this program qualification expansion, we now have an opportunity to help a significant number of epilepsy patients who would not have been referred to level four cec's to access rns therapy in the community setting.
As well as enabling the potential for increased referrals to level four C. He sees.
A fully developed strategy will take time and will be the topic of additional future commentary.
But we have already begun accelerating our initial market development efforts around this opportunity and are currently working through the targeting and qualification process with a number of pilot sites.
I am excited about this opportunity to offer our rns system through a significantly expanded group of epileptic allergist and functional neurosurgeons.
And expect this to be a core area of focus for neuro pace.
And doing our part to help close the drug resistant epilepsy patient treatment gap.
I plan to keep you updated going forward on our three fold commercial expansion strategy and want to reiterate my commitment to executing on our plans of consistent revenue growth operating.
Discipline and cash management.
Finally, before we review our financial performance over the last quarter in detail I would like to recognize the many contributions from Mike fab it over the past four years.
His execution with the team has brought neuro pace to the position of solid footing on which we find ourselves today and I along with the rest of the management team the board and all of neuro paces employees. Thank him for his efforts.
With that I will now turn the call over to Rebecca to review, our strong second quarter financial results Rebecca.
Thank you Joel.
Once again, thank you Mike.
Neuro cases revenue for the second quarter of 2023.
16, 5 million representing growth of 62% compared to $10 2 million for the second quarter of 2020 Q.
And 14% sequentially compared to $14 $5 million in the first quarter of 2023.
Our strong performance was primarily driven by increased utilization of our our next system by physicians in treating new patients.
We also had meaningful revenue from <unk> medical products, which was higher than we anticipated previously.
Replacement revenue continued to decline again this quarter as anticipated and was approximately 5% of total revenue.
Gross margin for the second quarter of 2023 was 72, 5% compared to 73 point to Chris <unk> in the second quarter of 2022, and 71, 7% in the first quarter of 2023.
The decline in 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 our next products.
Over time, we expect our gross margin will generally increase as our volumes increase and fixed overhead is allocated as <unk> yet.
Total operating expenses in the second quarter at 2023.
$19 8 million compared with $18 4 million in the same period of the prior year.
In the second quarter of 2023 operating expenses as a percentage of revenue was lower for both R&D and SG&A.
This was the result of our continued focus on appropriate resource allocation and cash management.
And as Joe said, we plan to continue focusing on effectively managing our operating expenses going flyway.
R&D expense in the second quarter of 2020 story was $5 $3 million compared with $5 $7 million.
<unk> period of 2020.
The decrease in R&D expense included reductions in outside services for product development and clinical studies.
Largely resulting from our increased focus and prioritization of key projects in these areas.
SG&A expense in the second quarter of 2020 story was $14 $5 million compared with $12 $8 million in the prior year period.
The increase in SG&A was primarily driven by personnel related expenses, including an increase in sales based compensation and expenses related to our CEO transition as well as expenses associated with distributing Dixie medical products.
These increases were partially offset by reduced general and administrative expenses, primarily outside services and insurance.
Loss from operations was $7 9 million in the second quarter of 2023.
Paired with $11 million in the prior year period.
We recorded $2 1 million and interest expense in the second quarter compared to $1 9 million in the prior year period.
Net loss was $9 1 million for the second quarter of 2023, compared with $12 7 million in the second quarter up 2022.
Our cash and short term investments balance as of June 32023 was $63 $6 million.
Our long term borrowings totaled $54 9 million as of June 32023, with the full principal due on September 32025.
Now turning to our outlook for the remainder of 2023.
We are increasing our revenue guidance and now expect total revenue for 2023 should range between 59 and $61 million up from $52 million to $54 million.
We expect that revenue growth will mainly be driven 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 rns devices.
The end of 2023.
With more replacement implants than anticipated in the second quarter.
Placement revenue is expected to decline sequentially at a rate slightly faster than we anticipated earlier in the year.
Replacement implant revenue will become a growth driver when the mueller longer lasting devices introduced in 2018 began to reach the end of their battery life.
We are increasing our gross margin guidance and now expect our gross margin for 2023 will be between 70% and 72% up from 69% to 71%.
Our quarterly 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 $9 million to $10 million in non cash expenses.
Our cash burn in the second quarter of 2023 was $4 million.
A substantial reduction from a cash burn of $9 $8 million in the first quarter of 2023.
Based on our current cash burn rate, we believe that we have sufficient capital to take us to mid 2025.
I would now like to turn the call back over to Michel for closing remarks.
Sure.
Thank you Rebecca.
Overall, the first half of the year results have been strong with Cec's continuing to expand initial implant volume.
Our distribution partnership with Dixie medical contributing nicely to those efforts and our clinical development program with Nautilus and the generalized epilepsy population is advancing as planned with tremendous opportunity and potential on the horizon.
Building on the momentum with our core CEC customer group I'm also very excited about the prospect of expanding drug resistant epilepsy patient access to <unk> therapy.
Through an expanded group of epilepsy, <unk> and neurosurgeons in the community setting and look forward to keeping you updated on those efforts cash.
Cash reserves remained strong and spending well managed.
We believe that we have sufficient capital to take us to mid 2025.
All of these factors position <unk> well for the remainder of 2023 into 2024 and beyond.
This concludes our prepared remarks, I would now like to turn the call over to the operator, who will open the call for questions.
Operator.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone.
Here are three Tom prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process Press star followed by the two if you are using a speaker phone. Please lift the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Frank.
Taken with Lake Street capital markets. Please go ahead.
Great. Thanks for taking my questions and great quarter, Congratulations Joel on the appointment and I'll also extend my gratitude to Mike was hoping we could start with one around the guide obviously, a great quarter you guys had here even after backing out the 5% contribution from replacement it feels like the <unk>.
Back half you guys have done a nice job of staying conservative and prudent with the forward outlook, but maybe talk a little bit about.
What needs to occur to achieve the guidance that you guys have laid out for 2023 and what could be sources of upside as you start to think about.
Second half of 'twenty three.
Thank you Frank and thanks on behalf of the team.
So thank.
Thanks for the question when we when we talk about guidance for the rest of the year I think I think it bears mentioning.
We're we're raising guidance by the amount of the beat in Q2, plus nearly that much again for the rest of the full year.
And that puts us in a position of having raised by $7 million, which is.
Again, nearly that beat plus the $3 million.
And that's in addition to the guide that we raised by $2 million in the first quarter.
Putting us now $9 million in guidance for.
From how we were thinking about the business at the start of the year.
So.
We mentioned, we do think it bears consideration as well as you mentioned that that we do expect replacement implants and revenue to be down somewhat in the second half of the year, but our guidance here for the rest of the year.
It really takes into account what we've seen in the business in terms of the growth in initial implants in the rns.
Good growth contribution that we've seen from Dixie and the dynamics that I mentioned around the replacement implants. So it's really those factors that are driving the second half of the year guidance.
<unk>.
That's what we're focused on.
Okay. That's helpful. Maybe shifting over to one on initial implants I realize you guys are intentionally not breaking that out but can you put some goalposts around just where that number came in trying to understand just the source of outperformance I mean I think it's.
Looking at my model and making some estimates that you can say.
30% initial implant number is probably rather conservative for the quarter, but any further clarity you can provide to break out the performance between the initial implants and Dixie.
Yes, I think as we've talked about we're not breaking out revenue by different product lines.
But what I would say is that we had strength in.
Revenue performance across the different product lines.
The initial implants.
Contribution primarily was driven by utilization within existing centers and so it was.
Primarily existing centers.
Rising that increase in initial rns implants, but.
Good contributions really across the across the business with some with some accelerated strengthen replacement implants as we mentioned.
Okay Perfect and then maybe just for my last one I was hoping to have a follow up on the.
Qualification qualification requirement downgrade, if we can call it that to an epileptic I'll just not at a level for CEC, maybe just take us a little bit deeper into how just how impactful that can be and if you've already started to maybe see some impact from that that change.
Great. Thanks, Thanks for that question as well Frank we're excited about the opportunity here for site expansion.
Really through the role that we see it playing.
In advancing neuro pieces mission.
Our focus is transforming the lives of patients and people who are suffering from epilepsy.
We see the opportunity here to expand sites as an opportunity to help close the treatment gap for patients who are indicated in our drug resistant epilepsy patients you would you would know but their $1 2 million people in the United States living with drug resistant epilepsy.
About 50000 of those are admitted to one of approximately 200 level four centers.
Mmm those level for Cec's.
This opens up our ability to take out two eligible clinicians and centers rns therapy to patients who may be who would not have had access to before and we think that's we think that's really exciting.
Well, we'll talk more about we're right at the start of this and so we will talk more about.
Modeling the opportunity and how we see all that.
In future calls, but again with the expansion in in clinician requirements and center requirements that we see here we.
We think this lines up very nicely with our overall commercial strategy is.
To increase therapy access in Cec's for patients that are incomprehensive epilepsy centers expand indications for patients for rns therapy like through the work that we're doing with the Nautilus trial.
And then thirdly expand clinician insight access and we think this.
This.
Regulatory approval and and the changing qualification criteria lines up very nicely with that third prong of that of that overall market development strategy.
Great I'll stop there thanks for taking the questions and congrats on a really strong start to the first half.
Thank you Frank.
Your next question comes from robbing Marquez.
J P. Morgan. Please go ahead.
Hi, This is al Anon for Robin on just a second you hear me okay.
We can Allen thank you.
Got it yeah. Thanks for having some connectivity issues I want to make sure that's not affecting it but congrats on the good quarter now I think when we look back to some of the conservatism you had after the strong first quarter you talked about how you know the EMU procedure environment hadn't exactly returned to pre pandemic levels due to staffing.
But clearly it looks like tons of continuing to improve in the second quarter. So when we spoke out to third quarter fourthquarter should be thinking about is basically being a fairly normal operating environment or you know with maybe some one time catch up an accord that that really drove the strength.
Yeah, So I think.
<unk>. Thank you for the question and for the congratulations on behalf of the team.
So when when we look at.
Volumes again, we saw we really saw strength across the different pieces of the business.
And really that strength coming from initial implants as well as.
From the contributions from Dixie, we do see that patient volumes, we believe going through the uplift monitoring units have strengthened.
And they have strengthened our pipeline and while we don't know yet whether the volume in those comprehensive epilepsy centers.
Has consistently fully returned.
We believe that we have seen strengthening.
Yes.
Does it does that answer your question.
That's helpful and then I got one on the.
The expanded criteria to you well when we think about what's needed to really turn the opportunity I know you said that you're kind of going through the planning yourself, but when I think about the potential need for additional cost, especially since you're reiterating you know that your cash and you can get you off in mid 2025.
Can you see the potential need for additional spending so we're gonna go after the opportunity and if so will you be able to hold to that may 2025 kind of target. Thank you.
Thanks, again Allen that's a great question.
As you state we are in the we are in the early stages here to really fully understand the scope of the of the opportunity that said.
I would remind us.
But.
This remains within our currently indicated patient population.
These are customers and by that I mean, epileptic allergist on functional neurosurgeons that are the functional specialties that we call on today.
It is our current technology and our commercial field team.
While these are.
Expanded sites are commercial field team is trained in and highly experienced and interacting with just this type of procedure in customer and patient and technology. So we see that there will be custom.
Customer training and education that will be we need it certainly and we're working on evaluating the scope there.
But we see it really more is expanding that training and education to the additional sites.
And an uplift allergist neurosurgeons, we'll be focused and thoughtful on targeting potential centers and we will be working on investing as we grow.
And <unk>.
While we grow will be thoughtful about how we invest and make sure that we're doing so responsibly. So that we maintain both the ability to expand into the opportunity and developed the market while doing so with a focus on operating discipline expense management.
<unk>.
Ladies and gentlemen.
Question. Please press star followed by the line. Your next question comes from paint Chamberlain with Wolf Research. Please go ahead.
Hi, Thank you for taking my questions I have one on <unk>, we understand that yeah. Several strategic reason behind that partnership one gang.
More visibility.
Patient so I guess I'm just curious to know that you guys are at nine months insufficiently ma'am, what what have you been learning and now it's a partnership helping you identify them our patients uhm on the front end and manage patient file all any better.
I page. Thank you for your question, it's a great question.
Did you say, we are a few months into this.
But it is still relatively early as we think about the sales integration process and and how.
The.
Collaboration is integrating with both our current customer base as well as potential new customers I would say that we are pleased with how things have started.
We have seen.
Positive contributions to both the revenue as well as our ability to get visibility further up the pipeline.
And we're continuing to work closely with both Dixie as well as with our field team.
In further defining and executing on those both current opportunities as well as customer expansion opportunities. So we're.
We're pleased with what we've seen so far we're pleased with the Tribune that we've seen to the current business as well as.
Hello, it's helping us.
Look into the pipeline deeper but it is also still relatively early in our overall integration efforts.
Got it. Thank you and then one more kind of jumping off that you guys might generic some changes.
<unk> in the corner, so I guess just.
Just kind of all that overall level, how are you feeling about the <unk>.
Maybe if you could shiny motivation behind that change as in and let the changes will look like in practice.
And then just for complete.
How does the <unk> partnership at all changing the sales side of geography at helpful to have another level to call that what does that look alike.
Page. This is Rebecca I'll comment on changes and sales team. There may have been a bit of confusion about that we had a change in our sales leadership. This quack.
Can't fail, which we announced.
About two months ago.
We have not had changes in the sales team.
May recall, we accelerated growth.
In earlier in 2020 Q, but.
Other than that change in <unk>.
Lita chefs there were not the changes this quarter our field commercial organization remains about the same size that it has been for the full year.
[noise] alright, thank you.
There are no further questions at this time. Please proceed.
Thank you and I would like to say, thank you to all who were on the call today and for your interest in neuro pace.
We're pleased with the first two quarters of 2023, we're focused on execution throughout the rest of the year.
And we're excited about both the recent progress on in the future opportunities with our site expansion and clinical study work to expand patient indications.
In the drug refractory generalized epilepsy population with the Nautilus study all of that with a focus on furthering neuro paces mission to transform the lives of people suffering from epilepsy.
Thank you operator with that will conclude today's call.
Ladies and gentlemen, this concludes our conference call for today.
Tests.
Thank you. Please disconnect your lines.
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