NeuroPace, Inc. (NASDAQ:NPCE) Q4 2023 Earnings Call Transcript
NeuroPace, Inc. (NASDAQ:NPCE) Q4 2023 Earnings Call Transcript March 5, 2024
NeuroPace, Inc. beats earnings expectations. Reported EPS is $-0.23, expectations were $-0.33. NPCE isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to NeuroPace’s Fourth Quarter and Year-End 2023 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Jeremy Feffer from LifeSci Advisors for a few introductory comments.
Jeremy Feffer: Good afternoon. Thank you for joining us for NeuroPace’s fourth quarter and year-end 2023 financial and operating results conference call. On today’s call, we will hear from Joel Becker, Chief Executive Officer; and Rebecca Kuhn, Chief Financial Officer. Earlier today, NeuroPace released financial results for the fourth quarter and year-ended December 31, 2023. A copy of the press release is available on the company’s website at neuropace.com. Before we begin, I would like to remind you that throughout this call, we will make statements that include forward-looking statements within the meaning of federal 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 NeuroPace’s projections, business opportunities, commercial expansion, market conditions, clinical trials and those relating to our operating trends and future financial performance, expense management, estimates of market opportunity and forecasted 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 recent quarterly reports on Form 10-Q, annual report on Form 10-K for the year ended December 31, 2023, to be filed with the SEC and any other reports that we may file with the SEC in the future. This conference call contains time-sensitive information, which we believe is accurate only as of this live broadcast on March 5, 2024. NeuroPace disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. With that, I will now turn the call over to NeuroPace’s Chief Executive Officer, Joel Becker.
Joel?
Joel Becker: Thank you, Jeremy, and good afternoon, everyone. As you saw in the fourth quarter press release issued earlier today, the NeuroPace team has continued to execute on our strategy and delivered another strong quarter to cap off what has been an outstanding year. Revenue for the fourth quarter was $18 million, a 41% increase compared to the same period last year. For the full year 2023, we reported total revenue of $65.4 million, a 44% increase over 2022. As we look back to where the company was just a year ago, we’ve continually raised the bar and exceeded expectations. I am proud of everyone on the team and all that was accomplished in 2023 and look forward to capitalizing on this momentum in 2024. With that, let me step back and provide some additional color around what drove our top line results in the fourth quarter and full year 2023.
I will then review our key business priorities for 2024 before turning the call over to our CFO, Rebecca Kuhn, to present the details of financial performance for the quarter and year ended December 31, 2023, which will be followed by a Q&A session. In 2023, we developed and worked to execute our three-part strategy to expand access to and increase adoption and utilization of RNS therapy for drug-resistant epilepsy patients that support our current near-term and medium-term growth plans, across existing and new groups of clinicians as well as patients. These plans are aligned with the International League Against Epilepsy or ILAE, which published new guidelines in 2022, stating that once a patient has tried and failed to medications, they should be referred for additional treatment even if surgical intervention is not appropriate.
We believe RNS fits exactly in that category. Turning to our three-part strategy for expanding access to and developing the market for our RNS system. The first part of our strategy, which is in motion now, is focused on the Level 4 Comprehensive Epilepsy Centers or CECs, and is aimed at driving adoption across clinicians and expanded therapy utilization by current prescribers under what we call the modern RNS story. This approach aims to stimulate our existing base of customers at Level 4 epilepsy centers through education and support on how RNS can be used to treat a broad range of patients with drug-resistant focal epilepsy through traditional focal stimulation approaches, treatment with a network stimulation approach and utilization of RNS as a hybrid therapy with surgery, meaning either in conjunction with surgery or by utilizing RNS to help and form a subsequent surgery.
The modern RNS story also involves highlighting the improvements in ease of use and efficiency we have made with the RNS platform. We are pleased with the momentum of these efforts within our Level 4 centers, and it has driven much of our RNS system growth in 2023. The second part of our strategy, which we call Project CARE, will be an area of focus in 2024 and provides an opportunity to expand access to our RNS system outside of Level 4 CECs. This expanded access has the potential to allow for appropriate patients who could not or would not have been referred to a Level 4 Center for Care to be treated closer to home and also provides the opportunity for patients to be identified and referred to Level 4 centers. This new approach is now possible due to the FDA approval of a PMA supplement in 2023, which opened up our ability to access the approximately 1,800 additional epileptologists and the remaining functional neurosurgeons to prescribe and implant the RNS system within the currently approved labeled indication.
We are planning to initiate this pilot program outside of Level 4 centers during the first half of 2024, and some of these activities have begun. While early in our process of initiating pilot program activities, we have been pleased with the interactions with a number of our initial target centers regarding the potential for appropriately indicated patients to be treated locally as well as in the identification of potential RNS patients who should be referred to Level 4 centers for valuation. In support of the growth that we have seen with the RNS system and Level 4 centers, as well as in order to ensure the proper support for Project CARE, we have begun making incremental additions to our sales and support teams and are pleased with the skill sets and experiences of the representatives we have hired and that we are seeing express interest in joining the NeuroPace team.
The third phase of our RNS strategy is based on expanding the improved indications for the RNS system. This effort is currently focused on the pivotal NAUTILUS study, which completed enrollment and subsequently the number of implants required for FDA submission during the fourth quarter of 2023. We believe that the pace of enrollment and implants in the study reflects the significant unmet need that exists for patients with drug refractory idiopathic generalized epilepsy. As a reminder, the NAUTILUS trial requires evaluation of a primary safety endpoint and an effectiveness evaluation 12 months post implant. If approved, our RNS system would be the first device with an FDA-approved indication for generalized epilepsy. This study has the potential to represent a highly meaningful market expansion opportunity.
Additionally, in 2024, we plan research and development work on software tools, leveraging our data and AI analysis capabilities designed to both enhance clinical insights, as well as patient support efficiency and ease of use. As we take a deeper look at our financial and operating performance for the fourth quarter of 2023, revenue growth was primarily driven by sales of our RNS system. The growth from new RNS system sales was partially offset by continued decline of RNS replacement implant revenue. As I've mentioned on previous calls, we expected this decline to occur as most patients with the older version of the RNS device have already had their devices replaced with the newer version. Also, we continue to see revenue growth from our exclusive partnership with DIXI Medical to market and sell their diagnostic electrodes and related products for epilepsy.
As a reminder, these products are used to determine where epileptic seizures originate. Physicians use this information to target interventional treatments at the seizure source, including with our RNS System. While we do not plan to break out revenue components on an ongoing basis, the contribution from the DIXI partnership to our top line performance remains at approximately 15% of total revenue. This is a highly complementary product offering to the RNS System that leverages our existing commercial team and customer base and provides earlier visibility into the pipeline of patients that may be appropriate candidates for RNS therapy. As we review our performance, we continue to be pleased with the progress made in 2023. The strategy we put in place is focused on clinician and patient needs and leverages our differentiated technology and organization.
As a result, we have been able to execute our commercial strategy while maintaining disciplined expense management, resulting in cash burn in the fourth quarter of 2023 of $3.4 million, compared to $7.9 million in the fourth quarter of 2022. With regard to the new opportunities we've recently announced, we have entered into a first-of-its-kind strategic collaboration with a biotechnology company, which will leverage our RNS Systems unique biomarker monitoring and data analysis capabilities. The collaboration will evaluate biomarker changes and currently implanted RNS System patients that have enrolled in the biotech companies Phase 2a proof-of-concept trial of its product candidate. We believe this groundbreaking collaboration is another example of the value that our RNS system can provide through its proven ability to collect and analyze data, which is then used to generate insights that can help inform treatment strategies.
We expect to receive total revenue from this collaboration of approximately $3.7 million. The agreement is broken out into four phases through the fourth quarter of 2025 with certain milestones correlating to each phase, the majority of which are planned to be completed prior to the end of 2024. Now turning to 2024, the NeuroPace team and I will continue to focus on increasing revenue growth, gross margin improvement and operating expense management. Currently, we are expecting to report between $73 million and $77 million in revenue for the full year 2024, which represents a 12% to 18% increase in revenue compared to 2023, driven by execution of our strategies. We look forward to keeping you apprised of our progress. With that, I will now turn the call over to Rebecca to review our fourth quarter and 2023 financial results, along with some additional detail around our 2024 financial plans.
Rebecca?
Rebecca Kuhn: Thank you, Joel. NeuroPace revenue for the fourth quarter of 2023 was $18 million, representing growth of 41% compared to $12.8 million for the fourth quarter of 2022 and approximately 10% compared to $16.4 million in the third quarter of 2023. This growth was primarily driven by increased sales of our RNS System. We also generated meaningful revenue from sales of DIXI Medical products in our first full year of serving DIXI Medical's exclusive U.S. distributor. DIXI contributed a small amount of revenue to the fourth quarter of 2022. The placement implant revenue continued to decline compared to the same period last year and represented approximately 4% of total revenue. Gross margin for the fourth quarter of 2023 was 75.2% compared to 68.8% in the fourth quarter of 2022 and 74.5% in the third quarter of 2023.
Our gross margin for the quarter increased primarily due to the increase in RNS products produced and sold as our fixed manufacturing overhead costs were spread over more units. The increase in RNS gross margin was partially offset by the lower gross margin from distribution of DIXI Medical products. R&D expense in the fourth quarter of 2023 was $5.4 million compared with $5.1 million in the same period of 2022. This increase was primarily driven by an increase in personnel-related expenses. SG&A expense in the fourth quarter of 2023 was $13.2 million compared with $13.6 million in the prior year period. The decrease in SG&A was primarily due to a decrease in insurance and outside services expense, partially offset by an increase in personnel-related expenses.
Total operating expenses in the fourth quarter of 2023 were $18.6 million, compared with $18.7 million in the same period of the prior year. This decrease reflects our focus on finding the appropriate resource allocation to effectively manage our cash, which we are committed to continuing as we move into 2024. Our key focus is on maintaining a balance of managing our operating expenses without compromising revenue growth. Loss from operations was $5.1 million in the fourth quarter of 2023 compared with $9.9 million in the prior year period. We recorded $2.2 million of interest expense in the fourth quarter compared to $1.9 million in the prior year period. Net loss was $6.2 million for the fourth quarter of 2023 compared with $11.1 million in the fourth quarter of 2022.
Our cash burn in the fourth quarter of 2023 was $3.4 million. Our cash in short-term investments balance as of December 31, 2023 was $66.5 million. Our long-term borrowings totaled $57 million as of December 31, 2023 with the full principal due on September 30, 2025. As we look ahead, we expect full year 2024 revenue to increase by approximately 12% to 18% to a range of $73 million to $77 million. We expect this growth will be mostly driven by an increase in sales of our RNS System with growth from sales of DIXI Medical products continuing to make a meaningful contribution. We expect our gross margin to be in a range of 72% to 74% for 2024, although we may see small variability due to fluctuations in the proportion of DIXI Medical revenue to overall revenue and other factors.
We expect operating expenses for 2024 to range between $80 million and $84 million, including approximately $12 million in stock-based compensation and non-cash expense. I would now like to turn the call back over to Joel for closing remarks. Joel?
Joel Becker: Thank you, Rebecca. We are very excited by the progress we've been making over the past year at NeuroPace. We believe that our strategy is clear and that our opportunities are compelling. Consistent with our 2024 guidance we believe we are positioned to achieve 2024 revenue of between $73 million to $77 million, and are also positioned to accelerate our growth in the future as these opportunities develop. 2024 will be a year focused on the execution of the strategy, and the entire NeuroPace team is committed to advancing each of its elements to deliver on their potential and to drive long-term growth and profitability. 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?
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