NeuroPace, Inc. (NPCE) Earnings Call Transcript & Summary

All right. Welcome, everyone, to the Morgan Stanley Healthcare Conference. I'm Drew Ranieri, one of the medical device analysts here. It's my pleasure to host NeuroPace with us today. I'm delighted to have Joel Becker, CEO; and Rebecca Kuhn, the CFO of the company. Before we jump into it, quick disclosure. If you want to read them, go to the website or ask your sales rep and now we can move on.

So kind of with that out of the way, Joel, thanks for -- Joel and Rebecca, thanks for coming down here. So maybe Joel to start, I wanted to start bigger picture. It'd be great to kind of hear like your high-level vision of the company. mean you've been here for some time now. Just maybe how are you thinking about the opportunity more broadly? And what has to change, if anything?

It's a great question. Thank you, Drew, and thanks again for having us. So when we think about the broader vision of NeuroPace, it's really grounded in the mission of the business. And that animates really everything that we do and the decisions that we make. And the mission of the business is focused on transforming the lives of patients that suffer from debilitating seizures. And we feel that the RNS system is uniquely well-positioned to do that, to meet that unmet treatment need and help fill that gap. As you know, there are about 1.2 million patients in the U.S. alone that suffer from drug-resistant epilepsy. And we see the RNS system with differentiated monitoring, recording and responsive stimulation is in a position to -- in a differentiated way be an important tool in helping those patients. So when we think about the vision for the business, it's really how do we use that unique technology to help those patient populations and our current strategies, our strategies are focused on how do we expand access to the technology. And how do we do? That through sites of service, expanding indications and then ease of use and efficiency improvements around the platform as well. So when we look at that, the nature of the unmet need, the unique capabilities of the technology and the opportunities for expanding access in front of us, we're tremendously excited about both the opportunity and leadership position in the field.

Got it. And just to maybe touch on some of the new executives you brought in this past week, adding a VP of R&D and a VP of Marketing. I guess one, talk about their priorities. You have NAUTILUS is progressing, and it's getting close to the end. But how does that inform us about bringing somebody in for R&D today? And then just talk about maybe the marketing opportunity that you're seeing at the company where you need to bring in this expertise?

It's a great question. It's a great segue from how we think about the vision and the strategy of the business, which is again, we see significant market development opportunities for us from a site of service delivery, expansion with our Project CARE opportunity that we're in the pilot for now. And as you mentioned, with the progression in NAUTILUS in our indication expansion efforts. We're in the midst of in preparing for launches and expansion of the technology. And so continuing to invest in raising our level and bringing in talent and leadership to prepare for and execute those launches is why we're investing in that way, and we're really thrilled to have Katie join the team. And she brings a lot of the skills and experiences that are going to be directly applicable to those growth opportunities that we're working on and are right there today. And then from an R&D perspective, I also mentioned that in my opening comments around the vision for the business, which is we think the platform is, has unique capability. And we see opportunities to continue to enhance that capability, both with efficiency and ease of use as well as expansion in the capability of the platform. And we see Brett as a key leader who can help us do that.

Are there any other executive team member holes that you still need to fill in as you're thinking about the broader opportunity for RNS, site of care, anything downstream that we should be thinking about?

No. I think we always and will continue to look at development of the organization to really stay in line with the opportunities that we see in the business. And that's really our focus, and that's why you see both the marketing function and our commercial organization development as well as then the R&D focus from a hiring perspective. It really lines up right now with those opportunities.

Got it. Maybe just on recent trends. You started out 2024 with about 25% growth in 1Q, 17% in 2Q. So that's about 21% first half of this year. I guess, when I listened to the call when we chat, you're very optimistic about the technology, the momentum you have especially coming out of the first half. So I guess maybe just help us better understand some of the factors. It doesn't feel like it's cautiousness necessarily for the back half, but maybe more conservatism. But just maybe help line us up with some of the puzzle pieces there on what you're seeing with the puts and takes?

Sure. Great. Thank you. Yes. And to your point, we're very pleased with the performance in the first half of the year. We -- in both Q1 and in Q2, we exceeded expectations. And I think our raise in guidance reflects that. And to your point, when we look at growth rate comparisons between the first half and the second half, one thing I'd point to is -- when we look back at 2023, there were a couple of things. One, the rollout of our first year with the DIXI distribution agreement that is one-time dynamic in 2023. And throughout the years, we scaled up that effort. And then I'd also point to the enrollment in the NAUTILUS trial that was really scaling throughout 2023 as well. So neither one of those really repeat, in particular, the NAUTILUS enrollment is something that we need to then fill in and continue to grow on top of in the second half of the year. And I think our guidance reflects that. We had $37.4 million in the first half of the year, and our guidance is $40 million implied for the second half of the year. And so we see absolute growth in the business from a revenue perspective in the second half of the year. And as you say, I am very optimistic about the business and the momentum that we've got.

Yes. Maybe that's a good segue into some of the strategy and growth drivers for the company. I mean you've outlined kind of a multi-tiered strategy. I think it's 3 parts. But maybe just take a minute to level set us with that strategy. And I'm really kind of curious to like dig into how you're thinking about expanding utilization. A lot of investors are -- and SMid Caps are focused on profitable growth versus growth at all costs. So I'd be fascinating to see how the strategy, how the multipart strategy is really going to drive utilization at an account level. And what you're doing to really kind of going out that opportunity?

Great question, and thanks for the opportunity to talk about the strategy. We're excited about the strategy. We think we have a clear vision for it. It really is in 3 parts. Increasing adoption and utilization within the Level 4 centers, expanding site of service utilization and then expanding indications for the technology as well. All of which are focused around increasing access to earnest therapy. We see increasing adoption and utilization within the Level 4 centers has been the focus of the business and has been the immediate focus of the business from a growth perspective. You talked about investor interest in particular, in profitable growth of the business. And we've also talked about -- that's very much in our focus as well. We stay focused on obviously, driving the top line but also then execution through the income statement with gross margin performance and operating expense discipline. And I think investors would have seen that from us. We've grown the top line and continue to grow the top line but have also demonstrated performance from a gross margin expansion perspective, 72.5% to 73.4% in the last quarter. So getting some good gross margin expansion there. And then, good disciplined, I think, investment in the business. We continue to be mindful of spending, but we don't hesitate to spend to invest in growth. And so that's really been our focus. So in addition to the first plank in the strategy, which is ongoing adoption and utilization within the Level 4 centers, one; two, site of service expansion associated with Project CARE. So a PMA supplement that we received in 2023 has allowed us to expand the site of prescribers and implanters for RNS therapy. And so we're in the pilot phase of that right now. And then thirdly, indication expansion with the focus of those efforts being on the NAUTILUS trial and the generalized indication. And I would just offer that for people thinking about the strategy, those 3 parts work together as well. Doing more in the Level 4 centers and expanding site of service allows site as service then to access the Level 4 centers with additional referrals as we build a beachhead outside of Level 4 centers as well, pending successful completion of a trial for the generalized indication. Those patients can be treated without the need to necessarily be referred to Level 4 centers. And so we have a virtuous cycle here of both expanding patients as well as expanding sites of service that we think all contribute to that kind of efficient growth that you talk about.

Got it. And maybe just on kind of the first part of the strategy about really kind of driving Level 4 utilization. I know you're not necessarily providing metrics anymore for that. Feel free to start today, if you'd like. But maybe just qualitatively talk to us about where those utilization trends have been going? And the technology, the company is more established. So as you are seeing your accounts, these prescribers and your prescriber base growing, are the more recent prescribers actually getting to a faster utilization ramp now that there is a little bit more data, a little bit more experience at an account level?

You've described a lot of the key elements of that utilization in your question. So when we think about utilization on an account basis, you need to think about how much adoption is there within the account. So when people think about an account, there will be 4, 5, 6 epileptologists inside of that account. And so we may have 2 or 3 of those today. And so broadening adoption of the technology is a key first step in increasing utilization within an account. And then as we think about utilization for each of those clinicians, there's an expansion of how they think about utilization of RNS as a tool within their toolbox. So they may start with a very focused patient population. And then what we talk about with them is the modern RNS story, which is those focused patients, they may start with, but then also utilizing RNS as part of a network stimulation strategy, which is gaining clinical interest, as well as an RNS is uniquely well positioned to be used as a hybrid with surgery as well. So it's really expanding the number of prescribers inside a center, as you mentioned. In terms of metrics that we are providing, we continue to retest new highs in terms of the total number of prescribers on a quarterly basis for RNS and I talked about that over the last couple of quarters. So we like to see that trend. But then as well, how do we increase the penetration of RNS usage within each of those prescriber's practices is really where our focus is.

And anything to share on like where you are in terms of I'm forgetting the exact number, but maybe 200-ish Level 4 centers in the U.S., somewhere around there. But any sense of where you are in terms of just having that net of national coverage?

Yes. We've got a presence in the vast majority of the Level 4 centers. And so for us, it really is that expanding adoption within the centers and then deepening utilization within the adopters.

And maybe let's go to Project Care. Just you were touching on it, I think, well, through this conversation a bit on the second quarter call. But just give us an update of where you are with the program, what the pilot today. What are you hoping to see out of the next 3 to 6 months as you kind of go into 2025 and eventually kind of the NAUTILUS trial coming through?

It's a great question. So we're in the pilot phase of rolling out the care program. And there are a number -- we're taking a targeted approach to that, and there are a number of targets that we are engaged with today, and are in the process of expanding that targeted group of centers. We are seeing implants as well as referrals from the care sites. And so -- and those are growing. So we're encouraged to see that. And another important point of progress for us has been we've recently completed the hiring and training of the initial incremental commercial expansion that is really focused on both supporting high-volume RNS accounts today, but importantly, coverage for and a focus on a lot of those care target accounts. So we like the progress that we're making. The pilot experiences are allowing us to both refine and focus our targeting as well as the education and training efforts that we have. And our expectation is that will continue to grow and expand here in the second half of '24 and into '25.

Got it. So it would become less of a pilot more in 2025? Is that kind of the plan?

Absolutely. Yes. We expect that we'll obviously continue to pilot and develop additional approaches to the program, but really to take a broader approach in expanding the program as we get into '25.

Got it. And maybe to dig in a little bit more to the Project CARE. I guess how does it really truly set you up commercially for NAUTILUS down the road? I mean as I've had conversations with community-level hospitals just looking at the epilepsy space in general, my sense is like neurologists and the community hospitals might spend like 10-ish percent of their time touching epilepsy and they're covering a lot of other different areas. So how do you help them have a more efficient practice to the point where they prescribe those patients up the channel when all this happens with generalized?

Yes, it's a great question. And that's really part of the market development efforts of expanding the site of service. And so when you think about who are good candidates for Project CARE program expansion. It's people who have the patient populations have the interest in it. the infrastructure and capability there, both from their own diagnostic capability as well as a good relationship and partnership with functional neurosurgeons as well. And so that's part of that targeting exercise that we go through. And then there's a training and education process that we also bring to people. So realizing that RNS therapy is new to them, but epilepsy patients in epilepsy is not new to them. We spend time talking with them about RNS, the technology, patient identification. So how do I identify good candidates for the therapy, and then the specific training around the technology. So those are things that we do to kind of bring people down the learning curve and help them see both the patients within their practices today as well as how they then can efficiently use and scale RNS. And I'd just take a minute to mention then that that's lot of our focus as well. It has been, and we've recently introduced some software enhancements that allow for more efficient data management and patient monitoring, and ease of use and efficiency is a big focus within our R&D pipeline. We talked about that earlier that we think is going to be important for scaling RNS technology as we get to the community, making it as easy as possible to deliver RNS care as we increase access.

Okay. And is that software update? Is that rolled out at a full account level at this stage? Or is there still probably opportunity to get more conversion?

There is opportunity. It's the nSight Software System. There is opportunity for us to more fully penetrate that. But we've had a nice rollout and good adoption of that, and it's really quite broadly available now.

Got it. Got it. And maybe just one other follow-up here with Project CARE. You talked about kind of just incremental commercial expansion here. As you do think about a fuller launch next year, is there going to be just another handful of making up the number here, some more incremental hires? Or do you have just the base now, then there's just going to be more kind of productivity enhancements coming next year?

Again, a great question. We do see, again, as part of the efficient growth, we do see where we get leverage with those accounts from our current sales organization as well. And again, we've made that incremental investment and are now deploying those folks. But while we see the opportunity to, again, leverage what we have today, we do see incremental investment in '25 in the commercial organization as well to continue to expand and take advantage of the opportunity. So yes, and we're excited about the early returns from that incremental expansion and looking forward to more fully developing it.

Got it. And it's tough not to ask you about the NAUTILUS trial, which is for some...

We like to talk about it so it's good.

For some who may not be like as familiar with it, just talk to us, one, about why it's critical, the clinical need that is kind of for solving. And then where you are in the process? I think you completed enrollment, which is what are the milestones from here as we're thinking about the next 12 to 24 months?

So the RNS system to doing -- we start where we are today and that will establish why it's so important. The RNS system today is indicated for focal drug-resistant epilepsy patients. And in the drug-resistant epilepsy patient population, about 60% of the population is focal and about 40% of the population is generalized. In the United States, there are no neuromodulation technologies that are approved by the FDA for use in the generalized population. And so patients today don't have an approved device-based neuromodulation therapy for them that has been approved. And so those patients don't have the options that we can afford them. And so it's important for us, again, as part of that increasing access and our mission to help treat those patients to expand the indications associated with RNS therapy. So that's -- that's really our focus. We're in -- and you're exactly right. We have completed enrollment. We expect the 1-year follow-up of those enrolled patients to be complete in the first quarter of 2025. And then we'll, of course, monitor and analyze the data, prepare our submission and then submit that PMA supplement to the agency.

And to push you on this, could we think of approval somewhere in the late '25 time frame because it's a supplement? Or maybe earlier 2026?

Again, good question. We haven't talked about specific time frames. Only in that -- of course, we're interacting with the agency, and those times take whatever time they take. But the steps in the process, I think we can kind of build that time line from there, which is, again, Q1 2025, 1-year follow-up enrollment completion. It will take us a window of time there to gather, analyze and prepare the submission. And then, it is a PMA supplement. So if on a traditional track, we'd be on a 180-day clock room there and so I think we can kind of build the steps. But we're just not quoting exact time lines just yet given that there can be some variability in each of those steps as well.

Got it. Do you think you might have a clearer picture of that maybe by the time that you guide for 2025?

We will absolutely be commenting on the status and updates around NAUTILUS and anything further we have to offer from a clarity on timing when we guide for '25. We're not guiding that just yet here today but we will plan to comment on NAUTILUS further as we guide '25.

Got it. And you have the patients fully enrolled. You'll be doing your data analytics. What about kind of the clinical strategy here, paper strategy? Will we be able to see or will you be publishing any data? It sounds like AES is obviously a late fourth quarter type of conference for the company. So would you expect to present any data at AES 2025 on Nautilus? Or just any kind of in between data publications?

We haven't talked about the publication timing for NAUTILUS just yet. What I would offer is that we think this is an important trial. This is going to be important data. And so we'll be looking to work with all the important stakeholders around significant opportunities for both publication as well as presentation for the trial. Given the structure of the trial is a blinded, randomized trial, we don't have early looks at the data. And so we're really focused right now on getting that follow-up done, getting the data collected and analyzed and then putting together a high quality and visibility strategy for talking to people about that. And we think it will be important in terms of educating the clinical community, both the referring neurology community as well as the neurosurgery community on the results of the trial.

Got it. Maybe just shifting gears to partnership opportunities. So you've had the partnership with DIXI for well over a year now, a couple of years almost. And it appears like it's progressing very well. So maybe just talk to us, too, about if you can share kind of any expectations for DIXI. And are you seeing any type of pull-through yet of the overall RNS implants? Sorry to add so many sell-side questions into this. I guess, how are you thinking about, too? Like it's just really interesting to see you partner with other companies just given RNS opportunities. So what other potential partnership opportunities do you see over the next few years for neuro phase?

It's a great question. And we have talked about that we do see with DIXI and the SEEG opportunity where it provides for our field commercial as well as clinical organization to be almost -- you'd say almost kind of vertically integrated into the diagnostic process with the patient. And so it provides them opportunities to be there and be present and be both aware of and discussing with customers the -- just that the diagnostics for patients and how that may apply to RNS therapy as well. So we've seen benefit associated with that. We also have recently partnered with a company by the name of Rapport Therapeutics. And the reason I mentioned that is we do see a lot of value in the data associated with the RNS system as well. And that's an example of just kind of a vector of being able to recognize the value of the data through a partnership. So we're really -- we're pleased with the products in the bag today. We really like the strategic opportunities we've got in front of us. And our focus is really on delivering with those products, a strong second half of '24. And continue the momentum into '25.

Got it. Just to touch on reimbursement for a moment. Just anything to think of with NAUTILUS or even for generalized or even focal on the reimbursement side? Anything on like the pricing that you'd be able to share for how you're thinking about that strategy looking ahead?

So from a reimbursement perspective, and I'll ask Rebecca to chime in here, too. She's very well versed and leads our reimbursement efforts. For reimbursement for focally indicated, currently indicated patients, reimbursement is well-established and as is coverage, and we're really in very good shape for today. As we continue to complete clinical trials and receive indications for additional patient populations, we'll obviously work with a variety of different insurers to ensure that coverage is expanded that those same kinds of conditions exist for those patient populations.n But we feel really good about reimbursement where we're at today and feel like the clinical strategy is really going to support that. Would you add anything there, Rebecca?

Actually, you covered it pretty well. There are no real gaps today in our currently-indicated patients. And of course, as we move into new patient populations, will need to work with payers on expanding their coverage policies. That will be the key for the new patient populations.

Got it. Got it. I'm sure we'll hear more about that in the coming quarters. Got it. So we touched on back half dynamics a little bit earlier in the conversation. But just maybe with the third quarter specifically, is there anything in terms of like summer seasonality or utilization that you're seeing that might be unusual for this year from a surgeon or from a surgeon perspective. Anything you'd call out?

There isn't anything that's unusual for this year. As we've talked about, we do see some normal summer seasonality but nothing that we would characterize as unusual. In fact, I think we would expect that we'd see a similar type of cadence to what we've seen in prior years, last year as an example. But generally, we see patient volumes and EMU volumes healthy and consistent.

Are you comfortable where the third quarter kind of sits now from a Street perspective?

We'll have more to say about that, obviously. But we're very comfortable with our guidance for the full year. And of course, considered the -- all of the dynamics, but the dynamics around the quarter that we had visibility to, in particular, when we set the range so had to slide it in there.

But just with OpEx, you talked about adding some incremental headcount for Project CARE. I mean it's been fascinating to see that you're holding OpEx really stable. You're very cost conscious on, while not sacrificing the growth opportunity. So maybe for Rebecca and for you, Joel, but how are you thinking about managing OpEx and given this growth opportunity in front of you in, let's say, late -- I'll say, late 2025, 2026? Should we be thinking about leverage? Or are there going to be some years or some quarters where you're going to have to spend more in front of the opportunity?

Yes. So I think -- there's a lot there. And thank you for recognizing that we -- and Rebecca is an important part of that due take a very disciplined approach to thinking about our operating expenses, but it is an approach that prioritizes funding key growth and development initiatives as well. So that's really our focus. And I think our operating expense control has really been a balance of improving efficiencies in the business, in particular, some of the G&A aspects of the business while investing in the commercial organization of the business. And we are investing in that organization, both take advantage of the opportunities in the first plank of that strategy that we have in front of us today as well as position us for those future opportunities as well. As I mentioned, we do expect that given that the strategy really builds on itself, we do expect to continue to get leverage from the current organization. But we also do expect to continue to invest incrementally in the commercial organization and in our market development efforts as well. Anything you'd want to provide Rebecca?

Just to emphasize that we're very committed to balancing those 2 objectives, managing our operating expenses effectively, but not at the expense of investing in initiatives that are going to grow our business. I think we've demonstrated that we can balance those and we are committed to continuing to do so.

And maybe just kind of on this topic, too. I don't think you've ever really kind of shared like a pathway to profitability. But I mean, is there like clear line of sight to breakeven? Is that after NAUTILUS gets approved? Just any color that you both could provide there?

Just start us off, and I'll jump in.

Sure. So we have not shared a revenue level that we believe we need to achieve in order to break even. As I'm sure you understand, there are a lot of moving parts associated with that. But I'll just reiterate that we're committed, first and foremost, to growing our top line, ongoing improvements in our gross margin and then managing our expenses. We expect to continue to see progress toward breakeven. And as you know, we've reduced our cash burn substantially over the prior several quarters. And we expect to continue to be on that path going forward.

Yes, I'd just emphasize that. We haven't said -- we haven't commented specifically on the details of it, but obviously, cash flow breakeven and the progress that we're making in the business on managing cash and the burn associated with cash are very much on our minds. And our focus is on the 3 levers of continuing to grow the top line. That's the most important thing we can do, doing so in a way that continues to expand gross margins and doing that with operating expense discipline. So a lot goes into, obviously, the answer to that important point, but it's a big area of focus for us.

Got it. And we only have a minute or 2 left. But Joel, I wanted to ask maybe just in closing, I mean you speak to a number of investors and analysts. But I mean, is there anything that's important to the NeuroPace story that you think is being underappreciated or maybe even being ignored that you would point us towards?

Thanks for that. We do spend time talking with investors. And I don't know that I would say that there's anything that's necessarily ignored about the story. But I would emphasize, and especially given the understandable kind of near-term focus that sometimes things can take, and we understand that, and we're focused on near-term execution very much as well. But I would emphasize the point that just how well positioned we are strategically over the coming period of time. The strategy that we've spent time talking about today is it's underway. And these are real programs with real potential impact that we're executing on and I think represents significant potential opportunities for us to significantly expand access to the therapy, expand RNS, adoption and utilization and really position us for leadership. And so I think that strategic position of the business is something that I do try to emphasize for folks, when we talk about the vision for the business.

Got it. we'll have to close it there. But Joel, Rebecca, thanks to spending time with us today. Really great to hear the update. We look forward to it. Thanks very much, Drew.

Thanks, Drew.