NeuroPace Inc Q1 FY2025 earnings call

Management Statement and Operational Highlights:

• Clinical Development: Made progress on key programs including the Post-Approval study in adults with focal epilepsy, presenting three-year effectiveness data at the American Academy of Neurology Annual Meeting showing an 82% median reduction in seizures. Progressed on the NAUTILUS Idiopathic Generalized study with primary safety and effectiveness endpoint evaluations ongoing. Worked on pediatric focal epilepsy indication expansion with FDA and NEST.
• Strategic Initiatives: Held an Investor Day in January to articulate long-term vision, completed a $75 million follow-on equity financing, refocused product portfolio on higher margin RNS business, and completed one-year follow-up of the NAUTILUS study.
• SEEG Distribution: Terminating distribution of SEEG products, with the transition to wind down the relationship from Q3 2025 through Q1 2026. This enhances margin profile as RNS System has higher gross margins.

Segment Performance:

• RNS System: Generated significant revenue growth. In the first quarter of 2025, RNS sales increased by 26% compared to the prior year, and by 29% when excluding the impact of NAUTILUS study implants in Q1 2024. RNS gross margin is over 78%. Revenue contribution is substantial, driving overall growth.
• DIXI Medical SEEG products: Contributed to revenue growth in the quarter but had lower gross margins historically (around 50%). The company is winding down distribution of SEEG products, with no material revenue impact expected in 2025 as remaining inventory is sold during the transition period.

Guidance:

• Revenue: Increased total revenue guidance to a range of $93 million to $97 million for 2025, representing a 16%-21% increase from 2024, driven mostly by RNS System sales with SEEG products also contributing.
• Gross Margin: Expect gross margin to be in the range of 73% to 75% for 2025, with potential quarter-to-quarter variability due to mix of revenue.
• Operating Expenses: Anticipate operating expenses for 2025 to range between $92 million and $95 million, including approximately $11 million in stock-based compensation.
• Cash Flow: On track for cash flow breakeven by year-end 2027.

Risks:

• Trade Policies: Minimal impact from U.S. Government trade policies on operations and financials, but still a risk factor.
• Transition from DIXI: Ensuring a smooth transition for customers and maintaining visibility in the patient referral and diagnostic process as SEEG distribution is wound down.
• Gross Margin Fluctuations: Potential quarter-to-quarter variability in gross margin due to fluctuations in the proportion of SEEG revenue to total revenue and other factors.

Question and Answer: Q: Mike Kratky asks about the 77% gross margin in the quarter and if there's negligible DIXI revenue.

A: Joel Becker and Rebecca Kuhn respond that gross margin was strong due to RNS business performance, including increased production volumes and price increases.

Q: Nelson Cox inquires about Project CARE's impact on referral volumes in Level 4 centers.

A: Joel Becker explains that Project CARE is driving increased referral volumes from Level 3 community centers to Level 4 centers, with dynamics around contracting and infrastructure development for care centers.

Q: Ross Osborn asks about getting docs up to speed on RNS procedures in community settings.

A: Joel Becker states that training and support for physicians is similar across centers, with some centers having familiarity with neuromodulation, and support required for contracting and infrastructure development.

Q: Priya Sachdev follows up on gross margin guidance and post-approval study data.

A: Joel Becker discusses that gross margin can fluctuate quarter-to-quarter, and the post-approval study data has been well-received, with strong reaction from customers due to significant seizure reduction and freedom rates compared to other neuromodulation options.

Q: Rohin Patel asks about Project CARE KPIs and RNS product features.

A: Joel Becker mentions RNS growth in Q1 driven by implants/referrals from CARE and Level 4 centers, and updates on software release for 2025, remaining on track for second half of the year with focus on ease of use and efficiency.

Q: Michael Polark asks about losing upstream visibility with DIXI exit.

A: Joel Becker states that while some upstream visibility was gained through DIXI, relationships will be transitioned smoothly, and the company will continue to leverage existing relationships for patient care.