Neuropace, Inc.

Good morning, and welcome to NeuroPace's first quarter earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Baxo from Gilmartin Group for a few introductory comments.

Thanks, Operator. Good morning, and thank you for participating in today's call. Joining me from NeuroPace are Mike Favitt, CEO, and Rebecca Kuhn, CFO. Earlier today, NeuroPace released financial results for the quarter ended March 31st, 2021. A copy of the press release is available on the company's website. Before we begin, I'd like to 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 safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. All forward-looking statements, including those relating to our operating trends and future financial performance, the impact of COVID-19 on our business and prospects for recovery, expense management, expectations for hiring, growth in our organization, market opportunity, revenue guidance, commercial expansion, and product pipeline developments are based upon our current estimates and various assumptions. These statements involve material risk 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 a list and description of the risks and uncertainties associated with our business, please refer to the risk factor section of our public filings with the Securities Exchange Commission, including the final prospectus filed with the SEC pursuant of Rule 424B4 on April 23, 2021, in connection with our initial public offering. The conference call contains time-sensitive information and is accurate only as of the live broadcast on June 3, 2021. 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 Mike.

Thanks, Matt. Good morning and thank you for joining us. Before we get into the details, I would like to take a moment to acknowledge that this is our first earnings call since we completed our IPO and listed on NASDAQ in April. I would like to take this opportunity to say thank you to all who participated in the offering, which raised approximately $105 million in net proceeds, and to those who have invested in the company since. I would also like to again thank the entire Neuropace team, our board of directors, and most of all, our patients and the clinicians who care for them. With all of your support, we are well positioned to take the next steps toward our goal of making RNS therapy the standard of care for drug-resistant epilepsy patients. While many of you had a chance to hear our story during our IPO process, I'll start today's call with an introduction to NeuroPace before moving on to cover recent updates and our vision for the future. Lastly, Rebecca will provide an update on the financial results before we open the lines for questions. NeuroPace is a commercial stage medical device company focused on transforming the lives of people suffering from epilepsy by reducing or eliminating the occurrence of debilitating seizures. Roughly 3.4 million people in the United States are living with epilepsy. While anti-epileptic drugs are available as a first-line treatment, approximately one-third of people with epilepsy are considered drug-resistant since medications are unable to control their seizures. As a result, there are approximately 1.2 million people living with drug-resistant epilepsy in the United States. Many of these individuals have been struggling with the effects of epilepsy for years, often decades, moving from one failed drug therapy to another, struggling with the medication related side effects and the limitations that seizures put on their lives. As a company, we strive to help epilepsy patients regain their lives and reach their full potential. Our RNS system is the first and only commercially available brain responsive neuromodulation platform designed to reduce or eliminate the occurrence of debilitating seizures. Our device continuously monitors brain activity and is programmed to recognize patient-specific patterns associated with seizures. The device is able to close the loop by responding in real time to deliver personalized treatment at the source, preventing seizures before they start. Our RNS system also records ongoing brain activity as patients live their normal lives, giving physicians unprecedented visibility into patients' unique seizure patterns. thus providing insights they can use to optimize therapy outcomes. While comprehensive epilepsy centers, or CECs, offer a variety of therapies for drug-resistant epilepsy, in clinical practice, specific therapy choices are typically based on the patient's type of epilepsy and location of seizure onset. Surgical resection or ablation can be considered for patients with well-identified seizure onset locations. However, Only approximately 20% of drug-resistant epilepsy patients are candidates for surgical resection or ablation because for most patients, removing or destroying brain tissue at the location of their seizure onset would be too damaging or the patients are unwilling to undergo the procedure. In addition to our RNS system, there are two neuromodulation devices approved by the FDA to treat drug-resistant epilepsy, vagus nerve stimulation, or VNS, and deep brain stimulation, or DBS. These alternative neuromodulation devices provide continuous duty cycle stimulation throughout the day and night to a fixed anatomical location, not specific to where the seizure starts. Only the NeuroPACE RNS system provides targeted, personalized therapy that responds to a patient's abnormal electrical activity, delivering real-time stimulation only when and where it is needed, without causing stimulation-related side effects. Only the RNS system from NeuroPace records brain signals associated with abnormal events and provides physicians with information about seizure patterns and trends, helping them to optimize therapy. We have also developed an extensive body of clinical evidence demonstrating that the RNS system dramatically reduces seizure frequency and improves quality of life for adults living with drug-resistant focal epilepsy. In the largest and longest prospective neuromodulation study conducted in epilepsy, our RNS system demonstrated significant seizure reduction through nine years of follow-up and provided enduring improvements in quality of life and cognition. The more recently published results from a real-world retrospective study conducted after FDA approval showed even better results faster. Specifically, the study reported an 82% median seizure reduction at three years of follow-up, demonstrating the utility of our unique brain recordings in driving improvements in therapy effectiveness across patient cohorts over time. We continue to learn and innovate by leveraging our comprehensive brain recording data set, which includes approximately 6.6 million intracranial EEG records. These recordings, along with our data analytics capabilities, allow us to improve our products and offerings, such as through our Insight platform, which provides clinicians with actionable information to help them monitor patient progress, optimize programming parameters, and better counsel their patients. After its recent launch, over 60 centers are already using the Insight platform in their practice. We believe the capabilities of our RNS platform provide a competitive advantage, which allows us to continue to improve therapy effectiveness for people living with drug resistant epilepsy. Additionally, we believe that our platform has the potential to offer a more personalized brain responsive solution for people suffering from other neurologic brain disorders, resulting in improved outcomes. NeuroPACE participates in a large market today with potential to significantly increase the addressable market over time. The 1.2 million drug-resistant epilepsy patients in the United States represent a $26 billion total addressable market. From this group of drug-resistant epilepsy patients, about 50,000 are referred into CECs every year for treatment by epilepsy specialists. Of those 50,000 patients, approximately 24,000 meet our current indication for use and represent an annual core market opportunity of $1.1 billion. Over time, we intend to expand our indication into a broader set of patients with drug-resistant epilepsy. We have an IDE approval for a clinical study to expand our indication into drug-resistant focal epilepsy patients ages 12 to 17 and expect to begin enrollment later this year. Additionally, we intend to expand our indication into generalized epilepsy, the second most common type of epilepsy. We were recently granted FDA breakthrough device designation for the RNS system in idiopathic generalized epilepsy, which we believe will be helpful in expanding our indication into this underserved patient population. We expect to submit for ID approval of a clinical study in this population later this year. Indication expansion into all drug refractory epilepsy patients in the United States would double the size of our addressable market. Market expansion is also possible by increasing referring physician and patient awareness of the advanced therapeutic options available at the CECs. Additional market expansion can come through an increase in the number of epilepsy specialists and CECs treating patients with drug-resistant epilepsy and through expansion into markets outside the United States. Turning to commercial, we have built a direct sales organization across the United States with 43 field representatives. consisting of therapy consultants and field clinical engineers deployed across 21 territories. In 2020, 132 of the approximately 200 CECs in the United States implanted our RNS system. Our commercial efforts include increasing the number of CECs implanting our RNS system, and we intend to have 148 CECs implanting our RNS system by the end of 2021. While we continue to expand into the remaining CECs, most of our growth is coming from increased utilization at centers that have already started to use the RNS system. Today, only a small fraction of the drug-resistant patients coming through the CECs that meet the RNS system indication for use are getting treatment beyond medication. We believe this represents a significant growth opportunity that can be achieved by having more of the epilepsy specialists at the CECs routinely prescribe the RNS system for the appropriate patient. Once at a CEC, a patient typically goes through an inpatient diagnostic evaluation within an epilepsy monitoring unit, or EMU, to determine the appropriate therapy option. It typically takes six months from the EMU diagnostic evaluation until the implantation of our RNS system. Because of COVID, there was a significant reduction in the number of patients coming through EMUs for these diagnostic evaluations. In recent months, we have started to see a recovery in the number of patients coming through EMUs for the diagnostic evaluation. Because of the lengthy timeline from initial EMU admission to RNS system implant, this recent improvement does not impact our business in Q2, but we believe this is an encouraging trend for the second half of 2021. In spite of the delayed impact on COVID recovery for our business, we expect second quarter revenues to increase low single digits compared to Q1. With regard to reimbursement, most of our patients are younger adults with commercial insurance. We have positive written coverage policies from commercial payers addressing over 200 million covered lives in the United States. In addition, Medicare and Medicaid regularly provide coverage. Overall, less than 1% of patients have been denied coverage for the RNS system implant. And with these positive policies in place, obtaining approval has become routine. Lastly, I would like to discuss the transition we made in 2018 when we introduced a new version of our device that extended the battery life to an average of eight years, doubling the battery life of the prior generations. While the longer battery life provides important benefits to patients, revenue from replacement devices will decrease over the next several years as the older devices are replaced with the longer-lasting, newer model. We expect replacement revenues to continue to decrease until early 2024 before revenue from replacement devices starts to increase when the newer generation devices start to be replaced in greater numbers. It is important to point out that we have historically generated a greater than 90 percent replacement rate, giving us confidence that replacement revenue will be a meaningful source of growth following this transition. To summarize, our primary focus is to continue to grow revenue in our current indication. We will do this by continuing to expand into all CECs in the United States, driving increased utilization at these centers, increasing referrals, and investing in innovations to improve patient outcomes and ease of use. We are also investing to expand our indications to younger patients with focal epilepsy, patients with generalized epilepsy, and to patients outside the United States. Finally, we are supporting the early feasibility work that could bring the benefits of responsive neuromodulation therapy to patients with other brain disorders. With that, I will turn over the call to Rebecca, Neuropace's Chief Financial Officer.