Neuropace, Inc.

Good afternoon and welcome to NeuroPace's third quarter earnings conference call. At this time, all participants are in 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 Baxill from the Gil Martin Group for a few introductory comments.

Thank you, Operator. Good afternoon 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 September 30th, 2021. A copy of the press release is available on the company's website. Before I 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 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 include those around NeuroPACES clinical trials and those relating to our operating trends and future financial performance, FDA approvals, the impact of COVID-19 on the business, and prospects for recovery. Expense management, expectations for hiring, growth in our organization, market opportunity, revenue guidance, commercial expansion, product performance, and product pipeline development are based upon our 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 factor section of our public filings with Securities Exchange Commission, or SEC, including our quarterly reports on Form 10-Q filed with the SEC pursuant to Rule 424 on August 12, 2021, as well as any reports that may be filed with the SEC in the future. This conference call contains time-sensitive information, which we believe is accurate only as of the live broadcast on November 10, 2021. or PACE 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'll turn the call over to Mike.

Thanks, Matt. Good afternoon, and thank you for joining us. Following a very strong second quarter where we reported record initial implant revenue and continued momentum following our initial public offering, we experienced COVID-19-related headwinds in the third quarter. Early in the quarter, we saw unusual seasonality associated with increased patient and provider vacation demand. Later in the quarter, we were negatively impacted when procedures, including initial RNS system implants and EMU diagnostic procedures, were postponed or delayed. This was primarily a result of hospital restrictions on inpatient elective procedures due to the Delta variant hospital staffing shortages, and patient reluctance to be in the hospital. While initial implant revenues declined sequentially in the third quarter, I am extremely proud of the NeuroPACE team's resiliency during this challenging and dynamic period. Despite the recent COVID-19 headwinds, we did increase the number of active accounts and physicians in the third quarter. As of November 1st, 140 centers have completed an initial implant this year, with additional sites scheduled to complete a procedure by the end of 2021. We have also continued to improve product performance in ways that we believe are important for patient adoption and to make progress toward expanding indications and increasing the market opportunity. It is important to point out that a year-over-year comparison may not be particularly helpful given the third quarter of 2020 was an entirely different environment. Specifically, in the third quarter of 2020, we experienced strong growth from cases that were rescheduled from the start of the pandemic, whereas in the third quarter of 2021, inpatient elective procedure volumes were significantly disrupted due to COVID-19, leading to implant procedures for our device being delayed beyond the third quarter. While we believe that Delta variant infection rates and hospitalizations have declined since the recent peak, Based on our estimate, EMU patient volumes continue to remain below 2019 levels, as they have throughout the pandemic. We are confident in our ability to recapture postponed cases, but frequent and unpredictable surges in COVID infection rates, in addition to staffing shortages, risk-averse patient behavior, and hospital restrictions on elective procedures continue to impact the number of patients moving through the diagnostic process at CECs. Since our business is largely dependent on EMU diagnostic evaluations, we believe our organic initial implant growth will be impacted and now expect growth to be in the low to mid 20% range annually until we emerge from these macro headwinds. We continue to have a high degree of confidence in our ability to activate new centers and drive utilization within those centers, but our previous initial implant growth assumptions were predicated on COVID-19 headwinds subsiding. resulting in a stable and growing EMU diagnostic patient funnel. Next, I would like to provide an update on the estimated battery life of the neurostimulator we have been selling since 2018. We recently submitted a premarket approval application supplement to the FDA that, if approved, will allow us to claim an increase in the estimated battery life of this device under typical operating conditions to nearly 11 years. This represents more than a two-year increase from our currently approved labeling. We believe that a longer battery life removes an important barrier for initial implant adoption and gives us a distinct competitive advantage over other neuromodulation devices for epilepsy. Given the relatively young average age of our patients and a replacement rate of over 90%, this change brings significant benefit by reducing the number of required replacement procedures over a patient's lifetime. We believe that providing an estimated service life of nearly 11 years with no recharging burden will enhance the patient experience, especially as we look to expand our indication into younger patients. We believe that it will make us a more attractive treatment option compared to other neuromodulation devices with five to seven years of longevity, potentially fueling future initial implant growth. While the longer battery life is of significant benefit to our patients, it will reduce replacement implant revenue in the coming years, including by approximately $2 to $2.5 million in 2022. Moving on to clinical updates. Today, we announced that we received IDE approval for a pivotal study to expand our indication for drug-resistant idiopathic generalized epilepsy, otherwise known as primary generalized epilepsy. Given the timing of this approval, we believe that we are in a favorable position to begin enrollment in 2022. As a reminder, we received breakthrough device designation from the FDA for this indication earlier this year. Additionally, we continue to make progress toward beginning enrollment in the IDE clinical study to expand our indication for drug-resistant focal epilepsy to younger patients aged 12 to 17. Lastly, our RNS system was recently highlighted in a Nature Medicine Journal article on October 4th titled Closed Loop Neuromodulation in an Individual with Treatment-Resistant Depression. The article features a woman who became the first patient to be implanted with our RNS system in an investigational study being conducted at UCSF to treat severe treatment-resistant depression. Similar to the therapeutic approach used for epilepsy patients treated with our RNS system, surgeons were able to calibrate and detect neural activity patterns that occur when a patient is becoming depressed. Once detected, our RNS system was used to deliver pulses of electrical stimulation to stave off depression. This is the first known study of our device in this patient population. While patient stories like this are encouraging, it's important to note that any potential indication for depression is many years away. That said, we continue to believe the RNS system is a truly innovative neuromodulation platform that has the potential to be used to address a variety of diseases. Before we move on to financial results, I would also like to update you on a change in our board makeup. As of November 1st, we added Lisa Andrade to the board, replacing Evan Norton. Lisa joined NeuroPace with over 25 years of experience in both large and early stage med tech, software, and technology companies. Currently, Lisa is CEO of M33, an executive coaching and leadership development firm, which she founded in 2018. Prior to founding M33, she served as chief marketing officer at St. Jude Medical, which was acquired by Abbott in 2017. We are excited to welcome Lisa to our board of directors as she brings a wide range of strategy, product development, and marketing leadership expertise. Lisa's breadth of experience in growing medical device businesses will be a valuable asset to NeuroBase as we continue to execute our commercial strategy. I would also like to thank Evan for his service as a board member of NeuroBase. Evan was and continues to be a big supporter of and advisor to the company. which was especially beneficial during the execution of our IPO earlier this year. In conclusion, our primary focus is to continue to grow revenue from initial system implants in our current indication. We intend to do this by expanding into all CECs in the United States, driving increased utilization at these centers, enhancing referral pathways, 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 exploring potential opportunities outside the United States. Finally, we are supporting the early feasibility work, such as the UCSF study on treatment-resistant depression, that could bring the benefits of responsive neuromodulation therapy to patients with other brain disorders. With that, I will turn the call over to Rebecca, NeuroPACE's Chief Financial Officer.