Neuropace, Inc.

Good afternoon and welcome to NeuroPace's fourth 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 the Gilmartin 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 Favit, CEO, and Rebecca Kuhn, CFO. Earlier today, NeuroPace released financial results for the fourth quarter and full year ended December 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 meeting 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 clinical trials and those relating to our operating trends and future financial performance, FDA approvals, 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, product performance, and product pipeline development are based on 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 a more detailed description of the risks and uncertainties associated with our business, please refer to the risk factors section of our public filings with the Securities and Exchange Commission, or SEC, including our quarterly report on Form 10-Q filed with the SEC on November 10th, 2021, the annual report on Form 10-K for the year ended December 31st, 2021, to be filed with the SEC, as well as any 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 the live broadcast on March 10th, 2022. 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. And with that, I'll turn the call over to Mike.

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. For today's call, I'll provide opening comments and a business update, followed by Rebecca, who will provide additional detail regarding her quarterly results and 2022 guidance before opening the call to Q&A. Moving to our quarterly revenue results. Consistent with our pre-announcement on January 11th, total revenue for the fourth quarter of 2021 was $11 million. Initial implant revenue in the fourth quarter of 2021 was $8.5 million, representing 9% growth over the third quarter of 2021 and 10% growth over the fourth quarter of 2020. For the full year 2021, we generated revenue of $45.2 million, representing growth of 10% compared to full year 2020. Despite the continued COVID-19 impact, we navigated quite well through the pandemic in 2021, And I'm proud to report that initial system implants represented 75% of our revenue in 2021 and grew at 20% over 2020. Before providing a business update, I want to speak to trends we experienced in the fourth quarter of 2021 that extended into the first quarter of 2022. While pleased with our initial implant growth in the fourth quarter, it is important to point out that we did see business impact due to the Delta variant at the beginning of the quarter, and Omicron variant cases started to impact our business in late December. As we entered the first quarter of 2022, headwinds associated with the surge in Omicron variant cases were severe in January, causing revenue to sequentially decline from December. The decrease in January procedure volumes was driven by temporary limits on elective procedures, staffing shortages, and patient COVID infections. As a result, January was one of our most COVID-impacted months of the pandemic. However, the operating environment has improved. In the month of February, we saw a marked improvement off of January levels, with improving trends continuing into March. Throughout the pandemic, we have seen the volume of patients going through the epilepsy monitoring units, or EMUs, reduced compared to pre-pandemic levels. As a result, we believe there is an increasing backlog of patients at the EMUs. As we have discussed previously, it takes about six months from initial EMU admission to RNS system implant. We expect that EMU volumes will eventually return to pre-pandemic levels and grow from there, creating significant opportunity for our business. The progress we have made and the investments we are making to increase the number of implanting centers and to increase utilization are positions us well for when EMU volumes increase. Now let me provide you an update on our key initiatives as we look to extend our leadership position and drive long-term growth, starting with our commercial organization and our focus on increasing awareness and demand generation. As we have communicated throughout the pandemic, COVID has presented a number of unique challenges which have impacted our patients and our commercial efforts. Given this reality, we believe it is more critical than ever to make investments in the commercial channel. We will continue to increase the number of implanting centers and increase the utilization rate of our RNS system within the implanting centers. One area we are increasingly focused on is targeting epilepsy specialists who practice outside of level four centers. Over the last few years, the number of epilepsy specialists has grown significantly. and it is our understanding that there are now more epileptologists practicing outside of level four comprehensive epilepsy centers than within level four CECs. We plan to educate these epilepsy specialists about the RNS system and to help them collaborate with CECs to have their patients treated with the RNS system. Through these relationships, we can make RNS therapy available to a larger number of patients with ongoing device programming and patient management provided by epilepsy specialists practicing outside level IV CDCs. In order to do this, we are accelerating hiring within our field organization. We ended 2020 with 42 field representatives, and the size of our field organization did not materially change in 2021. Given the investments we are making, we expect to end 2022 with approximately 56 field representatives. with most of those additions coming in the first half of the year. This would get us to the size field organization we initially anticipated having at the end of 2023 a year earlier. It takes time for a new hire to be fully productive, and we want to ensure that our team is in place and productive as we anticipate the increase in patient volumes in coming quarters. We are also driving demand generation by identifying and educating drug-resistant epilepsy patients earlier in their treatment journey. as they consider treatments beyond medication. We intend to expand our multi-channel marketing programs, including an increase in digital and social advertising, lead generation efforts, and patient-ambassador connections. As we connect with more RNS candidates earlier in their care journey, our patient education team will provide information about NeuroBase's RNS system and guide appropriate patients through the process. Moving to recent clinical updates and future indication expansion opportunities. As communicated on our last earnings call, we received IDE approval from the FDA for our Nautilus pivotal trial to support a PMA supplement to expand our indication to include primary generalized epilepsy. We remain on track to enroll our first patient around the middle of 2022. In addition to the large market opportunity for generalized epilepsy, there are important differences from our current focal epilepsy patient population that make this an excellent opportunity for our RNS therapy. First, diagnosis of generalized epilepsy can often be established with an outpatient EEG and does not require intracranial monitoring. In contrast, seizure onset localization for patients with focal epilepsy requires a one- to two-week hospital stay in the EMU for non-invasive monitoring. Approximately 70% of our patients are admitted for a second one to two-week stay in the EMU with temporary electrodes implanted in the brain to identify the seizure onset location. As a consequence, on average, it takes focal epilepsy patients approximately six months from the initial EMU admission until the implantation of the NeuroPACE RNS device. For generalized epilepsy, we expect the path from diagnosis to our NS treatment to be shorter and simpler. Another difference with generalized epilepsy is that there are no surgical alternatives to treat generalized epilepsy since there is no focus that can be resected or ablated. Upon FDA approval, we expect a relatively fast commercial rollout because we anticipate selling to the same physicians who are already treating focal epilepsy patients using the same neuroface device. We are excited to start enrollment in the Nautilus study and look forward to an indication expansion into this large and underserved patient population. While progress on the response study for patients aged 12 to 17 with focal epilepsy has been slower than expected, the first patient enrolled in the study was recently implanted with the RNS system. We expect to continue to support the response trial in 2022 and look forward to seeing the impact of our RNS system on patients going through the study. Next, I would like to provide an update on the estimated battery life of the neurostimulator we have been selling since 2018. I am pleased to announce that we received approval from the FDA to update our labeling to claim an estimated battery life of nearly 11 years under typical use conditions. This represents more than a two-year increase from our previously 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, which have much shorter expected battery life. Given the relatively young age of our patients and a replacement rate of over 90%, this change brings significant benefit by reducing the number of required replacement procedure 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 continue our pivotal trial to support expanding our indication to adolescent patients. While the longer battery life is of significant benefit to our patients, it will reduce replacement implant revenue in the coming years, as was communicated previously. To provide increased transparency, as of the end of 2021, there were 282 patients being actively treated with first-generation devices. We expect approximately two-thirds of those devices to reach the end of their battery life in 2022. As I look back on 2021, I can proudly say we have been able to make significant progress on key company milestones. On the clinical side, we enrolled our first patient in the adolescent study and received breakthrough device designation and IDE approval for the primary generalized epilepsy indication study. Important steps to expand our indication and market opportunity. On the commercial side, we were able to make significant progress by expanding into 150 implanting centers, driving increased utilization, and expanding the number of physicians prescribing and programming our RNS system. Lastly, we completed a successful IPO in April, raising net proceeds of $105.5 million and and growth capital to facilitate investments to make RNS therapy the future standard of care for epilepsy patients globally. With that, I will turn the call over to Rebecca, Neuropace's Chief Financial Officer.