Good afternoon, and thanks for joining us at the 23rd Annual Needham Healthcare Conference. I'm Mike Matson, and I lead the MedTech and Diagnostics Equity Research Team here at Needham & Company. I'm pleased to introduce NeuroPace. Presenting from NeuroPace, we have CEO Joel Becker. Joel is going to give a presentation on the company, and then there will likely be some time at the end for questions. If you have any questions you'd like to ask, you can submit them electronically through the Needham Conference website, or feel free to email them to me at mmatson@needhamco.com, and I'll do my best to fit them in. So with that, I'll turn it over to Joel, and I'll come back for the Q&A. Thanks.
Thanks, Mike. Thanks for the opportunity to be here today. Thanks to Needham, and thanks to everybody for joining. I look forward to the opportunity to talk with you about NeuroPace. If you would note our disclaimer slide here. I'd like to start with what really starts everything here for us at NeuroPace, which is the mission of the business. You can see it here, and it's what really animates and catalyzes the activities every day and the decisions that we make. That's to transform the lives of people suffering from epilepsy by reducing or eliminating the occurrence of debilitating seizures. The mission runs through everybody and everything that we do and, again, really forms the basis and the foundation of understanding NeuroPace.
When you think further about NeuroPace, I wanted to go over some of the highlights, many of which I'll cover in the rest of the presentation here today, but starting with some of the foundational elements that really differentiate NeuroPace. First, the presence of a large under-penetrated market, greater than a $55 billion annual TAM or U.S. Addressable Market for drug-resistant epilepsy patients in the RNS System, and a $2 billion original market within the Comprehensive Epilepsy Centers with additional upside coming from expansion outside Level four centers and further indication expansion for the system. A second foundational element here is the unique nature of the RNS System and the technology that's within it. It is a closed-loop, responsive brain neuromodulation system that is differentiated in both its features and its capability. And that really shows up in the compelling nature of the clinical evidence.
We have differentiated outcomes, both in terms of efficacy as well as adverse event rates, and the efficacy continues to improve over time. So those three fundamental pieces of a large under-penetrated market, a unique technology, and then compelling clinical evidence as a result are foundational to the company and the business and the opportunity that we have in front of us. Then when you think about the company, we are focused on operating execution. We realize that we have a tremendous opportunity in front of us. We're animated by the mission to take advantage of it, and we are focused on executing. And when we focus, there's really three key levers that drive our performance. One is revenue and revenue growth. Two is then gross margin and gross margin expansion. And the third is discipline around our operating expense management.
I think, as you'll see as we talk through our recent performance, that we've been focused on and hitting on all three, and that's had a positive effect on the performance of the business. Underneath that lies a healthy balance sheet. We have sufficient capital to support our key operating priorities into 2026, and we're focused on them. Then finally, we'll talk about our strategy, where today we have a focus in the Level 4 Comprehensive Epilepsy Centers with significant growth opportunities in front of us with the second and third planks in our growth strategy of expansion of site of service and market expansion outside of Level 4 centers. Then, as I mentioned, indication expansion into the generalized epilepsy patient population. That's all supported by an experienced management team.
Some of you who we've met with today have met with myself as well as Rebecca Kuhn, our Chief Financial Officer, and Dr. Martha Morrell, our Chief Medical Officer. I would also highlight here, who's really a fixture in the epilepsy community. Then Kelly Nicholas, our Vice President of Sales, who's leading a lot of the execution and the team responsible for a lot of the growth that we've seen so far. Those key business elements underpin with an experienced management and leadership team. On to epilepsy and some more of the detail around epilepsy. Drug-resistant epilepsy is our focus, and it is a devastating, highly under-treated disease, as I mentioned. Epilepsy itself is a disorder in which abnormal electrical activity in the brain causes seizures. It's the fourth most common neurologic disorder in the United States.
It has tremendous economic impact with greater than $28 billion in direct costs in the United States. It also has a tremendous impact on patients' lives. There's a lot to talk about here, but things like 2-3 times higher unemployment among epilepsy patients, adult epilepsy patients not being able to drive or take care of basic daily needs like being able to sleep alone or shower alone. Unfortunately, drug therapy has been found over time to be unable to control seizures in about a third of these patients, and so they're found drug-resistant. To say a little bit more about that drug-resistant nature of epilepsy, there are 3.4 million people in the U.S. with epilepsy, and about a third of them, about 1.2 million people, have tried and failed multiple anti-epilepsy drugs.
What we know is that if you have tried and failed more than two anti-seizure medications, the chances of a third one working for you are less than 5%. And so what we see is we see patients that go through a journey of polypharmacy and multiple medicines, different dosage, different combinations in dosage, and ultimately end up being characterized as patients who are drug-resistant and then need to be evaluated for alternative therapies. In fact, as you can see here at the bottom of this slide, the International League Against Epilepsy guidelines that were published in 2022 actually calls out patients who may not appear to be appropriate patients for epilepsy surgery and are drug refractory should be referred on to a tertiary epilepsy center to be evaluated for other potential interventions.
Really, the guidelines calling out the need for and the importance of referring patients that are drug refractory for additional therapy options. That really leads us to the RNS System. Here I would want to describe the RNS System to you as a unique and novel brain-responsive neuromodulation system that provides a unique window to the brain. The way that we do that is we're able, through an implantable neurostimulator in two implantable leads, to monitor continuous brain activity, recognize and respond to specific patient seizure patterns, and then record that data on an ongoing basis for physicians to be able to review. As a result, our epilepsy treatment can be personalized and targeted and data-driven. As a result, over time, we're able to tailor the therapy that we deliver for patients. Where that shows up is really in the data.
I'm just going to jump back here just real briefly. Our ability to identify seizure triggers, monitor the effect of therapy changes so we can see, as you can see in the graph there, when we make a therapy change or something else has changed in the patient's medical regimen or otherwise lifestyle, we can track that and see that, and that can inform how we both detect and treat seizures going forward and how we monitor patients. Where that turns out to be important, where all that device capability and technology sophistication and our ability to monitor, sense, and respond, and then analyze that data really shows up is in the data. And here you can see the data itself. Two different studies here presented on the page. And what you see is in the dark blue bars, the results of our original FDA study.
Now, after nine years of evaluation, there's a couple of things I'd like to call your attention to. One, median seizure reduction rates of 75%. So, tremendous seizure reduction rates out over time. And as you can see, those results have continued to improve over time. And the second thing that I would call your attention to in the light blue bars here is our real-world and FDA post-approval study results, which out over three years have also continued to improve with 82% median seizure reduction rates also improving over time. And as you can see here, also starting at a higher rate.
I think that really owes to what we have learned and have been able to then tailor in our treatment approaches for patients over time, so both being able to start patients at a higher level as well as then continue to improve and increase treatment efficacy. Unique and differentiated technology that has resulted in unique and differentiated clinical data as well. When patients are drug-resistant, they do have alternative treatment options. Here I'd like to walk you through some of the options that they have and some of the implications of those options. Classically, patients who are drug-resistant would be evaluated for epilepsy surgery. For about 20% of patients, epilepsy surgery can be a very good therapy option. I'll talk a little bit more about some emerging thinking about how epilepsy surgery can be combined with RNS therapy here in a moment.
But surgery, by its definition, either resection or ablative surgical procedures, are irreversible by nature, and they do carry risks. Memory risks, recall risks, as well as the potential to lose some of the visual field are all part of potential neurocognitive risks associated with surgery and provide for alternative neuromodulation therapy options. Some of those other options, some of the neuromodulation competitors, are VNS, vagal nerve stimulation, and DBS, deep brain stimulation. Those therapies have some drawbacks as well. In particular, there are procedural drawbacks as well as therapy and outcome drawbacks. For one, you have a fixed anatomical target. You're either restricted to the vagal nerve or a very specific target with VNS or a very specific target when it comes to DBS. And they're not responsive to brain activity.
These approaches are what we call duty cycle technologies, where the technology is programmed to be on for a period of time and then off for a period of time. As a result, what you see is that there are lengthy stimulation cycles where patients end up with hours of stimulation of their brain per day because that's what the technology has been programmed to versus what their brain requires. And in epilepsy patients, what we find and what we find with RNS therapy is that they require minutes of therapy a day.
As a result, when you stimulate when the brain doesn't need it and stimulate for hours of time when the brain doesn't need it, we see that there are adverse events and adverse effects that result in increased levels of depression, memory impairment, sleep disruptions, etc., in addition to not being able to provide recording, monitoring, and analysis of trends of that data as well. These are all applications that are addressed with the flexibility of RNS therapy, the flexibility to provide therapy at the seizure source and only when it's needed, flexibility with regard to lead placement and location, as well as reduced adverse event rates that go along with that. Looking further here then to the epilepsy population in the United States. As I mentioned earlier, there are about 1.2 million patients in the United States that are drug-resistant epilepsy.
About 50,000 of those patients are referred annually into Comprehensive Epilepsy Centers, and about 6,500 of those patients receive treatments beyond drugs on an annual basis as well. When we look at the population segmentation of that 50,000 patients, about 60% or 30% of the epilepsy population in Comprehensive Epilepsy Centers are focal patients, and that equates to about a $1.4 billion U.S. core market, as well as then about 20% or 20,000, rather, 40% are generalized patients, about a $900 million core market, which we're addressing as part of our Nautilus study into idiopathic generalized patients that I'll address here in a moment as well.
But a lot of our focus is really on closing the treatment gap, and that is both within the 50,000 patients that are admitted to comprehensive epilepsy centers each year and then for the remaining patients within that 1.2 million that results in that $55 billion a year-plus total addressable market. What can we do to close the treatment gap for patients who aren't receiving access to or have access to but aren't receiving RNS therapy? That's a lot of where our strategic focus is, and a lot of the opportunities that we see going forward and I'll spend some of the balance of our time here talking about those. Our strategy is clear and simple. We're focused on expanding therapy utilization within our core level four comprehensive epilepsy centers, one.
two, expanding therapy availability by moving outside of the level four centers and increasing clinician access to RNS. And then number three, expanding patient eligibility by broadening indications for the RNS system. So with those three things, we're able to expand out from the 160 or so customers that we have today and the 50,000 or so patients that are treated within comprehensive epilepsy centers to physicians outside of level four centers and the remainder of that 1.2 million drug-resistant epilepsy patients. And I'll talk to you now a little bit about what we're doing to affect those three strategies. With regard to expanding utilization of RNS therapy within our level four centers, we're really focused on what we call telling the modern RNS story and expanding utilization and adoption for RNS within level four centers and within the focal adult drug refractory population.
The way that we do that is the modern RNS story, both in terms of clinical application, which you can see here. Historically, many clinicians would have used very targeted stimulation for discrete onsets. And even inside of that particular patient subsegment, you can see here further segmentation of patients for either bilateral or suspected bilateral mesial temporal lobe epilepsy, eloquent cortex, deep brain structures, and kind of had a niche approach to the utilization of RNS therapy. And recent clinical advances, as well as some of the unique nature of the RNS therapy, have really allowed us to work to expand that clinical thinking into treating epilepsy as a network disease, as well as treating epilepsy in therapy combinations to augment surgery.
For example, I had mentioned earlier 20% of patients where surgery is a good treatment option for those patients, being able to use RNS therapy and our ability to monitor and record brain activity as a way to either supplement therapy so the patient has an RNS system as well as receives a surgical procedure or receives an RNS system as a way to inform the best location for a surgical procedure going forward.
So working on the modern RNS story to increase adoption and utilization in Level four centers, both with evolution in clinical thinking as well as we've made significant progress on the RNS platform where for things like improved efficiency and availability of analysis of the data, we've recently introduced software, our nSight software we call it, which provides for being able to identify and pull forward the most important pieces of the data that we can provide, highlight that for clinicians, and then even provide programming parameter suggestions that the clinician can then use to assess how they want to program the patient going forward. So the first part of the strategy, you're increasing adoption and utilization in our Level four centers.
The next piece is really expanding our market opportunity, and that's what we call our Project CARE initiative of bringing the RNS System to qualified clinicians and centers outside of Level four centers. In 2023, we received approval of a PMA Supplement that allows us to move from the core Level four center focus and expand into the additional 1,800 epileptologists. So there are a total of 3,000 board-certified epileptologists in the United States respond to or bring access to the technology to the incremental 1,800 epileptologists outside the Level four centers, as well as the rest of the functional neurosurgery community. A significant expansion of the 60% of the market, the 720,000 or so patients that are focal patients, all but 30,000 of those are out in the community, not in the Level four centers on an annualized basis.
And so this really provides us an opportunity to increase access for both clinicians as well as patients that can be treated well outside of Level four centers. And interestingly, what we have found is while there were absolutely good segments of patients that can be treated well outside the Level four centers, what we've also found now getting started with our pilot program activities is there are also patients out there who are being uncovered and can be referred back into Level four comprehensive epilepsy centers as well. So really having a reinforcing effect with the first part of our strategy here of expanding in Level four centers, expanding outside Level four centers allows us to both treat patients while there as well as refer additional patients that are identified back into those centers.
The third piece of the strategy, indication expansion, is really focused on generalized epilepsy and is the subject of our clinical trial work in both the Nautilus Trial as well as our work in Lennox-Gastaut. I'll focus mostly on our work in the Nautilus Trial here, but generalized epilepsy comprises 40% of the drug-resistant epilepsy market. Importantly, it's also patients who have a shorter diagnostic process. Focal patients, in their diagnostic journey, undergo a Phase I testing and then need to undergo phase two testing as part of a referral into a Level four center in an epilepsy monitoring unit to localize or determine the spot of focal origination of the epilepsy. Generalized patients, by definition, don't need, don't require that second step of phase two diagnostic testing because, by definition, it's generalized, and there isn't a local spot of epilepsy to be located.
This study has recently completed enrollment, and we've also announced that we've completed implants for the minimum number of patients required for submittal to the FDA of the trial. The study has primary safety endpoint as well as then a one-year follow-up from the last patient implanted. So we're now into the follow-up phase with this study. We're really excited about the enthusiasm and the pace of enrollment in the trial. We think that demonstrates the interest both from the clinical as well as patient communities. I would just make the point here that with the successful approval of the trial, the RNS System would be the first neuromodulation system with a generalized indication in the United States.
So when we think about all of those different pieces, the three different pieces of the study, of the strategy, rather, rolled together, we're focused on closing the treatment gap, and we're focused on increasing adoption and utilization across clinicians with both current as well as new prescribers in our Level four centers. We're also focused on expanding access to the RNS System outside of Level four centers, both with patients that can be implanted in a center outside of Level four centers as well as then building referral pathways. We have initiated pilot program activity here with regard to our outside Level four expansion and expect to continue that pilot program expansion throughout 2024. And then we're also working to expand patient indications with regard to Generalized Epilepsy. You can also see, hopefully, here through this slide, those things all build on one another.
Our presence in the community allows us to treat patients well outside of Level four centers as well as refer patients into Level four centers. And while we're doing that, we're also establishing a presence outside Level four centers and building a beachhead, as it were, such that as we pursue the Nautilus trial in parallel, assuming successful completion of that trial and then approval of the RNS System to be able to treat generalized patients, those patients don't require referral into Level two centers. So they could also be treated outside of Level four centers.
You can see here how all of these pieces work together to expand our addressable market and our customer population from the 160 or so comprehensive epilepsy centers and the 30,000 or so adult focal patients that we see today to really expansion to cover across the appropriate clinician community as well as the preponderance of that 1.2 million drug-resistant epilepsy patient population. That's the core of our strategy and where our focus has been. We have also recently announced, further to the point of our ability to monitor data and the importance of our ability to analyze that data, a strategic collaboration with an early-stage biotechnology company who's entering a Phase II clinical trial.
It's a first of its kind collaboration where we're extending the benefits of that data monitoring and analysis capability, where we make information and insights available to patients who are enrolled in that trial who are already RNS patients. It leverages our ability to monitor, sense, and record that brain activity and offer insights into those future therapies for how patients respond to this novel compound. This really shows how tailored therapy is. It's a nice external marker of validation of the value of that data of what we really do every day. Patients out in the community every day with RNS systems are being able to be treated with that window into brain activity by their clinicians to monitor detection and treatment parameter settings, monitor medication management, and lifestyles. This is an example of the strategic value of that to someone who's entering a clinical trial.
We think a very interesting and exciting opportunity for us as we go forward around the value of the clinical data. Additionally, within our product portfolio, 2023 was our first full year of distribution in a partnership with a company by the name of Dixi Medical. They offer a comprehensive solution of stereo EEG electrodes, which are lead electrodes that are used to localize seizures. So I mentioned focal patients being referred to level four centers for the localization of their seizures. These stereo EEG leads are used to localize the starting location as well as the network of transmission of the seizures. And it's a less invasive, faster patient recovery way that is rapidly becoming the predominant approach for intracranial monitoring. So it's great for us to have that product as part of our portfolio that we sell.
It's also been great strategically for us to be involved with almost vertically integrating, if you will, up the diagnostic pathway with patients and customers who we get increased in further access to patients earlier in the diagnostic workup that may eventually become candidates for neuromodulation and RNS therapy. So we're really pleased with what we've seen in terms of the adoption, both practically as part of the product in the bag as well as strategically. So that's really our approach to closing the treatment gap. We're focused on developing referrals into the epileptology community and reaching out within the epileptology community to expand both our clinical footprint and our indication expansion, and then working on both increasing adoption as well as utilization within the Level four comprehensive epilepsy centers and referral back into those centers as well. That has resulted in the following financial performance.
We have seen revenue growth, as you can see here, from fourth quarter a year ago of $12.8 million to fourth quarter in 2023 of $18 million, a growth rate of 41%. And that has resulted in a gross margin of 75.2%, so gross margin improvement as well with good discipline and control on our operating expenses. So when I opened the presentation, I mentioned that we're really focused on three levers: revenue growth, gross margin expansion, and operating expense discipline. And you can see that here. Looking forward to 2024, we have established revenue guidance for the year of $73-$77 million, growth of 12%-18% implied there with the $75 million midpoint at 15% growth, gross margin of 72%-74%, and operating expense profile of $80-$84 million.
So in summary here, we feel like NeuroPace is positioned for growth, and we're very much focused on our revenue profile and the operating discipline as well as resulting discipline around cash management that you would have seen from us as well, prioritizing increasing adoption and utilization within our Level Four Comprehensive Epilepsy Centers, expanding our care pilot activities outside of Level Four centers, as well as expanding into the generalized epilepsy market through the Nautilus Trial, really immediate term, near term, and medium term growth opportunities to further the mission of transforming the lives of patients suffering from debilitating seizures. With that, I appreciate your attention, and I'll open for questions.
Yeah. Thanks, Joel. I guess first, you saw improved revenue growth or revenue performance in 2023. Can you maybe just talk a little bit about that and kind of what drove that?
Absolutely. Thanks, Mike. Yeah, we did see improved revenue growth in 2023. That was primarily driven by sales of the RNS System. We saw good contributions in growth from the DIXI product line as well. And then we did have some initial contribution of revenue in the fourth quarter of 2023 from our collaboration relationship with the biotech company as well. So growth across the business, but primarily driven by sales from the RNS System.
Okay. Then you talked about sort of two main growth drivers, so expanding beyond the Level 4 centers and then indication expansion into generalized epilepsy. How should we think about the timing and magnitude of these opportunities?
That's a great question. I really would just emphasize that I think the strategy is three planks, and they all work together. One, immediate term, the opportunity to continue to increase utilization and adoption within the Level 4 CEC centers. That's what's grown and developed the business that we have today, and we see ongoing opportunity to do so. Two, the outside Level 4 center expansion, we think has two benefits there. One, patients that can be treated well with direct RNS therapy outside Level 4 centers gives us the opportunity to do that. But then, as I mentioned, also uncovering, rather, patients that can be referred back to our core customers.
As we've gotten started with our pilot activities, and I'll talk about the timing on that here in a second, but as we've gotten started with our pilot activities, we're finding both, both the patients that can be implanted and cared for well outside level four centers and then uncovering patients that maybe wouldn't have been that were out in the community that can be referred back who, for whatever reason, either their relationships weren't there from a referral perspective or there were concerns about continuity of care and being able to get patients back into their original practice. We see both implant opportunities as well as referral opportunities with that expanded customer footprint. We are just starting the pilot activities for that expansion here in the first half of 2024.
They're underway, and we expect those to continue here as we learn more and expand into the second half of the year. With regard to Nautilus, we announced that in Q4, we had completed enrollment for the Nautilus trial designed to expand our indications into generalized epilepsy. The timeline there is our efficacy follow-up is one year from the final implanted patient. So we have a one-year follow-up timeframe there. And then following that, of course, we'll organize and analyze the data, prepare our submission, and then submit a PMA supplement to FDA following that.
Okay. That's helpful. And then just wanted to see if you could give some additional color on the biopharma collaboration. What are you learning from that relationship? And can we see additional deals like this from here?
So it's been a great collaboration. I think a couple of things that we've learned is, one, the analysis and insight that we can provide into data is valuable as people think about how to treat patients and how to evaluate the response of patients to different changes in their therapy. And we do think there are future potential opportunities for us, both as it relates to the RNS System itself as well as to future potential collaborations on a more macro basis with regard to exploring and understanding the value associated with the data from the system and how that can be used to monitor and help tailor therapy for patients.
Okay. Got it. Thank you. I think we're almost out of time, so we're going to have to wrap up there. But thank you, Joel. I hope you had some good meetings today and look forward to seeing you when you report your first quarter results.
Thanks, Mike. Thanks again for the opportunity to both present here today as well as to meet with folks throughout the day. Appreciate it.
All right. Thanks.