Good morning, everyone. I'm Lily Lozada. I'm on the MedTech team here at JP Morgan, and I'm happy to have the NeuroPace management team with us here today. I'll pass things off to CEO Mike Favet before we open things up for Q&A.
Thank you. Good morning, everyone. I am here today to tell you about what's happening at NeuroPace. Starting with a little bit of an overview for people that are not as familiar with the story. At NeuroPace, our mission is to transform the lives of people living with epilepsy. The condition itself, epilepsy, is a condition that affects about 3.4 million people in the United States. Has a tremendous cost to the healthcare system, impact to patients, impact to family members and caregivers of patients. Many of those patients are looking for treatment options when medical management does not work for them. That's the place that NeuroPace comes in. The treatment pathway for a patient, so those 3.4 million people that are living with epilepsy, medical management is the first option.
Unfortunately, one in three patients are not able to control seizures on medication. After trying and failing more than two or more medications, patient is considered to be drug-resistant. For many of those patients, over time, they're able to find their way to specialty care at what are called comprehensive epilepsy centers. That comprehensive epilepsy center physician group is the call point for the NeuroPace business. Within epilepsy, there's what's referred to as a treatment gap, a large treatment gap, which is the difference between the people who have epilepsy and the people that are getting the care that they need or they deserve to be able to control their seizures. Only about 50,000 patients out of that 1.2 million make their way to a comprehensive epilepsy center every year.
Fortunately, there's some macro trends that are working to close that gap. There's a recognition within the medical community that more of these patients need treatment options. The number of epileptologists, which is a neurology subspecialty, has been growing. There's more and more of those physicians coming through fellowship every year. They're populating more and more epilepsy centers. More centers are being created over time. There's work within the patient advocacy groups to increase awareness of treatment options, and companies like NeuroPace are putting efforts to be able to support that as well. There's treatment guidelines that ask for patients that are drug-resistant have drug-resistant epilepsy to see an epileptologist and to be evaluated for interventional options.
All of those pushing in the direction that allows us to, over time, increase the number of patients that are coming to epilepsy centers to get advanced care, growing the market opportunity for the NeuroPace product. For those patients when they make their way to a comprehensive epilepsy center, there's still a treatment gap within the epilepsy centers. Of the 50,000 patients per year that make their way to an epilepsy center, about 6,500 of those patients today receive some sort of interventional treatment. There's work that we are doing to close that treatment gap by increasing physician awareness, doing more work on patient awareness of patients within the epilepsy centers, and increasing the effectiveness and the capabilities of our product to be able to treat a growing number of those patients.
That 50,000 patients per year coming to the epilepsy center is broken down between two primary types of epilepsy. There's focal epilepsy, which is where epileptic seizures originate at a particular location or locations within the brain and then spread into the brain in many cases. There's generalized epilepsy, where the seizures originate broadly across the brain all at once. About 60% of patients have focal epilepsy, 40% of patients have generalized epilepsy. Our current indication is for adults age 18 and above that have focal epilepsy. Playing in that top portion, about half of the patients meet our current indication for use. As a company, we're pursuing and actively engaged in projects to expand the opportunity to include generalized epilepsy.
I'll talk a little bit later about the things that we're doing specifically to move our technology into that important part of the market. The device itself, we have a one-of-a-kind neuromodulation system. The RNS System is a responsive neuromodulation system. The device is implanted, electrodes are positioned into the brain at the location where seizures originate for a particular patient. The device is programmed to recognize patient-specific abnormal patterns. When the device recognizes those patterns, it responds automatically with a stimulation that can prevent those abnormal patterns from becoming a clinical seizure. The device also records information about those detected events. Whenever the device detects an abnormal activity, it records the date and time that happened. It collects that information over time.
It also records the brain signals associated with that abnormal event, both before the therapy is provided and also the brain signals after therapy is provided. Patients have a remote monitor that they use to upload data from the device, and the patient is able to send that to the physician. There's a database that's available, and the physician can review that information remotely to see what's happening inside of their patient's brain. They're able to collect information out of the device that's very helpful in a number of different ways. It can help identify seizure triggers. They can trend information over time to see how the disease is progressing and how treatment effectiveness is affecting the progression of seizures and the number of seizures. They can identify cycles.
Many of these patients have day/night cycles, or they have multi-day rhythms, they're able to identify those. When they make therapeutic changes, including changes to the programming of the NeuroPace device, the device is able to record information about how effective that was, that they're able to use that feedback from the system to be able to optimize care over time. We've collected a tremendous amount of clinical data over the years, that starts with the dark blue bars here, which are representing the data from the original patients in the FDA trial followed out for nine years of follow-up. You can see from the dark blue bars that the effectiveness of the therapy gets better every year. Through nine years of follow-up, that effectiveness gets better and better.
That's driven by that feedback mechanism that I mentioned, where the device is able to record information. doctor is using that information to optimize the therapy, improving the outcomes over time. There's also a neuromodulatory effect, the more effect we have at preventing seizures from happening, the more we can encourage normal brain patterns, the fewer abnormal patterns happen over time. The two of those work together. In more recent, after the FDA approval, we've conducted a number of studies that have pointed to even better outcomes more quickly after FDA approval. Represented in the light blue bars are some data from our FDA post-approval study and a multicenter real-world outcome study. What you can see here is that that same every year getting better trend continues, but the outcomes are better at the beginning and patients are getting better faster.
The reason for that change is the learning from the original FDA trial. When we started the FDA trial, there was much we did not know about the way that this therapy would work and the optimal way to program the device. That learning from the clinical study has been applied back to new patients being treated, allowing them to have better outcomes and learn from the past. We continue to learn from the experience of our device. We collect information, and we're always analyzing what can we do and recommendations that we can provide to physicians to continue to help patients get better faster. There are other treatment options that are available for patients with drug-resistant epilepsy. Historically, the treatment option that's been used is a surgical intervention or epilepsy surgery that's broken into two types of procedures. It's a resective procedure or an ablation procedure.
Both of these are destructive procedures that identify the portion of the brain where seizures are coming from, and then it's either removing that portion of the brain or using a laser probe to ablate and destroy the brain tissue in that area with the hope of reducing or eliminating the seizures that are coming from that spot. As you can imagine, that is a technique that's not applicable for most of the patients. Depending on where seizures are coming from, it may not be appropriate. It is not appropriate in many cases to ablate or to resect that part of the brain. It comes with risks associated with doing that procedure. That said, most of the interventional procedures, even today at the epilepsy centers, for these patients are surgical resections and ablations. More recently, there's neuromodulation options.
In addition to the NeuroPace RNS System, there's a VNS device and a DBS device that are indicated for treatment of epilepsy. Both of these devices use an anatomical approach and a duty cycle stimulation, meaning stimulation is on for a while, off for a while, on, off in a cycle that results in many hours of stimulation a day, irrespective of what's happening inside of the patient's brain. In contrast, as I mentioned earlier, the NeuroPace device is detecting patient-specific abnormal brain patterns and only responding when abnormal activity is happening. Results of that is that we're providing about three minutes on average of stimulation per day versus multiple hours. Our device has also, because of that approach, no side effects, treatment-related side effects associated with the therapy.
The recordings that I mentioned, detailed recordings and that feedback to the physician that's so critical, is only available in the NeuroPace device because the other devices are not looking at brain activity. They're not sensing and providing any information back about that. The result of that is a really impressive efficacy profile. I talked earlier about the difference between the real-world outcomes and the post-approval study, where we've been able to achieve that 67% median seizure reduction after only one year of follow-up with effectiveness that continues to get better after that. The patient flow through the epilepsy centers is something that we've talked about quite a bit over the last couple of years because of the impact of COVID on the flow of patients through the epilepsy center. I wanted to describe that a little bit here.
For patients that have focal epilepsy, again, that's our current indication for the device, patients are admitted first into the epilepsy monitoring unit or EMU. They're typically there for a one to two-week stay with non-invasive monitoring. Scalp EEG and video monitoring, they're trying to elicit seizures in these patients to identify what kind of epilepsy they have and potentially where their seizures are coming from. In our clinical trials, 2/3 of patients needed to come back for a subsequent stay in the hospital for one to two weeks with the addition of intracranial electrodes. Those intracranial electrodes are used to further localize and identify specifically where seizures are coming from. The trend more recently has been for more of the patients that get an RNS device to go through that process. Historically, 2/3. Today, even more than 2/3.
Those patients make their way to an RNS system, and it can take on average about six months from that initial EMU admission to the RNS implant. From the time they do the phase two study or the intracranial monitoring study, it's typically two-three months from that procedure until the RNS is implanted. We are expanding our indication into generalized epilepsy, as I mentioned earlier. Generalized epilepsy has a very different flow. The patients that have generalized epilepsy are able to typically be defined or identified without that EMU visit. They don't require intracranial monitoring. In many cases, they don't require a EMU stay. They're able to just get a standard EEG recording to determine if they have that epilepsy.
One of the reasons that we're very excited about the expansion into generalized epilepsy is the shortened time and the simpler process for patients to go through that diagnostic. Talking about the DIXI product, we announced last year that we were going to start distributing the DIXI medical product as the exclusive U.S. distributor. This is a great opportunity for our business, and we actually did start distributing that product at the beginning of October. The fourth quarter was our first quarter distributing that product. I'm gonna go back to the back to the previous slide here for a second to point out where DIXI fits into this. I'd mentioned that most of our patients are going through the second intracranial monitoring procedure. That procedure is where the DIXI medical product are used.
Most of our patients go through this procedure. Temporary electrodes are implanted. DIXI medical is a provider. NeuroPace is a provider of those electrodes used in that procedure. The reason that we're doing this partnership, there's a number of reasons that I'll point to on the next slide. The technique that DIXI has developed is one for stereo EEG, which is a less invasive approach that's often robotic guided, less invasive, faster recovery, less pain for the patients. It's part of the reason that more and more of these patients are going through this procedure, is that the stereo EEG process is a better and easier process for patients to get through.
The reasons that we did the distribution agreement with DIXI medical, in addition to providing another product opportunity, another revenue point for our team that's calling already on these same epilepsy centers, the same epilepsy surgeons, the same epileptologists within the centers, is that it also provides us access to the flow of patients that are coming through the diagnostic process.
We've identified one of the important drivers for growth for our business is earlier patient education awareness around treatment options, including the RNS System, and being able to provide that by being aware of the patients that are coming through that diagnostic process, not only allows us to add additional revenue to the bag of our, of our field team and to be able to leverage the capabilities there, but it also feeds back into helping us increase the number of patients that are being treated with the RNS device over time. From a commercial perspective, when we prioritize what's happening in 2023, we have top two priorities for the organization. One of those, the number one of those, is to increase utilization of the RNS System within comprehensive epilepsy centers. There's two thrusts, if you will, that we're, that we're pursuing in this area.
One of those is to grow the market. I talked earlier today about the gap between 1.2 million people with drug-resistant epilepsy and only 50,000 of those coming into the epilepsy centers. There's work that we're doing to help that. That includes going out to referring physicians, which are increasingly epilepsy specialists practicing in the community, to identify drug-resistant epilepsy patients that are candidates for the RNS device to have them come through these epilepsy centers. There's work we're starting to do on a small scale for direct to patient, to identify patients that are being seen by these physicians that haven't yet been told about the options for RNS treatment and to be able to help those patients move through the process.
It's partnering with the other organizations, the Epilepsy Foundation and other organizations around community outreach and awareness, also over time, expanding our indication into generalized epilepsy. The other major initiative and the majority of the time of our field team is about increasing utilization within the CECs, comprehensive epilepsy centers. For us, this includes getting more of the epilepsy doctors within the comprehensive epilepsy centers to prescribe the RNS device for their patients. We're still relatively early in that adoption curve. We're also expanding the number of patients that are being seen by these physicians as candidates for the RNS device. Expanding the way that they are funneling patients into and talking about this therapy.
I had mentioned the importance of the patient pipeline, our team working to identify patients earlier in the diagnostic process within the CECs so that we can provide that education and help them work their way through the process and increase the number of patients that are being treated and the number of patients that are being treated with the RNS System. The second major initiative or major priority for the company is the expansion into generalized epilepsy. Generalized epilepsy, again, represents 40% of drug-resistant epilepsy patients. We're using the same device that is being used for focal epilepsy. It's being used in essentially the same way. It's a responsive neurostimulation system, but we're attacking a network location within the brain. We've identified a location in the brain where generalized seizures present themselves.
We're able to detect those abnormal patterns within a network location, the device works the same way, where it responds automatically with therapy to those detected events, preventing seizures from occurring. We're recording the same useful information about what's happening there, the brain signals, the trending information, all of that working the same way, expanding to another patient population coming through these comprehensive epilepsy centers. We started enrollment in our clinical trial, called the NAUTILUS Study, last year. We've been working in 2022 to really get all of those centers up and running. We're doing a trial that includes enrolling about 100 patients in that trial, following them for one year for the primary endpoint, then ultimately a PMA submission to be able to expand our indication to generalized epilepsy.
We're also working to expand indication to younger patients. We have a RESPONSE Study to move indication down to age 12. I'm recognizing that many of the patients that have epilepsy start having epilepsy earlier in their life, and the faster that we can intervene, the better the outcomes for these patients. Over time, the device has a platform capability, and we've been working to identify the most promising areas where a responsive neurostimulator can impact other conditions. We're working with outside institutions on several different initiatives, including depression, PTSD, impulse control. All of those are studies that are actively underway, where we've enrolled a patient or the centers have enrolled a patient to look at the use of our device in conditions that could benefit from neuromodulation therapy. Over time, there's an opportunity for us to expand into other applications as well.
From a financial standpoint, we had a very strong second half of 2022. Really happy to have pre-announced our preliminary revenue earlier this week. We have a number of things that are happening that are moving us in a positive direction. The main growth driver for our business is new patients being treated with the RNS System. We call them initial patient implants. Over time, more and more of those patients being implanted and more revenue coming from that. In Q4, we had $9.8 million of revenue from new patient implants, which is a significant increase over Q3 and over Q4 of 2021. We've also added the DIXI medical revenue, that, as I mentioned, we started that distribution in the fourth quarter.
We had $1.6 million of revenue from the DIXI medical products. We have revenue that comes from replacement devices that were previously implanted, the battery-- it's a battery-operated system, the battery expiring, and then those devices needing to be replaced. We have a trend where the number of devices being replaced is going down because we've switched from a shorter-lasting battery that we were implanting until 2018 to a much longer-lasting battery. We're nearing the completion of that transition. There's a relatively few number of patients remaining that have the shorter-lasting battery, and then as we complete those, the replacement cycle will be a growth driver for the business as we start getting to replacement interval for those new devices.
In conclusion, we have a really exciting platform, one-of-a-kind technology, responsive neurostimulation, treating a patient population that's looking for solutions. There's a significant treatment gap, and we believe that we have an important part of the solution to close that treatment gap. We've compiled a compelling amount of clinical evidence showing the outcomes that get better over time, both for individual patients improving as well as for outcomes getting better for new patients that have learned from our experience in previous patients. We have well-established reimbursement for this, both for the hospitals and for the physicians that are implanting and managing these patients.
We have a commercial model that is focused on increasing utilization within the centers as well as growing the market, penetrating more of the opportunity within the comprehensive epilepsy centers, as well as tapping into the patients that are in the community to bring them in for treatment. We've started the distribution of the DIXI medical product, which, as we go into 2023, will provide a full year opportunity for additional revenue in a way that is helping us bring more patients to the RNS device, which is the core growth driver for the business.
Expanding our indication in generalized epilepsy and the importance of that, to be able to leverage our team as well into a patient population that doesn't have good treatment options, and a diagnostic process that's an even a faster and simpler one than the focal epilepsy. With that, we'll stop and go to Q&A.
Maybe we'll start, as you mentioned, you pre-announced good fourth quarter results. Maybe if we could start by diving deeper into the quarter and the trends you saw there, and how things played out across both initial and replacement implants.
Thanks for that. We're very happy with the performance of the quarter. As I mentioned, we were able to grow revenue sequentially from Q3 to Q4, growth over last year. Within the quarter, we don't typically talk about intra-quarter trends, but what I will comment from a 2022 perspective is, at the beginning of the year, we saw impact in Q1 of Omicron and the impact on patients coming through the epilepsy monitoring units. There were fewer patients coming through the EMU at the beginning of the year.
That stabilized really for our business in Q2 through Q4. That was an important part of the ability of our system or our device to be able to grow revenue, is that we've had that a few quarters in a row of stable within the epilepsy monitoring unit. Throughout the last couple of years, we've been able to grow share within the space. Now we're benefiting from a market that's stabilized and over time, we believe will be expanding.
Great. Maybe diving a little bit deeper into the EMU volumes and the impact that COVID has had on that. In November, you were talking about continued improvement in EMU volumes in fourth quarter and into 2023. How have those trends played out relative to your expectations?
Through Q4, they've been in line with expectations. The discussion we had in November, we've continued to see the performance in the market similar to that. Our understanding is that epilepsy monitoring unit volumes are still not all the way back to where they were in 2019. We haven't had any disruption in the last few quarters. My discussions with clinicians, they're working to expand and increase the number of patients that are coming through. Working to increase staffing to allow more patients to come through, work that they're doing on referral development, and in many cases, expanding the number of clinicians and staff they have to be able to treat more patients. It's been stable through 2022.
Not yet all the way back to where it was in 2019, but signs that it's returning to a growth phase.
Great. I know there's no guidance out there just yet, and it's still a little bit early, but, you know, I think there's a lot of moving pieces when it comes to 2023 between EMU volume, staffing challenges, replacement headwinds. With those considerations in mind, are there any early commentary that you can share with regards to how we should be thinking about revenue growth next year?
As you mentioned, we haven't provided guidance at this point, we're not expecting that we'll do that until we announce our earnings here in early March. The trends that I would reiterate are progress that we've made historically at growing the share of patients. More and more of the patients within the epilepsy centers being treated with the RNS device, increasing the number of patients that are being treated with any therapy as part of that, and a few quarters of stability. Again, my belief that the market will be growing as we move into 2022, with more patients coming through the epilepsy monitoring unit, which provides an opportunity for more patients to be treated with the RNS device. Not answering the specifics.
Understood. Maybe taking a closer look at utilization. I think it's been a while since you've given any concrete numbers here, but how should we be thinking about utilization progressing next year? What does utilization and penetration look like in some of your more seasoned experience accounts versus your newer ones?
The growth of RNS, primarily, and I think we'll probably talk about the replacement devices as well, but primarily is coming from more new patients being treated with the RNS System over time. The way we're doing that is primarily by increasing utilization within the centers. We had, in 2021, 150 centers that implanted the RNS device. Most of our growth in 2022 came from more patients being treated in those centers. We are continuing and will continue to add additional centers, especially as there's more epilepsy centers that are coming online, and building practices and growing practices. As we go forward, utilization is the primary driver of that growth. More modest growth in number of centers.
Mm-hmm.
Most of our team focused on increasing utilization.
Where do you stand in terms of center penetration?
We haven't yet announced the number of centers for 2022. We did, as I mentioned, have 150 centers that we had in 2021. We had modest growth in the number of centers in 2022, with most of our effort, again, and most of the growth for the business coming from increased utilization.
Got it. Maybe I'll pause for a second and see if there's any questions in the room. No? All right, I can keep going. You know, maybe if we take a step back and look at your broader market opportunity, where does RNS penetration stand today, and where has that adoption largely been coming from? Is it, you know, resection, ablation, competitive devices, or pure market expansion?
The adoption today is still relatively low, meaning there's lots of opportunity for increased utilization over time. About 24,000 patients per year coming through the epilepsy monitoring units that have focal epilepsy in adults, meaning they're patients that are indicated for the RNS device today. If you do the math from the number of the revenue that we had in 2022 and the selling price, you know, we had kind of, you know, mid to high 700 patients that were implanted, treated in 2022 out of that 24,000. Generously, you know, 4% of the patients that are coming through are being treated with the RNS device. Meaning 96% opportunity for us to be able to grow into those other patients.
Over the patients that are coming through and getting a surgical intervention, I mentioned there's about 6,500 of those. You can see there that we've got, you know, 10%-15% market share within the patients that are being treated interventionally, so a lot of opportunity there as well. What we've seen in our business is that most of our growth comes from more patients being treated. The share that I talk about gaining within the epilepsy monitoring units is primarily coming from a larger number of patients or a larger percentage of the patients in the EMU getting a treatment, and disproportionately that going to RNS as opposed to taking share from the other treatment options. Over time, there's opportunity for that as well.
Trends change, neuromodulation becomes more of a leading therapy for many of these institutions. There's opportunity to do that. Historically, most of our growth has come from increasing utilization of technology, with ours being disproportionately used.
You talked a bit about indication expansion in your presentation. You know, it seems to me like RNS is the go-to device for focal epilepsy, but there are, you know, a good number of other devices that are used more so in generalized epilepsy. How do you think about how the RNS device stacks up against VNS and DBS, and how do you think about the competitive landscape playing out once you do get approval there?
I'm incredibly excited about the potential for RNS in generalized epilepsy. There are not any surgical intervention options. Again, most of the patients within these epilepsy centers that are getting an interventional treatment is resection and ablation, and that's not an option for patients with generalized epilepsy. The only option is neuromodulation therapy. To add the NeuroPace device in with the ability to record information and provide that trending information back to physicians, that visibility into what's happening inside of a patient's brain, is just so powerful for these clinicians to be able to manage these patients. Today, until NeuroPace gets into that indication, they don't have any ability to do that.
I feel very good about how we will be able to compete within that space and provide treatment option for so many of these patients that don't have other options that are available.
Great. As you mentioned, you announced your partnership with DIXI medical. Could you talk a little bit more about how this partnership has played out over the last few months, and how should we think about the growth potential and market opportunity for that product line?
I'm very pleased with the start of our partnership with DIXI. The distribution of that, as you mentioned and I mentioned, it just started a few months ago. We're in the early days of the partnership. What we've seen so far has been consistent with the thought behind doing the deal, meaning that it's provided an additional set of revenue that fits very well into our existing field team. The message of the benefits of the DIXI product have resonated well with the customers as we talk to them. We're seeing early signs that visibility into patients coming through the diagnostic process is helpful for us as we try to increase utilization of the RNS device. Those pieces coming together. Most of the patients, all...
Most of the patients, you know, a significant majority of the patients that get an RNS device go through that process, go through an intracranial monitoring, as I mentioned. From a market growth opportunity, most of our centers are not currently using DIXI products. There's an opportunity for us to convert some of those accounts, many of those accounts over to using the DIXI product. As we do that, it means revenue, and it also means that visibility to the, to the patient pipeline. I believe over time that we'll be able to not only support those centers benefit from the RNS device, but also to be able to get more revenue coming through account conversions. That benefits, that same market benefits from all of the market development activities. More patients come through the EMU.
That means more patients coming through intracranial monitoring as well.
Great. Maybe touching on ASPs. It sounds like you were able to take price this past year. How should we be thinking about that progressing in 2023 and your ability to sustain that over the long term?
The pricing over the last year, we've been able to make low single digit annualized price increase over 2022. Keeping in mind that that's phased in over a period of time. Most of our accounts, most of our customers have contracts that have pricing that's locked in for a period of time. As that phases in, we've been able to do that. I expect that that trend, that low single digit trend will continue through 2023.
Great. Yeah, I'll stop again and check for questions. Okay. Maybe, moving on to some of the financials. You know, how should we be thinking about spend progressing this coming year with all these growth opportunities that you have ahead of you between, you know, generalized epilepsy, your pediatric indication, and, you know, all those other opportunities you touched on longer term?
Yeah, I think thanks for that. The, we haven't provided guidance for 2023 yet, but I will provide some directional information. We, in 2022, made a couple of key things that happened for us in the year. One is we accelerated the hiring of people in the field organization in the first half of the year, we brought in a number of hires into our field team. We completed that by the middle of the year and really have been able to hold at a stable number of people within the field organization. In the middle of the year, we went through an exercise to really prioritize where we're spending money in the organization and identified some opportunities to reduce spending.
We took a number of opportunities to cut spending across the organization and been able to maintain that through the second half of the year. I was going to comment earlier just on... This may be coming up on cash and cash position, but we had $85 million in cash at the end of Q3. We'd announced that previously. We finished the year at $77.4 million or of cash at the end of the year. Our cash burn through the first half or through the second half of the year, last, two quarters, Q3 and Q4, was about $15 million.
That's really a function of the reductions in the focusing of spending that we had in the middle of the year last year. As we head into 2023, directionally, we're not expecting to have significant step-up in spending as we head into 2023. Again, we haven't provided guidance, but just kinda directionally, we've got a field organization that's about the size that we need to be able to support the customers and expansion. Modest changes to that over the course of time, and then really being very thoughtful about where we're spending money in the organization while being able to support the key initiatives of increasing utilization and expansion into generalized epilepsy.
Great. Maybe just on gross margin. Is there any color you can share on how we should be thinking about that moving forward, both in light of, A, macro pressures, but also, the mix shift between replacement and initial implants?
Yeah, and DIXI having an impact-
Okay.
Having an impact on that as well. I'll throw that in. We had provided guidance that 2021 we were expecting... I'm sorry, 2022, we were expecting low 70% gross margin. We haven't provided the final results, but that was the guidance that we provided, and I don't have a reason to change the guidance for that. The overall trends, DIXI medical will have a slightly lower gross margin than the core business because it is a distribution. There's a transfer price. It has lower operating expense, but the gross margin's a little bit lower. Because it's a relatively smaller part of our sales, it doesn't have a significant impact on the business.
You know, expecting that over the long run, we'll be able to continue to increase gross margin as volumes go up. Primarily volume driver being a key component of that. We're nearing the completion of the replacement revenue transition. That replacement revenue component becomes less and less significant as we go through 2023. Really having a baseline with that low 70s% and then over time and ability to increase that as volumes increase.
Maybe one last one for me in the last few minutes that we have here. You talked about, you know, nearing the completion of the replacement revenue...
Yep.
Cycle. How should we be thinking about the cadence of that revenue over the next few years, and when can we sort of expect the next wave of that cycle to start again?
We have. At the end of Q3, we communicated the number of patients that have the old system remaining. We expect that by the end of 2023, by the end of this year, that essentially all of those patients that have the old generation device will have had it replaced with the new device. Reiterating that our replacement rate is very high. We have a 20% or I'm sorry, over 90% replacement rate for the business, for the replacement business. By the end of 2023, essentially all of those patients with the old device will have been replaced. That is a decreasing trend through the quarter. You've seen that in the financial graph that I showed.
I expect that general trend will continue to a very low number of implants by the time we reach the end of the year. As we head into 2024, we'll start seeing very small numbers of early replacements of devices that were implanted in 2018. Again, the average battery life for these systems is between 10 and 11 years. We're not gonna hit the bulk of those until we get a little bit later. We expect that we'll start seeing small numbers of those early replacements for devices that use more energy for the amount of stimulation that they were providing.
Great. With that, I think we're just about out of time. Thanks to the NeuroPace team for being here, and thanks everyone for joining.
Great. Thank you.