Great. Thank you so much for joining us. I am Sarah James, the med tech analyst here at Cantor, and we are very excited to be welcoming to stage with us NeuroPace. They make RNS Systems, an implantable neuromodulation device for drug-resistant epilepsy, which is pursuing a label expansion into idiopathic generalized epilepsy. We have an overweight rating and a $21 price target. The core RNS business remains very strong, growing at 21% in the most recent quarter with record prescribers accounts, patient pipeline, and management continues to be optimistic on the pathway forward for IGE approval. Joining us today, we have Scott and Patrick Williams, Chief Financial Officer of NeuroPace. Thank you so much for joining us.
Thank you. Excited to be here.
Great. Patrick, I wanted to start off with IGE, since it is the part of the story that we are most excited about. When you reported second quarter results, you were preparing for the submission issue request meeting with the FDA. Can you walk us through where things stand today and what you have learned from the agency since?
Yeah. Just to sort of maybe give a little bit of background, we have submitted a PMA supplement to get the expanded indication for what we call another disease state for epilepsy called idiopathic generalized epilepsy. It will likely open up another 20% of the overall epilepsy market for us. Clearly, a nice driver of TAM expansion. With the approval, upon approval, we would be the only company that has a neuromodulation device approved for IGE. With all that said, we have had a few bumps in the road to get here. The most recent one was we did receive from the FDA what is known as a not approvable letter. We can certainly talk about that a little bit more, but what we are doing right now is going through a process, as you mentioned, called the SIR, or submission issue request, on behest, actually, of the FDA.
They said, "We strongly recommend that you go through this process." To give a little bit more background on it, the letter went through and talked about each of our different submissions that we had and some of the questions that they had, and we can dive into it. The takeaway for everyone is that on our last earnings call, we talked about we were in the process of resubmitting. It is not a denied letter. I think that's very important, and the FDA made that clear to us, as well as we've been very thoughtful about the words we picked. We've been saying consistently the FDA strongly recommended we go through this SIR process. What the SIR process is, you can almost think of it as kind of like a mini panel.
We'll have the ability to have the voice of the patient, the voice of the physician. We think that this is an unmet population that definitely needs the RNS System device. It is the same device that we use today that's approved. We met all the primary safety endpoints. You can certainly look at the MAUDE database and see that we have very pristine results when it comes to adverse events, very minimal. We have submitted the SIR. We did that recently. The FDA then has 21 days to respond and set up a meeting with us. We expect that meeting to happen in early to middle of Q4.
Then we can talk about, we'll have a meeting with them. We do have what's called a Breakthrough Device designation, and so that allows for a very collaborative back and forth with the FDA. They may require that when we amend it could be deemed a major amendment, and if that is the case, you would add a 180-day clock on that. Thus far, again, that could happen. It may not happen, and so people start doing the math, "Well, when do you think you'll get approval?" You start doing the math on that, and the calendar would say 180 days would push you, depending on when the meeting is, kind of in that Q2 timeframe of next year. That's where we're at, and we're excited to meet with the FDA and move this forward for the patients.
Okay. Great. You have previously talked about being comfortable with the subgroup analysis that was requested. Can you talk about what gives you that confidence, and do you still feel good about supporting the full broad IGE population that you originally targeted?
Yeah, I am going to let Scott kick that off, and then I will hit it. Scott heads not only our investor relations, but helps out on many fronts with biz dev and finance, but he is quite versed in this, so I am going to let him-
Sure
take it.
What Sarah is referring to is the recognition from the FDA that they do see a clinical benefit across the study population. What they have focused on is whether or not that is being driven by any subgroup analysis. Mostly driven by seizure frequency. Just give an example, if someone is having two or fewer or two or greater, does one of those specific subgroups drive the disproportionate impact? We do not think so. The data that we have within the NAUTILUS trial, we do not need any new clinical data to be generated. It is all stuff that we already have. We will provide them to that subgroup analysis, as well as other things that Patrick mentioned, which is physician and patient testimonials, also real-world data and evidence. We continue to believe that there is a pathway to approval based on the existing clinical data.
Yeah, maybe a couple of things to add on that is, one of the things that we've talked about and the FDA requested us to elaborate on further would be clinical meaningfulness. What does that mean at the end of the day? That's the totality of evidence, the importance of an unmet population that needs a device. As Scott said, one of the interesting things that they talked about is, they asked for our 24-month data. Our 18-month data, which has actually been published in Epilepsia, showed a 77% median seizure reduction at 18 months. We recently, as part of this, submitted 24-month data. The 24-month data improved dramatically. It's at 100% median seizure reduction at 24 months, 23- 24 months of stimulation. We really believe that the data's on our side.
We are not at the point where we're looking to parse out the population groups. We believe that all patients that have IGE should get this, and so we're not quite at the point of a narrowed indication that some people are asking. The one thing I would point out is another thing that the FDA said, the protocol allowed us to enroll patients above the age of 12. We did not get a lot of enrollees above the age of 12, unfortunately. Some of that has to do with the disease state. Idiopathic generalized epilepsy tends to present later on in your teens, and by the time you go through the evolution of healthcare, you probably don't get a medical intervention until you're an adult. Hindsight being 2020, it kind of makes sense we probably didn't get a lot of people.
The FDA did come back and said, for that population, there was limited representation.
Some people have speculated, would that be one that you may, in your amendment, maybe find a different path to get there? I think that's a fair assessment. We haven't spoken openly of what we're going to do exactly. As we get through the meeting, we will have those discussions. I think the next data point for people will be our Q3 earnings call, which will be in early November. Certainly at that point, we'll probably have more information on if the meeting had happened or when the meeting is scheduled, et cetera.
Okay, fantastic. Let's talk a little bit about core. RNS revenue grew more than 20% through the H1 of the year. It's been great to watch that continue. You've talked about roughly 20% long-term growth from adult focal epilepsy alone. What do you see as the biggest drivers behind your ability to sustain that sort of trajectory?
Yeah. There's about 3.6 million people that have epilepsy in the United States, and by the way, high majority of our revenue is the United States. We do do a little bit through a distributor, in Israel, the country, but very small amounts, and a little bit in Canada, but we kind of count that as the U.S. to some degree. With that said, about 1.2 million of those are resistant to drugs. Only about 75,000 of those will actually make it to a Level four comprehensive epilepsy center. Then of those, only maybe 15,000 will get some sort of medical intervention. The takeaway is there's a very under-penetrated market with that.
From where we work today, about 60% of all epilepsy is in the focal disease state, and about, call it, 80% is adult and maybe 20% is pediatric, so below the age of 18. We only have an indication for adult focalized epilepsy. We can talk about what we're doing with pedes. What we're going to do with IGE is open up, as I said, that extra 20%. To your question, what are we going to do to continue to drive adoption? We are in all 250 of the comprehensive epilepsy centers, the Level four. What we do need to do now is drive deeper and get more utilization out of that. Clearly, we will look to take market share. Of the 15,000, we're only getting a couple thousand, at best, in a year right now.
We're focused on that, and we're doing that in many different ways. We recently made investments, certainly in our sales force and our marketing side, but also in what we call nurse navigators.
You should think of them more as patient navigators. Where I am going with this is we are starting to build up, with more robustness, what we call our patient pipeline.
Requiring our entire field organization to start staging patients of where they are at in that process. I have been in med device for a little bit of time now, what I can tell you is, epilepsy is a disease that takes a long time to get addressed. We have patients that will get our device and tell us that it took them 20 years before they even knew about the device and actually got the treatment. It is sad to hear that, right? They will go years and years through a process of having to do drugs that do not work for them. This is a very long sales cycle from a patient standpoint. What we need to figure out is how do we get earlier in that sales cycle, how do we push out into the community hospital setting?
How do we make sure we do awareness through the patients? We are doing a lot of that stuff, I can certainly talk about, depending on your next question, the adoption dynamics that will come related to the generalized patient.
Yeah. That would be great. Go ahead, Scott.
I was just going to say one other thing that I would add about contributing to the continued growth is just I think the clinical story has deepened and broadened. I think what used to be viewed as a pretty narrowly defined focal patient is expanding. Physicians are becoming much more comfortable with both network stimulation as well as the device in general, and using things, even hybrid approaches alongside resection. The clinical story is broadening as awareness grows.
Yeah. Because I know you guys typically, in the Level four centers, you might work with one to three, but a lot of them have five or six.
epileptologists.
Yeah.
How do you get that broader adoption?
Yeah. It's a good question, and it's what we need to continue to solve for. Neuromodulation, it's a budding space, right? It's one of the specialties in medicine that just is newer. We got approved in 2014. Some of the other neuromodulation for epilepsy is later than that, 2018. It just hasn't been around a long time. When that happens, you've got to figure out how do you change the system a little bit. To your point, there might be five or six epileptologists at a Level four CEC, and you'll have one person that does RNS, one person that might be VNS or DBS, et cetera, and what we need to do is get more of them.
Yeah
to spread the word for us. This is where I think the adoption dynamics with IGE or generalized epilepsy will be really compelling. If I can take a minute on that. Number one, because it presents itself later on in life. These patients tend to have high-functioning cognitive abilities, unlike a focal patient that many times is a little bit more reliant on a network of care. Why is that important? Well, they can advocate for themselves, and I think that's very important. The other part of it is our clinical trial did not require what we call a phase II Stereo-EEG. That requires an implant and a multi-time stay, week stay, in order to monitor and record to figure out what's going on.
Again, that made sense for a focal patient because you had to figure out where to put the lead on the surface of the brain. With IGE, we're stimulating the neural network, as Scott says, the thalamus area, and so we put two of our leads into there. If you think about those adoption dynamics, our protocol didn't require you to go through a phase II. Now we can now move out of the Level four and move into the community setting and potentially do the procedures out there without having to go to a Level four to do that. When you combine that also with the fact that it's a little bit more of a straightforward procedure for the physician, they take two leads, and they just put it in the thalamus.
It reduces what you could call maybe that fiddle factor, that uncertainty of where I put the lead and am I putting it in the right place. We feel the adoption dynamics for IGE are very compelling. Most of them will be adults. Probably +90% will be adults. Again, we will be the only neuromodulation device that's approved by the FDA for IGE.
Fantastic. I wanted to spend a minute on the AI and data side of things. It's a topic we like a lot here at Cantor. You've now accumulated more than 27 million intracranial EEG recordings, which is a remarkable data set, and you've described it as a moat.
which we like. What can NeuroPace ultimately do with that data set that another neuromodulation company can't replicate?
Well, I'll kick off, and I'm sure Scott will have a couple of things to talk about, maybe even some of the collaborations that are giving us clinical validity with our data set. What we have is a closed-loop system, and what that means is we're able to detect ECoG or brainwaves, record them, and then we can adjust our programming to deal with that, unlike other systems that aren't recording that data. Why is the data important? Again, the data will guide the way to where we're going. We've hit on a couple of things, and I think there's three takeaways that I think about for people as they think about, I guess in this case, an investment decision with NeuroPace. We talked about our current indication with focal.
The number two thing is the expanded TAM that we can do with IGE as well as pediatrics. We are going to continue to work on pediatrics to figure out how we open up that side of it. I talked about the adoption dynamics with IGE is going to be very powerful with an adult IGE. It's going to be potentially more powerful with a pediatric. If you're sick, you power through it. You go to work or whatever. If your kid is sick, you're going to figure out whatever you can do to make them better. You're going to advocate on their behalf. You're going to do a lot of research, and we believe that at the end of the day, our data is that compelling compared to everything else. The third thing is your question, which is, well, why is that data important?
What are you going to do with it? We just recently launched what we called ECoG Assistant. I like to call it AI Assistant. What it does is it takes all these thousands of ECoG data and brainwave, and it shows the doctor, "Here are the 50 or 60 that matter." The doctor can still look at all of them, but it helps reduce time to do the patient. At the same time, we are also going to be introducing other things, such as remote monitoring, which we plan to submit to the FDA by the end of this year. What that'll allow is not just the monitoring ability, but more importantly, the programming ability on a remote basis.
Now, as I talked about with IGE, a patient that is sitting perhaps outside of a Level four heavy metro area, they can now get their programming done without having to go back to that Level four, even if they are not even in there. That will be, again, trying to remove the friction from that sales cycle at the end of the day. Why that data is important is, again, with that closed-loop system we are able to look at and the doctor can figure out, are there dosages we should change? We just had a doctor talk about how ECoG Assistant allowed them to look at the circadian rhythms and what they could do with the dosages based on reading the data, and they adjust the dosages, and they can have an instant readout to see how is that helping the patient or not.
Data is highly important. It is a moat. With that, maybe I will turn it over to Scott to see-
Yeah
if he has a couple things to add.
I do not have much to add to that other than I would not describe it as a static data set. It is a longitudinal data set over years and years that is tied to both changes in programming as well as clinical outcomes. To be able to pair that, it is not something that can be purchased or replicated. It is something that we have developed over many years. We recognize the value of that data. We are trying to be good stewards of that, both to help improve outcomes as well as develop that into tools that help both patients and ease of use on the physician side.
We do a little bit of revenue with service revenue. I do not want to spend a lot of time on it, but I think we are not the only ones saying it. There are other people that are saying the data is important, so there have been collaborations that we have done. I have seen some of the names at your conference here today. A paper recently came out on it as well, what it is, there are some pharmaceutical companies that have RNS patients where they are testing their drugs in phase I, phase II, et cetera, they are seeing the importance of being able to monitor the data as they are administering these drugs to change dosages, compounds, whatever it might be, get a more responsive indication or readout of what is happening. Of course, time is money and investment and time to market.
I bring that up not so much about the service component of it or revenue-
Yeah
but more importantly, there are other people that see the benefit, to your point-
of why it is important to collect data. If you talk to a doctor, data is extremely important in a space like this where we are all still trying to figure it out a little bit.
Sure. Yeah, and I guess on that service level, I think of like ECoG Assistant, you're not monetizing today.
Right.
Could you And then when I think about the doctor, the physician behavior and their workflow, how do you think about the timeline to seeing if your tools are actually impacting
Yeah
their decisions?
We actually are seeing it. We just launched ECoG Assistant, so it's early stages. We have some anecdotal examples or cases. I gave you one of them already. We actually have the ability in our background of our system to see how long doctors are spending in it, and we're seeing some pretty interesting results. For a patient, they could reduce the time that they're analyzing it by up to 10 minutes.
You start multiplying that by four or five patients in a day, you are getting meaningful time back. Instead of having to look through a bunch of data and parsing it, you are actually able to sit there and have a meaningful conversation about, well, what do we do next and
Yeah
how is it going and everything else. I think that is probably the biggest thing we see with ECoG Assistant. In terms of monetization, we get that question. We are so highly under-penetrated right now that we view this as the more friction we can remove from that cycle of getting a patient from their first seizure
Yeah
to eventually getting some sort of medical intervention, in this case an RNS System, we think it is important to be able to provide both the patient and both their physician caretaker the ability to reduce that friction. That is how we think about monetizing it. We have a very, very high ASP at +$50,000 . Our gross margins are in the low 80%. We do not believe we need to necessarily monetize more than that. You actually have a good example of
Yeah, I mean, just using that at $50,000, you probably would not be charging more on a SaaS basis than the incremental one or two implants. The more that we can, to Patrick Williams' point, increase the ease of use and increase adoption
we think the economic value of the system itself is enough to
Make up for it. Yeah.
Okay. Maybe a couple numbers questions here. You have been pretty consistent in talking about roughly 20% growth from adult focal epilepsy. If IGE comes in and gives you another layer on top of that, should we think about that 20% as the floor, or are there other constraints to growth?
I am not quite ready to talk about our long-range plan beyond what we said
Yeah
a few years ago, but what I would say is it's a completely fair question. Upon approval of IGE, again, caveat all that stuff, assuming we get the approval, which we are working hard to do, it will not switch over overnight. We do have to work with the insurance companies to get their coverage flipped over. About 50% of our coverage today, or our cases are through private pay. Reimbursement actually falls underneath me, and so we've got a whole list of what we're going to do and how we're going to flip their coverage. The good news is it's the exact same device. It's the exact same reimbursement codes, DRG, CPT. It's the same call points. What we need to do is just adjust their language a little bit to either approve an IGE patient or not.
But that could take upwards of a year.
Yeah.
To answer your question, yeah, clearly, if we're able to get a 20% entry into a new market or close to that with the adults, we're the only neuromodulation device showing clinical data of 100% median seizure reduction. One would expect that that would be a fairly compelling revenue opportunity for us, and we believe it the same. At the same time, I know I've hammered this quite a bit, but the adoption dynamics related to an IGE patient for all the reasons, right? Not just the advocacy of that patient, but also the fact that they don't have to go to a Level four and all that is going to really potentially be a great catalyst of growth for us as we go forward. With all that said, when we get the approval, the time will come, and we'll be happy to talk about it.
It'll be much of a hockey stick in that first 12 months as we work through the reimbursement and everything else. But we have everything in place. We don't need to hire more sales reps. We don't need to put anything else in place, really. We have structured ourselves because we thought we were going to get approval this year.
Yeah.
We are ready to hit the ground running.
Yep. You are approaching profitability with growth margins over 80%, reaching cash flow breakeven, I think guidance for exiting 2027. As the business scales, how are you thinking about balancing investment behind these growth opportunities with the operating leverage built into the model?
Yeah. I will kick off and maybe Scott can add. The one thing I would add is that our 2026 guidance did not include any contribution from IGE, even though we said that we were expecting an approval. We have not talked about 2027 yet. What I would tell you is that some models may have a little bit of IGE in there, and I totally understand why, but the company has not explicitly said that 2027 has any IGE contribution. I encourage people to think about how they model that out. Being in med device for a while, what I do know is that if you have a greater than 80% margin and you can continue to grow your business a little bit, it is difficult not to start throwing off some cash and eventually become profitable.
Every company I have been at, I have been able to release the valuation allowance. I would expect that we do the same thing here at some point. We are not backing away at this point from the exiting 2027 of being able to generate cash. Ultimately, it is really up to us. If you look at 2025, we actually had free cash flow in one of our quarters and generated positive adjusted EBITDA. Really it comes down to we have got the infrastructure in place. We need to do more and leverage. But with low 80% margins and a growing business, profitability does not worry me at all. What I want to do is figure out where can we take those dollars and invest it and actually grow the top line even further.
Yeah. Do you want to share those priorities with us?
One more time, sorry.
You were figuring out where to invest those dollars.
Oh.
Do you want to
Yeah
share any of the priorities?
No, of course. Look, it's always going to be on the commercial-facing side of the world.
Yeah.
We do do some direct-to-consumer. I like to call it direct-to-patient more, maybe-
Yeah
a DTP program. Again, I just keep coming back to the adoption dynamics of a generalized patient and where they're going to be. I think there's a real opportunity there to think about how we do maybe a more robust direct-to-patient program, especially upon approval of IGE. Pediatrics, as I said, that'll be an area of investment for us on the R&D standpoint.
What you can expect to see is normal. Sales and marketing will continue to grow for a growth company. We will continue to invest in our pipeline. That is the lifeblood of your revenue of tomorrow. We definitely want to get into the TAM of the other areas. I only talked about 60% focal.
Yeah
20% IGE. There is another 20% that what we call our more niche-type disease states. One of them is LGS, Lennox-Gastaut syndrome. We actually have studies going on with that. That is more of a childhood pediatric-type disease. Adoption dynamics on that should be very, very powerful because they really have nothing that helps them today, even pharmacological. There is a very compelling runway for us.
As we make investment on sales and marketing and R&D.
When I think about expanding maybe the patient funnel, community expansion has been a topic. You have spent a couple of years expanding beyond the Level four centers through Project CARE, and your broader community strategy sounds like it is gaining some real traction. At what point does community become a meaningful growth engine, rather than just a primarily referral source into Level four?
Yeah, I think it's been good so far. It's contributing to growth. I think over time, the focal point will continue to remain Level four centers. The vast majority of the business should continue to flow there. But you're right, the referral patterns that we're setting up now, both keeping patients in the Level three in community settings after they go into a Level four to be managed, or setting up those referral channels back into Level four, has been a contributor to growth. But we still have a long runway to go inside Level four centers.
Yep. Great. Fantastic. Then maybe an overarching picture one to sort of end our time here with. So if we're sitting at the Cantor conference 12 months from now, and you guys have had an exceptional year, what would've happened in between now and then?
Yeah. I think it's the stuff when I talked about those three takeaways a little bit is we continue to see progress in our current TAM of adult focal. A year from now, I would certainly like to hear that we are talking about IGE a year from now, and we're talking about, well, are all the insurance companies covering you now, and where are you at, and what do you think it's going to grow, and everything else. So that would certainly be probably the number one, would be IGE. Then I think the other ones are what I talked about with TAM expansion, which is, what is the progress we're making on pediatrics or maybe some of those other disease states? They're not certainly in the horizon of 2027.
But you start talking about 2028 and 2029, and what does that look like, and it'll be here before we know it. Clinical data, I don't see that going away. I think our clinical data continues to be the most robust out there, not just from multi-center prospective studies, clinical trials that no one else did, but continued benefit that you see from median seizure reduction, seizure freedom, et cetera. Then finally, I think it's reducing that friction. So what I'd love to be able to talk about a year from now is remote monitoring is fully out there. ECoG Assistant is really changing to your question, more case points on that, what is it doing? Then finally, what are the efforts that we're doing in that community setting? Because again, this is a very long sales cycle for the patient.
They go on this journey that just takes a long time. Unfortunately, with epilepsy, we're not quite sure why it happens and when it happens. We've got this incredible device that is truly changing lives. Ultimately, it's in our hands, and we have a responsibility to society to make sure that we get it out there as much as we can and make people aware of it, and make sure the doctors are comfortable, and again, reduce all that friction.
Okay, great. Thank you both so much for joining us.
Thank you so much. Appreciate it.
Appreciate your time.
Thanks, Sarah.