In spring 2021, I believed that NeuroPace (NASDAQ:NPCE) still had plenty of space to grow as the business went public around the time. The company has developed a savvy remote monitoring system, which provides real-time action, aiming to improve the lives of epilepsy patients.
After a disappointing performance post the IPO, and subsequently declining share price, the company has been seeing some operating momentum as of recent, making a speculative position, potentially an interesting consideration although a highly speculative one.
NeuroPace aims to improve the lives of people who suffer from epilepsy by reducing or even eliminating the occurrence of debilitating seizures. NeuroPace’s RNS system, brought to the market in 2014, was the only brain-responsive neuromodulation system on the market at the time, offering personalized and real-time treatments.
The basic premise is that the device continues to monitor brain activity. When abnormal electrical patterns occur, the device can interfere with electrical pulses to avoid these patterns hitting the patients.
By year-end 2020, the RNS system was applied to 3,000 patients as the runway for growth was substantial, with over half a million adults in the US suffering from drug-resilient epilepsy. In fact, the company sees a potential market of a million patients in the US, and many more across the globe.
Most of these patients are treated with antiepileptic drugs, but many of these patients are drug-resilient, in the sense that the drugs cannot take over control, or patients suffer intolerable side effects.
The company went public at $16 per share in spring 2021, as the business was granted a $300 million enterprise valuation at those levels. This was applied to a business, which grew 2019 revenues by 30% to $37.0 million, after which revenue growth slowed down to 11% in 2020 (due to the pandemic) with sales reported at $41 million. It was promising to see operating losses narrow from $22 million in 2019 to $13 million in 2021, still a substantial number.
With shares rising to $25 on the first day, pushing up the enterprise valuation to half a billion, the resulting 10 times sales multiple was substantial, but was based on somewhat slower top line growth (although the pandemic interfered with that) and operating losses still being reported, as overall I saw no reasons to get involved just yet.
Expectations Come Down
With shares trading around $25 per share in 2021 around the time of the IPO, shares fell back to the $10 mark by year-end, trading at just $1 and change by the end of 2022, although shares have come to life again in recent times and now trade at nearly $9 per share.
Earlier this year, the company posted 2022 results as they indicate why shares have seen such a terrible performance. Full-year sales for 2022 were reported at $45.5 million, virtually unchanged from a $45.2 million number in 2021. The lack of growth was very telling, however, as the company furthermore suffered significant deleverage, with operating losses increasing from nearly $24 million in 2021 to nearly $41 million!
Even as the company guided for a 10-14% increase in sales to $50-$52 million, the company expected to post another year of substantial losses, with gross margins seen around 70% and operating expenses seen at $75-$77 million, which would translate into operating losses around $40 million.
In May, NeuroPace posted a solid 27% increase in first quarter sales to $14.5 million, with operating losses reported at $8.3 million, marking modest progress on that front as well. On the back of the stronger traction, the company hiked the full-year sales guidance by two million, to a midpoint of $53 million.
Further momentum was seen in August, as NeuroPace announced a 62% increase in second quarter sales to $16.5 million, as operating losses narrowed a bit further to $7.9 million. On the back of the accelerating momentum, the company hiked the full-year sales guidance to a midpoint of $60 million, which looks conservative as revenues came in at $31 million in the first half of the year already.
With the company showing improved commercial traction while making progress on the R&D front, with larger addressable markets seen in the coming quarters, the situation is improving a bit. Nonetheless, the dilution of the share count made that the number of outstanding shares has risen to 25 million shares, granting the company a >$200 million valuation at $8 and change.
Net cash holdings have been depleted to just $10 million due to the continued losses, making that a net debt load is imminent, and perhaps it has been the recovery in the share price as of recent which provides room for an opportunistic share sale down the road.
Note that shares traded at just $4 in the wake of the second quarter earnings release, as the doubling of shares to $8 and change appears to be in reaction to the news that management will participate in a few investor conferences.
A Final Word
With shares down a great deal since the IPO day, mostly because revenue growth has generally been a bit underwhelming while substantial losses have been reported, the situation is a bit different now. This comes as the company has seen real commercial traction as of recent, which is comforting and interesting. On the other hand, NeuroPace still suffers a substantial (although declining) cash burn, which is resulting in rapidly depleting net cash balances.
Given the signs on the top line, a speculative position might be warranted as the company trades around 3 times sales, but I have to stress the word speculative here.