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Shares of NeuroPace (NASDAQ:NPCE), a relatively smaller epilepsy player, have seen a strong rally towards the end of 2023 and early into 2024. In fact, shares have doubled since I called shares a speculative epilepsy play in September of last year.
Amidst continued operating momentum, shares have seen a re-rating already, yet more potential remains to be seen if the company can further gain share in the epilepsy market, which makes that while I have trimmed some of my position, I continue to hold a long position here.
Treating Epilepsy
NeuroPace aims to improve the lives of epilepsy patients as it aims to reduce, or even eliminate, the occurrence of debilitating seizures. The company addresses DRE which stands for drug-resistant epilepsy, a devastating and untreated disease.
Abnormal electrical activity in the brain causes seizures, being the 4th most common neurological disorder in the US, with patients being 2-3 times more likely to be unemployed, with drug therapy unable to control seizures in about one of every three patients. This represents a patient population of about 1.2 million people. While some patients are intolerable to drug therapies, some patients are suffering from too severe side effects to use these drugs.
The company aims to address this with the remote monitoring system RNS. This device monitors brain activity on a continuous basis, and it recognizes and secures seizures with electrical pulses, while keeping track of records to review this by physicians. With median reductions in seizures being very impressive, the technology looks compelling in relation to alternatives such as epilepsy surgery and neuromodulation competitors, both of which come with drawbacks.
Addressing just ten thousands patients in this huge addressable market, this makes that there is a huge runway for growth here, although I must admit that adoption has been somewhat modest, with the RNS system being brought to the market in 2014 already.
Some Perspective
The company went public in spring of 2021 at $16, as shares immediately traded in the mid-twenties. At the time, the company reported 3,000 patients for the year 2020 and subsequently was awarded a $300 million valuation at the IPO price.
For the year 2019, revenues grew sales by 30% to $37 million. For the year 2020, growth slowed down, with sales up 11% to $41 million, with the slowdown of course attributable to the pandemic. Operating losses fell from $22 million to $13 million in the meantime.
With growth slowing down and expectations coming down, shares fell to just $1 and change late in 2022, although they recovered to $9 per share in September of last year. The reason for the massive declines was easily understood, as sales rose to $45 million in 2021, but were flat at these levels in 2022. Moreover, operating losses increased from $24 million in 2021 to $41 million in 2022.
While the company guided for 2023 sales to increase to $50-$52 million, operating losses were expected to remain very substantial, even as the company hiked the sales guidance to $53 million following the release of first quarter results. Second quarter sales rose 62% to $16.5 million, as the company hiked the full year sales guidance to $60 million, which frankly looked conservative.
With 25 million shares trading at $8 and change, the company commanded a $200 million valuation in September of last year, while net cash was down to $10 million. This valued the operations at just over 3 times sales which grew rapidly, as this looked quite interesting, if not for the continued losses (even as they were coming down). This stood at the basis of a speculative long position at the time.
A Double
Since September, shares have doubled in the time frame of less than half a year. In November, NeuroPace posted third quarter sales of $16.4 million, essentially at par of the second quarter, up 47% on the year before. The slower sequential sales growth was attributed to seasonality and a transition to longer-lasting devices (in terms of their batteries). Operating losses narrowed further to $6.0 million, as the company upped the full year sales guidance to $63 million, which looks conservative as it implies a $15.6 million guidance for the fourth quarter.
More good news arrived as NeuroPace announced a strategic collaboration to leverage the RNS System’s unique biomarker monitoring and data analysis capabilities, with revenues from this collaboration seen at $3.7 million. Later that month, the company announced the early completion of the patient enrollment in its Nautilus pivotal study, key to expand into the generalized epilepsy market as well, with this market being larger than the current target market.
Early in January, NeuroPace announced fourth quarter sales between $17.5 and $18.0 million, at the midpoint suggesting 39% sales growth on an annual basis. The company furthermore bolstered the cash position to $66 million, with nearly $8 million at-the-market equity financing being raised during the quarter.
This makes that I estimate that the share count comes in around 27 million shares, which by now have risen to $15 per share. This values equity at around $400 million, amidst an estimated very modest net cash position, with the valuation equal to about 6 times sales, now reported at $65 million in 2023. That said, I would not rule out a revenue number close to $100 million going forward, and great improvements on the bottom line here.
And Now?
While the operational developments around the company have been solid, I think that the share price advancements (having doubled since September) have priced in quite some good news. This makes that I am cutting a third of my position from September, to nearly free-ride on the remaining position. While shares are not very demanding yet based on sales multiples, losses remain the case.
Hence, I am happy to sit on the remainder of the position as operating momentum is great and long term potential remains there, and some real execution seems to have returned here.
