NPCE - NeuroPace: Making Strides In The Epilepsy Market

2023-12-07 14:27:37 ET

Summary

• Today, we take a look at NeuroPace, Inc., a medical device company that has developed a brain-responsive neuromodulation system for treating epilepsy.
• The stock has doubled since this summer, posted better than Q3 results in November, and has done a good job reducing its quarterly cash burn rate.
• An analysis around NeuroPace, Inc. follows in the paragraphs below.

History repeats itself, first as tragedy, second as farce ." - Karl Marx.

Today, we take our first look at NeuroPace, Inc. ( NPCE ) as this small cap medical device concern goes in the spotlight. The company is seeing solid revenue growth and is doing a good job reducing its quarterly cash burn rate. In November, the equity got a mention in the Seeking Alpha top stocks under $10 a share by quant rating list. The company appointed a new CEO in July. The shares have had a big rally since late summer. Is the stock still in the "buy zone"? An analysis follows below.

Company Overview:

NeuroPace, Inc. is headquartered just outside of San Francisco in Mountain View, CA. The company has developed and now markets the RNS system. This is a brain-responsive neuromodulation system that delivers personalized, real-time treatment at the seizure source for treating medically refractory focal epilepsy.

Among several capabilities, the RNS system records continuous brain activity data and enables clinicians to monitor patients in person and remotely. The stock currently trades just north of eight bucks a share and sports an approximate market capitalization of $215 million.

The RNS System is targeted at the approximately one third of epilepsy patients that don't respond well to drugs.

Third Quarter Results:

NeuroPace, Inc. reported its third quarter numbers on November 8th. The company delivered a GAAP loss of 28 cents a share, 13 cents above expectations. Revenues rose just over 46% on a year-over-year basis to reach $16.4 million, $2 million over the consensus estimate.

Management bumped up FY2023 sales guidance to $62.5 million to $63.5 million from $59 million to $61 million previously. Management also slightly increased its gross margin guidance to between 71% to 73% from 70% to 72%.

During the quarter, NeuroPace implanted its first patients with the RNS System in the community setting as part of their Project CARE initiative and still is on track to complete enrollment in a study called NAUTILUS to evaluate the RNS system for treating Generalized Epilepsy.

Analyst Commentary & Balance Sheet:

The analyst community is mixed on NeuroPace's current prospects. Since third quarter results were posted, three analyst firms including JP Morgan have reiterated/assigned Buy ratings on the stock with price targets proffered between $9 and $12 a share. Both Morgan Stanley and Wells Fargo maintained their Hold ratings with identical $9 price targets.

Just under two percent of the shares outstanding are currently held short. Two beneficial owners have sold off just over $300,000 worth of shares in the fourth quarter to date. That is the only insider activity in the stock so far in 2023.

The company ended the third quarter with just over $61 million in cash and marketable securities on its balance sheet after posting a net loss of $7.13 million in the quarter. Cash burn for the quarter was only $2.2 million, however. This was down significantly from the $9.8 million worth of cash burn from the same period a year ago and from $4 million in the second quarter of this year. The company has approximately $56 million in long-term debt and accrued $2.2 million in interest expense on that debt in the quarter. Management has stated their current balance sheet will fund operations into 2026.

Verdict:

NeuroPace, Inc. lost $1.91 a share in FY2022 on just over $45 million worth of revenues. The current analyst firm consensus has the company losing $1.39 in FY2023 as sales rise to $63 million. In FY2024, they see losses falling slightly to $1.29 a share as revenues rise some 14%.

NeuroPace is targeting a large potential market, has done a nice job reducing cash burn, is delivering solid revenue growth, and is a story to keep an eye on. However, profitability is years down the road and NeuroPace, Inc. stock has doubled since August and now is up against the low end of analyst price targets. Therefore, I would not chase the recent rally in the shares. If the stock drifted back under $6 a share, I might consider establishing a small " watch item" holding in this name at that point.

A generation which ignores history has no past — and no future ." - Robert A. Heinlein

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