NeuroPace (NPCE 2.68%), is growing the implantable device market for treating drug-resistant focal epilepsy and setting itself up to dominate it for years to come. With an offering that provides better outcomes than its competition, significant penetration into epilepsy centers across the U.S., and potential label expansions that could just about double its current addressable market, this company could offer significant upside to investors.
A large -- and mostly untapped -- addressable market
NeuroPace makes a $50,000 implantable device, the RNS (Responsive Neurostimulation) System, that continuously monitors epilepsy patients' brain activity and responds to patient-specific seizure patterns. This allows for personalized, targeted, and data-driven treatment.
Currently, the RNS System is only approved for adults with drug-resistant focal epilepsy. But the $590 million market cap company believes it's sitting on a $26 billion addressable market in the U.S. alone. Even better, it believes that if its device's approval is expanded to include patients under 18, as well as patients with generalized drug-resistant epilepsy, its addressable market could double.
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Preventing seizures with data
While there are other treatments for drug-resistant epilepsy, including devices and surgical interventions, NeuroPace claims that its RNS System is the only commercially available brain-responsive device of its kind -- capable of continuously monitoring brain activity, recording it as an electroencephalogram (EEG), then recognizing patient-specific patterns associated with seizures and potentially preventing those seizures before they start.
NeuroPace claims that its post-approval data shows that patients using RNS experienced an average 82% reduction in seizures at year three, and approximately a third of them had a 90% or greater reduction in seizure frequency. Plus, 28% of users achieved more than six months of freedom from seizures -- all this in patients whose seizures had been resistant to treatment with medication.
One year after implantation, patients experienced a 67% reduction in seizures in its post-approval study. That result compares favorably to the 44% average reduction achieved with current deep brain stimulator devices or the 35% reduction seen in patients with implantable vagus nerve stimulators over the same time frame.
In 2020, 132 of the approximately 200 epilepsy centers in the U.S. were implanting NeuroPace's device in patients. The company hopes to increase that to 148 by the end of 2021. But while it's good to see more centers utilizing the device, the small-cap device maker believes its revenue growth will primarily come from those centers already implanting RNS Systems increasing the number of patients they prescribe it to.
The secret ingredient is data
NeuroPace has a formidable and growing data set, with approximately 6.6 million EEG records in its database as of its June 3 earnings release. And no other implantable seizure control device has the ability to continuously record an EEG. Combining all that data with its analytics could be the formula that will enable the company to further distance itself from the competition.
Using NeuroPace's nSight cloud platform, clinicians can monitor patients' progress remotely, optimize programming parameters, and better counsel patients. Though the platform was only launched this year, over 60 epilepsy centers are already using it. The company anticipates that among those centers implanting RNS Systems in patients, nearly all will be using nSight by year's end.
As their exposure to the platform and the NeuroPace name increases, clinicians may well consider prescribing these devices more often. With a potential for improved patient care accompanying potential practice reimbursement for remote EEG review, in-clinic data review, and device programming that is not available with other treatment options, there are quite a number of reasons to believe clinicians may lean toward offering NeuroPace's device to their patients.
Is this the next Abiomed?
Much like Abiomed (ABMD +0.00%) did, NeuroPace is starting with a single product and aggressively promoting it to a core market of early-adopting specialists. Taking another page out of Abiomed's Impella playbook, the epilepsy-fighting company is tracking and touting an increasing number of scholarly publications of research that features its device -- one method to potentially increase provider confidence and peer-to-peer engagement. Both companies have taken to the cloud to offer real-time data monitoring, which is likely making their offerings more sticky, and both have appealing gross margins -- NeuroPace at 74% and Abiomed at 80.9%.
While NeuroPace's revenue growth slowed to 11% in 2020, prior to the pandemic, its growth was accelerating. Over the period from 2016 to 2019, its compound annual growth rate (CAGR) exceeded 30%. By comparison, Abiomed grew Impella sales from $107 million in 2012 to $310 million in 2016, resulting in a CAGR of 23.7%. Over that same period, Abiomed's share price rose from $18 to $106.
Interestingly, one reason NeuroPace's revenue growth has decelerated was because it improved its product. In 2018, it introduced an updated version of the RNS System that doubled its battery life to an average of eight years. Due to that, the company expects its revenues from system replacements will keep decreasing until early 2024. Despite this, its total revenue grew by 14% to $41 million in 2020, with 29% growth in initial implant revenue. Perhaps even more telling, the NeuroPace device boasts a replacement rate north of 90%. Compare that to the 73% reimplantation rate for vagus nerve stimulators, and the relative stickiness of the NeuroPace platform becomes clear. That points to likely future gains in market share.
NeuroPace has experienced steady revenue gains over the last few years, but with a rapidly growing mountain of data that it can use to further improve its device, a sticky cloud-based platform, high replacement rates, high gross margins, and a large addressable market, the company is in many ways still preparing for takeoff. Investors may want to add it to their small-cap watch lists.
