ClearPoint Neuro Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 8, 2023

Key Takeaways

  • ClearPoint Neuro reported a record Q2 revenue of $6.0 million (up 14% YoY), driven by a 40% increase in the biologics and drug delivery segment while capital equipment revenue fell 38%.
  • Gross margin dipped to 53% versus 63% a year ago due to higher‐volume, lower‐margin preclinical services and transitional costs from opening the new Carlsbad manufacturing facility, with margins expected to recover as the facility ramps and services mix normalizes.
  • Operating expenses rose as R&D (+50%) and sales & marketing (+46%) investments funded personnel, product development and the new manufacturing site, with headcount now sufficient to support planned launches through 2024.
  • The biologics & drug delivery pillar is anchored by strategic, milestone‐based pharma partnerships (e.g., UCB) that can generate over $10 million per program before drug commercialization, enabling ClearPoint to target cash‐flow breakeven prior to any large drug approvals.
  • New product rollouts include FDA submissions for operating‐room navigation tools and the PRISM laser system (5 installs in limited release, 5 more planned by year-end), supporting a goal of 100 installed sites and operational cash flow breakeven by Q4 2025.
AI Generated. May Contain Errors.
Earnings Conference Call
ClearPoint Neuro Q2 2023
00:00 / 00:00

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Operator

Greetings, and welcome to the ClearPoint Neuro, Inc. second quarter 2023 financial results conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. Comments made on this call may include statements that are forward-looking within the meaning of securities laws.These forward-looking statements may include, without limitation, statements related to anticipated industry trends, the company's plans, prospects, and strategies, both preliminary and projected, the size of total addressable markets or the market opportunity for the company's products and services, and management's expectations, beliefs, estimates, or projections regarding future results of operations. Actual results or trends could differ materially. The company undertakes no obligation to revise forward-looking statements for new information or future events.

Operator

For more information, please refer to the company's annual report on Form 10-K for the year ended December 31st, 2022, and the company's quarterly report on Form 10-Q for the 3 months ended March 31st, 2023, both of which have been filed with the Securities and Exchange Commission, and the company's quarterly report on Form 10-Q for the 3 months ended June 30th, 2023, which the company intends to file with the Securities and Exchange Commission on or before August 14th, 2023. All the company's filings may be obtained from the SEC or the company's website at www.clearpointneuro.com. I would now like to turn the call over to your host, Joe Burnett, Chief Executive Officer. Please go ahead.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Thank you, thank you to all of the investors and analysts on today's call. Thank you also for being a part of ClearPoint's vision and journey. Our mission and our priority is to help restore quality of life to patients and their families who are suffering from some of the most debilitating neurological disorders imaginable. In the second quarter of 2023, the company returned to double-digit growth and delivered record revenue of $6 million in the quarter. We have also continued to make progress across our four pillar growth strategy, including pillar one, biologics and drug delivery; pillar two, functional neurosurgery navigation; pillar three, therapy and access products; and pillar four, achieving global scale.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

I will now turn the call over to Danilo D'Alessandro, our CFO, to review our financial performance in the quarter, after which I will add some detail to our four pillar growth strategy and expectations for the second half of 2023. Danilo?

Danilo D'Alessandro
Danilo D'Alessandro
CFO at ClearPoint Neuro

Thank you, Joe, and thank you all for joining us today. Looking at the second quarter 2023 results, total revenue was $6 million for the 3 months ended June 30, 2023, and $5.2 million for the 3 months ended June 30, 2022, which represents 14% growth versus the second quarter of 2022. As a reminder, our revenue is made up of three components: biologics and drug delivery, functional neurosurgery, navigation and therapy, and capital equipment and software. Biologics and drug delivery revenue includes sales of disposable products and services related to customer-sponsored preclinical and clinical trials utilizing our products. Biologics and drug delivery revenue increased 40% to $3.4 million in the second quarter, up from $2.4 million in 2022.

Danilo D'Alessandro
Danilo D'Alessandro
CFO at ClearPoint Neuro

This increase was fueled by a 155% increase in biologics and drug delivery service revenue as we expand our service offering to pharmaceutical customers. The biologics and drug delivery service growth was partially offset by a $0.9 million decrease in product revenue. Functional neurosurgery navigation revenue consists of commercial sales of disposable products and services related to cases utilizing the ClearPoint system to deliver medical device therapy to the desired target. This revenue segment increased 1% to $2.2 million for the second quarter. Capital equipment and software revenue, consisting of sales of ClearPoint reusable hardware and software and of related services, decreased 38% to $0.4 million in the quarter from $0.6 million for the same period in 2022, reflecting fewer placements of ClearPoint capital and software.

Danilo D'Alessandro
Danilo D'Alessandro
CFO at ClearPoint Neuro

Gross margin for the second quarter of 2023 was 53%, as compared to a gross margin of 63% for the second quarter of 2022. The decrease in gross margin was primarily due to an increase in biologics and drug delivery preclinical services, which to date have had a lower margin than product sales as we increase our presence in this space. Increased and duplicated costs related to the transition to the new manufacturing facility also contributed to the decrease in gross margin in the quarter. Research and development costs were $3.6 million for the 3 months ended June 30th, 2023, compared to $2.4 million for the same period in 2022, an increase of $1.2 million, or 50%.

Danilo D'Alessandro
Danilo D'Alessandro
CFO at ClearPoint Neuro

The increase was due primarily to increases in personnel costs, including share-based compensation of $0.8 million, and increases in product development costs of $0.4 million as we invest in our technology platforms, particularly our software and biologics and drug delivery offering. Sales and marketing expenses were $3.5 million for the second quarter, compared to $2.4 million for the same period in 2022, an increase of $1.1 million, or 46%. This increase was due to additional personnel costs, including share-based compensation, as we expand our commercial reach in preparation for multiple new product launches over the next 18 months. The expanded hiring reflects the learning curve required to train and educate on the expanding ClearPoint product portfolio, which will be targeting new physician customers and new surgical arenas within hospitals.

Danilo D'Alessandro
Danilo D'Alessandro
CFO at ClearPoint Neuro

General and administrative expenses were $3.2 million for the second quarter, compared to $2.7 million for the same period in 2022, an increase of $0.5 million or 19%. This increase was due primarily to an increase in share-based compensation of $0.2 million and an increase in the allowance for credit losses of $0.2 million. Net interest income for the three months ending in June 2023 was $0.1 million, compared to $0.1 million net interest expense for the same period in 2022. With respect to our cash position, as of June 30, 2023, we held cash, cash equivalents, and short-term investments of $26.5 million, compared to $37.5 million as of December 31, 2022.

Danilo D'Alessandro
Danilo D'Alessandro
CFO at ClearPoint Neuro

While our operational cash burn in the second quarter was broadly in line with the prior year, we expect our operational cash burn to reduce meaningfully in the second half of 2023 compared to our first half of 2023. The reduction in operational cash burn will be driven by 1, the easing of supply chain conditions that allows us to gradually reduce the inventory. 2, operating leverage due to higher revenue. 3, our existing headcount should be sufficient to support our business into 2024. In addition, in the second quarter of 2023, we invested $0.3 million to set up our new pac- manufacturing site in Carlsbad, California. With that, I'd like now to turn the call back to Joe.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Thanks, Danilo. The second quarter of 2023 was a record quarter for ClearPoint Neuro, with $6 million in sales, driven by 40%+ growth in our biologics and drug delivery business, which is where the majority of our hiring and investment has taken place in 2023. Let's start the conversation with that first pillar of growth, biologics and drug delivery. We continue to gain traction and earn business from more than 50 pharma and academic partners who are using our ClearPoint Neuro products and services. We expect these partnerships to not only grow in number, but in scale and sophistication. A perfect example of this is a recently signed agreement for a multi-platform gene therapy program. This is a blueprint strategic partnership whereby ClearPoint Neuro will earn a cash payment for milestones tied to the clinical and regulatory success of the drug product itself.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Importantly, these milestones do not begin at commercial approval of the drug, but throughout the drug development process, where ClearPoint Neuro specialists play an integral role. This agreement is a clear and concrete example of how a drug candidate successfully navigating the regulatory process can contribute meaningfully to our results. This would only be possible because of our focus and our investment in a preclinical touch point that starts very early in the drug development process and is yielding terrific results thus far. While delays or even cancellations of some programs are expected, we believe our unique product portfolio and our expanded, yet neuro-focused service offerings, make us the premier partner for drug companies in the space. For perspective, one partnership could generate more than $10 million per program in potential revenue to ClearPoint in products, services, and milestones before the drug is ever commercially available.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

If all 50 current partners were to progress through phase 3 trials for their drug candidate, the potential for ClearPoint Neuro could be in the $ hundreds of millions over the next 10 years, just from preclinical and clinical work. The key message here is that we are not depending on commercial drug approval to reach operational cash flow breakeven and can achieve that key milestone prior to any large incidence drug approvals. One example of this progression through the regulatory pathway is the announcement earlier this morning from one of our clinical stage partner companies, Aspen Neuroscience, who are based here in San Diego. They announced IDE approval from the FDA for their phase 1, 2A clinical trials to treat moderate to severe Parkinson's disease. We are thrilled to be working with them on this important clinical study.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

In the event that a drug company achieves commercial approval, then the potential is much greater. We need to remember that the goal of many of these advanced gene and cell therapies is not only to address symptoms, but to sometimes cure the underlying disease itself. If a one-time administration of a drug could safely cure these debilitating diseases like Huntington's disease, Parkinson's disease, epilepsy, et cetera, then the demand for these treatments will be much greater than for the device and surgical interventions used today that sometimes simply control the symptoms. As an example, there are over 1 million patients in the United States alone living with Parkinson's disease, and yet only about 7,000 are treated annually with deep brain stimulation to control the symptoms. That is less than 1% of the total population struggling with this disease.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

We believe that proven drug alternatives that are endorsed and even prescribed by the more common neurologists, and not just the neurosurgeon, will dramatically expand the number of patients seeking or even demanding treatment. The neurologist is key to driving that education and demand. Hiring a commercial team focused on neurologists is a very expensive endeavor and difficult to scale. ClearPoint Neuro has the benefit of many pharmaceutical partners that already have a neurology channel to get the FaceTime and presence we need to build awareness and build the market itself. The commercial economics to ClearPoint Neuro can change as well in a commercial setting. This is due not only to our expertise, our experience, and our intellectual property, but also for regulatory reasons.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

When the PTC Therapeutics drug Upstaza was granted CE Mark approval for commercialization, the ClearPoint Neuro SmartFlow cannula was written directly into the label of the drug as part of the European marketing authorization. To say it differently, our SmartFlow is the only cannula that is to be used for delivery of Upstaza into the brain in the European Union. The regulatory reason for this is the battery of bench, preclinical, and clinical testing that is done to show drug compatibility with the delivery device, all of which we gather and organize for the notified body or for the FDA. This is not a small task and is essential to documenting the safety and predictability of the drug and device interaction.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Here's where ClearPoint Neuro has over a decade of experience gathering this data, refining our product, and even adding to our portfolio and IP, as you saw with our recent announcement of a cell therapy version of our delivery technology. In the future, you will see ClearPoint Neuro with multiple routes of administration to diverse targets in the brain, spine, and central nervous system, which will unlock new pharma partners that are prioritizing these alternative targets to the deep brain, as we do today. Why is ClearPoint investing so heavily into this biologics and drug delivery space? We believe our technology, our experience in neurosurgery navigation, and our significant head start puts us in a unique position that is worthy of maintaining and even expanding that lead.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

It is also very beneficial to have a more diverse customer base, where we are not just depending on the hospitals themselves to purchase our products. We are often working with large and well-capitalized pharma companies that are already investing hundreds of millions into the space. Temporary downtrends in hospital procedures or capital spending can be offset by development and service revenue from pharma, who value our head start and have access to capital even in challenging environments. If we think about the true potential of this strategy, let's imagine that ClearPoint Neuro's existing partners, not new ones, but the 50 or so that we have today, achieve commercial approval for their drug. That would be 50 different gene and cell therapy drugs available, treating more than 30 different neuro indications.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Patients around the world would be speaking with neurologists who have been educated by their pharma sales rep about getting treated. Imagine that each of these drugs is co-labeled with one of our multiple different cannulas, so we have become an essential part of the pharma company's supply chain. The very high switching costs necessary to move to a different delivery device because of the significant testing and clinical work necessary, is a barrier for new entrants. Because of this essential nature, we are able to not only protect pricing of our devices and navigation systems, but even expand commercial ASPs, which even at several times our current ASPs, would be a fraction of the overall cost of the procedure.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

We would be in a position to earn not only milestones, as already announced, but potentially also royalties, increased commercial device pricing, and even package sales to pharma companies that want to kit the delivery device along with the drug itself and take the hospital out of the procurement equation for that procedure. If this future is real, then every leading neurosurgery center will need a ClearPoint Neuro relationship, and our installed base will further expand. We will grow roots and be an essential part of this new standard of care. We believe many hospitals will start working not only for commercialization, but for participation in the clinical trial work itself, which is why we feel confident in our ability to reach an installed base of 100 surgical sites by the end of 2025.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

That is the rationale as to why we continue to invest in the space, which you saw in Q2, relative to R&D spending and a temporarily lower gross margin. On the R&D side, we've continued development not only for these new routes of administration, catheters, cannulas, and needles, as already discussed, but we have also continued development on new head frames like our Orchestra frame, new advanced drug delivery software to add to our Maestro platform, and other technologies designed to make the procedures faster, simpler, and more predictable, like MRI conditional drills and dedicated infusion pump solutions. On the gross margin side, in an effort to build our presence and reputation in the preclinical space, we performed a few projects at lower margins to show the value and responsiveness we bring to our partners.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

As we look ahead, we believe that this too, has been the right investment and is giving us valuable experience as we jumpstart this exciting part of our business that leads directly to strategic partnerships mentioned before and is already yielding results. Now, that was a lot of detail, but let's move on to our second growth pillar of functional neurosurgery navigation. This part of the business was relatively flat year-over-year, as the growth we saw in deep brain stimulation navigation procedures was somewhat offset by the navigation of laser procedures, particularly laser ablation for epilepsy. We have spoken about a high cancellation rate of procedures that increased during COVID due to illness, staff shortages, and supply chain issues. It seems that the cancellation rate has come down for many of our navigation procedures, but it has remained elevated or even increased for these laser epilepsy procedures.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

This seems to be stemming from reimbursement denials for procedures in this half of the laser ablation market. The appeal process is common and sometimes successful. However, the denial often takes place a couple days before the surgery itself, and it is often not possible to find another suitable patient to fill that scheduled MRI time. The result is that we miss out on the case for that day. This is something we are certainly paying attention to as we look to build our own laser business in the future, where it seems laser cancellations for tumor cases has not been nearly as common and the number of procedures continues to grow. The other delay on the neurosurgery part of the business is that one of our brain-computer interface partners had to place our co-development programs on pause due to their internal constraints.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

which also negatively impacted revenue in the quarter, and likely for at least the next couple of quarters, depending on the timing and availability of additional funds. Similarly, our capital revenue for the quarter was down, which can happen from quarter to quarter based on timing and installation date. What I will mention of note is that we have launched a new capital subscription process as another tool for capital placement. This tool allows a hospital to sign up for a multi-year commitment that spreads the investment out over five years. The economics are very similar; however, there is a delay in revenue recognition in the first year, as it acts as more of a service or rental agreement than a capital purchase, which would all be recognized day one of the placement.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

We have now had five hospitals sign up for the subscription service as part of our pilot, and we believe this will be a popular option in the years ahead. As a result, the capital line of our earnings will likely be flat or maybe decrease in the future, where these subscriptions or rentals will increase the service line of the capital business. On another positive note, we have had success on multiple new navigation technologies that we plan to submit to the FDA before the end of the year. These technologies will not only improve workflow for MRI procedures, but also represent our first navigation tool that is designed to be used start to finish in the operating room and not require the MRI at all.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

As a reminder, more than 95% of all DBS and laser procedures are performed in the operating room and not the MRI suite today. This tool will allow us to compete where the vast majority of procedures are already taking place and not rely on moving users from the operating room into the MRI, which is often a completely new environment for the physician and for the hospital. We see this as a potential product transition to ClearPoint that can be fast and with fewer barriers because of the more familiar workflow deployed today. For our third pillar of growth, therapy and access products, we have made progress with the new installs of Prism as part of the limited market release for our first laser therapy system.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

We currently have five systems installed worldwide and expect up to five more by the end of this year as part of the limited market release, where we test our system on multiple MRI scanners and software types, as well as in multiple indications, including epilepsy and tumor. These cases give us experience and help us build educational materials for a broader launch in 2024. We have identified and began the training of our dedicated clinical specialist team, which will be able to support complete laser cases, including both navigation and therapy, by the end of this year. While we are very early in the limited release, we are pleased with the ease of use and the capability of our system. Of all the installations performed to date, the clinician feedback has been very encouraging, and we expect higher utilization of the system in the future.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Laser ablation for neuro applications represents an approximately $30 million market today. The Prism product, combined with the capability of our team and our platform, should give us a competitive advantage, and as we have multiple applications supported, including deep brain stimulation, biopsy, laser ablation, brain-computer interface, and biologics and drug delivery. The exciting part of these first three pillars is that we plan for each pillar to be a growth driver in the next two to three years. Biologics and drug delivery will drive most of the growth in 2023 and 2024, and neuro navigation, especially in the operating room, as well as laser therapy, will contribute more substantially in 2024 and 2025.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

If all three of these pillars achieve our development milestones and modest expectations for market growth, we expect to exit Q4 of 2025 at operational cash flow breakeven, which again, would represent about 50 hospitals doing 50 cases a year, plus the contribution of our biologics and drug delivery services. This really represents pillar number four of achieving global scale and profitability, which is something we think about frequently and prioritize. While we do have $26.5 million in cash available, we want to make sure that we hit that inflection point and move toward profitability. As mentioned earlier, we have made substantial investments in our quality system, regulatory capabilities, and our operations, including a new manufacturing facility in Carlsbad, California. This investment was for a clear purpose as well, ensuring that all of our sophisticated pharma companies see us as a reliable partner and supplier.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

With more than 50 active pharma partnerships, you must understand that we are audited by these companies on a monthly, if not weekly, basis. Having a strong team and manufacturing facility in place to pass these audits with flying colors is another advantage we have when working with the pharmaceutical industry that can separate us from the competition. Similarly, we've expanded our global regulatory footprint to include multiple new countries beyond only the United States and the European Union. The investment is real, but it is also a powerful tool with pharma customers when they see this capability to expand to broader and sometimes underserved markets. It is 1 more reason to choose the ClearPoint offering. I'm happy to report that our Carlsbad facility is ahead of schedule, and we actually completed construction of the new clean room here in the second quarter.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

We believe that we will be able to produce sellable and inspected products by the end of this year and wind down our redundant operations in Irvine, California, by the end of 2023. As seen in 2022, based on the timing of some larger cash events, we expect the operational cash burn in the second half of 2023 to be lower than in the first half. While our margin dipped down in Q2, we do not expect this to be a long-term issue, but more of a reflection that we are currently launching new products and services in biologics and drug delivery, laser therapy, access devices, and operating room navigation. All new product introductions have some level of ramp-up efforts at launch that take some time to scale.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

We believe we have a portfolio of products that can achieve 70%+ growth margin in aggregate in the years ahead, especially when the growth of products once again overtakes services with all of these new product introductions. We continue to see an exciting opportunity in front of us and have worked incredibly hard getting all the puzzle pieces in place over the past couple of years. Now, our focus is putting our existing strategy and resources to work to gain scale and leverage. As mentioned, we have $26.5 million in cash at the end of the quarter and expect our operating burn to meaningfully decrease in the second half of this year, as the vast majority of our headcount is already in place, and we will wrap up the transition to our new manufacturing facility.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

We remain focused on executing our key value-creating milestones over the next six to twelve months, including new strategic biologic partnerships, initiation of new drug clinical trials, submission of the first BLA using ClearPoint technology to the FDA for commercial approval, expansion into the operating room, and exiting the limited market release for our Prism laser therapy system. That's a lot to digest, so let's take a break and open up the floor to any questions.

Operator

Thank you. The floor is now open for questions. If you do have a question, please press star one on your telephone keypad at this time. If your question has been answered, you can remove yourself from the queue by pressing one. Again, ladies and gentlemen, it's star one. Please hold while we pull for questions. Our first question comes from Frank Takkunen from Lake Street Capital. Go ahead, Frank.

Nelson Cox
Analyst at Lake Street Capital Markets

Hi, this is Nelson Cox on the phone for Frank today. Thanks for taking the questions. Sounds like growth in OpEx during the quarter was mostly related to the new facility, and it should be lower in the second half of the year. Just trying to think about how OpEx should be moving forward. Is that something that we should look at Q1 for more of a baseline moving forward, or how should we think about that?

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Well, I would think it. Thanks for the question, Nelson. I think it a little bit differently in that, you know, as I mentioned, our, the biggest part of our OpEx is really labor and personnel. We're up to about 115 employees, I think, worldwide, and that's the number that we sit here in Q2 that fell into the operating expense line, plus some into the cost of goods, obviously. What I would expect is that overall headcount number to remain relatively flat, as, again, a lot of the hiring we've done for these biologic services, as well as preparation for the launch of products on the commercial side, the hiring has already taken place, the training has begun, and we don't really need to hire many additional people. The biggest driver of OpEx should not be changing that much.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

What can change quarter to quarter is some things we do with partnerships, whether it's co-development work, whether it's licensing the technologies, things like that. That can be a little bit choppy, but the, the primary driver should be remaining relatively flat with just some inflationary adjustments, you know, over the next 6-12 months. Hopefully, that helps.

Nelson Cox
Analyst at Lake Street Capital Markets

Got it. Yeah, thank you. In the past, you've talked about total partnership revenue potentially being up to $10 million prior to commercial approval, with milestones included in the recent UCB partnership, could this be a particular partnership, have revenue potential in excess of $10 million? Going forward, I think you've talked about it being a blueprint, is that something we should expect being a standard feature moving forward?

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

I would say UCB is one example of the multiple deals that we have either signed, that are in term sheet, status or are actively being negotiated right now. It just happens to be one of the ones that we announced. But from that standpoint, you know, yes, these, these are the large incident type, relationships and, target, drug markets that require not just quite a bit of preclinical and clinical work, but the clinical trials themselves sometimes can be upwards of 100 or 200 or even more patients. Selling products into the clinical trial prior to the commercial approval is certainly something that drives that.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

The larger the incidence level, as well as the larger the number of alternative treatments that are available, the more detailed the FDA is going to require to go ahead and prove the efficacy of the drug, as well as the economics of the drug itself. So again, UCB is an example, but we've got multiple other programs in the works that, you know, could potentially exceed that $10 million number if all of the milestones as well as the trial revenue is successful.

Nelson Cox
Analyst at Lake Street Capital Markets

Got it. Then one more quick one, if I can. Do you see any opportunities to restructure some previous partnerships to include that driven milestone payment structure?

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

I think absolutely. You know, in fact, as we have continued to add biologic services, there's, there's a, a larger part of the menu that we can offer, and many of our, our existing partners have kind of staged things. You know, as a reminder, 1 level of a partnership could simply just be some initial benchtop testing, followed by some consulting services, consulting hours, and things like that. Year 1 might only be $20,000-$30,000, give or take. Where that changes is once they're happy with our product and they recognize that we're, you know, very likely going to be a part of their drug label. These companies also realize that, you know, our experience is valuable, our head start is valuable, and that they're going to be working with us for years, if not decades.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

They want some assurances that we are going to be around and supporting them in the future. It's normally year one or year two into a relationship where we begin talking through these much more sophisticated and strategic agreements, which can include backup manufacturing, they can include access to IT, they can include a lot of different things so that the pharma company can ensure control and access to this important part of their supply chain. It's, I would say it's more common than not that we might have a partner today that will eventually turn into a more sophisticated agreement.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

That's also a common point where we would negotiate commercial terms of the device itself, which in many cases can be, you know, multiples of the existing, sort of break we give in pricing during the development process for, for the disposable products. I'd, I'd say, you know, many more of those 50 partners, we still have the opportunity to continue negotiating as they get closer to initiating their clinical trial.

Nelson Cox
Analyst at Lake Street Capital Markets

Great. Thanks again. Thanks for the color there. Congrats on the quarter.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

All right. Thanks, Nelson.

Operator

Again, ladies and gentlemen, it's star one, and our next question comes from Neil Chatterji from B. Riley. Go ahead, Neil.

William Wood
William Wood
Healthcare Equity Research Analyst at B. Riley Securities

Hi, this is, this is William Wood on for Neil. Thanks for taking our questions. Really appreciate everything that you've done. It's looking good. I'm actually, just to start off, a quick question on your gross margins. I know you said those were primarily focused on, or can, as a result of your Carlsbad facility, as well as, preclinical services sort of being a, a larger part of that. With the Carlsbad facility, you know, coming to an end by year-end, how should we think about... I know you said gross margin should reach into the 70s in the coming years, but, you know, maybe give us a little bit more, or color on how we should be thinking about those for, for 2023, maybe even 2024. Is preclinical going to be a continued large contributor?

William Wood
William Wood
Healthcare Equity Research Analyst at B. Riley Securities

Then obviously Carlsbad will, will sort of fade off. Just a little bit more color would be appreciated. Thanks.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Sure, William. The two primary drivers, as you pointed out, for the kind of the reduced gross margin in the quarter and, you know, to frame it appropriately as well, if you look back at our history, quarter to quarter, based on what revenue gets recognized, the gross margin can actually jump around quite a bit. If we look specifically at the second quarter, there were two primary drivers. One is the redundant space and facility that we have relative to our prior Irvine facility and the new Carlsbad facility. Bringing Carlsbad up, having some certain construction, but also having redundancy and travel between the sites and things like that, while making the same number of products, that is obviously going to impact gross margins, and we certainly saw that in the quarter.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

The second thing, which is also, we believe, somewhat temporary, is that, you know, when you launch a new product, we're kind of the new kids on the block and, you know, we want to go ahead and demonstrate our services and prove our capabilities. And in a couple instances in the quarter, we ran some studies and did some testing for, for, you know, really mega cap pharma companies to get our foot in the door. And I would say that strategy worked. However, you know, giving a discount on that first study kind of brought some of the, the gross margin down as well. So, you know, what I would say is that the 53% you saw in Q2, we're, we're definitely not going to flip a switch and be at that 70% mark, but 53 is probably the lowest that we would expect.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

As Carlsbad is fully up and running and Irvine kind of shuts down by the end of this year, you know, that's when we'd start seeing a, kind of a, a broader improvement as well. To, to answer your other question, we do absolutely expect continued growth of services. That gross margin of the services is going to continue to be a significant factor. While that margin is not going to be as high as typical product disposable revenues, which we've seen in the 70% before, it's also not going to be lower-- as low as it was necessarily in Q2. It'll be a, you know, a much more positive contributor to our, to our margin moving forward.

William Wood
William Wood
Healthcare Equity Research Analyst at B. Riley Securities

Got it. That's very helpful. Additionally, and, hey, correct me if I'm wrong or, or maybe even fill in the gap. You had mentioned that you were going to be potentially moving into a, a tumor, a laser business in tumors. Sort of it sounded like you were gonna, you know, really sort of take on, on that. I guess if you could just sort of flesh that out for me, on how much of a, a tumor industry you plan to incorporate into your business strategy?

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Yeah, I think it's going to be a significant focus for us in a number of different ways. you know, the, the first comment I would make is that if you look at the hospitals that ClearPoint has a presence in today, the primary user of our technology is someone called a functional neurosurgeon, and this is someone that would treat something like essential tremor or Parkinson's disease, or epilepsy, or things like that. This is commonly where deep brain stimulation is used, but it's also where laser is a common treatment for epilepsy. If you think about where our strength and most of our relationships are today, it's primarily on the functional neuroside of the business, which is also, laser for epilepsy. What's a truly untapped potential for us is the neuro-oncology side of the business, which is generally a different neurosurgeon....

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

A different customer that historically we, you know, we've had very little experience with. You know, we have probably five or so sites that are routinely using us for oncology purposes today. I think the launch of a new laser that's designed and software that's designed specifically for tumor applications, is gonna be a way to be introduced into that tumor market. Then similarly, we have a number of drug partners that are also interested in doing work for tumors, not treating epilepsy or Huntington's or Parkinson's or things like that.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

As some of those partners move into the clinical trial stage, we have an opportunity to work with those hospitals on either laser therapy or drug delivery, or what I think is actually gonna be somewhat common is, is what I call a hybrid therapy, where the procedure starts with an ablation and then a drug is introduced into the margin to kind of clean up the part that was maybe missed by the ablation itself. You're absolutely right. You know, part of the investment that we are making is to go into oncology with a commercial team, now that we've got products and pharma partnerships that can kind of carry some of that burden with us.

William Wood
William Wood
Healthcare Equity Research Analyst at B. Riley Securities

Thanks, William. That sounds, sounds really good, actually. Additionally, you, you've mentioned some of your, your milestone deals or, or at least sort of, hinted to them. Can you talk to your ambition about really trying to incorporate these milestone deals, where you have a tie to the drug itself, and how you think these will be advancing, you know, going into second half and then later on in development? You know, is this really gonna be a, a top priority? Just any extra, any, any details would be appreciated.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Yeah, well, I mean, the way I think of it is this, is, you know, for the... I don't want to say the first time ever, but, you know, first time in, in sort of recent, recent memory, we have a number of different pharmaceutical companies that are now gonna be dependent on a device of some kind to get their drug to the target. The decision that they need to make is to say, "Look, do we build our own R&D team that's really a device company? Do we set up our own device quality system and complaint handling and supply chain, all of these different things? Is that an investment as a pharma company that we want to build up from scratch?

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Do we just partner with a company like ClearPoint that effectively can give them that black box solution of a quality system, complaint handling, neuroscientist specialist team that's in the field to help deliver the drug?" We're, we're really building ourselves into that turnkey solution, and that turnkey solution is what we feel earns us a seat at the table as it relates to, to getting a piece of the success of the drug itself. It's really a, you know, a risk-sharing agreement, and the bigger part that we play in the development cycle of the drug, you know, the more that we should benefit from, from some of that risk as well. I think what you'll see in the future, our expectation is there's gonna be a bunch of different flavors.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Some might be heavily weighted towards milestones, some might be heavily weighted towards commercial pricing of the product, of our devices. Some might be weighted towards royalties on the drug itself. You know, there, there might be three or four different flavors, but the concept will all be the same, is that we want a long-term relationship with pharma, and pharma wants a long-term relationship with us, and, and we feel like we are one of the, the, the best value ways to do it, compared to trying to build it yourself.

William Wood
William Wood
Healthcare Equity Research Analyst at B. Riley Securities

That, that makes sense. Just a quick follow-up. I know you've mentioned, or, or sometimes it's been a, a bit of a illusion, or we don't quite get all the details on, on these partnerships, the milestones, et cetera. Sometimes even who your partners are. Do you think you'll be at giving or providing more color going forward just so, you know, we have a better idea of where to be looking, you know, as you mentioned, Aspen this morning, or Aspen, sorry, this morning or just now. You know, will we be getting better color in the future? Just curious.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Yeah, I mean, I think that we, we don't necessarily do it by our choice. You know, if, if, if I, if I wanted to or if I could, I would simply announce all the partners. But I, I think what we try to do is, most importantly, be a good and loyal partner to these people we're working with in the pharma industry. If they ask us to keep it secret up until a certain point, we're happy to oblige by that. I think the two times that you've seen us really announce these types of partnerships in the past, which I would expect to continue in the future, is one, maybe where we do a multi-platform type deal like we announced with UCB. That could be one, one trigger, if you will, for an announcement.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

The second one could be the, you know, announcement of an IDE or a first patient enrolled in a trial. It's very common that you would see a press release from us that says, "Hey, congratulations. Happy to be a part of this." Those are kind of the two key milestones that we've seen in the past, but at the end of the day, we want to be good partners, and we let the pharma company decide when the right time for them to announce it.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

I can tell you in, in some cases, especially with some of the smaller pharma and biotech companies, the fact that they're able to announce that they're working with ClearPoint actually can benefit them from a fundraising standpoint or from an awareness standpoint, or even when they're recruiting centers or sites for their clinical trial, which often starts way before the first patient is enrolled. You know, having the ClearPoint name attached to them, we believe is a, a benefit to their brand and their trial as well. It's, it's possible that that could be accelerated, but it's, it's probably not going to be something that we drive.

William Wood
William Wood
Healthcare Equity Research Analyst at B. Riley Securities

Great. No, no, that all makes sense. Then, with your lasers, I know it's a limited launch. You've mentioned that you've already installed 5 worldwide and expect 5 more. I'm just curious, like, what would be the maybe year-over-year growth, or what would be the growth rate, or what type of installation do you think we could be expecting once you have a full release? Or is it just too early to sort of tell?

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Yeah, I mean, I, I don't know we want to give too many details. What I, what I would tell you, just to set expectations, is that, you know, getting an installation is not a simple process. You know, there's really three, three things to consider that are, are barriers that need to be overcome, and, and it's really why there's only a couple companies in this space. You know, they've, they've done a lot of hard work to, to, to build the market to where it is, but it has not been easy. You know, the, the first is that you need to have and be able to show compatibility on all of the different systems. You have to get FDA clearance for all of the different systems.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

If you look at our approval today, with CLS, we actually only have approval for 3 Tesla scanners that are manufactured by Siemens and by GE. We really only have access to part of the known universe, and we have to continue with some more testing and another FDA submission before we can add Philips or before we can add 1.5 Tesla to the equation. That's one, one sort of things that, that, that rate limits how quickly we go. The second one is that as, as we shared with our navigation software as well, getting any new piece of hardware or software into a hospital is so much harder than it's ever been in, in my career, specifically from an IT standpoint.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

The, the level of testing and questionnaires to ensure there's no cyber criminal activity, or you're introducing anything to a hospital, the, the hoops you have to jump through are, are so significantly more severe than they've ever been, that any new capital equipment is hard, and, and laser fits into that as well. The third part is that there's quite a bit of testing that actually has to go into an install. Let's say we have a hospital that has approved the evaluation or the purchase, or the subscription, they're ready to go. We need to get about, you know, a couple days of MRI time to do the specific testing for that hospital scanner and make sure we're operating with their protocols and everything else. Just getting that scanner time sometimes, sometimes can be slow going as well.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

You know, I think I said in the prepared remarks that, you know, if the, if the second half of this year, we can install up to five more systems as part of the limited market release. You know, by definition, I would say the LMR is meant to be slower than a full market release, there's a certain governor on how fast we can even go during the FMR, so it's not going to be a flip of a switch, we have a massive install base. I think where our focus is gonna be is getting installed at hospitals that have significant volume, where we can compete for that volume that's already there.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

You know, I think that's gonna be a bigger part of our, our story versus, growing the, the market, which, which is gonna take a bit more time.

William Wood
William Wood
Healthcare Equity Research Analyst at B. Riley Securities

That makes sense. I appreciate that. Last question. You, you gave some updates last time and, and, and hear now about your, the recent regulatory pathway, setting up sites in the EU and then most recently, in Brazil. Just I believe you maybe mentioned China in the past also. Just curious where we might be, if there's any additional countries that you're, you know, sort of currently in the works and what, where, when we might be expect to see some of these additional sorry, operational areas come online?

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Yeah, there's probably a few. You know, one of the key, the key first steps was the MDSAP certification that our quality system received last year. That opens the door from a quality system standpoint, into a number of countries, including, I think, Canada, Japan, Australia, Brazil, a few other ones that are included in that consortium. That's one place where I think you could look to that, you know, you should expect, you know, sometime in the next couple of years that we'll be, we'll be expanding or at least starting the regulatory process. The priority I would say we have outside of the U.S. and the E.U. is again, based on our pharmaceutical partners.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

We might have a pharma partner that is based in one particular country in Europe or in Asia or the Middle East, that really wants to do some clinical work on their home, their home turf, if you will, and is willing to put some funds into that process to go ahead and get that specific regulatory approval. You know, we're, you know, in a world with access to unlimited capital, yeah, we would go as quickly as we possibly could, but again, we want to make every dollar count these days. Our focus is still growing the strategy in the U.S. and Europe. However, opportunistically, when, you know, we can satisfy the needs of one of our pharma partners, we're, we're happy to oblige.

William Wood
William Wood
Healthcare Equity Research Analyst at B. Riley Securities

Got it. Understood and very helpful. Thanks, Joe. I'll jump back in the queue.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Mm-hmm. Thanks, William.

Operator

Thank you. That is our last question. I would now like to turn it back to Joe Burnett for any closing remarks.

Joe Burnett
Joe Burnett
CEO at ClearPoint Neuro

Once again, thank you to everyone interested in being a part of our team's journey here at ClearPoint. At this point, we are in fact, sort of reiterating our guidance for the year of revenue between $25 million and $27 million, which you saw in our press release. This is an exciting time as we plan for new product and service launches across all four of our growth pillars. We've worked very hard to get to this spot and are excited for our team, but also for the patients that we hope to treat with these new devices and therapies in the near future. The patient and the family are why we are here and ultimately who we are working for. Thank you very much and good night.

Operator

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

Executives
    • Danilo D'Alessandro
      Danilo D'Alessandro
      CFO
    • Joe Burnett
      Joe Burnett
      CEO
Analysts
    • Nelson Cox
      Analyst at Lake Street Capital Markets
    • William Wood
      Healthcare Equity Research Analyst at B. Riley Securities
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