Nevro Corp.

Ladies and gentlemen, thank you for standing by and welcome to NEVRO's third quarter 2020 financial results call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. If you require any assistance, please press star 0. I would now like to turn the call over to Matt Basco from Gilmartin Group for introductory remarks. Please go ahead, sir.

Good afternoon, and welcome to Nevro's third quarter 2020 earnings conference call. With me today are Keith Grossman, Chairman, CEO, and President, and Rod McLeod, Chief Financial Officer. The format of our call today will be a discussion of third quarter trends and business results from Keith, followed by detailed financials from Rod, and then we'll open up for questions. Earlier today, Never released its financial results for the third quarter, which ended September 30th, 2020. A copy of our earnings release is available on our investor relations website. This call is being broadcast live over the internet to all interested parties on November 5th, 2020. and an archived copy of this webcast will be available on our Investor Relations website. Before we begin, I'd like to remind everyone that comments made on today's call may include forward-looking statements within the meaning of federal securities laws. Our results could differ materially from those expressed or implied as a result of certain risks and uncertainties. Please refer to our SEC filings, including our Form 10-Q, to be filed later today for a detailed presentation of risks. In addition, we will refer to adjusted EBITDA, which is a non-GAAP measure that is used to help investors understand Nevro's ongoing business performance. Please refer to GAAP to non-GAAP reconciliation tables within our earnings release. And now I'll turn the call over to Keith.

Thanks, Matt. Good afternoon, everyone. Thank you for joining us today. Today we reported third quarter 2020 worldwide revenue of $108.5 million, representing growth of 8% compared to the third quarter of 2019. as well as a sharp sequential recovery of 92% growth over the second quarter of 2020. U.S. sales grew 8% of a prior year to $90.1 million in the third quarter, representing sequential growth of 78% over prior quarter and driven by an increase in patient and customer activity compared to the severely COVID-impacted second quarter of 2020. In the third quarter, total U.S. permanent implant procedures increased 9%, while new patient trial procedures were down only 5% compared to the prior year period. Reported U.S. revenue also excludes 0.7 million of product shipments due to a customer bankruptcy during the period. Daily patient trial activity increased 50% over the second quarter of 2020 and has improved sequentially every single month from July to October. were pleased with the dramatic pace of recovery in the U.S. and third quarter trial activity, which was approaching, though still just shy of prior year levels as we enter the fourth quarter of 2020. International revenues increased 10% year over year, as reported, or 5% on a constant currency basis to $17.5 million in the third quarter, representing sequential growth of 226% over the prior quarter. The increase in international revenue was primarily due to a successful Omnia launch and an increase in patient and customer activity compared to the prior quarter of 2020, along with a rebound in customer inventory levels. Remember that SCS procedures are performed on an outpatient basis with relatively little OR time required and no inpatient or ICU resources that are typically consumed. We've seen our customers return to performing procedures as quickly as patient willingness and facility safety requirements have allowed. While we expected to see a shift from hospitals to ASCs during the pandemic, our third quarter site of care mix returned to first quarter of 2020 levels, though we still believe that the gradual shift towards performing SCS procedures in ASCs will continue to grow over time as a percentage of total procedures. Case cancellation rates peaked in April with a shutdown of elective procedures, and those cancellations have since sequentially declined month over month all the way through October. We saw few cancellations resulting specifically from COVID in the third quarter. In the case of trials, while we've largely recovered, we're still trending just below prior year levels due, we believe, primarily to a reluctance on the part of new patients to seek care during the pandemic. As we sit here today at the beginning of November, a majority of the canceled permanent implant cases from Q2 that have been willing to reschedule have been completed, which leads us to believe that directionally the revenue recovery curve appears to be playing out as we discussed with you last quarter. With trials slowly recovering and some backlog cases still expected to be recaptured this quarter, we feel our earlier expectations for revenues that are roughly flat with prior year are still reasonable. However, we're also continuing to monitor areas where COVID cases have recently started to rise, as I'm sure you are. Thus far, we've seen only a small impact to elective procedures through October in the U.S. and Europe. However, increases in COVID activity around the world will continue to exert pressure on patients' willingness to seek care of all kinds and potentially even impact facility capacity in some areas, which could provide some downward pressure to our view for Q4. While the environment continues to be a difficult one, we feel strongly that we're faring better than our SCS competitors and, in fact, many of our MedTech peers. Within the SCS market, we believe the launch of Omnia has provided an advantage to Nevro, leading to additional market share gains. Even through the pandemic, position enthusiasm around Omnia and its versatile platform, capable of offering HF10 and lower frequencies, in addition to pairing of frequencies, has led to a more rapid adoption among our customers than we initially anticipated. We believe these favorable trends confirm that the Omnia platform provides us a compelling reason to once again engage with every doctor practicing in the SCS space, and we view most pain doctors and neurosurgeons in the field as potential customers. We also believe our commercial team is executing at a higher level, which has strengthened customer relationships during this difficult time. Our dedication to patient support and long-term outcomes is fundamental to our company, and it's an area in which we continue to invest. During the third quarter, we expanded our digital physician education programs and remote patient support programs to an enthusiastic response from our customers. In addition, we launched Omni in both Europe and Australia in the second quarter and continue to ramp up efforts in those markets. Our supply chain has remained healthy and our balance sheet provides us great resilience with roughly $573 million in cash and investments at the end of September, actually up from the end of the quarter before it. One of the areas I'm proud of is our ability to manage expenses and drive operating leverage without eroding our team or our core capabilities to drive growth. As a result, I believe we continue to be in a strong position to execute on a long-term strategy, and Ron's going to talk more in a few minutes about our results in the expense area. We continue to invest in R&D to evolve our product capabilities, and we're going to have some really interesting things to talk to you about in 2021. We're also working hard to expand our total addressable markets with new clinical data and new patient indications. Our PDN study continues to move forward, and we've had a very high percentage of study subjects in the control arm cross over to the SCS treatment arm at six months as permitted by the trial protocol. We believe that's a strong indication that our therapy addresses a critical and unmet need in this patient population. We still plan to present the next round of complete six-month data along with a preview of the 12-month responder rate data from this trial at NANDS in January of 2021. We've been in pre-submission discussions with the FDA regarding our data and our submission strategy, and I'm pleased to say that we're now planning to submit our PMA supplement to the FDA in the current quarter, which keeps us on track for a mid-year 2021 approval and a second half commercial launch. In next quarter's call, we'll begin to talk a bit more about our market launch plans and expectations for this really exciting opportunity. On our non-surgical refractory back pain study, we continue to expect to present our three-month primary endpoint data at NANS of 21 in January, with journal publications to follow. In total, we should have a very large presence at NANS, as we usually do, with quite a number of data presentations at this conference, most notably, of course, the PDN and NSRBP studies. In August, CMS published their proposed rule for outpatient payments. Outpatient payment rates for both hospital and ASC facility fees were increased between 2% and 5%. We view that as a positive for the therapy. Also in this proposed rule, CMS recommended a requirement for prior authorization of SCS procedures for Medicare fee-for-service patients in the hospital outpatient setting only. That was set to begin in July of 2021. Now, CMS's rationale for this proposed requirement was due to a perception on their part of over-utilization issues. We have very thoroughly reviewed the SCS utilization data, and we've submitted our comments to CMS on their proposal. In those comments, we pointed out that any overutilization was driven in large measure by non-rechargeable or primary cell products, which require surgical replacement on a much more frequent basis than rechargeable devices like those from Nevro. The reduced product life of a non-rechargeable product creates a situation in which patients must undergo more unnecessary and costly procedures, resulting in greater expenses and increased surgical risk to replace their system much more frequently than rechargeable systems. Despite this reduced durability and lower resulting economic value, Medicare reimburses non-rechargeable systems at the very same amount as rechargeable devices. As a reminder, rechargeable technology has demonstrated a much longer life cycle of 7 to 10 years or even longer. This is 2 to 4 times the reported life of primary cell products. We strongly recommended that if CMS were to proceed with the prior auth requirement, that they should limit it to non-rechargeable products. However, if they do proceed with requiring prior auth for the entire category, we'll be well equipped and prepared to manage that process. Remember that the vast majority of our business, which consists of both private pay patients and our Medicare Advantage patients, require prior authorization today. Lastly, we announced in mid-September our plan to establish manufacturing operations in Costa Rica. Currently, as you know, we use contract manufacturing partners for our business. As part of our confidence in our growth plans moving forward, we are establishing in-source manufacturing for our pipeline of future products to ensure we have the most efficient cost structure and flexible capacity, while also maintaining the highest level of quality control as we scale. We entered into a 10-year lease for a manufacturing facility in Costa Rica with total capital expenditures expected to be approximately $11 million between 2020 and 2023, with an additional $10 million above implementation costs over the same period of time. We expect the new manufacturing facility to be validated and approved for commercial production in 2022. Since the pandemic began, our highest priorities as a company have been the health and safety of our customers, their patients, and our employees, the support and coverage of our customers and their clinical case activity throughout the period, the integrity and readiness of our supply chain, the prudent stewardship of our balance sheet, and the maintenance or improvement of our competitive position and our capabilities in order to exit this crisis the way we came in back in the first quarter which was with a ton of momentum. Thus far, I believe we've achieved these five goals and we'll continue to work hard in the coming weeks and months to further our progress. While we're certainly still in the midst of this pandemic and dealing with its impacts upon our business, I remain very excited about the various growth drivers for this business. As we think about our ultimate emergence from the pandemic, the combination of a return to overall market growth, a continuing to grow Nevros market share, a measure of pent-up demand likely to exist at that time for SCS-suitable patients, and the impact of new product and indication launches like PDN, it should be the beginning of a very attractive period for the company. Lastly, and as I have been from the beginning of all of this, I'm grateful to the entire Nevro team for their hard work and their dedication during a time of great and continued uncertainty. Thank you again for joining us today, and with that, I'll pass the call over to Rod.

Thanks, Keith. I'll begin with our worldwide revenue for the three months ended September 30, 2020, which was $108.5 million, an increase of 8% compared to $100.2 million in the prior year period. Third quarter 2020 revenue growth was primarily driven by an increase in patient and customer activity compared to the severely COVID impacted second quarter of 2020. U.S. revenue was $90.9 million, an increase of 8% compared to $84.2 million in the prior year period. Reported U.S. revenue also excludes $700,000 of product shipments due to a customer bankruptcy during the period. Year over year, U.S. permanent implants increased 9%, while trials were down approximately 5% during the third quarter of 2020. Although U.S. trials declined in the third quarter, we remain encouraged by the rebound in our business and continue to realize incremental improvements month over month in organic daily trials from July to October. International revenue was $17.5 million, an increase of 10% on an as-reported basis or 5% on a constant currency basis compared to $15.9 million in the prior year period. The increase in international revenue was driven by a successful Omnia launch and an increase in patient and customer activity compared to the prior quarter of 2020, along with a rebound in customer inventory levels. Gross profit for the third quarter of 2020 was $76.1 million, an increase of 9% compared to $69.9 million in the prior year period. Gross margin was 70.1% in the third quarter compared to 69.8% in the prior year period. Compared to the prior year period, the increase in gross margin in the third quarter of 2020 was primarily attributable to product mix. Operating expenses for the third quarter of 2020 was $79.6 million, a 7% decrease compared to $85.9 million in the prior year period. The year-over-year decrease in operating expenses was primarily related to reduced travel and training-related expenses, decreases in discretionary expenses during the COVID-19 pandemic, as well as continued management focus on driving leverage throughout the business which began well before COVID. This was partially offset by a one-time charge of $2.5 million in the quarter related to our CFO transition. Legal expenses associated with patent litigation were $2.3 million for the third quarter of 2020 compared to $1.9 million in the prior year period. We expect that operating expenses will return to a run rate roughly similar to the first quarter of 2020 as revenue continues to recover. Net loss from operations for the third quarter of 2020 was 3.5 million, a 78% improvement compared to a loss of 16 million in the prior year period. Adjusted EBITDA for the third quarter of 2020 was 13.6 million, compared to a loss of $2 million in the prior year period. Adjusted EBITDA excludes certain litigation expenses, interest, taxes, and non-cash items such as stock-based compensation and depreciation and amortization. Please see our financial tables for GAAP to non-GAAP reconciliations. During these uncertain times, we continue to focus on cash preservation while balancing the need to reinvest in the recovery process. Cash, cash equivalents, and short-term investments totaled $572.9 million as of September 30, 2020. Net cash increased during the third quarter of 2020 by $10.5 million. That concludes our prepared remarks. I'll turn the call back over to Matt to moderate the Q&A session.

All right. Thank you. And can we please open the line up for questions?

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Larry Bigelson of Wells Fargo.

Good afternoon. Thanks for taking the question, guys, and congrats on a nice quarter. One on the pipeline, one on the recovery. And sorry to ask such a short-term oriented question on the recovery, but I just wanted to understand. you know, your comments on the call. You know, on trials being down 5% in Q3, you know, the press release talked about, you know, recovery or improvement through July through August. So my question is, were trials up year over year in October? And is that cancellation rate that you talked about improving through the quarter? Are you seeing that ticked up and I had one follow-up?

Okay. Yeah. Two different things. So from a cancellation of cases standpoint, I would say that's been a very small factor, Larry, throughout Q3 and remains so, frankly, even in October. So that's good news. And it's a little hard. I mean, cases get put on and taken off the surgical calendar all the time. So sometimes it's hard to discern the nature of cancellation. We're more tuned into them now, I think, than we've ever been. But I think it's safe to say that COVID-related cancellations are sporadic and a fairly small element of our activity right now. From a trial standpoint, trials have gone up on a month-over-month basis for the last four months. Your question, I think, was, are they still below prior year trends in October? The answer to that is yes. So we've been really happy with the rapid kind of V-shaped recovery of patients willing to come in and seek treatment. And we think it's different from lots of other categories of patients, frankly, from other categories of pain patients. If you look at the doctor visit data to pain doctors, we seem to be doing better than most. than that category in general. So we're pleased with the bounce back with the pace and where it's landed and the fact that it continues to grow. It is still slightly below prior year. And I think, you know, as we try to diagnose the reason for that, Larry, it comes pretty squarely down to patient reluctance. I think it's not, while there is some, you know, friction in hospital and ASC capacity and new procedures, It's probably not that much, at least for us. And there's doctor willingness to get volume back. So everything seems to be lined up in the right way. But there's still some residual reluctance on the part of patients to seek care and a willingness on the part of some patients to defer care, even in this category. And we believe that will free up over time. but the triggers are probably a little bit different for every single patient. It might be employment. It might be the vaccine. It might be their local infection rates. It might be their level of pain. We think it will improve, but it probably won't be back to normal, I don't think, in this particular quarter. It's close, but we don't think it'll be back to prior year or pre-COVID levels.

That's helpful, Keith. And then on the pipeline, at a recent investor conference, you talked about new products in 2021. And I think you, you know, in addition to PDN and Virgin Back, you know, I think you alluded to new products on this call. Could you, are you willing to kind of give us any color on what new products you might be, you know, launching in 2021? Thanks for taking the questions.

Yeah, no, I'd like to keep that one wrapped up so we can unwrap it when we launch just for Lots of reasons, not the least of which is competitive reasons. We've been a pretty open book on new patient categories and indications and the trials and data sets that will get us there. As you know, we've been trying to keep things a little closer to the vest until we're ready on product introductions. But hopefully in the first half of 21, we'll certainly be able to talk more openly about some of those. Thanks.

I understand.

Your next question comes from the line of Robbie Marcus with JP Morgan.

Hey, guys. This is actually Allen on for Robbie. Just to start off, I had kind of a question on RDN. You know, now that you're kind of, you have a better visibility into that second half of 21 timeline. What should we really think about the pace of adoption in that market? I think you guys have talked about in the past how it's a little bit of a different kind of call point for you guys. So how should we really think about that business picking up in the back half of 21 and then in 2022 and beyond? Okay.

Alan, you said, I thought I heard you say RDN. Did you mean PDN? PDN. Sorry. Okay. It's been a long day. All right. So we were trying to figure out what RDN was and if we'd missed something here. So I missed part of the rest of your question. You're looking for any discussion of potential adoption rates after FDA approval?

Yeah, since that's just kind of like a different call point for you guys. Yeah. Yeah.

You know, I think we're probably not ready to provide forecasts or visibility or guidance of any kind on either adoption or investment for PDN, but I think we're close to being at that point. A lot of that body of work is behind us, but frankly, a fair portion of it is still to be done over the course of the rest of this quarter. I think when we get to the first quarter call, we will almost certainly dedicate a fair portion of that call They're talking about the size of the market, how we're thinking about market segmentation, positioning, launch strategies, and even investment levels. So give us another quarter on that one, and we'll provide a bit more visibility.

Got it. And then I guess talking about Omnia and kind of, you know, the other new products that maybe some of your competitors are bringing out. It seems like clearly OUS, that looks to have been a very strong launch for you. But even domestically, how should we think about physician willingness to really look at new products right now? Is that a discussion they're willing to have? And what are you seeing on the competitive front as well? Thank you, guys.

Yeah. Well, there's certainly a willingness to look at a new product like this with existing customers. That's clear. I mean, if you look at Omnia... It currently represents, you know, between 70% and 75% of our utilization in the U.S. market. In Australia, where you typically see, once a product's listed as a complete switchover, we have maybe, as we expected, now see a virtual 100% utilization of Omnia in Australia. And the European markets, where we've just introduced, are sort of somewhere in between but ramping up. ramping quickly. So the acceptance of Omni has been at least as good, probably better than our internal expectations among our own customers. With regard to other customers, I think you fall back on sort of a market share look. We do think we have continued to take a bit of share each quarter, even through COVID. It's really hard to quantify market share because we don't have a lot of transparency from our competitors, given their ownership structure. We do some of our own work on market share, but it's a little opaque, and it's difficult to make a really granular sense of it. But I would say we do continue to gain share, and if you look at share over a longer period of time, say from 18 months ago today, I think it's pretty easy to discern an increase from what was probably the mid-teens, you know, low to mid-teens to today probably upper teens to even 20% or so share of the U.S. market. So I think it's been a nice range of capture for us over the last, call it 18 months or so.

Your next question comes from the line of David Lewis. With Morgan Stanley.

Hi, can you hear me okay? Hi.

Yeah, we got you, David.

Perfect. Lucky me. Keith, thanks for taking the questions here. I guess just two for me, Keith. The first is, I know it's obviously early, but I started thinking about the structural growth rate. And obviously, at our recent conference, you were going to talk about broadly how investors can start to think about the forward year. I mean, I look at street consensus numbers for 21, Keith, and the kind of upper teens type of growth, 21 versus 20. versus 19. Obviously, that implies sort of a business that's kind of growing 10%-ish or 2X the market rate over a two-year period of time. How are you thinking about your ability to grow relative to market, or any thoughts you believe on this year, next year, and other revenue? And then kind of related to this, kind of raw, just thinking about profitability, that was a very, very good number here on a profit basis, and I appreciate OpEx will start to scale. But it does look like you're making dramatic progress on OPEX here and profitability towards the back after this year, and I'm sort of assuming that extends to the next year. So just first off, any commentary you want to share on top and bottom for next year, even at a high level?

Yeah. So as you might expect, there's not a lot I can give you on 2021. We don't have guidance for fourth quarter, much less 21. I do think we view this as sort of a pre and post, like probably most companies, pre and post-COVID And I think our view of the business on a post-COVID, and we think, by the way, the 21 will have some portion of both of those, uh eras within it but yeah i think our view of post-covid portion of 21 is is very bullish um you know we look at the things that are lined up with omnia and the trajectory we're on as a company um uh the execution of our sales organization the uh probably the impact from what will then be a fair amount of pent-up demand uh from patients whose uh whose pain doesn't resolve through some other way or and they don't have an alternative a therapy so so we think the whole space will actually see a bit of a um a nice long wave behind it when when covid resolves and if you layer on top of that the fact that we've been capturing share uh and we think we can continue to do that and that around the second half of next year we're launching pdn it it does feel like the outlook for that portion of 21 is quite good the real question is does that portion of 21 start on March 1 or September 1? Or is it kind of a slow and steady ramp up until somebody flips a switch of some sort? So I think that's what everybody is grappling with. I think between here and there, so the COVID portion of 2021 sort of feels to us like it'll be a continuation of maybe what Q3 looked like. with kind of slow and steady improvement and not a lot of impact from the kind of dramatic closures we saw back in March and April. Trying to piece all those together and come up with guidance is certainly a little bit difficult today. Hopefully, we'll get a little bit more clarity by Q1, but we'll just have to see. And maybe I'll let Rod take on the spending and operating income question. Sure.

Hi, David. This is Rod. Thanks for the question. From an operating expense standpoint, like a lot of other businesses, we're getting a little bit of a good guy in Q3 as expenses are reduced, travel, conferences, et cetera, related to COVID restrictions. So we're getting a little bit of lift from that. As even tracking as well, the management team has made a lot of decisions, a lot of which started before COVID. in terms of driving business leverage at Nevro here. Driving efficiencies in the sales channel, patient support process have continued to drive leverage, and we'll continue to focus on that as we go forward as well as other parts of the business. We've also continued to focus on driving investment and resources around our key strategic initiatives, which is driving focus in the business as well. As we noted, in Q3, we also had the $2.5 million of the CFO transition costs, and our litigation was $2.3 million versus $1.9 million in the prior year. And like Keith said, we're not providing guidance, but we are pleased with our adjusted EBITDA in Q3. As we go forward, though, we are going to have a bias towards growth. And with some of the initiatives and opportunities that Keith mentioned, there will be opportunities for us to forward spend, for instance, in the PDN, in anticipation of the PDN launch, where we could see a little bit of fluctuation on a quarter-over-quarter basis as it relates to some of that investment and as COVID restrictions begin to lift. So super pleased with our third quarter results and excited we're continuing to drive leverage throughout the business as we move forward.

All right, Rod, super helpful. And then, Keith, just one more quick, you know, Future question for you on sort of product pipeline. So number one, obviously Medtronic has sort of confirmed to be copying your clinical playbook, both in terms of PDN, non-surgical, as well as ULN. So two questions. One, you have kind of expressed obviously less relative interest in ULN, just given the clinical data requirements and the bigger opportunity you have in front of you. Is that sort of still your view relative to ULN, just given Medtronic's interest in that particular category? And then if you think about the future, Keith, I know you're not going to tell us much about what these products are, but should we think of this more as label extension or think of it more as fundamentally new therapeutic areas, stimulation patterns, things of that nature? So is it more software label or is it more hardware? Thanks so much.

Yeah. Yeah. Well, let me take the first one, ULN, I think, and Medtronic or any other interest. I expect our competitors to have an interest in the segments that we've expressed interest in for all the same reasons. They're good and large opportunities to grow the business and help a lot of patients. So I'm sure that they have the same interest for the same reasons. Assuming they couldn't get there with their technology, and I think that's a very large assumption in the case of PDN, they've got a long way to go. And if they want to generate the kind of data that we believe both regulators and payers and clinicians in the diabetes world want to see, they're going to have to pursue some pathway that doesn't represent a shortcut. And so there's a significant head start here. on the part of Nevro at the very least, and all of that's based on the assumption that high frequency doesn't have some meaningful differential benefit in this category of patients, something, by the way, that we believe and believe pretty strongly. Now, in terms of whether or not these indications are just claims or distinct markets and market launches, I really think in the case of PDN it's very much the latter. Or maybe better put, it's the both. It's both. It certainly has to be a label claim addition and FDA approval. But it is a distinctly different market, different referral base, different patients, a different type of pain, different competitive therapies, and a different decision-making process. And the payers will view it differently as well. So I think we look at this as really launching into an entirely new market. The last part of your question was, I think, what are the implications for the product, and could it be product differences over time as well? And it certainly could be. If not initially over time, I think that's quite possible. In fact, over time, it might even be likely. But we're taking this internally as a significant new product slash new market launch. David, does that help answer your question?

It does very much, sir. Thank you so much for the detailed answer. Okay. You bet.

Your next question comes from the line of Bob Hopkins with Bank of America.

Hey, thanks, and good afternoon. Hi, Bob. Hey. So just wondering how your thoughts may have evolved over the last couple of months on PDN and the timelines for when that could have a real commercial impact. I'm just curious if that's changed at all over the last couple of months as you guys are getting closer and closer to you know, data and commercialization and kind of what I'm getting at is, you know, is this going to be kind of a long slog in terms of developing the market or are there ways to, you know, accelerate the creation of those pathways?

Well, let me answer that a couple of ways. I'll tell you that as time has come along here over the last quarter or two, we're smarter about this opportunity internally at least in two ways. One, we continue to see more data. Some of that data will be seen by everyone in a couple of months. And we continue to get more information and get more data about the market and expose a lot more endocrinologists and podiatrists and internal medicine folks and primary care physicians on the technology and talk to a lot more patients and do a lot more market research. And we're doing really a tremendous amount of work internally. And I would say that the sum total of the impact of all those things is a has been a growing level of excitement among our team and our board about this opportunity. So I would say with each passing month, we get more psyched internally about the ability to enter this market and grow a meaningful and defensible business and help a lot of patients that couldn't otherwise be helped and start to talk to a whole different group of of doctors. So that's one side of it. In terms of the impact on the business and ways to accelerate, certainly we're always looking at ways to accelerate the impact. You know, if you think about maybe a mid-year approval, what do you do from then? Really, you can't do a lot of market education until you have an FDA approval, of course. I mean, those are the rules of the road. And like everybody else, we play by them. So most of our education effort will take place after an FDA approval. And we have some work to do with at least some payers out there as well. So those things take a little bit of time. On the other hand, there's going to be great exposure to not only six-month but 12-month data There will be data in the published literature by then. We will have presented data at not only NANs but likely ADA by then. And so there will have been a fair amount of exposure, and there is a lot of pent-up demand among these patients. So I do expect some short-term impact, but we have to get patients referred, get them trialed, and then get them implanted, and that referral comes from a new referral base. So we'll do as much as we can to seed that market and that initiative up front, but much of it will start at launch. And so I think you'll see a second half of 21 where there's almost certain to be some revenue impact, but it's likely to be mostly preparing for a broader revenue impact in 2022. So without putting numbers to it, I think directionally that's how you should be thinking about it.

Well, that's great. Thank you for that. And then one short-term-oriented question. I just wanted to understand your thought process around the comments you made earlier and reiterated about the fourth quarter. I'm just curious if your commentary on Q4 assumes an increase in cancellation rates from here and just what you're seeing on that front today. I just want to understand how you thought about those comments.

Yeah. It really doesn't reflect – I mean – You know, with October under our belt and a couple days in November, it really doesn't reflect current cancellation rates. This is less about looking at our own patient records and more about reading the newspaper and just kind of seeing what's going on out there and hearing what hospitals in Europe might be talking about doing in November and December, plans that they're making, rumors that are afoot. in certain countries about maybe treating certain hospitals or certain types of procedures differently. Nothing has actually happened at this point other than infection rates are beginning to spike around the world, and we're anticipating what might happen in the second half of the quarter. So, Bob, it's based much more on that than it is, hey, something's starting to happen in October. October actually felt pretty good. And keep in mind, this is a fourth quarter where when we talk about being flat over prior year, we were getting a whole bunch of traction last year in fourth quarter. That was a very strong comparable for us. We had just launched Omnia, and it was a good quarter for us. So I think absent a, you know, kind of an erosion of patient demand here in November and December due to COVID, kind of a flat performance to prior year feels, A, very good. and be pretty likely. But we temper that with what's the likelihood that there won't be an incremental COVID impact in November and December based on what we're seeing in infection rates, et cetera, and it seems like there probably will be. We can't size it. We don't have guidance. We can't give you a range. We just think it's likely to have some impact to that view.

Got it. Thank you very much. Appreciate it. Okay. Okay.

Your next question comes from the line of Danielle Altaffi with SBB Blu-Wink.

Hey, good afternoon, everyone. Thank you so much for taking the question. Hi. Thanks for taking the question. Keith, I just wanted to ask you, one of the competitors in your space has been, you know, talking about going on the offensive more, just generally speaking, and has specifically talked about spinal cord stims and their recent DTM launch. And we did see a data update there. I think it was the nine-month data back in October. I was wondering if you could talk about that and how you're viewing that. that potentially changing the landscape for you guys?

Yeah. Yeah, thanks, Danielle. I'd love to. You know, certainly that's something we've been following. The Temetronic you're talking about, and they held a company-sponsored webinar to present 12-month results for their new approach of multiplexing or pairing two existing low-frequency waveforms, which is something they call DT-AB, as you mentioned. I guess, first of all, it's important to remember that these data were simply released by the company. So they haven't been peer reviewed or accepted for publication or presentation anywhere at this point that we know of. It's sort of an unusual way to unveil important data, something at least I don't think we've seen before. But anyway, DTM, it seems like to us, based on what we know, to be sort of a simple trial and error programming of two low frequency programs. probably something in the area of 300 hertz and 50 hertz after performing traditional paresthesia mapping in the OR. So far, at least, Medtronic hasn't disclosed the frequencies or the waveforms involved to their own customers, which we know at least some of those customers have found sort of puzzling. The analogy we've used internally is I doubt most doctors would prescribe a pill with two active ingredients they didn't understand. And that sort of lack of transparency may seem equally inappropriate to some clinicians when delivering a dose of electric current. The pairing, by the way, of two frequencies is something that any Omnia user can program today if they want. Though, importantly, Omnia also gives them the ability to do HF10 in a pairing platform, as you know. As for the Medtronic data specifically, which I think is your question, this was a fairly small cohort that hasn't been peer-reviewed. They had a very high loss to follow-up in their 12-month data. I think it was like 15% or 16%. But they actually excluded them in their reported responder rate. In the SENSA trial, by comparison, we only lost one patient to follow-up at 12 months in a study that was double the size. And we actually included that patient in our intent to treat And finally, we didn't have Nevero personnel programming patients in the control arm, unlike this study where the unblinded employees program both the control and the test arm. So it's very different, and it's been received, I think, in the market as being that. And look, it is great to see competitors spending time and money bringing innovation and investment to the field. We kind of feel like if you're going to progress to therapy, we're going to need to see product specifications and clinical data that are just a bit more transparent and objective than this. But eventually all of this will be up to the bodies of scientific and clinical leadership in our field to adjudicate. In the meantime, we're pretty confident that the quality of evidence that we brought to the therapy through the initial RCT as well as our ongoing initiatives like NSRVP and of course PDN that we've been talking about and that those will continue to gain the greater support of decision makers going forward. But it's something we'll continue to keep an eye on for sure. And we are glad, as I said, that we have competitors that are bringing new things to the market to try to capture more of these untreated patients.

That's great. Can I just ask one quick follow-up? And it's around clinical data in general in this market. You know, when Nevro first presented their data and there was lots of excitement, but then it felt like it sort of subsided. This has always been an industry that has been driven more feature and relationship driven. And I'm wondering if you feel like now, a few years down the road, that the paradigm has shifted and the bar is is higher for data so you're pointing out all you know all of the issues with or you know the differences between the trials i mean does data matter more now in this industry is it continuing to matter more and more as more of these data sets come out that's a great question i um so i think the answer is yes uh without questions and and i think

Nevro coming to the market with the original RCT that it really boldly had invested in made a big difference. And I think it's changed the tone and tenor of the market and the discussion around the importance of clinical data a lot since then. But I think it's kind of an ongoing process. I don't know how many data sets we publish or present every single year. It's a lot. And so we've added to this body of literature very considerably over the last three, four, five years. And I do think that as you want to grow this business through new kinds of patients, it's going to require the payers and, in some cases, entirely new sets of users to and I'm thinking of PDN specifically, are going to demand a level of clinical evidence to which they're accustomed. And so I think that will elevate the game for SCS, generally speaking, if you want to grow the market by treating new categories of patients.

Thank you.

Thanks, Danielle.

Your next question comes from the line of Joanne Winch with Citi.

Good afternoon. It's been a long day already. Hi, Joanne. Hi. All right, two questions. The competitive landscape, you've been fairly active in taking market share. Help me understand how much of this is Salesforce-driven, product-driven, or what do you think is really going on in terms of just the general competitive landscape?

Yeah. Well, I'll take the coward's way out and say it's 50-50, or maybe in an effort to look more like I'm putting a finer point on it, I should say 60-40, right? Look, I really think it's both. I don't think I know how to break it out. Our sales team, our sales and commercial management group, our marketing group has been going through lots of changes over the last year and a half. I think they are doing a great job. They are much more productive and effective now. uh they're doing the right things they're focused on the right things they're not focused on the wrong things uh and we're just getting a ton more productivity and they're winning um which is terrific so and and we have we have more to do there i think in in putting a much finer edge on our commercial uh initiatives but i'm i'm really pleased with where they are and i think it has quite a lot to do with uh our relative performance to competitors over the last year or two But I wouldn't underestimate the importance of Omnia. I think we said when we introduced this, this wasn't just a minor generational improvement, just a smaller can or with a new waveform. This was a significant strategic change of being able to say, look, we can bring to the market a unique product like HF10 for stimulating these patients and getting better workflow, completely better outcomes with better data to prove it, but we can also do everything else. And we can, you know, any patient that requires any kind of different treatment over time, we can pair those therapies, we can do them separately over time. That's a really meaningful change. That isn't a, you know, one-year life cycle kind of change. That's a significant strategic product offering change for us. And it's durable, and I think it's meaningful. And so I think that has had also quite a lot to do with what's been going on. Sorry, I don't really know. Kidding aside, I don't really know how to weight the difference between those two things, but I think they've both made a difference, and I think they'll both continue to make a difference.

That's helpful. Just for my second question, the whole discussion of CMS preauthorization, I'm trying to understand whether or not the whole discussion at the beginning of this was a so by the way, this is happening, but don't worry about it, or how should we sort of gate this? Thank you.

Well, I think the safest way to kind of tuck this in and think about it as part of the story is that usually proposed rules become final rules. Everybody comments, and rarely do they affect change from proposed to final. Sometimes it does. I felt it was important for investors to understand two things. One, that we looked at the utilization data as well, that we've come to a very clear conclusion about what they were seeing and why they were seeing it, and we've presented that back to them. And I think that we had a very engaged, very curious and maybe even a little bit surprised audience when we did present that back to them. That doesn't mean that the final rule will be any different than the proposed rule. That's, I think, always the safest baseline assumption that we as an industry will have to deal with prior auths for this segment of patients, just like we do for almost all the other patients. And we do it now. We do it well. We'll continue to do it with this category. But I do think what is clear to us is that there's an educational initiative that needs to happen with not just CMS, with payers. And they need to understand what's beginning to happen to their patient next, what they're really paying for. and how often they're paying for the same therapy for the same patient when they need not do that. So this was, I think, an eye-opener for us and for CMS and something that we'll be, a message we'll be, I think, sending on a regular basis.

Thank you. Your next question comes from the line of Kayla Crum with Truist Securities.

This is David Orozco. I'm for Kayla. Thanks for taking the questions. You bet. First one for me, you know, if we assume that the fourth quarter typically is kind of strong or the strongest quarter given the dynamics around patients meeting their deductibles by the year end, you know, how do you expect that factor to play out this year given that, you know, the impact of COVID may have left some of the patients reducing healthcare spend earlier in the year and thus not meeting their deductibles by the fourth quarter? And then, You know, the second part to that question is you look into the first quarter next year, you know, how do you think about patients who already heard any act on evidence thus far around patients pulling forward procedures from the first quarter into the fourth quarter, given that they may have some visibility around returning to work and potentially trying to get an SCS procedure in ahead of that?

Yeah. Yeah. It's a... Well, it's a sharp insight on the deductible. We're watching that. We actually think that is part of the normal Q4 seasonality, and we don't think this is a normal Q4 by any stretch. So I do think that that impact that we typically see in Q4, patients may be trying to rush through the door to therapy to take advantage of a lower or spent deductible. is going to kind of be attenuated this year. So I think we'll see some impact from that, but I think it will be reduced, frankly. Whether or not payers or patients will try to pull procedures in with the assumption that they're going to be busy and back at work after the first of the year, that I don't think we have any insight to. The logic makes sense to me, but I don't think we've seen evidence of it, and I don't think we've tested that. that thesis with any of our patient uh research um another area of speculation we've heard is that doctors may uh may press in q4 to um to treat patients where there's optionality between q4 and q1 when they may try to push patients into q4 due to a perception of of uh of tax law changes from the 20 to 21. now it it may be that the election results of this week may may dull that impact if there was ever going to be one as well. So these are interesting theories, and they're really hard to test and prove until you watch them. I think that none of them would change the commentary that we've given you today about Q4, however.

Okay, that's helpful. And then I guess a little bit more on TV, and I appreciate the commentary you've provided so far on that. You mentioned the press release of the companies in the early discussions with the FDA around the submission strategy there. I guess, has there been anything surprising to you in those initial conversations, and can you provide any insights around the payer strategy or the market development strategy? of progress that you've made so far ahead of the commercial loans? And then in the second part to that, have you seen any increase in maybe off-label use or physician interest so far in that indication just following the three-month debut product names last year? Thanks.

Eric Miller Okay. There's a few buried in there. So conversations with CMS, I think there's nothing I would reveal that I haven't. I think Look, the conversations we had with both FDA and any conversations we've had with CMS, which have been, by the way, with CMS so far, really not a lot has happened yet with CMS. Most of our conversations have been with FDA. Those have gone very well. Keep in mind, FDA saw not only a submission strategy that we wanted to pursue, but the data that would support it. And they're not obligated to make a commitment in a pre-submission process. They're merely giving feedback. But with that feedback, we concluded that submitting primarily leaning on the six-month data, not entirely, but primarily in the Q4 timeframe was the right thing to do. And so we viewed that as a good thing. In terms of CMS and payers, there just hasn't been a lot of contact on this point yet. We have been doing some research with private payers. We have been gauging the response from medical officers within different types of private payers. We have some really interesting data there. It's been actually very encouraging. But that data is, as you saw on the three-month data, that data is pretty compelling, and that trial was very well designed. um so we kind of expected a good response and we've gotten a good response but i think a really full push with private payers will come once we have a little bit further data published a six-month data published presented we have an fda approval we will have a planned and orchestrated initiative to launch with payers that will that will go out very quickly finally on uh off-label No, we really haven't seen a lot of off-label. I mean, this is not a we can't go out and promote PDN to remember what is a new group of referring doctors who aren't necessarily aware of SCS at all, much less as a treatment for some of their patients. So I wouldn't expect a ton of off-label treatment. There likely has been some, but it probably would be a onesie-twosie kind of thing where patients are maybe coded as being on-label, and they just would never show up to us. So that would be between the doctor and the patient and the payer. So I would say off-label from a visible standpoint has had very little impact so far.

Our final question comes from the line of Margaret Ketzar with William Blair.

Hey, guys. Thanks for taking my question and squeezing me in at the end. You know, a couple of things for me. So number one, you guys tend to talk about Omnia relatively bullishly. I know everyone's so focused on PDN and these new TAM opportunities. But maybe talk to us a little bit about why so much confidence that, you know, not only can it be and has been a driver this year, But this is a driver for next year. Is it simply reach? Is it, you know, continued evolution of the technology, meaning you'll kind of launch new lead forms on top of what you got? You know, any details there?

Margaret, I just want to kind of feed this back to you because I just want to make sure I really understand the question. You're wondering why the impact of Omnia would exceed a normal new product lifecycle in its impact and why it would help us in 2021 and beyond? Is that right?

Yeah, I mean, it'll be the second year of the launch, right? So why would it be as impactful in a second year of launch as it has in the first other than the pandemic?

Well, two reasons. One is this is a little bit of a lost year. You know, a lot of product launches, I think, were kind of in suspended animation this year, didn't get the full impact. I think that's true not only in our sector, but in others. There are even companies who pulled or delayed new product launches that I'm aware of that will launch them after the fact. So I think you get a little bit of a timeout in the game for new product launches. In the case of Omnia, and I spoke to this a little bit earlier in the call, so I won't go into quite as much detail, but I don't think Omnia is really a typical new product lifecycle kind of thing. You know, when you introduce a product that says you can uniquely and solely offer the most effective stimulation therapy for these patients in the industry, and now you can offer what everybody else can do in the industry on a standalone basis or on a paired basis, that's not typically something that you can erode over the course of what might be considered a normal life cycle. That is kind of a permanent and durable uh capability that can't be replicated without high frequency so um now does that mean it's it's an effective product and we never have to develop another new product for the next two three four five years of course not but i but i do expect the durability of impact from a product platform change like that to be far more meaningful and durable than just a typical life cycle uh add-on uh or capability change in a product i hope that makes sense

Yeah. And part of the question is, is that just more of an education effort on your end because you're not able to reach some of these clinicians? And would that then be new accounts that maybe you guys aren't a part of or trying to go deeper within accounts?

Yeah, and that's the part that got kind of delayed this year. So certainly our existing doctors understood Omnia immediately. They had the ability to choose to use Omnia as their primary product in their patients they were going to treat anyway with an Evro product. That conversion has happened pretty widely. But the ability to really get to those doctors who might be using a competitor's product to treat other different kinds of patients and really talking about using Omnia or even more so to get to completely competitive accounts, that's been harder to do, I think, during COVID for lots of reasons. So I expect that gets a little bit easier as our sales force and our doctors and our patients, you know, ramp up to full speed over the coming months and quarters.

Okay, great. Thanks a lot, guys.

I would now like to turn the conference back to Mr. Grossman for any additional or closing remarks.

Okay. Thanks, everybody. And I'm aware of the fact that we stranded a question or two, but we're at the mark here. But I appreciate everybody's time and interest in what we're doing. It certainly has been an interesting time. And if you have more questions, please reach out, and we'll look forward to talking to you next quarter.

Thank you for participating in today's conference call. You may now disconnect your lines at this time.