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.