Nevro Corp.

Good afternoon. My name is Katherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the NEVRO's fourth quarter 2020 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Julie Dewey for introductory. Thank you. Please go ahead.

Good afternoon and welcome to Nebro's fourth quarter 2020 earnings conference call. We appreciate you joining us. I'm Julie Dewey, Nebro's VP of IR and Corporate Communications. 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 fourth quarter trends and business results from Keith, followed by detailed financials from Rod, and then we'll open up the call for questions. Please note there are also slides available related to our fourth quarter performance on the NEBRO Investor Relations website on the events and presentations page. Earlier today, NEBRO released its financial results for the fourth quarter ending December 31st, 2020. A copy of our earnings release is available on our investor relations section of our website at nevro.com. This call is being broadcast live over the internet to all interested parties on February 24th, 2021, 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 filing, including our Form 10-K, to be filed later today for a detailed presentation of risks. The forward-looking statements in this call speak only as of today, and we undertake no obligation to update or revise any of these statements. 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 relief. And now I'll turn the call over to Keith.

Thanks, Julie. Hello, everyone, and thank you for joining us. Today we reported fourth quarter 2020 worldwide revenue of $109.7 million, representing a decline of 4% compared to the fourth quarter of 2019. On a sequential basis, worldwide revenue increased 1% over the prior quarter. U.S. sales declined 3% of a prior year to $94.6 million in the fourth quarter, but increased 4% sequentially over the prior quarter. International revenue decreased 8% year-over-year, as reported, or 14% on a constant currency basis to $15.1 million in the fourth quarter, and that represents a sequential decline of 14% over the prior quarter. Both U.S. and international revenue was meaningfully impacted by the resurgence of COVID activity in the second half of the quarter. U.S. trials per day, PERMs per day, and revenue decreased. all improved over Q3 results despite the increase in COVID activity. Now, while encouraging, it's important to note that activity started stronger at the beginning of the quarter and degraded over the course of the quarter as COVID activity increased. Compared to prior year, fourth quarter, total U.S. permanent implant procedures decreased 1%, with trial procedures declining 8%. Approximately 200 scheduled U.S. permanent implant procedures, or roughly 5 million in sales, were canceled and still unrecovered at the end of the fourth quarter, with the majority of those occurring in the month of December. Reductions in both trials and firms in the quarter were caused by a combination of a facility reduction of elective procedures, patient reluctance to move forward due to COVID concerns, or the exposure or diagnosis of healthcare providers with the COVID virus themselves. Throughout 2020, And despite the impact on our business of COVID, we delivered strong progress across our business. First, we maintained our workforce during an unprecedented and challenging pandemic environment and enabled our Nevro team to do their job safely, in most cases virtually, and effectively. We also added key members to our leadership team. Our field team continued to support our customers and patients side by side with frontline healthcare workers and patients. We use our unique NeverCloud capabilities to reach out to patients and have now had over 800,000 remote patient interactions throughout the challenges of the COVID environment, both optimizing therapy for our patients and getting canceled cases back on the calendar for our customers faster than our competitors could. We continue to capture share in our US market throughout 2020 and expanded our competitive advantage with the ongoing Omnia launch. In fact, Over the combined course of 2019 and 2020, we think we've picked up four to five U.S. market share points. Our R&D and clinical teams prioritize and advance future products and indication growth drivers, including the first major upgrade to our Omnia platform, which you'll hear more about later in this call. On the intellectual property front, we were successful in our offensive litigation against both Boston Scientific and StimWave, maintaining exclusivity for high-frequency SES therapy. We completed a successful capital raise within weeks of the onset of COVID, adding over $300 million to our balance sheet, and demonstrated prudent expense management throughout the year, delivering adjusted EBITDA positive performances in both the third and the fourth quarters. We kicked off a project to establish our own manufacturing operations in Costa Rica, and we expect to be approved to make and sell our own products sometime next year improving our cost position and our manufacturing flexibility. Continuing our long-standing commitment to our growing body of clinical evidence, data for both our PDN and NSRBP randomized clinical trials was accepted for the late-breaking abstract session at NANS, positioning us to help physicians treat new and underserved patient populations suffering from debilitating chronic pain. We ended the year on a high note by announcing our FDA submission to seek approval for the treatment of chronic pain associated with PDM. This condition affects millions of patients who are suffering today with no really good options. In any year, I think these are accomplishments that we would be proud of. But in 2020, our team accomplished these goals during a global pandemic. And I want to thank the entire NIPR team for all that they did, not only to respond to the pandemic, but for keeping the company moving forward in spite of it. So let me update you on the current state of the COVID impact on our business. As of today, COVID continues to impact patient demand, case scheduling, and cancellation rates, with procedures still strongly impacted as we're seeing in December. We continue to think that this impact will diminish with each sequential quarter this year as vaccine availability improves and patients begin to, again, seek elective care at a more typical pace. Rod will get into a bit more detail on what that means going forward from the standpoint of our guidance. We believe many patients are continuing to defer treatment until they feel comfortable visiting a physician, particularly as they perceive a vaccine to be just around the corner. Similar to the demand trends experienced in the second and third quarters of 2020, we expect the resurgence of COVID in the fourth quarter of 2020 and first quarter of this year will create another period of pent-up demand recapture as infection rates subside and vaccine availability improves and starts to positively affect patient behavior. Now, obviously, the timing and size of the recovery is really difficult to predict. While the environment continues to be a difficult one today, on a relative basis, we believe we continue to capture market share in the core, lower back, and leg pain market throughout 2020 as a result of our best-in-class HF10 SCS technology, our expanded Omnia platform, new and important indications, and sharpened commercial execution. And I really believe we're well positioned for attractive and sustainable growth as the pressure of COVID on our business subsides. We had another terrific NAMS conference this year with data presented from 20 clinical abstracts, including late-breaking abstract results from our CENSA PDN and CENSA NSRBP randomized clinical trials, both of which demonstrated highly favorable results to nearly all pre-specified endpoints at 6 and 12 months in the PDN study, and three months in the NSRBP study. No other SCS treatments have demonstrated such positive results in treating these patient populations, and we believe these are significant opportunities for Nevro. We announced that we submitted our PMA supplement to the FDA in December to seek approval for PDM, and that submission was accepted by the FDA in early January. If approved, the Sensa system would be the only spinal cord stimulation system FDA approved with a specific on-label indication for treating PDM. And assuming a six-month review cycle from acceptance and approval from the FDA will also position us to initiate U.S. launch activities in the second half of 2021. As a reminder, there are over 5 million patients in the U.S. diagnosed with PDN, and approximately 2 million of these patients are refractory to or failing conventional medical management and in need of a new solution to treat their chronic pain. that represents a roughly $47 billion prevalence pool in the U.S. and an estimated annual incidence rate of approximately 5 billion. I have to say I'm about as excited for this launch as any I can remember. Our goal is to get off to a fast start in the second half of the year in referral and trialing activity, setting the stage for an exciting revenue impact in 2022. I'd like to spend a couple of minutes setting the stage for the rest of this year's PDN launch activities. We submitted our six-month PDN trial results for publication, which have been accepted in a premier peer-reviewed journal. We plan to submit 12-month data later this year. In addition, the health economic data will be analyzed and submitted for publication later this year, along with real-world evidence from our NevroCloud platform, analyzing the long-term outcomes of HF10 patients diagnosed with PDN. An important aspect of our launch is to ensure market access. We've already started approaching payers with the goal of expanding policy coverage to include PDN patients where it doesn't exist today. So far, it seems the data will be compelling for those payers, particularly given this patient population where they just haven't received much traction with other therapeutic options that they're paying for. Part of our message to payers is that the quality of the clinical evidence and the outcomes reported, as well as a potential FDA approval, will all be unique to HF10 therapy and should be treated as such through their coverage policy decision making. We think there's already a meaningful percentage of patients that will have coverage at the time of our launch. Through local coverage determinations of the Medicare contractors, or MACs, we estimate approximately 50% of Medicare beneficiaries should have access at launch. On the commercial side, the majority of commercial health plans have not historically included PDM in their SCS coverage policy. So in aggregate between the two groups, we estimate that roughly 25% of our PDM patients will have access at launch. While some payers may require 12-month data, we expect to have that data by the time we receive FDA approval. With this in mind, we expect our commercial coverage to increase over time as additional commercial payers expand coverage throughout 2022. Our research has shown that while pain physicians are very interested in treating PDM patients, they don't see a lot of them referred to them today. So, education of those referring doctors will be a key part of our commercial launch. We've analyzed U.S. claims data and identified the doctors that are treating the most PDN patients today. In the U.S., the top 1% of physicians ranked by PDN patients treated, which is around 2,200 doctors, treat approximately 10% of all PDN patients. And the top 10% of physicians treat approximately 21% of all PDN patients. This relatively concentrated referring physician channel consists of primary care physicians, endocrinologists, internal medicine, and podiatrists. To reach these referring doctors, we will be staffing a dedicated referral sales organization as well as remote selling resources ready to begin calling on these referring doctors with the goal of educating them on the benefits of HF10 therapy and how their patients can access it. In addition, we'll be driving awareness with the referring doctors via digital marketing programs. Our existing sales force who are now focused on the pain medicine community will also have informational tools and resources to provide to our pain physicians so that they may begin to conduct outreach within their own referring physician communities. Our research found that referring physician enthusiasm for HF10 in PDM patients is very high. In fact, when presented with our trial data, 75% of referring physicians rated HF10 at five or six on a six-point attractiveness scale for treatment of PDN. There's also a strong desire to use HF10 prior to prescribing opioids. Our research indicates that physicians expect to refer nearly 90% of their refractory PDN patients for HF10 therapy before recommending opioids, providing hope of a new solution for the millions of patients suffering today. We've also formed a PDN Advisory Board, which consists of a cross specialty of physicians to refine our initiatives, help shape PDN clinical guidelines, and advise on future study designs. We plan to increase our presence at key diabetes conferences, starting with this year's American Diabetes Association Conference to drive awareness, beginning with scientific abstract submissions, and evolving to a broader footprint upon FDA approval. In addition, we've also completed research with PDN patients. These patients are truly suffering and are desperate for new solutions. As one patient told us, quote, it got to the point where I couldn't tell what was worse, the pain or the side effects of my medication. I wasn't able to concentrate when the pain was there, but if I took my medication, it was like I was a zombie. I wasn't even there, end quote. This sentiment pretty aptly summarizes what we hear from the majority of the PDM patients that we speak with. About 84% of PDM patients we surveyed said they would go see a pain specialist for HF10 therapy once referred. We know that these diabetes patients take an active part in their care and are highly engaged online. So we're building upon our success in direct to patient digital marketing to our back and leg market. And we're expanding that focus even now so that as many PDM patients as possible will already be informed by the time a new treatment option is available to them. In summary, 2021 is about gaining FDA approval for PDM, educating physicians that treat these underserved patients, driving awareness with the PDN patients themselves, and facilitating payer coverage expansion. Our 2021 investment in the activities I've listed, and many others, by the way, will total approximately $22 million this year and will be included in the forward-looking details Rod provides in just a moment. Because of the timing of the expected approval and, of course, the time needed to then move patients through the referral to trial to PERM pathway, We expect only a mid single-digit million revenue contribution from PDM in the back half of 21, and most of that will be in the fourth quarter. But then setting us up for a broader penetration and much larger revenue contribution in 2022 and beyond. Internationally, we'll be executing phase launch plans in the UK, Germany, and Australia. We expect these activities to mirror U.S. timing and launch plans to expand as we progress into 2022. So we're hoping for a really exciting year for this new indication. I'm also pleased to announce that we recently received FDA approval for our first major Omnia upgrade. If you recall, when we originally launched Omnia, one of the unique benefits was that the platform is upgradable, so our patients can continue to get the benefit of innovation without requiring a brand-new IPG. We're launching a limited market release of this upgrade in March, with a full market release in Q2 in the US and Australia. We've also submitted our application for approval in Europe and expect to have clearance later in Q2. Now, this upgrade will give Omnia the ability to accept the loading of 35 programming options for a patient immediately after implant, instead of the current limit of just five. This change, combined with the changes made to the new patient remote device, means that many of the future therapy adjustments that are now reprogramming events that need to be done in person by our field team can become a simple program selection by the patient, guided by one of our expanding team of therapy support specialists over the phone. The 35 programs originally selected will be done under the oversight of our clinicians, as always, and the order in which a patient would be directed to select them in the future will be driven by the same NeuroCloud-informed algorithms that are used by our field personnel today. Finally, the new upgraded patient remote will also include an auto impedance check feature. The impedance check is necessary to verify connection between the IPG and all of the electrodes on both leads. Currently, a member of our field team needs to be physically present. This happens in the OR at the time of every implant when leads are connected to the IPG. The impedance check is also performed at a hospital or satellite imaging facility when any patient with one of our devices requires an MRI. The new patient remote can eliminate the need for our sales rep to be there in person to perform either of these impedance checks. And by the way, these development projects kicked off just months ago as part of our rapid response to the COVID challenges, and our team did a great job of bringing these upgrades to market in record time. This new package of Omni upgrades will not only help us to be more responsive to patient needs, but importantly, all of these changes are also going to make our sales team much more efficient over time. and will be an important part of the efficiency with which we scale over the next few years. We're also expecting to launch our new trial stimulator module in the first half of this year once it's approved. The new module is designed to provide improvements in patient comfort through a smaller, more streamlined, cable-free system that simply allows patients to focus more on their pain relief than the logistics of the trial system. We're going to begin the early steps of developing the non-surgical portion of our market using the new three-month NSRBP data presented at NANS. Our work will start with surgeons, patients, and payers. And with six- and 12-month data coming, and our competitors eventually helping to push on this under-penetrated market, we think this patient group will help to drive SCS market growth in the coming years. One of the areas I'm particularly proud of is our ability to manage expenses and drive operating leverage without eroding our team or our core capabilities to drive growth. Prior to the pandemic, we took steps to focus on our overall cost structure and placed an emphasis on improving operational efficiencies. Even with a decline in revenue in 2020, our operating expenses as a percent of revenue dropped 700 basis points from 2019 levels. On a dollar basis, we're able to reduce operating expenses by more than $50 million compared to 2019. While we expect operating expenses, particularly sales and marketing costs, to increase as we emerge from the pandemic and continue investing in our PDM launch preparations, leveraging the income statement will continue to be a top priority. So while we're certainly still in the midst of this pandemic, we do see a light at the end of the tunnel, and we remain very bullish on the longer-term growth drivers for this business. First, a still under-penetrated SES market that should continue to grow, we believe, for years to come. Second, the pent-up demand of all those elective procedures that have been COVID deferred over the last year that will begin to seek care again as the year progresses and COVID starts to recede. If you look at where a healthy market should have been last year relative to 2019, Those numbers suggest deferred procedures in the worldwide SCS market in 2020 represented as much as half a billion dollars worth of product sales. We believe many of these patients will make their way back to SCS therapy in the quarters following COVID. Third, our ability to continue to increase our share of this market over time with better technology, better outcomes, and better execution. And fourth, market expanding clinical data like NSRBP and new market creating indications like PDM. As we think about our ultimate emergence from the pandemic, it should be the beginning of a really attractive growth period for this company. And lastly, I want to once again express my appreciation and gratitude to the entire NIBR team for their efforts throughout what was a very challenging 2020, which enabled us to deliver on our commitments to our customers, our patients, our employees, and our shareholders. And with that, I'll pass the call over to Rod.