Nevro Corp.

Good afternoon. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to Nevro's second quarter 2021 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 remarks. Please go ahead.

Good afternoon, and welcome to Nevro's second quarter 2021 earnings conference call. We appreciate you joining us. I'm Julie Dewey, Nevro'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 second quarter business results from Keith, followed by detailed financials and guidance from Rod, and then we'll open up the call for questions. Please note there are also slides available related to our second quarter performance on the NEVRO Investor Relations website on the events and presentations page. Earlier today, NEVRO released its financial results for the second quarter ending June 30, 2021. A copy of our earnings release is available on our IR section of our website at nevro.com. This call is being broadcast live over the internet to all interested parties on August 4th, 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 filings including our Form 10-Q 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. Non-GAAP adjusted EBITDA excludes certain litigation expenses, interest taxes, and non-cash items such as stock-based compensation, depreciation, and amortization. Please refer to GAAP to non-GAAP reconciliation tables within our earnings release. And now I'll turn the call over to Keith.

Okay. Thanks, Julie. Good afternoon, everyone, and thanks for joining us. In a moment, Rod will cover the specifics of our second quarter results and third quarter guidance. I'm going to focus my comments today on the current state of our business, including the current state of the COVID recovery, and on our PDN launch following July's FDA approval. This is certainly a really interesting time in our business. On one hand, our organization and our customers have never been more excited about our mid- to long-term prospects. Three new products already introduced this year, new and exciting data on non-surgical back pain and diabetic neuropathic pain patient populations, with the latter resulting in our most significant FDA approval since 2015. Really exciting new products on the horizon and a whole lot more. On the other hand, our team and our customers are dealing with a tough recovery environment from the COVID pandemic in the near term, which has proven quite challenging to forecast and at times to understand. So let me start with this topic. And after that, I'll talk a bit about the PDN approval and launch. In the context of the current environment, we were actually pleased with our 81% global revenue growth in Q2 versus 2020 and 9% growth versus 2019. What I'd like to do is look a little bit at actual procedure activity. Compared to prior year, Q2 total U.S. permanent implant procedures increased 60%, while trial procedures increased 45%. Sequentially, we're pleased that we saw a bit of improvement over Q1 as trials per day improved 4% and PERMs per day improved 11%. However, while a positive trend, both of them grew at a slower rate than initially projected. Now, compared to Q2 of 2019, U.S. permanent implant procedures increased 5% and trial procedures decreased 8%. And of course, trials drive future permanent implants and revenues, so lower trial procedures are certainly a significant factor in our Q3 guidance. It's obvious to all of us at this point that various procedure volumes throughout healthcare are returning to pre-COVID levels at different rates. And therefore, the same is true for the medical device markets that accompany those procedures. And clearly, as the data rolls in, the markets for chronic pain treatment have proven to be among the more deferable elective care areas by patients in this COVID recovery, to an extent that I think has probably surprised many observers. Our team has now done extensive rounds of market research with hundreds of implanting SCS physicians, primary care physicians, chronic pain patients, and even hospital and ASC administrators. And we've taken a deep dive into claims data as well. Here are a few insights into the SES market that we believe also sync up well with our own day-to-day observations in the field. First, any current delay in returning to pre-COVID volumes seems to be driven disproportionately by patient sentiment and patient behavior. And it's for now at least much less about doctor or facility capacity, interests, policies, or procedures. So let's start with patient visits. Patient visits for the identified reason of chronic pain continue to be slower to recover in both primary care and pain physician office settings. Lower primary care visits for these patients are running at about 76% of pre-COVID levels and have resulted, therefore, in lower new referrals to pain physicians. In turn, pain doctors are seeing new patient visits that are running at about 83% of their pre-COVID new patient levels whereas we know, of course, patient return to some other specialties are proceeding at a quicker pace. The primary reasons patients said they're reluctant to seek care are financial issues and ongoing fear of COVID. While the COVID fears are rather obvious, patients are concerned about employment instability, high out-of-pocket costs, and either their loss or potential loss of health insurance. Conversely, we inquired about payer policies and payer behavior And at present, there is no evidence of any change in payer behavior regarding pain therapies that seems to be having a material impact. Interestingly, and despite their near-term COVID or economic concerns, over 90% of pain patients indicate that their management of pain has not improved during COVID. In fact, half of the patients told us their pain has gotten worse, not better, throughout COVID. So we still do expect patients to return for treatment at prior levels at some point to address the burden of their chronic pain. As for physicians, both pain physicians and primary care physicians indicate they anticipate patient volume returning, and our pain doctors almost uniformly confirm that they remain very interested in SCS therapy generally and in growing their SCS business going forward. Now, on the topic of timing, we have what I'd say is around an equal split among our pain doctors, some who feel the recovery will accelerate in the next few months, some later in the year, and still others who see a recovery pushed into 2022. Now, looking at claims data, SCS trials and PERMs seem to have recovered as well or better than almost any other procedure the pain physicians are doing. So there doesn't seem to be any significant mixed shift of procedures within our customers' practices. Additionally, we've confirmed that opioid prescriptions do not seem to have risen during COVID, addressing any speculation that patients were being deferred with more aggressive medical management. Now, and maybe more anecdotally, we have observed in July what seems to be a very strong desire on the part of both patients and our doctors to seek time off and take vacations after what's been obviously a long year, and I think reflecting their underlying expectation that both school and professional schedules may normalize in the fall. We expect to see this dynamic in August as well. In short, we've learned that patient reluctance to present to either their primary care or pain physician for chronic back and leg pain is the most significant driver of slower recovery rates for reasons having to do with both COVID, infection fears, as well as the cost impact from factors such as job loss, healthcare benefit loss, or simply the fear of either or both. While there's no reason to believe that SCS patients weigh these concerns differently than other categories of patients, what is clear is that these patients, while still suffering from unresolved chronic pain, are nonetheless more able and more willing to defer their treatment than patients in at least some other elective care categories. Now, importantly, we validated that other things that some have speculated about are not significant factors, such as payer behavior, replacement of SCS with alternative treatments, patients managing their pain better during COVID, any loss of interest in SCS therapy among pain doctors or referring doctors, et cetera. And these were encouraging findings to us. I'd also add that we are just over a month into the updated Medicare prior authorization requirements that went into effect for hospital outpatient fee-for-service patients on July 1. While our customers are dealing with some extra administrative details, it doesn't seem to have changed treatment volumes, and we've not seen any disruption in getting claims approved through our own HFX access team. Finally, an important measure and diagnostic for us is how we're doing on a relative basis. While we believe our US revenue growth rate for the first half of 21 exceeds that of the market, we also recognize in this COVID environment that revenue comparables versus prior year and 2019 are all fraught with a lot of noise. Between industry-wide stocking and destocking that occurred in 2018 and 2019 respectively, as well as the timing of COVID impact and the disparate pace of recovery of canceled cases, it's challenging to determine accurate growth number comparisons. However, based on third party claims data for actual procedures, here's what we do know. U.S. permanent implant procedures for all market participants for the first half of 21 were down 6% compared to the first half of 2019. Nevro permanent implant procedures, on the other hand, were up 8% for the same six-month period. While revenue growth numbers can be impacted by the timing of shipments, procedural growth numbers more accurately indicate what products are implanted in patients and are a better indication of share trends. We've seen that some competitors accelerated shipments in the first half of 21, at least one or two quite meaningfully. And you'll recall when I joined the company, we made a decision to discontinue quarterly stocking practices that exceed quarterly utilization, and we've maintained that practice since. Based upon Nevro clearly outpacing market procedure growth by 1,400 basis points in the first half of the year, we're confident that we do continue to win. So let me close this portion of my remarks by concluding that, first, we believe that patient reluctance to reengage and willingness to defer is the primary issue behind slow SES market recovery. Second, we've uncovered nothing today to indicate that there is any enduring or fundamental change to or problem with the FCS market beyond the pace of COVID recovery. And third, NEVRO continues to perform well relative to the overall market by almost any measure. In fact, we continue to believe we're very well positioned for longer-term attractive growth in our lower back and leg business when the full impact of COVID on our market subsides, and in addition, We're excited to now provide the only SES treatment option approved by the FDA for patients who are struggling with debilitating painful diabetic neuropathy and who are unable to find relief with currently available pharmacologic options. So let me cover a few things on our nascent but exciting launch of PDN before I turn the call over to Rod. We were obviously thrilled to announce the FDA approval of the expanded indication of 10 kilohertz SES for the treatment of PDN just a couple of weeks ago. This approval demonstrates the strength of our clinical data and puts NEVRO at the forefront, again, of providing a proven and transformative non-drug treatment option for PDN patients who are struggling with debilitating pain and who are unable to find relief. Our high-frequency therapy delivered by our SENSA system is now the only SCS system with an FDA-approved indication for treating PDN and is the latest addition to our comprehensive HFX platform, providing the unique efficacy of our 10K therapy to an entirely new category of patients. It's also now the only non-drug product approved for this indication. The approval itself was on time, with the final language of the approval completely in line with the inclusion and exclusion criteria of our PDN randomized controlled trial. Let me be clear, this is not a category approval. This approval is specific to our product only, and in fact, the FDA approved labeling is specific to our proprietary 10 kilohertz high frequency therapy. We were fortunate to have just gathered our entire us commercial organization, the week before approval for thorough training and preparation for the launch. And following the FDA approval we immediately initiated commercial launch activities in the US i'm pleased to report that, while still extremely early the levels of interest among referring physicians and patients have exceeded our expectations and validated our market assumptions. We immediately deployed our dedicated PD and field organization to begin calling on physicians treating PD and patients. Our new website hfx4pdn.com went live, along with targeted professional education programs and digital as well as various other outreach initiatives to PDM healthcare practitioners and patients. In the two very short weeks since receiving approval, our PDM field team has made over 2900 calls on referring physicians. Our hfx coaches have engaged directly with hundreds of patients. and we've generated over 160 patient referrals to pain physicians through these combined initiatives. Now, these are qualified referrals of patients who fit the criteria for treatment and who have agreed to see a local pain physician regarding HFX for PDM therapy. In the coming months and quarters, we'll have more color for you on just how and at what rate these patients go from qualified referrals to treatment. Initial physician response has been really positive. Although the anecdotes are far too many to mention here, In one primary care office, one of our PDN sales reps was given six PDN patient referrals on their first call. In another, office staff members actually approached our PDN sales team to talk to them about family members that are suffering from PDN. We even had our first successful trials in the U.S. One patient was excited about the pain relief in her legs and pleasantly surprised that the burning sensation in her feet was also improved. Another physician actually performed two PDN trials after approval. His first patient reported 85% to 95% relief and was able to walk without much pain. The second patient before trialing the HFX system was suffering from multiple falls due to the numbness caused by his neuropathy. During the trial, the patient reported 95% reduction in pain and states he has regained feeling in his feet and hasn't fallen since the trial began, and that patient is anxiously awaiting his permanent implant. These are obviously anecdotes, and there are a lot more behind these, but the stories are so encouraging to hear. We're really excited to share more of them in the future. And we were, of course, delighted with the 12-month PDN and six-month crossover results that were presented at this year's American Diabetes Association meeting in June. We plan to submit these 12-month results for publication very soon. This evidence, as well as the JAMA Neurology publication of the six-month results, has created a lot of excitement in the pain and diabetes communities. These data will be used to support physician referral decisions as well as market access initiatives to expand payer coverage of this procedure. In addition, the health economic data will be submitted for publication later this year analyzing the long-term outcomes of PDN patients treated with our therapy. Now, remember there are over 5 million patients in the U.S. diagnosed with PDN and at least 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. As we begin interacting commercially with these patients, we're seeing firsthand what we already believed, that these patients are truly desperate for answers, and we think we can play a new and meaningful role in helping many of these patients. To further validate the PDN market opportunity, we recently fielded a blinded online research survey with a thousand U.S. referring physicians treating PDN patients today. Referring physician groups included endocrinology, internal medicine, primary care, podiatry, and neurology. To participate in this survey, physicians had to treat more than 100 patients with diabetes annually, have treated PDN specifically, have prescribed anticonvulsants for PDN, and had patients who failed conventional pharmacologic medical management. Our research found that the 1,000 patients referring physicians that screened into the study each actually treated an average of 169 patients with PDN in the last year. They told us about 34% of these patients were not responding to medical management. 68% of these physicians found the results of our SENSA PDN publication either extremely or moderately compelling. And overall, these physicians indicated they would refer about 37% of their refractory PDN patients for 10 kHz therapy based on these data in the first full year. and they expected to more than double their number of referrals over the following three years. Now, for those of you reaching for your calculator, you'll quickly realize these results imply some pretty eye-popping numbers. I'll caution you, these in no way represent a demand forecast for HFX for PDN, as we have a lot of work to do to educate the universe of referring doctors and patients, initiate a referral stream, and begin to get some experience with the conversion rate of referrals to implants, et cetera. However, this research not only validates but well exceeds our initial market assumptions regarding the level of interest and acceptance of referring physicians, and it seems consistent with at least the very early reception we have seen in the last two weeks since approval. We're looking forward to educating more patients and physicians about HFX for PDM in the coming months as part of our commercial launch plan, and hopefully by next quarter we'll have some pretty rich launch data to share with you. We also know we have some work to do with the payer universe to expand market access and drive adoption, and that will take some time as well. We have two key strategies to achieve this, which are, first, developing HFX-specific positive coverage policies for PDN with our payers, and second, concurrently, obtaining individual prior authorizations on a case-by-case patient basis. We have a team of specialists in-house in our HFX access group who assist with securing insurance approval for patients. We're reaching out to commercial payers, requesting to meet and present our RCT data and new FDA approval, and we're hopeful that our six-month published RCT results and our robust value and evidence dossier will be impactful enough to influence a policy change to cover PDM. Keep in mind that each payer has its own SCS policy review timeline, effective date, and may even collaborate with a third-party administrator to manage their policies. Additionally, we believe many payers will want to see 12-month data published, which we expect to have later this year. With this in mind, we expect our payer coverage to increase gradually over time, with an incremental increase through 21 and broader coverage with payers occurring throughout 22 and even beyond. We continue to anticipate a mid-single-digit million revenue contribution from PDN in 21, the majority of which is expected to be in the fourth quarter, with broader penetration and a larger revenue contribution expected in 22 and beyond. The revenue ramp is expected to build gradually during the initial months following the launch as, of course, patients must still move through the referral to trial to permanent implant pathway, but also as awareness increases among physicians and patients and access with insurance payers expands. Our PDN approval is the latest example of how Nevro continues to lead in innovation. The rollout of our recent Omni upgrade known as HFX Connect has been well received and we're on track to upgrade the majority of our existing US Omnia patient base by the end of the year. Our new trial stimulator is also now in full market release in the US, along with improvements in patient comfort and increased programming versatility so patients can evaluate our proprietary 10 kilohertz therapy. This new product extends the comprehensive value HFX and should improve success and patient experience with trial procedures. We continue to develop the non-surgical portion of our market using the NSRBP data as well and look forward to publishing our six-month follow-up data in the second half of this year and then presenting our 12-month data as early as Q1 of 22. And I'm also pleased to report that just this week, the FDA accepted our PMA supplement submission for substantive review to add explicit labeling claims to include the treatment of NSRBP patients. Now, unlike PDN, this is not a gating approval as NSRBP is already broadly on label. But based on the strength of our data, we feel a more explicit FDA approved label claim will help us as we work with payers to expand specific coverage of NSRBP. And similar to our PDN labeling, if approved, this would not be a category approval, but rather a claim only for our products and would be specific to our proprietary 10 kilohertz high frequency therapy. In closing, while the slower COVID recovery environment remains a near-term issue, we continue to believe we are very well positioned for longer-term attractive growth when the full impact of COVID on our markets subsides. Our fundamentals remain intact, and I believe we're really well set up for 2022 and beyond. And lastly, as always, I want to express my appreciation to the entire Nevro team for their efforts in the second quarter as they continue to move the SCS field and the company forward. With that, I'll pass the call over to Rod to provide further details on our second quarter results and financial guidance.

Thanks, Keith, and good afternoon. I'll begin with our worldwide revenue for the second quarter of 2021, which was $102.3 million, an 81% increase as reported, an 80% constant currency compared to $56.4 million in the prior year period, and an increase of 9% compared to the second quarter of 2019. On a sequential basis, Q2 2021 revenue increased 15% over the first quarter. As a reminder, this quarter included the same number of selling days as Q2 2020 and Q2 2019 and one more selling day than Q1 2021. You'll also recall that we had a tougher comp in Q2 2020 relative to our competitors due to the differentiated speed of our canceled cases recovery after the initial COVID shutdowns in April of 2020. U.S. revenue in the second quarter of 2021 was $85 million, an increase of 67% compared to $51 million in the prior year period and an increase of 9% compared to $78.1 million in the second quarter of 2019. International revenue was $17.3 million, an increase of 222% as reported or 191% constant currency compared to $5.4 million in the prior year period, and an increase of 12% as reported or 3% constant currency compared to $15.5 million in the second quarter of 2019. On a constant currency basis, international revenues were back to pre-COVID levels, but continued to be impacted by COVID-related issues, including both patient behavior and healthcare facility restrictions. Gross profit for the second quarter of 2021 was $70 million, an increase of 99% compared to $35.3 million in the prior year period and an increase of 9% compared to $63.9 million in the second quarter of 2019. The increase in gross profit compared to the prior year quarter was driven primarily by increased revenue as well as an improvement in product cost as a result of increased 2021 volumes. Gross margin increased to 68.4% in the second quarter compared to 62.5% in the prior year period and 68.3% in the second quarter of 2019. Additionally, during the most recent quarter, we continued to invest in our Costa Rica manufacturing facility, which decreased margin by about 140 basis points. We are still targeting shipping product from Costa Rica in the first half of 2022. Operating expenses for the second quarter of 2021 were $85.7 million, a 21% increase compared to $70.6 million in the prior year period, but down 9% from $90.5 million in the second quarter of 2019. The year-over-year increase in operating expenses was primarily related to patent litigation related expenses, new PDN marketing and selling related activities, personnel costs, and travel and meeting expenses, partially offset by a decrease in clinical trial expenses related to the NSRBP study, as well as management's continued initiatives to drive leverage throughout the business. Legal expenses associated with patent litigation were 6.6 million for the second quarter of 2021, compared to 2.3 million in the prior year period. We continue our ongoing patent cases in the District of Delaware and at the Patent Office relating to spinal cord stimulation technologies. While the disputes with Boston Scientific are unrelated to our core high frequency therapy IP, protecting these innovations remain an important objective. We are anticipating an October 2021 trial wherein we will be presenting our defenses with regards to Boston Scientific's retaliatory suit against us. The October trial is expected to be some combination of patent and trade secrets claims that Boston Scientific raised, which, again, are unrelated to high frequency FCS. Net loss from operations for the second quarter of 2021 was $15.8 million, a 55% improvement compared to a loss of $35.4 million in the prior year period and a 41% improvement compared to a loss of $26.6 million in the second quarter of 2019. Non-GAAP adjusted EBITDA for the second quarter of 2021 was a positive $3 million compared to negative $22.1 million in the prior year period and negative $11.1 million in the second quarter of 2019. We continue to focus on cash preservation while balancing the need to reinvest in the recovery process and our new growth drivers in PDN and NSRBP. Cash, cash equivalents, and short-term investments totaled $397.5 million as of June 30th, 2021. This represents a decrease during the second quarter of $178.9 million which was primarily due to the scheduled $172.5 million payoff of the June 2021 convertible notes. Turning now to guidance. It's important to note that we will be using non-GAAP financial measures to describe our outlook for the business. Please see the financial tables in our press release issued today for GAAP to non-GAAP reconciliations. Due to the uncertainties related to COVID on our operations and financial results, we are no longer providing full year 2021 guidance and only providing third quarter revenue and non-GAAP adjusted EBITDA guidance at this time. As a reminder, we may not continue to provide quarterly guidance once the impact from COVID subsides, vaccination rates increase, and patients begin to again seek elective care at typical levels. We expect third quarter of 2021 worldwide revenue of approximately $90 to $93 million. This guidance represents a 14 to 17% decrease over prior year and a 7 to 10% decrease compared to Q3 2019. As you'll recall, Q3 of 2020 benefited from the recovery of canceled PERM procedures from the initial COVID shutdown in the first half of 2020. While it's challenging to determine exactly how much of an impact the recovered backlog had on Q3 of 2020, we believe it negatively impacts this year's Q3 growth number by more than 500 basis points. As mentioned earlier, while we have seen directional, sequential improvement, the recovery is progressing slower than previously anticipated, including trial activity. In addition, with the rise of the Delta variant and increasing restrictive mandates, our ability in the near term to predict an inflection point is difficult. We expect third quarter of 2021 non-GAAP adjusted EBITDA to be approximately negative $10 million to negative $12 million. As Keith mentioned earlier, we continue to expect a mid single digit million dollar revenue contribution from PDN in 2021, the majority of which is expected to be generated in the fourth quarter with broader penetration and a larger revenue contribution expected in 2022 and beyond. Keep in mind that our third quarter guidance provided today is highly sensitive to the pace of COVID recovery and patient willingness to seek elective care, which continues to be difficult to predict. If these assumptions differ from the actual pace of COVID recovery and its impact on the company's markets, then the company may need to change or withdraw this guidance in the future. Although we are no longer providing full year 2021 guidance, we did want to provide you with some thoughts to keep in mind as you update your models for the remainder of 2021. On the plus side, It would be reasonable to expect some Q4 seasonality as well as the majority of anticipated revenue from our PDN launch. We could also see a return of some of the patients that have continued to defer SCS treatment during COVID. Offsetting this would be the negative impact from the slower than anticipated recovery of SCS procedure volumes and the lower trial procedures from Q2 and Q3. Furthermore, the combination of increased impact from COVID, along with reductions in capacity and shutdown of elective procedures, could adversely impact patient willingness to seek treatment. In closing, we made good progress in the second quarter as evidenced by sequential growth in revenue, trials per day, and PERMs per day, and remain on track to drive growth and scale profitably in our core business in the years ahead. We're in a great position strategically with best in class SES technologies, remaining share gain opportunity, future growth opportunities in PDN and NSRBP, superior clinical data, and a strong commercial organization. We continue to advance our operating margin expansion efforts with many of the changes we're investing in this year, such as our integration of manufacturing in Costa Rica, development of the PDN market, and the Omnia upgrades that facilitate greater commercial productivity, all expected to provide continued improvement in our financial leverage as we grow. That concludes our prepared remarks. I'll turn the call back over to Julie to moderate the Q&A session.

Thanks, Rod. In order to get through the question queue efficiently tonight, we ask that you please limit yourself to one question only. You can then rejoin the queue, and if time allows, we will take follow-up questions. Operator, we're ready for the Q&A instructions.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Larry Bejelsen with Wells Fargo. Your line is open.

Good afternoon. Thanks for taking the question. Keith, it would be helpful if you had a bridge from Q2 to Q3 guidance, you know, down 11% sequentially, and it's still on a year-over-year basis. You know, adjusting for that, the pent-up demand a year ago would be down, call it, 9% to 12%. So it's hard to understand why despite your comments, we had COVID last year, why it would be down so much year over year. Thinking ahead, when do you think PDN can offset the decline to the core SCS implants and sales? When do you think you can start to grow again? Thanks for taking the question.

Hey Larry, this is Rod. That's a great question and I'll start off and then I'll let Keith add a little bit of color. as you know in our business, leads to trials, trials lead to PERMs, and as we were going through Q2 and into Q3, the basic number of trial volumes, it's kind of a math equation, and it leads us to the revenue number that we're guiding to in Q3 here. And so while we did see sequential improvement, from Q1 to Q2 in trials, it didn't improve at the rate that we were originally expecting at the beginning of the year and going into the beginning part of Q2. And the way the trials in Q2 and so far in Q3 with the vacations in July and August, it's just going to be a little bit of a softer third quarter than what we anticipated.

Yeah, I guess, Larry, the only thing I would add would be that there's probably a little bit of a conservatism applied here just because of the pretty profound lack of visibility we feel we have into the business right now. And I think probably it feels to us like at least for our patients and maybe even our doctors that the summer vacation impact could feel a little bit more dramatic this summer than it did Of course, as Rod pointed out, we don't have the recaptured canceled cases that have an impact this year either. I think all of that with the trial model that we have now that we're a month into the third quarter gets us to third quarter guidance that we're reasonably comfortable with. In terms of PDN, look, we don't feel like we have to have PDN to drive growth in this franchise in the long term. I think I was pretty exhaustive in my remarks in our conclusion that there's growth in these markets beyond COVID. We certainly can't predict when that happens, when it gets backed and then begins to exceed again pre-COVID levels in the core, lower back, and leg pain market. But we don't view PDN as being the necessary growth driver on a long-term basis. Having said that, I can't give PDN guidance beyond what we've said about this year, which is pretty minimal. but it's a very, very large market. And given the size of our business, it doesn't take much to drive overall growth rates. I mean, you don't need your calculator to figure out that something in the neighborhood of $40 million of PDM sales next year would drive a 10% growth rate or something close to that in the whole business. So given the size of this market, I think we feel really encouraged with the idea of PDN as a growth driver, but not as a needed driver to give us positive growth, at least in the long term.

Thanks, guys.

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

Thanks, and good afternoon. Can you hear me okay? Yes, Bob. Great. So I'd love you to comment on two things, given how big a surprise this is to the way the street was thinking about your numbers for Q3 and the rest of the year. First, does this guidance for Q3 assume that things get worse from what you saw in July? You know, stays the same, gets better. We just love some perspective on that. And then the other thing, Keith, that I'd love you to comment on is that it's so far below what we were thinking, and we're not really hearing this from others. you know, this kind of magnitude about the market, it seems to me that this kind of has to be market share, or else I feel like I'm really missing something about the market and what's going on out in the field. So I was wondering if you could address that issue of market share, and then again, the comment on what you assume for the rest of the quarter relative to what you saw in July. Thank you.

Yeah. Yeah, I think in terms of a trend, look, we're We're giving you the facts, and we've done a lot of work to try and figure out what is going on in the pain treatment markets, what's happening in claims data, what's happening with patients. I think the reason our remarks went almost 40 minutes tonight was because we were trying to download as much information, Bob, as possible that support what we believe is happening in the market. In terms of a Q3 assumption, no, I think it pretty much assumes that August looks a lot like July and that we begin to see a little bit but not dramatic recovery in in September. So what the numbers you're seeing certainly require no heroics. It don't really assume it gets better, or at least in the near term that it gets that it gets worse in terms of share. I think you are looking at it the wrong way and we've tried to. We've tried to provide a lot of data in this call to help you with that. That the the claims data is is painfully clear on what's happening with actual procedures. What's also clear to us is that they're in this kind of environment, we're in a competitive environment where there's frankly, you know, a lot of moving parts in every quarter. And one of our competitors introduced a new product in the second quarter and we saw a lot of product going on their customer shelves in the last month. Another competitor in the first quarter did probably the most forward inventory stocking that we've seen that competitor do, at least in my time in this segment. So, yep, you can look at revenue. Our competitors don't have to talk about these details. They barely talk about neuromod or pain markets. They don't say much about SCS. They don't ever talk about procedures. They only talk about revenue. And so we're trying to give you as much visibility as we possibly can to what's going on. We do not feel as though this is a share issue. We're certain of that internally. We do not feel we're losing share. We're the only company we believe to have gained share in both 2019 and 2020. I'll repeat that. We're the only participant in SES that we believe gained share in both of 2019 and 2020. And in 21, the best data point we have is the one we just gave you on procedure claims codes. which was a 1,400 basis point difference between the market and our permanent implants. There's nothing that we're seeing outside of the movement in the quarter-to-quarter reported revenues numbers that can be pretty confusing to indicate otherwise.

Sorry, maybe just one quick follow-up, and I apologize. What's the rationale for why this market would be so much more sensitive from a recovery perspective relative to other things that we're seeing? Why is pain something you can put off so much more than other procedures? Do you have a thought there? Then I'll get back in queue and I'm sorry.

I mean, yeah, I addressed that thought in my remarks. I mean, we tried to give you as much fundamental data as we could that we've gathered, and we recognize that a lot of segments are behaving differently. We tried to rule out the things that we needed to rule out to make sure there wasn't something fundamental going on about which we should be concerned. Our conclusion is simply that we've got patients who can defer these procedures. And despite the fact that they're in pretty severe pain, this is pain they're willing to defer, they're able to defer, it's clear. And we can talk about why that is. I'm not sure we can go much deeper than that. And frankly, we haven't gotten a lot more insight than that from our customers. our doctors, but the conclusion is pretty obvious. The patients are still out there. They're not getting alternative therapy. They're not seeing increases in opioid prescriptions. Their pain is not getting better. They're not going to other procedures. They still say they're going to seek care, but they're deferring. And they've told us what they're waiting for in terms of their fears about COVID, economics, You know, I don't have a crystal ball on that, and it's been, as I said in my remarks, a bit of a surprise to a lot of observers, the extent to which these patients are able and willing to defer, even the ones who say they plan to seek care.

Thank you.

Your next question comes from Robbie Marcus with JPMorgan. Your line is open.

Oh, great. Thanks for taking the question. Keith, you mentioned that you're not seeing or hearing of any reimbursement pushback. Maybe, you know, looking forward a little bit, I noticed that the AMA CPT panel for September has SES codes on the agenda to better reflect current day usage. Do you have any idea, you know, what we should be anticipating? Are there possible price cuts or reimbursement cuts ahead for SES? Thanks.

okay um well two things on the on the reimbursement pushback let me let me be really clear there's always reimbursement pushback and i would say if you if you look back or if you look forward on a multi-year trend it's it's all going one direction i think that's true of our procedure i think it's true of most frankly so i i don't mean to imply and i hope i didn't that there's no reimbursement pushback my comment was that there's no significant change in the reimbursement environment that we think is having any material effect on what we're seeing in the market today. That it's not a factor in terms of patient demand today and any change over two years ago, et cetera. That doesn't mean there's not reimbursement pushback, there always is. On the review of the codes, that just popped up within the last couple of days. We're in the process of trying to get a little bit more insight into that. our sense is that may have been something done at the request of smaller non-SCS potentially peripheral nerve stimulation entrance into the field. We're not certain of that. There's nothing about it right now that seems to pose any particular threat or risk or that signals a concern for that matter. But we're looking into that to see if we can get a little bit more information. Great, appreciate it, thank you.

Your next question comes from Joanne Wensch with CD. Your line is open.

Thank you. Two questions. Non-surgical refractory back pain, PMA supplement, that's new information. It's been filed, so when are you anticipating getting that approved and how do you anticipate that changing or helping out the trajectory of sales?

Um, we, uh, we submitted, uh, just a couple of weeks ago and generally the FDA has, I think around 45 days to accept the submission for processing. And they did that in about two weeks. Um, that means the six month PMA supplement clock starts ticking. Um, I think essentially from yesterday. Um, and what that means to us is, uh, I think the ability to add an explicit claim for these patients for high frequency. into our label will come, we hope, if we get approval, about the same time our 12-month data is being reported. And I think the combination of those two will give us a much stronger case with payers. And remember, the main reason we ran this trial to begin with was to help our customers get a more complete and more consistent coverage of these patients from the payers. So I think having a label claim is going to be a good thing if we can get there.

And my second question has to do with, it sounds like you're getting a lot of interest on PDN. Is your sense that physicians are starting a wait list of some type?

I don't know that I know of a wait list. I think what's happening is we're interacting with a lot of the referring doctors, educating them on the data, on the approval, on the referral pattern, and they're beginning to refer patients to pain doctors. It's really early, Joanne. I mean, we're a couple of weeks in. We're not talking yet about thousands or tens of thousands of patients. So I don't think wait lists have begun, but I think we're probably going to see in the not too distant future that there is a fairly large volume of patients being referred to these pain doctors. And at that point, they'll probably begin doing something to make sure they process in the right way.

I'm going to squeeze in one more question. My apologies. Joanne. That's fine. Go on. Yep.

Thanks. Your next question comes from Matt Taylor with UBS. Your line is open.

Hi. Thanks for taking the question. So I guess I just wanted to touch on the competitive dynamic. I know there's always some trial that starts in the beginning when others launch. I mean, can you just talk about your confidence and your ability to gain share in the core market with Omnia through these competitive product launches? And what would you point to to give us an understanding of where that's coming from?

Yeah, I mean, I think we've continued to gain share. I mean, we've essentially started at zero. We've continued to gain share really through 2017 and then began taking share again in 2019. We feel like we've taken share since. You know, probably more aggressively in 2019 in the first half of 20 than in the last half of 20. And that oftentimes ebbs and flows depending on competitor reaction and new product introductions, and we've had some of both. But I think over time we feel like we can continue to gain share. We still have the fundamental differential edge of high frequency therapy. I think we're We are very clear with our customer base in letting them know that we are investing in the therapy and investing in new patient populations to bring to them for the therapy and making investments that nobody else is making. And I think that gives us some presence with our customer base in addition to the outcomes advantage. And we've also continued to introduce a lot of new products. The HFX Connect, the ability to have HFX coaches walk them through big data driven programs of 70 different programs. I mean, there's a lot of things that have continued to come out at a pretty steady stream that I think will allow us to continue to capture share. Having said all that, I'm not going to give some prediction for share. We're not going to guide to share for this quarter or next quarter or next year. The share as defined by revenue is really noisy. We track it through a few different sources, and it jumps around, and it jumps around a lot. A quarter, really better yet, two quarters is about the least resolution where you'd really get a good picture. We track it month to month, but I'll tell you, the rate of variability, the way it jumps around, makes it a less than reliable indicator based on reported revenue.

Got it. Okay. Thanks a lot for your time.

Your next question comes from Cecilia Furlong with Morgan Stanley. Your line is open.

Great. Good afternoon, and thank you for taking the question. Keith, I wanted to ask just what you've seen in the U.S. versus your international business in 2Q from a recovery as well as patient willingness standpoint. And then as you think about 3Q, just what you're factoring in across those two geographies, either patient willingness, vacations, anything else that you would call out or any trends that are unique when you look at those two geographies in comparison. Thank you.

Yeah, I would say a couple things going on there. From a patient willingness, I mean, that not only varies by country, it varies by zip code. I mean, really this is a patient psychology issue that is almost invisible in some states where it seems like it's not a problem, and in other states it's a major factor. And certainly that's true as you get from country to country. There's high sensitivity to news flow, infection rates, that kind of thing. I'd say the biggest difference between the US and our OUS markets is that our OUS markets tend to be more centrally controlled. They tend to, when demand is suppressed, it tends to be more top-down, more institutional. By that I mean local government decisions, hospital decisions, to limit or eliminate elective procedures for some period of time, to lower census of certain procedures on an inpatient or outpatient basis. So that's a little different from the U.S., but we haven't really seen that since the spring of 2020. Counterbalancing that, I would say if you compare our commercial performance to last year or the year before, you recall in 2019 we were very focused on our U.S. commercial organization. And I think that in 2020 and 2021, we've made great strides in our international organization. And I frankly just think that we're doing better in our overseas markets on a relative basis because we're executing well. I think the PDN data has been very well received, and we're starting to get a lot of attention in our European and Australian markets for that data as well. In terms of assumptions, look, I think we're assuming for the rest of the quarter, you might imagine we're – we're probably a little bit gun-shy from this particular environment if we've seen this recovery play out in this market. So we're not really assuming much in the way of improvement for the balance of Q3 as we think about our guidance.

Thank you. Your next question comes from Bill Pulvanic with Canaccord. Your line is open.

Hi, it's John on for Bill tonight. What have you seen in sales towards turnover in the past three to six months and how does it compare to historical trends?

I don't have a number in my head or certainly that I'm willing to put out there. But I will tell you just from a high level, the turnover has been for the last two years dramatically less than it was for the two years before that. And to my knowledge, it has not increased during COVID. We've got a really good, really effective, experienced team in the field. And I think we've been kind of shoulder to shoulder with them in terms of how we've tried to manage our business throughout COVID and frankly, how we've managed our relationship with them. And as a result, I just don't think we've had a lot of turnover. And I would add to that, there's a lot of excitement about PDN. And if you're a member of our commercial team in the field and you see this indication coming and you're getting the kind of feedback that you're getting from referring doctors, from your own customers, you're seeing the kind of outcomes that this indication gets in patients, it's pretty fun. I mean, it's an exciting and fun place to be as you think about the next couple of years. So I think for the most part, there's always some turnover, but I think for the most part our field team is very engaged right now.

Great. Thank you.

Your next question comes from Adam Mader with Piper Sandler. Your line is open.

Hey, guys. Good afternoon, and thanks for taking the questions. Keith, in your prepared remarks, I think you talked about, you know, ongoing fear of COVID that patients have, as well as, you know, some financing issues or high out-of-pocket costs associated with the deductible. I know you don't have guidance for Q4 of the full year, but just wondering if we should think about Q4 as maybe being not as seasonally strong in past years, given that perhaps as many patients wouldn't have achieved their deductible. I know there's several moving parts there, but just any thoughts as how we should think about that dynamic?

Yeah. Rod gave you a little bit of color on how to at least think about, and I know it was just that, it was just a little bit of color, but how to think about Q4. I'm not sure I can give you a whole lot more than that, but I will say that in Q4 of this year, our assumption has been that a lot of the time-off mentality we've seen in the summer is based in part on an assumption that things get back to normal in the fall. I expressed it as anecdotal in my comments, and it is in fact just that, but as we talk to our customers, many of them who have families that are raising and they're in that age group, A lot of them are assuming, I hope rightly, that kids are going to be back in school in the fall, and they're ready and able to actually travel at this point. So my assumption is we're probably going to see a typical seasonal uptick in Q4, but I don't feel comfortable enough in that to bake it into revised full-year guidance, which is why, in fact, we didn't do that. That's helpful. Thank you.

Your next question comes from Chris with Guggenheim. Your line is open.

Thanks. Keith, I just wanted to circle back on the question of market versus share. The claims data you provided was very helpful. I appreciate the comments about the noise factor in the revenue numbers. But you guys had a lot of momentum throughout 2019 and early last year, as you said. So that claims comparison to the first half of 2019, sort of predates those gains. Can you say anything about how your underlying performance in the first half of this year compared to the back half of 2020, which would be a more sort of recent comparison in the trend?

I don't think we have that. Yeah, we don't. Yeah, I'm sorry. I don't have that. I don't have the claims data comparison for the back half of 2020. For now, I guess that's not the point we were trying to make with the claims data. But I maybe can take your question on more generally. I do think that, you know, I think I said, in fact, that if you look at the market share gains we've had since early 2019, they were probably the steepest in 2019. They continued in 2020, though not as steeply. And then in the back half of 2020, I would say there was probably more aggressive and effective competitive activity in the second half of 2020. And I don't believe we lost here in the second half of 2020, to be sure. But I think our pace of gains probably slowed in the back half of 2020. We then just released a series of new products in the last, I don't know, 60 days, I guess. some of them in the last few weeks. And then, of course, the PDN claim, which has just come in the last two weeks. So, you know, momentum tends to shift around. I don't think that's unusual. But if you're looking at the last half of 20 as a less aggressive share capture time, I think that's probably right.

Okay. That's helpful. Thanks. If I could just sneak one in then on a different topic. You talked about the range of opinions from physicians about when things might recover and also this kind of lack of consensus about what's really keeping the market down. Do you have a candidate for what's the most important trigger for normalization? Is it progress on COVID? Is it economic factors? Is it just getting out of vacation season? Is there one of those that you feel like should be overweighted as we think about the recovery from here?

Thanks. I don't have a real scientific way of doing that for you. I mean, I think all three of those things are important. I think Probably it would be tempting to say that COVID and the sense around COVID is probably the biggest issue. Though I think we were maybe even a little bit surprised at just the prevalence of commentary from patients on economic issues, whether that reflects unemployment or loss of benefits or or just simply wanting to spend their deductible on other procedures first that were less deferable, other discretionary items like travel first, it's really hard to know. And we can only get down so deep. But I would say those two. The summer vacation thing is an important factor, but it's temporary. I think what you're looking for is a more reliable trigger to predict recovery. And between the other two buckets of COVID and economics, it's probably hard to give you a real quantitative answer. Thanks.

Your next question comes from Suraj Kalyo with Oppenheimer. Your line is open.

Hey, Keith. Thanks for taking my questions. So, Keith, forgive me, just juggling in between calls. I can't hear you. And maybe you already talked about this.

Hey, Suraj, we can just barely hear you. Is there any way you can speak up or get closer to a microphone or something? Is this better, Keith? A little bit.

Sorry, my phone is goofed up. So, Keith, over the last two years, can you give us a sense of the number of centers in the U.S. that Nevro has added and incremental centers? And the reason I ask is when I strip out ESPs, you know, I'm just trying to get a rough math on the utilization metrics, you know, what's going on with the utilization.

Well, there's a lot. A bunch there. There's new customers. I assume you're talking about new store, same store comparison, ASPs, and utilization. We gave a little bit of color on utilization, at least on a 21 over 19 comparison. We have not been granular on new store, same store statistics. It's just we're at a big disadvantage when it comes to disclosure from our three competitors and what we're public about, what we need to be public about, we've not generally waded into that topic. And frankly, I don't think we really feel like we need to or want to start. Not sure what the question is on ASPs. ASPs have been generally pretty steady. That's what we expected, yeah. Yeah, and they haven't been really a variable in our performance that wasn't expected. As you get Kind of as product cycles get kind of long in the tooth, you tend to see ASP degradation and then you tend to pick them back up as you refresh and renew with new products. I would say our ASP performance has actually been quite good and we still sell at a premium to every one of our competitors.

No, I get that. That's why I was, you know, when I strip out the ASP Delta, you know, that's what really I was trying to get at, but we can take it offline.

Thanks, Suraj. We need to move on. We're trying to – if you'd like to ask another question, you can get back in the queue.

Your next question comes from Danielle Antalfi with SVB. Your line is open.

Yeah, hey, good afternoon, guys. Thanks so much for squeezing me in. I guess I just really have one question at this point. And it's really, Keith, I appreciate all the data that you gave us around the claims and things like that. But I guess one of the areas of pushback that I get when I am talking to some folks that are more bearish is whether this market is really a growth market. And I guess my question is, what gives you the confidence that this slower patient return to SDS therapy in the legacy indications is really COVID related versus something broader and bigger and more endemic to the market itself? Thanks so much.

Daniel, it's a great question. I just can't imagine how I could give you anything more than I've given you on that. I mean, we have dug and dug and we've dug pretty deeply on these things. We've relayed a lot of that information to you today. There's no indication, there's nothing to lead us to believe that somehow the market just stops where it is today. I don't think any of our competitors believe that. I don't think there's any data out there from customers or from payers or from patients or from referring doctors that indicate that that's the case. We know there's a lot more patients that go untreated than get treated. We don't see an alternative therapy or treatment either on the market or coming. Um, so I don't think there's, I just don't think there's any reason to think that this is somehow magically because of a slow COVID recovery going to be a, a no growth market. Um, that's not just because we want that to be true. We've done the work and that's, that's our conclusion now. I mean, we're, we're open to new sources of information, but I don't think there's anyone in our, in our customer world or our competitive world that think that's the case. And we just haven't found anything to indicate that we should believe that either.

Okay, thanks. I'll keep it to that. Thank you.

Your next question comes from Margaret Kaxer with William Blair. Your line is open.

Hey, this is Maggie on for Margaret. I know there's been a lot of focus here on the short term, so I'd love to ask something more on the midterm here. What are you guys kind of expecting for market growth for the core FCS market in 2022? Obviously, no, there's a lot of variables there. And while I know you aren't giving guidance for 2022, can you give us some color generally on how you're thinking about both back and leg and PDN growth for the company? Thanks.

Yeah, I mean, the short answer to that is no. Look, I'd love to be able to do that. We've been kind of out of the projecting market growth game for a while, as you know, and certainly if we're not comfortable giving our own guidance beyond Q3, there's little I can say about 22. I will tell you this, it's certainly our hope that as we get into Q4 that we begin to see, I think, what other procedures have seen a full quarter before us. and we begin to see kind of an uptick in the return of patients for the core, lower back, and leg pain indications. If that's the case, and we continue to see this kind of enthusiasm about PDN, then I think the market and Nevro are poised for what I said in my remarks, which is a really encouraging 22. I can't give you a number on that growth rate. We certainly would like to think that if that's the case, it's fairly robust. That's about as much as I can give you, I think.

Okay, thanks so much.

Your next question comes from Michael Pollard with Baird. Your line is open.

Hey, good evening. Thank you. I want to bridge and just make sure I understand the 2Q trial performance and then the 3Q revenue guide. So I believe I heard that from 1Q to 2Q this year, sequentially trials improved 4%, and the revenue guided in 3Q is sequentially down 11% from 2Q. So is that timing? I've tended to think that trials lead PERMs by one to three months. So can you just help put a little color on what I'm missing there in that kind of simple framework?

Sure, Mike. Hey, this is Rod. I'll take this. I would think the way to think about it is the volume of trials that we saw in Q2 will lead largely to the revenue numbers in Q3. And just the fundamental volume in Q2 is not enough to get to a figure that probably you and we were thinking about earlier in the year. And we were anticipating that sort of a recovery and improvement in the recovery for COVID. And while we did see some improvement, and your number is correct on the 4%, it's just not fundamentally a large enough volume in Q2 to drive the sort of figures that we've been talking about or thinking about for Q3.

You know, I'll add on to that just quickly. I think, you know, as we think about the conversion curve from trials to PERMs, Given the scheduling that we're seeing among patients and doctors over the summer months, it's fair to assume that we probably model a little bit different curve, a little bit different behavior in converting trials to PERMs over the summer months, and we're certainly factoring some of that in as well.

Okay. All right. Thank you.

Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question comes from David Rescott with Truist. Your line is open.

Hey, guys. Thanks for squeezing me in here. Keith, you know, you've talked about prior authorization for CMS payers coming into play this year. So I guess the first question here is I just want to confirm that that went into effect on July 1st. And then as a second part to that question, you know, we've heard some some players in the med tech space kind of comment on how the process of documenting prior authorization particularly has been impacted by COVID. So I guess so far in the month of July, have you really seen any impact to the ability for patients to receive and then ultimately document some form of failed therapy ahead of STS implants? And then just looking into the second half of the year, I guess, how do you see that playing out within the context of guidance? Thanks.

Yeah, all I can tell you is what we've seen. It's only been in place a month, and so I can tell you that what we're hearing from our customers is that there hasn't been a loss of patience, a loss of cases, patients they couldn't get adjudicated and get to yes. What there has been is a little bit of a delay in some of those cases and some added administrative detail. It doesn't drag out forever. If memory serves, I think there's a statutory requirement on the prior auths to resolve them in 10 days. So whatever that process is needs to get to an answer fairly quickly. And then the more direct visibility we have are those cases that we're involved in through our own access team, and they've been able to get through them quite well, and they haven't seen a decline in the number of cases that have ultimately been able to move forward. So it's only a month of experience, and so it doesn't really play a role in our guidance going forward, frankly.

There are no further questions at this time. I would now like to turn the conference back to Mr. Grossman for closing remarks.

Okay, thanks everyone for joining us. We appreciate your time. I'm sure you're left with more questions. We'll be happy to answer them as best we can, and we'll talk to you next quarter.

This concludes this conference call. You may now disconnect.