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.