Nevro Corp.

Good afternoon, my name is Nick and I will be your conference operator today. At this time, I would like to welcome everyone to Nevro's third 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, ma'am.

Good afternoon, and welcome to Nevro's third 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 third 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 third quarter performance on the NEVRO Investor Relations website on the events and presentations page. Earlier today, NEVRO released its financial results for the third quarter ended September 30th, 2021. 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 November 8th, 2021, and an archive 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 10Q, to be filed 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 and depreciation and amortization. Please refer to GAAP to non-GAAP reconciliation table within our earnings release. And now I'll turn the call over to Keith.

Thanks, Julie. Good afternoon, everyone, and thank you for joining us. I'll focus my comments today on our third quarter results, the current state of our business and COVID recovery, and on our PDN launch. And following my comments, Rod will cover specifics of our third quarter results and our fourth quarter guidance. In the context of the current COVID environment and the related headwinds, we're still pleased with our third quarter results, which were at the high end of the guidance range we communicated in August. Both US and international revenue were impacted by the Delta variant surge and other COVID related issues, including patient behavior regarding elective procedures, healthcare facility restrictions, and staffing shortages. As a reminder, after the deep impact of COVID in the second quarter of last year, we regained our canceled or backlogged patients and recovered revenues considerably faster than all of our competitors last year in Q3. giving us a challenging 2020 Q3 comp as a result. In fact, if you look at the quote unquote net recovery impact, and for us that means canceled cases from prior quarters that were recovered in the current quarter, minus the impact of new case cancellations in the current quarter, we enjoyed a net recovery impact of approximately $14 million to revenues in the prior year third quarter. While our net recovery impact this year was roughly a negative 1.6 million to revenue or roughly $15 million swing on a year-over-year basis. Now you'll see a table on that impact in our summary slides that were just posted on our investor website. Compared to the third quarter of 2019, we delivered strong third quarter adjusted EBITDA results, demonstrating our ability to continue to improve efficiencies in the core business, despite investing in new growth drivers like PDN and NSRBP, as well as our new manufacturing capability in Costa Rica. Rod will cover expense efficiency trends in just a few minutes. We continue to be really excited about the PDN opportunity, which I'll discuss in more detail momentarily. And we're confident that we're well positioned for attractive core market growth when the impact and uncertainties of COVID on our market completely subside. Now, I'd like to look at actual procedure activity. Compared to prior year Q3 total us permanent implant procedures decrease 14% while trial procedures decreased 7% now remember that the same comparable issue I outlined for revenue impacts year over year. procedures sorry impact year over year with procedures as we were recovering a lot more canceled cases in the prior year third quarter. Encouragingly, however, our monthly trial and permanent implant procedures improved steadily over the course of this quarter. And that trend has continued into the fourth quarter thus far. Compared to the third quarter of 2019, US permanent implant procedures decreased 8% and trial procedures decreased 9%. Trial and permanent implant volumes were also still impacted by a continued reluctance of new patients to seek interventional therapies for chronic pain in numbers comparable to pre-COVID levels, as well as scheduled case cancellations and elective procedure capacity constraints due to COVID concerns customer capacity, and labor constraints. Of course, trials drive future permanent implants and revenues, so current trial procedures are certainly a primary driver of our Q4 guidance. On our last quarter call, we provided a significant amount of market physician and patient research data to explain the slower SCS market recovery, and I won't repeat that data again here today except to say that nothing has substantively changed. We believe that patient reluctance to reengage and willingness to defer is still a significant issue behind the slow SES market recovery. Fortunately, this factor is showing signs of improving, though, in our view, the impact of center capacity constraints related to labor shortages has probably grown. Importantly, we have still uncovered nothing to indicate that there is any enduring or fundamental change to or problem with the SES market beyond the pace of COVID recovery. And as I said, we believe Nevero continues to perform well relative to the overall market by almost any measure. In addition to the research that we did last quarter, our team also completed some additional survey work with patients and physicians, which confirmed that these previous findings are still valid. Clearly the markets for chronic pain treatment remain among the more deferable elective care areas by patients. You'll recall on our previous survey that the primary reasons patients said they were reluctant to seek care were financial issues and ongoing fear of COVID. In our most recent survey work, we found patients are still reluctant to seek care due to financial and economic reasons, but their ongoing fear of COVID has decreased substantially. And this continues to support our belief that the revenue impact and slower FCS market recovery is temporary, and that these patients, while still suffering from unresolved chronic pain, are nonetheless more able and willing to defer their treatment than patients in some other elective care categories. Pain doctors and primary care physicians continue to tell us that they anticipate patient volume returning and our pain doctors almost uniformly confirm that they remain very interested in SES therapy and are looking to grow their SES business going forward. On the topic of timing, an equal three-way split of pain doctors feel that the recovery will accelerate this quarter. Some see the recovery coming early next year and still others who see a recovery pushed into the second half of 2022. Finally, from a relative performance standpoint or share of market, we continue to see high variability in quarter to quarter results among market participants, though year to date, we feel like we've continued to win in a difficult 2021 market. For the first three quarters of 21, our U.S. revenues were up 4% compared to 2019, while we believe the U.S. SES market was down approximately 3%. In fact, we believe we're the only company well on deposit of year-to-date growth in the U.S. versus 2019. As we look at actual year-to-date procedures in 21 versus the same period in 2019 by using claims data, our U.S. trials were down 5% year-to-date, while total market SCS trials were down 11%. And our U.S. PERM procedures were up 4%. while total market SES perms were down 8%. So let me close this portion of my remarks by concluding that we're finally allowing ourselves enough optimism to conclude that the worst of the COVID impact on our business may be behind us. Patient and physician interest in pain treatments remains high, and after a very tough 18 months of COVID, we saw the first green shoots of recovery with the steady pickup and trial activity that occurred within the third quarter and in the fourth quarter thus far. In fact, we continue to believe we're well positioned for longer-term attractive growth in our lower back and leg business when the full impact of COVID on our market subsides. In addition, we're excited to now provide the only SCS treatment option approved by the FDA for patients who are struggling with debilitating PDN, or painful diabetic neuropathy, and who are unable to find relief with currently available drug options. Following the FDA approval of Nevro's proprietary high-frequency, or HFX for PDN, in July, We began U.S. commercial launch activities in earnest. While still, of course, in its infancy, the first three months of this launch have reinforced our excitement about our PDN indication and how impactful we believe this will be for providers and patients. We're very encouraged by the high levels of interest among referring physicians and patients, early trial volumes, and the validating clinical outcomes in those patients who have already received their permanent implants. Worldwide PDN revenues for Q3 was approximately 1.7 million. In the quarter, we performed 175 PDN trials and 71 PDN permanent implants in the U.S. In September, the second full month of our launch, PDN trials already represented approximately 6% of our total U.S. trial volumes, and we're on track for a meaningful increase in the number of PDN trials in Q4 over Q3. We will continue to provide you with this PDM trial information during the early phase of our PDM launch, but for a variety of reasons, we may or may not provide this level of detail in perpetuity. Through October, we've generated over 20,000 qualified PDM patient leads with our DTC advertising and PDM-specific patient campaign. Our HFX coaches have proactively reached out to a subset of these patients And the first several hundred of these DTC leads have been handed off to our U.S. sales team. Our new PDN referral sales team has called on close to 6,000 referring physicians and generated over 500 patient referrals to SCS specialists. We're finding the unmet needs of these patients are truly top of mind with the referring clinicians, and many times we've been entrusted with patient referrals on the very first sales call. Among our early treated PDM patients, we're seeing the results that we would expect based on our clinical trial outcomes, and we're working with the referring doctors to make sure they're well aware of the very positive results with their patients after the fact. Also encouraging is that our core SCS sales team, calling on our existing pain specialists, is gaining access to new competitive accounts that didn't previously implant or use Nevera products. PDN is opening doors for us with these customers, and many have already begun using Nevro, not just for PDN, but for lower back and leg patients as well. This demonstrates that our customers understand that treating PDN with high-frequency therapy is exclusive to Nevro, thus providing unique efficacy to an entirely new category of patients. We feel at this point we're getting credit from customers for the investment we've made in our technology. in our clinical trial on FDA approval and in the generation of a new stream of referrals to their practices. We've also seen tremendous willingness among our pain specialists to reach out to referring physicians in their local communities and even to do their own patient outreach. We've seen TV commercials, physician website updates, billboards, news stories, education events, social media posts, and more from our customers regarding the ability to now treat PDN with 10 kilohertz therapy in their practice. We've executed 52 PDN expert seminars for pain physicians, ensuring that these doctors are educated not only on how to treat PDN patients with 10 kilohertz therapy, but also how to achieve the significant clinical outcomes we reported in our trial. We've received significant press attention in the pain community, but also with diabetes advocacy groups such as Beyond Type 1 and Diabetes Mind. We've submitted our 12-month PDN data to a top-tier journal and anticipate that these results will now be published as early as late this year. We're hopeful that these published results, along with our robust clinical dossier, will support expansion of coverage policies to exclusively cover 10-kilohertz therapy for PDN. In addition, the health economic analysis of the six-month data has been accepted as an abstract at the International Society for Pharmaco-Economics and Outcomes Research, or ISBURG. one of the world's leading health economic conferences. These data will be presented during their upcoming virtual European conference taking place this year from November 30 to December 3. And we'll compare healthcare resource utilization data consisting of hospitalizations, ER visits, medication use, and other outpatient services between the high frequency therapy and conventional medical management arms. We also plan to submit the health economic data for publication later this year, analyzing the long-term outcomes of PDN patients treated with our proprietary 10 kilohertz therapy. Together, these data will be used to support physician referral decisions as well as market access initiatives to expand payer coverage of this procedure. Now, with regard to payer coverage, we're continuing our work and outreach to the payer universe to expand market access and drive adoption, which of course is a process that takes time. We have two key strategies to achieve this, which are, first, developing HFX-specific positive coverage policies for PDN with our payers. And concurrently, we're using our dedicated team of 20-plus reimbursement specialists in our HFX access group to assist with obtaining individual prior authorizations on a case-by-case basis where we've already seen some good success. Keep in mind that each payer has its own SES policy review timeline, effective data, and may even collaborate with a third party administrator to manage their coverage policies. With this in mind, we expect our payer coverage to increase gradually over time with a steady increase in coverage occurring throughout 22 and beyond. We continue to anticipate a mid single digit million dollar revenue contribution from PDN in 21 with broader penetration and a larger revenue contribution expected in 22 and beyond. The revenue ramp is expected to build gradually during these initial launch months as patients move through the referral to trial to permanent implant pathway, but also as awareness increases among referring physicians and patients and access with payers expands. We're generating awareness with patients and physicians for a brand new PDN treatment option. It's going to take some time for treating physicians to identify these patients. And of course, some physicians may refer one patient, then wait to see results before referring more. And for patients, the pathway from referral to trial to permanent implant typically takes months, not weeks. In summary, our launch is still very early, but the first three months have reinforced our excitement about our PDN indication and how impactful this will be for providers and patients. And we're looking forward to continuing to develop this exciting growth platform. Our PDN approval is the latest example of how we continue to lead in innovation. Following the acceptance of our PMA supplement submission for NSRBP, at the beginning of August to add explicit label claims for these patients, the FDA has now completed the substantive review of our submission. Thus, we believe we're on track for an FDA approval maybe by the end of this year or, if not, in early 2022. We continue to develop the non-surgical portion of our market using NSRBP data as well and look forward to publishing and presenting our 12-month follow-up data later this year or sometime in Q1. I'd now like to provide some commentary on our recent patent trial with Boston Scientific in Delaware. This trial was a result of a retaliatory suit regarding the design of certain leads that Boston Scientific filed against us in 2016 after we sued them to keep them from launching a high-frequency product and infringing our high-frequency patents, an effort that of course has been successful. After five years of litigation, only six of the original 249 claims Boston Scientific asserted against us actually made it to trial. In that trial, the jury found that Nevro infringed four of those six claims across just two Boston Scientific patents directed to ways of manufacturing SES leads, which Nevro obtains from a third-party supplier. The jury awarded Boston Scientific $20 million in damages, and we obviously disagree with the outcome and will now proceed to appeal the findings of infringement of those four claims. However, it's important to remember that the technology at issue in this trial was unrelated to our innovations in high frequency, has no bearing on Nevro's commercial strategy for any of our current or planned products, or our continued exclusivity of 10 kilohertz therapy. And the jury award itself is an amount of money that will have no material impact on our business, and was, by the way, far less than Boston was seeking. This was likely Boston's best offensive opportunity in our view, and it fell well short of being impactful. And we feel very good about where we stand going forward in the litigation matters that remain. So in closing, we continue to believe we are very well positioned for longer-term attractive growth. When the full impact of COVID on our market subsides, a process that we're now becoming optimistic has begun. Our early PDM launch is really exciting. Our fundamentals remain intact, and I believe we're well set up for 22 and beyond. And with that, I'll pass the call over to Rod to provide further details on our third quarter results and our guidance.