Nevro Corp.

Please stand by, we're about to begin. Good afternoon, my name is Beau and I will be your conference operator today. At this time, I would like to welcome everyone to Nevro's fourth 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 fourth quarter 2021 earnings conference call. We appreciate you joining us. I'm Julie Dewey, Nevro's Chief Corporate Communications and IR Officer. With me today are Keith Grossman, Chairman, CEO, and President, and Rod McLeod, Chief Financial Officer. The format of our call today will be a discussion of fourth quarter 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 fourth quarter performance on the Nevro Investor Relations website on the events and presentations page. Earlier today, Nevro released its financial results for the fourth quarter ended December 31st, 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 February 23rd, 2022, and an archived copy of this webcast will be available on our investor relations website. Before we begin, I'd like to remind everyone that comments made on today's call may include forward-looking statements within the meaning of federal securities laws. Our results could differ materially from those expressed or implied, as a result of certain risks and uncertainties. Please refer to our SEC filing, including our Form 10-K, to be filed later today for a detailed presentation of risks. The forward-looking statements in this call speak only as of today, and we undertake no obligation to update or revise any of these statements. In addition, we will refer to adjusted EBITDA, which is a non-GAAP measure that is used to help investors understand NEBRO'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 tables within our earnings release. And now I'll turn the call over to Keith.

Thank you, Julie, and good afternoon, everyone. I'm going to focus my comments today on our fourth quarter results, the current state of our business in COVID recovery, and on our PDN launch. Following my comments, Rod will cover the specifics of our Q4 results and our 2022 first quarter and full year guidance. While the current COVID environment and related headwinds remain challenging, we're pleased with our fourth quarter results, which were well above the high end of the most recent guidance range we communicated for both revenue and adjusted EBITDA. Both U.S. and international revenue were impacted by COVID-related issues, particularly in the last two weeks of December, as the Omicron variant began to spread widely. We were really encouraged by the level of recovery and procedures up to that point, however, which had been steadily improving since July and began to approach our highest historical levels in late November and early December. We believe this is an encouraging indication of how our market will respond as we begin a more durable recovery. We continue to be excited about the PDN opportunity, which I'll discuss in more detail shortly, as well as our recent FDA approval for a specific indication to treat non-surgical or NSRBP patients. All of this progress further differentiates our high-frequency, fair seizure-free SCS technology, and we're confident that throughout these difficult quarters, we've laid a foundation for attractive growth when the impact and uncertainties of COVID on our market subsides. Now, let's take a look at actual procedure activity. Compared to prior year, Q4 total U.S. permanent implant procedures decreased 5%, while trial procedures increased 3%. Compared to the fourth quarter of 2019, U.S. permanent implant procedures decreased 7% while trial procedures decreased 5%. As I said a moment ago, trial and permanent implant volumes were impacted by COVID-related issues in the second half of December, mostly. That Omicron impact continued into January. So, encouragingly, the worst of the impact seems to have been relatively short-lived. And we were already beginning to see some stabilization and improvement by the end of January, and that has continued through February. The impacts of a surge like this one include changes in patient behavior, increased hospital restrictions on elective procedures, and the exacerbation of already existing staffing shortages. From a volume of procedure standpoint, this shows up in lower new patient visits, cancellation of cases already scheduled, and an increased difficulty in scheduling cases in the OR, particularly perm cases, which has the effect of extending the temp to perm conversion curve and pushing revenue generation further out. These impacts are felt across all SCS patient categories, by the way. For these reasons, we're providing first quarter guidance in addition to full year 22 guidance. And Rod will cover this in more detail later in the call. But as you'll hear, this guidance assumes no new material waves of infection for the balance of the year. and therefore a steady improvement in procedure volumes throughout the rest of the year with a return to solid growth in the second half of the year. Since our last quarter call, we once again completed additional market survey work with our physicians and patients to gauge the progress of the SCS market recovery. At a high level, nothing has really substantively changed. We believe the patient reluctance to reengage and willingness to defer, which of course has been an issue behind the relatively slower SCS market recovery, is showing signs of improving. The impact of capacity constraints related to staffing shortages at healthcare facilities probably grew in the last quarter. However, we believe that will likely improve throughout the rest of the year. And importantly, our data still confirms to us that the underlying fundamentals of the addressable market and the opportunity for attractive rates of growth remain intact. Finally, from a relative performance standpoint, our share of market We continue to see high variability in quarter-to-quarter results among all market participants, though we feel like we have continued to win in a difficult 21 market, and in fact, throughout the pandemic. We don't yet have U.S. claims data to look at procedures through the full year 21, but on a revenue basis, our U.S. revenues were roughly equal to the full year 2019, while we believe the total U.S. SES market was still down about 4% year-over-year. So, Let me close this portion of my remarks by concluding that we're growing more optimistic that the worst of the COVID impact on our business may be behind us. Patient to physician interest in pain treatments remains high. And after a very tough two years of COVID, we continue to see signs of recovery with the steady pickup in trial activity that occurred within the third and fourth quarters of last year. And with the early signs of post-Omicron stabilization in the business that we're seeing in the first quarter thus far. Although there are residual effects from the pandemic, such as economic impacts and staffing shortages, which are harder for us to predict, we're hopeful that the Omicron variant will be the last meaningful wave, at least in terms of its impact on elective procedures, and that we'll begin to see some relief in our core lower back and leg business by the end of the first quarter that will then continue to improve throughout the year. In addition, we're excited with the progress we've made in our PDN launches, the only provider of high-frequency, paresthesia-free therapy approved by the FDA, for patients who are struggling with debilitating PDM, or painful diabetic neuropathy, and who are unable to find relief with currently available drug options. Based on published data, our HFX for PDM therapy is the most effective SES solution for PDM, with the highest responder rate at 86%, the highest average pain relief at 77%, and the only system to demonstrate neurologic improvements. While still nascent, the first six months of this launch have reinforced our excitement about our PDN indication and how impactful we believe this will be for both 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 revenue in Q4 was approximately $4 million. In Q4, PDN trials grew 93% sequentially compared to Q3 and represented approximately 7% of our total U.S. trial volumes for the quarter, growing to 8% in the month of December. Before I provide further details on our strong PDN launch progress, I want to address Medtronic's FDA approval announcement for PDN. That press release that we issued formally responding to that approval speaks for itself in terms of detailing the superiority of our high-frequency data in these patients, so I won't repeat that detail here, except to say that we offer the most effective therapy supported by the most robust evidence. In fact, I think there's a lot to feel good about here for a couple of reasons. First, and as we've said, one of our overarching goals for a successful PDN launch has been generating awareness with referring physicians and patients. Now, this is always a big lift in a new market like this one. So having a second market participant raising awareness about this indication with referring doctors and patients can only be helpful in developing the referral channel and in accelerating market expansion. Second, from a competitive standpoint, let me say I think there is now a pretty bright light on what we've been saying all along. And that is that low frequency just doesn't work very well in these patients. After all, the reference studies were published eight years ago. And if the data had been persuasive to the clinical community back in 2014, the PDN market for low-frequency SCS would probably already exist. What we now have is a very stark contrast between outcomes using our high-frequency non-parasitia treatment with low-frequency parasitia-based treatment, which is summarized, by the way, in slide 12 in our Q4 investor deck that's now up on our website. The responder rates in the SENSE of PDN trial were roughly double those of the study using the Medtronic device. And as one of our key investigators said recently, and some of you have heard me quote, We've known for years you don't treat paresthesia-based pain with more paresthesia. In fact, we recently fielded PDN market research with a random sampling of pain specialists, and of physicians who indicated Medtronic was their primary SCS system, 70% found the Nebro PDN data more compelling. In addition, roughly two-thirds of these same Medtronic users indicated they are more likely to use 10 kilohertz therapy to treat PDN patients after reviewing the data. This competitive approval doesn't impede our opportunity for success or dampen our optimism for this market. This is an enormous potential market and the superior outcomes and patient experience with high frequency in these patients will continue to put us at an advantage. Our PDM referral sales team has called on close to 10,000 referring physicians and over 900 patients have now been referred to SCF specialists, which is up 80% from our last call. We're finding the unmet needs of these patients are top of mind with the referring clinicians, and many times we've been entrusted with patient referrals on the initial call. Among our early treated PDM patients, we're seeing the results we would expect based on our clinical trial outcomes, and we're working with the referring doctors to make sure that they're aware of the very positive results in their patients after the treatment. Based on the success of our PDM referral sales team in educating these referring physicians, We're planning to expand this team by around 50% during 22. And we'll be moving all of these team members from their current roles with our market channel partner to in-house Nevro team members. Also encouraging is that our core SES sales team, calling on our existing pain specialists, is gaining access to new implanting accounts that didn't previously implant or use Nevro 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 pain as well. Our customers appreciate the investment we've made in our technology and the quality and outcomes of our trial and resulting approval and the opportunity to treat a new class of patients that has, for the most part, not previously been treated by SCS. We've also seen tremendous interest among our pain specialists to reach out to referring physicians in their own local communities to do patient outreach. The number of pain physicians that say they are proactively seeking local PDN referrals has already nearly doubled from before our PDN approval to over 60%. To facilitate such interest, we went live at the beginning of January with a new co-marketing platform that provides marketing materials to those in planning positions who want to do their own local outreach to referring physicians. We've also executed dozens of PDN expert seminars for pain physicians, ensuring these doctors are educated not only on how to treat PDN patients with 10 killer therapy, but also how to achieve the significant clinical outcomes that we reported in our trial. At the end of November, three important clinical data publications for treating PDM with 10K therapy were published. This included 12-month data from our landmark PDM RCT published in Diabetes Care, as well as real-world evidence publication, and finally, a comparative literature review of high versus low-frequency SCS evidence, which is timely, both published in the Journal of Diabetes Science and Technology. These three important clinical data publications further expand the growing body of positive clinical evidence uniquely supporting the use of 10 killers therapy for these PDM patients. Given the importance of clinical data to the referring physician in this community, we were also pleased to see a clinical compendium on the diagnosis and treatment of PDM published in late January by the American Diabetes Association. Notably, this compendium specifically now mentions high-frequency 10 kilohertz spinal cord stimulation as a non-pharmacological therapy recommended for PDM, which we believe is an important endorsement of our therapy by the ADA. This compendium was distributed to over 40,000 ADA members and will be a valuable addition to our expanding arsenal of clinical evidence supporting the use of our high-frequency paresthesia-free therapy. In addition to supporting physician referral decisions, we believe these data, along with the durability seen in the 18-month results that were presented at NAMS in January and our robust clinical dossier, will help support expansion of payer coverage decision policies to cover our therapy. Speaking of payer coverage, we were, of course, thrilled to see the positive decision by UnitedHealthcare in early January to expand their coverage to include SCS for PDN patients, effective on March 1 of 2022. UnitedHealthcare is the largest private health insurance company in the U.S. with more than 39 million commercial health care members. So this earlier than expected decision is a major milestone that's expected to significantly increase patient access to the therapy. And because United is so influential, we also believe their decision will positively impact the thinking of other payers. Once it's effective on March 1st, patient coverage will increase to approximately 35% of the addressable PDM population up from about 25% today. 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. Our two key strategies to achieve this are to develop positive coverage policies for PDM with these payers, and at the same time, use our HFX access team to assist with obtaining individual coverage on a case-by-case basis. We continue our payer outreach and direct engagement activities, and we'll provide updates on those payer decisions as they arise. Our HFX access team is continuing to support prior authorizations at the patient level. And to date, we've seen a patient access rate of approximately 60%, which is approaching rates that we see in our core lower back and leg business. Keep in mind that this rate is only for those PDN cases that have come through our HFX access group. We also expect our payer coverage to increase gradually over time with a steady increase of positive coverage decisions occurring throughout the year. Included in our 22 sales guidance is a $25 million to $30 million contribution for PDN. That's up five times the contribution in 2021, with broader penetration and a larger revenue contribution expected in 23 and, of course, beyond. The revenue ramp is expected to build gradually this year as patients continue to move through the referral to trial permanent implant pathway, but also as awareness increases among referring doctors and patients and access with payers expands. Despite the Omicron challenges in Q1 and what is the typical seasonal drop from Q4 to Q1, we're encouraged by the continued growth of PDN volumes in Q1-22 thus far. In summary, our launch is still in its early stages, but the first six months have reinforced our excitement about our PDN indication, how impactful this will be for providers and patients. And we're looking forward to continuing to develop this exciting growth platform. We also received FDA approval of our PMA supplement to add explicit label claims for our proprietary therapy in the treatment of non-surgical refractory back pain. That happened at the beginning of January. Patients who suffer from intractable back pain without prior surgery have limited treatment options if they're not a candidate for surgery. And this FDA approval marks another milestone in NEVRO's commitment to expanding access to HFX and our SCS portfolio. This approval is specific to programming that includes NEBRO's proprietary 10K therapy and differentiates NEBRO's solution as the only SES system with specific labeling to treat both PDM and NSRBP patients and access to more therapeutic programming options. Coupled with the publication of the 12-month follow-up data of our NSRBP trial in the Journal of Neurosurgery Spine, This approval will be used to support continued market penetration and, importantly, market access initiatives to further expand payer coverage. So, in closing, we continue to believe we're really well positioned to emerge from this pandemic with vigor and ready for longer-term attractive growth, a process that we're beginning to become more optimistic has at least begun. We're a leader in three large under-penetrated SCS segments that should continue to grow for years to come. We're uniquely positioned for recovery and renewed growth with our differentiated high-frequency paracetamol-free therapy with industry-leading outcomes and new indications in PDN and NSRBP. We remain very bullish on our ability to continue to capture share of this market over time with better technology, better outcomes, and solid execution. So our fundamentals remain intact, and I really believe we're well set up for 2022 and beyond. So with that, I'll pass the call over to Rod. to provide further details on our fourth quarter results and our guidance. Rod?