Nevro Corp.

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to Nevro's third quarter 2022 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 star followed by the number one again. 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 third quarter 2022 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 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 NEVRA Investor Relations website on the events and presentations page. Earlier today, NEVRA released its financial results for the third quarter ended September 30th, 2022. 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 2nd, 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 the 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 annual report on Form 10-K, filed on February 23, 2022, 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-related expenses and credits, interest, taxes, and non-cash items such as stock-based compensation and depreciation and amortization. Please refer to the GAAP to non-GAAP reconciliation tables within our earnings release. And now it's my pleasure to turn the call over to Keith.

Thanks, Julie, and good afternoon, everyone. Thanks for joining us. I'll focus my comments today on our third quarter results, the current state of our business and recovery, the progress of our PDN launch, and of course, our recent FDA approval and limited release of our new HFX IQ system. And following my comments, as Julie said, Rod will cover the specifics of our Q3 results and our guidance. Overall, we continue to move our business forward in Q3, despite a challenging environment for our customers, as well as macro impacts like currency exchange rates, inflation, and supply chain pressures. Our revenue was at the high end of our guidance. U.S. procedure growth rates were well into double digits. PDN revenue growth exceeded our expectations, again, and adjusted EBITDA results were above the high end of our guidance. Although we continue to experience the lingering impact of customer staffing and capacity issues, these began to improve slightly during the quarters. We continue to see a gradual overall trend of SCS market recovery, which we do expect to continue in the fourth quarter and throughout 2023. There were a number of encouraging elements of our progress in the third quarter. Global constant currency revenue was 10% ahead of prior year. U.S. trial activity, our best leading indicator of future growth, delivered 16% year-over-year growth. Based on a recent refresh of claims data for procedures, as well as all reported revenues thus far, we do believe that we continue to gain market share in Q3 as well. We're also extremely encouraged by the progress of our PDN launch, and we believe we've started to build some early interest with our indication to treat non-surgical back pain patients. And finally, with the recent FDA approval of our new HFX IQ system, We added a highly differentiated SES platform, the first and only SES system that uses truly big data and artificial intelligence to optimize and maintain pain relief using each patient's individual responses. I'll cover IQ in more detail later in my remarks, but this is an exciting achievement for our company. It's been years in the works, and we believe this is one of the most important launches in Nevro's history. All of this progress further differentiates our high-frequency, paresthesia-free SCS technology, and we're confident that we're well positioned coming into 2023. Our research confirms to us the patient willingness to engage has improved considerably. And importantly, the underlying fundamentals of the addressable market and the opportunity for attractive growth rate remains intact. Based on this and the trend we're seeing in our own trial procedures, We believe the SCS market is moving closer to recovery and is positioned to return to more attractive revenue growth rates as the funnel of trial procedures continues to refill. In our most recent market research, one-third of patients mentioned that their pain physician had canceled or rescheduled an appointment in the last six months, with the majority of these due to availability or scheduling challenges. However, 80% of patients who had no specialist appointments in 2021 at all, tell us they either have an appointment scheduled or already had at least one appointment, an appointment so far in 2022. Of course, lingering staffing issues and capacity congestion do continue to put pressure on the scheduling of procedures, but these also began to improve a little during the quarter. Our trial to PERM or T to P conversion curve, which is the average time to convert patient trials to PERMs and therefore revenue, also improved just slightly in the quarter. While our T2P curve is not back to its historical level yet, we expect it to continue to improve during the remainder of this year and 23. Our guidance that Rod will discuss takes this into account and implies year-over-year revenue growth for the fourth quarter of 9% to 13% on a constant currency basis. Our research makes it very clear that patient engagement and inflow coming into the pain practices is very high right now, And once the market's capacity to handle pre-COVID volumes is more fully restored, we expect to see market growth return to historical CAGRs. One of our competitors made a recent comment about prior authorization pressures from payers becoming a much more significant headwind for SCS in the third quarter. This is not something we saw. Medicare and commercial payers reimbursed almost universally for SCS therapy. And the payment amounts themselves for both facilities and physicians have remained reasonably stable and appropriate over time. Now, it is true that prior authorization requirements have been enforced more rigidly in recent years, even if those prior auth requirements themselves haven't changed, though we didn't see a meaningful change inside of Q3. When prior auth requests or appeals are documented correctly, approval rates actually remain high. As you know, we have a dedicated HFX access team to help manage this effort for our customers and our patients. In fact, about one-third of all of our patients come through our access team, and that number is growing. For those patients, we have an 80% to 85% prior auth approval rate for all trial patients and well over a 90% approval rate for PERM patients following a successful trial. Turning now to our PDN business. At the end of September, we received the positive recommendation of our proprietary high-frequency therapy, or PDN, by the American Association of Clinical Endocrinology, or ACE. Nevro's HFX therapy is the only form of SCS therapy to be referenced in his 2022 Diabetes Clinical Practice Guideline to Treat PDN. This update is notable in our view because, one, the professional society guidelines play, of course, an important role. to help guide clinical practice. Two, ACE is highly regarded within the diabetes treatment community. And three, the ACE guideline document specifically references our high frequency therapy as well as our SENZA PDM data. To be included in the clinical guidelines of an influential society in the first full year of approval is unusual. And it speaks to both the needs of these patients and the quality of our data and our outcomes. We're also really pleased with our PDM performance. Our PDM launch initiatives are driving greater awareness, and we continue to make strides in expanding payer coverage for these patients to significantly increase access to the therapy. During the quarter, PDM trials in the U.S. grew 22% sequentially over Q2. PDM trials represented approximately 18% of our total U.S. trial volume. That's up from 14% of our U.S. trial volume in Q2, and that improved throughout the course of the quarter. Among our permanent implant procedures, PDN represented 13% of our total worldwide procedures, resulting in approximately 13.4 million in PDN revenue. That's an increase of 21% sequentially compared to 11 million in Q2. As of the end of September, approximately two-thirds of never-implanting physicians have received one or more PDN patient referrals, which we attribute to our Salesforce expansion that was completed in June, as well as our outreach initiatives with both physicians and patients. Further up the patient demand funnel, we continue to invest in and strengthen our DTC campaign in order to acquire and activate qualified PDN patients. In the month of September, 19% of our US PDN trial procedures came from these DTC patient leads, which was an all-time high. And we're testing new media channels and programs to continue to strengthen our DTC campaigns going forward. We continue to make impressive progress in expanding payer coverage for our PDM patients. With the recent positive payer coverage decision by Aetna and several of the Blues plans, our positive policy coverage now stands at approximately 54% of the US PDM patient population. In addition, the two remaining regional Medicare MACs, Novitas and First Coast, have proposed updated coverage criteria to include PDN for SCS devices with an explicit FDA approval to treat PDN as well. If finalized, this will mean that Medicare and Medicare Advantage beneficiaries in all 50 states will have access to SCS for PDN, adding approximately 17 million covered Medicare lives and bringing coverage in the U.S. to approximately 66% of PDN patients. Many of you know that the lag for MedTech innovation between FDA approval and meaningful payer coverage, or the valley of death as it's often called, is something that typically takes years to get through. To be at two-thirds of covered lives at the end of the first full year, I think, is really pretty remarkable. In addition to these coverage policy decisions, we continue to see a high level of patient coverage on a case-by-case basis through the prior authorization process and the appeal of payer denials. including with payers who don't have a positive PDN coverage policy. For PDN cases that have come through our own access group, our cumulative approval rate as of the end of September continued to trend at or above 80%, and that was up from about 62% at the end of last year. Finally, we submitted the complete 24-month PDN data set for presentation at NANs in January of 23, and we plan to see the data published soon thereafter. We've revised our 22 sales guidance to now include a $45 to $47 million contribution from PDN, and that's up from our original guidance of $25 to $30 million at the beginning of this year. We're growing increasingly enthusiastic about the potential of the PDN market. In fact, I don't think any of us would be surprised if in the next five years the total PDN market represents, say, something like a third of the U.S. SES market. Moving on to non-surgical back pain, after receiving FDA approval of this indication in January, we began commercial activities to expand access to HFX therapy for this patient population by focusing on the identification and education of patients already at existing pain practices who have not had prior surgery and who are not a candidate for surgery. This strategy is beginning to bear fruit as many of our customers are holding educational events to engage this patient group, which we expect to positively impact trial rates in the future. As we previously announced, UnitedHealthcare released an update to its medical coverage policy and added language to exclude coverage for NSBP patients. This policy becomes effective on December 1 of this year. All other elements of their SCS coverage policy remained as they were before, including their early decision to cover the use of SCS for PDM. Although United previously had no coverage policy in place for these patients, keep in mind there were United NSBP cases getting both approved and denied before this change. And that will continue to be the case moving forward on an individual patient basis, depending on a patient's unique clinical history and medical necessity. We do not expect this coverage decision to have a material impact on our go-forward revenue, as we've said previously. We view these decisions as a very normal part of the market access pathway for new products and patient indications, and we believe our continued generation of high-quality clinical evidence will ultimately carry the day just as it has thus far with the PDN indication. Unlike PDN, we've always viewed the NSVP patient population as sort of a rising tide for the entire SCS industry and pain specialty. So as our competitors join us in the generation of NSVP data, we believe more payers will continue to cover SCS therapy for these patients who have exhausted all other options for which they are candidates. Now, I'd like to turn to our new Senza HFX IQ system. At the beginning of October, we were thrilled to announce FDA approval of IQ, the first AI-based spinal cord stimulation system that gets smarter over time by learning from each patient's pain experience and responses. Powered by over a decade of big data from our HFX Cloud patient database, IQ utilizes our smart HFX algorithm for patient programming and our superior high-frequency therapy platform, which has been proven, of course, in clinical trials and is further supported by real-world evidence from more than 90,000 implanted patients. We expect this launch to support our growth prospects in 23 and well beyond. There are important reasons why we're so excited about this platform. IQ is designed to improve the consistency of pain relief. Pain is obviously something that's very personal. Every patient and every patient's pain experience is different, and it changes over time. IQ uses our HFX algorithm, which is based on over 20 million data points from over 80,000 patients, to start patients on the stimulation program most likely to provide relief. Then it recommends personalized programming adjustments based on how patients themselves perceive their own pain to optimize and maintain that relief. This combination of AI and direct patient input is intended to produce continuous relief on an individualized basis. giving patients their desired control over their pain relief based on their personal experience, and to move the patient as needed much more quickly through our programming algorithm without clinician or NEVRO representative intervention. We believe this will lessen the burden on our patients, our customers, and our field and support infrastructure. In an IQ patient interface clinical study that we ran that supported our FDA submission, We found that 87% of patients reported moderately to a great deal better improvement in symptoms. 92% of patients preferred using a digital patient interface to adjust their therapy than more frequent programming calls or visits from the doctor or to the doctor. 82% of patients were satisfied or very satisfied with using the patient interface for making therapy adjustments. Finally, IQ is digitally enabled, so it easily allows for future updates to our algorithm and new features and capabilities, by the way, that are already in development for both patients and our providers. Since our IQ approval announcement, we fielded a few questions and seen some attempts by a couple of our analysts to compare what we're doing with the low-frequency ECAPS closed-loop systems a couple of our competitors have been talking about for some time. To the extent that there is any confusion on this point, let me try to clarify here is they're really not at all the same things. ECAP closed loop is intended to fix one of the primary problems of 40-year-old low-frequency paresthesia technology. That is the variability of the therapy that causes uncomfortable shocks in one moment and a complete absence of therapy in the next. Even when closed loop ECAP sensing does correct for that problem, you're left with traditional low-frequency paresthesia therapy, something that's Our field has been moving away from now for the last seven years. ECAPS is not closing the loop of a clinical endpoint, say, like pain, or in the case of CGM-based insulin delivery, blood glucose levels. It's merely adjusting amplitude up or down to maintain paresthesia intensity. Our high-frequency therapy doesn't generate ECAPS by design and doesn't rely on paresthesia at all by design. So it doesn't have this problem and therefore doesn't require this corrective fix. Instead, IQ takes real clinical endpoints like the patient's daily input regarding their pain relief and pain score into account along with quality of life input such as changes in activity and medication levels, and it combines this with insights from our big data, something no other SCS competitor has, to recommend the next programming adjustment to the patient. This capability combined with our superior high-frequency therapy is a far more powerful and personalized approach to actual pain relief, and that is what differentiates the IQ platform. Remember also that in our landmark SENZA RCT at our first approval, we used our HFX 10K therapy controlled against a competitor's low-frequency paresthesia therapy. The size of the treatment effect in that study, in other words, the difference between responder rates in the test arm and the control arm for back pain was almost 41%. The leg pain responder rates were also markedly improved. In our competitor's ECAP study, the treatment effect or difference in responder rate between study arms was only about 18% for back pain, with no statistically significant benefit at all for leg pain. So we're convinced that combining our already proven high-frequency therapy with a new IQ approach is going to be a really exciting way to treat patients. Now, our limited release of IQ in the U.S. is underway, and we've already successfully completed our first cases. We anticipate a full U.S. launch in early 23. In addition to the U.S. approval for IQ, we've already submitted for approval in Europe, and we'll be submitting for Australia approval soon. In summary, HFXIQ reflects our continued commitment to deliver comprehensive, life-changing solutions for patients with chronic pain, and it comes at an exciting time as we're closing in on 100,000 implanted patients later this year. We believe that what we're doing with IQ is the future of SCS therapy. We look forward to leading the path to smart pain management that brings truly personalized relief to patients who need it most. So in closing, we made what we thought was very encouraging progress in the third quarter. We're seeing the start of what we believe will be continued recovery in our markets, as well as cause for excitement in our new IQ platform and our other emerging growth drivers. It's been a tough two and a half years or so for our therapy, our market, and our company, but it feels like we're in the very early innings of an interesting stage of recovery, innovation, and growth. And with that, I'll pass the call over to Rod to provide further details on our third quarter results and on our guidance.