Nevro Corp.

Good afternoon. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to Nevro's fourth 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 at that time, simply press star followed by the number one on your telephone keypad If you'd like to withdraw your question, again, press star 1. 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 and full year 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 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, 2022. 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 February 16th, 2023, and an archived copy of this webcast will be available on our IR 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 these 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 to be filed 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 release. And now it's my pleasure to turn the call over to Keith.

Thank you, Julie. And good afternoon, everyone, and thank you for joining us. I'm going to focus my comments today on our fourth quarter results, the current state of our business and recovery, the progress of our PDN launch, and the limited market release of our new HFX IQ system. Now, following my comments, Rod will cover the specifics of our Q4 results and our 23 first quarter and full year guidance. Overall, we continue to move our business forward in Q4, and we're entering 23 with, I think, some real positive momentum. Our revenue was at the high end of our guidance. U.S. procedure growth rates grew double digits, and adjusted EBITDA results were within our guidance range, excluding one-time charges. I'm really pleased with the building blocks that are now in place for attractive growth and leverage going forward, and believe the challenges to our market will gradually but steadily continue to improve throughout 23 and beyond. There were a number of encouraging elements of our progress in the fourth quarter. Global revenue growth was 12% over prior year on a constant currency basis, while U.S. revenue growth came in at 13%, and U.S. trial activity delivered 9% year-over-year growth. In fact, October, November, and December were all-time record months for daily trial rates in the U.S., with Q4 U.S. trials, in fact, about 6% ahead of 2019, which, of course, was our last pre-COVID comparable period. Based on reported competitive revenues thus far for Q4, we continue to gain market share in the quarter and full year 22 as well. ADN continues to be a significant driver of growth with impressive performance quarter over quarter throughout 2022. And finally, our new AI powered HFX IQ system is performing really well in our limited market release with positive feedback from physicians and patients regarding the ability to deliver personalized pain relief using our big data-backed HFX algorithm. And more on IQ later in my remarks, but I think this technology really has the opportunity to further differentiate our competitive position in this space. All of this progress builds, of course, on our superior high-frequency, paresthesia-free SCS technology, and we're confident that we're well-positioned for 23. We see continued signs of market recovery as the recent challenges in our market are beginning to recede and we continue to believe that the underlying fundamentals of the addressable market and the opportunity for growth remain largely intact. We continue to see encouraging growth in trials and permanent implants. And we're starting to see the recovery that we expected to see as the impacts of the pandemic begin to wane. We think, by the way, that that is going to continue throughout 23, though we know it's unlikely to be linear in nature. Of course, lingering staffing challenges and capacity congestion do continue to put pressure on the scheduling of procedures. But these also seem to improve a little during the fourth quarter, and we believe this trend will continue throughout 23 as well. Our guidance takes this into account and implies year-over-year revenue growth for the first quarter of 9% to 11% on a constant currency basis. Of course, this assumes the typical sequential seasonality we usually see from Q4 to Q1. Our previous research indicated that patient engagement with pain specialists has been improving. And as the market's capacity to handle pre-COVID volumes is more fully restored, we expect to see market growth return over time to historical CAGRs. Turning now to our PDN business. Our progress with referring clinicians, payers, and clinical societies exceeded our expectations in 2022. And we're looking forward to continuing to develop this exciting growth platform in 2023. During the quarter, PDN trials represented approximately 20% of our total U.S. trial volume. That's up from 18% of our total U.S. trial volume in Q3. And that actually improved throughout the course of the quarter. Among our permanent implant procedures, PDN represented around 16% of the total worldwide procedures, resulting in approximately 17.3 million in PDN indication sales. And that's an increase of 29% sequentially compared to 13.4 million in the third quarter, which we attribute in large measure to the PDN referral sales organization expansion that was completed in June, as well as our outreach initiatives with both physicians and patients. In the month of December, approximately 16% of our US PDN trial procedures came from leads generated by our own DTC programs. And we continue to test new direct-to-patient media channels and programs to drive awareness and interest with patients directly. In addition to the existing payer coverage policies in place for PDN, we continue to see a high level of case-by-case approvals through the prior authorization process and the appeal of payer denials. including with payers who don't have a position or rather a positive PDN coverage policy. For those PDN cases that have come through our own access group, our cumulative approval rate as of the end of December continued to trend around 80%, and that was up from about 62% at the end of 2021. Finally, the complete 24-month PDN RCT trial data and the 12-month quality of life RCT data were presented in January at the NAMS conference in two separate podium presentations by Dr. Erica Peterson. These strong results confirmed the long-term durability of pain relief as well as clinically meaningful improvement in neurological function and quality of life achieved with 10 kilohertz therapy. We expect to submit this data in the coming months for publication. In addition, we're also looking forward to enrolling our first patient next quarter in our new PDM sensory study. which will be the first prospective RCT specifically powered to assess restoration of neurological function as a primary endpoint in patients with intractable PDN. We plan to enroll up to 236 patients at multiple sites across the US. Patients will be randomized to conventional medical management or 10 kilohertz SCS plus conventional medical management with optional crossover to the other treatment arm at six months if those criteria are met. This sensory study is groundbreaking really for several reasons. Diabetes and peripheral neuropathy pose a staggering socioeconomic burden. There is no available disease-modifying treatment option available for patients with PDM. In fact, every 20 seconds in the U.S., there's a diabetes-related amputation, according to the American Limb Preservation Society. And many of these amputations are preventable. Insensate or numb feet contribute to unrecognized injuries and foot ulcers as patients lack protective sensation. Foot ulcer treatment and associated amputation surgeries are costly, both economically and, of course, psychosocially. By restoring sensation in the feet, 10K SES may alleviate this tremendous disease burden, prevent amputations, and enable patients to be more active, all of which would improve overall health and quality of life and, of course, reduce healthcare costs. This study also affords a path forward to building clinical evidence for slowing the progression of or improving sensory loss of lower limbs in patients with chronic intractable pain and builds on the significant outcomes we saw in our landmark 10 kilohertz SCS RCT with powered study endpoints targeting the disease-modifying benefits of improved neurological function and pain relief. You'll recall that the observed neurological improvements we saw in the original Senza PDN study are unique to 10-K SCS and have not been reported for any other competitive SCS modality. Not only do we anticipate that this study will provide additional confirmatory evidence of the benefits of NEVRO's proprietary 10-K therapy in these PDN patients, but we also believe that the additional level one data generated will be very helpful as we continue to work with payers to expand PDN coverage generally. I'm pleased to announce that the FDA has granted breakthrough device designation for the PDM sensory study and this potential device indication. This designation by the FDA provides for an expedited review for a marketing application to expand Nevro's FDA labeling. And as I said earlier, we look forward to enrolling our first patient next quarter, and we're really excited about the opportunity for this target patient group. Following our strong progress in 22, PDN is expected to be a significant growth driver for us once again this year. As another example of the growing interest in PDN, as of the end of December, over 70% of Nevro and planting physicians had consulted with one or more PDN patients in their practice. Our 23 revenue guidance includes a $75 million to $85 million contribution from PDN. That's an increase of 56 to 77% over 22. As we said, over time, we think PDN is going to be one of the more significant parts of spinal cord stimulation, perhaps growing to as much as a third of the US SCS market. Our guidance for 23 implies this patient segment will already be about 15 to 20% of our own business in just its second full year. Moving on to non-surgical back pain, after receiving FDA approval of this indication last 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. Unlike PDN, we've always viewed the NSBP patient population as sort of a rising tide for the entire SCS industry and pain specialty. We continue to lead the charge in generating NSBP clinical data, but it was encouraging to see our competitors also begin to report their own data at NAMS this year, which helps to build the foundation of clinical evidence supporting this indication. As our competitors continue to join us in the generation of NSBP data, we believe more payers will continue to cover SCS therapy for these patients who have exhausted all other options for which they're candidates. We believe this will help to grow the market for SCS therapy for back and leg pain patients in the coming years. Speaking of that, our clinical investigators presented positive two-year follow-up data for our CEMSA NSBP trial at NAMS, which included clinically important and stable pain relief in patients treated with 10K SCS, as well as strong, durable improvement in reported function and a significant quality-of-life improvement. These results were seen in patients with refractory chronic low back pain who were evaluated by a spine surgeon for surgical candidacy and who had exhausted all appropriate non-operative medical management. On the reimbursement front, to date, we've not experienced any noticeable impact on our revenue from UnitedHealthcare's decision to exclude coverage for NSBP patients, which became effective on December 1. We also don't expect this coverage decision to have a material impact on our go-forward revenue opportunity, as we said previously. 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. Now I'd like to turn to our new Senza HFX IQ system. Following FDA approval last quarter, we initiated a limited U.S. market release, which has been very well received. IQ is the first big data-backed, AI-powered spinal cord stimulation system that gets smarter over time by learning from each patient's pain experience and that patient's interaction with the device and the therapy. IQ is powered by something no other SCS system has, big data. In fact, over a decade of longitudinal patient data from our HFX cloud patient database. Our HFX algorithm, which is based on over 20 million clinical data points from over 80,000 patients in this database, drives the IQ product. This algorithm starts patients on the stimulation program most likely to provide relief based on their specific profile. IQ is Bluetooth-enabled and connected to a patient app and learns each patient's individual inputs to personalized therapy recommendations designed to progress the patient along their pain relief journey. This combination of big data, AI, and direct patient engagement and input is intended to optimize and maintain pain relief on an individualized basis, giving patients more control over their pain relief based on their personal experience and at a time that suits them. IQ is a powerful supplement to our field team, our HFX coaches, and our cloud database that provides physicians with both detailed and summary outcomes data. We believe the IQ will lessen the burden on our patients and our customers and expect this launch to support our growth prospects in 23 and well beyond. By the way, the IQ product line is the next logical step in allowing us to drive more profitable growth. as it enables our existing team to scale more effectively over a larger base of patients and revenue going forward. I believe this, combined with the ramp-up of our Costa Rica manufacturing facility, is really going to help us with the earnings productivity of our revenue growth in the coming years. At the NAMS meeting, we have an opportunity to feature the HFXIQ system at our exhibit booth and several other events, including a well-attended physician education lunch. We're preparing for a full U.S. launch very soon. and expect a meaningful shift in mix to the HFXIQ product throughout the rest of the year. In addition to the U.S. approval for IQ, we've already submitted for approval in Europe and Australia. In summary, the 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've now impacted the lives of more than 100,000 implanted patients globally with our technology. We think what we're doing with the IQ represents the future of SES therapy, and it keeps Nevro firmly at the forefront of innovation as we continue to bring new technology, new data, and new indications to our customers and our patients. We're also very proud to announce that we recently received our certification to the new European regulatory standard for medical device companies known as EUMDR. This certification is a strong validation of the strength of our internal quality management system. and it follows several years of work and preparation by our team. I should mention that only about 25% of the applications received by European notified bodies have undergone regulatory assessment and received a certificate according to this new and more robust regulatory framework. And I'm really pleased that NEVR is among the first wave of medical device companies to achieve certification to this new standard. So, in closing, we made encouraging progress in the fourth quarter with what we believe will be continued recovery in our markets, important new products like the HFXIQ platform, entirely new patient populations like PDN and NSVP, and the opportunity for attractive operating leverage on future growth as a result of our intense focus on the scalability of our expense structure, I think the outlook for Nevro is increasingly bright. And with that, I'll pass the call over to Rod to provide further details on our fourth quarter results and on our guidance.

Thanks, Keith, and good afternoon. I'll begin with our worldwide revenue for the fourth quarter of 2022, which was $113.8 million, an increase of 11% as reported, and 12% on a constant currency basis, compared to $102.8 million in the fourth quarter of 2021. PDN represented 16% of worldwide permanent implant procedures, which resulted in approximately in PDN indication sales in the fourth quarter of 2022. As a reminder, this quarter included one less selling day than Q4 of 2021. U.S. revenue in the fourth quarter of 2022 is $99.8 million, an increase of 13% compared to $88.4 million in the fourth quarter of 2021. International revenue is $14.1 million, a decrease of 2% as reported, but an increase of 9% constant currency compared to 14.3 million in the fourth quarter of 2021. Now, moving on to some detail below the top line. Gross profit for the fourth quarter of 2022 was $75.2 million, an increase of 9% compared to 69.1 million in the fourth quarter of 2021. Gross margin was 66.1% in the fourth quarter of 2022 compared to 67.3% in the fourth quarter of 2021. As Keith said, the limited market release of the HFX IQ system continues to progress well, and the company continues to anticipate a full market launch very soon with a meaningful shift in mix to the HFX IQ product following the full market launch. As a result, we recognized charges to cost of goods sold in the fourth quarter of 22 of approximately $2 million related to the write-off of a portion of our legacy product inventory. Without these charges, margins would have been 68%. Operating expenses for the fourth quarter of 2022 were $94.6 million, down 1% compared to $95.3 million in the fourth quarter of 2021. And in fact, we're up less than 2% over the fourth quarter of 2019. Litigation related legal expenses were $1.2 million for the fourth quarter of 22 compared to a $6.1 million in the fourth quarter of 2021. The company also incurred restructuring charges of approximately $700,000 in the fourth quarter of 2022 and expects to incur an additional approximate $300,000 of restructuring charges in the first quarter of 2023. Net loss from operations for the fourth quarter of 22 was $19.4 million compared to a loss of $26.2 million in the fourth quarter of 2021. Non-GAAP adjusted EBITDA for the fourth quarter of 22 was a loss of $1.4 million, compared to a loss of $7.5 million in the fourth quarter of 2021. Without the $2 million inventory charge, adjusted EBITDA would have finished at a positive $600,000 for the quarter. Cash equivalents and short-term investments totaled $374.4 million, as of December 31st, 2022. This represents a decrease during the fourth quarter of 22 of $12.5 million. We continue to manage our working capital and are very comfortable with our balance sheet to fund operations. 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. Keep in mind that the guidance we are providing today assumes the full year of 2023 will see steady improvement in provider capacity due primarily to a decrease in healthcare facility staffing challenges, as well as no changes in macroeconomic factors that would materially impact a patient's willingness or ability to seek elective care. The trial to PERM conversion curve has improved just slightly, but it is still a bit slower than historical norms. In Q4, despite the slight improvement, we saw a small impact due to this lengthened trial to PERM curve relative to historical norms. Our guidance assumes that this trial to PERM curve remains at current levels for the balance of the year and doesn't improve or worsen. Given this backdrop, We're guiding the first quarter worldwide revenue of approximately $94 million to $96 million, which represents 9% to 11% growth on a constant currency basis and reflects the typical seasonal step down in revenue from Q4 to Q1. All of these market factors related to recovery apply equally to PDN case volumes as well. and we expect PDN to reflect similar Q1 seasonality to the larger SES market. Thus, PDN indication sales in the first quarter of 2023 are expected to be approximately 15 to 20 percent below the fourth quarter of 2022, and then expected to grow sequentially each quarter for the remainder of 2023, given the strong underlying momentum in this indication. We expect first quarter of 2023 non-GAAP adjusted EBITDA to be a loss of approximately $19 to $20 million. As we've seen historically, Q1 experiences a disproportionate amount of annual expenses due to the NANS conference, our global sales meeting, as well as certain other Q1 heavy expenses such as payroll taxes, And 401 matching that reset in the new calendar year. This year's Q1 expenses are more in line with our normal Q1 pace as a percent of total spending for the year. They also represent a bigger difference over prior year because of our global sales meeting, robust NANs presence, and increased PDN investment. We do want to point out that current consensus does not reflect this step up in operating expenses that we normally see in Q1. To help you with timing, in the second and third quarters of this year, we expect to be at around breakeven from an adjusted EBITDA perspective and moving toward a positive adjusted EBITDA range in the fourth quarter. We continue to expect worldwide revenue for full year 2023. of approximately $445 million to $455 million, an increase of 10% to 12% over prior year, or 10% to 13% on a constant currency basis. This full year 2023 guidance includes approximately $75 million to $85 million of PDN indication sales, an increase of 56% to 77% over prior year. For full year 2023, Gross margin is expected to be approximately 68%. The Costa Rica manufacturing plant is producing meaningful volumes to date in 2023. And we remain encouraged by the volume potential of production, as well as the high quality of and cost reductions in our manufactured products. However, 2023 gross margins will experience Some headwinds in the first three quarters of the year due to recent pricing increases from some of our contract manufacturers and heavier than anticipated 2023 projected mix of contract manufacturer products. We expect to see improvements in gross margins beginning in Q4. and then believe the Costa Rica facility will deliver gross margin expansion to the mid-70% range over the next three to five years, assuming no material pricing changes. Operating expenses are expected to be approximately $391 million to $393 million for 2023, including combined litigation expenses and ongoing investment in PDN market development of approximately $40 million. We expect full year 2023 non-GAAP adjusted EBITDA to be in the range of negative $5 million to negative $10 million, which compares to a non-GAAP adjusted EBITDA loss of $23.8 million in 2022. We do want to provide you with the expected cadence of our business to assist you in modeling our quarterly performance during 2023. We expect high single to double digit constant currency growth for the first half of the year over prior year. the two quarters in the back half of the year expected to grow in mid-teens over Q3 and Q4 of 2022, as we assume we will benefit from an improving market environment, the launch of HFXIQ, and continued progress in our PDM business. Finally, I think it's important to review our progress on our journey to drive growth and scale profitably in our core business. For example, Let's take a quick look at our operating expenses as a percent of revenue. Over the years, operating expenses excluding litigation and PDN have gone from 91% of revenue in 2019 to 84% of revenue in 2022 and are expected to finish 2023 in the high 70s. Many of the changes we continue to invest in, including our Costa Rica facility and development of the PDN market, are designed to provide continued improvement in our financial leverage as we grow. We believe that with these investments, we can create even greater leverage in the coming years. So please keep in mind that even including all of these investments I've just mentioned, our full year 2023 operating expenses will only be about 7% higher than those in the full year 2019. In closing, we made good progress in the fourth quarter and remain on track to drive growth and scale profitably in our core business in the years ahead. We are in a great position strategically with best-in-class SCS technologies, remaining share gain opportunity, future growth opportunities in PDN, NSBP, and our new HFXIQ platform, superior clinical data, and a strong commercial organization. We look forward to aggressively attacking the significant opportunities to drive the performance of the business the rest of the year. 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 and take as many questions as we can, we ask that you please limit yourself to one question and one brief related follow-up question. You can then rejoin the queue, and if time allows, we'll take additional questions. Operator, we're ready for the Q&A instructions.

At this time, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your first question comes from Joanne Winch with Citibank. Your line is open.

Thank you for taking the question. I'm a little bit curious about a couple of things. I'm just going to throw them out there in no particular order. Number one, it sounds like you completed the PDN Salesforce build, and I'm just curious how that is going. Number two, when you talk about historical CAGRs, what historical CAGRs? And then last but not least, if you can give us an update on the CEO search. Thank you.

Okay. Thanks, Joanne. Why don't I take the PDN Salesforce build on the search and I'll let Rod take the CAGR question. So the PDN referral Salesforce build is sort of an ongoing process. Um, we tend to go in, uh, in, in tranches once or a couple of times a year. And I, and I, in the past, and I think this year it'll be more of a continual, uh, building. So we we've come into this year with a referral sales team of a little more than 50 individuals. I think we'll probably exit this year with, uh, something closer to 80, 80 to 90. And that'll be, uh, uh, kind of a gradual building in, in probably a couple of different chunks. Um, That effort, I think, continues to not only go well but get better and better over time as we learn the backgrounds of those who have been successful, where to put them, how to pair them with our existing SCS sales force, messaging, targeting, et cetera. So I think that the point on that particular sphere has gotten sharper and sharper. In terms of the CEO search, Joanne, really there's not much to add. We obviously just made that announcement Pretty recently, I can tell you that we are heavily in the midst of that process. There's a lot of activity. I'm very encouraged by where we are and where I think we'll end up. And when we know more, you will know more. But we continue to be on a path to conclude this, obviously, in calendar year 23, which is our direction. You want to take the question? Sure.

And Joanne, I think you're referencing the historical sales CAGRs and market CAGRs. In the past, what we've talked about is prior to the pandemic, the market consistently grew in that mid to high single digit compounded annual growth rate on a year over year basis. And we've continued to assert that we believe that there's no reason why the core market can't return to those sorts of levels in the near future.

Thank you. Your next question is from the line of Chris Pasquale with Nefron.

Your line is open.

Thanks. A couple of questions. One on IQ. Just curious whether you have any plans to quantify the clinical benefits of that platform in some sort of trial setting. And then, Keith, you mentioned that you thought that PDN could eventually become a third of the US SCS market. I guess why that number? I mean, the opportunity here would seem to be potentially even larger in terms of the number of patients than the core opportunity, so why set that ceiling at a third?

Okay, let me take both of those.

From an IQ standpoint, keep in mind that what the IQ is doing is automating the patient's journey and progression along an algorithm that's already established. So if you look at all of the clinical data out there in the literature on the performance of high-frequency SES therapy, pain relief metrics, and many other things. That all applies to IQ. The whole idea is to make that journey for the patient, because it is something that takes a little bit of time once they go on the therapy, is to make that journey quicker, more predictable, and more in the control of the patient. We've been generating data now for well over a decade, and it all supports IQ. Now, having said that, we are going to continue to gather data specifically on the IQ capabilities and its ability to do what we've said it can do, which is get the patient to relief with more engagement quicker and to keep them there. So we'll continue to gather data, both real-world data, and you'll probably see some some more prospective clinical trial activity out of us as well. So stay tuned. In terms of PDM, we're not applying a cap to that market, Chris. I don't think we said anything even close to that. I think what we're trying to do is give you a sense of as we look out over the next three to five years and we think about how does the core SCS market grow over that timeframe and what do we think is sort of in the in the center of the possible, we place it around that area. Look, it's a very large market with patients who are in a great deal of need without any other really good option. So could it be 50% of the SCS market? Could it double the SCS market? Of course, those outcomes are possible. The TAM would justify all of them and then some. We're just trying to communicate to you what we think is maybe kind of the center case of our various scenarios. It's not a cap.

Thank you. That makes sense.

Your next question is from the line of Larry Beagleson with Wells Fargo. Your line is open.

Hey, good afternoon. This is Vic Chopra. And for Larry, a couple of questions from us. So you expect Q1 sales to be down about 17% sequentially, which is a steeper decline than what we saw in 2022, which had the Omicron effect. It's also your easiest comp. I'm just trying to figure out if this is conservatism or if there's something you're seeing in the market that leads to a greater than expected sequential decline in 2023.

And then I had a follow-up. Thanks. Hey, Nick. Yeah.

You know, it's definitely within the line of what we've seen historically in other years. So there isn't anything particular to point out. It's kind of the way that, you know, as we look at our trialing and perm activity over the months leading up to it, And it leads us to that $94 to $96 million range that we spoke about. There's really not a whole lot more than that to speak about. And then we do start to see sequential growth throughout the rest of the year to get you to that annual guidance.

The only thing I would add to that, Vic, is that if you look at the comparable period that you're talking about the pandemic had an impact in the fourth quarter as well. In the last half or two-thirds of the month of December, it had a pretty dramatic impact. So it's not, at least in our business, so it's not quite as simple as saying, hey, we had a pandemic impact with Omicron in Q1, so why the difference?

Got it. Helpful. And then my follow-up is you've talked about pricing pressure in Q4. Just curious what you're seeing now and what you're assuming for 2023.

Thanks for taking the question.

Yeah.

So we, you know, remember we're in limited launch of IQ and we're on the tail end of Omnia. And so, yeah, we've continued to see some pricing pressure in Q4. As we go throughout the year, we haven't provided any guidance so far on pricing on IQ. We have spoken generally about how with a new product release, we do anticipate that we should be able to get a little bit of a bump in price, but it's a little bit of a complex equation as we roll throughout the year in terms of the mix shifting to to IQ and away from Omnia. So we're anticipating overall that pricing roughly kind of holds for the year. But beyond that, we're not providing a lot of specifics on the IQ pricing.

Your next question comes from the line of Brandon Vasquez with William Blair.

Your line is open.

Hi, everyone. Thanks for taking the question. Just one quickly on kind of the clinical data that you guys have read out. Recently, you have two year positive data sets for PDM and NSRBP, both strong data and randomized controlled trials. So I'd assume maybe you guys will start to engage with payers, either if you haven't already, you will in the near future, especially in the NSRBP side to try and firm up some of those I think those coverage decisions. So just curious status on that end and if there's any expectations for updates in the next year. Thanks.

Well, you're right. The two-year data is important and it's to some payers very important in terms of follow-up. Now, a lot of times two-year data in the minds of a payer means a two-year publication. So while the data now are in and they've been presented, they'll be submitted here shortly for peer review and publication in a journal. That doesn't mean we wait for that to communicate with payers. I think as soon as that data set becomes available, we have them in front of payers and we're engaging those discussions now. And by the way, on an almost constant basis, our communications with payers aren't really episodic. They're just ongoing. And we have a strategy for each payer, and it's multiple communication points throughout the year. So we're talking to payers now that the two-year data sets have been presented. We have to be a little bit careful. We don't want to jeopardize publication. So we don't spend too much time on the details our investigators presented to their peers. So the publication will make it a lot easier for us to do that from a couple of standpoints. And that will come a little bit later this year, hopefully sort of in the middle part of the year.

Your next question comes from the line of Robbie Marcus with J.P. Morgan. Your line is open.

Yeah, hi. Thanks for taking the questions. I want to start, you know, the guide feels very similar to the guide for 2022 with a depressed first half and a much better second half with mid-teens growth. You know, that didn't end up playing out last year despite a pretty good med tech environment. So what gives you confidence that the market can accelerate to those mid-teens levels in the back part of the year?

Yeah, I mean, look, every year is different.

And we base the guidance that we give during the beginning of the year based on the available data to us at the time. So what happens in one year has little read, I think, on what's likely to happen the next. As we look at guidance for this year, Robbie, we're looking at exit velocities of procedures. We're looking at claims data, reported sales. We're looking at a bunch of our own market research with both patients and doctors. And we're making some what we think are probably pretty conservative core market assumptions. And assuming that things like IQ and NSPP data give us the ability to grab a little bit of share in the core back and leg market, although even those assumptions are not what I would call too aggressive. And then a lot of the growth assumption is based on what we think the trajectory of PDN looks like. And we have a lot more data on PDN obviously coming into this year. than we did last year. It's guidance. It could be wrong on either direction. But I feel like we've got a little bit more illumination this year on what's happening in the market than we did last. And it is our best estimate of where we think this year is headed.

Great. I appreciate it, Keith. And maybe just one follow-up along those lines. The PDN sales for first quarter came in a bit below where the street was thinking. I think, you know, in general, we weren't expecting that much seasonality during the launch year. So maybe talk to what you're seeing, why PDN seasonality in line with the base business is the right way to start the year and expected. And also, as it ramps, it kind of ends in the low to mid-20s, I would imagine, million's. to get to the guidance range. How are you thinking about competition in PDN, if at all? Thanks a lot.

Yeah. Yeah, no, I think the seasonality question is a good one. We actually did some work on that ourselves. Went back and looked at our initial ramp as a company. We looked at some of the initial ramps of other earlier stage high growth neuromodulation companies. Seasonality shows up pretty early. And seasonality is, in general, a pretty strong factor in this sector and maybe a little more so than other med tech sectors that I've been around. And I think generally what we've seen is seasonality shows up pretty quickly. Once you get past sales growth rates that are not say a multiple of prior year, but something sub 100% growth rate seasonality, at least in the Q4 to Q1 cycle shows up pretty early. It did for us and it has for other companies. So I don't think we're terribly surprised. And I don't think we think it has much bearing on our guidance for the balance of the year. I think PDN is one of those areas of our guidance where we have actually a fairly high degree of, maybe a relatively higher degree of confidence. In terms of competitive approvals, Medtronic's been approved for a while. We've had a pretty good long chance here to see what they've done in the market and how they've changed share or market growth. I think we've talked about this a little bit in the past. We do see them out there, and we're hopeful over time they'll have maybe a bit more impact on the growth of the overall market. But to date, it hasn't been a big impact and certainly hasn't been a big impact in terms of share. Abbott, of course, is now approved. We talked about this before as well. We knew this was coming, especially since Medtronic got their approval based in part on Abbott data. And I think Abbott has made it clear that they submitted virtually the same Medtronic and Abbott data that Medtronic submitted. So we expected this to come. The data that Abbott has out there, it isn't new. It's the same data set Medtronic put forward. It's 2014 trials that were never used for a submission before, that never moved the needle with payers or patient referrals before. and we don't really expect them to have a big impact now. Now, we hope that Abbott has some impact on awareness of the therapy, awareness among societies, referring doctors, et cetera, but we don't know yet. That's a very new approval. It remains to be seen how much they invest in that, what they do with it, and what kind of impact they have. I think we probably expect it to be at least this year relatively minimal.

Great. I appreciate the thoughts.

You bet.

Your next question is from the line of Rich Newiter with Truist Securities. Your line is open.

Hey, this is Dave Ruskin for Rich. Thanks for taking the question. Rod, I wanted to follow up first on a comment you made related to Joanne's question about returning to these historical mid-single-digit to high single-digit growth rates. Wondering if that comment or that market growth is inclusive of PDN or if that's specifically relevant just to the core SES market in the U.S.? And I guess based on that answer, if guidance for 2023 does assume that there is a return to that historical CAGR, and if so, when?

Yeah, thanks. So when we've talked about the CAGR in the market, we've generally spoken about it from a core back and leg perspective. We do believe that this market has the potential to return to those sorts of historical year-over-year growth levels that we saw in the 2010 to 2018, 2010 to 2019 sort of period. So we are talking excluding PDN in that case. As far as this year, we're still assuming pretty modest core back and leg market growth on the year. with a slower first half and a little bit of a stronger growth period in the second half of the year from a market perspective. So overall, we're anticipating kind of low single digits for the market on the year.

Okay, that's helpful. And then I guess on the, you know, based on kind of the full year and Q1 adjusted EBITDA guidance, there does appear to be a pretty steep acceleration curve implied between Q2 and Q4. So just wondering, you know, if we should be thinking about that improvement as more gradual, more back-end loaded, and then, you know, if at all that more profitable growth you're getting out of FX IQ, you know, is that product contributing to any of the improvements in the EBITDA profile in 2023? Thanks.

Yeah, so when you're talking about that acceleration, are you primarily talking revenue or are you talking adjusted EBITDA?

Just adjusted EBITDA.

Okay. Yeah, so we, you know, as we mentioned, Q1 historically carries a disproportionate amount of operating expenses. We also mentioned that the first three quarters of the year, that we're going to have some headwinds from a margin perspective with Costa Rica as we're bringing that manufacturing plant up to scale. We'll start to see some of the expansion and that's related to IQ as well as Costa Rica getting to sufficient scale in the fourth course. We'll see some of that expansion or I think what you called acceleration in the fourth quarter as a result of that margin expansion, but also with a disproportionate amount of operating expenses in Q1 and then less so in the next three quarters, it's driving that adjusted EBITDA expansion you're talking about.

Okay, thanks. And just, is there any contribution to that margin from the HFX IQ launch that you discussed that can drive more profitable growth? Just wondering if there's any contemplation about that in 2023 or if that's more longer term. Thanks.

Yeah, so we'll, I mean, we'll see some expansion from IQ. So there's a couple of factors there. One is it'll start to be a significant portion of our product mix later in the year. And we do anticipate that we'll receive some pricing increase as it relates to IQ. We're also manufacturing that product out of Costa Rica. So when we get into Q4, we'll start to see some favorability from IQ being out in the field, both from a price and a cost perspective. And that's driving some of that margin expansion.

Well, I would add maybe one more element to that, and that's the operating expense dimension of IQ. I think there's a disproportionate amount of support given to patients in their first three to 12 months of support on our technology. And so I think when we get to the point where a substantial percentage of all of our new patients are going on to IQ, that the promise of less intensive support needed for those patients should start to contribute to our ability to scale a little bit differently. And so I think where that part of the cost story starts to show up is probably in 24, mostly in 24, where the incremental growth driven by the IQ should require a little bit less field support and make our field team more efficient in driving that growth.

I think that's helpful. Thanks.

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

Hi, Keith. Hi, Rod. This is Simran on for Adam. Thank you for taking the question. Just two quick ones from me. So the first one, on NSRBP, have you seen any progress with the payer community? I think you presented the two-year follow-up data. at NANS last month. So I'm just kind of curious how this opportunity is trending both from a reimbursement and patient awareness standpoint. And maybe just specifically, have you seen any impact in the marketplace from the United No Coverage Policy that went into effect? I think it was announced at the end of last year. So just if you've seen any impact there. And then just my second question is on the topic of competition in the core SES market. There is a new entrant coming to the market this year with a closed loop system. So any thoughts on potential impact there and any new dynamics worth highlighting? Thank you.

Okay. That's a ton. So let me try and be efficient here. In terms of impact on the payers, yes, we've begun, we think, to get traction with payers and with patients. on an individual basis, getting them approved in the NSVP category. We have been pretty consistent from the very beginning, saying this would play out over time, and it would require ongoing follow-up from this study and other studies, and it would require our competitors jumping in and driving this as well. And we continue to believe that. But we have begun to see some impact. I think having the 24-month data out there and ultimately published will give us a bit more leverage in our payer conversations. But I think this is something that will be a gradual tailwind to the core back and leg market over the next two, three, five years as we see more data, more patients, and more pressure to treat these patients who don't have an option. On the UnitedHealthcare decision, we did speak to that in the script. a few moments ago. We haven't seen an impact from that to date, and we don't expect to see a material impact this year, which I think is what we said a few months ago, and we reiterated that today. And finally, on the new competitive entry to the market, I think you're referring to Saluda. And they are FDA approved, as we understand it, for a product they don't intend to broadly launch. and they are waiting for FDA approval for a version of their product that they do hope and intend to broadly launch. And so they're really in a very small limited market release in the US, so we're not seeing much of an impact. We're hearing different things. You should ask them, of course, but we're hearing different things. Most frequently we're hearing sometime later this year for an approval and a market launch. I refer you back to one or maybe two quarters ago in our transcript, and Julie, I'm sure, can get it to you. We spoke at great length to the comparison of what we're doing with the IQ product to low-frequency ECAPs closed-loop. They're entirely different things. We think we're really well-positioned, and I won't go through all that again today because we really spent quite a lot of time on it, and I don't think the fundamental comparison has much changed. since then, so anybody who would like to be referred to the proper part of the transcript and the right quarter, just contact Julie Dewey and she'll get that to you. But I think we feel like we're very well positioned. I think this may be a bit of a pitch battle between low frequency competitors that do or don't have eCAPs closed loop. I certainly think we have customers that will want to try anything that's new. But the idea of going back to paresthesia, which everyone's been trying to get away from, back to mapping patients in the OR, waking them up to do so in the face of everything we have to offer with high frequency and now AI-driven IQ, it seems unlikely to us that it will happen in large numbers. So I like our position, actually. I like the way we're set up in the market with our current offering.

Your next question is from William with Canaccord Genuity. Your line is open.

Hi, it's John on for Bill tonight. Thanks for taking our questions. To go back on the NSVP insurer coverage, Keith, you know the PDN trial today, which you said could help with reimbursement. Do you think the company should sponsor another clinical trial in NSVP to also help put those non-coverage policies? Thanks.

Sure, I think it could.

I think in this case, you know, we assume that our competitors, as they already have started doing, will begin publishing some data on NSVP as well, and we think that that will help with payers. I think the payers will tend to look at data as an industry and not make company-by-company distinctions in this area. So I think further trials will help. I think they always help. And I think that's what we'll see, both frankly from Nevro and from our competitors. NSBP is a little bit different. You know, payers are well aware that these PDN patients have no other options, that they pose a unique and difficult problem for not only the patient, but for the payers themselves. And I think they've been very receptive to what we've given them, which has been very high-quality evidence. of a new solution. I think in the case of NSVP, payers are probably over the years in the habit of thinking of SCS being an end of care pathway option, and we are asking them to flex a little different muscle here, to think about patients who don't have a surgical option, and therefore SCS gets moved up a little bit in front of an option that doesn't exist, but they're just not used to thinking of it, of the care algorithm that way. I think we've always viewed MSVP as being a little bit tougher conversation with payers as they get used to a different care pathway for a certain category of patients who aren't surgical candidates, and I think that's exactly what we're seeing. But I think the conversations we've had with payers have been productive. I think they've been completely rational. I think high-quality evidence usually ends up carrying the day, and we believe it will here as well.

There are no further questions at this time. I will now turn the call back over to Mr. Keith Grossman for closing remarks.

Thank you, everyone, for joining us, for taking the time today. I'm sure some of you will have questions after this call, and we'll look forward to taking them. Otherwise, we'll talk to you next quarter.

This concludes today's conference call. You may now disconnect.