Q3 2020 Nevro Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to <unk> third quarter 2020 financial results call. At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session.
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I would now like to turn the call over to Matt. That's go from Gilmartin group for introductory remark. Please go ahead Sir.
Good afternoon, and welcome to Nevros third quarter 2020 earnings Conference call with me today are Keith Grossman, Chairman, CEO, and President, Rob Mcleod, Chief Financial Officer, the format of our call today will be a discussion of third quarter trends and business results from Keith followed by detailed financials from Rod and then we'll open up for questions.
Earlier today never released its financial results for the third quarter, which ended September Thirtyth 2020, a copy of our earnings release, it's available on our Investor Relations website.
This call is being broadcast live over the Internet to all interested parties on November 5th 20 point.
And 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 law.
Our results make our results could differ materially from those expressed or implied as a result of certain risks and uncertainties. Please refer to our EPS you see filings, including our form 10-Q to be filed later today for a detailed presentation of risks.
In addition, we will refer to adjusted EBITDA, which is a non-GAAP measure that is used to help investors understand nevros ongoing business performance. Please refer to GAAP to non-GAAP reconciliation tables within our earnings release, and now I'll turn the call over to Keith.
Thanks, Matt Good afternoon, everyone. Thank you for joining us today.
Today, we reported third quarter 2020 worldwide revenue of 108.5 million representing growth of 8% compared to the third quarter of 29 team as well as a sharp sequential recovery of 92% growth over the second quarter of 2020.
US sales grew 8% over prior year to 90.1 million in the third quarter, representing sequential growth of 78% over prior quarter and driven by an increase in patient and customer activity compared to the severely cold it impacted second quarter of 2020.
In the third quarter total.
You ask permanent implant procedures increased 9%, while new patient trial procedures were down only 5% compared to the prior year period.
Reported U.S. revenue also exclude point sevenmillion or product shipment due to a customer bankruptcy during the period.
Daily patient trial activity increased 50% over the second quarter of 2020 and has improved sequentially every single month from July to October.
We're pleased with the dramatic pace of recovery in the U.S. and third quarter trial activity, which was approaching those still just shy of prior year levels as we enter the fourth quarter of 2020.
International revenues increased 10% year over year as reported were 5% on a constant currency basis to 17.5 million in the third quarter.
Representing sequential growth of 226% over the prior quarter.
Covid cases of recently started to rise as I'm sure you are thus.
Thus far we've seen only a small impact to elective procedures through October and the U S and Europe, however increases in Covid activity around the world will continue to exert pressure on patient willingness to see care of all kinds and potentially even impact facility capacity in some areas, which could provide some downward pressure to our view for Q4.
While the environment continues to be a difficult one we feel strongly that were furring better than our SCS competitors and in fact, many of our med Tech peers.
Within the Ses market, we believe the launch of Omnia has provided an advantage in a row, leading to additional market share gains.
Even through the pandemic physician enthusiasm around Omnia and it's versatile platform capable of offering H F 10, and lower frequencies. In addition to pairing of frequencies has led to a more rapid adoption among our customers and we initially anticipated.
We believe these favorable trends confirm that the Omnia platform provides us a compelling reason to once again engage with every doctor practicing in the space and we view most paying doctors and neurosurgeons in the field as potential customers.
We also believe our commercial team is executing at a higher level, which is strengthened customer relationships. During this difficult time.
Our dedication to patient support and long term outcomes is fundamental to our company and it's an area in which we continue to invest during the third quarter, we expanded our digital physician education programs and remote patient support programs to an enthusiastic response from our customers and.
At six months as permitted by the trial protocol we.
We believe that a strong indication that our therapy addresses a critical unmet need in this patient population.
We still plan to present the next round of complete six months data along with a preview of the 12 month responder rate data from this trial at NAND in January of 2021.
We've been in pre submission discussions with the FDA regarding our data and our submission strategy and I'm pleased to say that we are now planning to submit our PMA supplement to the FDA in the current quarter.
Which keeps us on track for a mid year 2021 approval and a second half commercial launch.
In next quarter's call will begin to talk a bit more about our market launch plans and expectations for this really exciting opportunity.
On a non surgical refractory back pain study, we continue to expect to present, our three month primary endpoint data advance of 21 in January with journal publications to follow in.
In total we should have a very large presence at NAND as we usually do with quite a number of data presentations at this conference most notably of course, the PDN and NSR VP studies.
In August CMS published their proposed rule for outpatient patients or payment excuse me out.
Outpatient payment rates for both hospital and AMC facility fees were increased between two and 5%.
We view that as a positive for the therapy.
Also in this proposed rule CMS recommended a requirement for prior authorization of SCS procedures for Medicare fee for service patients in the hospital outpatient setting only.
That was set to begin in July of 2021.
Now CMS is rationale for this proposed requirement was due to a perception on their part part of Overutilization issues.
We have very thoroughly review the FCS utilization data and we've submitted our comments to CMS on their proposal.
In those comments, we pointed out that any over utilization was driven in large measure by non rechargeable or primary cell products, which.
Which require surgical replacement on a much more frequent basis than rechargeable devices like those from Nevro.
The reduced product life of a nonrecurring surgical product creates a situation in which patients must must undergo more unnecessary and costly procedures, resulting in greater expenses and increased surgical risk replace their system much more frequently than rechargeable systems.
Despite this reduced durability and lower resulting economic value Medicare reimburses nonretail surgical systems at the very same amount as rechargeable devices.
As a reminder, rechargeable technology has demonstrated a much longer lifecycle of seven to 10 years or even longer this.
This is two to four times the reported life of primary cell products.
We strongly recommended that if CMS were to proceed with the prior auth requirement that they should limited to non rechargeable products.
However, if they do proceed with requiring prior auth for the entire category will be well equipped and prepared to manage that process remember that the vast majority of our business.
Which consist of both private pay patients and our Medicare advantage patients.
Require prior authorization today.
Lastly, we announced in mid September our plan to establish manufacturing operations in Costa Rica.
Currently as you know we use contract manufacturing partners for our business.
As part of our confidence in our growth plans moving forward, we are establishing insource manufacturing for our pipeline of future products to ensure we have the most efficient cost structure and flexible capacity, while also maintaining the highest level of quality control as we scale.
We entered into a 10 year lease for our manufacturing facility in Costa Rica with.
With total capital expenditure is expected to be approximately $11 million between 2000 22023.
With an additional $10 million of implementation costs over the same period of time.
We expect a new manufacturing facility to be validated and approved for commercial production in 2022.
Since the pandemic began our highest priorities as a company have been the health and safety of our customers their patients and our employees.
The support and coverage of our customers and their clinical case activity throughout the period.
The integrity and readiness of our supply chain.
The prudent stewardship of our balance sheet.
And the maintenance or improvement of our competitive position and our capabilities in order to exit this crisis. The way we came in back in the first quarter, which was with a ton of momentum.
Thus far I believe we've achieved these five goals and we will continue to work hard in the coming weeks and months to further our progress.
While we are certainly still in the midst of this pandemic and dealing with its impacts upon our business I remain very excited about the various growth drivers for this business as we think about our ultimate emergence from the pandemic accommodation of a return to overall market growth.
A continuing to grow nevros market share.
A measure of pent up demand likely to exist at that time for SCS suitable patients.
And the impact of new product in indication launches like PDN.
It should be the beginning of a very attractive period for the company.
Lastly, and as I have been from the beginning of all of this I am grateful to the entire Nevro team for their hard work and their dedication during a time of great and continued uncertainty.
Thank you again for joining us today and with that I'll pass the call over to Rob.
Thanks Keith.
I'll begin with our worldwide revenue for the three months ended September Thirtyth, 2020, which is a 108.5 million an increase of 8% compared to $100.2 million in the prior year period.
Third quarter 2020 revenue growth was primarily driven by an increase in patient and customer activity compared to the severely cobot impacted second quarter of 2020.
US revenue was $90.9 million, an increase of 8% compared to $84.2 million in the prior year period.
Reported us revenue also excludes $700000 of product shipments due to a customer bankruptcy during the period.
Year over year us permanent implants increased 9%, while trials were down approximately 5% during the third quarter of 2020.
Although you asked trials declined in the third quarter, we remain encouraged by the rebound in our business and continue to realize incremental improvements month over month inorganic daily trials from July to October.
International revenue was $17.5 million, an increase of 10% on an as reported basis or 5% on a constant currency currency basis compared to $15.9 million in the prior year period.
The increase in international revenue was driven by successful Omnia launch and an increase in patient and customer activity compared to the prior quarter of 2020.
Along with the rebound and customer inventory levels.
Gross profit for the third quarter of 2020 was $76.1 million, an increase of 9% compared to $69.9 million in the prior year period gross.
Gross margin was 70.1% in the third quarter compared to 69.8% in the prior year period.
Compared to the prior year period, the increase in gross margin in the third quarter of 2020 Rice was primarily attributable to product mix.
Operating expenses for the third quarter of 2020 was 79.6 million, a 7% decrease compared to 85.9 million in the prior year period.
The year over year decrease in operating expenses was primarily related to reduced travel and training related expenses.
Decreases in discretionary expenses during the COVID-19 pandemic as well as continued management focus on driving leverage throughout the business.
Which began well before covance.
This was partially offset by a onetime charge of $2.5 million in the quarter related to our CFO transition.
Legal expenses associated with patent litigation were $2.3 million for the third quarter of 2020 compared to $1.9 million in the prior year period.
We expect that operating expenses will return to a run rate roughly similar to the first quarter of 2020 as revenue continues to recover.
Net loss from operations for the third quarter of 2020 was $3.5 million, a 78% improvement compared to a loss of $16 million in the prior year period.
Adjusted EBITDA for the third quarter of 2020 was $13.6 million compared to a loss of $2 million in the prior year period.
Adjusted EBITDA excludes certain litigation expenses interest taxes, and noncash items, such as stock based compensation and depreciation and amortization.
Please see our financial tables for GAAP to non-GAAP reconciliations.
During these uncertain times, we continue to focus on cash preservation, while balancing the need to reinvest in the recovery process.
Cash cash equivalents and short term investments totaled 572.9 million as of September 32020 net.
Net cash increased during the third quarter of 2020 by $10.5 million.
That concludes our prepared remarks, I will turn the call back over to Matt to moderate the Q and a session.
All right. Thank you and can we please open the lineup for questions.
As a reminder to ask a question.
Press Star one on your telephone jealous draw your question press the pound key please stand by while we compile the kewaunee roster.
Your first question comes from the line of Larry Biegelsen of Wells Fargo.
Hi, good afternoon. Thanks for taking the question guys and congrats on a nice quarter highlights Keith.
Keith one on the pipeline one on the recovery.
And sorry to ask such a short term oriented question on the recovery, but I just wanted to understand.
Your comments on the call.
We're pleased with the bounce back with the pace and where and where it's landed in the fact that it continues to grow.
It is still slightly below prior year and I think as we tried to diagnose the reason for that Larry.
It comes pretty squarely down too patient reluctance I think it's not.
While there is some friction in hospital and AFC capacity in new procedures.
It's probably not that much at least for us and there's doctor willingness to get volume back so everything seems to be lined up in the right way, but there are still some residual reluctance on the part of patients to.
Seek care and a willingness on some part of some patients to defeat care even in this category.
And then market I think you guys have talked about it in the past helped a little bit of a different kind of call point for you guys. So how should we really think about that business picking up in the back half of 21, and then the 20th to 2022 and beyond.
Okay, and when you said I I I thought I heard you say already and did you mean P. D E N <unk>, Oh, sorry, Okay, and a long day alright. So so we were trying to figure out what RDM wasn't if we'd miss something here I saw him [laughter] I missed the part of the rest of your question you are looking for any any discussion of.
Angel adoption rates after F D a approval.
[noise] Yeah. Since I was just kind of like a different call point for you guys.
Yeah, you know I think we're probably not ready to provide Ah ah forecast, where visibility or guidance of any kind on either on either adoption or investment, but for P. D N, but I think we're close to being at that point, where we're doing a lot of that a body of work is behind us, but but frankly, a fair portion of it is still.
To be done over the course of the rest of this quarter I think when we get to the first quarter call. We will almost certainly dedicate a fair portion of that call.
Talking about the size of Margaret how we're thinking about market segmentation positioning lawn strategies and and even.
Investment level, so give us another quarter on that one and will provide a bit more visibility.
Got it and then I guess talking about Omnia and kind of you know the other new products that and maybe some of your competitors are bringing up you know it seems like clearly O U S that looks has been a very strong lunch for you, but even like domestically how should we think about you know a physician willingness to really look at new products right. Now is that a discussion they're willing to have and like what are you seeing uncompetitive.
Front as well thank you guys.
Yeah, well, there's certainly a willingness to look at a new product like this with existing customers that to clear I mean, if you look on the Big currently represents you know between 70 and 75% of our of our utilization in the U S market.
In in Australia, where do you typically see once a products listed as a complete switchover, we have maybe as we expected now see a virtual 100% utilization of Omnia in Australia, and the European markets, where we've just introduced are sort of somewhere in between but ramping.
Hi can you hear me okay.
All right Yeah, we got you David.
Oh perfect Lucky me Keith Thanks for taking the other questions here I guess just two from me Keith first as I know it's.
I know, it's obviously early but.
When thinking about the structural growth rate and obviously at a recent conference you're going to talk about broadly how investors can start to think about the forward year mean I look at street consensus numbers for 21 key from there kind of upper teens type of growth 21 versus versus 19.
Obviously that implies sort of a business thats kind of growing 10, percentish or two ex the market rate over a two year period of time, how are you thinking about your ability to grow relative to market or any any thoughts you blew up this year next year and other revenue and then kind of related for this kind of rod just thinking about profitability that was a pretty.
Very very good number here on a profit basis and I appreciate opex will start to scale, but it does look you're making dramatic progress on opex here and profitability towards the back half of this year and I'm sort of assuming that extends into next year. So just first off any commentary you willing to share on top and bottom for next year, even at a high level.
Yes.
So as you might expect there's not a lot I can give you on on 2021, we don't we don't have a guidance for fourth quarter much less 21, I do think we view this as sort of a you know a.
A pre and post like probably most companies pre and post co bid.
Operating income clutter, Hi, David this rod.
Thanks for the question.
From an operating expense standpoint, like a lot of other businesses.
We're getting a little bit of a good guy in Q3 as.
Expenses are reduced travel conferences et cetera.
Related to Covid restrictions, so we're getting a little bit of lift from that.
As as you've been tracking as well the the management team has made a lot of decisions a lot of which started before covid in terms of driving business leverage at <unk> here.
Driving efficiencies in the sales channel patient support process have have continued to drive leverage and we'll continue to focus on that as we go forward as well as in other parts of the business.
So number one am obviously medtronic has.
Has sort of confirmed to be copying your clinical playbook, both in terms of PDN nonsurgical as well as you all and so two questions. One you have kind of expressed obviously less relative interest in you and just given the clinical data requirements and need a bigger opportunity you have in front of you is that sort of still your view relative to you all and just give medtronics interest in that particular category.
Whether or not these indications are just claims or or distinct markets and market launches I really think in the case of PGN. It's it's very much the ladder.
Or maybe better put into the both it's both it certainly has to be a.
Label claim addition, and FTA approval.
But it is a distinctly different market different referral base different patients.
A different type of pain different competitive therapies.
And a different decision, making process and the payers will view it.
Differently as well so I think we look at it this is really launching into an entirely new market.
And expose a lot more endocrinologists, and podiatrist and internal medicine folks and primary care physicians on the technology and talk to a lot more patients into a lot more market research and we're we're doing really a tremendous amount of work.
Benefit amount of exposure and there is a lot of pent up demand. Among these patients. So I do expect some short term impact, but we but we have to get patients referred get 'em trials, and then get them implanted and that referral comes from a new referral base. So we will do as much as we can to see that market and that initiative.
Based much more on that than it is hey, something starting to happen in October.
October actually felt pretty good.
So and keep in mind. This is a fourth quarter, where when we talk about being flat over prior year, we were getting a whole bunch of traction last year in fourth quarter that was that was a very strong comparable for us we had just launched omnia.
And it was a good quarter for so I think absent a you know kind of an erosion of patient demand here in November and December due to co bid.
Important data something I at least I don't think we've seen.
Before but anyway, GTM seems like to us.
Based on what we know to be sort of a simple trial and error programming programming of two low frequency programs prior.
Probably something in the area of 300, Hertz and 50 Hertz after performing traditional paresthesia mapping.
In the market as being that look it's great. It is great to see competitors spending time and money, bringing innovation.
Investment to the field.
No matter more now in this industry. It is it continuing to matter more and more as more of these data that's come out.
Treating new categories of patients.
Thank you.
Thanks Danielle.
I'm really pleased with where they are and I think it has quite a lot to do with.
Our relative performance to competitors over the last year or two.
But I wouldn't underestimate the importance of omni I think we said when we introduce this this wasn't just a minor generational improvement just smaller can or with a new wave form. This was a significant strategic change of being able to say look we we can bring to the market.
A unique product like HF 10.
For stimulating these patients and getting better workflow completely better outcomes with better data to prove it but we can also do everything else and we can you know any patient that requires any kind of different treatment over time, we can pair those therapies. We can do them separately over time, that's a really meaningful change that isn't a one year lifecycle kind of.
Leather patients and we do it now we do it well we'll continue to do it with this category.
But I do think what is clear to us is that there is an educational.
An initiative that needs to happen with not just CMS with payors and they need to understand what's beginning to happen to their patient mix, what they are really paying for.
And and how often they are paying for the same therapy for the same patient when they need not to do that so.
This was I think an eye opener for us in for CMS, and and something that will be a message will be I think sending on a regular basis.
Uncle.
Your next question comes on the line of Kayla crime with choice Securities.
David Roscoe Brocail. Thanks for taking my questions for you, but first one for me.
We assume that the fourth quarter typically is kind of strong and the strongest quarter given the dynamics around patient speaking their deductibles by the year and how how do you expect that factor play out this year given that the impact of Covid may have left some of the patients reducing health care spend earlier in the year and does not meeting their their knocked off by the fourth quarter and then the second part of that quest.
Bonnie thing surprising to you in those initial conversations and can you provide any insights around the payer strategy or the market development progress that you've made so far ahead of the commercial launch and then as a second part to that have you have you seen any increase and maybe off label use or physician interest so far in that indication just following a three month than you're proud of men's last year. Thanks.
Okay Theres a few buried in there so.
So conversations with CMS I think there's nothing nothing I would I would reveal that I that I haven't I think.
Luca conversations we had with.
With both FDA and and any conversations we've had with CMS, which have been by the way with CMS, So far really not.
Not a lot has happened yet with CMS most of our conversations have been with FDA.
Those have gone very well keep in mind FDA, we saw not only a a submission strategy that we want to pursue but the data.
That would support it and they are not obligated to make a commitment in a in a pre submission process.
They are they are merely giving feedback.
But with that feedback we concluded that submitting primarily leaning on the six month data not entirely but primarily in the Q4 timeframe was the right thing to do and and so we view that as as a good thing.
In terms of CMS and payers there just hasn't been a lot of contact on this point yet we have been doing some research with.
With private payers, we have been we have been gauging the response from.
Medical officers within different types of private payers, we have some really interesting data there.
It's been actually very encouraging.
But that data is as you saw on the three month data that data is pretty compelling and that trial was very well designed.
So we kind of expected a good response and we've gotten a good response, but I think a really full push with private payers will come once we have a little bit further data published a six month data published or presented and we have an FDA approval. We will have a planned and orchestrated initiative to launch with payers.
That will that will go out very quickly finally on off label no. We really haven't seen a lot of off label. I mean, this is not a we can't go out and promote.
PDN to remember what is a new group of referring doctors, who aren't necessarily aware of SCS at all much less as a treatment for some of their patients.
So I wouldn't expect a ton of off label.
They're likely has as its been some but it probably it would be a onesie twosie kind of thing where patients are.
Our maybe coded as being on label and we and they would just would never show up too.
To us so.
That would be that would be between the doctor and the patient and the payer so I would say off label.
From a visible standpoint has had very little impact so far.
So I think we get you get a little bit of a.
Time out in the game for new product launches in the case of Omnia and I spoke to this a little bit earlier in the call.
So I won't go into quite as much detail, but I don't think Omnia is really a typical new product lifecycle kind of thing.
When you introduce a product that says you can uniquely and solely offer the most effective.
Stimulation therapy for these patients.
In the industry and now you can offer what everybody else can do in the industry on a standalone basis or on a pared basis. That's not typically is something that you can rode over the course of what might be considered a normal lifecycle that is kind of a permanent and durable.
Capability that can't be replicated without high frequency so.
Does that mean, it's an effective product and we never have to develop another new product for the next 2345 years of course not.
But I do expect the durability of impact from a product platform change like that to be far more meaningful and durable than just a typical lifecycle.
Add on or capability change in a product I hope that makes sense.
Yeah, Yeah and.
The question is is that just more of an education effort on your end because you are not able to reach somebody clinicians and would that then be new accounts. So maybe you guys are in a part of her trying to go deeper within accounts.
Yeah and.
And that's the part that gets.
Got kind of delay this year, so certainly our existing doctors understood omnia immediately they have the ability to choose to use.
Is there a primary product and their patients that we're going to treat any way with an ever a product that conversion is happen pretty widely.
But the ability to really get too.
Those doctors, who might be using a competitor's product to treat other different kinds of patients and really talk to them about using omnia or or or.
Or even more so to get to completely competitive accounts, that's been harder to do I think during covid for lots of reasons.