Q4 2022 Nevro Corp Earnings Call

Good afternoon, My name is Brent and I will be your conference operator today.

At this time I would like to welcome everyone to NEP Rose fourth quarter 2022 financial results Conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session.

If you'd like to ask a question at that time simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question again press Star one. 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 Nevertheless, fourth quarter and full year 2022 earnings Conference call. We appreciate you joining us.

Julie Dewey Nevertheless, chief corporate Communications, and IR Officer with me today are Keith Grossman, Chairman, CEO , and President and Brian Macleod, 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 quest.

Please note there are also slides available related to our fourth quarter performance on the <unk> Investor Relations website on the events and presentations.

Earlier today <unk> released its financial results for the fourth quarter ended December 31, 2022, a copy of our earnings release is available on our IR section of our website at <unk> Dot 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 that comments made on today's call may include forward looking statements within the meaning of federal securities laws or 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 <unk> ongoing business performance.

non-GAAP adjusted EBITDA excludes certain litigation related expenses and credits intra.

Interest taxes, and noncash items, such as stock based compensation and depreciation and amortization. Please.

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 <unk> launch and the limited market release of our new <unk> 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 'twenty three 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 continued to improve throughout 'twenty three 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% in U S trial activity delivered 9% year over year growth.

In fact October November and December were all 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-19 comparable period.

Based on reported competitive revenues, thus far for Q4, we continued to gain market share in the quarter and full year 'twenty two as well.

<unk> continues to be a significant driver of growth was impressive performance quarter over quarter throughout 2022.

And finally, our new AI powered <unk> IQ system is performing really well and our limited market release with positive feedback from physicians and patients regarding the ability to deliver deliver personalized pain relief using our big data backed <unk> algorithm and a more on IQ later in my remarks, but I.

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 'twenty three.

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 2003, though we know it's likely.

Although it's unlikely rather to be a linear in nature.

Of course, lingering staffing challenges and capacity congestion do continue to put pressure on the scheduling of procedures, but he's also seem to have improved a little during the fourth quarter and we believe this trend will continue throughout 2003 as well.

Our guidance takes this into account implies year over year revenue growth for the first quarter of 9% to 11% on a constant currency basis.

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-19 volumes as more fully restored we expect to see market growth return over time to historical CAGR.

Turning now to our PDL business, our progress with referring clinicians payers and clinical society has exceeded our expectations in 2022, and we're looking forward to continuing to develop this exciting growth platform in 2023.

During the quarter PD, one 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 PD unrepresented around 16% of the total worldwide procedures, resulting in approximately $17 3 million in PD and 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 PD and referral sales.

<unk> expansion that was completed in June as well as our outreach initiatives with both physicians and patients.

Yes, the month of December approximately 16% of our U S. PD and 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 PD and we continue to see a high level of case by case approvals through the prior authorization process and the appeal of payer denials.

<unk> with payers, who don't have a position or rather a positive PD on coverage policy.

For those PD and 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 months <unk> RCT trial data and the 12 months of quality of life RCT data were presented in January at the <unk> conference in two separate podium presentations by Dr. Erika Petersen.

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 <unk> 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 PDL.

We plan to enroll up to 236 patients at multiple sites across the U S 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 century 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 PD and.

In fact every 20 seconds in the U S. There is a diabetes related amputation. According to the American land 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.

But also treatment and associated amputation surgeries are costly both economically and a core cycle socially.

By restoring sensation in the feed 10-K, Ics 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 health care costs.

This study also affords a path forward to building clinical evidence for slowing the progression of or improving sensory loss of lower levels in patients with chronic intractable pain and builds on the significant outcomes. We saw in our landmark 10 killer 10, Kilohertz SCS RCT with powered study endpoints targeting the disease modifying benefits of <unk>.

Improved neurological function and pain relief and Youll recall that the observed neurological improvements we saw in the original <unk> 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 <unk> proprietary 10-K therapy in these PD in patients but.

But we also believe that the additional level one data generated will be very helpful. As we continue to work with payers to expand PDL coverage generally.

I am pleased to announce that the FDA has granted breakthrough device designation for the PD and sensory study and this potential device indication.

This designation by the FDA provides for an expedited expedited review for our marketing application to expand <unk> 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 'twenty, two <unk> is expected to be a significant growth driver for us once again this year.

As another example of the growing interest in PD and as of the end of December over 70% of net ROE implanting physicians had consulted with one or more PD in patients in their practice.

Our 23 revenue guidance includes a $75 million to $85 million contribution from <unk>, that's an increase of 56% to 77% over 22.

As we said over time, we think <unk> is going to be one of the more significant parts of spinal cord stimulation, but perhaps growing to as much as a third of the U S SCS market.

Our guidance for 'twenty three implies this patient segment will already be about 15% to 20% of our own business in just its second full year.

Moving now to nonsurgical back pain after receiving FDA approval of this indication last January we began commercial activities to expand access to <unk> therapy for this patient population by focusing on the identification and education of patients already at existing paying practices, who have not had a prior surgery and who are not a candidate for.

Surgery.

Unlike PD and we've always viewed the MSP patient population, there's sort of a rising tide for the entire SCS industry and pain specialty.

We continue to lead the charge in generating NSP clinical data, but it was encouraging to see our competitors also begin to report their own data at <unk>. 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 NSP data, we believe more payers will continue to cover SCS therapy for these patients who have exhausted all other options for which their 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 sensor NSP trial, adding Ams, which included clinically important end stable pain relief in patients treated with 10-K, Ics 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 anywhere exhausted all appropriate non offer of medical management.

On the reimbursement front to date, we have not experienced any noticeable impact on our revenue from United Healthcare's decision to exclude coverage for NSP paid <unk> patients, which became effective on December one.

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 <unk> indication.

Now I'd like to turn to our new <unk> IQ system. Following FDA approval last quarter, we initiated a limited U S market release, which has been very well received.

<unk> 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 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 <unk> cloud patient database.

Our <unk> algorithm, which is based on over 20 million clinical data points from over 80000 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.

Q as Bluetooth enabled and connected to a patient app and learns each patients 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.

<unk> is a powerful supplement to our field team, our <unk> coaches and our cloud database that provides physicians with both detailed and summary outcomes data.

We believe the <unk> will lessen the burden on our patients and our customers and expect this launch to support our growth prospects in 'twenty, three 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 <unk> meeting, we have an opportunity to feature of the <unk> IQ system at our exhibit booth and several other events, including a well attended physician education launch.

We're preparing for a full U S launch very soon and expect a meaningful shift in mix to the <unk> IQ 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 Hff's IQ reflects our continued commitment to deliver comprehensive life changing solutions for patients with chronic pain and it comes in at an exciting time as we've now impacted the lives of more than 100000.

Implanted patients globally with our technology.

We think what we're doing with the IQ represents the future of SCS therapy, and it keeps never 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 <unk>.

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.

<unk> regulatory framework.

And I'm really pleased that never was among the first wave of medical device companies to achieve certification to this new standards.

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 <unk> IQ platform entirely new patient populations like PD and NSP and the opportunity for attractive operating leverage on future growth as a result of our intense focus on the scalability.

Our expense structure I think the outlook for <unk> is increasingly bright.

And with that I'll pass the call over to Rob to provide further details on our fourth quarter results and on our guidance.

Thanks, Steve 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.

After a 2021.

PDL represented 16% of worldwide permanent implant procedures, which was which resulted in approximately $17 3 million in PDL indications sales in the fourth quarter of 2022.

As a reminder, this quarter included one less selling day in 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 was $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 <unk> 22, compared to 67, 3% in the fourth quarter of 2021.

As Keith said the limited market release of the <unk> FX 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 H FX IQ product following the full market launch.

As a result, we recognized charges to cost of goods sold in the fourth quarter of <unk> 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 2020 to $94 $6 million down 1% compared to $95 3 million in the fourth quarter of 2021 and in fact were up less than 2% over the fourth quarter of 2019.

Litigation related legal expenses were $1 2 million for the fourth quarter of <unk> 22, compared to $6 $1 million in the fourth quarter of 2021.

The company also incurred restructuring charges of approximately 700000 in the fourth quarter of 2022 and expect to incur an additional approximate $300000 of restructuring charges in the first quarter of 2023.

Net loss from operations for the fourth quarter, 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 <unk> 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 600000 for the quarter.

Cash cash equivalents and short term investments totaled $374 4 million as of December 31, 2022. This represents a decrease during the fourth quarter of 'twenty two.

$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.

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, we 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 our patients' willingness or ability to <unk>.

<unk>.

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 small impact due to this length and trial to perm curve relative to historical norm norms. Our guidance assumes that this trial to Perm cover remains at current levels for the <unk>.

For the year and doesn't improve or worsen.

Given this backdrop, we are 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 PDL case volumes as well and we expect PDL to reflect similar Q1 seasonality to the larger SCS market.

Thus PDL indications sales in the first quarter of 2023 are expected to be approximately 15% to 20% below the fourth quarter of 2022, and then expected to grow sequentially each quarter for the remainder of 2023, given the strong under.

Your line 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 <unk> conference our global sales meeting as well as certain other Q1 heavy expenses, such as payroll taxes and 401Key matching the 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 Nance President and increased <unk> investment.

We do want to point out the current consensus does not reflect the 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 EBITA 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 Pn indication sales.

An increase of 56% to 77% over prior year.

For full year 2023, gross margin is expected to be approximately 68%.

Kosta Rico 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 and.

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 that 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 PD and market development of approximately $440 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 <unk>.

Q4 of 2022, as we assume we will benefit from an improving market environment.

<unk> of HFF IQ and continued progress in our <unk> 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 PD and have gone from 91% of revenue in 2019% to 84% of revenue in 2022 and are expected to finish 2023 and the high Seventy's.

Many of the changes, we continue to invest and including our Costa Rica facility and development of the PD end 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. Then 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 drive growth and scale profitably in our core business in the years ahead. We are in a great position strategically with best in class Ses technologies remaining share gain opportunity future growth opportunities in PJM and SPP and our new.

New <unk> IQ 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, and 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 related follow up question.

And then rejoin the queue and if time allows we will 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 Wuensch with Citibank Your line is open.

Thank you for taking my questions.

I'm curious about a couple of things.

Just kind of throw them out there in no particular order.

Number one it sounds like you've completed the PDL salesforce build and I'm just curious how that is going.

Number two when you talk about historical CAGR, what historical CAGR.

And then last but not least if you can give us an update on the CEO search. Thank you.

Yeah.

Okay. Thanks, Joanne why don't I.

It takes a PD on salesforce build on the search and I'll, let Rob take.

The CAGR question, so the PD and referral salesforce build a sort of an ongoing process.

We tend to go in in tranches, one for a couple of times a year and in the past. So I think this year it'll be more of a continual.

Building. So 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 something closer to 80 to 80 to 90 and that will be.

Kind of a gradual building and probably a couple of different chunks.

That effort I think continues to not only go well, but get better and better over time as we learn the background of those who have been successful where to put them how to pair them with our existing SCS sales force.

Messaging targeting etcetera, so I think thats the point on that particular.

Spirit 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.

Very encouraged by where we are and where I think we will 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, 'twenty, three which was which was our direction you.

Do you want to take the CAGR question for Sharon Joanne I think youre referencing.

Historical.

Sales CAGR and.

Market CAGR in the past so we've talked about is prior to the pandemic the market consistently grill 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 is no reason why the.

Why the core market can't return to those sorts of levels.

In the near in the near future.

Thank you.

Your next question is from the line of Chris Pasquale with Nephron. Your line is open.

Thanks couple of questions. One on <unk>, 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 <unk> could eventually become a third of the U S. SCS market I guess why.

Why that number.

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 of a third.

Okay.

Let me, let me take both of those from an IQ standpoint.

Keep in mind that what the IQ is doing is automating the patient journey in 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 SCS therapy paint.

Pain relief metrics and many other things that all applies to IQ and the whole idea is 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.

More on the control of the patient so we have 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.

To relief with more engagement quick.

Quicker and to keep them. There. So we will continue to gather data both real world data and Youll probably see some.

Some more prospective clinical trial activity out of us as well so so stay tuned.

In terms of PDL were not apply.

Applying a capture 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 over look out over the next three to five years. When we think about how does the core SCS market grow over that timeframe and what are 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 what we think is maybe kind of the center case of our various scenario scenarios, it's not a cap.

Thank you that makes sense.

Your next question is from the line of Larry <unk> with Wells Fargo. Your line is open.

Hey, Good afternoon. This is vik Chopra in for Larry a couple of questions from us.

Do you expect Q1 sales to be down about 17% sequentially, which is a steeper decline than what we saw in 2022, which had the older crowd effect. It's also your easiest comp.

Just trying to figure out if this is conservatism or if thats something youre 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.

It's definitely within the line of what we've seen historically and other years.

So there isn't anything particular to point out.

It's kind of the way that we look at our Trialing and perm activity over the months, leading up to it and it and it leads us to that that kind of 90% to 94% to $196 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 throughout the rest of the rest of the year to get you to that that annual guidance.

Yes, the only thing I would add to that.

If you look at the.

Comparable period that your.

Talking about.

The pandemic had an impact in the fourth quarter as well in the last in the last half or two thirds of the month of December had a pretty dramatic impact so it's not.

At least in our business and it's so it's not quite as simple as saying, Hey, we had a pandemic impact with omicron in Q1, so <unk>.

So why the difference.

Got it helpful. And then my follow up is you've talked about pricing pressure in Q4, just curious what youre seeing now and what Youre assuming for 2023, thanks for taking the question.

Yeah. So.

Remember, we're we're in limited launch of IPO and we are on the tail end of of Omnia and so yes, we've continued to see some pricing pressure in Q4.

As we as we go throughout the year, we haven't provided any guidance so far on pricing on an IPO. 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 little bit of a bump in price, but it's a little bit of a comp complex equation as we roll throughout the year in terms of the mix shifting.

To IQ and away from Omnia. So.

We are anticipating overall that pricing roughly kind of holds for the year.

But beyond that we're not providing a lot of a lot of specifics on IQ pricing.

Your next question comes from the line of.

Brandon Vazquez with William Blair. Your line is open.

Hi, everyone. Thanks for taking the question.

Just one quickly on <unk>.

On kind of the clinical data that you guys have read out recently you have two two year positive datasets for PD and an MSR DP both strong data in 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 MSR side to try and firm up some of those.

Those coverage decisions. So just curious status on that.

If theres any expectations for updates.

In the next year.

Well Youre right.

The two year data is important and it's.

To some payers very important from a 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 have 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.

That dataset becomes available we have them in front of payers.

And we're engaging in those discussions now and by the way on an almost constant basis.

Our communications with payers aren't really episodic there are just ongoing.

And we have a strategy for each payer and its and its multiple communication points throughout the year. So we are talking to payers and now that the two year data sets are 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 of our investigators presented at to their peers. So the publication will make it a lot easier for us to do that from a couple of standpoints and that'll come a little bit later this year, hopefully hopefully sort of in the middle in the middle part of the year.

Your next question comes from the line of Robbie Marcus with Jpmorgan. Your line is open.

Yeah, Hi, thanks for taking the questions.

I wanted to start 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.

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.

Yes, I mean look every year is different and we base guidance that we gave 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 on what's likely to happen. The next as we look at guidance for this year Robby we're looking at eggs.

Exit velocities of procedures, we're looking at claims data.

<unk> sales were looking at a bunch of our own market research with both patients and doctors and were making some what we think are probably pretty conservative core market assumptions.

And assuming that things like IQ and MSP data give us the ability to grab a little bit of share in the core back and leg market, although even those assumptions or not.

What I would call.

Too aggressive.

And then and then a lot of the growth assumption is based on what we think the trajectory of PD and looks like we have a lot more data on PD and obviously coming into this year.

We did last year.

It's guidance it could be wrong on either direction, but.

But I feel like we are.

We've got a little bit more elimination this year on what's happening in the market than we did last and it is our it is our best estimate of where.

Where we think this year is it.

Great I appreciate it Keith and maybe just one follow up along those lines.

And the <unk> sales for first quarter came in a bit below where the street was thinking.

I think in general, we werent expecting that much seasonality.

During the launch here, so maybe talk to what Youre seeing why PD and seasonality in line with the base business is.

The right way to start the year at an expected.

And also.

As it ramps it kind of ends in the low to mid Twenty's that would imagine millions to get to the guidance range. How are you thinking about competition in PDI and if at all thanks, a lot yes, yes.

Yes, no I think the seasonality question's a good one we actually did some work on that ourselves went back and looked at our our initial ramp as a company we looked at some of the initial ramps of other <unk>.

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 rates 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 <unk> is one of those areas of our guidance, where we have actually a fairly high degree of.

Maybe relatively higher degree of confidence in terms of competitive approvals.

Medtronic has 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 will have.

Maybe a bit more impact on the growth of the overall market, but to date it hasnt been a big impact.

And certainly hasnt been a big impact in terms of share.

But 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.

I think Abbott has made it clear that they submitted virtually the same medtronic and Abbott data that Medtronic submitted.

So we expect a desk to come the data that Abbott has out there is a new it's the same dataset Medtronic put forward its 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 at 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.

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 New Winter with <unk> Securities. Your line is open.

Hey, this is Dave <unk> on for rich thanks for taking the questions.

Rod I wanted to follow up first on a comment you made related to Joanne question about returning to these historical mid single digit to high single digit growth rates.

Wondering if that comment.

That market growth is inclusive of <unk> or if thats, specifically relevant just to the core SCS market in the U S. And then 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 backend late perspective so.

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 2018 2010 to 2019.

Sort of sort of a period. So we are talking excluding PDL in that case.

As far as this year, we are still assuming pretty modest core backend leg market growth on the year with with a slower.

With a slower first half and a little bit of a stronger growth period in that in the second half of the year.

From a market perspective, so overall, we're anticipating kind of low low single digits for the market on the year.

Okay. That's helpful and then I guess on the baseline.

Based on kind of the full year and.

Q1, adjusted EBITDA guidance.

Doesn't appear to be a pretty steep acceleration curve implied between Q2 and Q4. So I'm just wondering if we should be thinking about that improvement is more gradual and more backend loaded and then if at all that more profitable growth youre getting out of H FX Iq.

Is that product contributing to any of the improvements in the EBITDA profile I'm trying to I three thanks.

Yeah.

So when we're talking about that acceleration or are you primarily talking revenue or are you talking adjusted EBITDA.

Just just us just adjusted EBITDA.

Okay.

Yes, so we as.

As we mentioned Q1, historically carries a disproportion 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 with Costa Rica, as we're bringing that manufacturing plant up to scale, we will start to see some some of the expansion and thats related to IQ as well as Costa Rica getting to sufficient scale in the <unk>.

Fourth quarter. So we'll see some of that expansion I think what you call the acceleration in the fourth quarter as a result of that.

That margin expansion, but also.

With a disproportion amount of operating expenses in Q1 and then.

Less so in the next three quarters is driving that.

Adjusted EBITDA expansion, you're talking about.

Okay. Thanks, and just is there any contribution to that margin from DH FX IQ launch I know you discussed it 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.

Yes, so well I mean, well.

We'll see some expansion for my queue.

So there's a couple of factors there one one is.

It will 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 us.

Some some favorability from <unk> being out in the field both from a both from a price and a cost perspective, and thats and thats driving some of that margin expansion.

Well I would add one more maybe one more element to that and that's the operating expense dimension of of IQ I think when you.

There is a disproportionate amount of support given to patients in their first three months 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.

The promise of.

Less intensive support needed for those patients.

You should start to contribute to our ability to scale, a little bit differently and I think so I think we're at that part of the cost story.

It starts to show up is probably in 'twenty for most.

Mostly in 'twenty, four where the incremental growth driven by the IQ should be should require a little bit less field support and make our field team more more efficient in driving that growth.

Okay. That's helpful. Thanks.

Your next question comes from the line of Adam <unk> with Piper Sandler Your line is open.

Hi, Keith Hi, Rod This is Brian on for Adam. Thank you for taking the question.

Just two quick ones from me.

So the first one.

On RVP have you seen any progress with the payer community I think you presented two year follow up data at <unk> last month, and 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.

Thank God 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 SCS 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.

Thats a tongue so let me, let me try and be efficient here.

In terms of impact on the payer's, yes, we've begun we think to get traction with payers and with patients on an individual basis getting them approved in the SPP category.

We have been pretty consistent from the very beginning saying this would this would play out over time.

And it would require ongoing follow up from this study and other studies and it will require our competitors jumping in and driving this as well and we continue to believe that but.

But we have begun to see some impact I think having the 24 months data.

Out there and ultimately published will give us a bit more leverage in our in our Payor conversations, but I think this is something that will be a gradual.

Tailwind to the core back and leg market over the next 235 years as we see more data more patients and more pressure to treat these patients who don't have an option on.

On the on the Unitedhealthcare decision, we did speak to that in the in the script.

A few moments ago, we haven't seen an impact from that.

To date, we don't expect to see a material impact.

This year, which is I think is what we said a few months ago, and we reiterated that today and finally on the.

On the new competitive entry to the market I think you are referring to <unk>.

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 are really in a very small limited market release in the U S. 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 were hearing sometime later this year.

Four four.

For an approval and a market launch.

I refer you back to.

One or maybe two quarters ago in our in our transcript and Julia I'm sure. It 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 caps closed loop they are entirely different things.

We think we're really well positioned and I won't go through all of that again today, because we really spent quite a lot of time on it and I don't think the fundamental comparison as 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 show and you will get that to you, but I think we feel like we're very.

Well positioned I think this may be a bit of a pitched battle between low frequency competitors that do or don't have E caps closed loop.

I certainly think we have customers that will want to try anything thats new.

But the idea of going back to paresthesia whichever ones have been trying to get away from back to mapping patients and EUR 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.

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.

And Nick.

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 NSP insurer coverage.

Keep the Pn trial today, what you think could help with reimbursement do you think the company to sponsor another clinical trial NSP.

Ill put those non coverage policies.

Sure I think it could I think.

In this case.

We assume that our competitors as they already have started doing.

We'll begin publishing some data on <unk> 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 thats, what we will see both frankly from from <unk> and from our competitors and SPP is a little bit different with payors.

Are well aware that these PD and patients have.

No other options that they pose a a unique and difficult problem for not only the patient but for the payers themselves.

I think they've been very receptive to what we've given them, which is which has been very high quality evidence.

Our new solution I think in the case of NSP.

Payers are probably over the years in the habit of thinking of SCS being kind of 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.

Therefore, SCS gets moved up a little bit in front of an option that doesn't exist, but theyre just not used to thinking of it of the care algorithm that way. So I think we've always viewed <unk> 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 arent surgical candidates and I think.

It'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.

Thanks Keith.

Yep.

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

Alright, Thank you everyone for joining us for taking the time today I'm sure. Some of you will have questions. After this call end.

And we will look forward to taking them otherwise, we'll talk to you next quarter.

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

Please wait the conference will begin shortly.

Okay.

Okay.

Okay.

Yes.

Okay.

Yes.

Yes.

Yeah.

Okay.

No.

Okay.

Yes.

Okay.

No.

Okay.

Okay.

Yeah.

Yes.

Yes.

Sure.

Yeah.

Okay.

No.

Okay.

Yes.

Yes.

No.

Okay.

Okay.

Yeah.

Yes.

Yes.

Yes.