Nevro Corp (NVRO) 2014 Q4 法說會逐字稿

Good afternoon. My name is John, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Nevro Fourth-Quarter and 2014 year-end earnings 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.

(Operator Instructions)

Thank you. Lynn Pieper of Westwicke Partners, you may begin your conference.

Thank you, John. Thank you for participating in today's call. Joining me from Nevro are Michael DeMane, Chairman and Chief Executive Officer, Rami Elghandour, President, and Andrew Galligan, Chief Financial Officer. Earlier today, Nevro released financial results for the quarter and full-year ended December 31, 2014. Before I begin, I'd like to remind you that Management will make statements during this call that include forward-looking statements within the meaning of Federal Securities laws made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed to be forward-looking statements.

All forward-looking statements including without limitation our examination of historical operating trends and our future financial expectations are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these forward-looking statements. For a list of risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission.

Nevro disclaims any intention except as required by law to update any financial projections or forward-looking statement whether because of new information, future events, or otherwise. This Conference Call contains time-sensitive information and is accurate only as of the live broadcast today, March 18, 2015. With that, I'll now turn the call over to Michael DeMane. Michael?

Thank you, Lynn, and good afternoon, everyone. It's a pleasure to speak with you today about Nevro's progress for the 2014 Fiscal Year. I will begin the call with highlights from our Fourth-Quarter results and operating accomplishments and also provide a few comments about our plans to commercialize Nevro's HF10 spinal cord stimulation therapy in the United States, assuming receipt of FDA approval. I'll then have Andrew Galligan review the financials and discuss our financial guidance for the full year, and then we'll open it up for your questions.

So, for recent highlights on the revenue side, full-year revenue increased to $32.6 million representing a 39% increase over 2013. Fourth-Quarter revenue increased to $9.7 million representing a very strong 57% growth over the same period in 2013. The full-year revenue expansion was driven by continued adoption of the Senza system in the markets where it is available. We did not expand our geographic footprint during this time. I should point out that this brings the number of patients treated with HF10 therapy to over 3,000 since the commencement of commercialization in Europe and Australia.

As previously announced, we received an approvable letter from FDA for the Senza SCS system in January, 2015, and our plans, which have been communicated previously, call for a US launch by mid-2015 assuming timely FDA approval. To that end, we are continuing our preparations for the US launch, including executing on our plan to hire our initial sales organization of 30 to 40 representatives and overall launch readiness. We believe we have an attractive technology which has the potential to provide improved relief for patients suffering from chronic intractable pain. We believe the attributes of this proprietary therapy will allow us to both take share and significantly expand the current $1.5 billion spinal cord stimulation market, all under current reimbursement structures.

Going forward, I'm pleased to report the excitement in the organization is high given the strong 2014 performance and the prospect of launching in the US market later this year. So, with that, I'd now like to turn the call over to our Chief Financial Officer, Andrew Galligan.

Thank you, Michael. Revenue for the Fourth Quarter of 2014 was $9.7 million which represents growth of 57% as compared to the Fourth Quarter of 2013. Australia continued to be strong with growth of 80% over the prior-year period. Europe was also strong with growth of 45% lead by the UK and Germany when compared to the prior-year period. Gross margins improved to 69% in Q4 compared to 59% in the Fourth Quarter of 2013. We achieved these margins primarily due to benefits of scale as we increased units during our ramp-up of production. Operating expenses for the Fourth Quarter of 2014 were $13.8 million, an increase of 36% compared to the Fourth Quarter of 2013. The increase in operating expenses was driven primarily by increased headcount and related personnel costs as well as costs associated with becoming a public Company.

In addition, we had $1 million of net other expense for the Fourth Quarter of 2014 compared to $200,000 in the same quarter last year. This loss was primarily related to the impact of the significant swing in FX rates on our foreign currency denominated balances when remeasured to the US dollar. Net loss from operations for the period was $7.1 million compared to $6.5 million for the Fourth Quarter of 2013.

Turning to the full-year 2014, revenue was $32.6 million which represents growth of 39% from 2013. Australia continued to be strong with growth of 62% year-over-year. Europe was also strong with year-over-year growth of 28% lead by the UK and Germany. Gross margins improved to 65% in 2014 compared to 60% in 2013. The year-over-year improvement in gross margin is primarily due to higher revenue coupled with a decrease in cost of revenue as a percent of sales as our overall cost per unit decreased due to the previously mentioned benefits of scale.

Operating expenses for 2014 were $49.6 million, an increase of 27% compared to 2013. The increase in operating expense was driven primarily by increased head count and related personnel costs as well as costs associated with becoming a public Company, partially offset by decreased clinical trial expenses year-over-year. Net loss from the operations for the year was $28.3 million compared to $25.2 million for 2013. In addition, we had $1.9 million of net other expense for the year compared to $700,000 in the prior year. Similar to our other expense recorded in Q4, this loss was due to the significant fluctuation in FX rates throughout the year. At the end of the Fourth Quarter of 2014, we had $176.8 million in cash, cash equivalents, and short-term investments as well as access to $30 million from our capital royalty Credit Facility.

Looking forward, we are sharing our international revenue guidance for 2015. We anticipate international revenue of $36 million to $38 million for the year which would represent approximately 11% to 17% growth over 2014. I would like to note in constant currency that translates to 24% to 30% growth using mid-first-quarter foreign exchange rates. I would also like to remind you as we have discussed during our IPO and subsequently that our market shares are getting to the point where incremental gains in our existing Markets are more difficult even with a compelling technology such as ours.

I would like to pay particular attention to the First Quarter of 2015, noting that in the First Quarter this year, we are likely to take approximately a 16% hit over the First Quarter of 2014 just due to foreign currency exchange rates. In addition, First-Quarter revenues are normally seasonally tempered in relation to the Fourth Quarter of the previous year as Australians are returning back from their summer vacations and European hospitals are just starting to ramp up spending of their annual budgets.

With respect to US revenue, nothing has changed in terms of our view of the market since the IPO except we expect to launch earlier than initially anticipated. As a result, we remain comfortable with the current consensus. Michael, back to you.

Thank you, Andrew. So, that concludes our prepared remarks, and we will now open up the call for your questions.

(Operator Instructions)

Our first question comes from the line of Mike Weinstein from JPMorgan.

Good afternoon and thanks for taking the questions and also very nice First Quarter. So, let me start with the Fourth-Quarter performance where your revenue growth accelerated and really it accelerated over the course of the year. The first question is one, NANS and the presentation was very late in the quarter so was there any impact at all in the Fourth Quarter do you think from the presentation of the data? That's the first question.

And, two, just talk about the guidance commentary. I'm familiar with the challenges on market share gains, but obviously you're coming off of a very strong Fourth Quarter and you're assuming more modest share gains going forward. So, if you could just add a little bit more to that, that would be great.

Thanks so much, Mike. Now, in terms of the NANS presentation, you are correct. That was a mid-December presentation, so it's unlikely the presentation per se had a significant impact on the revenue in the Fourth Quarter. That said, as you know much of the clinical data has been released in other venues. In particular, the S1 filing and simply the act of submitting the data for the presentation at NANS that does get circulated within the various review parties at the NANS level which includes both US and international physicians. So, I suspect that there was a lot of discussion and visibility to the data well ahead of the NANS presentation, and I do have to assume that that contributed to the strong showing in the Fourth Quarter. Andrew, do you want to handle the second question? No?

No, I think that covers it pretty well.

Michael, any update on the publication of the trial?

So, on the publication. Basically, as you know, we did have the presentation at NANS, and it was well received. The manuscript has been submitted for publication and we are in what we believe are the later stages of the review process. It is a little bit like the FDA process though, Mike, in that once it goes in that hopper we don't have a whole lot of visibility as to exactly where it is and when we're likely to hear back. So, I would say it's a little bit like the FDA process in that regard. We'll just have to wait and see.

Maybe two more questions and I'll let some others jump in. One, can you spend a minute talking about the salesforce buildout and where the reps appear to be coming from? I think we're all assuming that you're going to have a pretty good opportunity to pick up some high-quality reps. But, if you can give us some flavor for where you're hiring reps from, the creative experience they have in the field? And then, second, now that it has been a few months since the NANS presentation, can you just talk about feedback from US physicians that were there? And, the amount of dialogue that's been going on in the clinical community post the presentation? Thanks.

Sure. So, with respect to where we are hiring as we build our introductory sales organization, I think we shared in our last call that we would be really hiring from a lot of different areas and we have done exactly that. We have hired a number of people with very significant and successful experience within the spinal cord stimulation space with all three of the incumbent companies. And, many of them have actually gone to other fields, and we have enticed them to come back into spinal cord stimulation and some of them are currently in the spinal cord stimulation space.

In addition, we are hiring some of the other more notable med tech companies that have very good sales organizations but are not necessarily committed at this time to spinal cord stimulation, and we're finding some very good talent in those pockets as well. So, I would say that it's across-the-board, and you are correct in that there are some very, very talented people there that are interested in coming to an opportunity like Nevro so we have been encouraged by that process.

Now, in terms of conversations with US physicians. As you know, we have to be exceedingly careful not to get into any pre-promotion sort of risk area so we are very circumspect with all of our conversations. I will say there's a buzz certainly on the clinical data, and I've just returned from a meeting in Australia yesterday. There's a lot of discussion there as well about the clinical data and the impact of that data, and I would say that it has been very favorably received as both good clinical evidence, a good clinical study, and also with potentially profound positive impact on the spinal cord stimulation space.

Great. I'll let some others jump in. Thank you. Congrats again on the quarter.

Thanks, Mike.

Our next question comes from the line of David Lewis from Morgan Stanley.

Good afternoon. Just a few questions. Wanted to start maybe following up on one of Mike's questions on FY15 guidance. Michael, if I think about FY14 for a second here, the second half of the year grew twice as fast as the first half of the year, but your FY15 guidance implies you go back to the first half of 2014 trends. So, other than Andrew's comments around market share, can you think of any factor that has been driving this business that is no longer present since the Fourth Quarter?

Yes, so it's one of those parts of the market where as you get bigger and bigger, the opportunities reduce. So, there are many, many major doctors that now use us so it becomes harder and harder as you get larger to maintain high growth rates. That's the fundamental issue there, and we're dealing in a market that's reasonably inflexible in Europe. Budgets are pretty inflexible so the more you grow into that market, the more competition you're going to run into because you're really taking share away from your competitors. And, we've got to the point where they are really fighting hard against us. And, in Australia, it's only so big.

Andrew, where would you estimate your European market share is today?

Put that over to Rami.

Hi, David. If you look at the rechargeable segment of the market, we believe we're still in that 30% to 40%-type market share. Obviously, as we've talked about, we're not in -- we're getting into more and more accounts, as Andrew said. But, we are not in every single account so our share on an account-by-account basis tends to be higher than that. But, on a global scale if you look at the rechargeable segment of the market, we're getting up there in terms of share.

Helpful and just a couple of faster ones here. OUS rep productivity. We talked about this last quarter. I think there was a debate about whether you would share that information going forward. Is there anything you can share about European rep productivity at this time?

Yes, we're about $800,000 in rep -- per rep in [productivity] on average.

In Europe.

Yes.

Great, very helpful. Two more quick ones. First is what is a good estimate for when we'll get US revenue guidance? Could we get it some point in 2015? Or, are we going to have to wait for 2016? And then, Andrew, are you still expecting 200 to 300 basis points of GM degradation as we enter the US launch in the back half of the year. And, with that, thank you. I'll jump back in queue.

Andrew, why don't you handle both of those.

Okay, so the margin will obviously as the reality kicks in, we'll update that. But, that is what I would expect -- 200 to 300 basis points. As regards to US guidance, I think we want one or two quarters of actual experience on the ground before we believe we would be prepared to actually give some harder numbers ourselves is the way I would look at it.

Great. Thank you very much. Nice quarter.

Thank you.

Our next question comes from the line of Danielle Antalffy from Leerink Partners.

Hi, good afternoon. Congrats on a great quarter and strong guidance for 2015. Mike or Rami, or whomever. I was hoping you could comment on what you're seeing competitively in the marketplace from St. Jude, Boston, Medtronic as far as detailing goes ahead of your launch here mid-year. From our perspective, all three companies have gotten more vocal on their neuromodulation businesses. So, just wondering what you're actually seeing there on the ground? And, maybe comment not just on the US, but also in Europe, if you've seen them sort of reinvigorated in Europe after seeing the data in December.

Danielle, I'd have to say, as I said earlier, because we are not in the market in the US and because we are very restricted on conversations we can have -- I would say that we certainly hear anecdotally about what's going on. But, it's -- I have to say -- I have to be circumspect there and it's innuendo and rumor so I'm going to kind of leave that alone.

Within Europe and Australia, I would say that certainly they are competitive Markets, and Australia especially is intensely competitive. But, I wouldn't say that we've seen a sea change in competitive response since the data has come out. I don't think we can say that that has occurred. Pricing seems to be reasonably stable, and we continue to make inroads as you've seen from our results. And, I think we've got -- I would say it's not a sea change at all. It's kind of not more the same but it's a continuation is what I'd say.

Okay, that's helpful. And, you have gotten some expanded MRI capabilities OUS. I know you probably aren't going to comment on the label if you would that would be great, but I don't expect you to. But, as far as MRI capability goes, how important is that going to be here in the US? And, assuming you don't get it on the label here how long until you do get it on the label? And, I guess maybe I could ask it this way. What percentage of the US market is MRI-compatible today?

Okay, so I'm going to ask Rami Elghandour to field that.

Sure, so obviously, I think, Danielle, we've gone down this path. We can't comment on the labeling. What we -- just to clarify for everyone -- what we announced recently is that we got expanded MRI coverage in two dimensions. So, we had only 1.5 Tesla MRI compatibility -- conditional compatibility. We've expanded that to extremities as well as that, and then we also expanded from 1.5 Tesla to 3 Tesla as well. So, that is the labeling that Danielle is talking about and that we hope to hopefully secure in the US as well.

In terms of the importance, we believe MRI is important from a patient perspective. It's certainly -- it's a nice feature to have. It allows physicians more flexibility in terms of seeking diagnoses for their patients, but I think from our perspective, we believe it hasn't really materially changed the market in the US. Medtronic introduced the fully -- full-body conditional MRI system, and our understanding is that it has been a useful feature but not one that's obviously of similar magnitude to the type of innovation we're bringing to the market. So, it's something that we're working on. It's something that we believe is a benefit to patients, but something that we don't see as a market-changing technology and instead more of a feature set that we hope to bring to market.

All right, thanks so much.

Thank you, Danielle.

Your next question comes from the line of Dave Turkaly from JMP Securities.

Thanks. I was just wondering since you received the letter from the FDA in January, can you share -- have you had conversations, communications with them? And, do we know anything new since you received that letter?

Thanks, Dave. So, what I would say there is clearly we've had a number of conversations with FDA and continue to. We're not really prepared to get into the details of the process. What I can say though, Dave, is that we are at a place right now, everything is consistent with our plan for a mid-year launch. So, we're comfortable with that. At this stage of our discussions with FDA, it's consistent with the timetables that we've kind of laid out and the expectations that we've built into the market as to when we're going to launch.

Great, and you mentioned the 30 to 40 reps. I guess if you got an approval, let's say a little early, maybe in April. Can you just comment, do you have 30 to 40 on Board now? Or, are you still planning on hiring a bunch? I'm just trying to get a feel for how fast you could hit the ground running if something came a little early.

So, what we would like to say at this point in time is that we are in the process that we've laid out. When we get the approval, assuming the approval comes, we will at that time disclose exactly how many representatives we have on Board. But, until then for competitive reasons, we prefer to keep that closer to the chest.

Last one quick for me would be a follow-up from last quarter. But, given your data and specifically what you showed in primary back pain, can your reps track patients that could possibly be getting the implant for that? And, if so, do you have an idea of how many patients may have gotten a Senza for that indication?

So, let me make sure I understand. Can you rephrase that question to be sure I understand what you're asking?

If your data in your clinical trial showed that it was 1.5 times better, superior say in leg pain, primary leg and then twice as good in primary back, I'm curious -- and the market today is a majority of leg. I'm just curious if you are tracking this market expansion opportunity. The back pain patients -- are docs starting to put the device in primary back? In other words, is the market expanding to those patients? Are you seeing docs do that today?

I see your question, and it's a good one. What we see outside the US is that we typically do start in many accounts with predominant back pain conditions, and there's a lot of reasons for that. But, I think we can agree it's a poorly served or underserved part of the patient profile that comes into a pain practice. And, as a result, it is where we often start but very clearly we get both predominant back pain patients and predominant leg pain patients ultimately. So, we really go across the spectrum, which is of course reflected in the outcomes data in our clinical data, so that's all consistent. What we don't do is track exactly which ones of our -- how many of our patients are predominant back pain and how many are pre dominant leg pain. That's really anecdotal, but we don't track it on an ongoing basis.

Thanks a lot.

Our next question comes from the line of [Shegun Sing] from CRC Capital Group.

Thank you for taking the question and congratulations on a great quarter.

Thank you.

So, just on the 2015 guidance, you've talked about a very slow and controlled rollout in 2015 in the United States. There is a lag between trial and actual implant plus doctors -- they do have to get a few cases under their belt before adoption can really be meaningful. Can you give us a sense of how you think all these factors play in in 2015, and if you feel the $5 million to $10 million number, give and take, that the Street is expecting for US is something reasonable? Any color you can give there?

Sure. First of all I have to say, Shegun, that I think you listen well, and I think you have the time lag that is likely to be experienced in the market. You've got it down well so I want to reinforce it. That is a good understanding. We do expect to see that. That said, if we do have our approval in hand to do the mid-year launch, as is currently envisioned, we do think that the current guidance is out there is reasonable and that was reflected in Andrew's comments earlier in the call. So, we're comfortable.

That's really helpful. And then, with respect to gross margins, I know you've talked about a couple hundred basis points of margin contraction. I believe you mentioned in 2015 as well as 2016. The 200 to 300 basis points, is that just in 2015? And then, how should we think about the cadence of that?

That's in 2015, and then it really is independent on growth so as revenue continues to grow, those additional costs of having a US approval and US level quality system and complaint system will get diluted over time by revenue. So, it really is a function of revenue growth as to how those -- it's really a step-up in fixed cost but then get diluted as revenue increases.

Okay, and then my last question is just on your cash position. Can you talk about your comfort level there? How far do you think you can take it? And, do you expect to draw on tranche two of the Credit Facility? I believe you're eligible to do so by March 31. Thank you.

Yes, I think in the 10-K that should have gone out in ten minutes. It will show that we've moved out the period from March 31 to June 29 to be able to draw the next tranche to give ourselves more flexibility. So, we have more time to decide whether to take that money down, and we are going to take that time. And, as for that -- I think the $176 million is certainly sufficient to see us through the initial launch period, but as we've always said from the IPO on, that's not sufficient cash to get us to breakeven.

Very helpful, thank you.

At this time, we have no further questions. I'll turn the call back over to Michael DeMane for closing remarks.

So, thank you everyone for joining the call this afternoon. We sincerely appreciate your continued interest in the Company and look forward to providing an update on our progress in the future. So, thanks for being here.

This concludes today's Conference Call. You may now disconnect.