Nevro Corp (NVRO) 2015 Q1 法說會逐字稿

Good morning, my name is Shawn. I will be your conference operator today. At this time, I would like to welcome everyone to the Nevro FDA approval and first-quarter 2015 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). Ms. Lynn Pieper, you may begin your conference.

Thanks, Shawn. Thank you all for participating in this morning's call. Joining me from Nevro are Michael DeMane, Chairman and Chief Executive Officer; Rami Elghandour, President and Andrew Galligan, Chief Financial Officer.

Last Friday, May 8, Nevro issued a press release announcing that it received approval from US Food and Drug Administration, FDA, for the Senza Spinal Cord Stimulation System and today issued a separate press release for financial results for the quarter ended March 31, 2015. A copy of these press releases are available on the Company's website.

Before we begin, I would like to remind you that the management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including without limitation, our examination, operating trends, our future financial expectations and statements related to our expectations of the commercial launch of Senza in the US 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 statements. For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission. Nevro disclaims any intention or obligation, except as required by law, to update or revise any financial projections and forward-looking statements 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, May 11, 2015. I will now turn the call over to Michael DeMane. Michael.

Thanks, Lynn. Thanks, everyone, for dialing in today. Clearly a lot going on here. This is an invigorating and exciting time for the Company and we really appreciate your continued support. We have a full agenda for the call. I want to start this morning with an update on our FDA PMA approval that we received Friday night. I will then ask Rami to cover the Company's US commercial launch preparations. Then I will follow with our high level Q1 results and operating achievements and Andrew will follow with a deeper review of the financials and cover our financial guidance for the year. Then, of course, we will open it up for your questions in the remaining time.

So now as a quick refresher, we received an approvable letter from the FDA in late January of this year. Since that time, we've successfully completed the requisite regulatory inspections and audits of manufacturing facilities and have come to agreement with FDA on our Senza SCS system labeling resulting in the FDA approval we announced after market close Friday.

As described in the press release, the Senza SCS system, which delivers our proprietary HF10 therapy, has been indicated by FDA as an aid in the management of chronic intractable pain of the trunk and/or limbs, including unilateral or bilateral pain associated with failed back surgery syndrome, intractable low back pain and leg pain. Nevro's HF10 therapy has been approved with labeling indicating that it has achieved superior results as compared to traditional SCS therapy for the treatment of chronic back and leg pain.

In my view, this is a truly groundbreaking approval. So if you will indulge me, I think it makes sense to highlight some of the notable firsts that this approval represents for the practice of chronic pain management. Nevro's HF10 therapy is the first ever to receive superiority labeling from FDA. As you know, superiority labeling is rare in the medtech space and unprecedented in the field of spinal cord stimulation.

HF10 therapy is also the first SCS therapy ever with an FDA approved indication for paresthesia-free pain relief. As you know, paresthesia is a tingling sensation that is the basis for traditional SCS therapy and can be uncomfortable for patients, which in turn may limit patient acceptance and therapy uptake.

In the same vein, HF10 therapy is the only SCS therapy approved by FDA to be used with outpatient restrictions on motor vehicle operation while receiving therapy. Patients are known to switch off paresthesia-based systems during many activities of daily living such as driving due to uncomfortable stimulation, so we believe paresthesia-free HF10 therapy has the potential to be liberating for patients. And Senza is the first implantable SCS system to garner a 3 Tesla conditional MRI compatibility approval from FDA.

Finally, and notably, this is the first FDA approval for an SCS system solidly underpinned by a prospective randomized controlled comparative study. The Senza RCT pivotal study on which the approval is based was quite a significant undertaking for the Company and it reflects Nevro's long-standing commitment to collaborating with leading clinicians to develop the highest-quality clinical evidence. It is the largest prospective randomized SCS study ever to investigate both back and leg pain and at a time in which demand for evidence-based medicine and comparative effectiveness is high, it is the only FDA pivotal study to directly demonstrate comparative effectiveness between two different SCS therapies.

So changing gears here, it should be noted that this approval is the culmination of many years of sustained effort by many people. I want to take this opportunity to express my deep appreciation and respect to everyone involved in this remarkable clinical effort. I could never do it proper justice, but wish to acknowledge the commitment and effort of the exceptional clinical investigators and study coordinators and the dedicated Nevro team that did the heavy lifting for this groundbreaking work. And I would especially like to thank the 241 patients that consented to participate in this impactful clinical trial.

Okay, onto commercialization. As a reminder to those listening in, Nevro's product has been available in 15 international countries with our CE Mark for the product dating back to 2010 and TGA approval in Australia in 2011. Over the past five years, more than 3000 patients have been successfully implanted with HF10 therapy. To enter those important markets, we undertook a very deliberate and responsible launch of the therapy. It served us well and we intend to employ that same successful strategy as we enter the US market. And with that, I will ask Company President, Rami Elghandour, to take us through our US commercial launch plans now that approval is in hand. Rami.

Thanks, Michael. As we've highlighted in the past, our plans for US commercialization are to execute a successful launch that lays the foundation for long-term adoption of HF10 therapy in the United States. As Michael mentioned, our international commercialization strategy is to focus on a limited number of key accounts early on and to deliver consistent and superior clinical outcomes as a path to success.

We plan to utilize this same strategy in the United States. The core components from our launch are hiring exceptional talent, providing rigorous training, delivering consistent clinical outcomes and educating the market on the pivotal RCT data. I am happy to report that we've been successfully executing on the hiring and training fronts and are ready to bring HF10 therapy to the US market in a responsible manner.

We've previously stated we hope to hire a field organization of 30 to 40 experienced sales professionals prior to our anticipated midyear launch. We are pleased to share that we have 52 experienced reps and clinical specialists that are trained and ready to go for our launch. We have scaled the organization accordingly in preparation for the launch and are ready cross functionally in all key areas to ensure support for our new customers and field salesforce. Additionally, we have a number of reps currently in both the training and hiring pipelines and as discussed previously, intend to continue to expand the salesforce over the next 18 to 24 months to bring HF10 therapy to the broader US market.

In terms of delivering clinical outcomes, this is a pillar of our training programs and we are confident our salesforce will deliver on the promise of HF10 therapy and support our core value of being an outcomes-driven company.

Finally, regarding educating the market on our pivotal data, we expect to have a meaningful presence at key national, international and regional meetings in addition to leveraging our professional education platform. Key upcoming meetings include the International Neuromodulation Society conference in Montreal, starting June 6, where the 18-month data from our US pivotal study will be presented and the International Spine Intervention Society meeting in Las Vegas beginning July 28 where the Senza RCT 18-month results were selected as the 2015 best clinical abstract. We are confident in our plan presence and programs to support our launch objectives.

Finally, two other key things to note, namely the time to adoption on an account level, which we have discussed in the past on our expected time to commence US commercialization. Recall that in an average case it could take about three months from when a patient is identified to when the implant procedure is performed. This is a function of the time necessary to obtain the requisite insurance pre-authorizations and schedule both the trial and permanent implant procedure. As is typical of many new product introductions, a physician may tend to follow their initial set of patients for up to three months to evaluate a new therapy. It is important to keep these factors in mind as they provide you a sense of the time it takes to gain traction in a given new account.

In terms of commencing commercialization, we are prepared to begin immediately. However, we do need to wrap up some administrative tasks such as the Global Unique Device Identifier Registration. As such, we expect to begin shipping product in approximately two weeks.

In closing, we are very well-prepared to enter the US market and are thrilled to bring HF10 therapy to the many patients here in need. This is an exciting time for the many people over the years and around the world that have contributed to developing this groundbreaking therapy. Notably, many clinicians across many countries and investigators in the US took a chance on a small company and a novel therapy. It is because of their courage and pioneering efforts that this therapy stands to help so many patients globally.

In that spirit, I should also mention we intend to maintain focus on our international markets as they remain very important to us. While we recognize that our competition is formidable and there's much work ahead of us as we continue to scale the organization, navigate the learnings from the US market, as well as continue to perform in our international markets, with our focus on quality and clinical outcomes, we are both excited and confident in our ability to impact the lives of many more chronic pain patients with HF10 therapy. Michael, back to you.

Thank you, Rami. Now transitioning to Q1 financial highlights. Revenue for the Company for the three months ended March 31, 2015 was $9.7 million compared to $6.7 million during the same period of the prior year, an increase of 45% and approximately 70% on a constant currency basis.

So in summary, we are off to a strong start to 2015 and are quite excited about our prospects. Armed with an attractive novel product, buttressed by very compelling clinical data, we believe that Nevro was well-positioned to help even more patients in partnership with leading pain physicians and neurosurgeons in the US and worldwide. And with that, I'd like to turn the call over to Chief Financial Officer, Andrew Galligan, to elaborate more on the Company's financial highlights. Andrew.

As Michael mentioned, revenue for the three months ended March 31, 2015 increased 45% to $9.7 million from $6.7 million during the same period of the prior year. This represents constant currency growth of 70%. The revenue increase was primarily attributable to continued adoption of the Senza system. To put this in context, fourth-quarter 2014 growth was 57% on a reported basis with 69% growth on a constant currency basis.

Australia continued to be strong with growth of 43% over the prior-year period. Europe was also strong with growth of 46% compared to the prior-year period led by the UK and Germany. Gross profit for the first quarter of 2015 was $5.8 million representing a 60% gross margin, up from $3.7 million a 55% gross margin in the same period prior year.

Our product costs as a percent of revenue decreased as our average cost per unit benefited from economies of scale with higher unit volumes compared to the same period last year. While our revenues were negatively impacted by the appreciation of the US dollar, our costs are primarily incurred in US dollars, which negatively impacted overall gross margin for the period.

I would like to highlight there was a decrease of 9% in gross margins from fourth quarter 2014 versus the first quarter of 2015. This impact was primarily due to currency. The sequential currency impact was 9% over fourth-quarter 2014 rates. As a result, we had to sell more product to achieve revenue comparable to that achieved in the fourth quarter of 2014, which cost us 6% in margin. An additional 3% of the margin pressure was due to increased overhead spending.

Operating expenses for the first quarter of 2015 were $18.1 million, an increase of 66% compared to $10.9 million in the first quarter of 2014. Increase in operating expenses were driven primarily by increased headcount and related personnel costs for the sales and marketing organization in preparation for the US launch, as well as an increase in general and administrative costs associated with being a public company. Net loss from operations for the period was $12.3 million compared to $7.2 million for the first quarter of 2014.

Additionally, we had $1.6 million of net interest and other expense for the first quarter of 2015 compared to $278,000 net interest and other income in the same period in the same quarter last year. This expense in the first quarter of 2015 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. We additionally had an increase in interest expense related to the December 2014 $20 million drawdown against our credit facility. At the end of the first quarter of 2015, we had $159.2 million in cash, cash equivalents and short-term investments, as well as access to $30 million from our capital royalty credit facility.

Turning to our outlook, we are maintaining our international revenue guidance for 2015. We continue to project international revenue of $36 million to $38 million for 2015, which represents year-over-year growth of approximately 11% to 17%. Adjusting this on a constant basis, this represents revenue growth of 26% and 33% using first-quarter foreign exchange rates.

With respect to US revenue, we plan to provide US guidance after having a couple of quarters on the market under our belt. With regard to our guidance for operating expenses for 2015, as Rami has noted earlier, we have accelerated our salesforce hiring, which will impact our operating expenses for the remainder of the year. We will be launching the product roughly six weeks earlier than we expected, which will additionally drive operating expenses. We expect operating expenses to approach $30 million in the second quarter and to level off from there for the remainder of the year in support of our deliberate controlled launch. Michael.

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

(Operator Instructions). Mike Weinstein, JPMorgan.

First off, congratulations. I hope you had a very busy weekend. Let me start with the first-quarter performance because it was very strong. And Michael, I know you have tried to caution people on the ability to continue to gain this much share as you are sequentially outside of the US given the size of those market segments, but could you start by maybe commenting on where you think your marketshare is today in Europe in the rechargeable segment and in Australia in the rechargeable segment? Thanks.

Sure. So Mike, first of all, we are very pleased with the uptake of the therapy and it is very rewarding to see that and we think it is good for patients. Relative to marketshares, as we have discussed, marketshare data in the EU market and Australia are pretty sketchy, frankly. So these are all estimates and with that as kind of a backdrop, I think what we have said in the past is that within Europe we think that we are probably above 30% in the EU market in the rechargeable segment of the market. And in Australia, we think we are higher than that. I know numbers of 40% have been speculated. I think that might be pushing it a little, but who knows. We could be getting close to there.

Okay. Let's talk about the reps. So as you know, I am pleased that you guys have been so aggressive on the hiring. Can you just talk a little bit about the 52 reps, their backgrounds, where they have come from and their experience?

Sure. So consistent with our last call on this, we are casting a wide net here. We are really going to a lot of different places and the only really unifying criteria in here is that they be the very best at what they do. We want exceptional talent and we are going wherever we need to to get that. So some of these, as you might imagine, some of the key people we brought onboard are in fact SCS experienced individuals. Some of them have actually come from roles within the SCS space and have come immediately to us. Others have had an extensive career in this space and then subsequently went to other companies outside of the SCS field and we have enticed them to come back into this exciting field. And some frankly are call it SCS-naive, but they are exceptional sales professionals and we have brought them on as well. So it is really quite a broad mix, Mike, and we think it is working out quite well. Our training and education programs are going exceptionally well and it is a really good spirit and kind of group that we've assembled here.

Okay. Two final questions and I let some others jump in. So one, the clinical trial sites that were involved in the RCT, is there any -- do any of them have a backlog of patients that you are aware of that might be ready to go earlier than new sites? And then second, is there any update on the RCT publication? Thanks.

So relative to a backlog of patients, two things. First, as you know, we have had to be very, very careful about any conversations with any US sites relative to commercial efforts prior to the FDA approval. So I'm not sure I can fully answer that. And beyond that, Mike, look, we have all been through enough launches now to know that a prelaunch chatter is not something that can be counted on. You have to wait until you get into the market. And I'm sorry, the second question?

On the publication.

Right. So, the publication, clearly it is taking longer than we had hoped. The manuscript has been submitted. We are well into the process and we are answering questions as they come to us. And I do wish I had more news, more definitive news to share with you right now, but we just have to wait for that to play out.

Okay, great. I will let some others jump in. Thanks, guys.

David Lewis, Morgan Stanley.

I just want to echo Mike's comments of congratulations as well. A few quick questions here. Andrew, maybe starting off with you on international revenue guidance, so it still seems conservative, if you just hold stable with the first quarter and don't actually have any sequential progression, you are still going to be at the higher end of the range. I know you talked last quarter about some counterdetailing or potential counterdetailing from the incumbents, but I guess in light of the FDA approval and the superiority claim, I just -- maybe you can comment on the likelihood of seeing that incumbent pressure and the conservatism implied in the international number.

There's a lot there. The plain fact is that the European market is restricted and the Australian market has the size that it has and to actually predict that we can continue the current growth and getting to higher and higher market penetration just isn't the type of thing that we do. We want to do a, again, controlled expansion. We're not going after every sale everywhere and we are happy where we are and I don't think we are going to promise to do better than what our guidance is.

Okay. Very clear. Then a few quick ones here. Michael or Rami, the superiority claims, is there anything we don't know, any specific language you can share that we are going to see when the label is public and any comments you can give us in terms of what this superiority label will do in terms of launch timing, rep number utilization per rep?

Okay. So, Rami can you field that?

Sure. So first, let me just make some general comments to clarify the labeling. For the purposes of this discussion, labeling is really effectively. The results from our pivotal study at that FDA approves to be placed in our summary of safety and effectiveness document and serves as the basis for claims regarding the safety and effectiveness of our device.

In our case, the FDA allowed us to include in our SSED the superiority analysis from our pivotal study, including superiority in the primary and all secondary endpoints encompassing superior response rates, pain relief and functional outcomes, thus establishing broad superiority of HF10 over traditional SCS for treating chronic back and leg pain. So that is kind of the -- I don't know if that is what you were looking for, David, but that should give you kind of the context around the superiority labeling once it becomes public.

In terms of impacting the ramp, again, we have a very defined strategy that we are executing against. Obviously we were hopeful to get the superiority label and we received it, but it doesn't really fundamentally change our plans or objectives. Our goal all along has been to leverage this data, to educate the market on its relevance and frankly the data speaks for itself beyond just the superiority aspect. So it really overall doesn't change our marketing or sales plans very much.

And just two quick ones; I will jump back in queue. The first is just, based on where you are now in rep hiring in the third quarter, or expectations for the third, you'll be at 65 reps by year-end. It now looks like perhaps 80 is a better number. Could you give us a year-end target for reps and then, Andrew, in light of the earlier launch and the operating expense guidance for the second quarter, can you just give us your updated thoughts on capital needs? Thank you.

So David, we expect to hire about 100 reps by the end of the year and we will certainly keep you guys up to speed as to how that progresses, but obviously we are a little bit ahead of target at this point and as we get into the market and learn, as I mentioned earlier, we will kind of adjust that ramp, but we expect to get to 100 by the end of the year. Andrew.

Okay, well, David, as you know, we were always very clear that we didn't raise sufficient funds in the IPO to get us to cash flow breakeven. On the other hand, we have $159 million in the bank plus $30 million of excess under our credit facility. So as we stand today, we have sufficient resources certainly to undertake this launch. On the other hand, we are always looking at our cash balances and then looking at what our strategic and operational goals are and reexamining timing of raising funds. So it is a balance.

Thank you very much.

[Danielle Intelissi], Leerink Partners.

Thanks so much. Good morning, guys and congrats on a very exciting weekend. I hope you guys got time to celebrate a little bit. Just wanted to follow-up on a comment in the press release on the MRI compatibility; it's conditional. So just wondering is it head only? Can you give some more context around the MRI compatibility?

Sure, Danielle. So it is similar to our international labeling in that it is a head and extremities for both 1.5T and 3T.

Okay. And then how much of the US market do you think today is MRI compatible versus -- or are using MRI compatible devices versus not?

That is hard to tell, to be honest with you. Obviously, there's not really a lot of good numbers, so won't even dare speculate.

Okay. That's fine. And then I thought it was interesting that you also got approval for lower frequencies, as well and I am probably reading too much into this, but just wondering is FDA stance that low frequency and high frequency, not that they are similar but -- I am not sure how to word this -- because they gave you a low-frequency approval without actually seeing any low-frequency data, could the converse potentially happen where they could lower the clinical burden of proof for high frequency, so some of your competitors could potentially do that? As we know, Boston is already running a trial. So just any context around how to think about how FDA is viewing high-frequency therapy versus low-frequency therapy.

Sure. So Danielle, of course, you always try to avoid speculating as to what FDA may or may not do in the future. So we can all agree on that, but their traditional approach in matters like this is low frequency is something where they have three PMAs. Now two of those are paper PMAs, but nevertheless there are three PMA approvals in the market potentially forthcoming. So I don't want to call it grandfathered, but I think it's a different level of evidence expectation from FDA for those frequency bands from 2 to 1200.

When you go above that and when you institute a paresthesia-free claim, FDA has been very, very clear that one has to generate significant data in a pivotal study showing safety and efficacy. Now your question is, is it likely they would change that in the future. I think whenever you have -- I think there is a precedent at FDA that once you have three or four PMA approvals -- full PMA approvals with pivotal data, FDA can be petitioned for a down classification. I think that is unlikely here, but it is of course possible, but I think we can all agree that would be very well into the future.

Thank you so much, guys. Congrats again.

Dave Turkaly, JMP Securities.

First, I was wondering, could you give us an update in terms of how many people you have selling today in Europe and Australia?

46 people.

You may not want to break that out at all, but that's 46 total across both?

Yes. And no, we won't break it down.

I appreciate that. You mentioned rigorous training as one of your four goals. How long do you say it takes you to get some of these new reps, particularly the ones without SCS in their background, fully ready to sell?

Takes us probably about six to eight weeks, about two months end to end.

You said 100 reps by year-end. I guess as we look at the SCS world today and realizing that you have something that is very different, where does that go over time? Do you need 200? Is that the upper limit, or if you look at some of your more sizable peers, I guess I would just be curious to think about where you think that settles in say longer term?

So Dave, I think we have been pretty consistent through the roadshow and subsequently that what we are going to do there is wait and see what happens. We do think that we will, because of our strategy of going to significant accounts that are actually quite familiar with SCS technology and really make it a focus to work with pain patients, that we have the potential to have more productive representatives in the field. The potential is there, but until it really plays out, until we actually do it, it is hard to know for sure and I think we've consistently said that we will titrate or increase, call it, our steady-state number once we are fully fledged in the market to see where it goes. It's hard to call that from this point in time.

Thanks a lot. Congrats on the superiority labeling.

[Chowguan Xing], Sterne Agee.

Thank you for taking my question and congratulations on the approval, as well as a very strong 1Q quarter. So the first question is on US guidance. It sounds like we won't hear an update until maybe around your 3Q call. I was wondering if you can share with us you are comfort level with where the Street is for US revenue. I think the range is pretty broad right now, between $8 million to $17 million for the year.

I think on last quarter's call we said we saw no reason to change Street guidance and that once we are in the market for a couple of quarters. We will have information sufficient to guide us to a number, but until then we are going to wait.

Okay. That is helpful. And then I wanted to get a better handle on your launch strategy. So can you help us think about your target accounts and how big is the doctor network that your current salesforce covers? What is the low-hanging fruit here? If you can quantify that for us, that would be really helpful. And then just a related question, it just seems like the momentum is very strong based on your international results, as well as the buzz around the Senza RCT data presentation. Why shouldn't we expect a more aggressive rollout and is there any pent-up demand? Thank you. That's it for me.

So Chowguan, I will take a shot at this and then ask Rami to jump in. I want to reiterate that we are very interested in going deep in accounts, in the right accounts, as opposed to call it skimming the market. That's really our strategic intent here. We want to go to significant pain practices where clinicians have refined their skills to treat complex pain patients, the ones that are interested in superior outcomes and better outcomes for patients. So those are our target accounts when we go into the market and our intent is to go deep in those accounts as opposed to moving on immediately to another account down the street or in an adjacent city.

So that is our strategy and it is consistent with the approach we took in Europe and Australia. It has served us well and we think that especially with this therapy where getting superior outcomes is really the linchpin to the whole system, we think it fits with the therapy and we are not particularly interested in getting distracted from it in a goal to try to drive revenue or maximize revenue over a short time period. In short, what we are trying to do is establish a base for the long-term growth of the Company and expansion into the market both into the current market, as well as expanding the market in a significant way. So that's our strategic intent and with that, I will ask Rami to add his color.

Sure. Thanks, Michael. I think if you take that as a starting point, Chowguan, we are focused on driving long-term adoption of the therapy and to do that, we have to focus on partnering with experienced physicians who really buy into the concept of delivering superior clinical outcomes in areas where we have geographic coverage. The reason that is important is twofold. The first is we have, while the data is obviously phenomenal and we're ecstatic with the superiority labeling, this is -- at the end of the day, a lot of physicians are going to want to see the therapy in their hands and how that performs. So we have to be really selective and really focused in how we support the initial commercialization to really demonstrate the value of the therapy in the hands of the US physician base.

The second point is that this isn't a market that has been really driven by clinical data or superiority claims in the past. This is a market that has really been highly driven by marketing around technical features. And so there is a fair amount of education around the data and superiority that needs to take place and it's just not something simply that can be done overnight. So while again we are obviously incredibly excited about the data and the superiority, we do want to launch this in a responsible manner. We do want to make sure we can replicate the clinical outcomes that are seen in this study in the accounts, on an account by a account basis and we strongly believe that this grounds-up approach to the market where we have local physicians that become ambassadors and champions for the therapy in key geographic areas is going to lead to the long-term adoption success of this therapy in the United States.

Okay. Thank you very much.

There are no further questions at this time. Mr. DeMane, I turn the call back to you.

Okay. Well, we thank everyone for dialing in this morning and we very much appreciate your continued support and look forward to talking to you in the future. Thank you.

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