Nevro Corp (NVRO) 2016 Q2 法說會逐字稿

Good afternoon. My name is Kirk, and I will be your conference operator today. At this time, I would like to welcome everyone to the Nevro second-quarter 2016 earnings call.

(Operator Instructions)

Ms. Katherine Bock, Senior Director of Corporate Development and Investor Relations, you may begin your conference.

Thank you, Kirk. And thank you all for participating on today's call. Joining me are Rami Elghandour, President and Chief Executive Officer; and Andrew Galligan, Chief Financial Officer.

Earlier today, Nevro released financial results for the quarter ended June 30, 2016. A copy of that press release is available on the Company's website.

Before we begin, I'd like to remind you that Management will make statements during this call that include forward-looking statements within the meaning of the federal securities laws, which are 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 operating trends and our future financial expectations, which include full-year 2016 guidance, 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 financial projections or 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 webcast today, August 8, 2016. And with that, I'll turn the call over to Rami.

Thank you, Katie, and thanks, everyone, for dialing in today. For today's call, I will start with reviewing our second-quarter performance and operating highlights, as well as providing additional color on our US launch.

Andrew will follow with a deeper review of the financials and expectations for worldwide revenue, gross margins, and operating expenses in 2016. Then we will open up the call for your questions.

Nevro's worldwide revenue for the second quarter was $55.4 million, an increase of 385%, as reported. US revenue was $40.6 million and international revenue was $14.8 million, the latter representing an increase of 30%, as reported, and 33% in constant currency over the same period in the prior year. Our results underpin strong global adoption trends with HF10 therapy representing approximately 13% share of the worldwide SCS market, and greater than 10% share of the US market in our first year of launch in the United States.

We believe HF10 therapy is poised to become the therapy of choice for physicians seeking the best treatment for patients suffering from chronic back or leg pain. And with our superior therapy focus strategy and outstanding team, we are confident in our ability to continue delivering on the promise of HF10 therapy.

Based on the strength and momentum of our US launch and sustained performance in year six of our international commercialization, we have sufficient visibility to raise our global revenue guidance. We are increasing the full 2016 total revenue guidance to $210 million to $220 million, which is an increase of $35 million above our May 9 guidance for the full year. In light of our continued operational success, accelerated trajectory of our US launch and favorable financial market conditions, in June, we announced and closed a public financing of $172.5 million in convertible senior notes.

Our success as a Company has been predicated on operating from a position of strength without financial constraints. This financing will allow us to continue making long-term decisions, such as the advanced planning that resulted in our successful US launch, as well as investing in evidence-based therapies and driving our pipeline. Our core focus has been and will continue to be delivering superior patient outcomes.

Just last week, I had the pleasure of meeting one of our US pivotal study patients, who has now been implanted for four years. Her story is representative of many chronic pain patients. A back injury, followed by two surgeries, left her in excruciating pain, and the pain drugs she was prescribed obscured her cognition and adversely impacted her quality of life.

She was very emotional and sharing the positive impact of HF10 therapy on her life over the past four years. She is now 100% off opioids, has gone back to work, and is thoroughly enjoying her grandchildren. The impact HF10 therapy has had on her life is simply why we do what we do.

It is evident that our strategy of focusing on patient outcomes has proven successful, both domestically and internationally, and with it we have built a foundation for sustainable success. HF10 therapy continues to generate excitement in the market from customers, and attract talented individuals, inspired by our mission of enabling passionate people to transform more lives by delivering breakthrough evidence-based therapies. On the hiring front, we ended the second quarter with 140 hired and trained reps, an increase of 27 reps from the previous quarter count of 113 reps.

As we have stated in the past, we expect hiring to peak in the second and third quarter, and we do not have a limit on the number of reps we will hire against our target of ending 2016, with a minimum of 160 reps in the field. Internationally, we ended the quarter with 57 sales reps trained and in the field, and similar to the US, we continue to add field support as needed to provide further adoption of HF10 therapy worldwide.

We are excited to announce the acceptance for publication of our two-year pivotal study results in the journal Neurosurgery. Neurosurgery is a preeminent journal in our space, and where the other two landmark studies in SCS history, North and Kumar, were also published. This publication further distinguishes HF10 therapy in terms of superior efficacy, unmatched durability of outcomes, as well as strength of clinical evidence.

The publication in Neurosurgery is also fitting, as it further communicates our commitment for continued collaboration with the surgical community in conjunction with our SURPASS surgical lead launch. We have initiated a staged rollout of our surgical lead, where we are gaining valuable insights. Clinically, we have demonstrated the ability to deliver HF10 therapy to our SURPASS lead.

From a production standpoint, we need to make improvements in moving to large-scale manufacturing, and as a result, we are now expecting to have a broader launch in the first half of 2017. Our priority as always is to deliver superior clinical outcomes, and ensure we have a robust product. Launching in the first half of 2017 allows us to ensure our production ramp can support the market demand upon launch.

On the reimbursement front, we had a number of developments in the second quarter. On a positive front, Aetna and Humana joined Kaiser and CMS in updating their coverage policies to include HF10 therapy. Beginning in late April, however, Cigna and certain Blue Cross Blue Shield regional plans published updated policies designating high-frequency as investigational and/or experimental.

Let me first state that the decisions by Cigna and Blue Cross are not supported by the available evidence or market adoption of HF10 therapy. The rationale for these decisions is unclear, as they are effectively denying patients access to a clinically superior therapy.

HF10 therapy is backed by two two-year published clinical studies, one of which has comparative effectiveness evidence against traditional low-frequency stimulation. No other therapy in this space comes close to the quality of evidence supporting HF10 therapy or superiority of clinical effect. This is precisely the type of evidence commercial peers request, and the evidence is further strengthened by market adoption that supports the real world impact of HF10 therapy.

Further, we believe these decisions undermine the very basis of innovation and that they discount comparative effectiveness evidence while reimbursing inferior products, simply due to their long-standing use in the market. While we continue to address these decisions, they do allow us to open a dialogue with commercial payers regarding the superiority and advantages of HF10 therapy. We are confident that this dialogue will over time be a net positive for Nevro and HF10 therapy.

To that end, we have made progress in addressing these decisions and have already overturned Blue Cross of Alabama on a highmark, as well as secured coverage from HCSC, which are all Blue's plans that, combined, represent nine states and include two of the top 10 commercial payers in the United States. We continue to have a dialogue with CIGNA, and other regional Blue Cross and Blue Shield plans, and are confident in addressing this manner. Our success thus far is underpinned by overwhelming support from individual physicians and medical societies strongly advocating for HF10 therapy.

Further, as evidenced by our increased revenue guidance, we do not anticipate a meaningful impact from these decisions at this time. Our commitment is to continue to invest in breakthrough therapies through a multi-tiered approach, ranging from scientific research to indication expansion. As part of that commitment, at the recent Neuromodulation: the Science Conference, on June 28, in San Francisco, we presented some of our latest preclinical findings related to the mechanism of action of HF10 therapy.

Professor Steve McMahon of King's College presented results demonstrating that 10 kHz electrical fields could significantly reduce wind up in pain circuit neurons, compared to sham. In addition, our research team presented groundbreaking data, demonstrating an increasing frequency dose response on pain circuit neurons, showing an initial inhibitory effect starting only at frequencies above 2,000 Hz. This result supports the importance of high kilohertz frequency to the superior clinical effects we deliver, and further supports our intellectual property, which we successfully defended against Boston Scientific.

Equally important, we believe this foundational research could over the long-term contributed to our pipeline, and is an example of the long-term decisions and investment we are making to maintain our position as the innovator in this space. In closing, we are well positioned for success due to our outstanding team, which continues to deliver key results across the Business. Reflecting on our first year of US launch, it is incredibly satisfying to see all the hard work and dedication by the Nevro team resulting in so many lives positively impacted by our incredible therapy.

More and more physicians are discovering the power of HF10 therapy and where they see ability to transform more patients' lives. And our Team is discovering the reward of building a Company that allows them to do what they do best every day. Overall, I could not be more pleased with our success or more optimistic about our future. We have and will continue to demonstrate that the strength of Nevro is not only our therapy but our Team and culture.

I am confident we will maintain our track record of execution and continue to embrace the opportunities ahead, allowing us to further bolster our competitive advantage. And with that, I'd like to turn it over to Andrew Galligan, our CFO, for a more detailed review of our financials and guidance. Andrew?

Thank you, Rami. Revenue for the three months ended June 30, 2016, was $55.4 million, an increase of 385% year over year on a reported basis. This increase was primarily due to the launch of HF10 therapy in the United States.

US revenue was $40.6 million in the second quarter, the fourth full quarter of our US commercial launch. International revenue was up 30% to $14.8 million from $11.4 million during the same period of the prior year. This represents constant currency growth of 33%.

Going forward on this call, all revenue growth rates will be stated on a constant currency basis. Europe had 20% year-over-year growth for the quarter, and Australia had growth of 63% compared to the prior-year quarter. In addition to ongoing product uptake, about half of the growth in Australia was attributable to pricing uplifts.

We were able to capitalize on our superior clinical evidence to increase the reimbursements for HF10 therapy. Absent the Australia price uplift, overall international growth would have been in the region of 25%. I have mentioned in previous earnings calls, due to constraints such as capitation and increasing market share in international markets, we expect that our international growth to moderate.

We have seen this in the first and second quarters of 2016, and continue to expect a moderation of international growth rates in the future. In addition, due to seasonality and the summer months, we are expecting a sequential decrease in international revenue in Q3. Gross profits for the second quarter of 2016 was $36.6 million or 66% gross margin, as compared to $5.9 million or 52% gross margin in the same period of the prior year.

Gross margins increased year over year, partially as a result of a decreasing impact to foreign currency exchange rates on our margins. With the expansion of US revenue, the currency impact on total margins is less significant to our results. Additionally, in the second quarter of the prior year, we recorded charges of $1.3 million, related to the write-down of inventory. While similar charges this quarter were far less, and therefore on a much smaller impact on margins.

Partly as a result of an uplift in reimbursement rates in Australia, we have additionally seen a net increase in average selling prices in the past year, and have separately seen a decrease in per-unit costs, as we drive down our component costs and further leverage our manufacturing overhead. As we continue to grow revenue, we additionally expect to expand margins by improving efficiency and further leveraging our manufacturing overhead.

Operating expenses for the second quarter of 2016 were $42.5 million, an increase of 69% compared to the second quarter of 2015. The increase in operating expenses was primarily driven by increased headcount and related personnel cost. Net loss from operations for the period was $5.9 million, compared to $19.2 million from the second quarter of 2015.

In June, we announced and closed a public offering of $172.5 million in convertible senior notes, which includes $22.5 million of notes issued upon the exercise of the over-allotment option. We used approximately $21.6 million of these funds to pay off our then-existing term debt, originally drawn in 2014. At the end of the second quarter of 2016, we had $290.5 million in cash, cash equivalents and short-term investments.

Turning to our outlook, we are increasing our revenue guidance for 2016. We are updating our worldwide revenue guidance for the FY16 to be in the range of $210 million to $220 million, up from our previous worldwide revenue guidance, which was in the range of $175 million to $185 million. We're still projecting profitability in the range of $1.3 million to $1.5 million per rep, but have shortened our expectation of reaching that metric to 12 to 15 months.

In the near-term, productivity continues to be positively impacted by the uptake of early adopter accounts. Over time, we expect productivity to be in line with our current guidance. For gross margins in 2016, we expect to end the year at approximately 66%, absent any material write-downs of inventory, as we continue our rapid production expansion.

With regard to our operating expenses for 2016, we now expect quarterly operating expenses to trend upward to a total of approximately $180 million to $185 million for the year. As we have mentioned previously, as the revenue ramp increases, we incur additional OpEx spend. As Rami outlined, we also plan to continue hiring experienced sales representatives to support the rollout of HF10 therapy, with a minimum of 160 reps in the field by the end of 2016. Now back to you, Rami.

Thanks, Andrew. So, that will can conclude our prepared remarks for today. Operator, please open up the call for questions.

(Operator Instructions)

Mike Weinstein, JPMorgan.

Congratulations, guys. Absolutely phenomenal quarter and a great update.

If we think back to the US launch and look at the numbers this quarter, really two things have happened. One, you've captured now more than 11% of the US market. And two, the market has really accelerated. We don't know Medtronic's numbers yet for the quarter, but the overall numbers so far suggest a market growing mid-teens, versus a market that was growing more mid-single digits before you guys launched.

I was hoping you could spend a minute talking about the market acceleration and just your own view on it, number one. And then two, obviously, we are seeing much more rapid ramp then we were all expecting just a few quarters ago, and talk about any constraints you're running against in trying to meet demand and to get the product in front of as many customers, as many physicians as want it.

Thanks, Mike. I really appreciate that.

In terms of the market acceleration, l think going back, we've always focused and believed that we're not only directly impacting the market in terms of offering this new therapy, but we're also spurring our competition to really invest more and more in this space, and I think we are thing that in fact not just in the United States globally in fact. I think that's an overall very positive thing for the market, it's positive for physicians, it's positive for patients. We do feel like that trend will likely sustain for some time.

In terms of constraints on adoption, I would say we are just continuing to execute our commercial strategy. We are continuing to have a very controlled rollout of HF10 therapy. We're not feeling any particular outside constraints, but we feel very good about our ability to continue to execute against our plan.

Rami, can you talk now, just give us a little bit of anecdotal experience on customers that might have started using the product six months ago, nine months ago, and kind of what their usage rates look like. I'm really looking for where your share is on customers over time, and how that's migrating upwards.

Sure, Mike. Just as a function of our focused approach, and you can see it partly as well from the size of our sales force, we tend to have higher share in the accounts that we're in. The conversion time, if you will, if that's kind of the root of your question varies, right, there are accounts that certainly convert very quickly, fully, and by fully I mean for back or leg pain, very rapidly, and there are others that do take a 6 to 12 month sort of time horizon.

We are continuing to feel very good about the adoption. I think it's reflected in the updated guidance that Andrew provided on productivity.

We still have enough for those early adopters that are driving our conversions very rapidly. We hope to continue to see that for some time, but we will certainly keep that updated with respect to our productivity guidance.

Rami, I was hoping you could spend just a minute on something you raised during your prepared remarks. You were talking about one of the studies that showed the effect of higher frequencies and how the benefit didn't start to materialize in one study until you got to 2000 hertz and higher. Can you spend another minimum that, because there's been questions about the accelerate trial and the significance or lack thereof in that trial, I tend to fall into the lack thereof of some significance.

Could you just spend a minute on that in terms of what your research has shown in terms of higher frequencies, where you do see the benefit and whether at 1200 hertz, which is whisper or a higher frequency, where you might see the benefit, and whether it's just about frequency or are there other factors that play into the equation? Thanks.

Sure. Thanks, Mike. Great question.

We do believe that the high kilohertz frequency is essential for the sort of superior clinical outcomes that we deliver. But the frequency also alone isn't enough in the sense that you also have to apply it in the right location. You have to have the right program and algorithms, et cetera.

Those are actually two separate points. We do fundamentally believe and our research continues to support the thesis that high-frequency and high-kilohertz frequency, very specifically, is required for the clinical effect. Even if we were to, as I've said in the past, provide our exact device to one of our competitors, they would have to have the know-how and applying the therapy consistently, and that point is sort of the question that you're getting at, which is can someone else, like at Boston Scientific, replicate our clinical results with their accelerate study, and the question is we don't know, because it's unclear to us what level of know-how around the programmability and application of high-frequency stimulation they had going into that study. Thanks, Mike.

David Lewis, Morgan Stanley

Nice quarter doesn't quite do it, but I'll say it as well, nice quarter. Couple of quick questions here.

Rami, clearly you are taking a lot of share, but I think the interesting thing is, the distribution of those share gains against incumbents has been a bit polarized. The one that's doing the best against Senza has a disproportionate paddle-lead share and primary cell exposure. I guess if you think about the first half 2017, is that a full commercial launch for paddle leads or do you think of that more as a soft launch, and how are you performing against primary cell in the US?

Maybe take the primary cell question first. There is a reason why the US market shifted to 90% plus rechargeables. From our perspective, the primary cell is just another technology feature in a long list of technology features and sort of the old world of spinal cord stimulation.

While there is some touting of improved battery technology, et cetera, that are claiming to be driving a return of primary cells with one of our competitors, the reality is to the extent that they are targeting the use of those devices with newer wave forms that consume more and more energy, it seems like those things might net out and it might be more of a wash. We do believe that the market shifted to rechargeables for a reason, that there is, from our economic perspective, rechargeables are generally more favorable, and certainly from a patient perspective and saving patients from unnecessary repeat surgeries, there is a patient advantage there as well. So, I think we feel good about our ability to compete there on the primary cell side.

As far as the paddle, I think before that this for the 2017 event for us anyhow with the way the timing worked. But we feel good about our ability to launch it next year, and we will certainly update you on more details as we get closer to that.

Related to that, Rami, maybe this is what Mike was trying to get at a little bit is, look, you have 10% to 12% market share, but if you do it in adjusted math and say, look, you are not covering the entire US in terms of account perspective, you're not in the paddle lead market, doesn't it sort of apply that your adjusted share of the accounts that you are interfacing with today could be a number that is in excess of 30% already?

I'm not going to comment on the 30% number correctly, David, but I think certainly in the account that we are in, we have obviously higher share than that. Higher share than the overall 10% to 13% market share. How high that is, we are not going to get into that on this call.

Okay. Just two guidance questions, Rami, and I'll jump back in. One for you and then one for Andrew.

For you, Rami, thinking about this quarter, you grew reps 25% sequentially and you still delivered revenue per rep in excess of 15% while growing reps and growing revenue per rep pretty quickly. Is there any reason to believe revenue per rep would go down or would not grow in the second half of the year?

And then for Andrew, my favorite question here on margins, so 66% by year end, once again, any reason to believe margins shouldn't tick up into the back half of the year, and now when I think about how you've cut the burn rate this quarter, how are you thinking about profitability in light of kind of narrow launch in the balance sheet strength? Thanks.

Wow. So, where to start. I think the obvious one to start at is at the very bottom, profitability.

What we really want to communicate to people is that we are, and are going to continue to be driven by the investment needs of our Business. We think we have incredible growth ramp ahead of us.

And so, we will always be putting investment opportunities ahead of the drive to profitability. So, I just want to start there.

With regards to margins, I think we have been trying to explain more recently that our margins do take more of a step function, and I think you have just seen a nice step up in margins, but they tend to be more step function increases than linear increases as margins go up, which is why we are predicting a period of stability before they increase again.

The revenue productivity is near-term, though probably I think going to be more stable, but we are trying to tell people that over time we're going to move out of the quick early adopters into the kind of middle majority, more conservative doctor, where we would expect probably a slowdown in how long it takes them to ramp up, less so in the actual dollar productivity per rep. I think that's probably more stable than the timing of how quickly a rep can get to that number, which I think is more instability about it.

Thank you very much.

(Operator Instructions)

Danielle Antalffy, Leerink Partners.

Congrats yet again on an awesome quarter. I just wanted to follow up on guidance. Could you give us some color on what the different levers are?

Obviously, you're not giving a maximum number on salesforce reps, but would love to know how you are thinking about what's included in the newly-raised guidance range. It sounds like you are not assuming any -- you are assuming stable rep productivity, so that's helpful. But any of the levers driving guidance towards the low or high end would be helpful.

Yes, so really, it's all about hiring reps and hiring quality reps. We have always said that the quality is really, really important. Our reps, and in this industry, everybody's reps become fully integrated into the doctor's practice.

They don't just drop product off and leave. How good the rep is is really critically important to how well you do in the marketplace. And that's a bigger issue in this industry than I think any other medical device industry.

So, really, the pacing item for us is hiring those quality field personnel. And we continue to put a huge amount of effort into finding the right people. And are continuing to do so.

And so, Andrew, is it safe to assume that the 160 reps as sort of stable productivity versus what we have seen is what gets you to the midpoint of the guidance range, is that how we should be thinking about it? And if you hire more, you'll come in at the higher end, if you hire less, you will come in at the low end?

Danielle, the best way to think about it is, as we have said, you have got to take our productivity and the number of people that we have announced we have had over periods of time and sort of build that waterfall to get at what this should look like. I think using midpoints of numbers is probably not the best way to do it. I would build a waterfall, you know how many reps we've had at the end of the last couple of quarters, we have our updated sort of productivity guidance and that should lead you to figure out where we might land, depending on how hiring might trend for the rest of the year.

Dave Turkaly, JMP Securities.

Rami, I guess would love to get an update sort of on your thoughts. What percent, just broadly speaking, of your revenues in the US do you think are market expansion?

That's a good question, Dave. I don't know that I can give you a specific number, but we certainly, in our ability to both the treat the back and leg pain patients certainly gives us kind of the ability to both treat the existing patient population, as well as offer our therapy to patients who previously may not have had an option. I would say maybe the best way to answer your question is the numbers we have given previously, in terms of our split between back, leg, other, are fairly consistent today from what we have previously announced.

That's great. And congrats on your ability to overturn some of the investigational language. I'm just curious given some of those guys that are out there, I know there's a process.

Are they receptive, and it seems kind of interesting that it's primarily one insurance Company with different regional offices. But, you know, have any of them said that, hey, we are not really opening this up, we just issued it, or are they all pretty willing to hear you out and look at the data and have that discussion? Thank you very much.

Thanks, Dave. I'll say it's a mixture. There are some that it's been a very linear conversation, and others that it takes multiple knocks on the door to try to get a conversation. I think there is kind of a spectrum, but, again, we feel very confident in our ability to deal with it, and further, we feel confident that overall, with our evidence basis, will be a net positive over the longer period of time frame.

Bob Hopkins, Bank of America.

Thanks for taking the question, and again, congrats on a terrific quarter. I was just wondering if you might be able to provide a little more detail on the strength in the quarter.

Just anything that you think is noteworthy that happened over the course of the quarter that has allowed you to produce these results that were so much better than what people expected. If you had to narrow it down to the thing that maybe drove it higher than people were looking for, was it really that ability to hire more reps than you originally assumed?

Everybody has been constructive on this launch, but it's just done a lot better than we thought. And it's sort of a missing piece here your ability to attract such high quality reps to the Company post-launch.

Frankly, our success on the commercial side really comes down to just our ability to continue to continue to hire great reps and to get that right on the first shot. I think we have obviously, we have been -- put a lot of effort towards that.

I think we've done fairly well so far. That's really fueled by our success. Any time that we have been asked, maybe I should have said it earlier, again, the only constraint really in our ability to continue to be successful is our ability to continue to find those very best reps, because we're not going to compromise on talent.

I would attribute it to certainly that, and look, we have become just kind of better over time. We get better every day here, whether it's our marketing programs or our training, or just across the board, everything that supports our reps in doing what they do best every day. We continue to get better and better at it, and I think it's certainly all coming together to create this sort of effect that you are seeing.

Maybe one other trailing thought would be that I think certainly launching, if you are a rep for Nevro launching today, it is certainly in a lot of respects easier than it was a year ago, and that the market, there's just a generally much higher market awareness receptivity. There is a lot more clinicians who have become champions of the therapy. They are starting to influence their peers.

I would say the atmosphere, if you will, for fostering success in the sales force has certainly gotten better and better over time is gone on. Those are stream of consciousness, some of the things that come to mind.

I would add one to that. That is if you think about the current industry, a lot of the doctors who have operated in the industry were used to telling their patients, if you had only had a 50-50 chance of this therapy working for you. Turn that around to a doctor who can now say to a patient, you have an 80% to 90% chance of this therapy working. It engenders an enthusiasm in the doctor, because he feels like he has something that really can benefit his patients. I think there is an enthusiasm amongst the doctors that we are dealing with in the field that has helped us a lot.

Joanne Wuensch, BMO

I don't have quite the right words to say how nice this quarter was, but good job. Couple questions.

What is the pushback that you are getting from physicians when you go to market? Because when we do our physician surveys, they love this product.

That's a great question, Joanne. As we have talked about, and I think Andrew touched on it really well earlier, there's a certain stickiness, if you will, for this market, just given the level of relationship that gets developed between salesforce and the practice. They really do do a lot for that practice, and it's hard to allow someone in there that's new and develop that trust.

That's not really directly what they express to you. They may come up with a different objection, like name your technical feature. Underlying that, it's generally that sort of comfort level that we need to win over time.

For some physicians, it takes longer than others. But we have obviously demonstrated we can overcome those if we have the right people and with the strength of our product [drivers].

And then as a second question, this is a modeling moment. If you have OUS sales quarter over quarter are down, which makes sense, in the US, are you thinking it is going to be the same type of thing because of seasonality, or are you so early in your launch, you should plow through that?

That's actually a very good point. The US market is not as seasonal as the international market. Internationally, people take August off and parts of July.

There is, sequentially, there is very definitely a decline, and we don't have growth rates that can overcome that dramatic decline, and last year we also had the sequential fall in revenue. In the US, I think it exhibits itself more in a softer sequential increase if you look at the various companies' revenues, and I think med devices in general.

It's not necessarily that Q3 is lower than Q2, it's just the growth isn't as robust in Q3 as compared to a Q2. We will probably exhibit, I would think, a slowdown in growth rates in Q3.

Larry Biegelsen, Wells Fargo.

Thanks for taking the question. I guess I have to also congratulate you on a great quarter.

Let me start with one area we got a lot of questions on when we initiated coverage earlier this quarter. New indication expansion new indications, upcoming clinical data.

Rami, maybe you could walk us through where you are in some of these new indications you are pursuing. I know you have chronic neck and upper-limb and extremity studies on clinicaltrials.gov.

I understand you're pursuing abdominal and pelvic pain, and maybe doing more, collecting more data in pre-surgical back pain. Could you give us an update on the status and when we might see some clinical data?

Thanks, Larry. I think we've mentioned, both Andrew and I, that we are investing in indication expansion for this therapy, we believe particularly given some of our experience internationally, that there is definite merit behind that investment. At this time, we haven't really gone through when those results might read out. Obviously, the upper-limb and neck study is ahead of the others but we will certainly keep everyone posted when we have a podium time secured and are ready to have some of these results revealed, especially some of these other earlier studies you mentioned begin to mature.

I think it's also just important to remind everyone that while you listed, everything you listed, is accurate, they are in various stages of development. Some things are purely feasibility and we're trying to get a signal and also figure out how to design an appropriately larger study, while others are further along. There is still definitely a lot of work to do there, but we are excited about the platform potential of the technology.

Then just two quick ones for me. The 24-month data, I think we saw at NANS, is there 36-month data coming from the pivotal US trial?

And then, just lastly, Rami, if you could just talk about the issues with the production of the paddle lead, and if that had -- it has any impact at all on the second-half guidance, which was obviously quite strong, but I'm just curious if you think that has any impact at all by pushing that launch out to the first half of 2017. Thanks for taking the questions, guys.

Thanks, Larry. Let me take that one first, that one's easy. I think the guidance speaks for itself.

We certainly take everything into account when we issue guidance. We're fairly thoughtful on the guidance that we issue, so I think I will let that stand on its own. As far as the paddle, look, this is the reason you do these stage rollouts, because you always learn something.

And we have talked about this a lot, we make long-term decisions here and we want to make sure that when we launch something it's robust. The biggest thing we have learned is that the clinical efficacy is maintained with the paddle, which is frankly, the most important thing. Making some of these other tweaks just to be able to produce at a large enough quantity to meet demand is fairly straightforward, and we feel pretty comfortable about our ability to do that on a go-forward basis.

With respect to the data, you will recall, Larry, that in the history of this space, when you look at back or leg pain prior to Nevro's arrival, there had only been two studies with greater than 12-month data, those were two 24-month studies that North and Kumar study. We now have two studies that go out to 24 months.

That's really, I think, the upper limit of studies in the pain field for a number of different reasons. We are pretty proud of the fact that we have two of the four 24-month studies in the history of this space, and we are confident in that data set and how it supports our therapy going forward.

Brooks West, Piper Jaffray

Thanks for taking the questions. Rami, I want to circle back to the salesforce discussion.

Can you talk about the available pool of reps that you are looking at in terms of hiring in your confidence that you have a robust pool of good candidates? I am curious, are you seeing a slowdown, maybe in Neurostim, or are you pulling more from spine? Just some of the dynamics there would be helpful.

I think consistent with what we have said in the past, we continue to attract reps from a variety of different places, so certainly competitive reps who have been in the field and left and now are excited to come back, purely because of our therapy, or reps in adjacent fields. They may be in pain but not in stim, or they may be not in implantables but not in pain. But they have some -- at least some knowledge of something that's important to being successful in this space, and overall, certainly reps who have demonstrated an exceptional track record of success and they're our Company culture and our focus on patient outcomes and clinical outcomes.

Actually, not a lot has changed there. I would say, if anything, certainly our continued success has helped us attract more and more reps that may have been more conservative initially in joining a company at the beginning of a launch. I think that's what has aided our ability to continue to attract and hire exceptional talent a year out now into the launch.

Maybe just a practical question on coding. In the situations where you have physicians with patients that are covered by some of these payers who have deemed it investigational, just curious, the way that they actual code these cases, does it actually show up that they are using high-frequency therapy, and therefore are at risk of being turned down? Or is it actually fairly difficult for the payers to detect what device is being used case-by-case, and are you really seeing any detrimental effect from the payers that don't have positive coverage?

Yes, obviously we don't have visibility into how each individual practice bills, so I'm sure there's a variety out there it's hard for me to comment on. What I will say at this point we haven't seen much of an effect. Again, I think it's reflective of our view of the Business in the back half of the year.

Margaret Kaczor, William Blair.

So, maybe first question for me. Seems like the market is clearly expanding, but with some of the head-to-head data, are you seeing some of the patients come back on the market that were maybe non-responders from other competitive devices, or are they all new to SCS, and is that maybe an opportunity that is sustainable or not?

Sure. Great question, Margaret. There's definitely a percentage of patients treated that had prior SCS.

This space has been around for a really long time, and it has a pretty healthy procedure volume. I'm not sure that that opportunity to help some of those patients is practically limited. I'm sure it's actually technically limited, but not practically limited in the foreseeable future here.

But overwhelmingly, our patients are generally de novo patients anyhow. On both accounts, we certainly feel like there's enough patients out there that we can help, it will help continue to fuel our growth.

Okay. Then from a competitive standpoint, I'm sure you guys are well aware that one of the competitors launched a full MRI-compatible system, and has really talked about some nice growth with that product. If you can maybe take a minute to explain that MRI compatibility with Senza, as well as some of our checks indicating that it's important to physicians.

Sure, we do agree that MRIs is an important feature for patients. Certainly, our product has what we believe is competitive MRI labeling at this point, it is one of our goals to continue to expand that labeling.

Having said that, we do believe that MRI falls in the bucket of technology features versus real efficacy, if you will, the job, the reason that these products get used is to provide pain relief. In that dimension and that category, we think we stand alone. We haven't seen MRI necessarily be a notable objection in our experience thus far, but it certainly does exist and something we will continue to work towards curing in the future.

Suraj Kalia, Northland Securities.

Congrats on a nice quarter. So, Rami, just one question from my side. Most of them have been asked.

Did you mention the average number of accounts covered per rep? And a subpart to that is, what do you think is the optimal number of accounts per rep that should be covered?

Thanks, Suraj. We have not mentioned the average number of accounts per rep. And the latter question, maybe optimal number is really hard to determine, because it largely depends on the geographic area that you cover and the volumes that happen to be in that area.

Frankly, for some reps, the optimal number may be one, because they are in L.A., or -- and it might be several, if they are in a more densely packed area where the procedure volume is spread out over a larger number of physicians. That's a really difficult question to answer. I think it also, frankly, speaks to the level of detail that we get into in that we really make sure that we are optimally guiding and designing our strategies and approaches on a territory-by-territory basis.

And that's why we point to $1.3 million to $1.5 million, we look to productivity, really, and the amount of patients, as we're seeing from the amount of accounts, and then the amount of accounts you need for that level of patients varies widely.

Gentlemen, thank you for taking my questions.

We have no further questions in the queue I'll turn the call back over to the presenters.

Thank you once again for joining the call today. We sincerely appreciate your continued interest in Nevro and look forward to our next progress update. Have a great day.

Thank you.

This does conclude today's conference call. You may now disconnect.