Nevro Corp (NVRO) 2016 Q3 法說會逐字稿

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

(Operator Instructions)

Thank you. Katherine Bock, Senior Director of Corporate Development and Investor Relations, you may go ahead.

Thank you, Blair, and thank you all for participating in 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 September 30, 2016. A copy of the 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 meanings of 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 the 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 and our expectations of achieving profitability, are based upon 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 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 broadcast today, November 7, 2016.

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'll start with reviewing our third quarter performance and operating highlights, as well as providing additional color on our US launch. Andrew will follow with a deeper review of the third quarter financials and expectations for worldwide revenue, gross margins and operating expenses for 2016. Then we'll open up the call for your questions.

Nevro's worldwide revenue for the third quarter was $60.9 million, an increase of 296% as reported, compared to the same period of the prior year. US revenue was $47.2 million and international revenue was $13.7 million, the latter representing an increase of 26% as reported and 27% in constant currency. These results are driven by continued adoption and excitement for HF10 therapy.

We now estimate our US market share is approximately 15% as of the end of the third quarter of 2016, with opportunities for further growth driven by the ongoing expansion of our outstanding sales organization and access to the broader US market through the launch of our paddle lead in 2017. The rapid growth in our US share underscores that FH10 therapy is becoming the therapy of choice for leading physicians and that this community of clinically driven physicians will continue to shape the neuro modulation landscape for years to come.

With over one full year into our US launch, we have gained meaningful insight from our customers and commercial organization, which now allow us to better predict our US business. As a result, we are increasing and narrowing the full-year 2016 total revenue guidance to $220 million to $225 million, as compared to our August 8 guidance of $210 million to $220 million for the full year.

We remain ever focused on ensuring chronic pain patients have access to our clinically superior therapy. HF10 therapy remains the only paresthesia-free SCS therapy, has demonstrated nearly twice the efficacy and responder rates as traditional ICS and other new low-frequency stimulation wave forms, and is the only therapy to demonstrate clinical superiority to traditional SCS.

Our strategy of delivering clinically superior outcomes continues to serve us well, driving both adoption and increased awareness and demand for our therapy. At the core of our growth is a physician community that has demonstrated they are innovators in embracing new technologies, clinically driven in their search for improved outcomes, and sophisticated in elevating the SCS space by embracing level 1 clinical evidence. We are still early in our controlled launch and over time, expect HF10 therapy to be the market-leading SCS therapy.

I had the opportunity to meet with clinicians in Europe and the US throughout the third and continuing into the fourth quarter. Through these meetings, it's clear how far we have come since our launch last year. The number of physicians that are interested in adopting HF10 therapy continues to grow and reflects the excitement our early adopters have generated due to the outcomes they have been able to deliver to their patients.

Recently, one of these pioneering US clinicians presented outcomes from nearly 300 patients treated with HF10 therapy within his practice since launch. It's these types of positive results in everyday clinical practice that have established HF10 therapy in the US market and around the world.

Finally, with respect to our paddle lead, we continue to be on track for a full launch in the first half of 2017, as discussed on our last call. As we have worked through our operational ramp, we have identified a minor design improvement that will aid in the transition to full-scale manufacturing. We have submitted this change to the FDA and are simultaneously ramping manufacturing operations in preparation for the launch.

On the hiring front, in the US we ended the third quarter with 165 hired and trained reps, a net increase of 25 reps from the previous quarter count of 140. We have now exceeded our minimum hiring goal for the year and are continuing to hire into the fourth quarter.

Two factors have driven us towards accelerated hiring. First, we have seen more rapid uptake in the US market, due to many leading early adopters utilizing the therapy. Second, due to the demonstrated ability to treat back pain, we are finding that our territories have greater potential than the historical SCS market data suggests. As a function of this procedure density, coupled with the uptake to date, our reps have been quite busy in their accounts, limiting their ability to broaden access to HF10 therapy to new physicians.

As a result, we have worked earnestly over the past several months to add to our outstanding sales organization in order to ensure expanded access to HF10 therapy. This concerted effort is reflected in our year-to-date hiring, and we expect to continue hiring to keep up with the demand for the therapy.

Internationally, we ended the quarter with 60 sales reps trained and in the field and we continue to add field support, as needed. Additionally, we have continued investing in our commercial infrastructure internationally, in order to drive further adoption of HF10 therapy worldwide.

Transitioning to reimbursement, we are pleased to announce that we are now broadly covered by top national insurance providers. In August, we announced that Cigna and certain Blue Cross Blue Shield regional plans published updated policies designating high-frequency as investigational and experimental. We believe these decisions fail to align with the clinical superiority of HF10 therapy, which is backed by two, two-year published clinical studies, the latest of which was published in the preeminent journal, Neurosurgery.

We have made positive progress in our dialogue with commercial payers and in the third quarter, Cigna reversed its prior decision on the strength of our clinical evidence. HF10 therapy is now fully covered for Cigna beneficiaries. We continue to work with certain Blue Cross Blue Shield regional plans to address their decisions in our continued effort to ensure broader access to this clinically superior therapy.

Finally, last week the 2017 CMS SCS reimbursement rates were published. The facility rates were increased, or were largely unchanged, representing stability in the current reimbursement landscape. Medicare facility reimbursement for trials increased 9.5% in the hospital outpatient setting and 10.7% in the AFC setting. In the AFC, Medicare facility reimbursement for permanent implants increased 9.4% for implants with percutaneous leads and 4.9% for implants with surgical leads. In the hospital setting, reimbursement was increased 1.1% for both percutaneous lead and surgical lead IPG implants.

Nevro is recognized as a leader and innovator in neuro modulation, due in large part to our investment in rigorous long-term studies in areas with unmet clinical needs. In order to maintain our position and drive long-term growth of our business, we continue to invest in scientific research and clinical evidence to develop new applications of our proprietary therapy.

In recognition of these efforts, we recently learned that two HF10 therapy-related abstracts were selected for presentation during the groundbreaking study portion of the plenary program at the 20th annual North American Neuro Modulation Society meeting in January. The first abstract, featuring results from a prospective study on the application of HF10 therapy for the treatment of upper limb and neck pain, will be presented during the groundbreaking critical trial plenary session. This will be the first time these study results will be presented publicly, and I know the investigators of the study are honored by the recognition of NANMS for their important work.

The second abstract, detailing results from basic science research on 10,000 hertz stimulation, will be presented during the groundbreaking basic science plenary session. This study represents the latest work regarding the mechanism of action HF10 therapy. I'm excited by the progress of our pipeline and I look forward to discussing it in more details in 2017.

In closing, I'm proud of our dedicated team and I'm excited about what we will continue to build together. As we grow, more and more people contribute to our mission and I know they embrace the opportunity ahead of us as much as I do. I'm pleased with our progress in both our clinical and commercial operations, as we continue to make decisions that we believe will drive long-term value.

It's especially rewarding to know that our strategy of focusing on patient outcomes has proven successful, both in our controlled US launch and continued international adoption. Through this focus, we have built a foundation for the long-term adoption of HF10 therapy.

With our outstanding people and company culture, we will find success by continuing to do the right thing and supporting the physicians and patients that depend on us. It's clear we have invigorated the SCS market and I'm confident there is more we can do to improve the lives of many more patients in need.

And with that, I'd like to turn the call 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 September 30, 2016 was $60.9 million, an increase of 296% year-over-year on a reported basis. This increase was primarily due to the continued success of the US launch of HF10 therapy. US revenue was $47.2 million in the third quarter.

As we said in our previous earnings call, industry results in the third quarter tend to be flat or down on a sequential basis, due to seasonality. We expected our growth to attenuate in the quarter, but given that we're still in the high-growth stage of our launch, revenues did grow sequentially in Q3 in the US, albeit at a slower rate than in previous quarters.

International revenue was up 26%, to $13.7 million from $10.9 million during the same period of the prior year. We achieved a constant currency growth rate of 27%. Going forward on this call, all revenue growth rates will be stated on a constant currency basis.

Europe had 35% year-over-year growth for the quarter and Australia had growth of 14%, compared to the prior year quarter. After the impact of our recent price increase that's taken into account, actual human shipments were down in Australia, due to some short-term local factors.

We are increasing our focus on local marketing, reimbursement, and clinical activities specific to the international market to continue to drive broader adoption of HF10 therapy. We continue to expect that due to constraints, such as capitation and increasing market share in international markets, our international growth will moderate. We have seen this in the first three quarters of 2016 and continue to expect a moderation of international growth rates in the future. As we said in our previous earnings call, due to seasonality in the summer months, we expected the sequential decline in international revenue in Q3.

Gross profit for the third quarter of 2016 was $41.7 million, or 68% gross margin, as compared to $9.4 million, or 61% gross margin in the same period of the prior year. Gross margins increased year-over-year, primarily due to fundamental cost improvements. As we continue to grow revenue, we additionally expect to expand gross margin by improving efficiency and further leveraging our manufacturing overhead.

Operating expenses for the third quarter of 2016 were $43.6 million, an increase of 60% compared to the third quarter of 2015. The increase in operating expenses was primarily driven by increased headcount and related personnel costs.

Net loss from operations for the period was $1.9 million, compared to $17.7 million for the third quarter of 2015. And at the end of the third quarter of 2016, we had $288 million in cash, cash equivalents and short-term investments.

Now on to some considerations regarding profitability. This quarter, our net operating loss was $1.9 million, as compared to a loss from operations of $5.9 million in the second quarter. Our revenue growth has far surpassed expectations and we are still ramping our R&D spend as we get new clinical trials and development projects up and running. We do not plan to slow down the spending and plan to robustly invest in future opportunities to drive innovation. As a result, when we do achieve profitability, it may or may not persist in subsequent quarters.

In this transition, we want to be clear that we are focused on growing our market and expanding the reach of our groundbreaking technology. There are new markets where we can bring the power of HF10 therapy to patients and we intend to do so.

When faced with a choice between the bottom line and investing in the future of the Company, we intend to invest in the future. The time will come when we focus on profitability, but that time is some distance away.

Turning to our outlook, we are increasing our worldwide revenue guidance for 2016 and narrowing the guidance range. We are updating our guidance for FY16 to be in the range of $220 million to $225 million, up from our previous worldwide revenue guidance of $210 million to $220 million. We are still projecting productivity in the range of an average of $1.3 million to $1.5 million per rep after 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 more in line with our current guidance.

For gross margins in 2016, we expect to end the year at approximately 69%, absent any material write-downs of inventory, as we continue our rapid production expansion. This is an increase over our prior guidance of 66%, due to our achieving fundamental cost improvements.

With regard to our operating expenses for 2016, we now expect to end the year at approximately $170 million in operating expenses, plus or minus a few million dollars. This is a decrease from our prior guidance of $180 million to $185 million, as our spending on clinical trials and development projects has lagged our expectations.

As Rami outlined, we also plan to continue hiring experienced sales representatives to support the rollout of HF10 therapy. Now back to you, Rami.

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

(Operator Instructions)

Mike Weinstein, JPMorgan.

Good evening, guys. First off, I apologize. I'm on my cell phone, so sorry if it's not a great connection. I was hoping you could talk about the sales force growth over the last six months. Obviously, the business continues to grow very nicely, but you increased the size of your sales force by 46% in the last six months. I mentioned it one, for you to comment on the aggressiveness of the adds. Obviously, it suggests a fair amount of enthusiasm for the outlook of the business. But two, talk a little bit about how you're managing that. If you add that many reps over a short period of time, it's not always easy to manage through. Thanks.

Thanks, Mike. So happy to address both of those questions. I think in terms of the, as you call it, the drive to add, or the aggressiveness to add, I think we're obviously very pleased with the progress of the business thus far. But we continue to hear, and I know many on the investment community side who have done their own research and surveys have heard that there continues to be strong demand for HF10 therapy that we haven't quite been able to meet yet, just simply by not having enough boots on the ground to get there. Even in territories where we have had boots on the ground. I think it's clear, due to the rate of adoption of the therapy, as well as just the efficacy in back pain and the ability for those physicians that are on [gagular] therapy to treat many more of their patients, it's been hard for our existing sales force to really branch out and broaden access to the therapy.

So it's really primarily driven by our desire to meet more and more of the demand in the United States. We have obviously been in the market here for over a year and we certainly appreciate the patience of the physician community as we scale our sales force and try to do things the right way. We know that we have to continue to add in order to get this therapy in the hands of many more physicians.

To your next point, dovetails very nicely in, which is how do we manage that? Well, we still have a lot of controls. We still interview every single person that comes through. We have scaled the organization internally from a marketing, training, and otherwise to make sure that we have the appropriate support for the sales force to be successful. So we are managing that very closely. We certainly feel very comfortable about the rate that we're growing and we, as I said, intend to continue to add in order to keep up with the demand in the market.

Rami, did the decisions by Cigna, which first off, congratulations on getting that reversed, but did Cigna and the regional Blues, is that impacting you at all? Did it show up at all in the quarter, or is that a non-issue?

It's generally a non-issue. I would say on the margins, there is some impact in certain territories more than others, where you're going to get some kind of residual impact. But by and large, it hasn't been an issue, and we're certainly pleased that Cigna ultimately recognized the strength of the evidence and we hope that the Blues will follow suit soon enough.

Okay. And then maybe if I could sneak in two more, Europe was very strong in this quarter, but Australia was lighter than it had been and you commented on some local factors. Maybe you could shed a little bit more light there. And then the gross margins are ramping very quickly every quarter here and obviously the operating spend, we heard the commentary there and couldn't agree more in terms of investing in the business. But you just want to update us on your thoughts on how gross margins scale from here now that you're approaching 70%, or do you think gross margins ultimately reach, for this company, and how you think about long-term profitability and not the short term? Thanks.

Thanks, Mike. With respect to Australia, I think we've talked about it. We have significant share in that area. And with a couple of physicians having either traveled or changing hospitals and idiosyncratic issues like that, and with the concentration of generally the way the markets are internationally and specifically Australia, there was some impact. We think it's obviously something. We're very confident in the Australia business and our team and the ability to continue to grow there, but there was definitely a near-term impact that we're going to have to work through. And I'll ask Andrew to address the margin question.

Yes, Mike. So obviously, I think we've got to a volume where we've got some good cost improvements that now have worked its way through the system so that we're actually seeing them in the field. I don't think we're prepared to change our long-term view of low- to mid-70s for gross margin. And the bottom line we've always guided towards mid-20s, where we can get operating income. We're pleased with where we are, but not ready to change anything. Thanks, Mike.

David Lewis, Morgan Stanley.

Good morning, actually, good afternoon. A few quick questions. Just coming back to Mike's question here on revenue per rep, Rami. So interesting dynamics for investors, I think, this afternoon. You have revenue per rep was down a little bit sequentially, but yet you're adding very aggressively into reps. I guess a couple questions. Is this more about market expansion now, Rami, versus actually supporting the existing physicians who have already adopted? And I guess for Andrew, just thinking sequentially here, SG&A has been relatively flattish sequentially, even though you're hiring very aggressively. Is that just a timing dynamic?

Sure. To answer your first question, you're absolutely right, David. This is more about expanding access to the therapy, as I've said. And we certainly have plenty of room for growth there. Our footprint remains quite small in the United States market and we know that's something we have to continue to address.

And as for the revenue per rep coming down a little sequentially, I think we're pretty clear that long term, we expect $1.3 million to $1.5 million. So that wasn't really a surprise to us.

The other question on --

Just spending, Andrew. A lot of aggressive hiring, but the SG&A was relatively flat sequentially. Was it timing?

That's all timing, when people actually come on board.

Okay. And just a couple more. Rami, heading into next year, it was nice to see the paddle lead timing is on track for 2017. How are you thinking about paddle lead? Obviously, you have one competitor who has a dramatic outsize exposure to paddle leads. They have a new therapy which recently got a superior label. They're also talking a lot about their primary cell versus your rechargeable device. How are you feeling about the ability to take share with the paddle lead and expand your market opportunity in light of some of these competitive changes with one of your competitors?

Our view on the -- despite those developments that you mentioned, our view on the paddle launch is unchanged. We feel very good about our ability to take share in that segment of the market. We know that there is demand there and we look forward to meeting it.

Rami, just lastly, clinically, we weren't expecting any upper extremity data this early, certainly not at NANMS. How are you thinking about either timing for a US ID, perhaps a little too early, but we weren't thinking US ID for upper extremity for at least two more years. Should we take this early data as indication that we could see upper extremities trials moving forward earlier than expected? And I'll jump back in queue. Thanks, guys.

Thanks, David. At this point, we're not going to comment on the regulatory strategy. We're certainly very excited about the data and very excited that those investigators will get to present it in that groundbreaking session. But we'll talk about the regulatory strategy and timelines in the future.

Bob Hopkins, Bank of America.

Thank you. Can you hear me okay?

Yes. Hello, Bob.

Great. Great. Good afternoon. Just a couple of follow-up questions here. I was wondering if you wouldn't mind quantifying the issue in Australia and how much it impacted you this quarter or was that a couple million dollars or was it less? And does that get fixed in Q4? Just curious if you could clarify Australia.

It's a very small part of our overall market. So we're talking about a few million dollars, a couple million dollars here. It's one of those things where Australia is a very concentrated market, like most international markets. So it only takes one or two doctors to actually be doing something different, like taking a very long vacation or changing their practice, to actually impact you. And it usually takes a couple of quarters to work its way through. And it's the main factor there is despite all of those [perturbations] in the underlying units, we actually grew revenue in that market.

I just want to clarify something that Andrew said, because it's important. The reason it takes a couple of quarters to work through is because of the way our business works. So when they go back to practice, they have to rebuild their pipeline, they have to go through their implants. So in fact, when you have a quarter perturbation, it doesn't necessarily resolve immediately. It starts to resolve, but it's not wholly made up in the subsequent quarter, just because of the way the pipeline works in our business.

Okay. And then just two other quantitative follow-ups to that. Andrew, you mentioned a few times OUS growth was slow. That's obvious the law of larger numbers and faster growth rates. But I was wondering, given your emphasis, from where you sit today, is there a decent way you would advise us to think about the OUS growth prospects for the Company as we look forward?

And then a little bit more shorter term, I just wanted to ask about the implied Q4 guidance for the fourth quarter, because it suggests at the midpoint maybe somewhere in the neighborhood of 5% sequential growth. Was there anything going on in the fourth quarter that's worth noting about? It seems like that's maybe a conservative estimate for Q4. So just wanted to chat a little bit more about longer term OUS growth and the fourth-quarter guide.

Sure. I think we've been saying for quite some time that international is slowing down as a function of just the underlying dynamics of those markets and the fact that we have such a large share there now. It becomes harder and harder to actually grow them. We are seeing the slowdown. There is no question about it. And then part of it, I think, really is, and we've said that in today's script, which is to actually build our international markets now, we're actually going to have to move beyond having a sales focused organization to having a much broader organization on the ground there that's working on local reimbursement issues, local clinical trials and local marketing that's really specific to the individual markets. So I think to get to the next stage of growth, we need an increased sophistication of resources on the ground in our international markets.

And with regard to Q4 guide, we really do tend to guide towards what we believe is achievable. And that's really how we set guidance and I think we have a lot better visibility now and there are fewer uncertainties than there were earlier this year, and we believe we're really homing in on our guidance much better nowadays.

Okay. Thank you very much.

Thanks, Bob.

Danielle Antalffy, Leerink Partners.

Thanks so much. Good afternoon, guys, and thanks for taking the questions. You have a competitor that's going to be releasing their own high-frequency clinical trial data. I guess actually not at NANMS, what we're hearing is they'll be discussing it on their Q4 call. I'm not asking you to speculate on what that means the data is, but if you could walk us through, now that that event is getting closer, how you guys are preparing one way or the other, if it's negative or if it's positive, from a competitive perspective?

Sure. I think first of all, there's not a lot of clarity on when or if any data will be released. Just like everybody else, we'll see what happens there. We're very confident, obviously, in our product and our approach to the market. We've demonstrated the superiority of HF10 therapy, not just in terms of data, but I think it's reflected in our adoption to date. To the extent that there is other data that's presented by another company that may or may not have had the experience with high-frequency stimulation, we're not really sure that, that will weigh very much on the market. And the other thing, what I've said and I'll repeat again, is that we have invested a lot of time and money and infrastructure and people into building this Company into what it is, and we very much plan on defending our intellectual property vigorously, if that is the path that lines up for us.

Okay. Great. Thanks so much. And then again from a competitive perspective, you do now have a competitor that got their first product approved with a superiority label. Just wondering what you're seeing from them specifically from a counter detailing or competitive perspective, if you're seeing them yet at all, and then any changes in competitive counter detailing this quarter versus the last few since you first launched? Thanks so much.

Thanks, Danielle. So I think, as everybody knows, we don't really like to talk about our competition. However, I think I'll go into more detail on this because I think some clarification is required. I'll certainly address this question, just based on the evidence presented in the Sunburst study, as detailed in their FDA disclosures. The whole premise of this Burst question claiming superiority is to effectively draft on the branding of HF10 therapy.

First, our superiority claim is based on superiority in responder rates, VAS scores, and functional outcomes at multiple time points and across all primary and secondary endpoints. Conversely, Burst ran only two superiority tests and failed one of the two. The one failed test was done in a similar manner to how HF10 superiority testing was performed. So their superiority, effectively, which has been referenced a couple times on this call today is effectively due to an anomaly of being their own control. They were not superior in response rates and functionality or a cross group comparison. Looking at the underlying data, I think, gives a little bit more clarity. For example, if you look at responder rates, HF10 has responder rates in the 80s. Burst and St. Jude [Donac] are in the 30s, and traditional SCS historically, based on published evidence, is in the 40s and 50s.

So I think that gives you an idea of that comparison between therapies, because this comparison comes up a lot. However, they do have strong marketing programs and I'm sure they're going to push Burst as a clinically meaningful option. But I think anyone who digs deeper, I think the evidence speaks for itself. And further, we ultimately believe the difference between the therapies will be evident to the physicians.

Dave [Troncalli], JMP Securities.

Thanks. Just wondering if you could maybe provide a little additional color on the clinical spending. I think you said it lagged your expectations. So what other areas were you looking to start on, and is it just a timing issue, I imagine?

Thanks. Yes, so clinical trials is all about how fast you can get them set up, and also then the pace at which patients go through the trial. It really is, a lot of it is a timing issue on the number of patients through the trials. But also, there were clearly some clinical trials that we expected to have up and running by now that aren't. It just takes longer to get through ethics approval, doctors' sites signed up, financial agreements, et cetera, et cetera. It just takes longer than we were hoping.

I guess the flip side, the good news is the markets that you're going after are large enough that, that shouldn't be an issue, at least from our point of view. But the other quick one I would have is the upper limb and neck market, do you have an estimate of the size of that today?

We're going to talk more about our pipeline in 2017. So we're not ready to talk about it yet.

Okay. Thanks.

Thanks, Turk.

Joanne Wuensch, BMO Capital Markets.

Can I bug you for a little bit more specificity on the pipeline?

Yes, in 2017.

You've got some data coming out in January. We all love what you're doing here in back and leg. But clearly there's other things that you're coming up upon. How should we think about it or when will you start sharing it?

I think we've consistently said, and maybe I can provide some more detail, Joanne, just in terms of the process. So there's a couple of different data points that we're looking at here. I think certainly there is the evidence that we get from these studies, the enrollment. There is the aspect of regulatory strategy, which for a number of these indications, we're continuing to work through. And then there's the market research aspects which informs the best approach to the market and market sizing. And while, obviously we've announced and we're very excited about this data being presented in January, a number of these other process points we're in the middle of and working through, and once we have a broader view, we're certainly going to be happy and excited to share.

Okay. And as a second question, could you remind us of the size of the paddle lead market and how you approach taking share in that segment of the market opportunity? Thank you.

Sure. Thanks, Joanne. We believe that the paddles comprise about 30%, plus or minus 5%, of the US market. The way we go after that is really, at a high level, really no different than the way we've approached the rest of the market. There are physicians who primarily prefer to use paddle leads, and they're part of a lot of the territories we're in today. Some of them were willing and have used our percutaneous leads to access the therapy up until this point, but many others just prefer to stay with the paddle. So it'll be an opportunity for us to more broadly engage that physician community. And just to be clear, it doesn't require a different or a new sales force. It's just a function of continuing to expand our existing sales organization, or provide access to that therapy, once this particular product is available.

Thank you.

Thanks, Joanne.

Larry Biegelsen, Wells Fargo.

Hello, guys. Good afternoon. Thanks for taking the questions. A couple clarification questions. On the upper limb and neck trial, that's off label today, correct? It's the other indication that you're studying, the extremity trial, that's on label. So upper limb and neck is technically off label. Is that correct, Rami, or is that on label?

Neck pain is off label. Limb, as our indication is pain of the trunk and limbs, is generally considered on label.

So with this data that's positive, you'd be able to promote that data?

If the data is positive, you can certainly, based on our existing labeling, we believe, treat limb pain. However, the other notable thing in this particular market is reimbursement. The upper limb and neck is not broadly covered. So that's another hurdle that has to be worked through.

And then on the paddle lead, have you refiled it yet, and is that more of a Q1 or Q2 launch? And I did have one more question.

We have submitted to FDA. Given obviously, we're working through something with FDA, we haven't specified specifically if it's Q1 or Q2 for exactly that reason. So I think we'll work through that.

Okay. Fair enough. And then on the guidance, just a two-part. Back to Bob's question about your sequential, the guidance implies about 2% to 10% sequentially If I look back, the market's been up about 9% to 12% on a worldwide basis in Q4. Any commentary on if you're expecting the market to slow or anything like that? Because obviously, we can see your guidance and we can see what the market's done sequentially.

And just lastly, Andrew, any opportunity here to comment on 2017, just puts and takes, or color commentary to make sure that people are on the right track. Thanks for taking the questions, guys.

Great. We're not ready to talk about 2017. I think that's too early to really get involved in that conversation. Going back to 2014, we've always given what we believe is conservative guidance. It's solid guidance. And they're numbers that we believe that we can achieve.

I think it is worth clarifying, if you look at, as far as the third quarter, I think if you look at our competitors, they're generally flat to down this quarter and we, obviously, grew sequentially. So I think there's a little bit of a clarification there, where there's a look at year-over-year growth for our competitors, but sequential growth for us. I think if you look at everyone from a sequential growth view, you'll see that their numbers were up $1 million or $2 million over much larger denominators. But with the additions of new products, whether those are acquisitions or et cetera, that inherently are growing, which implies that there is actually a sequential decline likely in their core SCS businesses. So I think that's the commentary I'll make on Q3.

And on Q4, I think we have a reputation for being conservative and we certainly are very confident in the business. But we also are trying to, as we learn more, to try to be more accurate. So we're certainly trying to balance that. But we certainly want to make sure that it's clear that we're very comfortable with our business going into the fourth quarter.

Margaret Kaczor, William Blair.

Good afternoon, guys. So the first question for me is on US territories. I think you guys referenced towards the beginning of the commentary that you've seen greater potential than the historical SCS market suggested. And I think you referenced that, that was due to back pain. So is there any details that you can give us in terms of how many more patients per account you're seeing? Are you seeing more new accounts? And is it certain geographies or across the board nationally?

That's a good question, Margaret. I think our comments apply pretty much broadly. There's going to be variability as to the extent of the growth driven in any given geography, but I think it's fair to say that physicians at large have back pain patients that they've been unable to treat, and those who embrace the therapy certainly see utility in that patient population.

And to follow up on that is that twice as many patients that these guys are seeing or treating, and then as you look at your reps and sales rep productivity, you've hired a few reps maybe from your competitors. How does their productivity at Nevro compare to what they've seen maybe at their respective shops before you guys?

Sure. I think I've said before, on the first part of the question, that we believe that the back pain patients are a multiple of the existing SCS patient population. So I think I don't want to put a specific number on it, but there's certainly ample room for growth.

From a productivity perspective, I'll start and maybe Andrew can add onto it. I think the biggest difference that we see is, there's two differences that we see in terms of our productivity. One is that the magnitude of the productivity is higher certainly. But even more importantly, the acceleration or the pace at which they get to the productivity number is probably the biggest difference between us and traditional stem. And I'll ask Andrew to maybe expand on that.

Yes. When you look at competitive reps, for those reps that have really had to go out and build a new territory, and there aren't really that many of them, those competitor reps inherit territories which are already sizable. But they actually, it takes them many, many years to get up to a $1 million to $2 million type run rate, which is a really good territory, I think, for many of our competitors. So it takes them a much longer time to get up to that level and by and large, that's their average productivity. So I think we get to our, we have higher productivity and we get there a lot faster, 12 to 15 months.

Great. And then if I could sneak one more in. In terms of 2017, without obviously going into details on your expectations, what do you think is a bigger impact on your growth? Is it going to be hiring more and more new reps or maybe going after the paddle lead, or do the two go hand-in-hand? Thank you.

It's all about reps. I think we need to emphasize more. No product is dropped at a hospital. We actually have to be in the OR. We have to program patients, so that revenue is really driven by a number of people in the field. Without those people in the field, you can't have the revenue. You cannot drop product off at a hospital. So the main driver of our business is hiring reps.

Having said that, there are certainly territories that are overwhelmingly paddle that won't make as much sense to have reps in today than it will once we have the paddle available. So that will certainly be a growth driver, as well. But underlying that, as Andrew said, is the people. Without the people, the product itself isn't going to solve a lot.

Brooks West, Piper Jaffray.

Hello. Thanks. Can you hear me?

Yes. Hello, Brooks.

Great. Just a couple of clarifications, at this point. Andrew, on the gross margin guidance, you said you expect to end the year at approximately 69%. Is that 69% for Q4, or is that a full year number, or is that a Q4 number?

That's a Q4 number.

Okay. That's what I thought. And then, you gave your share assumption for the US market at about 15%. Can you update us on where you think your share is in Europe and Australia?

It's really, as you know, while there's some data in Australia, there's not great data in Europe at all. We think roughly we have about 33% of the market, roughly.

About 33% in each of those territories?

Up and down, around that. But overall, probably if you took them all together, probably about 33%.

Okay. That's helpful. And then just last for me, is there any other major reimbursement hurdles from a coverage standpoint or an experimental decision standpoint? I know you're working through some of the Blues, but anything else out there that you're working on that's meaningful that we should be aware of?

No. Just working through the Blues, at this point.

Perfect. Thanks, guys.

Thanks, Brooks.

Suraj Kalia, Northland Securities.

Good afternoon, everyone. Thank you for taking my questions. Rami, I know on the upper limb, a lot of questions have been asked. Let me ask a more high-level question. Does the funnel for upper limb and neck work the same way as the lower back and leg pain? By that I mean, just the algorithm of how things are done on these patients and how they land up at SCS. Is the algorithm the same?

It's somewhat similar, Suraj. I think there's probably a lower failed surgical component. But overall, they're generally viewed as the second largest population seen by this specialty. But they tend to have lower rates of failed surgery relative to the existing market.

Fair enough. And understandably, you don't want to give specifics. I would get that. But Rami, based on what you'll have seen so far in the US launch, can you directionally characterize for us what your percent of initial implants are quote-unquote de novo patients, or other failed SCS patients?

They are overwhelmingly de novo patients.

De novo. And Andrew, one final thing, the comps for reps, do they change after year one, or do they stay the same, or do the metrics change? Just working the rep productivity numbers and curious if there any net drop offs, and is that due to comp, or any color there would be great? Thank you for taking my questions.

The $1.3 million to $1.5 million is the peak. At that point, they've pretty much run out of time, because again, they actually have to be in the OR, they have to do the patient educations, the programming for the trials, the implants, help on insurance, et cetera. So it really can get to $1.3 million to $1.5 million a year, and then they're kind of there. I think that's --

If there are no further questions at this time, I will turn the call back over to the presenters for closing remarks.

Thanks, Blair, and thanks again, everyone, for joining our call today. We certainly appreciate your continued interest in Nevro and very much look forward to our next progress update. Have a great day.

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