Welcome back or welcome again. For the second session this morning, we have the management of Nevro. Rod and Julie, welcome. Thanks for having us. For those of you who don't know me, I'm Joanne Wuensch, the medical technology analyst at Citi. A few things have been going on for Nevro over the last couple of years. I think it would be great to sort of level set us. Where do you think the spinal cord stimulation market is, and where do you think Nevro is within that market? I mean, it's been an interesting couple of years, obviously for all of us. I think the pain space has been particularly interesting, and it was certainly impacted by the pandemic and the staffing issues that you've heard from a lot of companies. A couple of things that I'd say. First of all, the core back and leg business was obviously impacted over the last couple of years. During that time, we also received FDA approval for PDN. In our first full calendar year, we delivered about $48 million of new business to Nevro. We've guided to $75 million-$85 million in the PDN space for 2023. We're super excited by what PDN what that opportunity represents for the business and for Nevro. It's a gigantic market, and we think that we're in the very, very early stages of that business. We also received approval in the NSRBP space, which affects our core back and leg business. As we said on the NSRBP space, we think that that's gonna be more of a gradual impact to the core back and leg market, and that's gonna be a little bit more of a rising tide raises all ships. We've seen some faster growth in that area as we've been able to go out into the industry and work with physicians on the NSB or the virgin back patients. Coming into 2023, we're roughly about 20% market share. We have the IQ launch, which is coming out very soon, and we're really excited about that as a new platform for us. It's the first artificial intelligence SCS system out there. We have big data behind it. We've collected data on over 80,000 patients, and it represents over 20 million data points that links therapy results with the actual therapy that they're receiving. This is something that we'll continue to gather even more data on with the IQ product, and we think it's a really unique offering. We've been in limited launch there. Physician and patient response has been super positive to the iQ platform, and we're really excited about what that can do for us as we go into 2023. We always anticipate that we're gonna take market share. We believe our technology is unique and it's differentiated. As we think about the overall core back and leg market, we're only projecting kind of slow single-digit growth in the core back and leg market this year. We've seen that market growth. We think Q4 came in maybe slightly negative on a quarter-over-quarter basis to 2021. If you think about where that market was two to three quarters before that point, we were in the -10%, -15% on a year-over-year basis. We've seen that market come back to delivering year-over-year growth. We think it's gonna cross over in 2023, and for the year, we'll end up in kind of that low single digits. That obviously means that the first part of the year is slightly negative, and it goes into that positive growth territory in the second half of the year. I think I covered most of what you had in there, but... Then some. Yeah. I was gonna just say there's a lot for us to unpack in there. Okay. I want to take it piece by piece. I think the market side of it is an important place to start. If you think about low single digit growth, what is assumed in that as it relates to either a backlog or staffing or new product adoption? I wanna be clear, is low single digit growth a dollar basis, or is that a unit basis? I'd say on a dollar basis. Dollar basis. Okay. Yeah. let's see here. I say that again. you want to talk about the core market. Core market, how do you get low single-digit growth, and what is implied in that? Perfect. -as it relates to staffing- Staffing and new product. Yeah, yeah. New products. From a staffing perspective, we're assuming that that recovery will continue, but at a slow pace. I think we saw the largest impact from staffing in Q2 of last year, and while it's gotten better, it certainly hasn't gotten all the way back to maybe where we were at, like a pre-pandemic level. It's certainly not getting worse. We're assuming that it definitely doesn't get worse, and we're assuming that gradually it continues to recover. We're not assuming that our trial to perm curve materially changes. We saw a little bit of slowness last year. We saw a little bit of improvement in Q3 and Q4, but we're basically holding our trial to perm curve about where we are in the business right now, and that's the rate at which patients convert they go from the trial process to the actual permanent implant where we make the majority of our money. From an IQ perspective, we anticipate that we will get to about a 75% mix by the end of the year, so kind of in the Q4 timeframe. It takes a while for those products to ramp up, and as that's ramping up, Omnia and Senza II will be ramping down a little bit. We think IQ will enable us to continue to take share. As we look back at the competitive results over the last few years, we've definitely taken share, and we think iQ with a new product launch out there, and there's a lot of enthusiasm around it, that'll continue to enable us to take a little bit of share beyond just the single-digit growth in the market. Does IQ come out at a price premium? I mean, we haven't talked about the specifics of it, but yeah, we'll be experiencing some uplift from a pricing standpoint from IQ. Just remember that as that's ramping up, Omnia, in its third year of its life cycle last year, was experiencing some pricing pressure, which you'd expect in the third year of almost any med device life cycle. As IQ increases and becomes a part of the mix at the premium, you know, we'll see Omnia decreasing from a mix perspective. We certainly wouldn't think that the pricing pressures on Omnia would diminish from, you know, with having a product like IQ out there. All right. I'm gonna backtrack just a little bit here 'cause I'm trying to get my head around patients. This isn't specific to Nevro, but specific to most of med tech, where there are patients that have delayed procedures. No one is using the word backlog anymore. I feel like we've redefined backlog, but patients in pain, they need to be treated. What's happening to them? Yeah, that's a good question. Yeah, early on, we defined backlog as patients that were on the calendar and then canceled due to the pandemic or a staffing-. Right. -shortage or whatever. That was backlog. We're pretty caught up on that. Yeah. We do a pretty good job of, if somebody gets on our calendar, for a procedure, we're pretty proficient at, you know. Yeah. working with them, tracking them down and getting them back on the calendar, working with the physicians to do so. The pent-up demand that you're talking about is. This is a patient population that if you looked at it from 2010 to 2018 or 2010 to 2019 before the pandemic, was pretty consistently growing. I mean, it had some fits and starts, but the compounded annual growth rate on the growth in that market was typically in the single high digits, kind of in that 6%-9% range. When the pandemic hit and we saw, you know, volumes really drop off, if you look at the wedge there, that's the pent-up demand that we know. We did a lot of market research with these patients, and we know that they're still suffering. They're not getting better. They're still interested in SCS, but for whatever reason, pain patients in particular were able to defer re-engaging with the kind of the traditional medical work stream at a greater rate than almost any specialty out there. Yeah. We do anticipate that at some point these patients do come back. Our ability to identify and pinpoint when they're gonna come back and at what rate has proven to be really difficult. And also when they do finally come through the doors, they don't have a, you know, a special lanyard on them saying, "I'm, I was pent-up demand," you know? It's hard. Wouldn't it be nice? Wouldn't it be nice if we tell them, "Oh, you're the or that one." They just look like a normal patient. Mm-hmm. It's kinda hard to tell, you know, once they do start showing up, you know, really how to identify them or pull them out from what was just. Yeah. a normal back and leg patient. Yes. I think if you to the extent you start to see that core market continue to recover, which it has, slower than any of us would like, but it has, that's probably a good thing to keep your eye on as well, because that's gonna give you, right, an early look, not only from Nevro, but everybody in this space, are these patients actually returning? You know, if you see signs of life and green shoots there, that's good as well. In addition to obviously trials, which are our best indicator of the future growth. That leads me to two other questions. I'll hit one first. If I'm a physician, and I haven't been implanting SCS devices, what am I doing? I still wanna make a living. I mean, there's two sides to this. The patient who's in pain, they may be doing something else, taking more meds. The doctor, what is he or she doing? I mean, there are a number of other procedures. They can do some RF. They can do shots, prescribe medication, physical therapy. All those typical things that generally come before they get to an SCS. Okay. I just wanna make sure you weren't implying that. 'Cause we haven't seen generally doctors just quit doing SCS. Okay. Good to know. you know, I don't know if that was implied in your question or not. No, it wasn't on... No. I just wanna know how- No. what they're doing until their day. Yeah, no, those are the standard things. Yeah. I mean, SCS has traditionally been at the end of the. Yeah. Of, you know, the kind of, not end of the road, but the continuum of care. Got it. Yeah. For the physician that is now ready to put the SCS device in. Talk about the trial to perm. Is that increasing, decreasing, and is the period of time increasing, decreasing? Our trialing rates have been really encouraging. We set record months, in every single month in the fourth quarter. And some of that's PDN. Mm-hmm As that's growing. The trialing activity has been increasing. It's at an all-time high. The trial to conversion that I think you're talking about and what we saw earlier in the year, in general, it takes about one year for and we usually get about 67%, 68% of those trials will convert within about a 12-month period. Historically, about 50% of those trials, so you know, 50% of the 67% or 68% would convert in the first 90 days. That's kind of the math of it. What we saw in the second quarter of last year is that first 90-day period dropped to about 47%. We think that correlated with the staffing challenges. People were just having trouble getting patients and getting surgical teams calendared OR time, all of that. As those staffing challenges have somewhat diminished, albeit they haven't gone back to maybe kind of pre-pandemic sort of, levels or efficiencies, that first 90 days has increased, but it hasn't fully gotten back to that 50%. The good news is we're still at kind of that 67%, 68% over 12 months. We're not losing these patients. It's just that curve has just flattened a little bit. Right. That 3% drop in Q2 Q2 of last year was worth about $3 million of revenue. Arguably, we picked up and we caught that up since we're still ending at 67%, 68%, it was just spread out over, you know, 6, 7, 8 months. Got it. Okay. You highlighted or started talking about HFX iQ, and Omnia was launched three years ago. Mm-hmm. How is IQ better than Omnia, and why does that matter to the patient and the physician? Yeah, it's a, it's a good question. We're really excited about IQ. Let me just give you a little bit of a backdrop. We've been collecting data on patients for 10 years. We have, we've implanted over 100,000 patients. We've got over 80,000 patients that we've done our algorithm on, and that constitutes about 20 million data points. What IQ enables us to do is to leverage the data that we have, and we're gonna also continue to capture even more data because what IQ enables is a patient will receive a couple of questions every day. What their pain level is, what their activity level is, has their medication usage gone up or down? Depending on how they respond to that, it'll either say, "Hey, your therapy is working for you know, stay the course," or it'll say, "Wow, it doesn't look like you're receiving the same results that you were. Would you like to try a different therapy?" What's great about that? Well, one, if a patient is not receiving the therapy results with Senza 1, Senza 2 or Omnia, they have to call and make an appointment to reprogram their device. Right now, they can actually do it, you know, on their iPhone in real time. The ability to deliver a new therapy to a patient is significantly reduced. We can individualize that therapy to the patient, and we can draw from our algorithm and all of our data to be able to give them an individualized therapy in very real time. The patient experience should go up. The physicians have really liked HFX iQ and they feel very comfortable with us being able to deliver a new therapy to patients just as they kind of click through it with their thumb. Also from a leverage perspective, it enables our reps to spend more time selling as opposed to reprogramming. The reprogramming, kind of the lift on a new patient in the first 90 to 180 days is pretty high. Over the last couple of years, we've been able to shift a lot of that work to our HFX Coach team. This actually puts it in the hands of the patient where they can switch therapies on their own. I think this is important, and just to sort of summarize, what I think I'm hearing is, I'm a patient, I've been implanted, not so thrilled. On my iPhone, I can adjust. Are there parameters with which I don't like go way off the reservation or, you know? Yeah. They They suggest a new program. Okay. You don't necessarily go in there and adjust all these different parameters. Okay. You answer the questions. Okay. It'll use based on your answers, that algorithm will get to work and say, "Hey, Joanne, looks like you're on the right course. Let's stay." Or, "Hey, Joanne, let's try this one. Would you like to go ahead and switch?" "Yes. Okay. It'll automatically do that for you. There's 35 programs. Yes. It'll, it'll- Okay. It'll take you through based upon your answers and what your experience has been. It'll steer you towards one of the 35 therapies. That provides immediate relief for me. It's time at the physician that's saved, and it's time at your- Yeah. sales person. It's a win-win-win. Yeah. All three benefit. Yes. Yes. How does that help your COGS? Not your COGS, your SG&A. SG&A? You know where I'm going. I'm gonna tell you first. Yeah. Yeah, yeah. No, it's a good question. One, our HFX Coach team, which spends a lot of their time reprogramming these patients, it takes some of that workload off. As we grow our business, we're not gonna have to scale that team. Now, they have to still reprogram our Senza II and Omnia patients, and they'll continue to engage with them. If you're a HFX iQ patient, you can still call up and ask for guidance and ask questions if you want to. You're still gonna have somebody that you can talk to if you need to. It'll help us scale our HFX Coaches. Where I think we'll really see some benefit, though, is it'll enable us to have our reps really focus on hunting as opposed to being reprogramming and working with the patients post-procedure. What that'll enable us to do, it frees up their time, and it frees up their focus so that. You know, when if you go back a couple years ago, the reps had. They were predominantly the ones that were providing the support to these patients. Right. That really prevented you from being able to scale a territory in a material way because you're still working with customers one, two, three, four, five years ago. What this will enable us to do is for those reps to be able to handle much larger territories as we go forward. We should be able to drive. We're anticipating, we're modeling out that we're gonna be able to drive pretty material leverage in our P&L as we continue to go down this automation pathway with our products. let's spend some time on PDN. You highlighted at the beginning, you know, $45 million this year, $75- $48 million. $48 million. Thank you. Yeah. Uh, $75 million-$80 million for 2023. $75 million-$ 85 million. To $85 million. All right. You're keeping me honest here. Yeah. Yeah. Thank you. What's going on? Just want everybody to be clear. Everybody. Okay. Level set. Excellent. What makes that the right number for this year? Well, we've done a lot of work around PDN, and we're still early on. It's a gigantic market. As we lay out, you know, we have the benefit that we were able to see our trialing activity in the second half of the year, and particularly in Q4. As we go into this year, and we know the sort of initiatives that we have in place, the math on the trials and how it converts into perms, it gives us confidence in that $75 million-$85 million. We still think we're very early from a, you know, an adoption awareness perspective. It's a really big market. I'd say the confidence is pretty high in that number. While being early can also work against you don't know what you don't know. The fact that the market is as big as it is, the fact that other competitors are moving into that space, and I think they're gonna help drive some awareness as well. We believe our product and our clinical results are differentiated in the core SCS and back and leg market. They're particularly differentiated in the PDN space. We've also got some really exciting work that we're doing on the sensory side as well, that we think our competitors are gonna have a really tough time to be able to match up. Let's talk about the market. There's gotta be an educational aspect of it, both for the physicians and for the patients. One of the things that I noted when I was at the ADA meeting last year, is booths starting to pop up, talking about PDN for the diabetic patient. How do you start or where do you think you are on the continuum of education? Yeah. We received FDA approval in July of 2021. Coming into that, we had a number of thesis statements or positions about who the patients were, who the referring physicians were, what, you know, how they would engage and adopt the message for having an implantable device to deal with their painful diabetic neuropathy. Most of these patients have dealt with their disease primarily from a pharmaceutical perspective over the years. That is a leap to go to an implantable device. Most of our thesis statements, I would say, were directionally accurate and right. There weren't a whole lot of surprises there. What we have done over the last little over a year and a half is we've tweaked our message to our patients, to our physicians, or to the referring physicians. We've geared up our PDN referral sales force. We ended this year in 22 with roughly 50. We'll probably go to 80 to 90. We found that they've been really impactful in terms of dealing with the referring physicians, and they've been a really key part of dealing with that education with the patients and the referring physicians. The referring physicians are very interested in the clinical results. We think that actually works to our advantage as well as we go along, because we think our results are really differentiated, as I mentioned. That PDN referral sales force, we're gonna continue to invest in. Like I said, it's been a powerful part of that equation. We've learned a lot about what makes a really successful PDN referral rep. We've learned how to partner with them with our, with our, kind of our core reps. Yeah. We've learned how to, you know, from a pain physician standpoint, you know, for those pain physicians that have engaged in the process, they've been able to build their practices, you know, in a more expeditious manner. Direct to consumer, we've actually learned a lot as well as we've reached out to these diabetic patients. They're a very engaged patient population, and we've gotten smarter and been able to change some of our messaging from the direct to consumer perspective. It's a gigantic addressable market. We've learned a lot about how to work with the patient, the referring physicians, the pain doctors. As Medtronic and Abbott and, you know, more competitors enter into that space, we think the awareness around SCS as a viable option for PDN is gonna just continue to grow. Help me understand. I'm a diabetic patient, and I have lower limb pain for an extended period of time, and the doctor comes and says to me, "We're gonna put in this permanent implant." All right? What is the response? Do they say, "Oh, thank goodness," or... The referring doctor. The referring doctor. Okay. The referring doctor is going to say, "Hey, you know, you've been on these meds for a period of time. You've tried gabapentin, you know, Lyrica, whatever. They're not working so well. There's a new non-pharma option that's FDA approved. It's called HFX iQ. You know, this might be a technology that you might wanna consider. The data's robust. You know, there's several doctors in our area that are using it. Would you like to learn more about it?" That's kind of how the conversation starts. They'll usually our rep, you know, our PDN referral rep will get involved. We have a new patient ambassador program, maybe that patient gets to talk to another PDN patient that's had the therapy to help them along, you know, in their decision-making process. Then they'll get a referral to one of our pain specialists or implanting physicians in an area that, you know, they move forward, you know, with the next steps of it. It starts with a conversation, typically with their referring doc, who, you know, again, can put them and take advantage of resources provided by Nevro, to keep that conversation moving along, and they get nurtured along the way. Are other manufacturers nurturing them along the way too? I think we've- Are you still? I think we've got an advantage. You know, we're first to market. We've learned a lot. I think that our programs, you know, we've been out there and had tremendous success. I mean, to go from where we were to $48 million in the first commercial year, I think by anybody's estimate, that's a great first-year commercial launch. We've done a lot of things right and learned a lot along the way. I would like to think that, you know, we're gonna be ahead of the competition with that, and they're gonna have to maybe relearn some of the things we've already perfected. Reimbursement is improving. Oh, reimbursement's in a great spot, you know, right now. Yes. In fact- Yeah, we're a little over 50% right now in Novitas and is First Coast? Yep. First Choice. Oh, it's First Choice. They've proposed coverage. It hasn't gone into the policy yet, but once that happens, I think we'll be close to two-thirds of covered lives. Yep. We continue to work with the commercial payers as well. You know, in cases where they don't have explicit coverage for PDN, we continue to work with the payers to get approval for the patients. We have a team that works with them, and they've had really good success on that. Reimbursement for SCS, stable, improving, declining? It's in a good spot. Yeah, it's in a good spot. You know, I think a lot of people have talked about how it might take a little bit longer. We have an HFX Access team that about 30% of our patients go through. They continue to have really strong approval rates. We haven't seen a dip in that. But they're a very proficient team. They know what they're doing in terms of dotting all the I's, crossing the T's, in terms of working with the payers to get the approval through. Reimbursement for Non-Surgical Refractory Back Pain, where is that? Yeah, we just submitted or we just presented our latest data at NANS in January. We think as we the results there continue to be really strong from a durability perspective and a pain reduction perspective. We'll continue to work with payers as that data comes out and as publications come out. The UnitedHealthcare decision in the fall really hasn't impacted us as we thought it wouldn't. We continue to, you know, work with our patients and receive the necessary approvals for them as well. Is there an opportunity for UnitedHealthcare to reevaluate the decision here? Yeah. we'll continue to have discussions with them as data comes out and publications come out. It's a great therapy, and we think at the end of the day, when you have great results, it speaks for itself, and we think that'll win the day and carry the day. Yeah. We think at some point here. Yeah. We don't know when, but we do think that UnitedHealthcare will revisit that, and we think that they'll reverse their decision. Remember, they were the first ones out of the, out of the blocks to cover PDN. Right. Based on the robust data. They did that off cycle. You know, I think with great data, and they usually like to see. It's important. They like to see published data. We presented it at NANS. It's gonna be in publication soon, and that's really when we begin to, you know, obviously you continue to have work with them. They don't give you any special insight into what they may or may not do, but getting that data in publication certainly will be helpful for us. How many, NSRBP patients are there? Ugh. In total? In total. Like, in the market? In the market. Well- I mean, we spend all this time talking about it, but I wanna make sure. Yeah. our time in the right place. Yeah. I don't have the number of patients. I tried to calculate. I try to reverse engineer my way into it, but we believe it's about a $12 billion market. Yes. We believe it's about a $12 billion market. It's about 5% penetrated. It's a larger market than the core back and leg market, and it's far less penetrated. We really do believe. We've seen that that part of our core back and leg patient population has grown at a faster rate than our FBSS or Failed Back Surgery Syndrome patients have over the last 12 months. Once again, that's gonna be a little bit of a rising tide raises all ship. It's not gonna be a really acute situation like PDN, nor can we necessarily break out the new NSB patients versus the ones that have been flowing through our patient population for the last number of years. If you remember, about 30% of our patients have historically been NSBP patients. What we expect to see is that little bit, little by little over time, that'll become an increasing part of the mix. Actually, we're encouraged that our competitors are out talking about NSBP a lot more than they were 12 or 24 months ago. We think that that's a good thing for the overall market. Doesn't it make sense to put in an SCS device before a full open spine procedure instead of putting it in after it's failed? Am I looking at the wrong model? Well, that's Failed Back Surgery Syndrome. Right. That's the core market. Right. What we define is that nonsurgical back pain. Yep. Right? That's for patients that are not eligible for surgery. That's how we ran our trial. I think that from that perspective and a payer perspective, that's really important that you're not suddenly now talking about bringing SCS way forward in that continuum of care, which would probably give a lot of payers severe heartburn. We didn't run the study that way. They were evaluated and were not deemed a candidate for back surgery. That's important, we think. Once they're not, now they become, you know, in that patient group that we can go out there and hunt for. Also you have to remember, a lot of back surgeries are designed to treat a structural problem. Right. We're just dealing with pain. Yeah. if you have a structural issue, you need to go deal with that. Yeah. If that gets fixed, but you still have pain, that's why we tend to be towards the end of that continuum of care. Yeah. let's spend a few moments on expenses and getting to cash flow, break even and adjusted EBITDA positive and all those kind of good things. Mm-hmm. How do you think about managing the expenses of the organization as you move forward? Yeah. We have a lot of exciting things going on from a leverage perspective. As a finance person, it's one of the things I actually get really excited about. I figured it was a good question for you. Yeah. Yeah. I get excited about that. You saw right to Rod's face. Okay. What's our number? Just a couple things. One, we have our Costa Rican manufacturing plant coming online. We have volumes ramping there. The cost that we are gonna see out of there on our IPG, the little batteries and some of the other products that we're manufacturing out of there are right in line with what we thought they would be when we actually went into the greenfield operation of building the plant down in Costa Rica. You know, holding pricing basically flat, we still see a pathway to kind of mid 70% gross margins from where we are in the high 60s currently. That's really exciting, and that obviously creates a lot of leverage. As we continue to go down this pathway of iQ, where we can put more of that in the patient, more of the therapy in the reprogramming the patient's hands, we can free up our reps to be more of a hunter. Those two things enable us to drive our reps to much larger territories. That will bring down our cost of selling. We'll be able to take a little bit of the pressure workload wise off of our HFX coaches as well. That will enable us to scale. I think the rest of the P&L and whether you look at what we'll continue in R&D and clinical, we're gonna continue to invest in our product pipeline, new clinical areas, new indications. We should be able to get some scale because we have a lot of the infrastructure in place that will enable us to scale in a meaningful way there. We'll be able to get a lot of scale out of our selling organization. G&A, we should be able to scale pretty well. As I think about our P&L, our ability to drive really strong leverage over the next 3-5 years, we're in very good shape. I think on our Q4 call, we mentioned that the 2022 operating expense as a% of sales was, you know, kind of in the, you know, lowest to midish 80%. Mm-hmm. We're targeting high seventies. When you're picking up, you know, several hundred basis points of leverage on your operating expense to sales on a year-over-year basis, that's pretty. Yeah. strong leverage on a business. I think we've got several years ahead of us. Yeah. in that range. Very good. That even started in 2019, 'cause 2019 it was like roughly 91%. 90%. Yeah. You know, it's gone from 91, 84, and then, you know. Yeah. Our target- High 70s. High seventies. We've gotten some pretty good progress on it. A year from now, when we're talking again. You always ask that question. Not giving- I do. Not giving- It's good to be known for a question. Okay. Yeah, not giving guidance out on 2024 yet. I can try. Yeah. All right, Rod and Julie, thank you so much for joining us. All right. Thanks for having us. Thank you. Okay.