Nevro - Q2 2023

Transcript

Operator (participant)

Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to Nevro's 2Q 2023 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question and remove yourself from the question queue, press star one a second time. Thank you, and I would now like to turn the call over to Greg Chodaczek for introductory remarks. Please go ahead.

Greg Chodaczek (Managing Director)

Thanks, Abby. Good afternoon, and welcome to Nevro's 2nd quarter 2023 earnings conference call. With me today are Kevin Thornal, CEO and President, Rod MacLeod, Chief Financial Officer. On today's call, Kevin will discuss 2nd quarter business results, and Rod will conclude with detailed financials and guidance before we open it up, open up the call for questions. Please note, there are also slides available related to Nevro's 2nd quarter performance on their investor relations website in the Events and Presentation section. Earlier today, Nevro released its financial results for the 2nd quarter into June 30, 2023. A copy of the earnings release is available on the Investor Relations section of Nevro's website at nevro.com.

This call is being broadcast live over the internet to all interested parties on August 1st, 2023. An archived copy of this webcast will be available on Nevro's Investor Relations website. Before we begin, I would like to remind everyone that comments made on today's call may include forward-looking statements within the meaning of the federal securities laws. Results could differ materially from those expressed or implied as a result of certain risks and uncertainties. Please refer to Nevro's SEC filings, including the annual report on Form 10-K, filed on February 21st, 2023, for a detailed presentation of risks. The forward-looking statements in this call speak only as of today. The company undertakes no obligation to update or revise any of these statements.

Management will refer to Adjusted EBITDA, a non-GAAP measure used to help investors understand Nevro's ongoing business performance. Non-GAAP Adjusted EBITDA excludes interest, taxes, and non-cash items such as stock-based compensation, and depreciation and amortization, as well as litigation-related expenses, certain litigation charges, and credits and other adjustments such as restructuring charges. Please refer to the GAAP to non-GAAP reconciliation tables within the earnings release. Now it's my pleasure to turn the call over to Kevin.

Kevin Thornal (CEO and President)

Thanks, Greg, and good afternoon, everyone. We appreciate you joining us. It's hard to believe that three months have already passed for me as CEO. It's been very busy and productive as I've gotten to know our organization and assess the pathway forward to continue to win in the SCS market and fully capitalize on the opportunities ahead of us.

As I said on our last call, my top priorities will be to build on the significant progress the company has made, professionalizing the organization, establishing a manufacturing plant in Costa Rica, bringing new indications to market, and launching innovative new product platforms like iQ. During the last three months, I've spent significant time in the field meeting with our sales teams, customers, and key opinion leaders in the U.S. and internationally. I've learned a lot already.

Our customers believe in our superior technology and want to partner with a company that's easy to do business with and people in the field that partner with their care teams. Our products in 10 kHz therapy are highly differentiated, and our HFX iQ launch has been well received. We also have a great pipeline of new products currently being developed by our R&D and clinical teams that we intend to launch in the coming years.

Our team is talented, determined, resilient, and mission-driven. However, we have areas for improvement and need to be laser-focused in these key areas that will move our business forward. Our must-dos are focused on three key pillars for success, which are, first, commercial execution. We have not performed commercially to the levels that we consider world-class in a market that demands excellence in sales force execution.

Starting with the hiring of Greg Siller to the CCO role, we are moving quickly to ensure we have A+ talent at every position to increase sales productivity, improve physician engagement, and maximize the growth opportunity in this business. We are also focused on improving our sales rep performance to quota, right-sizing some of our sales territories, and filling open territories faster. These changes, coupled with aligning the goals of our internal and external teams, will improve our sales productivity and enhance our customer experience.

Second, market penetration. We will continue to expand indications with strong clinical evidence as our ongoing sensor, such as our ongoing Sensory Study for PDN, pursue HFX line extensions, and support our robust R&D pipeline development. We will also consider augmenting our product portfolio through strategic opportunities. Lastly, profit progress.

We will continue to scale our Costa Rica manufacturing facility, improve our operational efficiency, and streamline internal processes. On the commercial front, Greg Siller recently joined as our new Chief Commercial Officer. Greg's proven track record of success and his passion for building high-performing commercial organizations will be instrumental as we continue to focus on accelerating revenue growth, developing underpenetrated markets such as painful diabetic neuropathy and nonsurgical back pain.

Launching new products, including our new HFX iQ system. Greg is off to a fast start and is already having a positive impact on our commercial organization. He has realigned our sales reporting structure, so the teams are working closer together with one common goal: providing the best service and clinically proven stimulating therapy to our clinicians and their patients. This change sets us up for success in future quarters.

I'm confident that Greg's appointment will further bolster our ability to capitalize on the growth opportunities in front of us and accelerate our market performance. Okay, let's now turn to our second quarter results and business updates. Although we lowered our second quarter guidance, we continued to move the business forward and lay a stronger foundation for improved commercial execution in future quarters. Nevro's revenue of $108.8 million increased 4% on both an as reported and constant currency basis compared to prior year results. Our U.S. perm procedure growth was 8% year-over-year, and PDN continues to be a significant growth driver, with a strong second quarter increase in revenue of 73% compared to last year. As of today, three of the four main market participants have disclosed their Q2 SCS results.

Nevro and one of our competitors reported clear SCS growth. It's evident that the challenges to our market are improving, and although recovery isn't expected to be linear, we expect it to continue to improve in the quarters ahead. Remember, SCS is considered a late or last-line therapy used to relieve patients of their chronic pain when surgeries and more conservative treatment options either don't provide optimal relief or just simply don't work and are not an option. We have seen positive indicators of growth and recovery, including patients entering the pain treatment funnel. As patients make appointments with their pain specialists and continue to move through the treatment pathway, we are confident we'll see more patients who are ready for SCS and the market return to historical growth rates.

The nonlinear recovery, along with our recent sales force execution changes, which will take time to fully implement, however, have led us to re-gauge our guidance for the year. I will come back to this at the end of my prepared remarks. In Q2, HFX iQ accounted for approximately 30% of our permanent implant procedures, up from 11% in Q1, and we expect a meaningful shift to our HFX iQ throughout the rest of the year. We continue to receive positive feedback from physicians and patients regarding the ability to deliver personalized pain relief using our HFX Algorithm. I'm convinced this technology has the opportunity to differentiate our competitive position further. All of this progress builds on our superior high-frequency, paresthesia-free SCS technology. Turning now to our PDN business, PDN trials represented approximately 23% of our total U.S. trial volume.

That's up from 14% of our total U.S. trial volume in Q2 of last year. Among our permanent implant procedures, PDN represented 18% of total worldwide procedures, resulting in approximately $19 million in PDN indication sales, an increase of 73% compared to $11 million in the second quarter of last year. We attribute this in large measure to the continued PDN referral sales organization expansion, our direct outreach initiatives to physicians and patients, and the general enthusiasm regarding the compelling data and real-world outcomes in these otherwise difficult-to-treat patients. We continue to see success with our direct-to-patient marketing for PDN as well. In Q2, approximately 23% of our U.S. PDN trial procedures came from leads generated by our DTC programs. We continue to believe both patient and physician marketing efforts are imperative to drive awareness of the PDN indication.

On the new indication coverage front, our PDN coverage continues to grow. Florida Blue, the largest commercial payer in Florida, represented 4.6 million covered lives, updated their medical policy to include coverage for PDN, which became effective on June 15th. We are very pleased to see that Medicare Administrative Contractors, Novitas and First Coast Service Options, decided to retire their SCS Local Coverage Determination, or LCD, and cover both PDN and nonsurgical back pain using Medicare National Coverage Determination, or NCD, that is already in place. This positive coverage policy development became effective on July 13th and provides immediate access to SCS therapy for PDN and NSBP patients who meet the NCD coverage criteria and have Medicare or Medicare Advantage health plans.

This is a huge win for Medicare patients suffering from PDN, who have had limited to no access to HFX therapy since FDA approval in July 2021. The combined increase of coverage represents nearly 24 million covered lives, bringing health plan coverage of PDN to over 205 million covered lives total. I want to congratulate our entire Government Affairs and Market Access team on this accomplishment and thank them for their significant effort and unrelenting focus on expanding coverage to patients who suffer from these debilitating conditions. In addition to the existing payer coverage policies in place for PDN, we continue to see a high level of case-by-case approvals through the prior authorization process and the appeal of payer prior auth denials, including with payers who don't have a positive PDN coverage policy in place.

For those PDN cases that have come through our own access group, our rolling 12-month approval rate at the end of Q2 continued to trend around 72%, up from approximately 62% at the end of 2021. By leveraging our strong published clinical data, FDA-approved PDN indication, and inclusion in various society guidelines, we have been able to successfully overturn over 50% of these prior auth denials. Equally impressive is that through Q2, across all indications, our HFX Access team has an over 80% approval rate at the initial prior authorization for patients who meet medical necessity for SCS.

In June, we attended the American Diabetes Association 83rd Scientific Sessions, where Dr. David Klonoff and Dr. Erika Petersen presented important secondary findings from the landmark SENZA-PDN RCT, comparing Nevro's proprietary high-frequency SCS plus conventional medical management for the treatment of PDN to conventional medical management alone. This presentation was the first look at the correlation between the use of a 10 kHz SCS implant and reductions in A1C and body weight. For your reference, we've included this ADA abstract data in our 2Q investor slide presentation.

Dr. Erika Petersen also participated in an ADA symposium on the treatment of painful diabetic neuropathy, where she re-reviewed the long-term 24-month durability of pain relief, as well as clinically meaningful improvement in neurological function and quality of life achieved with 10 kHz therapy. Impressively, at two years, high-frequency spinal cord stimulation from Nevro HFX was associated with significant pain relief, with 90% of participants reporting greater than 50% pain reduction.

We recently received confirmation that this 24-month PDN RCD-RCT data has been accepted for publication, and we expect to see this data published in the second half of this year. In addition to these promising results, we've enrolled almost 20 patients in our new PDN Sensory Study, which is the first prospective RCT specifically powered to assess restoration of neurological function as a primary endpoint in patients with intractable PDN.

You'll recall that the neurological improvements we observed in the original SENZA-PDN study are unique to 10 kHz SCS therapy and have not been reported for any other competitive low-frequency SCS therapy. By restoring sensation in the feet, 10 kHz SCS may alleviate this tremendous disease burden, reduce amputations, and enable patients to be more active, all of which would improve overall health and quality of life, and of course, reduce healthcare costs.

Now, before I leave PDN, I wanted to cover one more topic. On our last earnings call, you'll recall that we mentioned that we were evaluating whether we should continue to break out PDN indication sales since there are now two other PDN on-label competitors who do not segment their SCS business at all. Since that call, we received a lot of feedback from analysts and investors on this topic. All of these in SCS indications, whether for PDN, nonsurgical back pain, or failed back and leg, use the same SCS technology, utilizing products sold and serviced by the same organization, are reimbursed using the same codes, used with patients that may have multiple pain areas and etiologies, and are developed by the same or and are deployed by the same implanting physicians to treat chronic pain.

Given this, we've decided to continue providing this PDN indication breakout for 2023 reporting purposes. However, beginning with our first quarter of 2024 results, we will not specifically break out PDN, but we will continue to provide qualitative commentary on this important growth indication. As stated last quarter, we are interested in driving overall market share gains and company growth, period, and we're doing just that. Finally, I wanted to say a few words about our updated guidance. First, do not interpret our guidance as a lack of confidence in the long-term outlook of the SCS market, our growth drivers, or where the company is headed. We believe the market is on a path to recovery and will eventually return to sustained historic growth rates.

Along with the organizational changes we discussed, the scaling of our Costa Rica manufacturing facility, and our future product line, we believe we can generate significant future returns, including improved revenue growth, enhanced margins, and increased operating leverage, setting us up for success in 2024 and beyond. We are also not providing formal PDN indication guidance for the year, but expect PDN indication sales to be in line with how we have previously discussed the 2023 PDN opportunity. We are enthusiastic about our plan and look forward to executing our current strategies, driving growth, and taking advantage of the meaningful leverage opportunities we have to drive towards profitability and deliver shareholder value. With that, I'll pass the call over to Rod to provide further details on our second quarter results and guidance.

Rod MacLeod (CFO)

Thanks, Kevin. Good afternoon. I'll begin with our worldwide revenue for the second quarter of 2023, which increased 4% reported and on a constant currency basis compared to the second quarter of 2022. PDN represented 18% of worldwide permanent implant procedures, which resulted in approximately $19 million in PDN indication sales in the second quarter of 2023. This quarter included the same number of selling days as Q2 2022. U.S. revenue in the second quarter of 2023 increased 4% compared to the second quarter of 2022. International revenue in the second quarter of 2023 increased 5% as reported, and 4% on a constant currency basis. Moving on to some detail below the top line.

Gross margin was 68.4% in the second quarter of 2023, compared to 69.8% in the second quarter of 2022. The full market release of the HFX iQ system continues to progress well, and we expect a meaningful shift in the mix to the HFX iQ product throughout 2023, which, combined with the ramp-up of our Costa Rica facility, is expected to benefit gross margins beginning in the fourth quarter of 2023. Looking at operating expenses year-over-year, the increase in operating expenses was primarily due to $3.6 million in personnel-related costs, largely specific to management changes made in the second quarter. Non-GAAP Adjusted EBITDA for the second quarter of 2023 was a loss of $3.1 million, compared to a loss of $4.5 million in the second quarter of 2022.

Cash, cash equivalents and short-term investments totaled $329.9 million as of June 30, 2023. This represents a decrease during the second quarter of 2023 of $11.8 million. Uses of cash were in line with normal business operations as well as our projections. We continue to manage our working capital and are very comfortable with our balance sheet to fund operations. Turning now to guidance. It's important to note that we will be using non-GAAP financial measures to describe our outlook for the business. Please see the financial tables in our press release issued today for GAAP to non-GAAP reconciliations. We expect third quarter worldwide revenue of approximately $95 million-$97 million, which represents a decrease of 4%-6% on a constant currency basis.

We expect third quarter of 2023 non-GAAP Adjusted EBITDA to be a loss of approximately $8 million-$10 million. We expect worldwide revenue for full year 2023 of approximately $410 million-$415 million, an increase of 1%-2% over prior year on both the as reported and constant currency basis. We expect full year 2023 non-GAAP Adjusted EBITDA to be in the range of -$25 million to -$28 million, which compares to a non-GAAP Adjusted EBITDA loss of $23.8 million in 2022. In closing, we made good progress in the second quarter and remain on track to drive growth and scale profitably in our core business in the years ahead.

We are in a great position strategically with best-in-class SCS technologies, remaining share gain opportunity, future growth opportunities in PDN, NSBP, and our new HFX iQ platform, superior clinical data, and the opportunity to improve our commercial execution. We look forward to aggressively attacking the significant opportunities to drive the performance of the business the rest of the year. That concludes our prepared remarks. I'll turn the call back over to Greg to moderate the Q&A session.

Greg Chodaczek (Managing Director)

Thanks, Rod. In order to get through the question queue efficiently and take as many questions as we can, we ask you to please limit yourself to one question and a brief related follow-up question. You can rejoin the queue, and if time allows, we will take additional questions. Abby, we are ready for Q&A.

Operator (participant)

Thank you. At this time, I would like to remind everyone in order to ask a question, press star and then the number one on your telephone keypad. Pressing star one a second time will remove your line from the queue. We will take our first question from Shagun Singh with RBC. Your line is open.

Speaker 12

Hey, good afternoon. This is Avian for Shagun. Just overall, talking about 2023 guidance, how did you arrive at the new guidance range? Overall, what's your guidance philosophy? Is this a guide that you think is conservative, or allows you to be at a place where you can be in a raise as you progress throughout the year? Thank you.

Kevin Thornal (CEO and President)

Yeah, thanks for, for the question. You know, if you, you look at the, the previous two quarters, all four of us that, that you know, the biggest part of the SCS market, reported positive growth. This is the first quarter since those last two quarters where one of us reported flat. Now, we were up 4%, one of the other competitors was up significantly, but one of the others was, was, was flat to, to negative in, in the U.S., per the reports. So that gives us a little bit of caution just to, to think about the market. We've, we've said it's going to be a nonlinear recovery, and so each quarter-by-quarter may, may be a little different on that recovery journey.

The second part is if you, if you look at the changes that we, we did during the second quarter with bringing in Greg Siller as the new Chief Commercial Officer, who got off to a fast start and has, has made the appropriate changes that we've done in the past at other organizations that we know will be successful. It does take some time for those changes to sort of take hold and get the, get the, sort of the teams in the field working as one unified unit, as well as filling some of those open territories with speed and making sure people are getting trained and, and effective out in the field. Those are really the two reasons which made us change our guidance for, for the remainder of 2023.

Operator (participant)

We will take our next question from Anthony Petrone with Mizuho Group. Your line is open.

Anthony Petrone (Managing Director and Senior Medical Devices, Diagnostics, and Therapeutics Equity Research Analyst)

Hi, thanks. Maybe just to dig in a little bit to maybe the second half implied guide and fully understand that PDN, you know, beginning in 2024 is gonna go away here. If we just assume PDN is basically flat in 3Q and 4Q, and that would be conservative, considering that it's still growing. You know, the implied math sort of shakes out to, you know, a core outlook that's, you know, sort of down in the low double digits for a blended, you know, time frame of 3Q and 4Q.

Maybe between just underlying market and competition, you know, if we barbell those two themes, you know, what's really sort of impacting the second half more so? Then the quick follow-up would be just on sales force, you know, restructuring and replenishment in the core SCS division. Is that also at play when we look at the back half guidance? Thanks.

Kevin Thornal (CEO and President)

Yeah. I'll, I'll answer the, the second part and then turn it to Rod for the, for the numbers on the first part and the implied math, that you, that you said. Yeah, with the sales force execution, you know, what we're really doing is, is aligning the people that are in the field underneath the closest manager that's in each of those regions or territories. Previous to that, we had different, reporting structures reporting to different leaders within the organization. Now compiling together so that they're operating and making decisions for each territory, that's the big change, and it will take some time for that to sort of take effect.

The, the positive outlook on that, you know, I'm a big believer that putting power to those closest to customers is what drives meaningful results, because every city is not the same, every territory is not the same. The decisions that need to be made to drive growth in each of those territories is different, versus a peanut butter spread across the whole nation or the whole world, for that matter.

So that's gonna take some time, though. People have new managers. They have new teammates, new bosses. We know that this is the right thing to do. Specifically, as we look about, you know, look at strategic opportunities, maybe in, in the future, you know, we've got to organize ourselves ready to be able to scale, not only in the SCS market, but anything else for the future as well. I'll turn it to Rod to do the implied math and, and the other question that, that you asked.

Rod MacLeod (CFO)

Yeah. Hey, Anthony, this is Rod. Yeah, yeah, the first is your, your, your math is directionally right, using, using those assumptions. We do think PDN continues to be a growth driver for us. We've seen good sequential growth, quarter-over-quarter, with, with that business. We also continue to see NSBP as a growth driver, and, and, you know, we're all, we're all seeing ourselves as well as our competitors out there, continuing to push NSBP. Fundamentally, yeah, your, your, your math is right. We're--

As Kevin mentioned, we're sitting here after two pretty strong quarters in Q4 and Q1 of, of growth in the industry, and, as he mentioned, we've two of the three posted growth in the second quarter, with 1 being flat to maybe down a little bit in the U.S. You know, with that and our sales force execution that we have, we have in place, you know, that's, that's how the guidance is kind of playing out for the second half of the year.

Anthony Petrone (Managing Director and Senior Medical Devices, Diagnostics, and Therapeutics Equity Research Analyst)

No, that, that, that is helpful. I'll hop back in queue. Thank you.

Operator (participant)

Your next question comes from the line of Adam Maeder with Piper Sandler. Your line is open.

Simran Kaur (Equity Analyst)

Hi, this is Simran on for Adam. Thank you for taking the questions. I want to dig into Q3 a little bit. It looks like the Q3 guide implies revenues down about 12% sequentially, and I understand there is a seasonality component with the business, but this is maybe a bit steeper of a quarter-over-quarter sequential step down than we've seen historically. Can you walk us through the puts and takes for Q3, and how do you weigh other dynamics like competition, HFX iQ launch, and just, you know, underlying market recovery in this quarter?

Kevin Thornal (CEO and President)

Yeah, sure, Simran. Yeah, seasonality definitely in Q3 is historically been one of the lowest quarters throughout the year before, you know, the Q4 end of the year, where people's insurance plans, right, when their deductibles were reset into the new year. Still going back to the couple of reasons we talked about in the script and also answered on the first couple of questions. You know, if you go back and look at what happened and transpired with Q2, I started on the two days before the last earnings call, and about four weeks in, five weeks in, I made the change at the Chief Commercial Officer role, and we took down guidance for the second quarter.

Obviously, that was one month and 1.5 months into the quarter, I knew that we had some things that we needed to change in the organization. It's either, you know, put off in some of those changes that we need to make or, or, or do it immediately so we can set us up for the future. Bringing Greg in in the middle of the, of the quarter, obviously gave him time to spend time with the team and really assess what, what offense we need to play here.

He quickly made those changes with the re- the reorganization of the sales teams and made some changes on the marketing side as well, to be able to align our internal and external organizations to be working together as one team versus two separate units. That all happened towards the back half of second quarter. If you look at those changes and possible a little bit of disruptions that could occur because of those changes, that's why the Q3 is down sequentially more than it would have been in previous years. Rod, do you want to add to that?

Rod MacLeod (CFO)

No, I think, I think you covered it. The only thing that I might add is that HFX iQ, which we should receive a bump from both in pricing, it's going to take a little while for that mix to ramp up. And we saw it increase or improve in Q2, and we'll see that continue to improve as we go into the third and the fourth quarters.

Operator (participant)

Your next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is open.

Nathan Treybeck (VP of Equity Research)

Hi, this is Nathan Treybeck calling for Larry. Thanks for taking the questions. You had indicated several times that you plan to diversify Nevro in interventional pain. You talked about new technologies and new indications on your existing technology and all within three years. Can you let us know what that will entail, and would you raise equity for M&A? Thanks.

Kevin Thornal (CEO and President)

Yeah. As far as, I'll answer the new indication question. As you know, we have 20 patients enrolled, as I said on the script, out of the 200 we need for our PDN Sensory Study. Our plan is to withdraw and extract some really good data that will allow us to build on the claims we already have on that indication, so that one's already in play. We've not talked about other indications that we're working on in the background, but we're in the pilot phase of some really interesting other areas of pain that's not been publicly disclosed yet. We'll do that whenever we get closer to something that's more tangible there. But that's the plan with our superior clinical team that we have.

I mean, look at the clinical results that we've been able to produce over the history of this company. That's a core part of who we are, and we're never gonna get away from that. So, think about the things that we're able to find because we're doing that clinical studies. You know, the Sensory Study is an offshoot because we saw these early indications in our first PDN study that allowed us to say, "Hey, you know what? We should explore this further because this is showing really good things for additional claims." Now, as far as new technologies and diversifying, yeah, I talked about it in, in the, the, the main pillar that we have to really diversify our revenue.

I'll just say that we're always constantly looking and taking meetings and looking at what should be part of our, you know, leveraging our biggest asset we have in this organization, which is our sales force. We've got great relationships. We have, you know, we've said publicly, 500 people out in the field, that should be leveraged to be able to service our same call point that we service today, with adding stuff in the bag that they're already doing from a procedure standpoint, or other areas that there are other procedures that could be launched that could help those patients that suffer from chronic pain. We're not gonna steer way far from the ship. We won't do anything stupid, but we're constantly looking for those opportunities. As far as raise- raising, capital, I'll let Rod talk about some of the options that we might have.

Rod MacLeod (CFO)

Yeah. Hey, Nathan. Really financing, it, it, it depends. It depends on if, if we enter into a deal, what, what the size and the magnitude and, and the timing of it is. We're, we're, we're in very good shape from a balance sheet perspective. We have about $330 million on the, on, on the books in cash, cash equivalents, and short-term investments as of the end of the second quarter.

With, with, with a little bit of growth, we find ourselves getting closer to that Adjusted EBITDA positive growth territory, and then cash flow should be not, not too far behind that. We like where we are from an operating perspective, but it really depends on what size of a, of a deal and, and when, when it comes along from, you know, from a financing perspective, what we'd, what we'd entertain at that point.

Nathan Treybeck (VP of Equity Research)

Okay, thanks. If, if I could follow up with one more. In terms of just the competitive landscape, you know, one of your larger public competitors reported a strong quarter, but in terms of, you know, the smaller private competitors like Saluda and Biotronik, would, would you say you gained or lost share in Q2? Where, where, where do you think Nevro stacked up?

Kevin Thornal (CEO and President)

Yeah, we our calculations show that we, we held steady with the physicians that we already had that implant, exclusively Nevro, or those accounts that we call splitters, that use some of us and some of, of somebody else. Obviously, they're gonna try new technology that's out there, but we don't think by our calculations and data that we can get, that there were significant impacts on any of us from those two new entrants at this time. To say that, you know, I'm an ex-athlete, both NFL and college, and I do not take any competitor, lightly, we'll continue to be vigilant.

Some of the changes that we made in our organization and the commercial organization will set us up to be more competitive, to not only just, you know, tread water and just keep the share we have, but our plan is to go out and take share. We're a highly competitive team here, and that's why we're changing our organization and ensuring we have A+ talent at every position, so we can go out there and continue to win in this market.

Operator (participant)

Your next question comes from the line of Robbie Marcus with JPMorgan. Your line is open.

Allen Gong (Equity Research Analyst)

Hi, team, this is Allen, not for Robbie. Just for the first question, you know, clearly, the, the rest of 2023 is gonna be pretty impacted by the commercial changes as you kind of, you know, refocus the organization. What level of confidence do you have that the majority of work is gonna be behind you by 2024, and that you're gonna be able to kind of return to a normalized growth rate then?

Kevin Thornal (CEO and President)

Yeah, I mean, that was the, that was the plan of making the change early here with Greg. You know, Greg had 17 years at Stryker. Rod and I both came from Stryker as well, where we know how to build world-class sales organizations and bring in our people that we know from other organizations that operate with the same level in intensity, competitiveness, and passion that we all do, and all the other leaders that we have on my direct reporting team, we're a highly, highly competitive group in everything that we do.

So, we believe that that six month mark is traditionally what it takes new people to sort of get ramped up, specifically if they're top performers, but maybe they're coming from a different side of med tech. We, we believe that most of that groundwork is gonna be taken care of in 2023. As I mentioned at the other question, doing it early was the right thing to do for our shareholders, our investors, and, and for all of us as employees, so that we can get off to a, a really good start as we come out, out of this year.

Allen Gong (Equity Research Analyst)

Got it. Then, you know, as a quick follow-up, you referenced confidence in the market kind of returning back to historical growth rates. I think, you know, I hope I'm not alone in saying that, you know, this idea of, you know, historical growth rates is one that's kind of been up in the air because the market has been, you know, pretty bumpy, both before Nevro first entered the market, after you entered the market, and then the slowdown we saw in the years after leading to COVID. When you talk about a normalized market growth rate, what are you, what are you thinking of?

Kevin Thornal (CEO and President)

Yeah, typically, the historical rate would be anywhere from, like, 6%-9%. You know, if you look at, if you look at this quarter and the last two quarters where we all had, we all had growth in the, the previous two quarters, this quarter was, as you mentioned, or the previous question mentioned, there was one large competitor that had really good double-digit growth. We had 4% growth, and then we had one of our competitors that were flat and then down 4%, we, we calculate in the U.S. It's, it's starting to diverge a little bit, but overall, the market's gonna show, likely show growth, in this quarter.

Just to go back to those remarks, the non-nonlinear nature, it's not gonna be a, a straight, you know, bottom left to top light, right graph that we see in some other elective procedures return. It's a little choppy as it's going up and to the right. It's not just a, a linear line, but the, the trajectory is going in the right direction if you look back from the last two, two to three quarters now.

Operator (participant)

As a reminder, it is star one if you would like to ask a question. We will take our next question from Brandon Vazquez with William Blair. Your line is open.

Brandon Vazquez (Research Analyst)

Hi, everyone. Thanks for taking the question. Kevin, you had made a brief comment earlier about potentially replacing or, or filling some open territories as you guys make some commercial changes. Just wanted to, one, clarify, you know, do you have open territories? Is that a result of any higher than usual turnover, given there's been some volatility in the core market recently, or perhaps there's just commercial changes? Curious if you can just give an update on how the sales force has been. Is there turnover? Are you guys having to fill in some open territories, and does that kind of elongate what a, a recovery could look like since they have to ramp? Thanks.

Kevin Thornal (CEO and President)

Yep. No, we're, we're still within those norms of med device turnover. There's traditionally, you know, the 10%-20% type, type range. We only have a handful of territories open. A lot of that's behind us with what we've been doing behind the scenes since our, you know, our last public announcement was Greg's hiring and, you know, quickly bringing in some people that, that we both have known from, from, you know, even before Stryker and, and me, even before that as well. These are people that we've known that, that are great results-driven sales, sales professionals. So we have a handful of sales openings right now.

Yeah, anytime you make a change with an underperforming rep, even when you put in a A+, you know, star rep there, it does take them time to, to get those relationships built and to start taking share from our competitors. That's again, what's gonna take, you know, six months for us to start seeing some of those territories that we have proactively changed over, 'cause we've had some non-performing territories. We have some territories that, by the way, are absolutely crushing it in some areas that have higher than our national market share, sometimes double of what our national market share is. We know we can do it when we have the right people in the right territories.

Operator (participant)

Your next question comes from the line of Richard Newitter with Truist Securities. Your line is open.

Speaker 13

Hi, this is Sam on for Rich. Thanks for taking our questions. Just one quick one on, on the market growth rate, 6%-9%, just to clarify, is that inclusive of PDN when you, when you say that amount?

Kevin Thornal (CEO and President)

Yes.

Speaker 13

Okay, thanks. Then just as we think about, Salesforce productivity going forward with a lot of the changes getting made up front, how should we think about productivity ramp through 2024? And then how does that relate to what, what operating leverage the business can see as growth returns to more normalized rates in, in 2024? Thanks for taking the question.

Kevin Thornal (CEO and President)

Yeah, thanks, Sam. You know, as, as far as some of the, the reorganization that we had out in, in the Salesforce, really it's the realignment to who their managers are and, you know, a little bit of a increase and an enhance in their co- comp plan, where they're working together as a team to hit their number, the quota that we hand out to them. We had, we had people that were, were sort of chasing different numbers out there, and now they're aligned to work together closer to the customer, closer to the patient, to make those right decisions that are for right for their territory. That's really the, the big change that we have. As far as productivity, having a team that's working together and aligned together, that's always championship-winning teams that are out there.

It's not those teams that are full of all-stars that don't work together. We've seen it in sports. For those of us that watch sports, you can see those organizations that have a, you know, A+ people on their team, but they don't work together as a team. This is a team sport, right? Each of our sales reps can't do it on their own. They have therapy consultants, they have assistant sales reps, they have coaches that talk to the patients post-implant. They have to be working together as one oiled machine, and that that'll bring efficiency as well as the team culture and engagement should increase as well. So those are more of the things that we, we expect to get out of them.

Then longer term, you know, as I said publicly, being able to, you know, add in something more to their sales bag, eventually will also bring really strong operating leverage, because that will allow us to increase the revenue with the same footprint that we have out there today. Obviously, we can never comment on when and how and, and what we would do on an M&A standpoint, but that's something and why we're constantly taking all these calls and, and looking to see what would be a right fit for us over the longer term.

Operator (participant)

Your next question comes from the line of William Plovanic with Canaccord. Your line is open.

Speaker 11

Hi, it's John on for Bill tonight. Thanks for taking our questions. Just a quick one on iQ. I know you mentioned briefly, but are you seeing any ASP benefits, and do these benefits more than offset the ASP degradation you see on older generation products in the U.S.? Thanks.

Kevin Thornal (CEO and President)

Yeah, you, you were asking about ASP there?

Speaker 11

Hey, Rod. Yeah.

Kevin Thornal (CEO and President)

Okay. Sorry, I didn't hear that real clearly.

Speaker 11

Uh-

Rod MacLeod (CFO)

Yeah, we're so, so far, we are seeing the sort of pricing that we anticipated for the year, and we're receiving a premium on the iQ product. We are seeing some pricing erosion, as we've talked about in prior quarters and that we've seen over the last couple of years with some of our legacy products, and those continue to make up a disproportionate amount of the mix. They have a tendency to offset one another. As iQ continues to become a greater part of our mix as we go throughout the year into Q3 and Q4, we anticipate that the pricing will hold, and we'll start to see that show up in margins, particularly in Q4, when we also start to see some of the benefit of some of the lower costs from Costa Rica starting to flow through gross margins.

Speaker 11

Great. Thanks, Rod. Kevin, for you, just when you think about the HFX Coaches and how this allows sales reps to be more productive in terms of selling versus managing patients, are we still at the beginning ages, beginning innings in terms of sales productivity for utilizing those Coaches and bringing up rep? Thanks. Same question.

Kevin Thornal (CEO and President)

Yeah, I'd call it, early innings or, you know, maybe fourth inning, if you will. It's there. Some would call that mid-inning, maybe, depending on when you bring in your, your reliever. So I think that, yeah, I, I would call it early to, to mid-innings on, on that, and we're seeing a lot of success. Now, you know, part of the changes that we've made and the realignment is those coaches are now gonna be aligned closer with each of those individual territories, so that those coaches, work alongside the sales reps as one team and get to know the physicians and what they like and what the patient's, pool is.

Yes, that allows our sales reps to concentrate on going out and winning new business and, you know, taking more cases away from our competitors while the coach is talking to the patients and really taking care of them. Just wanna, you know, make sure we're not just talking about, you know, money and growth and everything here. The good news is about the coaches is it's better for the patients as well. You know, if our, if our rep is in the OR covering a case, they're not answering the cell phone when a patient calls them. Our coaches are stationary, and they're not traveling around. So our coaches have the ability to be able to spend more caring time with those patients.

And, you know, these, some of these patients are, are trying to find optimal pain and really trying to dial in what the right frequencies are for them or the right amplitude or what have you, and really talk them through their, their pain management journey. They've really appreciated the fact that they can get somebody on the phone more quickly and often than they could if the sales rep wasn't available. It's better for patients and our, and our customers as well.

Speaker 11

Great. Thank you so much.

Operator (participant)

As a reminder, it is star one if you would like to ask a question. Your next question comes from the line of Bradley Bowers with Mizuho Securities. Your line is open.

Bradley Bowers (Senior Associate)

Hi, thanks for taking one of our questions again. Just wanted to follow up from Mizuho here. We've, we've been talking a lot about, you know, you know, a lot of the growth outlook, but just wanted to hear more about, you know, kind of the reimbursement wins that you had. I mean, obviously, they're incremental to, you know, all of the coverage that you've gotten on both PDN and, you know, nonsurgical back and, and on the core business over the years. But wanted to kind of hear, you know, how they're impacting conversations with doctors and, you know, are you kind of-- You know, are, do you plan on leading with, you know, those new wins and, and to help drive the U.S. trials higher as well? Thanks for the call.

Kevin Thornal (CEO and President)

Yeah, you know, we, we believe, which we'll never know for sure, what turned the, the, the tide for someone like First Coast and Novitas. They wouldn't have made that change in decision unless there was clinical data that led them to make that decision. We believe that we made the biggest impact, regardless of what other press releases or whoever else took the credit for that, because it was the RCT data that was out there that allowed them to make that decision based upon the clinical data. We have a team. Our government affairs and medical affairs team is one of the best in the business. I'd put them up against anybody in any of the companies I've ever worked for or any of our competitors.

They are an unbelievable team that work underneath Greg Siller in the commercial organization and are completely aligned with working with our customers to ensure that their patients have access. You know, yes, that's a big tailwind for us. However, you know, they've been shut down for quite some time, and believe it or not, not all the physicians just read the newspapers and find out about this good, good news. It's our team's ability to go out there and educate, and educate the referral pathways in for PDN that need to be sort of primed.

It's not like immediately that happens in Q3 and Q4, but we're going out there and, and selling the good news and telling the good news to both the referring physicians as well as the implanting physicians, that this is now an available treatment for those patients that were previously didn't have the access. It doesn't happen overnight, so that's gonna take a little bit longer into, you know, Q3 and Q4 before we see a ramp-up from, from those changes. Think about the areas in which they cover. You know, these are, these are high, high Medicare populations and, and really cover a lot of those 205 million people that we now say, are covered for, for PDN. Yeah, thanks for recognizing that that's a, that's a big win. It's a big win for patients.

Bradley Bowers (Senior Associate)

Thank you.

Operator (participant)

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

Dave Turkaly (Managing Director and Senior Equity Research Analyst)

Hey, great. Good afternoon. On the guidance, I just wanted to clarify one thing. You, you, you mentioned sort of market growth fluidity, but you also said, you know, obviously there's been some turnover. I'm just trying to make sure that the, the updated 3Q and implied 4Q include that turnover, that you're not anticipating more, that you've made those changes and, and replaced the folks, and that, that, that is implicit in what you're talking about for 3Q and 4Q right now?

Kevin Thornal (CEO and President)

Yeah, we took that all in consideration as we, as we set the guidance. You know, there may be some macroeconomic things that we can never predict that could be outside of our control. However, we took into the just like we said in our prepared remarks, that the sort of, you know, two quarters of, of all of us growing, this quarter being the first one where we saw one of our competitors flat to negative in the U.S., gives us a little pause. Obviously, the changes that we've made. We've got a handful of territories that we're interviewing for and close to some candidates. You know, we took that into consideration as, as we set the guidance for, for the back half of the year.

Dave Turkaly (Managing Director and Senior Equity Research Analyst)

For some of the folks that are no longer with you, I imagine you've taken out whatever their contribution was or adjusted those numbers to account for the fact that you might have to start, you know, rebuilding a territory maybe from scratch or from a lower base.

Kevin Thornal (CEO and President)

Yeah, I see where you're going there. Just, just to make sure you understand, most, we don't have any territory that has one person only in them, right? When we lose a, a rep or more than likely, we made the decision that the rep wasn't gonna be an A+ player, and we wanted to make a change. There are therapy consultants and assistant sales reps that are often there to be able to keep the business sustained for at least a period of time. Those are areas in which you don't expect, you know, a 5%-7% growth out of because those that are left are just, you know, managing the current business that's there. Yes, we took that into consideration as well as we set the Q3 and Q4 guidance.

Dave Turkaly (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

There are no further questions at this time, so I would now like to turn the conference back to Mr. Thornal for closing remarks.

Kevin Thornal (CEO and President)

Thanks for joining the call, everybody, and, I look forward to reporting on our progress on the next call. See you then. Thanks.

Operator (participant)

Ladies and gentlemen, this concludes today's conference. We thank you for your participation. You may now disconnect.