Nevro - Q3 2020

Transcript

Speaker 0

Ladies and gentlemen, thank you for standing by, and welcome to Nevro's Third Quarter 2020 Financial Results Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer I would now like to turn the call over to Matt Basco from Gilmartin Group for introductory remarks. Please go ahead, sir.

Speaker 1

Good afternoon, and welcome to Nevro's Q3 2020 earnings conference call. With me today are Keith Grossman, Chairman, CEO and President and Rod MacLeod, Chief Financial Officer. The format of our call today will be a discussion of Q3 trends and business results from Keith, followed by detailed financials from Rod, and then we'll open up for questions. Earlier today, Never released its financial for the Q3, which ended September 30, 2020. A copy of our earnings release is available on our Investor Relations website.

This call is being broadcast live over the Internet to all interested parties on November 5, 2020, and an archived copy of this webcast will be available on our Investor Relations website. Before we begin, I'd like to remind everyone that comments made on today's call may include forward looking statements within the meaning of federal securities laws. Our results could differ materially from those expressed or implied as a result of certain risks and uncertainties. Please refer to our SEC filings, including our Form 10 Q to be filed later today for a detailed presentation of risks. In addition, we will refer to adjusted EBITDA, which is a non GAAP measure that is used to help investors understand Nevro's ongoing business performance.

Please refer to GAAP to non GAAP reconciliation tables within our earnings release. And now, I'll turn the call over

Speaker 2

to Keith. Thanks, Matt. Good afternoon, everyone. Thank you for joining us today. Today, we reported Q3 2020 worldwide revenue of $108,500,000 representing growth of 8% compared to the Q3 of 2019, as well as a sharp sequential recovery of 92% growth over the Q2 of 2020.

U. S. Sales grew 8% over prior year to $90,100,000 in the 3rd quarter, representing sequential growth of 78% over prior quarter and driven by an increase in patient and customer activity compared to the severely COVID impacted Q2 of 2020. In the Q3, total U. S.

Permanent implant procedures increased 9%, while new patient trial procedures were down only 5% compared to the prior year period. Reported U. S. Revenue also excludes $700,000 of product shipments due to a customer bankruptcy during the period. Daily patient trial activity increased 50% over the Q2 of 2020 and has improved sequentially every single month from July to October.

We're pleased with the dramatic pace of recovery in the U. S. And the 3rd quarter trial activity, which was approaching, though still just shy of prior year levels as we entered the Q4 of 2020. International revenues increased 10% year over year as reported or 5% on a constant currency basis to $17,500,000 in the 3rd quarter, representing sequential growth of 2 26 percent over the prior quarter. The increase in international revenue was primarily due to a successful Omnia launch and an increase in patient and customer activity compared to the prior quarter of 2020, along with a rebound in customer inventory levels.

Remember that SCS procedures are performed on an outpatient basis with relatively little OR time required and no inpatient or ICU resources that are typically consumed. We've seen our customers return to performing procedures as quickly as patient willingness and facility safety requirements have allowed. While we expected to see a shift from hospitals to ASCs during the pandemic, our Q3 site of care mix returned to Q1 of 2020 levels. Though we still believe that the gradual shift towards performing SCS procedures in ASCs will continue to grow over time as a percentage of total procedures. Case cancellation rates peaked in April with the shutdown of elective procedures, and those cancellations have since sequentially declined month over month all the way through October.

We saw few cancellations resulting specifically from COVID in the Q3. In the case of trials, while we have largely recovered, we're still trending just below prior year levels due, we believe, primarily to a reluctance on the part of new patients to seek care during the pandemic. As we sit here today at the beginning of November, a majority of the canceled permanent implant cases from Q2 that have been willing to reschedule have been completed, which leads us to believe that directionally, the revenue recovery curve appears to be playing out as we discussed with you last quarter. With trials slowly recovering and some backlog cases still expected to be recaptured this quarter, we feel our earlier expectations for revenues that are roughly flat with prior year are still reasonable. However, we're also continuing to monitor areas where COVID cases have recently started to rise, as I'm sure you are.

Thus far, we've seen only a small impact to elective procedures through October in the U. S. And Europe. However, increases in COVID activity around the world will continue to observe pressure on patients' willingness to seek care of all kinds and potentially even impact facility capacity in some areas, which could provide some downward pressure to our view for Q4. While the environment continues to be a difficult one, we feel strongly that we're faring better than our SCS competitors and in fact, many of our MedCheck peers.

Within the SCS market, we believe the launch of Omnia has provided an advantage to Nevro, leading to additional market share gains. Even through the pandemic, physician enthusiasm around Omnia and its versatile platform capable of offering HF10 and lower frequencies, in addition to pairing of frequencies, has led to a more rapid adoption among our customers than we initially anticipated. We believe these favorable trends confirm that the Omnia platform provides us a compelling reason to once again engage with every doctor practicing in the SCS space, and we view most pain doctors and neurosurgeons in the field as potential customers. We also believe our commercial team is executing at a higher level, which has strengthened customer relationships during this difficult time. Our dedication to patient support and long term outcomes is fundamental to our company, and it's an area in which we continue to invest.

During the Q3, we expanded our digital physician education programs and remote patient support programs to an enthusiastic response from our customers. In addition, we launched Omnia in both Europe and Australia in the Q2 and continue to ramp up efforts in those markets. Our supply chain has remained healthy and our balance sheet provides us great resilience with roughly $573,000,000 in cash and investments at the end of September, actually up from the end of the quarter before it. One of the areas I'm proud of is our ability to manage expenses and drive operating leverage without eroding our team or our core capabilities to drive growth. As a result, I believe we continue to be in a strong position to execute on our long term strategy, and Ron's going to talk more in a few minutes about our results in the expense area.

We continue to invest in R and D to evolve our product capabilities, and we're going to have some really interesting things to talk to you about in 2021. We're also working hard to expand our total addressable markets with new clinical data and new patient indications. Our PDM study continues to move forward and we've had a very high percentage of study subjects the control arm crossover to the SCS treatment arm at 6 months as permitted by the trial protocol. We believe that's a strong indication that our therapy addresses a critical and unmet need in this patient population. We still plan to present the next round of complete 6 months data along with a preview of the 12 month responder rate data from this trial at NANS in January of 2021.

We've been in pre submission discussions with the FDA regarding our data and our submission strategy, and I'm pleased to say that we're now planning to submit our PMA supplement to the FDA in the current quarter, which keeps us on track for a midyear 2021 approval and a second half commercial launch. In next quarter's call, we'll begin to talk a bit more about our market launch plans and expectations for this really exciting opportunity. On our non surgical refractory back pain study, we continue to expect to present our 3 month primary endpoint data at NASHIP 21 in January with journal publications to follow. In total, we should have a very large presence at NASH as we usually do, with quite a number of data presentations at this conference, most notably, of course, the PDN and NSRBP studies. In August, CMS published a proposed rule for outpatient payments.

Outpatient payment rates for both hospital and ASC proposed rule, CMS recommended a requirement for prior authorization of SCS procedures for Medicare fee for service patients in the hospital outpatient setting only. That was set to begin in July of 2021. Now CMS' rationale for this proposed requirement was due to a perception on their part of overutilization issues. We have very thoroughly reviewed the SCS utilization data, and we've submitted our comments to CMS on their proposal. In those comments, we pointed out that any overutilization was driven in large measure by non rechargeable or primary cell products, which require surgical replacement on a much more frequent basis than rechargeable devices like those from Nevro.

The reduced product life of a non rechargeable product creates a situation in which patients must undergo more unnecessary and costly procedures, resulting in greater expenses and increased surgical risk to replace their system much more frequently than rechargeable systems. Despite this reduced durability and lower resulting economic value, Medicare reimburses non rechargeable systems at the very same amount as rechargeable devices. As a reminder, rechargeable technology has demonstrated a much longer life cycle of 7 to 10 years or even longer. This is 2 to 4 times the reported life of primary cell products. We strongly recommended that if CMS were to proceed with the prior auth requirement that they should limit it to non rechargeable products.

However, if they do proceed with requiring prior auth for the entire category, we'll be well equipped and prepared to manage that process. Remember that the vast majority of our business, which consists of both private pay patients and our Medicare Advantage patients require prior authorization today. Lastly, we announced in mid September our plan to establish manufacturing operations in Costa Rica. Currently, as you know, we use contract manufacturing partners for our business. As part of our confidence in our growth plans moving forward, we are establishing in source manufacturing for our pipeline of future products to ensure we have the most efficient cost structure and flexible capacity, while also maintaining the highest level of quality control as we scale.

We entered into a 10 year lease for a manufacturing facility in Costa Rica, with total capital expenditures expected to be approximately 11,000,000 dollars between 2020 2023, with an additional $10,000,000 above implementation costs over the same period of time. We expect the new manufacturing facility to be validated and approved for commercial production in 2022. Since the pandemic began, our highest priorities as a company have been the health and safety of our customers, their patients and our employees the support and coverage of our customers and their clinical case activity throughout the period the integrity and readiness of our supply chain the prudent stewardship of our balance sheet and the maintenance or improvement of our competitive position in our capabilities in order to exit this crisis the way we came in back in the Q1, which was with a ton of momentum. Thus far, I believe we've achieved these five goals and will continue to work hard in the coming weeks months to further our progress. While we're certainly still in the midst of this pandemic and dealing with its impacts upon our business, I remain very excited about the various growth drivers for this business.

As we think about our ultimate emergence from the pandemic, the combination of a return to overall market growth, continuing to grow Nevro's market share, a measure of pent up demand likely to exist at that time for SCS suitable patients and the impact of new product and indication launches like PDM, it should be the beginning of a very attractive period for the company. Lastly, and as I have been from the beginning of all of this, I'm grateful to the entire Nevro team for their hard work and their dedication during a time of great and continued uncertainty. Thank you again for joining us today. And with that, I'll pass the

Speaker 3

call over to Rod. Thanks, Keith. I'll begin with our worldwide revenue for the 3 months ended September 30, 2020, which was $108,500,000 an increase of 8% compared to $100,200,000 in the prior year period. 3rd quarter 2020 revenue growth was primarily driven by an increase in patient and customer activity compared to the severely COVID impacted Q2 of 2020. U.

S. Revenue was $90,900,000 an increase of 8% compared to $84,200,000 in the prior year period. Reported U. S. Revenue also excludes $700,000 of product shipments due to a customer bankruptcy during the period.

Year over year, U. S. Permanent implants increased 9%, while trials were down approximately 5% during the Q3 of 2020. Although U. S.

Trials declined in the Q3, we remain encouraged by the rebound in our business and continue to realize incremental improvements month over month in organic daily trials from July to October. International revenue was $17,500,000 an increase of 10% on an as reported basis or 5% on a constant currency basis compared to $15,900,000 in the prior year period. The increase in international revenue was driven by successful Omnia launch and an increase in patient and customer activity compared to the prior quarter of 2020, along with a rebound in customer inventory levels. Gross profit for the Q3 of 2020 was $76,100,000 an increase of 9% compared to 69 $900,000 in the prior year period. Gross margin was 70.1% in the 3rd quarter compared to 69.8% in the prior year period.

Compared to the prior year period, the increase in gross margin in the Q3 of 2020 was primarily attributable to product mix. Operating expenses for the Q3 of 2020 was 79 point $6,000,000 a 7% decrease compared to $85,900,000 in the prior year period. The year over year decrease in operating expenses was primarily related to reduced travel and training related expenses, decreases in discretionary expenses during the COVID-nineteen pandemic, as well as continued management focus on driving leverage throughout the business, which began well before COVID. This was partially offset by a one time charge of 2 $500,000 in the quarter related to our CFO transition. Legal expenses associated with patent litigation were $2,300,000 for the Q3 of 2020 compared to $1,900,000 in the prior year period.

We expect that operating expenses will return to a run rate roughly similar to the Q1 of 2020 as revenue continues to recover. Net loss from operations for the Q3 of 2020 was $3,500,000 a 78% improvement compared to a loss of $16,000,000 in the prior year period. Adjusted EBITDA for the Q3 of 2020 was $13,600,000 compared to a loss of $2,000,000 in the prior year period. Adjusted EBITDA excludes certain litigation expenses, interest, taxes and non cash items such as stock based compensation and depreciation and amortization. Please see our financial tables for GAAP to non GAAP reconciliations.

During these uncertain times, we continue to focus on cash preservation while balancing the need to reinvest in the recovery process. Cash, cash equivalents and short term investments totaled $572,900,000 as of September 30, 2020. Net cash increased during the Q3 of 2020 by $10,500,000 That concludes our prepared remarks. I'll turn the call back over to Matt to moderate the Q and A session.

Speaker 1

All right. Thank you. And can we please open the line up for questions?

Speaker 0

Your first question comes from the line of Larry Biegelsen of Wells Fargo.

Speaker 4

Good afternoon. Thanks for taking the question guys and congrats on a nice quarter. Keith, one on the pipeline, one

Speaker 2

on the

Speaker 4

recovery. And sorry to ask such a short term oriented question on the recovery, but I just wanted to understand your comments on the call. On trials being down 5% in Q3, the press release talked about recovery or improvement through July through August. So my question is, were trials up year over year in October and is that cancellation rate that you talked about improving through the quarter? Are you seeing that ticked up?

And I had one follow-up.

Speaker 2

Okay. Yes, 2 different things. So from a cancellation of cases standpoint, I would say that's been a very small factor, Larry, throughout Q3 and remains so, frankly, even in October. So that's good news. And it's a little hard.

I mean, cases get put on and taken off the surgical calendar all the time. So sometimes it's hard to discern the nature of cancellation. We're more tuned into them now than we've ever been. But I think it's safe to say that COVID related cancellations are sporadic and a fairly small element of our activity right now. From a trial standpoint, trials have gone up on a month over month basis for the last 4 months.

Your question, I think, was are they still below prior year trends in October? The answer to that is yes. So we've been really happy with the rapid kind of V shaped recovery of patients willing to come in and seek treatment. And we think it's different from lots of other categories of patients, frankly, from other categories of pain patients. If you look at the doctor visit data for to pain doctors, we seem to be doing better than that category in general.

So we're pleased with the bounce back with the pace and where it's landed and the fact that it continues to grow. It is still slightly below prior year. And I think as we try to diagnose the reason for that, Larry, it comes pretty squarely down to patient reluctance. I think it's not while there is some friction in hospital and ASC capacity and new procedures, it's probably not that much, at least for us. And there's doctor willingness to get volume back.

So everything seems to be lined up in the right way. But there's still some residual reluctance on the part of patients to seek care and a willingness on some the part of some patients to defer care even in this category. And we believe that will free up over time, but the triggers are probably a little bit different for every single patient. It might be employment, it might be the vaccine, might be their local infection rates, it might be their level of pain. We think it will improve, but it probably won't be back to normal, I don't think, in this particular quarter.

It's close, but we don't think it will be back to prior year pre COVID levels.

Speaker 4

That's helpful, Keith. And then on the pipeline, at a recent investor conference, you talked about new products in 2021. And I think you in addition to merging back, I think you alluded to new products on this call. Could you are you willing to kind of give us any color on what new products you might be launching in 2021? Thanks for taking the questions.

Speaker 2

Yes. No, I'd like to keep that one wrapped up so we can unwrap it when we launch just for lots of reasons, not the least of which is competitive reasons. We've been a pretty open book on new patient categories and indications and the trials and data sets that will get us there. As you know, we've been trying to keep things a little closer to the vest until we're ready on product introductions. But hopefully, in the first half of 'twenty one, we'll certainly be able to talk more openly about some of those.

Speaker 0

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

Speaker 5

Hey, guys. This is actually Alan on for Ravi. Just to start off, I had kind of a question on REN. Now that you're kind of you have a better visibility into that second half of twenty twenty one timeline, what should we really think about the pace of adoption in that market. I think you guys have talked about in the past half a little bit of a different kind of call point for you guys.

So how should we really think about that business picking up in the back half of 'twenty one and then in 2022 and beyond?

Speaker 2

Okay. Alan, you said I thought I heard you say RDM. Did you mean PDN? PDN. Sorry.

Okay.

Speaker 4

It's been

Speaker 5

a long day.

Speaker 2

All right. So we were trying to figure out what RDM was and if we had missed something here. So I missed part of the rest of your question. You're looking for any discussion of potential adoption rates after FDA approval?

Speaker 5

Yes, since that's just kind of like a different call point for you guys.

Speaker 2

Yes. I think we're probably not ready to provide forecast or visibility or guidance of any kind on either adoption or investment for PDN. But I think we're close to being at that point. We're doing a lot of that body of work is behind us, but frankly, a fair portion of it is still to be done over the course of the rest of this quarter. I think when we get to the Q1 call, we will almost certainly dedicate a fair portion of that call to talking about the size of market, how we're thinking about market segmentation, positioning, launch strategies and even investment levels.

So give us another quarter on that one and we'll provide a bit more visibility.

Speaker 5

Got it. And then I guess talking about Omnia and kind of the other new products that maybe some of your competitors are bringing up, it seems like clearly OUS looks like it's been a very strong launch for you, but even like domestically, how should we think about physician willingness to really look at new products right now is that a discussion they're willing to have and like what are you seeing on the competitive front as well? Thank you, guys.

Speaker 2

Yes. Well, there's certainly a willingness to look at a new product like this with existing customers, that's clear. I mean, if you look at Omnia, it currently represents between 70 percent 75% of our utilization in the U. S. Market.

In Australia, where you typically see once a product is listed a complete switchover, we have maybe as we expected, now see a virtual 100% utilization of Omnia in Australia. And the European markets where we've just introduced are sort of somewhere in between, but ramping quickly. So the acceptance of Omnia has been at least as good, probably better than our internal expectations among our own customers. With regard to other customers, I think you fall back on of a market share look. We do think we have continued to take a bit of share each quarter even through COVID.

It's really hard to quantify market share because we don't have a lot of transparency from our competitors given their ownership structure. We do some of our own work on market share, but it's a little opaque and it's difficult to make really granular sense of it. But I would say we do continue to gain share. And if you look at share over a longer period of time, say from 18 months ago today, I think it's pretty easy to discern an increase from what was probably the mid teens, low to mid teens to today probably upper teens to even 20% or so share of the U. S.

Market. So I think it's been a nice range of capture for us over the last, call it, 18 months or so.

Speaker 0

Your next question comes from the line of David Lewis with Morgan Stanley.

Speaker 6

I guess just 2 for me, Keith. The first is I know it's obviously early, but I start thinking about the structural growth rate and obviously at our recent conference you were going to talk about broadly how investors can start to think about the forward year. I mean, I look at consensus numbers for 'twenty one, Keith, in the kind of upper teens type of growth 'twenty one versus 'nineteen. Obviously, that implies sort of a business that's kind of growing 10 percent -ish or 2x the market rate over a 2 year period of time. How are you thinking about your ability to grow relative to market?

Or any thoughts you believe on this year, next year and other revenue? And then kind of related to this, kind of, Rod, just thinking about profitability, that was a pretty very, very good number here on a profit basis, and I appreciate OpEx will start to scale. But it does look like you're making dramatic progress on OpEx here and profitability towards the back half of this year, and I'm sort of assuming that extends to the next year. So just first off, any commentary you want to share on top and bottom for next year even at a high level?

Speaker 2

Yes. So as you might expect, there's not a lot I can give you on 2021. We don't have guidance for Q4, much less 'twenty one. I do think we view this as sort of a pre and post, like probably most companies, pre and post COVID basis. And I think our view of the business on a post COVID, and we think by the way the 'twenty one will have some portion of both of those areas within it.

But yes, I think our view of post COVID portion of 'twenty one is very bullish. We look at the things that are lined up with Omnia and the trajectory we're on as a company, the execution of our sales organization, probably the impact from what will then be a fair amount of pent up demand from patients whose pain doesn't resolve through some other way and they don't have an alternative therapy. So we think the whole space will actually see a bit of a nice long wave behind it when COVID resolves. And if you layer on top of that the fact that we've been capturing share and we think we can continue to do that and that around the second half of next year we're launching PDM, It does feel like the outlook for that portion of 'twenty one is quite good. The real question is, does that portion of 'twenty one start on March 1 or September 1?

And or is it kind of a slow and steady ramp up until somebody flips switch of some sort. So I think that's what everybody is grappling with. I think between here and there, so the COVID portion of 2021 sort of feels to us like it will be a continuation of maybe what Q3 looked like with kind of slow and steady improvement and not a lot of impact from the kind of dramatic closures we saw back in March April. Trying to piece all those together and come up with guidance is certainly a little bit difficult today. Hopefully, we'll get a little bit more clarity by Q1, but we'll just have to see.

And maybe I'll let Rod take on the spending and operating income question. Sure. Hi, David. This is Rod. Thanks for the question.

From an operating expense standpoint, like a lot of other businesses,

Speaker 3

we're getting a little bit of a good guide in Q3 as expenses are reduced, travel, conferences, etcetera, related to COVID restrictions. So we're getting a little bit of lift from that. As you've been tracking as well, the management team has made a lot of decisions, a lot of it started before COVID in terms of driving business leverage at Nevro here. Driving efficiencies in the sales channel, patient support process have continued to drive leverage, and we'll continue to focus on that as we

Speaker 2

go forward as well as

Speaker 3

in other parts of the business. And we've also continued to focus on driving investment and resources around our key strategic initiatives, which is driving focus in the business as well. As we noted, in Q3, we also had the $2,500,000 of the CFO transition cost. Our litigation was $2,300,000 versus $1,900,000 in the prior year. And like Keith said, we're not providing guidance, but we are pleased with our adjusted EBITDA in Q3.

As we go forward though, we are going to have a bias towards growth. And

Speaker 7

with some

Speaker 3

of the initiatives and opportunities that Keith mentioned, there will be opportunities for us to forward spend, for instance, in the PDN in anticipation of the PDN launch where we could see a

Speaker 2

little bit of fluctuations

Speaker 3

on a quarter over quarter basis as it relates to some of that investment and as COVID restrictions begin to lift. So super pleased with our Q3 results and we are continuing to drive leverage throughout the business as we move forward.

Speaker 6

All right. That's super helpful. And then Keith, just one more quick future question for you on sort of product pipeline. So number 1, I mean, obviously, Medtronic has sort of confirmed to be copying your clinical playbook, both in terms of PDN, non surgical, as well as UOLN. So two questions.

1, you have kind of expressed obviously less relative interest in UOLN just given the clinical data requirements and the bigger opportunity you have in front of you. Is that sort of still your view relative to UOLN just given Medtronic's interest in that particular category? And as we think about the future, Keith, I know you're not going to tell us much about what these products are, but should we think of this more as label extension or think of it more as fundamentally new therapeutic areas, stimulation patterns and things of that nature? So is it more software label or is it more hardware? Thanks so

Speaker 2

much. Yes. Well, let me take the first one, ULLN, I think, and the Medtronic or any other interest. I expect our competitors to have an interest in the segments that we've expressed interest in for all the same reasons. There are good and large opportunities to grow the business and help a lot of patients.

So I'm sure that they have same interest for the same reasons, assuming they couldn't get there with their technology. And I think that's a very large assumption in the case of PDN, they've got a long way to go. And if they want to generate the kind of data that we believe both regulators and payers and clinicians in the diabetes world want to see, they're going to have to pursue some pathway that doesn't represent a shortcut. And so there's a significant head start here on the part of Nevro at the very least. And all of that's based on an assumption that high frequency doesn't have some meaningful differential benefit in this category of patients, something by the way that we believe and believe pretty strongly.

Now in terms of whether or not these indications are just claims or distinct markets and market launches, I really think in the case of PDN, it's very much the latter. Or maybe better put it to the both. It's both. It certainly has to be a label claim addition and FDA approval. But it is an distinctly different market, different referral base, different patients, different type of pain, different competitive therapies and a different decision making process.

And the payers will view it differently as well. So I think we look at this as really launching into an entirely new market. The last part of your question was, I think, what are the implications for the product and could it be product differences over time as well? And it certainly could be. If not initially over time, I think that's quite possible.

In fact, over time, it might even be likely. But we're taking this internally as a significant new productnew market launch. David, does that help answer your question?

Speaker 6

It does very much, sir. Thank you so much for the detailed answer.

Speaker 2

Okay. You bet.

Speaker 0

Your next question comes from the line of Bob Hopkins with Bank of America.

Speaker 8

Hey, thanks and good afternoon.

Speaker 2

Hi, Rob.

Speaker 4

Hey. So,

Speaker 8

Keith, just wondering if your how your thoughts may have evolved over the last couple of months on PDN and the timelines for when that could have a real commercial impact. And just curious if that's changed at all over the last couple of months as you guys are getting closer and closer to data and commercialization. And kind of what I'm getting at is, is this going to be kind of a long slog in terms of developing the market or are there ways to accelerate the accretion of those pathways?

Speaker 2

Well, let me answer that a couple of ways. I'll tell you that as time has come along here over the last quarter or 2, we're smarter about this opportunity internally, at least in 2 ways. 1, we continue to see more data. Some of that data will be seen by everyone in a couple of months. And we continue to get more information and get more data about the market and expose a lot more endocrinologists and podiatrists and internal medicine folks and primary care physicians on the technology and talk to a lot more patients and do a lot more market research.

And we're doing really a tremendous amount of work internally. And I would say that the sum total of the impact of all those things is a has been a growing level of excitement among our team and our Board about this opportunity. So I would say we're, with each passing month, we get more psyched internally about the ability to enter this market and grow a meaningful and defensible business and help a lot of patients that couldn't otherwise be helped and start to talk to a whole different group of doctors. So that's one side of it. In terms of the impact on the business and ways to accelerate, certainly we're always looking at ways to accelerate the impact.

If you think about maybe a mid year approval, what do you do from then? Really, you can't do a lot of market education you have an FDA approval, of course. I mean, those are the rules of the road. And like everybody else, we play by them. So most of our education effort will take place after an FDA approval.

And we have some work to do with at least some payers out there as well. So those things take a little bit of time. On the other hand, there's going to be great exposure to not only 6 month, but 12 month data by then. There will be data in the published literature by then. We will have presented data at not only NAMS, but likely ADA by then.

And so there will have been a fair amount of exposure and there is a lot of pent up demand among these patients. So I do expect some short term impact, but we have to patients referred, get them trialed and then get them implanted. And that referral comes from a new referral base. So we'll do as much as we can to seed that market and that initiative upfront, but much of it will start at launch. And so I think you'll see second half of 'twenty one where there's almost certain to be some revenue impact, but it's likely to be mostly preparing for a broader revenue impact in 2022.

So without putting numbers to it, I think directionally that's how you should be thinking about

Speaker 8

it. That's great. Thank you for that. And then one short term oriented question. I just wanted to understand your thought process around the comments you made earlier and reiterated about the Q4.

I'm just curious if your commentary in Q4 assumes an increase in cancellation rates from here and just what you're seeing on that front today. Just want to understand how you thought about those comments.

Speaker 2

Yes. It really doesn't reflect I with October under our belt and a couple of days of November, it really doesn't reflect current cancellation rates. This is less about looking at our own patient records and more about reading the newspaper. And just kind of seeing what's going on out there and hearing what hospitals in Europe might be talking about doing in November December, plans that they're making, rumors that are afoot in certain countries about maybe treating certain hospitals or certain types of procedures differently. Nothing has actually happened at this point other than infection rates are beginning to spike around the world and we're anticipating what might happen in the second half of the quarter.

So Bob, it's based much more on that than it hey, something is starting to happen in October. October actually felt pretty good. And keep in mind, this is a 4th quarter where when we talk about being flat over prior year, we were getting a whole bunch of traction last year in Q4. That was a very strong comparable for us. We had just launched Omnia, and it was a good quarter for us.

So I think absent kind of an erosion of patient demand here in November December due to COVID, kind of a flat performance to prior year feels, A, very good and B, pretty likely. But we temper that with what's the likelihood that there won't be an incremental COVID impact in November December based on what we're seeing in infection rates, etcetera, and it seems like there probably will be. We can't size it. We don't have guidance. We can't give you a range.

We just think it's likely to have some impact to that view.

Speaker 0

Your next question comes from the line of Danielle Antalffy with SVB Leerink.

Speaker 9

Hey, good afternoon, everyone. Thank you so much for taking the question. Keith, just wanted to add to one of the competitors in your space has been talking about going on the offensive more just generally speaking and it has specifically talked about spinal cord stim and the recent DTM launch and we did see a data update there. I think it was the 9 month data back in October. I was wondering if you could talk about that and how you're viewing that potentially changing the landscape for you guys?

Speaker 2

Yes. Thanks, Danielle. I'd love to. Certainly, that's something we've been following. The Medtronic you're talking about, and they held a company sponsored webinar to present 12 month results for their new approach of multiplexing or pairing 2 existing low frequency waveforms, which is something they call DTM, as you mentioned.

I guess, first of all, it's important to remember that these data were simply released by the company. So they haven't been peer reviewed or accepted for publication or presentation anywhere at this point that we know of. It's sort of an unusual way to unveil important data, something at least I don't think we've seen before. But anyway, DTM, it seems like to us, based on what we know, to be sort of a simple trial and error programming of 2 low frequency programs, probably something in the area of 300 hertz and 50 hertz after performing traditional paresthesia mapping in the OR. So far, at least, Medtronic hasn't disclosed the frequencies of the waveforms involved to their own customers, which we know at least some of those customers have found sort of puzzling.

I don't the analogy we've used internally, I doubt most doctors would prescribe a pill with 2 active ingredients they didn't understand. And that sort of lack of transparency may seem equally inappropriate to some clinicians when delivering a dose of electric current. The pairing, by the way, of 2 frequencies is something that any Omnia user can program today if they want. Importantly, Omnia also gives them the ability to do HF10 in a pairing platform, as you know. As for the Medtronic data specifically, which I think is your question, this was a fairly small cohort that hasn't been peer reviewed.

They had a very high loss to follow-up in their 12 month data. I think it was like 15% or 16%, but they actually excluded them in their reported responder rate. In the SENSA trial, by comparison, we only lost one patient to follow-up at 12 months in a study that was double the size. And we actually included that patient in our intent to treat analysis. And finally, we didn't have Nevro personnel programming patients in the control arm, unlike this study where the unblinded employees program both the control and the test arm.

So it's very different and it's been received, I think, in the market as being that. And look, it is great to see competitors spending time and money bringing innovation and investment to the field. We kind of feel like if you're going to progress to therapy, we're going to need to see product specifications and clinical data that are just a bit more transparent and objective than this. But eventually, all of this will be up to bodies of scientific and clinical leadership in our field to adjudicate. In the meantime, we're pretty confident that the quality of evidence that we brought to the therapy through the initial RCT as well as our ongoing initiatives like NSRBP and of course PDN that we've been talking about and that those will continue to gain the greater support of decision makers going forward.

But it's something we'll continue to keep an eye on for sure. And we are glad, as I said, that we have competitors that are bringing new things to the market to try to capture more of these untreated patients.

Speaker 9

That's great. Can I just ask one quick follow-up and it's around clinical data in general in this market? When Nevro first presented their data and there was lots of excitement, but then it felt like it sort of subsided. This has always been an industry that has been driven more feature and relationship driven. And I'm wondering if you feel like now a few years down the road that the paradigm has shifted and the bar is higher for data.

So you're pointing out all of the issues with or the differences between the trials. I mean, does data matter more now in this industry? And is it continuing to matter more and more as more of these data sets come out?

Speaker 2

That's a great question. So I think the answer is yes without questions. And I think Nevro coming to the market with the original RCT that it really boldly had invested in made a big difference. And I think it's changed the tone and tenor of the market and the discussion around the importance of clinical data a lot since then. But I think it's kind of an ongoing process.

I don't know how many data sets we publish or present every single year, it's a lot. And so we've added to this body of literature very considerably over the last 3, 4, 5 years. And I do think that as you want to grow this business through new kinds of patients, it's going to require the payers and in some cases entirely new sets of users, and I'm thinking of PDN specifically, are going to demand a level of clinical evidence to which they're accustomed. And so I think that will elevate the game for SCS, generally speaking, if you want to grow the market by treating new categories of patients.

Speaker 9

Thank you.

Speaker 2

Thanks, Danielle.

Speaker 0

Your next question comes from the line of Joanne Wuensch with Citi.

Speaker 9

Good afternoon. I'm pulling a long day already.

Speaker 4

Hi Joanne.

Speaker 9

Hi. All right, two questions. The competitive landscape, you've been fairly active in taking market share. Help me understand how much of this is sales force driven, product driven, or what do you think is really going on in terms of just the general competitive landscape?

Speaker 2

Yes. Well, I'll take the cowards way out and say it's fifty-fifty or maybe in an effort to look more like I'm putting a finer point on it, I should say sixty-forty, right? Look, I really think it's both. I don't think I know how to break it out. Our sales team, our sales and commercial management group, our marketing group has been going through lots of changes over the last year and a half.

I think they are doing a great job. They are much more productive and effective. They're doing the right things. They're focused on the right things. They're not focused on the wrong things.

And we're just getting a ton more productivity and they're winning, which is terrific. And we have more to do there, I think, in putting a much finer edge on our commercial initiatives. But I'm really pleased with where they are, and I think it has quite a lot to do with our relative performance to competitors over the last year or 2. But I wouldn't underestimate the importance of Omnia. I think we said when we introduced this, this wasn't just a minor generational improvement, just a smaller can or with a new waveform.

This was a significant strategic change of being able to say, look, we can bring to the market a unique product like HF10 for stimulating these patients and getting better workflow, completely better outcomes with better data to prove it. But we can also do everything else. And we can any patient that requires any kind of different treatment over time, we can pair those therapies, we can do them separately over time. That's a really meaningful change. That isn't a 1 year life cycle kind of change.

That's a significant strategic product offering change for us. And it's durable and I think it's meaningful. And so I think that has had also quite a lot to do with what's been going on. Sorry, I don't really know all kidding aside, I don't really know how to weight the difference between those two things. But I think they've both made a difference, and I think they'll both continue to make a difference.

Speaker 9

That's helpful. Just for my second question, the whole discussion of CMS pre authorization, I'm trying to understand whether or not the whole discussion at the beginning of this was a so by the way, this is happening, but don't worry about it or how should we sort of gate this? Thank you.

Speaker 2

Well, I think the safest way to kind of tuck this in and think about it as part of the story is that usually proposed rules become final rules, everybody comments and rarely do they affect change from proposed to final. Sometimes it does. I felt it was important for investors to understand 2 things. 1, that we looked at the utilization data as well that we've come to a very clear conclusion about what they were seeing and why they were seeing it, and we've presented that back to them. And I think that the I think that we had a very engaged, very curious and maybe even a little bit surprised audience when we did present that back to them.

That doesn't mean that the final rule will be any different than the proposed rule. That's, I think, always the safest baseline assumption that we as an industry will have to deal with prior auths for this segment of patients, just like we do for almost all the other patients. And we do it now, we do it well, we'll continue to do it with this category. But I do think what is clear to us is that there's an educational initiative that needs to happen with not just CMS, with payers. And they need to understand what's beginning to happen to their patient mix, what they're really paying for and how often they're paying for the same therapy for the same patient when they need not do that.

So this was, I think, an eye opener for us and for CMS and something that will be a message we'll be, I think, sending on a regular

Speaker 0

basis. Your next question comes from the line of Kayla Krum with Truist Securities. David

Speaker 7

Rasco on for Caleb. Thanks for taking my questions. First one for me. If we assume that

Speaker 5

the 4th quarter typically is kind

Speaker 7

of strong or the strongest quarter given the dynamics around patients meeting their deductibles by the year end, How do you expect that factor to play out this year given that the impact of COVID may have left some of the patients reducing healthcare spend earlier in the year and thus not meeting their deductibles by the Q4? And then the second part of that question is, as you look into the Q1 next year, how do you think about patients who or have you heard any anecdotal evidence thus far around patients pulling forward procedures from the Q1 into the Q4, given that they may have some visibility returning to work and potentially trying to get an SCS procedure in ahead of that?

Speaker 2

Yes. It's a well, it's a sharp insight on the deductible and we're watching that. We actually think that is part of the normal Q4 seasonality And we don't think this is a normal Q4 by any stretch. So I do think that that impact that we typically see in Q4, patients maybe trying to rush through the door to therapy to take advantage of a lower or spent deductible is going to be attenuated this year. So I don't think we'll I think we'll see some impact from that, but I think it will be reduced, frankly.

Whether or not payers or patients will try to pull procedures in with the assumption that they're going to be busy and back at work after the 1st of the year, That I don't think we have any insight to. The logic makes sense to me, but I don't think we've seen evidence of it and I don't think we've tested that thesis with any of our patient research. Another area of speculation we've heard is that doctors may press in Q4 to treat patients where there's optionality between Q4 and Q1 when they may try to push patients into Q4 due to a perception of tax law changes from the 'twenty to 'twenty one. Now it may be that the election results of this week may dull that impact if there was ever going to be one as well. So these are interesting theories and they're really hard to test and prove until you watch them.

I think that none of them would change the commentary that we've given you today about Q4, however. Okay, that's helpful. And then I And then I guess a little

Speaker 7

bit more on TDN.

Speaker 2

I appreciate the commentary you've

Speaker 7

provided so far

Speaker 2

on that.

Speaker 7

You mentioned in the press release that the the companies in the early discussions with the FDA around submission strategy there. I guess, has there been anything surprising to you in those initial a as a second part to that, have you seen any increase in maybe off label use or physician interest so far in that indication just following the 3 month data you put out in Maymes last Thanks.

Speaker 2

Okay. There's a few buried in there. So conversations with CMS, I think there's nothing I would reveal that I haven't. I think with the conversations we had with both FDA and any conversations we've had with CMS, which have been by the way, with CMS so far, really not a lot has happened yet with CMS. Most of our conversations have been with FDA.

Those have gone very well. Keep in mind, FDA saw not only a submission strategy that we wanted to pursue, but the data that would support it. And they're not obligated to make a commitment in a pre submission process. They're merely giving feedback. But with that feedback, we concluded that submitting primarily leaning on the 6 month data, not entirely, but primarily in the Q4 timeframe was the right thing to do.

And so we view that as a good thing. In terms of CMS and payers, there just hasn't been a lot of contact on this point yet. We have been doing some research with private payers. We have gauging the response from medical officers within different types of private payers. We have some really interesting data there.

It's been actually very encouraging. But that data is, as you saw on the 3 month data, that data is pretty compelling and that trial was very well designed. So we kind of expected a good response and we've gotten a good response. But I think a really full push with private payers will come once we have a little bit further data published, the 6 month data published, presented, we have an FDA approval, and we will have a planned and orchestrated initiative to launch with payers that will go out very quickly. Finally, on off label, no, we really haven't seen a lot of off label.

I mean, this is not a we can't go out and promote PDM to remember what is a new group of referring doctors who aren't necessarily aware of SCS at all, much less as a treatment for some of their patients. So I wouldn't expect a ton of off label. There likely has been some, but it probably would be a onesie twosie kind of thing where patients are maybe coded as being on label and they just would never show up to us. So that would be between the doctor and the patient and the payer. So I would say off label from a visible standpoint has had very little impact so far.

Speaker 0

Our final question comes from the line of Margaret Katzur with William Blair.

Speaker 10

Hey, guys. Thanks for taking my questions. We've got a moment at the end. A couple of things for me. So number 1, you guys tend to talk about Omnia relatively bullishly.

I know everyone's still focused on PDN and these new TAM opportunities. But maybe talk to us a little bit about why so much confidence that not only can it be and has been a driver this year, but this is a driver for next year. Is it simply reach? Is

Speaker 2

Margaret, I just want to I'm going to kind of feed this back to you because I just want to make sure I really understand the question. You're wondering why the impact of Omnia would exceed a normal new product lifecycle in its impact and why it would help us in 2021 beyond. Is that right?

Speaker 0

Yes. I mean,

Speaker 10

it will be the 2nd year of the launch, right? So why would it be as impactful in a second year of launch as it has in the first other than the pandemic?

Speaker 2

Well, two reasons. One is this was a little bit of a lost year. So a lot of product launches, I think, were kind of in suspended animation this year, didn't get the full impact. I think that's true not only in our sector, but in others. There are even companies who pulled or delayed new product launches that I'm aware of that will launch them after the fact.

So I think you get a little bit of a time out in the game for new product launches. In the case of Omnia, and I spoke to this a little bit earlier in the call, so I won't go into quite as much detail, but I don't think Omnia is really a typical new product life cycle kind of thing. When you introduce a product that says you can uniquely and solely offer the most effective stimulation therapy for these patients in the industry. And now you can offer what everybody else can do in the industry on a standalone basis or on a paired basis. That's not typically something that you can erode over the course of what might be considered a normal life cycle.

That is kind of a permanent and durable capability that can't be replicated without high frequency. So does that mean it's an effective product and we never have to develop another new product for the next 2, 3, 4, 5 years? Of course not. But I do expect the durability of impact from a product platform change like that to be far more meaningful and durable than just a typical life cycle add on or capability change in a product. I hope that makes sense.

Speaker 10

Yes. And part of the question is, is that just more of an education effort on year end because you're not able to reach some of these clinicians? And would that then be new accounts that maybe you guys aren't a part of or trying to go deeper within accounts?

Speaker 2

Yes. And that's the part that gets that got kind of delayed year. So certainly our existing doctors understood Omnia immediately. They have the ability to choose to use Omnia as their primary product in their patients if we're going to treat any way with a Nevro product. That conversion has happened pretty widely.

But the ability to really get to those doctors who might be using a competitor's product to treat other different kinds of patients and really talk to them about using Omnia or even more so to get to completely competitive accounts, that's been harder to do, I think, during COVID for lots of reasons. So I expect that gets a little bit easier as our sales force and our doctors and our patients ramp up to full speed over the coming months quarters.

Speaker 10

Okay, great. Thanks a lot guys.

Speaker 0

I would now like to turn the conference back to Mr. Grossman for any additional or closing remarks.

Speaker 2

Okay. Thanks, everybody. And I'm aware of the fact that we stranded question or 2, but we're at the mark here. But I appreciate everybody's time and interest in what we're doing. It certainly has been an interesting time.

And if you have more questions, please reach out, and we'll look forward to talking to you next quarter.

Speaker 0

Thank you for participating in today's conference call. You may now disconnect your lines at this time.