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Edited Transcript of NVRO earnings conference call or presentation 6-Nov-19 9:30pm GMT

Q3 2019 Nevro Corp Earnings Call

MENLO PARK Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Nevro Corp earnings conference call or presentation Wednesday, November 6, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew H. Galligan

Nevro Corp.

* D. Keith Grossman

Nevro Corp. - Chairman of the Board, CEO & President

* Juliet Cunningham

Nevro Corp. - VP of IR

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Conference Call Participants

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* Anna Marie Nussbaum

William Blair & Company L.L.C., Research Division - Associate

* Danielle Joy Antalffy

SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst

* David Louis Turkaly

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Jason Richard Mills

Canaccord Genuity Corp., Research Division - MD of Research & Analyst

* Lawrence H. Biegelsen

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Matthew Charles Taylor

UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

* Robert Justin Marcus

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome everyone to the Nevro Third Quarter 2019 Earnings Conference Call. (Operator Instructions) I'd now like to turn the call over to Juliet Cunningham, Vice President of Investor Relations for Nevro.

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Juliet Cunningham, Nevro Corp. - VP of IR [2]

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Thank you and good afternoon. Joining me today are Keith Grossman, Chairman and CEO; Andrew Galligan, Chief Financial Officer. Keith will review the company's progress during the third quarter, and Andrew will provide detailed financial results and guidance later in the call.

Earlier today, Nevro released its financial results for the third quarter, which ended September 30, 2019. A copy of our earnings release is available on the company's Investor Relations website.

This call is being broadcast live over the Internet to all interested parties, and an archived copy of this webcast will be available on our IR website.

Before we begin, I'd like to remind you that management will make forward-looking statements on this call within the meaning of federal securities laws. All forward-looking statements, including discussion of operating trends and expectations of future financial performance, as well as full year 2019 guidance are based upon current estimates and various assumptions. These statements involve risks and uncertainty that could cause actual results to differ materially.

Accordingly, you should not place undue reliance on these statements. In addition, we will refer to adjusted EBITDA, which is a non-GAAP measure. Please refer to the GAAP to non-GAAP reconciliation table included with our earnings release.

Please also review our filings with the Securities and Exchange Commission, including our quarterly report on Form 10-Q, which we expect to file today, for a full description of risks and uncertainties. Nevro disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements because of new information, future events, or otherwise.

This conference call contains time-sensitive information and is accurate only as of today, November 6, 2019.

And with that, I'll turn the call over to Keith.

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [3]

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Thanks Juliet and good afternoon everyone. Today we reported third quarter 2019 revenue of $100.2 million worldwide, reflecting year-over-year growth of 5% and sequential growth of 7%. We were really encouraged by the fact that patient trials and permanent implants in the U.S. each grew by 18% compared to the prior year period.

As we've said, looking at the underlying procedural growth is particularly important this year as year-over-year revenue comparisons are complicated by our decision to end certain high-volume ordering patterns in 2019. If we net out the prior year stocking and current year destocking impact of this particular decision, real U.S. sales growth would've otherwise been approximately 17%.

Our strong quarterly results are largely attributable to the operating initiatives we began at the end of Q1. And while typically these types of initiatives take several quarters to bear fruit, I've been really impressed by the positive response from our team as well as our customers. During our last 2 quarterly calls, I spoke in detail about our actions to optimize the productivity of our sales force in terms of overall tone in the market, organizational structure, training, increased visibility and accountability, enhanced support of the sales process, pricing consistency and responsiveness, and overall alignment and focus on key priorities, not the least of which has been driving trial procedures and conversion to permanent implants.

We've raised the visibility of these important metrics throughout the sales force and we continue to measure our progress daily. In addition, as we move into 2020, we're actively prioritizing those market development programs that we believe can move the needle for our customers and sales force. And we've become much more focused I think in our efforts.

We've recently consolidated the entire commercial team, which includes global sales, marketing, therapy optimization, and market access under the leadership of Niamh Pellegrini, our new Chief Commercial Officer. Niamh and team are making great strides to unify all our customer-facing initiatives into a single, well-coordinated effort. I view greater cross-functional alignment across the company as critically important as we plan and execute on our current and on our future business plans.

Yesterday, we announced the commercial launch of Senza Omnia in the U.S. This launch was the culmination of months of planning and preparation across the organization. As you might recall, we began the launch preparation process months ago by conducting a very large qualitative and quantitative study of our market to inform a greater understanding of relevant market segmentation, growth opportunities for the market, and specific growth and share drivers for Nevro.

While I'm not going to provide a lot of details here on this today, I will say this study yielded some valuable information that has helped inform our Omnia launch strategy. Importantly, the study results validated our hypothesis that customers really want the ability to customize SCS therapies using not only HF10, but other available frequencies and waveforms to meet their patient's needs over time. We believe the versatility that Omnia provides will both help grow the SCS market and enable Nevro to capture additional share.

During the third quarter, we began the Omnia launch preparation by conducting extensive field training sessions followed by a very limited market evaluation of the product. By all accounts, we received enthusiastic support and positive feedback from the sites involved in that evaluation.

The versatility offered by the Omnia system has resonated with this group and initial adoption rates for the Omnia system in these accounts has been encouraging. In addition, we were impressed by the number of physicians who participated in the limited market release that showed significant interest in pairing frequencies with HF10, a capability that I'll touch on in just a moment.

As I've mentioned previously, I view the Omnia launch as a larger opportunity to reengage with our current customer base, as well as address a broader segment of our market. The Omnia system was developed based on feedback from the critical community and resulted in a unique product with significant market interest that we are solely able to provide.

In designing the Omnia system, our goal was to develop a product that gives physicians the peace of mind that when they implant the product, they'll have the versatility needed to achieve the best possible outcomes for their patients. The Omnia system is unique because it's the only SCS system that offers HF10 in addition to all other available SCS frequencies. In addition, Omnia is capable of pairing frequencies and waveforms together, including with HF10, which has created quite a lot of customer interest and early feedback, since it enables dual mechanisms of action with HF10 and the other SCS frequencies that no other system can offer due to our exclusive ability to provide HF10.

The Omnia system is comprised of 3 new components. The first is a new programmer that will make it easy for physicians to offer a wider array of waveforms across the full SCS frequency spectrum, either separately or paired together as I've said.

The second component of the system includes the redesigned patient remote that is smaller and more intuitive for patients to use and enhances their experience. The new remote supports greater programming capacity allowing for the flexibility to expand on the HF10 algorithm by giving physicians the ability to provide additional waveforms either independently or paired.

Our unique Nevro cloud capabilities will also play an important role in allowing us to track outcomes by patient and by physician practice, as Omnia system provides this greater flexibility and optionality to our customers. The system comes with an updated and upgradable IPG, which is a third component. And unlike non-rechargeable systems, the Omnia system is designed to last over 10 years no matter what stimulation profile is used.

Finally, the Omnia system has conditional full-body MRI approval. In addition to the US approval for Omnia, international approvals are expected in Europe during the first half of 2020 with Australia coming sometime in the latter half of the same year.

Based on our market research, our conviction in the long-term potential of our current market of treating lower back and limb pain has increased. We view this as a business that will be a growth driver for us in the SCS space with plenty of runway ahead of it for the foreseeable future. We're focused on improving our execution and increasing our market share. And this segment remains our greatest near-term opportunity and our highest priority.

Having said that we're also continuing to plan for future growth drivers through our investment in our clinical pipeline. And on that front, our PDN or painful diabetic neuropathy study is fully enrolled now, and we look forward to presenting preliminary 3-month data at NAMS in January.

Unfortunately, we'll just narrowly miss the ability to present the full cohort of patients because a couple of patients were delayed in getting implanted after being enrolled. Our principal investigator, Dr. Eric Peterson, will still be presenting patient demographics as well as 3-month pain scores, adverse events, and other relevant findings for nearly all of the patients in this large cohort. We expect to present the full 3-month data with P values within a few months following NAMS.

Based on past experience, our expectation is that payers will likely want to see 12-month published data before approving reimbursement. So this will all imply a full commercial launch with specific claims and meaningful revenue impact in 2022. Now, we also believe we could see some increase in utilization before that.

Remember that there are some PDN patients already treated for limb pain, since some patients are reimbursed today for this primary diagnosis. And depending on the data released, we'd expect that to continue and possibly even grow as awareness of the data increases.

Regarding our upper limb and neck label indication, based on the strength of our data, we appealed the FDA's assertion that a new RCT, or randomized controlled trial, be conducted. However, that appeal has not been successful thus far. Remember that upper limb pain, including shoulder pain is included in our current labeling and patients are being successfully treated with HF10 in these areas now.

While we'd like to expand our label to explicitly include neck, in order to allow payers to more uniformly reimburse SCS therapy for these patients, we're not yet convinced that the market size justifies the cost of an RCT if that's required. We're continuing to review our options for this indication and we'll keep you apprised.

On the legal front, in our appeal of the summary judgment ruling in the Boston Scientific litigation, we've been notified that the federal circuit, which is the court that will rule on the appeal, will hear the case on December 2. Based on that hearing date, we would expect a decision sometime in the first half of 2020 but the exact timing of that decision is of course up to the court.

As a reminder, this appeal relates to the summary judgment ruling issued by the Northern District of California in July of '18 and our offensive legal action against Boston Scientific. And in that ruling, the court invalidated certain claims in our system patents but otherwise left intact the claims in our method patents covering high-frequency SCS, thus ensuring that we can maintain exclusivity in the use of high-frequency therapy for SCS.

We realize these cases are complicated and understandably, there have been occasional misperceptions and errors even recently among the investor and analyst community on the actual facts. We would just remind everyone that as a result of the July 18 ruling, we've been able to maintain exclusivity in high-frequency SCS and we're confident in our ability to continue to defend our IP, both in this instance and in general.

This confidence is further supported by our success in our action against another competitor, Stimwave, in which we successfully obtained a preliminary injunction regarding the use of high-frequency SCS using patents unaffected by the July 18 summary judgment ruling. Stimwave is currently appealing the preliminary injunction ruling. We expect the federal circuit to hear that appeal in the second half of 2020.

Now, before I conclude, I'd like to thank a moment to thank our Nevro team members who have worked so hard to design, develop, and launch the Omnia system. The entire Nevro team has done a really great job and we're looking forward to sharing our progress in the market on future calls with you. I also want to congratulate Andrew on his future retirement, which we announced today as well. Andrew has been a champion of Nevro for more than 9 years and he's also been a great support to me personally since I joined the company almost 8 months ago.

Andrew has agreed to stay on board as we initiate a search for his successor and I'm confident we'll have a smooth transition sometime in 2020. Andrew has also agreed to be available in a transitional role to help us deliver on a couple of our key initiatives and ensure the process is seamless. I really appreciate and value Andrew's leadership of the past and throughout this transition.

Finally, I think it's fair to say today that the organization has regained some real momentum a bit sooner and a bit more than I originally expected when I arrived last March. I believe I told you after Q1 the my goal was to make sure that our commercial organization was at least in a position that effectively launch an important new product, meaning Omnia, by Q4, to be prepared to drive growth in 2020.

Clearly, we've been able to gain much more traction in the market even well in advance of Omnia launch. As a result, I can tell you there's a lot of excitement growing here in our potential for 2020 and beyond. So with that, I'll turn the call over to Andrew.

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Andrew H. Galligan, Nevro Corp. [4]

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Thank you for the kind words, Keith. It's been an honor to be part of Nevro for nearly a decade. I'm proud of all that we've accomplished together. The Nevro team truly changed patient's lives, beginning with the original launch of Senza and now with Omnia, which we believe delivers real innovation to the SCS market yet again.

Now, turning to our third quarter results, I'll begin with worldwide revenues for 3 months ended September 30, 2019. Third quarter worldwide revenue of was $100.2 million compared to $95.6 million in the prior year period. This was a 5% increase year-over-year and a 7% sequential improvement. U.S. revenue in the third quarter was $84.2 million, a 6% increase from $79.6 million during the prior year period.

The year-over-year increase in U.S. revenue was primarily driven by SCS procedure growth, which was partially offset only by the impact of earlier high-volume product orders. As an update on that topic, we believe that customer destocking was completed during the third quarter as we anticipated.

International revenue was $16 million, roughly flat compared to same period last year. Though on a constant currency basis, international revenue grew by 5%. Similar to what we saw in Q2, European growth in the low double-digits on a constant currency basis was partially offset by weakness in Australia.

Gross profit for the third quarter of 2019 was $69.9 million, a 4% increase compared to $67.2 million in the prior year period. As a percentage of revenue, gross margin was 69.8% in the third quarter of 2019 compared to 17.3% in the year ago period. Total operating expenses for the third quarter of 2019 were $85.9 million, an increase of 12% year-over-year compared to $76.5 million in the prior year period. The year-over-year increase in operating expenses was primarily driven by U.S. sales and marketing personnel costs.

Legal expenses associated with [patent] (corrected by company after the call) litigation were $1.9 million for the third quarter of 2019 compared to $3.5 million in the prior year period. Net loss from operations for the third quarter of 2019 was $16 million compared to a loss of $9.2 million in the prior year period. Adjusted EBITDA for the third quarter of 2019 was a loss of $2 million compared to a positive $5.2 million in the prior year period.

Adjusted EBITDA excludes interest, taxes, depreciation, and amortization, as well of litigation and non-cash stock-based compensation charges.

For GAAP to non-GAAP adjustments, please refer to the reconciliation table in our earnings press release.

Cash, cash equivalents, and short-term investments totaled $232.8 million as of September 30, 2019. Net cash used during the third quarter of 2019 was just $1.2 million and $31.8 million for the 9 months ended September 30, 2019.

Turning now to our full-year 2019 guidance. Considering our third quarter results, we currently expect worldwide 2019 revenue to be in the $383 million to $386 million range and gross margin to be in the high 60s as a percent of revenue.

That concludes our prepared remarks. Operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from

David Lewis with Morgan Stanley.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [2]

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Keith, I want to focus on a couple things here. Maybe one on business outlook and the second on Omnia. First just the goal here is to get back to implant growth of 15%, 18% the last couple quarters. If I kind of adjust the 5% U.S. growth rate for stock and you get pretty close to mid-teens. I'm assuming the remainder is price. But I think, Keith, about the fourth quarter guide, it doesn't really imply that you get back to sort of that mid-teens level as you sort of anniversary the stocking.

So just your sense of when this business in the U.S. can get back to mid-teens growth and any dynamics of the fourth quarter you'd like to call out here. Because it looks a little conservative for our taste. And then one quick follow-up on Omnia.

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [3]

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Okay. Well, listen, I think if you look at our procedure volume now, we're already, as we've said, in the mid to upper teens from a growth rate standpoint. We've I think made clear the spread between reported revenues and unit volume and why that is the case.

With regard to Q4 guidance, which I think is the crux of your question. Look, we're a couple of quarters, two and a half quarters into a fairly complex turnaround. We're making a lot of change in the organization. We've just introduced a new product and I will tell you there's some conservatism built into our guidance for I think good reason, but conservatism nonetheless. I don't think there's anything about where we're headed in Q4 that's markedly different from where we are today from a trending standpoint. But this is still a fairly young turnaround and I think we'd love to get another quarter or so under our belt before we catch up fully, if that makes sense.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [4]

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And then if I think about Omnia, it's a fundamentally different system. The difference is obviously programming complexity. How big of a change is that going to be for sales and clinicians? So when you think about full commercial launch, how long do you consider you're in full commercial launch? How long does it take to train the reps? And what has been that early physician feedback as it relates to getting used to the programmer?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [5]

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The programmer is I think one of the most attractive parts of the system and one that has garnered probably the most positive reaction. It's very intuitive, very simple. It very clearly lays out what the programming options are between frequencies, either separately or paired. And I think it's safe to say the sales organization and the clinical community so far have been extremely excited about the layout and the capabilities of the programmer.

From a training standpoint, I'd say we're probably about halfway done and we'll be completely done by the end of this week, at least with the first tranche of the training. Now, that'll be an ongoing thing for us but I think that our sales force is trained and competent to deploy the Omnia and all of the programming associated with Omnia. They are, I think, extremely excited about this capability and I think that excitement is coming mostly from the excitement they're hearing from their customers.

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Operator [6]

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Your next question comes from Danielle Antalffy with SVB Leerink.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [7]

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Keith, I was wondering if you could give a little bit more color on what is factored into the guidance from a trial growth rate? And if this is a good leading indicator to how -- I'm not asking you to give 2020 guidance -- but to how we should be thinking about the potential for 2020 growth in this mid to high-teens rate.

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [8]

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Well, obviously, we're coming into fourth quarter. We've just changed our guidance and we've been pretty granular on some of the input we've given you on procedural rates. So I understand the question that that begs. We just aren't in a position to give anything even kind of tiptoeing into 2020 guidance at this point.

I will say, I don't -- look, I think the growth that we've been able to create in procedure volumes, and trial, and frankly, it seems pretty apparent now that we've actually captured share for a couple of quarters in a row. I don't think there's anything about that, that is unique to the timeframe or temporal. I think it's one that we would expect to continue. In fact, I would say that we are probably still in the early to mid-innings of kind of rehabilitating our commercial structure and effectiveness.

So I think, look, we're really bullish about going forward but it's early and we still have some things to learn here in Q4 and in the initial Omnia launch. But we don't have any expectations that would necessarily change in any dramatic fashion going forward. We're encouraged.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [9]

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Just one quick follow-up if I could. As you look at the competitive environment and what you're seeing from a market growth perspective, it sounds like obviously, you guys are growing faster than the market. Do you feel like the market has reached a point of stability and is on its way back towards sustainable growth going forward and benefiting from what seemed to be long tailwinds from the opioid crisis, et cetera?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [10]

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Well, stabilization, I think, yes, it feels that way. Not everybody has reported of course. We have one more participant competitor that will report in a week or two. So we'll have a better view then. But certainly, it seems like it has stabilized.

All of our instinct and knowledge about the business, and frankly all of the research we've been doing continues to point to a lot of future growth in the business, a lot of unpenetrated and untapped market potential in the core patient population, not in even considering future indications.

So look, I think as we get into another round of new product introductions, I suspect we'll see some new product activity coming from our competitors throughout 2020 as well. Everything we see continues to be favorable in terms of long-term growth trends. Now, we're going to have to get through that and see it just like everybody else. But it does seem to have stabilized and there are some things that are pretty encouraging, I think as we move into 2020 and beyond.

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Operator [11]

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Your next question comes from Larry Biegelsen with Wells Fargo.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [12]

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Congrats Keith on another good quarter. Just one on Omnia, one on kind of pipeline if you will. So first on Omnia, you talked about, Keith, expecting this to impact your growth. When do you think we could start to see an impact? Could we see it as early as Q4? And I don't think you've talked about the pricing strategy. Is this going to be priced at a premium? And then I had a follow-up.

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [13]

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We didn't model anything and we didn't contemplate any meaningful impact in our guidance from Omnia in Q4. keep in mind that you know the patient treatment algorithm, Larry, as well as anyone. As we introduce the product, patients have to be scheduled for trials. Those trials have to be successful. They then have to be approved and scheduled for permanent implants. That process takes a little bit of time.

There is and there will be some activity I think that was held, waiting for the Omnia. So I think we will see probably some activity related to Omnia. It's hard to really quantify that I think until we get into Q1 and 2020. So we didn't include it in our modeling.

From a pricing standpoint, typically that's the way we and others in the market have maintained and managed pricing is by product lifecycle management. There will be a little bit of that from us. Obviously, I'm not going to get into specifics on pricing.

I will tell you, in the past we've had some experience with really going after price as a primary endpoint. You've heard me talk about that before. That is not the case here. So certainly, we think it's a product that justifies a premium. I think in many cases that's exactly what will happen.

Our priority here is growth. And our priority is growth in the market and growth by market share. And second priority would be pricing, but definitely in that order. So I hope that helps a little bit.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [14]

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That helps a lot. Thanks. And then for my follow-up, Keith, I wanted to get your updated thoughts on the external devices. There are a couple in the market. One, from a competitive standpoint, what are you seeing? And second, I think you've talked about these being complementary to the fully implantable devices. So what's your latest thinking on wanting to have something like this technology internal at Nevro?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [15]

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Well, look, I don't think our thinking has changed dramatically. I think the external pulse generator concept, external battery one is an interesting one. I think it has a place. I think there is probably a portion of patients that might not otherwise get the therapy, maybe because of intimidation with an implantable form factor in the IPG.

So I do think that it has a place. I think it's not a mainstream replacement for a traditional IPG kind of product construct, but I think it could be a market expander. So I don't know that our view has changed that much. We're interested in watching it and seeing what's happening.

In terms of whether or not it has a role in the Nevro product catalog, either -- I assume you mean either through some sort of business development or internal product development. That's something we are looking at and will continue to look at, along with a number of concepts. We're watching very carefully and we may at some point in the future choose to participate. And if we get to that point, we'll certainly let people know.

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Operator [16]

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Your next question comes from Robby Marcus with JPMorgan.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [17]

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I was hoping you can talk about what you've seen at the doctor level to substantially improve the traction you've had this year. I understand clearly, there is new management. We're having new sales put in place but what do you think has been the underlying driver for the improvement in growth? Is it just hitting the ground in a more concerted effort? Is there a different message out there? What do you think is really driving the uptake here?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [18]

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Well, I guess I'll start the answer to that question the same I did, I think in the call last quarter, which is what's more remarkable is not the growth we're seeing now. I think what's more remarkable is that we stop seeing it at some point. Depending on where you have our market share, and I think most estimates are somewhere between 15% and 19% share, kind of in the mid to upper teens.

If you look at our product, if you look at our data, if you look at the market adoption in the first 2.5, dash, maybe 3 years, and then the rather sudden cessation of that growth, that is really the question is why did we stop growing.

And I've been very clear that I thought the reasons were mostly in kind of the self-inflicted execution bucket. And that in their fixing, that we could reengineer sales growth that frankly should never have stopped, and market share capture that in my mind probably should not have stopped anywhere near this early.

So I think that's what we're seeing. Not some unique new phenomenon with customers, but a continuation of what probably should have continued in the first place over the last year and a half or so.

So I think what a lot of what you're seeing is a lot of really good and improved blocking and tackling. And I've listed the categories of some of those things in my remarks. So I won't recover them. But I think we have a lot left to do in that category as well. And I think that's -- to me anyway, that's encouraging.

I think the early response to the changes we've made have been gratifying, but I think we have a lot left to do and I'm encouraged by the likely impact of the things that we'll continue doing. And added to that, of course, will be things like Omnia, which aren't even in the execution bucket.

So that's maybe kind of a high-level answer to your question but I hope it gets there.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [19]

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And then just to follow-up on that, I was wondering if you could maybe just as look across the competitive landscape, clearly Omnia is going to have a big impact over the course of 2020. But is there anything competitively that gives you pause or you think that we should be aware of?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [20]

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Well, there's always lots of little things that give me pause. I always -- look, I give all of my competitors a huge benefit of the doubt. And they're good companies with good products and good people. So I assume they'll respond in some ways as we've predicted, maybe even a few that we haven't . And they'll make a good run of it as they always do.

But there is no one single thing I think out there that gives me pause in terms of what we expect from competitors in 2020. I think it would be more of the -- I think it would probably be more of the same.

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Operator [21]

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Your next question comes from Bob Hopkins with BoA. Your line is open.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [22]

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Congrats on a great quarter, Keith. Just wanted to ask a couple of quick follow-ups. Just on Omnia, just to be clear. Last quarter, you said that you might expect a decent sized impact within the first couple of quarters. I don't think I'm hearing anything differently from you, but just to be clear, is that still the case? No change in the way you're framing the timelines for when you could see this start to contribute relative to what you said last quarter?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [23]

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You're talking about Omnia specifically, Bob, right?

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [24]

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Yes, exactly. Yes.

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [25]

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No. No change in our thinking.

And then just wondering if you could give us latest updated thoughts on the diabetic neuropathy opportunity because I know this is something you've been kind of looking into. So what are your sort of latest thoughts on sizing the incremental opportunity for Nevro? And how should we think about the potential impact next year?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [26]

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Well, we'll -- if it's relevant, we'll talk about that in the framework of our guidance for 2020. But as I indicated in my remarks today, I think the impact next year may be relatively small compared to other things we're doing and t also may be hard to discern until we're after-the-fact and we try to figure out where these patients actually came from. I would expect some impact next year but I am not ready to try to quantify it at this point.

In terms of -- I guess in terms of the market size, I don't think we have anything new for you on a quarter over quarter basis from last quarter. We'll be a little bit more granular in 2020 with our thinking on PDN with regard to market size, segmentation launch. But a lot of that will be informed by the data that comes out of the trial, which is still being put together.

What we do know and what we've said before, as you'll probably recall, is that there are, we think in the U.S. alone, about 4 million patients who are being medically managed for severe pain due to diabetic neuropathy. And roughly, half of those are failing in that treatment. And the literature is pretty clear on that point. There are about 50% of patients who are managed in the traditional fashion who have -- who continue to have intractable and severe pain, implying a potential market of about 2 million.

I've no doubt that we'll see some inset further segmentation that come out of the data from our trial. But right now that looks to be sort of the pond in which this therapy would be fishing to get outcomes in patients who need it.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [27]

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And if I could sneak in maybe on more. Was there anything particular in Q3 that drove the uptick relative to the trends that you were seeing in Q2? Or was it really just more a continuation of the process that you put in place when you started?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [28]

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I don't think it's -- I mean if you look at our growth rates and kind of where we exited Q1 and early Q2, what we talked about for the totality of Q2 and where we are now for Q3, it seems to me to be a continuation of the trend. And there wasn't anything episodic or remarkable in Q3 that was different from Q2 other than just a continuation of some of the refinement that we've been putting in place in the business.

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Operator [29]

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Your next question comes from Jason Mills with Canaccord Genuity.

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Jason Richard Mills, Canaccord Genuity Corp., Research Division - MD of Research & Analyst [30]

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Congrats on another great quarter. Could you -- I know several quarters before you started, the company stopped giving numbers of sales reps. But clearly, you highlighted the proficiency with which you've been instituting blocking and tackling measures to improve. Could you talk about the composition of the sales force, or things that you've done. Have you changed the size?

Have you made it smaller, more efficient? Have you made it larger and more broad from a comprehensive coverage standpoint? What are you willing to talk about with respect to your sales force and some of the specific measures you've taken to have such success early?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [31]

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Well, I think if you look at the size -- the total footprint of our field operation in the U.S., and if you look at the end of Q1. So I started at the end of March and there were a fair number of headcount additions in the sales group put in place in the second half of '18 and in the first quarter of '19.

Since March, since the end of first quarter, we haven't grown the U.S. field operations. In fact, I think the total footprint may be just slightly smaller. The makeup of the field operation is slightly different, in terms of maybe a few more technical consultants who are largely responsible for managing patient programming and care after the implant, and maybe a slightly smaller footprint of sales territories.

That's a trend through things like natural attrition that, at the very least will probably continue. I don't think at this point we anticipate any meaningful change, by the way, in the U.S. field footprint through 2020 as we sit here today.

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Jason Richard Mills, Canaccord Genuity Corp., Research Division - MD of Research & Analyst [32]

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And then as it relates to your account base and Omnia coming onboard, which should help you penetrate deeper but also open new accounts. Could you talk about your trial and permanent implant growth these last 2 quarters? And within that construct what you've seen in terms of, say, same-store sales versus new store or new account growth to drive those numbers?

And what you would expect to drive in terms of specifically new store sales growth vis-a-vis Omnia and your sales force, becoming more effective, going out, and hunting in 2020. Would you expect to see a material increase in the number of accounts that are buying Nevro SCS?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [33]

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It's actually a really good question, Jason and I would love to give you a lot of detail around that. It's hard to do I think from a competitive standpoint. I will tell you that retrospectively, so looking back over this year so far, I think that it's pretty clear that much of the growth, not all of it, but probably a disproportionate amount of growth we're now seeing is coming from same-store sales.

Certainly not all of it and I don't want to break it down. But I think we're doing a much better job of developing our business, developing --helping our doctors grow their therapeutic practice and developing our market share within those practices, probably more so than new customers. We have a very specific strategy in mind and a mix in mind as we launch Omnia.

And we have very specific market segmentation and targeting and marching orders that we've given our sales organization. But I'm going to stop short of describing that in detail for obvious reasons. But we do see the opportunities framed very much as you frame them, as being specific to doctors who are either our current customers or future customers, which ones, and down to the specific account names in terms of the roadmaps we've given to our sales organization.

But I'm not going to -- as you might understand, I'm not going to go into details what those are.

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Jason Richard Mills, Canaccord Genuity Corp., Research Division - MD of Research & Analyst [34]

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I can understand that. Maybe I'll just ask one follow-up and get back in queue. With that level of detail with respect to down to the account name, using your words, do you feel that level of detail was germane to Nevro before you joined, to the extent that you could capitalize on it? Or is that relatively new?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [35]

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Well, look, I think the rigor around that practice and many others around the support, and management, and direction, and training of our sales organization is all relatively new. Some of it was being done directionally and in bits and pieces, and maybe a little bit inconsistently.

The vast majority of what we're really doing and emphasizing right now was probably not being done, maybe in some cases at all, but certainly in other cases maybe not effectively uniformly, consistently, or in any kind of a focused or prioritized way. So I think it's safe to say that that initiative and many others, in terms of their impact, are probably relatively new.

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Operator [36]

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Your next question comes from Matt Taylor with UBS.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [37]

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I just want to be clear. I know you said before that you thought most of the improvement was really due to fixing a lot of the self-inflicted wounds. But do you think there has been a positive change in the market as well? Or are there things out there that you can point to that would suggest that?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [38]

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Well, I think the -- I mean I can tell you that anecdotally, from my interaction with customers, and more than anecdotally, through our market research and that's been kind of, honestly, an ongoing effort for the last 8 months. There is an awful lot of enthusiasm about where the market could go, should go, and where our customers desire it to go. So I don't think there's any shortage of belief in the market, belief in its potential, or interest in growing it.

As for the actual results, and I think you have the same data honestly we do, and it's still not complete for Q3. And so I know that the effort has been how do we reconcile these 2 things. You've been grappling with it as we have been. We see a little bit of -- I think it's safe to say we see a little bit of a stabilization and the beginning of a reversal in this quarter.

And we'll see if that's true in Q4 and into 2020. But I think it looks and feels that way to our team. And we've got one more competitor to announce. I think maybe that competitor may have a year-over-year comparable challenge that they'll have to deal with. So I suspect we won't start to see a lot of gross revenue growth market impact until Q4, probably into 2020. But it feels good to our team right now.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [39]

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And just on the Omnia launch, I was hoping you could just help frame the shape of the ramp there. You talked about the limited launch and the officially announcing it. So now, is it full systems go? Or are you going to see more of a ramp up period into next year and maybe compare it to prior launches or something like that to give us a sense for how it could go.

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [40]

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I think it's full systems go. I think we've got a little bit of our launch training and planning to complete through the end of this week. But I think it's -- if you look at our direction to our sales organization, our preparation for launch, how we're launching, our inventory, everything else. It's gone from 0 to 100 here. So we're in full launch mode between now and the next couple of weeks, and certainly thereafter.

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Operator [41]

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Your next question comes from Dave Turkaly with JMP Securities.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [42]

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For the folks that have the earlier versions of the product, can they upgrade and are you assuming that some of them will? And secondly for Omnia, if you were to swap a competitor can out, can Omnia work with the leads as they currently are?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [43]

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So there's no difference in terms of how the leads interface with our own IPG or how the Omnia leads, because they're the same leads, might have worked with competitive device. So none of that has changed.

In terms of backward compatibility, I think what we've said is that the Omnia product is upgradable and that implies that any future innovation we bring to market that is specific in the areas of frequency or waveform innovation, other software, firmware features that we would make sure that the Omnia is upgradable.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [44]

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And I guess just a quick follow-up. Are you assuming that any of that happens, do you think -- will there be customers that you think will come in and maybe docs or their patients say, hey, I'd like the frequency pairing or the new features that this device has?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [45]

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We can -- certainly, if you're asking whether or not they can use the new programming features to backward programming, say, a Senza 2 patient, then the answer to that is yes, that is a capability they will have now. So for example, a patient wouldn't have to contemplate being explanted and then reimplanted with an Omnia if the doctor felt like they needed that functionality. And that's something that we felt was important to our customers and a feature that we wanted to make sure was available.

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Operator [46]

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And your last question comes from Malgorzata Kaczor with William Blair.

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Anna Marie Nussbaum, William Blair & Company L.L.C., Research Division - Associate [47]

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This is Anna on for Margaret. I just wanted to ask one question on the bottom line. Keith, since you've joined the organization, how do you view incremental opportunities for leverage going forward? I realize you'll be launching Omnia into next year, but could we see incremental leverage on the sales and marketing line, particularly, given you won't be hiring new reps next year?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [48]

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Yes. So I think that'll be probably more clear -- we'll make it more clear in our 2020 guidance. My objective really was to sort of stabilize where we were coming in from a spending standpoint, really understand it, understand the growth sensitivity to some of the investments we were already making, and learn the organization. And frankly, to get a feel for what growth I thought was really possible in this market and for this company before we began to even look at expenses.

I think the 2 things that have really contributed heavily to our operating expenses have been our field sales organization and our clinical trial activity, especially those areas that have really grown. And I think there's every expectation -- I'll stop short of guiding for 2020 -- but I think we have every expectation that 2020 will be a year in which we demonstrate a lot of leverage. I think certainly safe to say more than you've seen from us in the past. So -- but more to come on that.

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Anna Marie Nussbaum, William Blair & Company L.L.C., Research Division - Associate [49]

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And then it seems like international stabilized a bit in the quarter and on a constant currency basis you were up. Is this stabilization a trend? How do you view growth in the segment going forward? And is Australia getting better?

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [50]

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So I think growth going forward we'll contemplate I think during our guidance. I think there is room for growth. I think actually, the European market, for as long as we've been in that market and as mature as that market is, I think we continue to do reasonably well there. I think our expectations would always be for improvement.

The Australian market obviously has been a troubled one for us over this last year. I think we've still got work to do there. But I think we believe that's work that's doable. So as we come into 2020, I think certainly it would be our expectation that our position in Australia and our growth there would stabilize, and we'd get back to a growth mode. But I think we'll probably be a little bit more direct on that point when we give guidance for next year.

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Operator [51]

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That's all the questions we have for today. I turn the call back to Keith Grossman for closing remarks.

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D. Keith Grossman, Nevro Corp. - Chairman of the Board, CEO & President [52]

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Okay, great. Thank you, everyone for joining us. Appreciate your time. I know we're right in the throes of lots of earnings announcements. So I appreciate your joining us for this call. We'll look forward to updating you after the next quarter.

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Operator [53]

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