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Edited Transcript of NVTR earnings conference call or presentation 28-Feb-19 9:30pm GMT

Q4 2018 Nuvectra Corp Earnings Call

PLANO Mar 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Nuvectra Corp earnings conference call or presentation Thursday, February 28, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fred B. Parks

Nuvectra Corporation - CEO & Director

* Tram Bui

The Ruth Group, Inc. - VP

* Walter Z. Berger

Nuvectra Corporation - COO, CFO & Executive VP

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Conference Call Participants

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* Bruce M. Nudell

SunTrust Robinson Humphrey, Inc., Research Division - MD

* David Louis Turkaly

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

* Matthew Jay Wizman

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Matthew Oliver O'Brien

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q4 and Full Year 2018 Nuvectra Earnings Conference Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Tram Bui, with The Ruth Group. Please go ahead.

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Tram Bui, The Ruth Group, Inc. - VP [2]

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Thanks, operator, and thanks, everyone, for participating in today's call. Joining me from the company are Fred Parks, Chief Executive Officer; and Walter Berger, Chief Operating Officer, and Chief Financial Officer.

This call is also being broadcast live over the Internet at www.nuvectramed.com, and a replay of the call will be available on the company's website for 90 days.

Before we begin, I'd like to caution listeners that comments made by management during this conference call may include forward-looking statements within the meaning of federal securities laws. These forward-looking statements involve material risks and uncertainties. Such forward-looking statements are not guarantees of future performance and actual results and outcomes could differ materially from our current expectations. For a discussion of risk factors, I encourage you to review our 10-Q, 10-K and other reports filed or to be filed with the Securities and Exchange Commission.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 28, 2019. Nuvectra undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

With that said, I'd like to turn the call over to Fred Parks.

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Fred B. Parks, Nuvectra Corporation - CEO & Director [3]

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Thanks. Tram, good afternoon, everyone, and thank you for joining us today for Nuvectra's fourth quarter and full year 2018 earnings conference call.

On today's call, I will provide my initial perspectives on our business, Walter will then highlight the company's key achievements to the fourth quarter and full year 2018. Before covering our financial performance. I will then conclude with our 2019 initiatives and key areas of focus before we open up the call for questions.

First, I'd like to highlight the company's early success in gaining traction in the Spinal Cord Stimulation market in a few short years, as reflected in our ability to deliver 84% growth in Algovita sales in full year 2018 compared to 2017.

Our early growth has been and will be driven by our experienced sales team and their ability to leverage our competitive feature set, which includes a robust IPG and differentiated lead technology to provide physicians with versatility and clinical results. In addition to our ability to gain share, we have continued to benefit from consistent SCS market growth fueled by positive patient outcomes, increased awareness of SCS and a move by physicians to advance SCS within the treatment continuing of a non-opioid alternative.

In addition, hiring incremental sales professionals through 2019 will further expand our market access. We will also continue to invest in our current sales teams in terms of on-the-job training. And most importantly, we are collecting ideas from the sales team on changes that would make them more efficient.

We are listening, I look forward to leveraging our experience in adolescent organizations as size of Nuvectra -- as it enters the next growth phase.

Second, upon FDA approval, we will introduce Virtis for SNM to leverage our platform technology implying lessons learned with SCS to diversify our product offering and further build shareholder value.

We continue to work with the FDA as they review our PMA submission following their extension of the 180-day review process in late January, which to clarify, did not initiate an additional full 180-day review period. We will provide an update on our submission as appropriate.

The company has been responsibly deploying resources as we balance driving commercial momentum with fiscal prudence. As Walter will further describe, we have worked diligently to drive revenue while expanding on margins.

As we continue to grow, we will remain dedicated to further improving our financial cost structure, driving responsible growth consistent with fiscal realities. With that, I'd now like to turn the call over to Walter, who will highlight key achievements through 2018 in subsequent calls, Walter and I will share the achievement discussions. Walter?

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Walter Z. Berger, Nuvectra Corporation - COO, CFO & Executive VP [4]

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Thanks, Fred and good afternoon, everyone. As Fred mentioned, before I cover our financial performance, I'd like to highlight our progress over the past year. Specifically, our continued U.S. commercial success of Algovita with 3,000 U.S. implants completed as of December; second, our FDA head-only and CE mark full-body MR- conditional approvals for Algovita in December of 2018; third, the advancement of our Algovita post-market clinical studies; and finally, our success in improving gross margins this year, while reducing our cash use from operating activities and enhancing our balance sheet. With respect to our commercial update through 2018, our growth continue to accelerate as we expanded our sales force while building a larger market share position.

Notably, we delivered record revenues from continuing operations of $14.5 million in the fourth quarter, representing a 36% year-over-year growth, following record quarters in both the second and third quarter of 2018.

Total Algovita revenue was $14.1 million in the fourth quarter in 2018, which represents a 36% growth year-over-year and a 13% growth sequentially as we benefited from Q4 seasonal tailwinds that are typical as patients reach their year-end deductibles.

We continue to generate year-over-year growth in U.S. for Algovita by growing the number of case ready and revenue-generating accounts with a more tendered sales force. In 2018, we also continue to penetrate hospital systems in a competitive market. These factors contributed to our ability to deliver $47.1 million in Algovita revenue for the full year of 2018 representing 84% growth year-over-year. Furthermore, we remain committed to expanding our Algovita commercial team in 2019. We currently have approximately 60 active territories as of February 28, which although, is slightly lower than our prior earnings call, is in line with our expectations of our stated goal of carrying 60 reps by year-end. We expect to have approximately 75 to 80 territories by the year-end of 2019.

In terms of our Algovita regulatory update. As we look ahead, we expect U.S. Algovita sales to further benefit from the recent FDA head-only MR- conditional approval. This approval further validates the safety of our Algovita systems, while growing the number of patients eligible for the implantation of our system.

We continue to look forward to the further advancement of the system, with submission for a full body MR- conditional approval to the FDA in the coming months.

Now turning to our clinical update. With respect to Algovita, as previously stated, the initial arm of our forearm multicenter prospective randomized post-market clinical study is focusing specifically on comparing Algovita's high fidelity tonic stimulation versus ultrahigh pulse width stimulation in 90 patients at 12 to 14 sites.

We have initiated the first phase with 7 sites activated today with patients currently being actively enrolled. As we look ahead, we expect to add additional study arms designed to highlight the efficacy profiles of the different solution that Algovita delivers, which include high fidelity, tonic, burst, ultrahigh pulse width, high-frequency and paresthesia.

Now with that, I'd like to turn and provide an overview of our fourth quarter and full year 2018 results.

In the fourth quarter, we generated revenues from continuing operations of $14.5 million, which excludes NeuroNexus, discontinued operations revenue of $1.2 million, representing an increase of 36% from $10.7 million from continuing operations in the fourth quarter of 2017. Total revenue from continuing operations for the full year of 2018 was $48.8 million, which excludes NeuroNexus discontinued operations revenue of $4.9 million, representing an increase of 80% from $27.1 million from continuing operations for the full year of 2017.

Our Algovita revenue in the fourth quarter was $14.1 million, a 36% increase from $10.4 million in the fourth quarter of 2017.

Total Algovita revenue for the full year 2018 was $47.1 million, an 84% increase from $25.6 million for the full year of 2017.

Our deep brain stimulation systems development agreement with Aleva generated $429,000 of revenue in the fourth quarter of 2018 and $1.7 million for the full year of 2018, up from $317,000 for the fourth quarter of 2017 and up $1.5 million for the full year of 2017.

As we previously stated, we expect to be winding down our existing development agreement with Aleva in the coming quarters. Upon completion of a DBS system for Aleva and its receipt of regulatory approval, we expect that Aleva will commercialize the DBS system in certain European markets initially, and later possibly in United States. If it does so and is successful, we will receive royalties on the sale of these DBS systems and components.

Gross profit from continuing operations in the fourth quarter of 2018 was $8 million or a 55% gross margin, an increase from $5.4 million or a 50% gross margin from continuing operations in the fourth quarter of 2017. Gross profit from continuing operations for the full year of 2018 was $25.8 million or a 53% gross margin, an increase from $12.7 million or a 47% gross margin from continuing operations for the full year of 2017.

Although operating expenses from continuing operations were $18.3 million in the fourth quarter in 2018 and $69 million for the full year 2018, a 40% and 26% increase year-over-year, respectively, we improved our operating leverage for the full year. The increase for both periods primarily reflects an increase in personnel-related expenses.

Net loss for the fourth quarter of 2018 was $12.9 million or a $0.73 per share loss, including a loss of $1.3 million or $0.08 per share from NeuroNexus discontinued operations, compared with a net loss of $8.6 million or $0.80 per share for the fourth quarter of 2017.

Net loss for the full year of 2018 was $48.1 million or a loss of $3.25 per share, including a loss of $1 million or $0.06 per share from NeuroNexus discontinued operations, compared to $44.6 million or a $4.22 loss per share for the full year of 2017.

Lastly, turning to cash and cash equivalents. There were $99.2 million as of December 31, 2018, compared to $101 million point -- excuse me, a $101.9 million at the end of September. This figure includes net proceeds received from our strategic divestiture of NeuroNexus. And as a reminder, we also raised gross proceeds of approximately $69 million from a follow-on offering in September and gross proceeds of approximately $26 million from a follow-on offer in February 2018.

Notably, net cash used in operating activities decreased from $38.7 million in the full year of 2018 from $48.2 million in the full year of 2017.

With that, I'd now like to turn it back to Fred for closing comments. Thank you.

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Fred B. Parks, Nuvectra Corporation - CEO & Director [5]

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Thanks, Walter. I'd also like to take a moment to welcome Chris Chavez to our Board of Directors. Chris' extensive industry experience makes him a great addition, and I believe his insights will steer the board and company in directions rewarding for our shareholders. Let me now conclude by outlining the company's key initiatives for the year. First, to continue our revenue growth trajectory with Algovita by growing our sales teams and driving sales rep productivity to further expand our SCS market share. Second, to expand our Algovita label even further by advancing towards full body MR- conditional approval with the FDA. Third, to design and then execute post-market studies focused on the clinical effectiveness of the 4 stimulation waveforms of which our Algovita system is capable. Fourth, to cooperate with the FDA as they review our PMA submission for Virtis, and lastly, to further improve our financial profile while driving responsible growth consistent with fiscal realities to build shareholder value.

Before turning the call over for Q&A, I'd also like to thank our employees for their hard work and dedication, which has powered Nuvectra's growth to date. It has been a privilege to join the Nuvectra team and I feel their welcome. I look forward to working closely with our entire team including our Board of Directors to refine a comprehensive business strategy over the coming months and will provide more insights on our future quarterly calls. With that, I now turn the call back to the operator and open the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Matthew O'Brien of Piper Jaffray.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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Fred or Walter, can you just start with sales force, little bit of churn here in Q4. Doesn't sound like the end of world, but we've got a management change as well, and so I would love to hear about the stability of the sales force early days here and then what you're anticipating because it sounds like, Fred, you're trying to balance top line growth with pushing on the profitability side. What kind of productivity improvements we should expect this year?

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Fred B. Parks, Nuvectra Corporation - CEO & Director [3]

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Matt, thanks for your question. First of all, we had a highly successful national sales meeting recently here in Dallas. There was a ton of energy in that room. So I'm very optimistic about our future. Regarding the sales team after the sales meeting, I started calling a sample of the sales team and ask them how we could help, what else we could do, how we could organize to make them more effective. And I got a ton of good ideas for competitive reasons, I'm not inclined to share those, but I think the message is the improvements don't start from here, they start from the people that have to create that productivity. And I'm encouraged and I think we will find that productivity. The numbers we cited take us roughly from low of around 60. We expect to add another 15 or 20 during the year, and I think that will be sufficient to meet our expectations. Thanks for your question.

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Walter Z. Berger, Nuvectra Corporation - COO, CFO & Executive VP [4]

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Yes, I think, Matt, what I would also add is, at the end of the day, our goal for last year was to be at around 60 as you know any sales force is going to be fluid in terms of headcount. I think what's most important is what we delivered financially with that sales force that we have and the one that we are very proud of.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [5]

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Very helpful. So when we're talking about the head-only and full-body approval over Europe, can you talk a little bit about how those 2 indications should influence the business this year?

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Walter Z. Berger, Nuvectra Corporation - COO, CFO & Executive VP [6]

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Well, I think when you look at the one with respect to our international business, while I think it's helpful, our international business has been relatively small because of the success we have enjoyed in the United States of the accelerated growth over the last several years. And as we've commented on a host of the prior calls that has to, one extent to another, if you open a modern inhibitor to us and penetrating some accounts. So we're excited about the prospect that we have in front of us for our sales organization. It will be favorable.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [7]

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Okay. Just 2 more for me. One of your competitors has talked about moving into multimodality, kind of, validating what you've been saying for a while here. And I think something that investors are afraid of is their ability to catch up to what you're doing and then all of a sudden, there's really no differentiation for Nuvectra and Algovita. So can you just share a little bit in terms of the challenges that you've faced, not to be super specific, getting to multimodality and then maybe the timeframe that it's taken you to get here? And then how do you compete in an environment with more and more competitors having multimodality?

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Fred B. Parks, Nuvectra Corporation - CEO & Director [8]

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Well, I think the first response is we're flattered that there's a follow the leader attitude out here it, sort of, endorses the strategy that we've had for a while. You ask us how long it's taken to get here, it's taken since inception of the company to make this offering. And my third comment is in direct conversations with physicians, it's a huge asset. As this procedure matures and gets better every year, there is still a little bit of trial and error on the front end. And so I've heard personally from some of the users set, the value of having options should the first waveform not be exactly to their liking. So I think the net of all this is, flattered by the compliment of the competitor.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [9]

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Okay. And last one from me. Just to try to push a little bit on Virtis. I'm sure you are limited in what you can say, but obviously, a lot of investors are waiting for an update there. Just to be clear, they haven't come back to ask for more data, would you characterize the discussions as real time that something that you're doing on a daily basis or multiple times a day, and you think there could be a conclusion within the next few weeks? Or just any kind of qualitative commentary there would be helpful?

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Fred B. Parks, Nuvectra Corporation - CEO & Director [10]

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So I think it's safe to say -- Fred again, that they are not waiting on us from any additional information to make a determination. That could change at any time we know, but you're right, beyond that, I think the last statement we've made remains valid until we get the next phone call.

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Walter Z. Berger, Nuvectra Corporation - COO, CFO & Executive VP [11]

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Or e-mail.

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Fred B. Parks, Nuvectra Corporation - CEO & Director [12]

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Or e-mail. Any response we'd enjoy having. But they're not waiting on us.

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Operator [13]

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And our next question comes from Dave Turkaly of JMP Securities.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [14]

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Congrats Dr. Parks -- Fred Parks, excuse me. I was sad to see Scott leave, being a former A&S alum, but happy to see -- very happy to see Chris Chavez get named to the board. And just to be clear, I wanted to just confirm the sales rep, the 5 or so fewer that you have. You don't think that had anything to do with Scott's departure? I just want to make sure that you don't think any disruption would go on, whether it be in operations or in sales, given that departure. I guess what I would say is from a positive standpoint to have one A&S alum depart for the former CEO, who I covered for years, seems like a positive decision, but just thoughts on that? And any potential disruption?

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Walter Z. Berger, Nuvectra Corporation - COO, CFO & Executive VP [15]

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So I think Scott's being gone for a matter of couple of weeks and I believe these people departed long before Scott did. So the math wouldn't actually translate.

As you know, having filed the stories as long as you have Dave. We are responsible in terms of how we evaluate the sales force, we've got a strong sales force leadership that evaluates their talent and again, I think you're trying to or potentially trying to connect 2 dots that frankly don't exist.

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Fred B. Parks, Nuvectra Corporation - CEO & Director [16]

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Yes, Dave, Fred, by the way, I go by Fred, you don't need the formality, but thank you for that. I think we all wish Scott well. We're here today because he and many other people brought us to this stage. But the circumstances under which he left the company would not allow him to do any recruiting of these people. So unrelated events.

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David Louis Turkaly, JMP Securities LLC, Research Division - MD and Senior Research Analyst [17]

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No, and that's great to hear. I wasn't making the assumption, I just wanted to clarify that that was the case. And then I guess as a follow-up, you talked about the hi-fi study and some of the other modalities that you are going to test it. Is it your intent to run each of them separately until completion? Or is there a chance that you kind of start to ramp up some of the others while that main one is enrolling?

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Walter Z. Berger, Nuvectra Corporation - COO, CFO & Executive VP [18]

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So -- here is a little bit of an answer, I'm going to help Fred with this a little bit. We need to give Fred a little bit of time to get his feet really planted. We've been working on these and you know Dave because you had some helpful insights as we've discussed these. The teams moving on these -- we have such a firm belief in the sort of the relevance of the waveforms that come out of the IPG and we just need to sort of validate it, and we knew we can move probably a little bit more concisely and faster on this and I think Fred's going to bring some insight and some background to help facilitate that process.

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Fred B. Parks, Nuvectra Corporation - CEO & Director [19]

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I got it in my hand the document that talks about 4 or 5 studies. Good question, I think we'll probably go late into Q4 2019, which is a primary endpoint for a couple of studies. So then we will have outcomes and we won't be speculating and I think I can give you a better quality answer there. As far as the full body MRI kinds of studies, I think we'll have those designed probably in -- maybe in 4 months from now. So we may not catch a full detail on the next quarterly telecon, but certainly, before the second one, we'd be able to give you a quality answer.

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Operator [20]

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And our next question comes from Bruce Nudell of SunTrust.

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Bruce M. Nudell, SunTrust Robinson Humphrey, Inc., Research Division - MD [21]

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Welcome, Fred. Sure and just looking at -- just prognosticating into 2019. Leaving 2017, you guys I think had about 2% share, exiting '18 you had about 2.5 points. You know the market in the U.S. grew about 17% over the year. But looks like it slowed in the fourth quarter quite dramatically, not sure if that's just real or not in terms of just its durability, but looking forward to '19, should we be assuming about the same amount of share gain and could you just hazard a guess of what you guys are thinking internally regarding the pace of U.S. market growth?

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Fred B. Parks, Nuvectra Corporation - CEO & Director [22]

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I'm going to start from the position and after 3 weeks, I shouldn't be guiding you and my colleagues look at me and say, we don't guide in general. So I don't have an answer for you, Bruce. Can you help me, Walter?

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Walter Z. Berger, Nuvectra Corporation - COO, CFO & Executive VP [23]

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So, Bruce, I think it's a great question and I think it's one that a lot of people are kind of trying to reconcile because they're getting different data points on where the market is heading. Our view is and I think frankly, you and I have dialogued about this that how the market's evolving, it's a little bit at this point, it's still a little bit independent of how we perform because of our size relative to our competitors and so most of ours is going to be in share shift but then obviously, is going to be benefited by a stronger market. So we can't really, because I think it's sort of borders on guidance to say, whether we replicate the share take that we've enjoyed in '17 or '18, but I think when we have commented on the fact that -- our expectation is to continue to grow and invest into Algovita sales team, independent of what we do with Virtis that the intent is going to be to continue to take share. So we're focused on doing that.

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Bruce M. Nudell, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

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Sure. And then just looking -- stepping back and looking at Virtis you're, sort of, in between where Medtronic is right now and where Axonics is in terms of size, longevity, full-body MRI probably for Axonics as well as clinical data. So what level of confidence do you have regarding the relative competitiveness of Virtis, relative to those 2 other offerings?

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Fred B. Parks, Nuvectra Corporation - CEO & Director [25]

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Fred speaking here. I remained quite confident about this, in the offering and the product. I'm ready to get it to market, as soon as we have approval. Our launch will be somewhat different than spinal cord. I think in this one, we'll do a round of patients, a few dozen perhaps, and as long as that goes well, then I think we'll hit the gas pedal. But I think until we've done the first round of patients, we probably can't help you into a specific number. Walter?

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Walter Z. Berger, Nuvectra Corporation - COO, CFO & Executive VP [26]

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Yes, I think the interesting thing is that when you look at how we have performed in Algovita as the fifth entrant with a very compelling product. We still had to compete. And as you said, we've been successful in taking market share out of the market. When you look at the landscape that you just described, with respect to Virtis. I think we should be at least as positioned as well, to be able to take share out of that market. The dynamics are very different. You had as, you just described one company that is the legacy company and you have another one that is, sort of, calibrating at the same pace we are to, sort of, get through regulatory approval. One, as I said is a legacy product, the other one is yet to commercialize. We've had success commercializing in a very tough environment. I think we'll be able to leverage that as we look to go into market on Virtis.

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Operator [27]

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And our next question comes from Jayson Bedford of Raymond James.

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Matthew Jay Wizman, Raymond James & Associates, Inc., Research Division - Senior Research Associate [28]

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This is Matt Wizman on for Jayson Bedford. So my question is on Algovita growth. So are you seeing growth mainly from opening new accounts? Or are you seeing success further penetrating the same accounts with same-store growth? So can you speak to that a bit? And then I have one follow up.

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Walter Z. Berger, Nuvectra Corporation - COO, CFO & Executive VP [29]

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It's both, and we've talked about that on the host of our prior calls. Our sales team does a very good job of penetrating into an account and then driving share into that account. But they're also charged with new account generation as well. So we're agnostic in terms of our orientation, other than to say, we're going to push for new account and for deeper penetration. No different than any of our competitors candidly.

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Matthew Jay Wizman, Raymond James & Associates, Inc., Research Division - Senior Research Associate [30]

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Okay. Got it. And then my question is on gross margin, so when Virtis launches, can we expect -- what impact can we expect on gross margins? Will economics be similar? Is that something you can speak to yet? Or how should we think about that modeling-wise?

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Walter Z. Berger, Nuvectra Corporation - COO, CFO & Executive VP [31]

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So as we had said on prior occasions, the ASP for Virtis is going to be 20-ish to maybe 25% lower than the ASPs we have enjoyed on Algovita. We are -- haven't gone through the entire cost structure on Virtis, but I would probably lend to believe that the margins will not be as strong as they are on Algovita, but also remember that, for others that have a desire to get into a second indication, a great deal of that capital or the R&D investment has already been baked into the existing IPG, obviously, we will need to continue further, but it's not like starting greenfield from the beginning. So as you think about this as a multi-indicational company you can see the leveraging benefits of that.

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Operator [32]

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Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Fred Parks for closing remarks.

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Fred B. Parks, Nuvectra Corporation - CEO & Director [33]

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Thank you, Candice. Again, I'd like to thank everyone for participating today and for your support and interest in Nuvectra. I like forward to meeting many of you personally at some of the upcoming investor conferences and have a great evening.

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Operator [34]

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Ladies and gentleman thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.