Summary
- Nevro is a company that has developed a spinal cord stimulation implant to treat chronic pain.
- The FDA approved device is implanted into the back and has a good amount of clinical data to support the efficacy.
- Future growth relies on expanded geography, utilization, and the addition of new indications for various types of chronic pain.
Introduction
One of the least understood forms of chronic pain are related to non-surgical back and leg pain. There is also a significant population of patients who suffer from painful diabetic neuropathy that is hard to treat. These are markets that the FDA has approved Nevro ( NVRO ) to treat with direct electrical stimulation to the spinal cord. Now, patients who have been unable to cure their chronic pain issues have a new way to attempt to find peace.
For Nevro, the path to full approval of their product has been in the works for over a decade, with limited use allowed in years prior. Growth really took off from 2015 to 2018, but has plateaued since, partially due to the pandemic limiting marketing the products and elective procedures. Also, the company has failed to find profitability despite the ~$100 million in quarterly revenues, primarily due to capital expenses and funding numerous trials. Investors must consider this when considering the investment, but I will share my thoughts on the potential by the end of the article.
Nevro Q3 Presentation
Nevro's Device - The Key to Success
As discussed, Nevro's uses electrostimulation to influence the nervous system and attempt to reduce pain. Their platform involves implanting a device that directly inserts leads into the spinal cord to target various frequencies depending on the setting.
Over the years, the company has collected enough data to create an AI-led platform that optimizes a patient's treatment based on their needs. This new software platform is expected to be fully released by 2023 and will likely boost sales if patients believe the personalization is worthwhile. So far, so good, if early clinical results are representative.
Nevro Q3 Presentation Nevro Q3 Presentation
I think it is important now to address the elephant in the room. As is common in the medical device and equipment industry, litigation has been an issue for Nevro over the past few years. In fact, this includes a patent battle against Boston Scientific ( BSX ) that has recently been settled and Nevro won $85 million. This is despite losing in front of a jury a few years ago and signals an end to this overhang. The influx of cash also helps Nevro take those final steps towards profitability.
Although, there is still some risk remaining as BSX remains the main competitor in the neuromodulation market. Due to this fact, when BSX sees a weak sales environment, so will Nevro. This has been the case even into 2022 with sales remaining flat for years. According to managerial comments, the issue seems to be less related to physician willingness or a lack of patients, but with insurance coverage and payment. As per a SA news article :
Commenting on Spinal Cord Stimulator ((SCS)) Systems, Chief Executive Mike Mahoney said that despite solid international growth, "US SCS sales were impacted by preauthorization denials despite strong patient demand and ongoing physician interest in our fast therapy."
The lack of sales growth for years across the industry is a real bad sign for Nevro because they are missing out on at least a $2.0 billion market spinal stimulation market. When considering general chronic pain issues, and not just the spinal cord stimulation market, the TAM looks to be over $15 billion per year. Certainly, investors can expect that there is plenty of room to grow, the issue will be penetration and execution.
Nevro Q3 Presentation Koyfin
One Area of Growth
A newly expanded indication into painful diabetic neuropathy, or PDN, is the one small niche that is seeing noteworthy growth for Nevro. With a TAM of approximately $3-5 billion, this segment could hold NVRO's current valuation on its own even if the other indications fail to provide growth. However, it is still the early innings as quarterly revenues have not even reached $15 million. Thankfully, there seems to be better insurance coverage for this segment and I expect the growth to continue rapidly over the coming years.
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Financials
As shown in a prior chart, revenue growth has flattened over the past few years. At the same time, losses have continued at an average of 20-50% quarterly EBITDA losses. Apart from a few influxes of cash from litigation or investments, Nevro is operating at a serial loss and no improvement to the trend can be seen at the moment. The recent boost of cash from the BSX settlement certainly helps, especially when looking from the lens of the balance sheet.
Koyfin
From the payment, cash on hand raised to a respectable $387 million as of the last earnings report, and this allows for an operational runway of 15 quarters, or just about 4 years. However, shareholders are not fans of the increases in debt and dilution that have helped to provide operation cash, although bankruptcy is far worse than debt and dilution.
However, one positive development to consider is the fact that the creation of a manufacturing facility in Costa Rica is now complete and FDA approved, so capex spending is likely to fall moving forward. Combined with the expected return to growth over the next few quarters, I believe that profitability will increase, which will in turn improve FCF and the health of the balance sheet.
Koyfin
I would not disagree or argue with anyone who would want to wait for the profit margins to improve prior to the investment. The question for those willing to take a chance on the turnaround is whether the share price will continue to fall before the fundamentals improve. This is a difficult decision as the current valuation is trading around all-time lows, or ~$1.6 billion. Due to the lack of growth, the P/S remains low as well, trading at just a 4.1x ratio.
The last time the valuation was this low, investors were afraid of the swift decline in growth after the initial product launch back in 2019. Now, the valuation is being suppressed due to general market weakness, economic disruption, and continued flat revenue growth. As such, I do not believe that the company is weaker now than in 2019, but I would be wary of the share price. I also do not know when profitability will eventually improve as 2023 will be the first year of a major rollout of the full AI-assisted platform across PDN and original indications.
Koyfin
Conclusion
Nevro is a case of a solid product and large available market being hindered due to the failure for their products to stick. While the company has certainly been conservative in their rollout due to performing a wide range of clinical trials, it seems some insurance groups remain unwilling to spend on the products, regardless of efficacy or benefit. Perhaps the spending on multiple clinical trials, and expanded indication into PDN will be enough to turn insurers around, but it is a risky bet. In fact, the basis of the bull case remains based on things to occur rather than the current state of the company.
Therefore, I will remain on the sidelines for now and wait for developments to occur before revisiting the bull case. I also expect better buying points to arise moving forward, although whether because of a fall in share price or valuation is unknown for now. I will be sure to update if any major changes occur.
Thanks for reading. Feel free to share your thoughts below.
For further details see:
Nevro: Opportunity Overshadowed By Weaknesses