Nevro: Treating Patient Back Pains, Causing Shareholder Back Pains (NYSE:NVRO)

When Nevro Corp. (NYSE:NVRO) went public late in 2014, I urged a cautious tone on NVRO shares after the pain-relief company had seen a successful public debut. Shares rose as much as 50% on their first day of trading, with investors pricing in the prospects for adoption of its chronic pain treatment in the U.S.

The higher valuation in relation to a somewhat modest addressable market made me a bit cautious.

Back To 2014

When Nevro went public, investors were upbeat on the prospects for the business. It had developed the so-called Spenza system, the only spinal cord stimulation (at least at the time), used for the treatment of back and leg pain. These two segments represented a large $1.5 billion global market segment after the company obtained pre-market approval by the FDA in 2014, with commercial launch seen in 2016. This came after Spenza was already available in Europe in 2010 and in Australia a year later.

Nevro Corp. shares went public at $18 per share, two dollars above the midpoint of the preliminary offering range. The shares immediately rose to the $25 mark, granting the company a market value in excess of half a billion, including a substantial net cash position of around $150 million. Based on the limited user base at the time, Nevro posted sales of $23 million in 2013, as losses of $26 million exceeded the revenue base. Revenues rose 28% in the first half of 2014, trending at a rate of $28 million, as losses were stable, running at a rate equal to reported sales.

The potential, of course, was the launch in the U.S., although that same launch and burn rate would create a significant cash burn, creating quite an uncertain situation. All of this made me a bit cautious.

Working Out, Then Not So Much

Nevro Corp. stock has been a huge success, as shares hit the $100 mark in 2016. Thereafter, they fell back to the $40 mark in 2019 and rallied to $180 late in 2020. Ever since, shares have gradually come down to $35 per share again.

Forwarding to early 2019, we have seen that Nevro has seen a successful launch in the U.S. 2018 sales rose nearly 20% to $387 million, of which the vast majority being generated in the U.S. following a successful commercial launch. While that is promising, the company still posted a GAAP operating loss of $41 million and change, as the company has been posting losses since the public offering. Moreover, Nevro Corp. has seen continued dilution, with the share count being up to 30 million in the meantime.

Forwarding to spring 2022, Nevro posted $387 million in 2021 sales, being dead flat compared to 2018, after showing a modest recovery from the 2020 sales multiples which were impacted by the pandemic. Operating losses rose to $111 million, and even if I kindly exclude a $20 million litigation charge, losses were up sharply from a $63 million loss in 2020 (and losses posted before). These losses and some stock sales (or at least dilution) meant that the share count has risen to 35 million shares here, as the company maintained a modest net cash position. After peak valuations topped $7 billion, the equity valuation came down to $2.6 billion at $75 per share early in 2022, still translating into demanding multiples given the lack of growth and substantial losses.

For 2022, the company guided for sales between $415 and $430 million, expecting adjusted EBITDA losses between $8 and $18 million, hardly set to make an improvement from a $17 million loss posted in 2021. Through the first three quarters of 2022, Nevro has posted stable results. Revenues were up less than 3% to $293 million for the first three quarters, as a litigation benefit of $105 million (received from Boston Scientific (BSX)) was responsible for an operating loss of $25 million, as otherwise, losses would be pretty flat. By now full year sales are seen at a midpoint of $405 million, with the shortfall mostly due to the strong dollar, with the midpoint of the EBITDA losses now seen at $21 million.

The 37 million shares now granted the business a $1.3 billion equity valuation, including a $200 million net cash position. Adjusted for this, an enterprise value of $1.1 billion works down to less than 3 times sales, although the real issue is a lack of growth and continued losses.

One of the few bright spots was that the company is starting to show a meaningful revenue contribution from painful diabetic neuropathy (also known as PDN) at a run rate of around $50 million, but this growth was more than offset by declines in the core business.

And Now?

The truth is that I have been very cautious about Nevro Corp., too cautious as the initial sales momentum for the U.S. launch went well in 2016. That is about all the good news, as despite the rapid growth, Nevro has never been able to post profits. With sales now flat for quite a few years and losses having increased a bit, the situation is quite dire, with few green shoots on the horizon. Therefore, a 2-3 times sales multiple here seems to make a lot of sense, with little fundamental support for the shares.

Truth is that the Nevro Corp. valuation seems de-risked quite a bit, but there are a few signs to get optimistic. One of the bright spots is that the company obtained FDA approval for its Senza HFX iQ spinal cord stimulation system, using artificial intelligence based on algorithms to optimize pain relief on an individual basis for each patient.

That said, after nearly a decade, Nevro Corp. is a show-me story, and while current valuations seemingly are the time to become upbeat, it is the large realistic losses which prevent me from getting upbeat here about Nevro Corp. stock.