Q3 2019 Earnings Call
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Orthofix third quarter 2019 earnings results conference call at this time, all participants' lines are no listen only mode. After the speakers presentation. There will be a question answer session to ask a question. During the session you will need to press Star then one on your telephone.
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I'd now like to hand, the conference over to your Speaker today Mr., Mark quick senior director of business development and Investor Relations. Sir Please begin.
Thank you operator, and good afternoon, everyone welcome to the Orthofix third quarter 2019 earnings call joining me on the call today, our President and Chief Executive Officer, Bradley, Chief Financial Officer, Doug Rice, incoming President and Chief Executive Officer Johnston person.
Started for Safe Harbor statements and then pass over to Brad.
During this call will be making forward looking statements involve risks and uncertainties.
Other than those of historical facts are forward looking statements, including any earnings guidance would provide.
These statements about her plans beliefs strategies expectation goals for objectives.
Investors are cautioned not to place undue reliance on such forward looking statements that there's no assurance the matters contained in such statements will occur.
Forward looking statements we make on today's call are based on our beliefs and expectations as of today October 22019.
We undertake any obligation to revise or update such forward looking statements. Some factors that could cause actual results to be materially different from the forward looking statements. We biochemical include the risks disclosed under the heading risk factors.
Form 10-K for the year ended December 31st 2018, as well as additional that's if he finds we make in future.
Copies of these documents please contact my office Edwards fix in Lewisville, Texas.
In addition on today's call will refer to various non-GAAP financial measures.
We believe that in order to properly understand or short term and long term financial trends investors may wish to review these matters as a supplement to financial measures determined in accordance with U.S. gap.
Please refer to today's press release announcing our third quarter 2019 results for reconciliations of these non-GAAP financial measures to our USGIF financial results at this point I'll turn the colder Brad.
Thanks, Mark and good afternoon, everyone.
I'd like to start my publicly welcoming John for both at Orthofix.
He has been great to work closely with John over the last few months and I strongly believe that he has the right experience long term focus and skill set to take what is a good company with a strong team financials and products to build it into a great company.
On today's call I'll start by giving you an overview of our third quarter 2019 performance.
Dr, which Doug will discuss the financial results in more depth as well as our expectations for the remainder of the year.
John will then give you his thoughts and observations about the opportunities ahead for Orthofix and all finish up with some closing thoughts.
The third quarter had mixed results with positive highlights in biologics and the M. six cervical disc rollout in the U.S.
And challenges in our other businesses.
For bear various reasons that I will discuss in detail.
For the third quarter, we reported net sales of $113.5 million, representing a year over year increase of 1.6% or 2.5% a constant currency.
This fell short of our expectations for the full company for the period, primarily driven by disruption or bone growth therapies and spine fixation sales due to key management vacancies.
Delay of expected stocking orders in the extra Orthofix extremities business.
Unanticipated currency headwinds.
Longer than expected new CEO search process.
I will give you some additional color on each of these factors starting with the spine business.
Last year, we made the decision to reorganize our four business units into two spine and extremities.
In the spy business, we eliminated or spine implants, and biologics president roles.
Elevated our Boingo therapy, president to lead and consolidate these three businesses along with the spinal kinetics products into one integrated business, including the function to sales and marketing.
Operations R&D.
Clinical regulatory and order to cash.
In the middle or this significant transition the employment other president of the new global spine business, who is executing this consolidation was terminated.
The VP of sales for spine fixation also left the company at the ended the second quarter.
The integration plan to being implemented were put on hold we're slowed significantly including the addition, and onboarding a several large distributors as well as plans for needed changes in operations R&D and regulatory delays key product rollouts.
The uncertainty around the leadership changes and what to expect from New leadership also distracted the team and impacted sales in all of our spine product lines.
With the exception of biologics and the Unsexy cervical disc.
The team did a very nice job keeping their focus on the launch of the Unsexy desk give us which exceeded our expectations and is the most important driver a future growth for the company.
Additionally, John has already begun recruiting candidates for these vacant leadership positions, who have the experience and skill sets specifically needed to address the areas that require the most attention.
Well this is a top priority and we are attracting great talent to the recruiting process.
We do expect to continue to see our topline in spine impacted into 2020.
The story in our extremities business is much simpler.
We have two large tenders in our Oh U.S. business that we have anticipated shipping for quite some time.
We have the inventory on hand and orders in house for approximately $2 million worth of products.
But due to geopolitical uncertainty in these countries we were unable to ship these orders in the third quarter.
Given the uncertainty of timing of when these orders can shift we have now removed these sales from our updated guidance numbers.
Also we had an unanticipated 1 million dollar currency headwind in this business in the third quarter, which our guidance now reflects for the full year.
Lastly, well, it's hard to quantify as much as we've tried to reduce the uncertainty around the changes CEO with employees and customers. It has been a distraction and let in some cases to the postponement of decisions and new hires that would have normally been implemented.
While it was a bit of a perfect storm. This period. None of these issues are reflective of the core value proposition aboard the fixed and the opportunity for growth and shareholder value creation.
They are all fixable and in the process of being addressed as.
As I just had a few minutes ago I strongly believe that John is the right person to put this chapter in the rearview mirror and take the company in the next level.
Moving on to segment results more specifically orthofix spine, which include our bogo therapies spinal implant and biologic product lines.
Generated $88.1 million and sales in the third quarter, which represented a 3.9% increase in reported sales over prior year or 4% in constant currency.
Beginning with bone growth therapies product line net sales increased 1.6% in the third quarter versus prior year.
Based on this quarter's results in current trajectory, we have lowered our expectations for the full year 2019 to growth to 1.0% to 1.5%.
3% to 4%.
Which implies a year over year decline in the fourth quarter due in part to a difficult comparison.
It's finally plant, which includes both spine fixation and motion preservation products.
Reported a net sales increase of 3.8% or 4.4% in constant currency compared to prior year.
These reported results were driven by a 1.3 million dollar increase or 50.1% in constant currency from our motion preservation products offset by a 2.4% constant currency decrease in spine fixation products.
For the full year 2019, we now expect mid single digit growth down from high single digit to double digit growth.
Our updated spinal implant sales guidance reflects both the strengthening six sales and the continuing softness in our spine fixation products for the remainder of the year as I previously mentioned.
On a positive note us sales of our EMS six see cervical disc continue to go very well.
We have now trained over 200 surgeon, which has exceeded our rollout plan for the full year.
As a reminder, there's typically a lag between when a surgeon is training and when they started planning the desk due to case timing and hospital approvals.
As of today trained surgeons have implanted approximately $2 billion in U.S.M. sixsix cervical desks.
This remains ahead of our launch plan and continues to give us confidence that we will achieve our three to 4 million dollar four year us revenue target.
Another highlight of the quarter with the continuing strong performance of our biologics business, which reported a sales increase of 11.4% compared to prior year.
As in the last several quarters. This performance was primarily driven by the contribution from new distribution added in the last year and the returned to solid results in each of the three U.S. sales regions.
Based on this performance we've raised our sales expectations for the full year for these products.
And now expect growth of approximately 10% up from our previous expectation of high single digit growth.
Lastly, in our Orthofix extremities business reported net sales in the third quarter were $25.4 million, a decrease of 5.6% or 2.4% in constant currency over the prior year.
Given the quarter quarterly variability in this business, we believe the best way to continue to assess its performance is to look at the constant currency trailing 12 months year over year growth on this basis, the orthofix extremities business grew 2.6%.
As mentioned, we've adjusted our guidance to reflect the additional currency impact in any possible further delay in shipping the stocking orders.
With that we now expect a low single digit decrease down from our previous guidance a flat to low single digit growth.
In summary, the third quarter had mixed results. While we're very pleased with our continued strong performance and biologics product sales and their trajectory of the M. six cervical disc in the U.S several issues that I mentioned negatively impacted other parts of our business.
The good news is that we believe in the quarters ahead. These disruptions will be addressed and the momentum of the Unsexy desk and the new leadership team that has been recruited by John will have a very positive impact on our future performance.
Doug will now take you through the key financial metrics in the quarter and update our guidance Doug.
Thanks, Brad and good afternoon, everyone.
We'd like to start by also welcoming John to the team. He has already made a significant positive impact on our company.
I also want to personally thank Brad for his tireless leadership I know I speak for the rest of our Orthofix team when I say, how grateful we are for Brad's passion for is high expectations of us and pushing us to achieve greater things and lastly for setting the stage for our next growth phase with the Mpsix in our market, leading Trinity and other product lines, we will Miss Brad.
The much.
Moving on I will now provide additional details into our net sales and earnings results and then discuss some of our other financial measures.
As Brad noted total net sales for the quarter were $113.5 million up 1.6% on a reported basis and 2.5% on a constant currency basis, when compared to the third quarter of 2018.
It's topline results in the quarter also included currency headwinds and extremities of approximately $1 million foreign currency headwinds have been stronger than expected. This year and we now expect as much as $6 million of impact for the full year, but from our prior expectations of $4 million.
With this additional foreign currency impact combined with the product category sales guidance that Brad provided we now expect net sales for the full year 2019 to be in the range of $460 million to $463 million, representing a reported year over year increase of 1.5% to 2.2% or 2.9%.
The 3.5% in constant currency.
For the fourth quarter, we expect reported net sales to be in the range of 121 million to 124 million, which implies a fourth quarter growth rate of flat to 3% reported and 2% to 4% constant currency.
Gross margin in the third quarter, 2019 was 78.1% compared to 78.5% in the prior year period.
For the full year 2019, we expect gross margins to be between 78% and 78.5%.
Sales and marketing expenses were 48.3% of net sales in the third quarter 2019, an increase over 44.7% in the third quarter of 2018, we continue to see this year over year increase due primarily to the extensive training and education programs to support them Sixsix us commercial launch the.
Continued strong performance in Biologics has also increased our commission expenses due to overachievement of bonus commissions.
With expected outperformance in biologics continuing for the remainder of the year, we know its projected sales and marketing expense in 2019 to be between 48, and 48 and a half a percent of revenues for the full year.
GAAP DNA expenses were 18.6% of net sales in the third quarter of 2019 down from 19.9% in the prior year period. This decrease was due primarily to lower strategic investments in the period relative to higher expenses associated with the spinal kinetics acquisition in Q3 2018.
R&D expenses for the third quarter were 7% of net sales down from 8.6% in the prior year period, due primarily to the higher regulatory spending associated with the M. Sixsix Pmeight approval process last year.
We expect R&D spending to be approximately 7.5% of revenues for the full year 2019.
I would like to point out that we are in the midst of our compliance efforts associated with the new European Union medical device regulations, and the pending 20 2022 004 deadlines, we have incurred $600000 have related expense through Q3 29 team like many of our peers. Since these initial compliance expenses are not expected to recur.
And will vary depending on the timing of the underlying activities, we will be adjusting these implementation costs out of both adjusted EBITDA and adjusted EPS going forward.
Moving on to acquisition related expenses as a reminder, we have potential remaining revenue milestone payments related to spinal kinetics of $15 million and $30 million that are payable upon achievement of trailing 12 month worldwide revenue of $30 million and $50 million respectively based on the initial.
Success of the US launch of the Unsexy, we updated our long term sales forecast during the third quarter and as a result, we recognized $22.3 million and charges in the third quarter related to the re measurement of the revenue based milestone payment liability associated with the spinal kinetics acquisition.
We have now crude $41.7 million of the potential $45 million total milestone payments.
Moving on to other expense, we recently entered into a letter agreement with Europe to settle our restructured debt security investment for $4 million in cash, resulting in the recognition of a 6.5 million dollar other expense charge associated with further impairment of the in our debt security investments during the quarter.
Pursuant to the terms of our letter agreement. We've already received the 4 million dollar payment, which concludes all transactions related to Europe .
Also we expect approximately a 4 million dollar tax benefit as a result of the settlement.
Adjusted EBITDA decreased to $20.3 million or 17.9% of revenue down from $21.4 million or 19.2% of revenue in the third quarter of 2018.
This decrease reflects our continued investments and accelerating topline growth primarily from the Unsexy commercial launch that are reflected in sales and marketing as well as the gross margin decrease that I mentioned.
We now expect adjusted EBITDA for the year to be between 78, an $80 million down from our previous range of $86 million to $89 million. This reduction primarily reflects the lower sales expectations for 2019.
Now turning to tax we had GAAP income tax expense for the quarter of a negative 51%.
Of income before income taxes, as compared to GAAP income tax benefit of 9% of loss before income taxes in the same period of 2018 the tax provision for this quarter was significantly impacted by the increase in acquisition related expenses associated with the likelihood of achieving the spinal kinetics milestones, which is largely not deductible.
For tax purposes.
In the same period of 2018, we recognized certain benefits related to our domestication, which resulted in a net tax credit.
For the third quarter 2019, we reported a GAAP loss of $2.14 per diluted share as compared to seven cents per share for the third quarter 2018, after adjusting for certain items and when normalizing for tax using a non-GAAP long term effective tax rate adjusted EPS for the third quarter 2019 was 41 cents.
Compared to 44 cents and the third quarter of 2018. The majority of the decrease was due to the investments in the Unsexy us launch.
For the for the full year 2019, we now expect adjusted earnings per share will be between $1.55 and $1.60 down from our previous expectations of $1.75 to $1.82.
For the fourth quarter, we expect adjusted EPS to be in the range of 59 to 64 cents.
Moving onto the balance sheet highlights days sales outstanding our Dsos were 65 days at the end of the third quarter 2019 up from 61 days at the end of the third quarter 2018, and from 63 days at the end of the second quarter 2019. This increase is primarily due to the timing of certain collections in our global spine segment.
We expect this increase can be temporary and to improve in the coming quarters.
Our inventory turns at the end of the third quarter 2019 were roughly flat at 1.2 times in the third quarter 2018.
Cash and cash equivalents and restricted cash at the end of the third quarter totaled $57.5 million compared to $52.1 million at the end of the previous quarter.
Cash flow from operations for the quarter was $11.7 million down from $15.8 million in the third quarter 2018, due primarily to increases in inventory in other working capital investments to support our topline growth initiatives.
Capital expenditures were up in the quarter to $4.5 million from $4.1 million in the prior year due primarily to investments in our global infrastructure and manufacturing capacity expansion for them six artificial cervical disc.
We now expect 2019 capital expenditures of $21 million to $23 million down from $20 million to $24 million.
Free cash flow, which we calculate by taking cash flow from operations and subtracting capital expenditures was $7.2 million during the quarter compared to $11.7 million in the prior year.
Finally, I'm also happy to note, but today, we announced the renewal of our credit facility, we were approaching the expiration of our previous credit agreement from 2015, which needed to be updated to reflect our subsequent group as well as our new operating environment with our 2018 domestication to Delaware This updated facility Upsizes.
Our revolver to $300 million from $125 million previously and provides additional financial flexibility as well as tighter borrowing spreads and improved covenants.
With that I will now turn it over to John .
Thanks, Doug.
I first want to start by thanking Brad Doug the rest of leadership team the board and the employees at Orthofix for the warm welcome over the last few months.
I believe my first few months here have been very productive.
I spent considerable time with our internal and external stakeholders and learned a great deal about the company.
One thing is very clear to me is the team has done a great job and building solid business Foundation.
With strong infrastructure robust internal controls and compliance programs cash flow generation and clean balance sheet Orthofix is well positioned to execute commercially.
In my opinion based on my experience driving commercial execution in spine biologics and medical device space in general I see a great opportunity ahead for Orthofix.
We have some obviously well defined market and technology leadership positions in bone growth stimulation cell based allographs.
External fixation and of course artificial discrete placement, we have many great assets to build upon.
Needless to say I believe we undoubtedly have a white canvas for growth over the next several years.
Moving onto my priorities in short term I'm focused on strengthening the spine business leadership and strategy well assessing the needs within our extremities business to secure our position for business execution and growth.
My next task will be to work with the leadership team to set short term to long term priorities and objectives.
I will update you in those plans as well as a 2020 guidance on our fourth quarter call.
After that I look forward, a meeting with our shareholders analysts potential investors in the months to follow and sharing our story, which I know will be a very exciting one.
With that I'll turn it back to Brad for his closing remarks.
Thanks, John .
On a personal note. Since this is my last operated opportunity to share my thoughts I want to tell you how much I've enjoyed the last six and a half years my interactions with all of you our shareholders and analysts it has been an honor and privilege to serve all of the orthofix stakeholders through both the difficult in good times.
I, particularly want to thank our amazing orthofix employees around the world, who have worked tirelessly to create a company with products that help improve patients lives, while developing a financial and business foundation for accelerating growth.
I am confident that with Johns leadership in the great team at Orthofix, the future will be very rewarding for shareholders and I look forward to assisting John in any way I can in my consulting roll over the next year.
With that operator, we're ready to open up the lines for questions.
Ladies and gentlemen, as a reminder to ask a question you would need to press Star then one on your telephone towards draw your questions crest account.
Please standby always compiled acuity roster.
Our first question or comment comes from the line of Craig Bijou from Cantor Fitzgerald. Your line is open.
Thanks, Josh Thanks for taking the questions, let me start with Brad just.
Quick wishes good luck to you and your your future endeavors and I enjoyed working with you.
Thank you Craig I appreciate that same same for me.
Thanks, and so let me start at a high level, obviously, a lot of things going on.
With John coming in.
And some of the integration.
Integration delays that Brad called out.
Just wanted to get a sense for and maybe a little early John but.
Is there any change in the strategy the integration of the three pieces of the spine business and just.
From an overall perspective, given biologics is still strong and then.
The other ones or are struggling a little bit.
Just bigger picture any any any thoughts in a change of strategy either in the near term or or longer term.
Great. Thanks for the question.
At this stage are still on the data gathering mode I've been here for a number of weeks and I think it's it's going really well as gathering that data, but it'd be really premature for me to basically give strategic guidance at this point in time, but it will affording provided that to you on fourth quarter call though.
Okay.
And maybe a little bit more specifically you guys talked about.
Not being able to onboard some distributors.
So I mean any.
Obviously, one of the questions that investors are going to have is.
The confidence that you guys have that some of the issues that you saw during the quarter don't get worse. So maybe if you can outline some of the steps that you guys have done.
Either during the quarter or plan to do just do we have a little better sense of.
What do you guys are doing to to ensure that if things don't get worse than that you can rebound from this.
Craig Craig as John the as far as spending my time is just getting more granular in the business and understanding and learning it.
Ed basically, yes, theres things I see in short terms I can do on doing them and basically let's say gathering information for the more strategic direction.
Theres nothing it's.
Thats unwinding in every way shape or form and so thats just based on my business experienced on that were just handling on a day to day App based on the street.
No there's nothing that I worry about that risk management.
Stance, but also there's a lot more to learn.
Okay, and then maybe on one for Doug quickly if I could squeeze one last one in on EBITDA you guys. Obviously brought down sales guidance, but I think was 13 million at the midpoint EBITDA came down 8 million at midpoint. So.
Doug I think you talked a little bit about.
Maybe some some other investment but just any reason why came down at a little bit higher rate and then your normal EBITDA contribution.
Yes, Craig it's a good question.
As we stated before we're out investing and things like sales and marketing out ahead of the revenue on him six so.
When it comes to investing in sales logistics trainers and education.
We are ramping up based on the initial success of the US launch of the Mpsix. So I think you're seeing.
Some of that and.
In the flow through.
Looking at.
In addition to we had a great NASS conference we.
Q3, spending reflective of that and that flows through the end of the your guidance as well.
Okay. Thanks, Thanks for taking the questions guys.
Thanks, Greg.
Thank you. Our next question or comment comes from the line of Raj Denhoy from Jefferies. Your line is open.
Hey, Great. This is Anthony in for Brian .
Mike Congratulations to Brad and also to John on your role with the company and we look forward to work against you.
Im actually going to start with two questions.
Hey, good housekeeping questions for Doug and then I'll have a handful for Brian and John .
Doug just in terms of 308, the push out in extremities I want to come from that that was $2 million.
And then indeed the guidance revision does not include debt coming back in at any point in the second half of 2019.
And then a few other companies have alluded to the benefit of an extra selling day in the quarter. So I just want to come from was there.
Selling day benefit.
In the quarter and if so what was the contribution from that extra selling days.
Right.
Anthony with regards to Didnt extremity $2 million you are correct. That's the amount and we have taken it out of the guidance for the remainder of the year.
With regards to selling days, we've not really focused on what bays and selling days within a quarter.
Given our long term focus.
I don't think we would consider that a material driver this quarter.
Okay and just in terms of.
Brighter John just looking at the the optics.
The guide I guess the midpoint.
The topline is 13 million.
I guess relative to our estimates and the street the Miss was about 4 million. So.
No that math suggests certainly three Q4 q you are going to can continue to see headwinds in so how much of that is.
Deal really vacation season sales versus hesitation.
On the side of customers.
Any additional color on those fronts would be helpful.
Sure Anthony it's Brad.
It's hard to quantify I think it's a combination of a lot of things you know when you get some uncertainty around leadership changes add it to be clear.
Leadership vacancy and spine that we had over the summer that so that was a pretty significant.
Hit to US one that in the short term long term, we will recover from that and then some particularly with johns experience in spine, but.
I don't want to underestimate that that impact we also lost our VP of sales in spine. So.
Is that translates down it can be it can be a number of things that can be some of the sales management that is.
It is concerned it can be customers it can be distributors.
Certainly one of the bigger impacts in and versus what we've previously anticipated with these larger distributors that we are are bringing on that they were either delayed either on the onboarding or delayed and coming on board.
All of those things are fixable, and I think the one note that I want.
Our investors to take away is Theres theres nothing broken in our core business.
We've got some management.
Bacon sees that we're going to Phil.
Hi, John is positioned to extraordinarily well to recruit some top talent paid his network as.
Well beyond what minus in spine and I think.
Over time as as we get those those new people onboard I think all of these things will be fixed and thats up.
And just a follow up there Brad would be is there a specific sort of number I'm just.
Salesforce turnover that was sustained in the past few months.
The actual slots have to have to be filled and then I'll just have.
Six.
Yes nothing.
I don't have those numbers off hand, Anthony and nordyke tracking quite that way.
But there's nothing there that I think is added out of the ordinary in terms of turnover of distribution.
And then the last one for me would be on M. six it sounds like it did a million and a half and that was the 500000 versus 500000 last quarter. So.
Clearly big momentum and you guys exceeded on on the training in 200 Surgeons I think.
I believe last quarter, Brad you mentioned that the target was 150 for the year, but about a 100 of those would be active implanters I guess heading into.
2020.
And so now that that number is a bit upsize how many active.
Implant Theres do you expect when you heading into 2020. Thanks.
Yes, absolutely Anthony So you know.
Here's the thing about training the surgeons, so we have a variety of.
We have a lot of requests coming in for training. Some of these surgeons will do a lot of cases somebody certain surgeons will do a few cases.
And some will be.
The case every every three or four months, it's all it all depends so we're going to train and we are training all those that are requested.
It does take time as John mentioned and I mentioned previously.
Or once a surgeon is trained.
There is lag time with the hospitals lag time can be with insurance coverage can be with case loading things like that also the other thing that's.
That's a factor in kind of the ramp up of how the surgeons adopt is their own practice and their own belief in products.
Most good surgeons are very very careful about making the changes they make in products and so they're going to want to see a case or to follow it for a period of time then another few cases and so on it. So it takes a little bit a little while to ramp up for that for most surgeons.
So while the 200 is a good number and ahead of what we we had planned for even a year.
We still expect that the ramp will be steady.
But accelerating and.
We're very happy with that number surgeons and we're very happy with where we are in our overall sales today compared to what our plan was.
Thanks.
You bet Anthony pickup.
Thank you.
Thank you. Our next question or comment comes from the line of Ryan Zimmerman from VTI James Your line is open.
Great. Thanks for taking my questions, Brad pleasure working with.
John look forward to work as well.
I want to talk about some of the dynamics in the corner.
On the distributor dynamics, just following up from what Youre asking.
If I recall some of those assurance.
Coming on board is predicated on M. Sachs. It sounds like that's going well, but with the delays.
Our stand with those distributors is there any impact here now considering.
For Ams IX sales in 2020 because.
Coming onboard and then just how we should think about that dynamic relative to the momentum that it you have what surgeon training.
Yes no.
John can speak to this as well.
No I don't expect any any negative impacts from those distributors on m. six sales.
Distributors in the number of cases are selling six and we'll continue to.
But the momentum we have there is it's just really beginning I think it we're going to get a nice snowball effect from Ampsix.
But nothing nothing that threatens our plans or expectations for 2020 in regards to them six as I said in my prepared remarks.
He has done a very nice job of staying focused.
On the Ampsix launch and really driving that as it because we know that.
That is the number one growth driver we have going into 2020.
Right.
And then along those lines I mean, maybe refresh us.
The bone growth stimulation market.
Stays in terms of growth.
How do you improve that level of growth and the 2020, you had some really nice growth coming out of last year.
Hard to moderate a little bit so just help us kind of understand where that market that and what we.
And do that to improve that.
Yes, absolutely and that's it's a great question right. Obviously, that's it that's at a very important business for US we said we've grown probably average.
Compounded annual growth rate I'm guessing isn't this six and a half 7% range over the last five years four or five years. That's just again second I can confirm that but it's been pretty significant growth.
Far in excess of procedure growth rate. So we've had a really good long run at that and I've said, Oh I've said for a couple of years now that's not that's no. We can't expect that to happen forever in what is a pretty mature marketplace. So I think for us with our considerable market.
Share if we come back to.
Procedure growth rates.
Even in the face of some ASP is we'd be outgrowing bye.
ASP declines or potentially ASP declines.
We still outgrowing bye bye volumes.
Procedure growth rate. So I think if you think in terms of this business in that.
Two 3%, 1% to 3% growth. That's just my own opinion, John John will have his thoughts as well thats, how I think about the market. What we can do in the market or will it leave that into John to answer that.
Obviously, we have done very well to date and we would expect to continue we have a very very strong distribution. There we have strong sales leadership there as well.
And none of that has changed what has what did impact us a little bit is.
The president of our spine business was previously focused on.
Loan growth therapies that within specialty and and that was a loss, but we will will recover there as well as some was added talent.
Okay and last question for Doug.
You mentioned, a $4 million tax benefit coming from I think your impairment.
Sarah.
What do you expect the timing of that I think.
I was left open on that.
Time, we should think about that benefit.
We expect that to benefit our 2019 GAAP tax rate from a cash perspective, we'll we'll realize that benefit next year when we.
Well file our return and settle up our 2019 techs situation.
Okay. So sometime in 2000 got it okay alright, thank you for taking the questions OPEC. Thanks Ryan.
Thank you. Our next question or comment comes from the line of Dave Turkaly from JMP Securities. Your line is open.
Hi, Thanks, Brad I hope you get the chance to spend more time surfing John looks like.
You are going to be busy here for us so.
Have you onboard.
Last call, we talked a bit about ASP in spine.
Potentially the decline accelerating a bit I was wondering.
Is there any of that happening still or what was your comment be on pricing and overall spine market.
Yes, our view is.
It's no worse than normal in fact, probably a little bit better in the quarter in terms of the ASP pressure. So no. We're not seeing an increase in ASP pressure over over kind of previous.
Patterns.
Got it and you mentioned the two vacant positions.
I am curious outside of those do you need to hire more people now that you have six in the bag.
Curious if you're out there trying to bring in new reps new new.
Distributors.
Since you've gotten that product approved and launched.
Absolutely absolutely we have a lot of lot of vacant areas a lot of white space out there that's just pure opportunity for us.
We will we have a lot of lot of area for improvement and the coverage we have in the U.S. for sure. Dave. This is John on that on that topic, we have.
More distributors coming to us now looking for opportunities because they want to carry ampsix and with that we get to have the additional leverage to basically.
We'll move more of our products and with those distributors for them to have ampsix. So it's a good positive position for us to be in right now.
Got it last one.
You mentioned 200 surgeons any colors to.
Any percentage or guess it.
How many of them were new orthofix or or orthofix customers in the past prior to him six and.
I imagine there is some opportunities for cross selling but I'm trying to understand these mostly new people for you.
That's a good question I think it's a mix of existing customers and new customers I couldn't tell you what that that mix is off the top my head day, but we can follow up.
Awesome. Thank you.
Thanks.
Thank you. Our next question or comment comes from the line of Jeffrey Cohen from Ladenburg Thalmann. Your line is open.
Hi, guys, Brad Thanks for service and wish you all the best and thank you John John and welcome New and wish you all the questions well so.
I want to solve a little bit on some of the integration delays and if you could you expand upon.
His commentary as far as.
Spill over into the New York.
You stated that Q4 would be impacted but theres sounds like there's a fair amount to address as far as the impact on the topline for 22 why not.
Looking for guidance, but can you give us a sense of some of those rules to be filled some of the distributors that sounds like.
Portion maybe on backlog.
What would you expect as far as western remedy by end of this calendar year, and then how that spills over into Q1.
Jeff Joe Thanks for the question the.
Hiring is a timeline that you can't always push and so we're looking for the best how we can to fill those roles.
And there are no interim I basically tapping my my.
My network as far as from not only just from sales, but also distribution and trying to pull in the best talent and it's so work in process and we've got to a number very viable candidates coming into coming forward looking at the opportunities, but we have made those decisions yet so it'd be premature to basically tell you the timeframe on that but.
That priority one for me coming into the role and.
So I'll spend a great deal time, not only with bringing on the talent to be part of the organization, but also the distribution talent that we're looking for as well that's an ongoing activity as well.
Okay got it could you give us for for the.
$2 million.
Impacts from this quarter as far as on ramifications should that come from that particular territory or ICANN that you could expand upon us.
Yes, it's there's couple countries that have been traditionally have been some good business for us off and on.
We're talking Libya's to relax.
And and the geopolitical situation. This is can be volatile in those in those countries and so.
While we had expectations.
Actually more than a quarter ago for these those tenders to come through the orders from those tenders. We David we have in fact got the orders to purchase orders. We just haven't got all the documentation and things required in those areas.
But traditionally.
These are countries that need our product. These are patients that need our product and there's a lot of countries out there that we deal with that are can be a little more volatile. This just happened to be two element in this particular case, but.
Over the long haul thats it can be some good business for us and more importantly, we can get our products on the patients who needed in those countries.
Okay got it.
Yes.
Jim I, just wanted to add to that as John that Brad I talked about how we.
How we basically I'm not sure Jeff Jeffrey I'd, how we basically.
Look at those.
Accounts, so we're not going be loading those to the forecast going forward was only NAFTA side. So we don't have a choppiness in these numbers going forward, we think it's prudent thing to do.
Got it Okay, and then lastly on the biologic portfolio could you.
So a little color if you will as far as trends you're seeing.
As far discounted QEPM portfolios during as compared to Trinity.
We expect to the further.
Patients are further developments as far as from new product launch.
Launch.
We we released our our.
DBM or Super DBM earlier this year it really is a.
Situation, where there where if somebody if if a customer is based on price only.
We will bring that forward, but we don't do that as our first choice.
Trinity Elite is still the gold standard out there and that's that's what we sell the most of and Thats. What you see reflected in the numbers and the 11 plus percent growth in the quarter year over year, that's all Trinity and Trinity is continued to gain traction year after year after year and now is the number one.
Cell based.
Hello graph in the marketplace.
Great. Okay got it thanks for taking the questions. Thanks, Jeff.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad. Our next question or comment comes on line of Jim Sidoti from Sidoti. Your line is open.
Good afternoon or can you hear me.
Yeah, we haven't Jim.
Great.
Just.
I wanted to the metrics you gave for gross margin R&D and sales and marketing and those full year numbers are fourth quarter numbers.
Hi gave full year guidance in my script.
Okay, all right I just wanted to make sure I understand that all right and in the quarter inventory is up about 2 million is that related to the extremities business and those tend orders not shipping or is that more relating to building up inventory ahead of the end.
For the objects.
I didn't notice in the beginning of the question did that 2 million on what right.
Widening inventory go up in the quarter.
Well I'd say, yes, again, but a couple of reasons number one the just.
Based on the anticipated rollout of Mpsix, we're getting out ahead of that.
And as well as we are launching some spine product lines that were getting out ahead of as well.
All right and you need to put in instrument sets out in the field for that.
Well with.
Overall.
As our metals business grows we'll ultimately put up more instrument sets, we try to be as efficient as we can with with where those instrument sets go and how efficiently their utilized.
Yes, we would anticipate putting up.
Instrument sets in general to support the growth.
And can you give us a rough idea of how many instrument sets are out there now.
Yes.
Would be a tough when Jim we have hundreds and hundreds of different types of sets out there.
I meant specifically for the handset.
Well, we when we wouldn't give that information.
Just for competitive purposes.
Okay, all right well brand I think this is at least the second time, saying goodbye.
Good luck in what you're doing in.
Do you think it's really.
Good by this time.
You know you never say never Jim.
I've I've appreciated our relationship over the years and.
And have been grateful for it and wish you all the best as well.
Right right I'm thinking about it it's at least a third time, saying goodbye.
Good luck with whatever you do thanks.
You bet, Thanks, Jim right or.
Thank you.
Im showing no additional questions in the queue at this time I'd like to turn the conference back over to management for any closing remarks.
Yes, Thank you operator, and thanks, everybody for joining us today, and I believe you farewell and I wish you all the best take care.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.