Q2 2020 NuVasive Inc Earnings Call
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Welcome to the Nuvasive Inc. second quarter 2020 earnings conference call.
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Brief question answer session will follow the formal presentation.
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I would now like to turn the conference property your hosts Suzanne Hatcher, Vice President of internal and external affairs. Thank you you may be getting.
Thank you welcome to new basis second quarter 2020 earnings call. The Companys earnings release, which we issued earlier. This afternoon is posted on our website has been filed on form 8-K with the Securities Exchange Commission. We have also posted supplemental financial information on the IR website to accompany our discussion.
To begin with prepared remarks from our CEO, Chris Barry and CFO, Matt.
Well open up for Q1 day with not link president joining us during that portion of the call I'd like to remind you. The discussions during today's call will include forward looking statement.
Based on current expectations and involve risks uncertainties assumptions and other factors, which if they do not materialize or proved to be correct could cause new bases results to differ materially from those expressed or implied by such forward looking statements.
In particular, there's significant uncertainty around the duration impacted at Cobiz My team kinda like on the company's business operations and financial.
The cobot Nike pandemic continues to evolve and it's important to note that our commentary reflects our best estimate as of today's date.
Additional risks and uncertainties that may affect future results are describing the basic news release, a periodic filings with the Securities and Exchange Commission Nuvasive assumes no obligation to update any forward looking statements or information, which speaks as of the respective date.
This call will also include a discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles are gap.
Which I'll refer to those of non-GAAP financial measures. These measures include our cost of goods sold.
Its margin.
Sales marketing and administrative expenses research and development expenses operating margin non-GAAP earnings per share free cash flow EBITDA.
Reconciliations to the most directly comparable GAAP financial measure, maybe Donna stays news release, and a supplementary financial information, which are accessible from the Investor Relations section of the basis website with that I would now like to turn the call over to Chris.
Thank you Suzanne good afternoon, everyone and thanks for joining us.
Oh, well what do you your family and friends getting can you just say healthy unsafe during these times.
Moving through the second quarter and now into the third quarter. We continued to make forward progress on our business financial and operational strategies, while keeping the safety of new based employees and customers at the forefront.
This is particularly important as we adjusted operating within a new normal including extending work from home options for our employees globally and implementing safety protocols that are physical sites and amongst our field teams who serve within a hospital setting.
Currency and local government guidelines.
I'd now like to turn to discussing the second quarter 2020 performance, which is inline with the preliminary financial results announced on July Twentyth.
I will share further commentary on the quarter and how's the remainder of the year shaping up related to our priorities.
I will then turn the call over to Matt Harpo, who will discuss our second quarter 2020 financial performance and liquidity and cash position.
As with nearly all Medtech companies, we experienced a temporary but substantial impact on the business due to the cobot 19 pandemic has a large portion of surgery cases supported by our technology and services are considered elective.
The decline in procedure volumes in April was as expected and communicated on our last earnings call. The hardest hit month to date, which drove net sales down nearly 70% from prior year.
The good news is volumes increased at a significant rate through may and continue to improve throughout June.
June still represented a low double digit year over year decline in net sales in the business. We were there were pockets that returned to growth in the month based on geographical impact from coal to 19.
Thanks.
Global procedural volumes for July remain fairly steady and similar to the exit rate from June.
Continue to actively engaged with our surgeon partners and chart data on a regular basis that gives us a better understanding of what the business may look like over the next few months.
While procedural volumes of gradually improved over the second quarter and into July.
It is important to understand the trend line is starting to taper and it remains uncertain, where the business will return to growth by the end of the year.
I'll remain optimistic and reaching pre cobot 19 volume levels. This hinges on several factors with many of them out of our control.
Start with.
Hospitals continue to work through the backlog of patients signaling and ongoing demand for spine surgery and better than anticipated patient willingness to go into the hospital for surgery.
However, many of the surgeon partner say that new patient clinical volumes continue to remain suppressed creating uncertainty in the level of future volumes.
On a positive note hospitals are broadening their service lines and we're seeing a greater variety of spine surgery cases occurring now compared to when elective surgeries first resumed in may.
Including multi level fusions complex and deformity cases.
In addition to the simpler fusion cases.
But the more recent increase in positive Coburn 19 cases in certain cities over the last few weeks localized government mandates and hospital responses continue to lack uniformity with hospital protocols and procedures varying in certain situations between hospitals that operate within the same city.
Looking even further ahead, it's uncertain, how some broader issues may affect healthcare, including unemployment and loss of insurance coverage.
Again, the takeaway here is that I'm optimistic overall, given some positive signs pointing to a pre coated level recovery of the spine surgery market.
But it's uncertain how long it will take given the variables that we need to see further play out.
Now I'd like to transition discussing the company's innovation efforts and other priorities for the remainder of this year.
As communicated since the start of the pandemic Nuvasive is committed to maintaining the level of R&D investment budget for at the beginning of the year to continue to make solid progress on our technology roadmap.
We remain highly focused on executing against our five year strategic plan through differentiated spinal hardware solutions and enabling technologies to continue our position as the innovation leader in spine.
The X 360 system and our focus on less invasive surgery continues to be a key growth driver for the company.
Last month, Nuvasive launched the lesson basis spine surgery campaign title, it's time to evolve.
This campaign includes new online resources and enhance virtual training capabilities to educate healthcare providers on the benefits of less invasive surgery over traditional opened posted three approaches including reduced operative time blood loss and length of stay all of which are key efficiencies that are more important to hospitals and surgeons than ever.
Before.
As part of the new resources Nuvasive clinical professional development team has expanded its online training and development courses on less invasive techniques to targeted peer to peer engagement interacting learning modules kind of very trainings and weekly Webinars series.
Our recent Webinars series have been positively received and viewed by thousands of healthcare partners.
In addition, we've seen in person training Inquests increased globally over the last quarter.
Turning to our innovation roadmap, we're excited about the new technologies that have recently launched or will launch in the second half of the year.
The realized threed posterior fixation system for pediatric patients suffering from spinal deformities launched in Q2.
Assistant unifies current deformity techniques involving multi step single plane correction into one holistic procedure, enabling surgeons to overcome current inefficiencies in the operating room in further expands our global complex spine portfolio.
In addition, alpha launches are still gaining traction with surgeons, despite dependent and elective surgery shutdown earlier in the year.
We continue to be the innovation leader in lateral surgery and will soon tick off the alpha phase of our next generation Max access retractor as the latest advancement to the X 360 system.
This lateral retractor will offer surgeons enhanced functionality streamline workflow and a simplified user interface to help surgeons better address those degenerative and deformity cases.
We're also preparing to commercially launch and anterior cervical plate and posterior cervical fixation system to help treat degenerative trauma and deformity pathologies by the end of the year.
In addition, Nuvasive will continue its momentum and transforming the t. lift market by entering into alpha launches for cohere, Tila FFO and Tina Fey rounding out this portfolio with the clinical benefits of our proprietary course Pete technology.
Finally, I'd like to give a status update on the pulse system and post robotics application.
As it relates to Paul's we've shifted our timeline slightly and now expect to wrap up testing and obtain required FDA clearances in the summer of 2021 compared to the previously indicated first half 2021 timeline.
This is due to several factors, including software and hardware updates following beta testing as well as the impact of Kobin 19.
As previously communicated in February we pull back the system for beta testing and hospitals to further refunding system.
We have since institute of technology enhancements that require additional submissions to the FDA to obtain five 10-K clearance.
And given the impact to cover 19 on the current environment with allowed additional time in our timeline for further beta testing in the clinical setting.
We remain confident in the full system and that market opportunity and sell anticipate recognizing revenue from the poll system in the back half of 2021 as previously communicated.
To keep our commitment on the above timeline for release and revenue generation from the pulse system, we had to shift robotic application resources to work on pulse full time.
We also experienced some hiring challenges related to the colder 19 environment.
As a result, we expect the delay in the first in May and use of robotics applications likely into the 2022 timeline.
Our progress relative to development milestones over the next three to six months will better informed this timeline.
We're also looking for additional opportunities to bring the development timeframe forward as robotics is a key priority for our imaging navigation and automation strategy.
Finally, global operations continue to execute well, including meeting the manufacturing and distribution demand from customers to help them work through their backlog of patients.
In addition, several milestones were achieved this quarter to address European MDR readiness, including a pilot launch of a still packaging deployment process and an important regulatory certification was obtained.
The company has also leveraging the opportunity to further our focus on operational excellence with warehouse optimization automated warehouse scanning and supply chain improvements in both the European in us distribution centers.
These are critical steps to help enable our long term international growth plan strategy.
With that I want to reiterate the company's fundamentals and long term strategy are sound the need in demand for life changing spine procedures remains high and while impacted by cobot 19 is not going away.
As global efforts are made to control the spread of scope in 19, we're optimistic that procedural volumes can continue to improve and stabilized throughout the third and fourth quarter.
We will continue to navigate this new business environment.
To advance our market leadership position in spine with innovative technologies educate on the benefits of less invasive surgery and fulfill our purpose to surgeons and patients around the world.
With that I'd now like to turn the call over to Matt.
Thanks, Chris and good afternoon, everyone.
Before we get started with the financials, let me remind you that many of the financial measures covered in today's call or on a non-GAAP basis unless noted otherwise.
Please refer to today's earnings news release, as well as the supplemental financial information on Www Dot noninvasive dotcom for further information regarding non-GAAP reconciliations.
For the second quarter 2020, net sales were $203.6 million down 30.3% year over year as reported and 30.2% on a constant currency basis, driven by the widespread deferral of elective surgeries due to code that 19.
These results represent a continual recovery throughout the quarter from equals low point through June as regions around the globe began to reopen and demonstrate varying levels of recovery.
Although we did not reach net sales growth versus last year in any individual month within the quarter. We were encouraged by the improving trend.
Turning to the business results in particular, let me provide some further color.
US spinal hardware net sales declined 29% year over year to $113.8 million.
Certain portions of Nuvasives product portfolio, such as cervical in pediatrics were less impacted by the pandemic and experience quicker recovery throughout the quarter.
As more deformity and complex surgeries come online.
X 360 continues to be a key driver for the business and we expect this trend to continue for the remainder of the year.
Innovation continues to be a key differentiator for this business and a pillar two nuvasives ongoing and long term market leadership.
The contributions of several alpha products, this quarter, including cohere, Exela and modulus a lift further validate the company strategy to maintain budgeted levels of R&D funding during this uncertain time.
Equally that demonstrate surgeon willingness to utilize the latest technology advancements to continue to adopt less invasive surgical solutions with the end goal of improving patient outcomes.
Net sales from us surgical support came in at $47.2 million, a 36.2% decline over prior year.
This result was primarily driven by the impact of coded 19, and Nuvasive clinical services payer mix dynamics.
The Nuvasive team remain very responsive in support of our customers as volumes improve throughout the quarter, all while navigating the new hospital working environment.
In addition, NCS continued to drive business and operational efficiencies during this time.
Turning to international net sales were $42.6 million for the second quarter declining 26.4% year over year as reported and 25.7% year over year on a constant currency basis similar trends, we saw in March and discussed on our last earnings call.
It is evident.
Impact and recovery is not uniform across all regions and continues to evolve based on local response to the pandemic.
In particular, we saw solid performance from Australia, New Zealand parts in Northern Europe, and Japan throughout the quarter.
While other geographies like southern Europe, the United Kingdom in Latin America will more negatively impacted.
Turning to the rest of the piano non-GAAP gross margin for the second quarter was 60.5% a decrease of approximately 13% when compared to prior year.
This decline included $21 million, an incremental inventory, resulting from pandemic related impacts.
We assess the adequacy of our inventory reserves every quarter.
After examining a number of factors and assumptions, including quantities of inventory on hand historical turnover product lifecycles previous and continuing efforts towards new product introductions and uncertainties around anticipated future demand. It led us to increase our reserve for excess and obsolescence.
Orient the quarter, which was primarily focused on older product lines.
As you know Nuvasive prides itself on continual product innovation, which inherently could obsolete some products prior to the end of their previously anticipated useful life.
Non-GAAP EPS DNA expenses decreased by 24.9 million compared to prior year to $124.8 million.
This was primarily driven by variable expense reductions from the impact of code that 19 on net sales coupled with actions taken by management in April two deliberately decreased operating expenses.
As we noted earlier in the quarter, we implemented actions to reduce expenses, including compensation reductions for our board and executive officers as well as reducing discretionary spend across the organization.
Non-GAAP research and development or R&D expenses totaled approximately $18.2 million or 8.9% of total net sales in the second quarter.
300 basis point increase over prior year further demonstrates our commitment to maintaining R&D investments even in this uncertain environment to continue developing innovative technologies that shape the future of spine care.
Second quarter non-GAAP operating margin came in at negative, 9.8% or a 19.9 million loss as compared to a gain of 16.3% or 47.6 million in the prior year.
Non-GAAP tax benefit in the quarter was 5.5 million, resulting in a non-GAAP effective tax rate of 21.2% versus the prior year tax rate of 23%.
In the second quarter, the company reported a non-GAAP net loss of $20.4 million or non-GAAP diluted loss per share of negative 40 cents compared to non-GAAP net income of $32.8 million.
Or non-GAAP diluted earnings per share of 63 cents for the same period last year.
Turning to GAAP results GAAP net loss for the second quarter of 2020 was $50 million for GAAP diluted net loss per share of 98 cents compared to net income of $15 million for GAAP diluted earnings per share of 29 cents in the same period last year.
Finally free cash flow through the second quarter was $3.9 million versus $37.5 million in the prior year.
Our positive free cash flow in the quarter was a result of our focus on reducing both operating and capital expenditures to mitigate the impact of Coca 19, while at the same time, maintaining stable working capital metrics, notably throughout the quarter, our cash collections remain strong, particularly in.
The United States.
As it relates to guidance for the remainder of 2020 at this time, we are not reinstituting guidance as visibility for case volumes continues to be limited given countries are in various stages of their phase three opening in response to the pandemic can vary by region state and even hospital.
The company is unable at this time to predict when or how quickly case volumes will return to more normalized levels.
We are speaking with surgeons hospital administrators, and our commercial teams on an ongoing basis to garner information on the local market recoveries to help shape, our evolving forecast for 2020 and beyond.
Before I discuss nuvasives cash position I want to give some insight into how we're thinking about volume trends for the third quarter.
From what we have seen in July surgical volumes remained stable from where we exited in June we anticipate this to continue throughout the third quarter I must say things take a turn for the worse.
Good news is that we are far off from lows that we saw in April and continue to see hospitals in patients push forward this spine surgeries.
Obviously, if things take a turn for the worse surgery volumes could decline, but we are optimistic the current volumes will hold.
As Chris shared Theres still many variables such as patients sentiment effects of unemployment and loss of insurance coverage that directly impact the rate at which the spine market could return to more normalized case volumes.
Now.
Turning to the company's cash position Nuvasive maintained a strong cash and liquidity position and ended the quarter with 927 million of cash cash equivalents in short term investments on hand, along with an undrawn revolving credit facility of 550 million.
In late May Nuvasive took steps to further solidify our capital structure and completed an additional debt offering of 450 million of convertible notes due in 2023 in preparation for repaying the 650 million convertible notes due in March 2021.
In addition, the company entered into an amendment on its 550 million revolving credit facility to provide additional flexibility in determining its financial covenant leverage ratios for the second and third quarters of 2020.
This additional capital raise along with improved flexibility to access the revolver provides us liquidity to meet our short term financial needs and plan for long term investments.
I am confident in the overall financial health of the business. The disciplined approach, we are taking with our balance sheet and how this allows nuvasive to navigate the current environment.
In conclusion Nuvasive experienced the most acute impacts of the coded 19 pandemic to date in April but recognize case volume improvement at a far faster rate than originally anticipated in early may with further improvement in June.
We are encouraged by this momentum and remain cautiously optimistic on the shape of recovery for the remainder of 2020.
Nuvasives long term strategy and innovation roadmap continue to guide our teams work for using this time to develop alternative approaches to continue delivering on our commitments to surgeons and patients.
Lastly, I want to take this opportunity to recognize our global teams rally to meet the uptick in demand for surgeon customers in patients throughout the quarter and their resiliency in overcoming the challenges within this new working environment.
It is with this collective strengthen commitment nuvasive continues to uphold our purpose to transform surgery advanced care and change lives of patients around the world.
Thank you and with that I'd like to turn the call back over to the operator to start to Q in a session.
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Our first questions come from the line of David Lewis with Morgan Stanley. Please proceed with your question.
Great. Thanks for taking the question, Chris just want to flush out how you're seeing the recovery a little bit here. I mean, you obviously talked about July stable with June I just heard one during the month of July do you think that stability reflects more a resurgence in certain pocket areas or any dynamics as it relates to the backlog as it relates to reschedule patients.
[noise] versus de Novo patients and then and had a related to that you've been consistent and looking for recovery more in the early part of 21 versus your peers in Fourq and just maybe help us understand some of the assumptions that go into that view as a trend to demand of the year. Thanks. So much.
Thanks, David Thanks for the question.
As we as I kind of talked about some of the first statements. We saw continuous improvement through June and have seen that continue through July.
I would say, though that we're still looking for sort of a month over month, if you will uniformity to the recovery So I still believe that.
Lot of the backlog of Asia, I think you're seeing a significant mix now in July the question I have in really in Q4 is that last 510% of volume that get us back to previous years volume I think thats going to be challenging with some of the uncertainties that we see specifically.
The impact of potential election.
The unemployment the essential off of insurance there is still to meet certain variables.
That that are challenging me to see how we get fully back to previous years volume by Q4, helping us out of the question, but I think everything would have to go fairly well.
With some of the researchers you're seeing certain markets.
Although those markets are not anywhere near where they were in April timeframe, so they're being creative.
We still don't truly understand the impact of what you're seeing in areas like Florida, and California that may reflect into September October and into the into the back half of the year soft I am I'm optimistic and more optimistic than our was at this time, when we talked last quarter.
But I'm still somewhat uncertain as to our ability to truly climb back into previous years volume by the fourth quarter because of those uncertainties I spoke up.
Yes, David this is after there thanks.
But sorry, David.
Self guided that you're more important to me.
No not at all.
So I was going to say is we're thinking about the back half of the year average kind of really gets to your core of your question.
I would say for the third quarter when we look at consensus.
The business a bit stronger than than kind of where things are at and it appears in the fourth quarters, returning more normalized levels and I would say.
Hard to really predict or right now to all the points that Chris just need.
Okay. Thanks, so much right Claire.
Make sense.
Thank you. Our next question has come from the line of Matt Miksic of Credit Suisse. Please proceed with your questions.
Thanks, so much.
And just wanted to follow up Chris if I could on your comments on the.
The pulse pipeline the beta testing that you need to get done and the commercial timelines that you've laid out.
If you could maybe because because that's been there's been a lot of moving parts I understand the environments changing access to docs and reps and putting reps and then centers to get the beta feedback that you need is more difficult.
I guess at this 0.8.
Hey, how confident can you feel in the commercial timeline, just maybe help us understand what what allows you to hold that but it may be push some of the other.
The other elements of the timeline and have one quick follow up if I could.
Sure.
Thanks a question.
As I as I kind of mentioned, we expect to wrap up our testing and obtain all we've acquired asset classes and the.
In the early spring and summer of 2021.
Data timeline, although not tragically different the wasn't attributed communicated we did add some time there.
Again for the factors, including software and hardware update following some of the beta testing that we discussed last quarter.
And some software and component level hardware updates does require some additional approvals so.
So we have built a little bit of timing there. We've also resource it up over the last several months to make sure that we're seeing very close that timeline.
Now they are there is some theres some obvious environmental challenges that we see from Cowen 19.
All things that we.
And that we built in the timeline for I think revised your level of buffer to get back into the clinical setting early in the year progressed through the FDA clearance process and still maintain those timelines communicated around summer fewer every before it was first half we both a little bit of buffer and of that because of all the things that I just mentioned plus.
The second 19 environment at some of the challenges from from the clinical setting.
Getting some of these things done, but I believe we have clear on site.
To our plan around beta testing I guess sites on Q. So I feel very confident ascena. It's been a it's been a quite clearly learning process where nuvasive.
Having said that is very unique.
Platform as it used to one of a kind it obviously as we talked about adding that platform providing.
Independent wireless access optimize our optimized guidance.
Workload open imaging customized to each of our unique needs. So this is a fairly sophisticated system.
But as as we work through it over the last several quarters years, we're getting to that point now I think every day by retiring our confidence goes up so on on that link you had any any comments on our on our line of sight to the actual.
Pathway to commercialization.
Yeah, Chris.
I think you hit on all the major points, which are we at continue to be able to make progress against critical milestones I think we believe appropriately.
Accommodated in our updated timeline consideration for the current environment, which certainly has some level of.
Variability with respect to our access and the like but given the timeline into the first half of next year into summertime.
Feel confident that that has been appropriately taken into consideration.
For our milestones so while we will continue to.
Work toward that end and at this point feel like we leave.
As you commented Chris appropriately.
Resourced.
And de risk.
Our approach to that timeline.
As we look forward.
That's Super helpful. Then just quickly on the follow up just any any color you could provide on some of the digital strategies are things you're doing differently in this environment to kind of help.
Keith interactions.
And continuous with with surgeons and weather.
360 in the and the efficiencies that that system brings have been.
Catalyst Durbin Vin been a part of.
Helping healthy centers be more efficient in this environment.
I'll take the first part and then I'll have Matt comment on on how our customers are surgery partners are embracing extra assessing how that I think has actually been accentuated by this crisis.
The first on the first question.
This has been a bright spot for us as an organization the work specifically with our clinical personal development team Nuvasive I think we pride ourselves on providing top notch education and support to our certain partners on the clinical staff.
And we've done that historically drew one on one engagements people coming on site in San Diego Us going to the up to the hospital setting and clearly that.
As a limitation.
Or basically was an impediment for us delivering that support and continuing education.
So the team was very creative we really I think accelerated our online capability and our and our digital capabilities with the within Webinars series that the team developed our ongoing.
Virtual training sessions.
All of those things I mean, the numbers were were incredible me and the receptivity of our surgeons and their response has been overwhelmingly positive so that has it.
Has also driven what we're now seeing which is a much more let's say vetted surgeon population and our request for a 101 training as never bit higher coming out of this crisis, nor still somewhat limited in some of our location for us, but our capabilities and the work that went into CPV airclic.
ICL professional development team and what they did I think will be a best practice for us in something we'll build upon going forward. So thats the best capabilities I believe we needed.
Leave it at it and it enhances not only our domestic such education programs, but also really gives us up for some of the global expansion that we did that.
Our strategy.
So on unimpressed with how Weve responded in the creativity. The team has shown and I think it if it's a it's a core capability that will pay dividends for us in the future.
Now you want to talk on the after 60 days.
Yes, so again I'll I'll echo all the comments.
You made Chris I think the team has done a remarkable job.
Pivoting to a digital platform.
Both with respect to training and education, but but also to think about how dramatic the shift has been and are sort of traditional curse commercial model and engagement with our customers and showcasing of products and technologies through.
Sort of the historical trade shows and conferences all of which has have shifted to a virtual environment as well and so developing the digital platforms in digital strategies.
Had been having critical as it relates to excellent X 360 that has been a key pillars within our digital strategy. Both in terms of sort of training education, but also.
Clinical indication for different applications of the procedural approach leveraging our existing faculty and our.
Our.
Editorial faculty that it has helped build and train and develop the train criteria.
As many of you if not all of you know we were.
Prepared at the early part of this year to open and showcase a new.
Training and customer experience center, and while decreasing comments the environment.
I have.
Costs and limitations in terms our ability to engage.
Groups of Surgeons were training, we have had been able to do small groups and individuals.
And the other aspect is that training center, an experienced in or is it technology platform that allows us to share and broadcast both didactic as well as category or training on from that facility out to site than learners across the us and around the globe and so.
Certainly we've seen a pretty significant shift with respect to our traditional curriculum we are leveraging further.
Training better local utilizing non nuvasive facilities to bring that training closer to our customers and mitigate obviously the risk concerns associated with travel and then over the last several weeks and months as the market has opened up we've seen resumption of a higher number of scheduled.
And elective surgeries, we have been able to leverage our field organization, including our commercial development team focused on X with an X 360 to get out and view targeted.
Training and development activities with surgeons, who are either in the process are interested in incorporating an excellent extrinsic into their practice and that's not just in the us, but we're starting to see a more open in permissive environment for those types of engagements and training activities.
In Europe as long as Asia Pacific.
Thanks, so much.
Thank you our next questions come from the line of Josh Jennings with Cowen. Please proceed with your question.
Hi, Thanks, good afternoon.
Hoping to just start by asking about some intra quarter trends and as you looked into July Chris you mentioned that you're seeing more complex cases.
Getting into the mix can you help us think about that trend and where you sit today because if you think about those multi level degenerative cases more revenue per case approved for Nuvasive common where are you relative to pre cove. It.
Last year in exiting tuning in July.
Relative to that recovery pace is it isn't on par and then just on the follow up just to ask about your sales force Incentivization need sounds like during the downturn you treated your salesforce well.
Can you help support them during those April and May months housing on incentivizing them here as we move into the back half of 20 to 21 thing about year over year growth targets sequential growth targets anything that you can you can help us think about salesforce incentivization in this period would be great. Thanks for taking the questions.
Thanks, Josh permanent Matt as close as to this once I want to have math alexy to two to the revenue per case I'll just speak to that it's generally in line with pre covert levels. So that that the mix of cases now more normalized it's really just say volume question at least the way I look at it coming out of June where it was more skewed.
Q2 simpler fusion cases, now we're seeing the more robust cases, which which is a promising.
Which brings us a lot of optimism that the full service lines are now are now engaged.
So we're roughly in that you can check the honest, we're roughly as a pre code level and revenue per per case, Sars, the salesforce metal only speak to that.
Yes, just confirm your comments our revenue per case and sort of sub indicator of revenue per case, a number of levels per case.
Our back in line with pre covered by that levels, we've seen a steady recovery will some of the more complex procedures, we saw a little bit of an earlier rebound.
And sort of the lower risk population of patients, which would include some of the adolescent pediatric than we've seen that start to flow back through to the adult and complex deformity now.
Fortunately for us it relates to salesforce incentives and compensation, our compensation and incentive design.
Naturally supports.
The.
I think the appropriate targeting in activities that we would want to see as we think about recovery in the back half of the year and we think about recovery really through two primary to dimensions participating fully in the recovery of volume. So that's in part reflecting the breadth of technology portfolio.
Able to support all types of cases and in some instances maybe become a further preferred technology supplier because of the focus on less invasive and minimally invasive procedures.
And then look we also want to continue to.
Execute against our plans, we had coming into the year Azure as at risk relates to market share shifting activity than competitive conversion.
And all of those are supported within the existing compensation design, we had for our teams and so.
No no material changes, but I believe the incentives as we look not just across the us, but the the markets outside the United States.
Certainly support the incentivized.
Growth.
And continued improvement that we would expect to see as Chris said through the back half of the air into 2021.
Great. Thank you.
Thanks, Josh.
Thank you. Our next question questions from the line of Matthew O'brien with Piper Sandler. Please proceed with your question.
Afternoon. Thanks for taking my question just to put a finer point on the pulse robotics commentary you know you're not the first company to suffer a delay on the robotic side Globus did any Chris when you were at Medtronic with the the robotic surgical system. There there's theres been delays there so thats.
Not overly surprising, but when I hear software.
Issues, the hardware stuff its fixable, but the software.
Commentary is a little bit more concerning to me because I think thats been the area that that's been difficult to fix so.
How much of the delay a software related and how strongly our you convicted that you have that piece of the equation figured out going forward ticket to that summer 2021 timeframe and then you know without the robot maybe for a few months how do you feel about.
Continuing to be in a position to take share in this market you know with a couple of other companies out there, having a robot really being able to to focus on that and get market share can X 360 in the cervical products be enough for you to keep taking share as you're waiting to get that system on the market. Thank you.
Yes, great question, and clearly software for I made a lot of med tech companies becomes the Achilles heel and learning how to become a better software developer and this particular case, we actually had a component level issue.
So the software changes or related to the component change and so the overall architecture of softwares stable very stable, we feel very good about the integrated software that has been developed with this case, but when you have a component level change that does change the software requirements that we that had to go back and adjust.
That really then spurred the by 10-K extension.
And as robotics at an application within the pulse system, we got to get full subsidiary offers we were running parallel pathways, but then we obviously full of resources over to the total system to two to mitigate some of that Craig we pull that back.
Now, we're left with with a bit of a gap on the only on the on the Robotics program now I sit here today.
Understanding that had some resource changes and also had the situation of the cobot 19 and are in our organizational commitment to maintaining as much financial stability as we could all of that being said, we'll know a lot more about robotic application over the next three to six months.
So I will feel much better when we have a chance to really get more assessment about what can we do not to pull that robotic timeline back into.
An earlier date.
As I sit here today, it's just.
It's not it does create that delight now having said all that today's environment. One of the few things that works in our favor is today's environment from the capital restraints, we're seeing in certain markets right now robotics, Although don't give me wrong, we're dedicated to our navigation automation robotics strategies, but they're not hurting us to.
Or say today at least not they're probably they represent an opportunity costs, but we are able to continue to take share and grow our business at least today without that robotic application. We're laser focused but the current environment has given us some level of air cover now how long that will last we don't knows over where we are.
We're being as creative and as aggressive as you can on making those assessments of bringing on new talent and making sure we have the most.
Talented engineers working on our on our projects.
But as I look into the first half of next year glass. After this year first up next year.
I'm not overly concerned.
We won't be successful we've got a fairly significant amount of products. We continue to do very well and continue to deliver greater extra 60 technologies.
The new products that we've launched in the Q2 or we're launching in later this year and our service portfolio are showing great signs of growth and we're seeing good receptivity to market.
So I am confident we can mitigate the gap that we see within these projects for the time and I think code 19 situation actually works in our favor in this regard to be clear we need to get these products on the market their gas not portfolio average utilization strategy are inclusive of these technology.
Okay.
So for US is not a question of.
If it's when and where we're pulling every every lever we can to brings timelines closer to the closest as we can.
Very helpful. Thank you so much.
Thank you. Our next question comes from the line of Kyle Rose with Canaccord. Please proceed with your question.
Great. Thank you very much for taking the questions.
Just.
Two part question for me one.
In line with some of the Paul's questions I understand the reasoning for the delay.
Maybe if you could just also.
Help us understand how you think about the commercial model there some of the competitors maybe on the total joints item robotics I'd have talked about.
And your customers increasingly looking towards the placement model or the utilization model or leafy as well as some increased interest in the outpatient market. Just wondering how you see polson the robotics application on the commercial model perspective, and then historically you've also provided some color around X 360, the percentage of surgeons.
Using that in India.
Opportunity to capture the other parts of that business. One is due to see if you could give us an update there. Thank you Sir.
Ill cover the first season, and then Matt again, I can have him speak to any changes that we've seen an extra six the over the course of lesser month I don't know there's a lot.
It's worth commercial model, yet you're seeing a lot more placement models I think that will continue as hospitals will have my opinion will have a significant hangover from some of the revenue gap set but they're facing.
So there will be constraining capital where they can.
We are 78 A. placement model now, having said that I think the spine market specifically the fragmentation of the market.
For me if an opportunity.
I am I'm more than willing to place systems at some point for greater share of wallet for more share and more and more predictable share.
So I were considered the pull system and ultimately the robotic application.
As a as part and parcel through our hardware technology are monitoring capabilities in over the whole the whole procedural sedation strategy and we want to try to try to two to capture as much of that cervical geography as possible to relate to really than leverage our technologies to create that most.
The best possible patient outcomes.
So I think that will continue to two to proliferate with within the will of robotics, specifically in spine Juicy target I.
I think the current environment will will will accelerate that have already hasn't it will continue and as you have more competition, including our system coming in.
And with the purpose of before the relative fragmentation within the spine market I think I think all all signals with point to place Smith in exchange for four for volume commitments and and we're going to be a flexible as possible coming into the market with the idea that we're looking to increase our position across our.
The entirety of our portfolio.
So Matt I want to comment on exclusivity and any changes we've seen.
Yes, so to your tier comments, Chris I don't I don't think we've seen.
In any material shift or change with respect to our strategy the caveat to that meeting being we've obviously seen in a pretty profound impact.
In Q2, specifically with respect to.
How we're able to to access our.
Our customers an interactive them from a from a training perspective, and we've already covered that in the enterprise.
Question, what I will say, though is for those who have been trains we continue to see the benefit increase pull through and decrease.
Procedural leakage, so capturing more of the entire procedure.
As we continue to train.
Surgeons and expand their their clinical indications for.
Lateral and single position surgery in their practice, we can also address a why wider range of pathology and larger cases, so I think thats the metric thats a critical component in consideration as well as we've touched on in our.
Higher comments, despite the disruption and training and in particular in person on flight training for large groups, we have been leveraging.
Digital platforms and digital learning environments.
We are seeing a continued interest from customers to to incorporate these techniques into their practice and we are leveraging not just the digital platforms, but also reamer remote.
Learning environment and one of the other things were looking to leverage.
A little further with the I think ongoing concern on travel and how do we leverage.
Local faculty too.
Collaborate with learners within their local or regional geography is on and a peer to peer environment either in a categoric setting or within the clinical setting and that's something we're seeing again not just in the U.S., but outside as well. So I think we've got it's Nick significant runway and again, despite some of that.
The challenges in the environment, we're continuing to see robust demand in adoption for those that have been trained.
As a reminder.
When you asked the question please limit yourself to one question. Please.
Next question comes from the line of Robbie Marcus with JP Morgan. Please proceed with your question.
Hi, This is actually Allen on for Ravi I, just had a quick one on the PNM all expectations in the back half of the year I know you called out of this on a 20 million of incremental cost of sales incurred this quarterly to cover 19 and I'm just curious like kind of what your expectations are for the back half of the year to what extent should we expect Q.
On a return to that low somebody that you were at previously will that be and the second half of the year or will take into 2021, given your expectations for a return to kind of normalize volumes in 2021, and I guess I kind of similarly on the M&A side, where do you say opex going in the balance of the year. Thanks.
Yes, Alan I'll take that this is Matt ARVO. Thank you for the question. So look on inventory that was definitely pandemic related.
We have a normal quarterly review process that we perform.
And so we've looked at quantities of inventory on hand historic Stork will turn over product lifecycles older usual suspects you can think about older product lines and so really the calculation is pretty Sarah we've been looking at this for many many years, obviously and with our continued focus.
Is on R&D investment in the new product introductions in the fact that you look at just the amount of revenue.
It was lost over the course of the last I'd say four months April through the end of June.
We don't envision another incremental inventory write off to the tune of the 21 million that we posted in the quarter, but obviously if coated were to come back very strong once we get trued up in future quarters, We would review it at a point in time, so what you're seeing is.
Some older products.
You know the that are slower in moving has now been pushed out particularly in international regions.
So if you kind of step back and dig into the math.
Thanks, a lot a sense as it relates to your question. If you were to add back than the 21 million.
You'd be you'd have a seven handle on the on demand and so yes as things move out I think you should anticipate us to be in any given quarter in that in that low seventys 70 to 73 range, depending on mix shift in any given quarter.
Thank you. Our next question comes on line of Richard Newitter SVB Leerink. Please proceed with your question.
Hi, Thanks for taking the question.
On the on the pulls were positive.
Pete.
Just to be delayed here, a little bit I think in your opening remarks, you characterized it as it may extend into 2022 and.
I guess I'd like to discounted debt give arms around that time line, a little bit, but first and then may extend to try to versus ended the year 2020, it seems like a pretty pretty long period.
And I'm curious you also said that youre looking for additional opportunities to bring to development timeline timeline forward does that mean PAMA forward from 20 to 22 and.
Maybe just talk a little bit off about both timeline the what exactly.
The resource allocation kind of took off in terms of of that or by the two to push out. Thanks.
Hey, rich Thanks, let me clarify so so basically the series of events that have led us to make a statement that it will as of now it's the extends into 2022 and the reason for that is when we encountered a component level issue with polls during the cold the situation when we're bringing a lot of engineering.
Alan into the building we work in the building. So we took a lot of resources and deployed them against Poles to bring that timeline back into where we are roughly had it originally that created a gap that plus the the component level issue itself creates a gap because as we talked about robotics is an application within.
Also pulse has to be sample for robotics, then to work off of calls so so point being enters the timelines impacted by shifting resources to to fill the gap and bring the poll system timeline back into roughly what it was before and maintain our commitment to revenue in the back.
It was 21 as we look now at the gap created in robotics. It extends our timeline into 2022, we are actively looking to go back now and resource for actively searching and looking to up the resourcing around robotics.
Mark as we.
Obviously has been summer surgeons, but coming somewhat out of the covert 19 situation. We're now having people back on our campuses.
The environments more conducive so we're putting the robotics program under a microscope, we're looking to how do we not bring that back in and what's going to read required how much is it resourcing are their timelines verification validation milestones that we can somehow bring yen.
That's what I'm, saying, it's the combination of of moving resources to accomplish what we needed to accomplish with pulse, which I feel very confident about but in doing so we traded.
The the timeline for robotics Altamont folks at least in the short term now our job looking forward and what I'll be able to update you guys on.
This time next quarter is a much much greater assessment of what can we do now to ensure that we're bringing that as close back to original expectations as possible. It's on its system for me to your a finer point on the stage right now would be will be responsible because we need to take a hard look at it.
We havent had a chance that everybody sit down in San Diego and really go through it.
We've been on the phone we ourselves at that meeting and we're scheduling every asset to have that done plus bringing on additional resources to support so that that's the that's the that's the story of Paul's inflows robotics now there how the related as we look at the projects today.
Okay. Thanks for that classification, and then just on the ASV and the trend.
Couple of trend.
Increasing spine surgery procedures on the assay setting on I'm curious what have you learned.
As we move through the recovery and to what extent.
It is actually 60 actually starting to put jabil up more in that care setting. Thanks.
Yes, Matt when it used to cover the conversation.
Yes, so I think when we talk about the at the end in spine, we need to be really deliberate around what specific procedural opportunities you know our best associated with that type of shift inside of care and so you have a segment of an instrument Ed lumbar procedures.
Decompression disconnected maeve and the like that that are currently commonly done on an outpatient basis or because in the assay as well as some cervical fusion.
We are seeing some continued and growing interest in the ability to do.
More simple and straightforward the generative lumbar fusion in an assay setting and those are absolutely the types of procedures that benefit from a less than basin intervention like Exelis and X 360, as well as many of our other MKS interventions.
Like you May ask Telus brand mass plants, and so that is absolutely part of our focus moving forward as you heard Chris mentioned in his remarks previously and the and the opening comments that we have.
And ongoing campaign, it's time to evolve really focusing on the incorporation and integration of less invasive technique into surgeon practices, reducing the risk and morbidity associated with those procedures in the inpatient setting, but but also than making those those fusion procedures.
Candidates to be identified as a as a potential area to shift site of care from a traditional inpatient setting into an outpatient our inventory surgery center setting. So it's really when you think about backs Pacific.
Subset of of procedures, which again are sort of degenerative lumbar fusion its first continuing to build.
Proficiency within the clinical practices.
Hi them as my guess techniques are less invasive techniques for those pathology and then then partnering with surgeons and how they can shift those procedures to an alternate site of care and a very cost effective and efficient manner and I'd say that in general as we see across other surgical specialties, including orthopedics theres, absolutely desire to liver.
Leverage the alternate care setting both on on on the side of the individual providers as well as the health system. This themselves to increase their capacity to serve all patients and all.
Medical and surgical conditions, leveraging a wider range of.
Of care setting, both inpatient and outpatient so.
We're continuing to lean and we see strong surgeon interest there I think there are certain other procedural interventions as I mentioned in spine, either on instrumented lumbar procedures or even potentially cervical fusion as well as other orthopedic and types of preceded that maybe lend themselves to a a more rapid shift to that that ultra.
Site of care, but it's clearly I think an opportunity that all of us are interested in as it relates to degenerative lumbar spine fusions as well.
Okay.
Okay. There there are no further questions at this time I would like to turn the call back over to you for closing comments.
Thank you and thank you all participating in today's call I Hope you all stay healthy and we look for speaking with you on our next quarter's call.
Thank you.
This does conclude todays conference you may disconnect. Your lines at this time. Thank you for your participation have a great anything.