Q3 2020 Orthofix Medical Inc Earnings Call

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Ladies and gentlemen, this is the operator todays conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.

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Ladies and gentlemen, thank you for standing by and welcome to the Orthofix third quarter 2020 earnings Conference call I went out on the conference call over to Alexa.

Thank you operator, and good morning, everyone welcome to the Orthofix third quarter 2020 earnings call. Joining me on the call today are our president and Chief Executive Officer, John Travolta thick and Chief Financial Officer John.

I will start with the Safe Harbor statements and then pass it over to John.

During this call we will be making forward looking statements that involve risks and uncertainties Oh.

All statements other than those of historical fact are forward looking statements, including any earnings guidance we provide.

And any statements about our plans beliefs strategies expectations goals or objective.

Sure there are cautioned not to place undue reliance on such forward looking statements.

No we're sure but the matters contained in such such statements will occur.

The forward looking statements we make on today's call are based on our beliefs and expectations as of today November 10, 2020, we do not 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.

Made by US on this call include the risks factors disclosed under the heading risk factors in our form 10-K for the year ended December 31st 2019.

In our form 10-Q expected to be filed later today as well as additional FCC filings, we make in the future. If you need copies of these documents. Please contact my office at work.

Orthofix in Lewisville, Texas.

In addition on today's call, we will refer to various non-GAAP financial measures.

We believe that in order to properly understand our short term and long term financial trends investors may wish to review these matters as a supplement to the financial measures determined in accordance with the U.S. GAAP.

Please refer to today's press release announcing our third quarter 2020 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results.

At this point I will turn the call over to John.

Thank you Larry.

Hi, everyone and thank you for joining our third quarter 2012 results conference call.

On today's call I'll provide an update on the third quarter performance I will then review the progress we've made within each of our strategic initiatives before handing the call over to Doug will provide a financial update.

Closing with our perspective on the business going forward before opening the line for questions.

Shifting to the third quarter performance total revenue for the quarter was down 2% on a reported basis and 3% on a constant currency basis compared to the prior to your quarterly.

Largely driven by a decline in elective procedure volumes during the third quarter.

Despite the year over year decline, we are very encouraged by our performance during the quarter, which reflects continued strong execution and leadership as we navigate uncertainty of co design team can begin to carry out our strategic plan with the new team.

Month to month performance was generally flat throughout the quarter, which we view as a positive indicator that we are returning to some level normalcy.

The sequential basis revenue increased 52% over Q2, and we saw some positive trends across the businesses with procedure volumes rebounding and restrictions continue to be lifted across geographies we operate in.

Now, let's turn to the performance within each of our business units.

For the quarter.

Since our 2019 launch of the Unsexy artificial cervical disc in the US we have trained over 650 surgeons.

In biologics sales were down 7% versus prior year, primarily as a result of the reduction in elective procedure volumes during the quarter generally our biologics business is in line with the market procedure volumes, but his upcoming off a double digit growth in the third quarter of 2019 and continued ASP pressure.

Sequentially Biologics is up 37% over the second quarter.

Roles in our global spine business, we are well positioned and seeing early positive results from the new structure.

In September we announced the appointment of Paul can solve lives as president of global extremities.

Paul brings a wealth of global experience and proven leadership to the organization. Most recently Paul served as corporate Vice President and Chief Commercial Officer at Integra Life Sciences.

We are very excited to have him on board. He is a great addition to the team and we believe his leadership can accelerate the growth of our global extremities business.

Great example of the progress we have made in spine is the presence we had this year's virtual NAS conference, where we are going to launch our new campaign Orthofix on the move.

We received positive feedback on this campaign and how we are positioned to new work effects.

In October we announced an additional FDA clearance for the fire occurred five fusion system, specifically to the nano technology feature.

See artificial cervical disc.

The trailing elite allograph with viable sales the firebird five fusion system.

And various peek titanium composite or PTC spacer systems.

Throughout the course of the meeting we were very pleased with the participation in our virtual experience and through this form we are able to highlight our new products and share our scientific data, while gathering excitement from our surgeon customers and distributor partners.

Well, we are just getting started under the new spine leadership team. We are very encouraged based on the outcome of our efforts at this meeting.

In late September, we announced an investment and partnership with Neo medical essay privately held Swiss based spine company to develop and market innovative outcome driven procedural solutions specifically the partnership focused on the co development of a surgical platform, including single use.

Sterile pack procedure solutions designed to increase operating room efficiency.

Reduce procedure times reduce infection rates and improved patient outcomes through novel device designs and techniques.

Beyond those advantages the associate instruments are ideal for forward looking surgical settings, including hfcs.

Surgical staff increase hospital efficiency.

With the addition of fit its own Judy also plating system, along with Trx plate limb reconstruction system and our pre operative planning platforms. We believe we have now established the industry, leading most complex deformity care offering to address all pediatric extremely deformities.

Moving now to our fourth and final strategic initiatives commercial channel development.

We continue to focus on adding and developing long term strategic partnerships in the us and moving away from transient transactional relationships.

With our now complete spine extremities commercial leadership teams, we continue to execute our plan over the near and long term.

I am pleased with the progress in partnerships with distributors that now carry multiple spine product lines and the extremity distributors that are adding our biologics and bone growth therapies product lines to their bags. This.

This has positioned us well to capture synergies among our product lines in the U.S.

Outside the U.S., we're scoping, our spine business and making investments and we look forward to sharing with you in future quarters.

Before handing the call over to Doug I would like to comment on our recent activities around the FDA proposed reclassification of bone growth stimulation devices.

On September eight to medical device Advisory Committee orthopedic rehabilitation device panel recommended requiring robust and complete clinical data from the proposed reclassification of bone growth stimulators from class three to class II with special controls to ensure patient safety and therapy.

Efficacy.

We support the panel's decision requiring robust clinical evidence for the effectiveness of these devices as we believe there should be a high hurdle to prove that these products are beneficial to the patient.

We continue to believe that the proposed ruling is finalized as recommended by the panel, which could not likely issue any earlier than late 2021 there.

There will be little impact on our business and we continue to maintain our market share position.

Down 15% to prior year in constant currency.

Gross margin of the third quarter of 2021, 76% compared to 78% of the prior year period.

Primary driver of this decrease was the increased non-cash inventory reserves on certain products due to lower procedure volumes, mainly resulting from the covid impact.

As mentioned last quarter and as demonstrated in the third quarter of 2020, we expect gross margins to trend back to historical levels as volumes rebounds and revenue increases.

Sales and marketing expenses in the third quarter of 2024, 48% of net sales, which was flat to the third quarter of 2019. This was in line with our expectations as we started sales rebound sequentially over the second quarter.

As mentioned on the last call, we received $13.9 million in Medicare advance payments as part of the Cures Act during the second quarter of 2020.

We will commence repaying these advances in April of 2021 in accordance with government directors.

Late in the quarter, we repaid the remaining $50 million outstanding on our line of credit. The company now has no borrowings outstanding under our $300 million secured revolving credit facility.

As John mentioned earlier, we announced a new partnership with Neil medical to develop and market a single use spinal instrument solutions focused on improving patient outcomes.

In early October Orthofix invested $10 million in neo medical to support the ongoing partnership through a combination of a convertible term loan and an equity investment.

I'm ready for the rebound and procedure volumes.

With a key factor to this is the patient's willingness to schedule a procedure and head to the hospital or AFC to have that procedure perform.

We've seen some stability in U S volumes, but our <unk> business continues to have more variability.

We will continue to adapt drive new business and take advantage of opportunities when they are presented themselves within the fourth quarter and beyond.

Really impressive Threeq result, so congratulations to the team.

Maybe if I could start John just a couple of recovery question and I know this is tough to tease out but as we look at the the strong results across all franchises is there a way to think about how much of Threeq was working through backlog versus a a return of new patients to the funnel and then sort of a follow on to that is when I think about the U.S. recovery from a regional standpoint.

I assume it was broad based across the country over or are there still pockets of weakness and then I have a couple of follow up.

Yes, Thanks, Matt question.

Look at the market trends coming back.

It is still positive in certain areas, let's be specific here as far as the U.S. first outside of Europe.

And the U.S. its relatively harmonize, but there still are some pockets and we're still seeing some reluctance for in our channel checks for surgeons for patients to come back and have procedures done, but that's that's becoming a narrow base could be smaller but outside the U.S. There are certain regions such as the UK and other.

Countries that are being locked down for a period of time. So those procedures are still get locked down and we're also starting to see some early signs of additional countries started spacing restrict activities, including Germany, Italy, and Spain, and so were monitoring that closely to watch flow, but on the baseline and.

You actually have come back to near 2019 levels with the exception of those reluctant patients.

All right I appreciate that and this is probably not a fair question, but I'm going to give it a shot anyway, but its cobi isn't an incremental headwind in Fourq do you think the business could be flat to up.

Based company as far as carrying instruments and technologies. They already have an existing system that were co marketing and bringing them to be as C environment and a very limited khobar relationships. So we can learn about these markets going forward. So we have those activities. We did not do this as a revenue accelerator. We did this as a learning activity and so we will be monitoring that activity.

In real time, and and clinics and <unk> around the U S.

No development side.

Initiated developments already.

Shortly after we closed the deal and that's those are ongoing and we will keep you apprised those we go forward about quarters.

Okay. Thank you I'm clear now.

Could you Ah you know I love to talk about timing. So could you also give us an idea of when.

Full launch with some of these.

Newly launched products like Hipbone, Jonathan's now acquaint could occur and what kind of.

Consistent.

On our second quarter call.

Call out each month's performance as we recovered but that as we hit that threshold in July August and September.

We saw our performance.

Become fairly consistent.

Consistent with the rebellion.

First is yes year over year that fits right into <unk>.

Okay, all right I just wanted to be clear on that and then I'm sorry, I didn't hear the answer to the previous question what is the timeline for the.

Those areas and we're we're we have a number of high quality distributors and we're also creating more strategic distributors. We go forward and so will report back to you on our progress there, but we are now moving chart channel channel development with since we have the sales leadership in place.

Okay. So that's gonna be the area of focus November 2021, it sounds like it.

Yes and beyond.

Okay Alright, thank you thank.

Thank you too thanks, Jeff.

Thank you I will now turn the call back over to Miss just about cake.

Sure operator, we appreciate everyone taking the time this morning, and we look forward to updating you on our progress on our next quarterly call. Thank you everyone have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Yeah.

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