Q4 2020 NuVasive Inc Earnings Call
Greetings and welcome to the invasive Inc, fourth quarter and full year 'twenty and 'twenty earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow our prepared remarks today.
For anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
This conference is being recorded.
I'd now like to turn the conference over to your host Harbaugh Executive Vice President and Chief Financial Officer. Thank you you may begin.
Thank you welcome to new basis fourth quarter, and full year 2020 earnings call.
Company's earnings release, which we issued earlier this afternoon and has been filed on form 8-K, with the Securities and Exchange Commission.
We have also posted supplemental financial information and an overview on the acquisition of simple biomedical, we announced yesterday on our website and the Investor Relations section to accompany our discussion today.
Joining me on the call us invasive CEO, Chris Barry for.
<unk> will provide opening remarks, and then I will share additional details on our financial results before we open it up for Q&A.
I would like to remind you that discussions during today's call will include forward looking statements, which are based on current expectations and involve risks and uncertainties assumptions and other factors, which if they do not materialize or prove to be correct.
Cause new basis results to differ materially from those expressed or implied by such forward looking statements. In particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic on the company's business operations and financials.
The COVID-19 pandemic continues to evolve and it is important to note that our commentary reflects our best estimates as of today.
Risks and uncertainties related to simplify and medical and additional risks and uncertainties that may affect future results are described in our recent news releases and then other releases and periodic filings with the Securities and Exchange Commission and.
<unk> assumes no obligation to update any forward looking statements or information, which speak as of their respective dates.
This call will also include a discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP.
We generally refer to these non-GAAP financial measures.
Many of the financial measures covered in today's call for on a non-GAAP basis unless noted otherwise these.
These measures include non-GAAP gross margin.
<unk> general and administrative expenses research.
Research and development expenses operating margin other income and expense tax expense net income diluted earnings per share free cash flow and net sales reported on a constant currency basis.
Reconciliations to the most directly comparable GAAP financial measures may be found in today's earnings release, and the supplemental financial information, which are accessible on our website and the Investor Relations section with that I would like to turn the call over to Chris.
Yeah.
Thank you, Matt and good afternoon, everyone before we get started I wanted to take a moment to thank our employees for their continued resilience and commitment.
This past year rebuild the true character of new basis.
I am proud of our people showed up and continue to serve our surgeons providers and patients.
During a challenging year for everyone around the globe.
Earlier today, we reported fourth quarter and full year 2020 financial results and yesterday announced the acquisition of simplify and medical.
On today's call I'll provide an overview of full year 'twenty and 'twenty results, then turn to the investments debates of us making to deliver what I believe to be the strongest innovation pipeline and inspiring.
And then Matt will share additional details on the fourth quarter thoughts on how the first quarter is taking shape and how we're thinking about 2021.
Full year 2020, net sales came in at $1.051 billion, a decline of 10, 1% on a reported basis or 10, 2% on a constant currency basis compared to the prior year.
Around the globe elective surgical volumes have largely been impacted by COVID-19, which is reflected in the companys results.
Specifically this led to the declines and the U S spinal hardware and U S surgical support business lines.
Despite COVID-19.
We had solid performance and key international geographies, and particular Asia Pacific delivered double digit growth for the year.
And this is a testament to our commercial execution leadership.
And investments in the region and aligns with our continued focus on globalization.
While I recognize the challenges of last year brought it also offered us opportunities to invest and infrastructure talent and innovation to better position the company to deliver against our long term strategy and create value for our shareholders.
New basin has always been and will continue to be the innovation leader and spine.
In 2020, we increase investments in R&D to continue advancing our leadership position and less invasive surgery.
Spanning our full line portfolio and integrating enabling technologies to offer comprehensive solutions for our surgeon partners.
This is evident in the 15 clinical evaluation and commercial launches, we released in 2020 and aligned to the key launches we have planned across all procedural areas in 2021.
Looking ahead, new basic will utilize its industry, leading expertise to procedurally integrate each surgical approach anterior posterior and cervical with differentiated.
<unk> technology, just like we did with X 360.
We will continue to target the largest subsegment in spine, giving us tremendous runway to continue expanding our global reach and growth opportunities.
And tears spine surgery represents a $900 million global market opportunity and continues to be a key driver for the company.
We are the leader and single position spine surgery and are well positioned to become the <unk> market share leader with the continued portfolio enhancement slated for 2021 and beyond.
We continue to invest and our proprietary advanced materials science implant portfolio, featuring the poor speak family Cohere.
And for titanium family and modulus, which are designed with unique surface and biomechanical properties to improve fusion.
Our cohere portfolio includes implants for anterior posterior and cervical now features coke your excellent the for.
First porous peek interbody for use and our clinically validated ex lift and ex 360 procedures.
This is already garnering significant surge and attention following the launch late last year.
To help drive continued growth and the Ayliffe market, we plan to commercially launched modulus Ala and the second half of 2021 for.
For us and supine elite and ex Ayliffe approaches and.
In addition, our R&D teams have applied to fully force in plate design.
Modulus and two new expandable implant portfolio ex.
For both lateral and posterior surgery with clinical evaluation starting this year.
Turning to cervical we launched the <unk> 360 portfolio late in the fourth quarter of 2020.
This is our comprehensive procedurally integrated portfolio for interior and posted on cervical spinal surgery are.
A key driver to our long term growth strategy.
For ACD F procedures. The recent new base of ACP system launch was one of our largest commercial introductions and features three profile designed to help reduce common postoperative complications.
This includes the finished plate currently on the market at $1 six millimeters.
Cervical segment of the global spine market represents a $2 six.
Other opportunity.
The company is well positioned to take share with our <unk> 360 portfolio together with the upcoming commercial launch of our reliance cervical for post era cervical fusion integrated with the pulse platform.
As announced yesterday, the strategic acquisition of simplify medical further advances our cervical portfolio with the most clinically effective technology and the cervical total disrepair and art procedure segment.
Simplify team has spent more than 10 years developing innovative technology designed to offer surge and best in class capabilities, including.
Optimize design with peak and blades and ceramic materials, which allows for enhanced visualization through MRI postoperatively compared to competitive devices.
Anatomic disguise and three options with the lowest available day sky in the market.
And proprietary technology to balance mobility and stability.
The simple by cervical artificial disc is backed by level one evidence through the FDA investigational device exemption study and was found to be clinically superior to ACF and the randomized controlled trial.
Device currently has a one level of FDA approval and pending a two level approval.
In addition, a large number of cervical total district placement surgeries take place and ambulatory surgery centers, providing opportunities to extend our for line portfolio and this expanding market segment.
Coupled with our <unk> hundred 60 portfolio. The simple fact is positioned to do basis with our leading offering of procedurally integrated solutions for cervical spine surgery provide.
Providing surgeons best in class technology to support their preferred procedural approach.
This acquisition aligns with the company's capital allocation strategy to acquire highly differentiated technology it.
It will be a long term growth and margin driver for our business and supports our commitment to transform surgery advanced care and change lives.
Throughout last year, we continued to make progress with the commercialization of pulse, our integrated technology platform to enable better spine surgery.
We utilize this time to accelerate and scale of the launch and are now planning for a global release of the platform.
We recently submitted our application for five 10-K clearance for the FDA.
And anticipate CE approval and the first half of 2021.
Based on these timelines, we anticipate the first cases with pulse to be and Europe.
As previously communicated pulse will include upon launch <unk> navigation and.
For operating Neuromarketing.
For Iga and <unk> applications.
And integration with the leading <unk> imaging technologies.
In addition to the software it and come on at level hardware updates made last year, we expanded the upcoming commercial launch to include.
Our proprietary and lesser application, which is designed to reduce radiation exposure and helps improve or efficiency.
Enhanced functionality with our neuromodulator and application to support complex spinal pathologies.
Improved measurement capabilities available with our Iga application.
And and the integration of our <unk> Rod bending system and the pulse camera technology.
These additions demonstrate our commitment to deliver innovation that helps improve clinical and operational outcomes.
The extensible architecture of polls allow us for future applications like robotics, the integrated and accessible from a single platform and the operating room to drive better spine surgery.
Also allows for opportunities to collect and disseminate data both before and after surgery to improve patient outcomes.
The ability for this platform to be utilized and 100% of spine procedures is a differentiator over competitive offerings and the market.
We believe the pulse platform would be one of the most transformative technologies and new based on history and remain committed to our launch timing of summer 2021.
While much of our attention is focused on ensuring a successful launch of the pulse platform. We continue to make steady progress against our pulse robotics timeline.
And our expectations for first in human use and 2022 remain unchanged.
Despite COVID-19 travel challenges, we've maintained our R&D evaluation and trainings with both our surgeon partners and commercial teams to prepare for the upcoming post launch.
R&D and <unk> labs, along with surgeon demonstrations continued providing opportunities for real time feedback from our customers.
These labs have been critical and the development process, allowing surgeons, who experienced the differentiated platform.
We have also provided an early indication of demand as surgeons look to bring this technology to their hospitals and practices.
In addition, we've continued to educate our global sales teams on the procedural benefits of the pulse platform with virtual trainings hosted by surgeon partners to help prepare for a successful commercial launch.
As we announced earlier this month, we are on track to open our East Coast experience Center and the New York Metropolitan area in Q3, 2021, expanding our clinical professional development and market, leading surgeon education programs.
And this experience center will host competency based courses and category trains on a procedural solutions.
Lastly, we've made key investments and leadership and infrastructure to strengthen our commercial execution and customer engagement capabilities.
Without a doubt we have one of the most talented and clinically trained commercial teams and spine.
We've made key additions to our commercial organization that Leverages, both long standing internal talent and new external additions and key regional leadership roles capital sales and clinical professional development to further align and deliver on our strategic commitments.
As I look to the year ahead I cannot be more excited about the innovation, we're bringing to the market in 2021, which includes the expansion of our cervical portfolio with a simplified yes.
Nuvasive is developing differentiated procedural solutions that deliver clinical financial and operational outcomes across our entire portfolio.
We continue to gain operational efficiencies across our supply chain to improve how we provide products and services to our customers.
The investments we made in 2020, coupled with our strong innovation pipeline.
<unk>, new basic well to make continued progress on our long term strategic plan and fulfill our vision to change a patient's life every minute of every day.
Now I'd like to turn the call over to Matt to discuss the Companys financial results in more detail.
Thanks, Chris and good afternoon, everyone.
Net sales for the fourth quarter 2020 were overall in line with our expectations at $291 8 million down 6% compared to prior year on a reported basis six 7% on a constant currency basis.
As we entered the fourth quarter case volumes were relatively stable and market volatility had flattened however, as we exited the fourth quarter. We once again experienced market disruption from the resurgence of COVID-19.
In particular December experienced a significant decrease and procedural volumes as elective surgeries were delayed or canceled and patient sentiment declined most notably and parts of the United States and Europe.
U S spinal hardware and net sales were $155 2 million and the quarter down year over year by eight 1%.
Pricing was a one 4% headwind in line with our annual performance, while having the same number of billing days as compared to the prior period.
The business saw growth from portions of our thorough Columbia portfolio, driven primarily from continued adoption of our advanced material science implants with strong results from the clinical evaluation of modulus, a list and relying on <unk> within our pediatric portfolio.
This progress was offset by declining case volumes as a result of COVID-19.
Our cervical portfolio was down double digits from prior year compared to a particularly strong quarter in 2019.
This was sequentially flat from Q3, which shows continued momentum within our new <unk> 360 portfolio offset by headwinds from legacy products.
Turning to U S. Surgical support net sales were $67 4 million and the quarter down from $77 3 million and the prior year period, representing a 12, 9% decline.
This performance was driven by the impact from new base of clinical services experiencing a similar reduction and case volume to our U S spinal hardware business, along with the challenging billing and collections comparison from the prior year period.
In addition, we did not see typical levels of stocking orders within our biologics or inter operative neuro monitoring product lines due to the pandemic resurgence driving additional pressure in late December.
International net sales and the quarter grew 8% as reported over the prior year period or for 6% on a constant currency basis to $69 2 million.
As we've previously discussed parts of Europe continued to be heavily impacted by the pandemic countries like the United Kingdom, and Spain saw significant year over year declines.
This was offset by continued strength and our Asia Pacific region, where we saw strong double digit growth driven by new product introductions, and the cervical portfolio and lesser impact from COVID-19.
Non-GAAP gross margin for the quarter was 71, 6% down 160 basis points from the prior year within the quarter. We continued to see elevated levels of inventory reserves compared to the prior year as a result of updates to estimates and assumptions about future demand for certain spinal hardware products based on <unk>.
Current market conditions.
This headwind along with volume reductions was partially offset by underlying efficiencies, we continue to gain from our supply chain.
Moving down the income statement non-GAAP SG&A expense was 142, and a $5 million for the quarter, representing a nine 8% decline compared to prior year and a 48, 8% of net sales.
This is a 210 basis point improvement as a percent of net sales the.
And the organization continued to execute on initiatives.
And disciplined expense management and reduced discretionary spend which helped to offset the margin impact from the pandemic.
These expense initiatives are temporary and that being said, we don't believe these will impede our short and long term financial commitments.
Non-GAAP research and development R&D expenses and.
Increased to $20 3 million and the quarter. This wasn't a 11, 2% for $2 million increase over the prior year period.
As we stated at the beginning of the year, we not only maintained R&D investment levels in light of the pandemic, but increased our investment throughout the year. We will continue to invest in R&D to best position the company for the future taking this time to advance our innovation pipeline.
Fourth quarter non-GAAP operating margin came in at 15, 8%, which is sequentially flat to third quarter 2020.
This demonstrates the company's commitment to our margin profile, despite headwinds from the macro environment and continued investments and R&D.
Other income and expense for the quarter was $6 $3 million on a non-GAAP basis up from $4 $5 million and the prior year. This increase is primarily related to interest expense on the additional $900 million and convertible debt issued in 2020.
Non-GAAP tax expense and the quarter was $9 $4 million, resulting in an effective tax rate of 23, 6% versus a tax rate of 16, 8% and the same quarter last year, which included a onetime benefit due to a release of a historical tax reserves.
And the fourth quarter. The company reported non-GAAP net income of $30 4 million or diluted earnings per share of <unk> 59.
Compared to non-GAAP net income of $38 5 million for diluted earnings per share of <unk> 73, and the same period last year.
Turning to GAAP results GAAP net income for the fourth quarter of 2020 was $1 $7 million for diluted earnings per share of <unk> <unk> compared to GAAP net income of $29 9 million.
Our diluted earnings per share of <unk> 55, and the same period last year.
Notably free cash flow for the fourth quarter was $44 $8 million versus $46 3 million and the prior year.
The decrease and free cash flow was a result of reduced net income offset by strong accounts receivable collections and controls implemented around both inventory and capital expenditures.
With solid free cash flow and timely access to the market and 2020, we ended the quarter with cash cash equivalents and short term investments at over $1 billion.
As announced yesterday, we acquired simplify medical and used $150 million of cash on hand to fund the upfront payment at closing.
We remain well positioned to repay the $650 million principal amount of convertible debt due in March of 2021.
The company also ended the quarter with an undrawn revolving credit facility of $550 million.
With this in mind, our capital allocation strategy remains unchanged.
Looking to 2021 I'd like to address the outlook for the year and provide some insight into what we're seeing within the business.
As you know we continue to operate and are highly variable environment due to the impact of COVID-19 on elective surgeries.
In January we saw a continuation of the headwinds that we experienced in late December however, and certain markets. We saw improvement as geographical restrictions ease and vaccine distribution white, we anticipate improvement and surgical volume over the first half of 2021 as the vaccine becomes more widely.
Distributed and patient sentiment improves but at a rate below 2019 market conditions with this continued variability and the market.
Not providing guidance at this time.
We will continue to operate and a diligent manner investing strategically in the business to fuel growth and deliver on our commitments.
Before I turn the call over for Q&A I'd like to discuss the announcement of our acquisition of simple five medical as.
And as Chris mentioned, we are excited to have the simplified team join our company and add the most clinically effective technology and the Ctr procedure segment and our global commercial channels.
We believe this acquisition makes new basis portfolio, a leading provider and cervical and positions us to participate and take share and this faster growing subsegment of the cervical market.
We expect this share gain and together with simplifies just favorable margin profile to accelerate our topline growth and margin expansion.
The acquisition is expected to provide minimal net sales in 'twenty and 'twenty, one and be accretive to non-GAAP diluted earnings per share starting in 2022.
However, this technology is and in early stage of commercialization, we must train and convert surgeons and need to continue clinical studies to further validate the benefits of the simplified desk. Therefore.
We will have an approximate $10 million headwind to operating margin in year, one while the net sales ramp.
On the total consideration front. In addition to the upfront payment previously mentioned there are future payments contingent upon milestones related to regulatory approval and net sales from products incorporating the simplify cervical artificial disc technology.
We are excited about the opportunity to take further share and the cervical market deliver continued growth for our shareholders and ultimately helped change more patient lives.
With that thank you for your time today I'd like to turn the call back over to the operator to start the Q&A session.
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One brief one on for the first question.
Our first question is from the line of Matt mixing with Credit Suisse. Please go ahead. Your line is open.
Hey, thanks, Thanks, so much and for taking my questions. So one on pulse on it and a follow up on on simplify and and <unk>.
So.
On the on.
On the pulse timeline could you.
And because this has been and sort of conversation for a while and leading up to sort of hit for launch here in mid mid 'twenty. One maybe just expand a little on the timeline and you expect you mentioned first cases and Europe likely.
And the first half.
But maybe how the cadence of Europe and U S ex.
Take them to play out and maybe ramp into into the second half to give some sense of how you see this year playing out and then have one follow up.
Sure Thanks, Matt and thanks for the question, Yes, we're excited.
And now submitted five 10-K, so we are really under the regulatory timeline and the us as far as Europe. We're also on track.
To secure CE Mark so just the way that the regulatory approval process works, we expect to have cases, and Europe first and that doesn't in any way share perform preclude us from from hitting the timeline, we've talked about with cases and the summertime and the US now clearly everything we can do to pull that ahead, we will book, but once we kind of get into the regulatory timeline.
We sort of follow up from there, but the fact is we believe will be and clinical setting and both the us and Europe over the summer and and launch later in the year. So that's the that's the clarification.
And like I said I think we're very very happy with the progress being made we've actually expanded.
The applications and the system as we talked about and some prepared remarks, but but very excited about this and technology hitting the timelines that we committed to and are on track to deliver what we said we wouldn't share.
Excellent excellent that's exciting so and then the follow up on on simplify.
Maybe just.
You mentioned minimal sales net sales and 21.
Couple of things, maybe if you could frame out what you think this this segment is.
Currently in terms of in terms of dollars and then maybe where it can go I know thats been a topic of <unk>.
Debate for some time, how big can and cervical disc replacement actually get.
But with coverage improving I suspect that that's.
That's also kind of improving and then Matt I think you had mentioned something about the launch of <unk> hundred 60.
Positive offset by some.
Offsets and legacy cervical products, and maybe give us a sense of what that dynamic looks like when you are when you are net positive or are you net positive and how we should think about growth if theres going to be sort of an offset of legacy ACF products as well. Thanks.
Thanks, Matt.
And we're super excited about the simplify opportunity and again, let me just kind of back up and the context of the broader strategy, we laid out and going all the way back into August and our 2019, we kind of did our investor day us moving from sort of the excellent company to taking continuing our leadership on on anterior but.
Complementing our organization through innovation and.
Cervical Q3 dollars 60 was just launched and it was sort of launched and the teeth of the pandemic really and the December timeframe. So we're still ramping up.
And that that opportunity.
80, sympathize, a great complement and again, if you look at the tire entirety of the cervical market. It's a $2 $6 billion segment huge segment, where as new base that we enjoy low single digit share position and it has just has not been and area of focus.
Today's market size, I think it's somewhat and <unk>.
Moving target.
Youre seeing a transition of ACD and procedures to just replacement the indication today.
And as more narrow, but increasing over time.
So I think it's still a question of what this what the size of this market could become but clearly.
Within within simplify its somewhat pre commercial so we can look at today's market. If you say, it's $2 50 $300 million huge upside for us.
And with what.
<unk> to be.
A differentiated technology and and.
And any way so I think what Matt was saying earlier as the initial launch of <unk> hundred 60, compared with our legacy products. The growth we saw with <unk> hundred 60, as still being somewhat dragged down by the by the predicates and we expect that to shift over the course of the next couple of quarters and see substantial growth and back half.
Our next question is from the line of Joanne Wuensch with Citibank. Please go ahead. Your line is open.
And good afternoon, and thanks for taking my question I wanted to circle back to your commentary that you would expect the first half.
'twenty, one revenue to be lower than the first half of 2019 on make sure that I heard that right and just for setting up models and expectations any way to put a parameter of how much lower.
Sure. Thank you Joanne.
On a full year basis.
We actually think that current consensus is a reasonable range to be and plus or minus right now and so on a full year.
And the numbers look pretty good.
We are concerned about is the first quarter because of the continuing impact from Covid and to a lesser extent some of the weather challenges, we've had and the us.
So as we're thinking about the first quarter, we think will be roughly plus or minus flat with what we did and the first quarter last year that number was $260 million. So we do think and us.
Second quarter, and things will get better there'll be less impact from Covid and then the back half of the year.
Very strong results for the kind of get us for that $1 $2 billion Mark.
And that I mentioned earlier and a lot of that has to do with.
Pulse being launched success with <unk> hundred 60, the simplify medical addition, a lot of that net sales is going to manifest itself and the back half of the year.
Excellent and then as a follow up question, how do we think and about pulse contributing.
Financially and dollars and cents in the second half of the year and then into 2022.
Yes.
It's going to be similar to simplify and it's going to be and $5 million net sales range plus or minus.
So it's not going to be hugely impactful on this year, but obviously that gets us well set up for future years.
Our next question is from the line of Josh Jennings with Cowen. Please go ahead. Your line is open.
Hi, good evening, thanks for taking my questions.
And I'd a follow up on.
Pulse robotics and understand that.
For cement is still on track for for early 2022.
On the share any development timelines after first in man and we.
When we could potentially see assuming all things go well up to first and Matt when we could potentially see us submission.
And I believe can you just help us understand again the submission pathway.
It's still Josh Thanks for the question on on Robotics and are clearly getting cost out we've taken a parallel pathway to continue to develop along the pathway for robotics.
We feel confident that the timeline, we put out.
On first in man and 2022.
And the timeline and we're pursuing today and feel comfortable as.
As far as far as some of the broader milestone for its just too early for US at this point to lay those out I think as we go through this year.
We want to make sure that we're seeing the things we want and we've got we got to make sure. We have a firm understanding of all the regulatory pathway.
The regulatory pathway and general that we need to pursue so it's a little early to comment on some of those milestones today, but over the course of this year I plan on edge.
Letting you guys know kind of where things are going with that project.
Excellent and then just a second question on pulse and it's our checks suggest that about 30% to 35% of surgical cases, and the United States Surgeons use navigation, one form and the other day.
It Hasnt had and navigation system, most NAV systems aren't exclusive for the manufacturers implant technology, but could you just help us understand the headwind Nuvasive has faced and that kind of 30 ish percent a third of the market sort of the surgeries that us navigation and.
And I understand pulse matched.
Matt said about $5 million, plus or minus and 2022, but just on the debt.
Procedure pull through potential for pulse and getting into that then navigation segment, sorry, and multiple questions on one there but.
And if you get the chest with would love some help just thinking about the puts out that dynamic.
Yes.
I think youre kind of hitting on an area that I think it's important for us to talk about which is sort of this.
This idea that what's the remaining opportunity and the market for enabling technologies, where youre talking about navigation or youre talking about something like robotics.
We still believe it's early days you kind of mentioned that 30%, 35% of cervical cases, using navigation and that's in line with with generally the ballpark of what we see.
And it's inconsistent I think and where we're at Qunar should become standard of care, we still think theres an opportunity to drive that's why we think the integrated nature of the pulse technology provides a great entrance into and operating room, where you utilize that platform and 100% of spine cases, and I think the key for US is thinking in terms of you'd.
<unk>.
Same thing on the robotic side, if we look at this the number of robots and.
And played a day, maybe 10% to 20% of the available operating rooms.
And have access to a robot.
But and when you look at that the utilization is still less than one a week. If you really do the macro level math, so so our ability to drive and integrated system to.
Drive a superior performance and our system, we think gives us an opportunity.
On the navigation as far as the exclusive city for US, we're being used and a lot of those cases that us navigation today. So there is there's no necessarily.
Proprietary nature for using anybody's navigation with their own products I think performance wise, it will be advantaged with our products, but but we very much look at the opportunity both on the navigation and robotics.
And early days, where there is still a significant upside opportunity for us as a company.
Thank you and as a reminder, please limit your remarks to one question. We have a question from Robbie Marcus with Jpmorgan. Please go ahead. Your line is open.
Hi, This is actually Lili on for Robbie Thanks for taking the question.
And so something we've heard from some of your peers is that new product launches really just aren't seeing the same sort of traction that they normally would because of COVID-19.
Could you give a little bit of color on how receptive doctors and hospitals have been to new products like <unk> or are people, putting off on adopting and he started things until trends and materially improve.
And thanks, a lot and thanks for the question.
It's really hard to say honestly and the eyes of Covid, because theres been such volatility both U S space, but also globally.
I can tell you that the demand and the excitement from our surgeons. It's still remains unchanged. There is significant excitement on <unk> hundred 60, and we're ramping up.
Our assets to fulfill that demand over time, there is still significant excitement on our pulse technology.
A lot of the technology and launching this year, including our margin. Examples there is significant excitement there it is.
Hard to say, what 2020 represented to us because of just differentiating between a lack of and ability to bring on a new product versus just volatility and as a result of COVID-19, it's really hard to discern that but I would just say that in this space innovation still carry significant interest that hasn't gone away and won't go away getting past that.
The situation, we find ourselves and with still some impact from Covid.
I think will give us a clearer picture, but I don't think anything fundamentally changed in 'twenty and 'twenty.
I think surgeons are still looking for better ways to treat their patients. So we're looking for innovation that is meaningful.
And as I said on my prepared remarks, and we are dedicated to driving clinical financial and operational results that meet their demands and so to that and.
And kind of hard to look back, but but looking forward I still believe the demand is very high and we've got a strong pipeline.
Our next question is from Richard <unk> with Us.
Silicon Valley Bank. Please go ahead your line is open.
Hi, Thanks for taking the questions. One clarification question and I had a follow up you had mentioned that.
And it's plus or minus 5 million around pulse and simple simplify I just want to make sure was that a second half 'twenty, one comment kind of plus or five or is that a 'twenty and 'twenty two cuts.
<unk> and 'twenty, one 'twenty and 'twenty.
Okay, Okay, and thanks for that and then.
Yes, Chris maybe just on.
Two things as it related to the fourth quarter International's trailing strong obviously us so weak I mean is that really more or less the way we should be modeling.
And first half.
The us significantly pressure and.
Some of the strength and international and then secondly, I appreciate that.
And some protocols and cervical but last quarter, you called that geographic mix.
Mix relative to the rest of the industry might have been impacting you guys a little bit more harshly I guess.
And I'd love some updates there on how that turned us into the fourth quarter and if you could also just talk to what your actual ex 360 growth rate was and what your growth rate was perhaps by region. Thank you.
Thanks Rich.
Give a shot at some of those on and on our Q4, obviously you said that we saw.
Strength, even in the face of certain markets internationally that were down but offset by those markets again some of the diversification that we look at geographically is starting to pay dividends for us. So we're happy with that U S contingencies and headwinds and we look at Gabon.
And the volatility of Covid, it did impact us and.
Kind of mixing us up for the second part geographically. So we saw intense pressure on certain parts of the U S versus others now towards the end of December and into early January we saw a pretty uniform reduction almost across the board.
As far as Q1 and kind of the first half of 'twenty, one and I expect to continue to see increasing levels of strength internationally, but I expect us they also see recovery.
And the US and again you also got to think about the U S business, we were coming off of a back half of us.
Of 2020.
And that reflected some pretty strong comps for 2019, we had some of our strongest U S growth quarters.
And that we'd had in recent history.
So.
And I still believe that we'll see strength international markets I think youll continue to see ongoing recovery in the us business and hopefully less geographic impact.
As far as X 360, and some of those specific gross we don't really go into that but I can just say that the runway for extra dollars 60.
We didn't we didn't make a lot of progress in 'twenty and 'twenty because of the volatility and some of the challenges, we faced with bringing new people and and training, but the demand is still there and as we've talked about and some of our prepared remarks.
<unk> and our capacity to train and educate through our east Coast experienced center, we've got a healthy we've got a healthy number of.
Folks that want to come in and be trained we're obviously operating now see $3 60, and then ultimately simplify and then launching pulse later this year. So we've got it we've got a strong pipeline of innovation.
Coming out of Q4 and coming into this year, we're looking to get out from under that the volatility of the market.
But I feel very very good about the direction, we're taking rich the only other thing I'd add Chris in his comments is that.
I mentioned in the prepared remarks around stocking orders and he did not see typical stocking orders and largely driven because of COVID-19 at the latter part of December and that would've impacted our U S results by us.
A little below $10 million net sales. So that also was kind of a onetime impact, which I think you were kind of alluding to we didn't see anywhere near that sort of.
One timer and our international results.
Our next question is from Ryan Zimmerman with BTG. Please go ahead. Your line is open.
Thank you yeah I have two brief questions I just want to follow up on Rich's comments. There that you were referring to so that $10 million, let's specifically related I think for biologics, but can you just quantify the impact of Covid on your U S hardware business, a little bit more and if I think about one of your closest competitors who grew.
With a 10% and called out a 5% impact I'm just trying to understand kind of the full impact of Covid for you guys kind of late in the summer.
Yeah. So.
We were doing pretty well and so we got to mid December.
And December is always on.
On this Berkeley for the company.
Where we book the most net sales and.
So what we saw.
Herb was COVID-19 really started to impact us and last week.
We see the ramp.
Right around biologics as far us.
The orders that didn't manifest themselves in the quarter.
We in turn saw that trend for mid December continue into kind of that mid June.
And that better, but we still have volatility out there it is getting better but.
Part of the reason why and we aren't giving guidance today other than my remarks earlier around the first quarter and the full year.
Is that we just want to play this out a bit further and.
And make sure that.
We're in a place where we feel really comfortable with where things are at.
And then maybe just to kind.
And it's time to step on our Q4, if you just look at the year and we triangulate it again across all competitors, we estimated that the overall impact of Covid was around nine to anywhere from us.
And we that's about the impact we experienced throughout the 10% Mark So volatility has been and the quarter's volatility geographically volte.
Volatility volatility.
Globally, but overall if you just if you sort of spread it out we believe we were in line with how the market was impacted and and obviously credit into the forward into 2020.
Okay, and I think it cut out there, but I think you said between nine and 11 aircrafts and then correct.
Okay and then just lastly for me you guys back and 19, Chris when you stepped in and you put a target of about $1 6 billion out there in 'twenty and 'twenty four by my math, that's about a 10% CAGR from here to there and so is that still on the table in your mind or is that we shouldnt be thinking.
And especially with 2000 Twenty's impact.
No I mean for 2020 is a bit of a lost year, but the innovation pipeline and what we're pushing its still on the ballpark.
Ex us another year to get to that number but clearly the the.
And the growth rates and the strategic buy and we put in place. We believe gives us it gives us a healthy runway not only on and Terry, but also and cervical and taking advantage of our low position and post your and and also obviously, we're doing it with enabling tech and a globalization. So still on the ballpark clearly 2020, and the impact from 'twenty and how quickly recover and 'twenty 'twenty, one and get back.
On track is still a bit of a question, but I believe it is on the ballpark of where we think we are going.
We have a question from Matthew O'brien with Piper Sandler. Please go ahead.
Good afternoon, and thanks for taking the question.
And I look back and LDR and when they launched Mobi C and the us and the first full year that they were on the market. They did just under $30 million and revenue that year. So as we look into 'twenty to Chris or Matt.
Is that a fair kind of.
Expectation that investors should have you'll have a one and two level indication for.
And if you're not willing to go kind of to that extent I mean isn't it fair to think that debt simplify should add 150 to 200 basis points of growth over the next couple of years at a minimum.
Yeah listen.
And we're getting this technology sort of pre commercial so we're ramping up our capabilities across the board.
Nearly the manufacturing and the R&D will be and internal integration, we're getting our sales force up and try and getting curriculum built two two to support our product with also our professional education, all things will do and 21.
And 2022.
Youre, saying something that's generally and the ballpark again, it's a little early for us to comment, but but we're very very optimistic about the opportunity that we have here and it's a.
It's an opportunity and a market that has somewhat been set you've mentioned LDR. They created the market we have an opportunity with a very differentiated product both from how this shows up under visualization, specifically post operatively on the MRI.
The proprietary for millimeter size of this technology, and we think Thats a broadening of the potential patient population that are.
That could present for this type of technology, and then lastly, striking the balance between what's on the market today with a with a technology that sort of strikes the right balance between mobility and stability and we're getting overwhelmingly positive.
Comments from our from our key surgeons that we've spoken with.
Listen I'm optimistic about 2022 very optimistic.
Hesitant to put a number out there yet because we've got to walk before we can run, but but I can tell you that it's going to be a key focus for us as we move forward.
Yeah and then.
Gross margin profile.
On the simplify medical deal is very very attractive as it does improve our gross margin.
Over time and it gets better throughout the life of our ownership because for some things we're doing.
From a manufacturing perspective to lean and out further and the operating margin is also <unk>.
Significantly accretive well above kind of our coal from Australia.
Sure.
We have a question from Kyle Rose with Canaccord. Please go ahead. Your line is open.
Great. Thank you for taking the questions.
Chris just wondering if you could talk just about the overall.
Mentality and stability within the sales organization I mean, 2000, Twenty's and then it's been a tough year I think for everybody.
You've talked about some of the big product launches and over the past several years, maybe been more training focus so.
Being impacted from an execution standpoint in 2020 just.
Whereas the stability of the sales force fall.
Right now.
And have you lost anybody on any key distributors and anything along that.
Perspective.
Yeah. Thanks, Thanks, Kyle I appreciate the question listen I've spent on I've spent a lot of time and and I actually mentioned this and some other prepared remarks.
We brought in some fresh faces that complement just a tremendous amount of knowledge and knowhow and the spine industry and I think that those things coupled together starting to match what I consider to be a.
And a very healthy mentality and very healthy culture.
2020 of us hard for everybody I think it was specifically hard for our commercial teams, but I was proud of the company, we stepped up and bridge the gap and compensation and I think that there is a.
There is an acknowledgment of that within our sales channel and then you said it our our our innovation and what we've got coming down the Pike I think people see it clearly simplify was was well received I was with a lot of our Rvp's This morning actually and <unk>.
Some of the newer leadership are brought on brought in more recently and I can tell you that there is a growing excitement.
A growing level of bullishness on where we're taking things and clearly coming off a year like 2020 as.
Welcome to get together and actually get to sit down and talk to one another.
As far as turnover and the sales force I mean, we have turnover and we have competitive games every year I've kind of said this before it's a part of the industry will continue to try to lead our advancement.
<unk> talent through our innovation and I think if you're a competitive rip out today and you see.
What we're doing with simplify what we're doing at cervical the opportunities, we see with enabling technologies and hopefully youll see and this is a place.
Want to come to and we continue to see interest and pick off.
Key talent from our competitors and from time and time, we lose talent so.
The churn has not and does not meaningfully different I think the innovation pipeline and some of the cultural cultural changes that we're feeling now are better than they have been so I'm actually bullish more bullish now then and then I was when I started the company two years ago about where we are and our commercial organization.
We have a question from share dancing with Wells Fargo. Please go ahead. Your line is open.
Alright. Thank you so much for taking the question.
I guess the first one is on margin.
Matt I think previously you had indicated that we should think about 2019 operating margin of about 15, 8%.
As the floor and you would expect a modest step up from there and I think today, you've indicated that we should assume an additional 10 million from simplify.
So what does that net out to should we still should be expected to be flattish year over year.
And so that's that's question number one and then secondly, just on M&A. It looks like you do have additional firepower.
New deals how are you thinking about other areas of interest as well as deal size. Thank you for taking the questions.
Thank you so yes margins.
We've said all along that the operating margin improvement that we talked about and 2019 was backend weighted from a strategic plan perspective and.
So.
This year with Covid impact, it's a bit unclear.
As to how this all is going to shake out our operating margin should be lower and the first half. This year and then we'll pick back up in the back half and yes, the 10 million us a clearer headwind from the simplify at but as we said in the prepared remarks were really excited about it and we're excited about the fact that it becomes profitable next year. So we don't have to wait that long.
Long to start driving the bottom line and as I said earlier the margins are very attractive on this transaction and then finally from an M&A perspective, yes, we do have additional firepower.
And we envision generating positive cash this year much like we did last year and years before we have not touched our $550 million revolver.
The debt capital markets are incredibly attractive right now so we don't feel any constraint and we just want to find really good deals like the one we announced yesterday.
Our next question is from David Lewis with Morgan Stanley. Please go ahead.
Hi, guys. This is drew ranieri on for David Tonight, just a question on on.
International to start, but just broadly on confident on reaching your 2020 for LLP and and.
International It seems like it's a bigger component of that for for revenue, but just with the resurgence lingering globally. I know we have ongoing vaccination is there anything that changes and you're thinking about international.
Do you need to make any more investments to drive potential incremental revenue there or are there even more attractive regions or countries.
And that look more attractive today than they did a year ago or two years ago.
Thanks.
Simple answer is we're still very excited about our national opportunities and nothing material has changed and I still think that the.
And the opportunity to grow and those markets I do think there's ongoing investment that is taking place as we speak today and will continue going forward.
Got it.
And I believe we continue to add strength and and our key markets.
The performance of our Asia Pac team this year inclusive of Japan.
Even through the Covid crisis, and we saw pockets of strength in Europe.
And just the resiliency across the globe really two two to deliver during this time to the extent that they could based upon their situations. So generally speaking and I still think there is significant runway in our existing markets and as I've said before there is still very attractive markets that we're not participating in today and some of those are within our short term reagents.
And I might be within the mid and long term range based on portfolio things like simplify may accelerate our opportunities and certain markets and we're also looking at M&A opportunities like simple fire, maybe other things that that would accelerate our opportunities and some of these key markets, but we're still committed to the globalization opportunities we saw I think.
Strength amongst our competitors significant strength within our business over the course of this year, which is a disruptive year, which gives me even more confidence for our ability to deliver our commitments over the next several years.
Our next question is from Kayla CRO with Truest. Please go ahead and your line is open.
Yeah.
Hi, This is Sam on for Kale and thanks for taking the question.
And I wanted to ask one on reimbursement and the updates around preauthorization for cervical fusion.
And especially if you have you seen any impact on that and your fusion business and is that.
Playing and add on to the simple high transaction and if you think that this could benefit on the desk market more broadly could benefit from those reimbursement changes.
And.
Thanks and for the question generally speaking no we don't see any impact to our cervical fusion business because of three reimbursement preauthorization and I should say.
And we do believe and and do believe that changes and reimbursement over time.
Benefit the simple acquisition I think we've seen those changed over the last few years.
This is a procedure that we mentioned earlier many of these are done and the AFC. There was some deficit there early on I think thats being neutralized now on some of the reimbursement decisions made there is still work to be done there and we will be enacted participant to ensure that we're supporting that those changes from a from a from a reimbursement as we move forward.
Our next question is from Craig Bijou with Bank of America. Please go ahead.
Hey, guys. Thanks for taking the questions. Just a couple quick follow ups on on pulse and so you mentioned the $5 million in 'twenty, one and so just wanted to see if you guys can provide a little bit of color is that capital sales revenue disposables, just how to think about that and then in 'twenty one can we.
That 5 million for impulse double or is it a multiple higher than that.
And sorry in 'twenty, two how should we think about <unk>.
<unk> revenue and 22.
Yeah, So the way we're thinking about pulses.
Plus or minus $5 million and we think is reasonable because obviously the launches later this year. So we start to see the benefit we'll get a full year sales cycle next year. So yes from.
Kurt.
We're going to be as flexible as we possibly can as whether its capital sale or a cash sale.
At least to buy whatever whatever model. It is we have kind of a mix and our.
And our numbers and our assumptions as to how thats going to play out I would also add that.
We see units sold this year, both here and the United States and in Europe, and that and that number.
Got it thanks.
You bet.
Our next question is from Jason Wittes with Northland. Please go ahead. Your line is open.
Hi, Thanks for take the questions.
First off on I appreciate your conservatism on the simplicity desk.
That said it does seem particularly well positioned potentially to take quite a bit of market share.
Is that a fair assumption and is there the gatekeeper just training the field out there.
To be able to capture that share.
Yes, thanks for the question, Jason and generally.
<unk>.
I would say that its really just its pre commercial we got to commercialize the product. So we've got to we've got to train up our existing sales organization and we've got to make sure. We integrate the company effectively from a manufacturing and from an R&D perspective that'll that'll be ongoing.
We got to make sure that we trained on how to use the product properly I want to make sure that we do what's right and build a curriculum to train our surgeons and educate along the way so.
It's really just and in the product up it's an implantable technology.
And we want to make sure that we are approaching it the right way, it's within our warehouses and what we always do and these things do take time.
And we're also looking for the level to approval. This year I think that will further accelerate the growth of the products. So that comes early.
And there is potential to outperform but the fact is run on a timeline I think it's the right timeline and as we move forward. We do believe as you said, it's a significant opportunity to take share.
We have a question from Anthony Petrone with Jefferies. Please go ahead. Your line is open.
And thanks hope everyone's doing well.
And what has happened between calls so apologies if a couple of these were asked but the first one would be maybe to just level set.
Where do you see the underlying spine market in terms of volume growth at the moment, even considering that COVID-19 to headwind and.
And maybe the latest trends on price.
And if he can give an update on where new base of share is exiting 2020 and.
And then a follow up on pulse would be the system is modular and its coming out ahead of robotics and so how do we think about adoption and when you factor in the six modules that are available will it be offered us a complete suite, where do you think a lot of accounts will accumulate piecemeal. Thanks.
Okay.
Alright, let me, let me try to hit on some of these.
And.
So the underlying spine market, we thought that we thought the market pre COVID-19.
It is growing and the.
And the zero to 2% range.
I don't think that's necessarily changed I think the COVID-19 dynamic obviously slows the market down and had an impact in 2020 moving through this year, we think we'll get back to previous volumes, which reflect those numbers that you've probably seen in the past pricing I think as it remains relatively unchanged versus versus what you may have seen in the past.
Our share position remains relatively unchanged, we consider ourselves.
Three share position.
Player on the market slightly behind the Pew with our sights squarely set on on changing that over the next year or so.
Pulse will it be for all the applications listen on Paul's just just again, we believe that the runway is still substantial debt the relevance and the utilization of things like navigation and robotics and the market. There still early but we think the integrated nature of this technology provides an opportunity to be used on a 100% us.
And cases, I think that as a gating item that gives us a competitive opportunity.
And by installing pulse and.
Pulse represents with neuro monitoring imaging and dini less ray.
And then.
And then adding a robotic application creates a truly unique platform and the market and we are dedicated to bringing us market over the next one for months.
And we have a question from Matt Taylor with UBS. Please go ahead.
Yes, hi, Thank you for taking the question.
So I wanted to ask.
One just about your decision to not give formal guidance. This year, you gave us some color but.
Why not just give conservative guidance that you think you can hit.
What's your philosophy behind guidance.
Going forward and for when do you think you might be able to start to reinstate it.
Yes. This is Matt.
And we decided not to give formal guidance because as we track our net sales.
And there is some volatility that I mentioned earlier, both from Covid and also weather and.
And we wanted to give it a little more time this being said I would just echo what I said earlier, which is we do think our first quarter will be plus or minus in line with what we posted last year last year and we came in at $260 million. So.
And that impact there and then on a full year.
And sensus.
As it makes sense to us.
Just remind us where in the zone of where consensus is right now so.
And just wanted to give ourselves more time.
Before putting something out there and its formal but I think we've given you enough to have a good understanding of how we're thinking about the company this year.
Yeah.
And Mr. Barry There are no further questions at this time I would like to turn the call back to you for your closing comments.
Hey, Scott and thanks, everyone for your questions.
Thank you all participating and the earnings call today, I'm confident that the investments we've made in 2020 and how this position new basis.
And my progress against our long term strategy, we will continue to unlock value for our stakeholders. So with that we look forward to speaking to you all next quarter. Thank you.
That concludes the call for today, we thank you for your participation and ask you. Please disconnect your lines.
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