Q1 2021 NuVasive Inc Earnings Call

Greetings and welcome to the Nuvasive, Inc. First quarter 2021 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, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

I'd now like to turn the conference call over to your House, Matt Harbaugh Chief Financial Officer. Thank you you may begin thank you.

Welcome to new basis first quarter 2021 earnings call.

On the call is an invasive CEO, Chris Barry, Chris who will provide opening remarks, and then I will share additional details on our financial results before we open it up for Q&A.

The 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 slides on our website and you and.

Buster relations section to accompany our discussion today 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 could cause new basis results too.

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 and 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 and.

Additional risks and uncertainties that may affect future results are described and new basis news releases and periodic filings with the Securities and Exchange Commission.

Invasive 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 as non-GAAP financial measures and then.

Many of the financial measures covered in today's call are on a non-GAAP basis unless noted otherwise. These measures include non-GAAP gross margin selling general and administrative expenses 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 maybe found in today's earnings release, and the supplemental financial slides posted on our website, which are accessible on www dot and invasive dot com and the Investor Relations section.

With that I'd like to turn the call over to Chris.

Thank you, Matt and good afternoon, everyone I hope you're well.

Let me begin by thanking the incredible researchers and scientists and health care workers for their tireless work on the COVID-19 vaccines and distribution.

It's a true testament to the strength of our health care system and I'm encouraged by the progress and its eventual impact on returning to normal business operations and daily lives.

Earlier today, we reported first quarter 2021 financial results.

On today's call I will provide an overview of our first quarter 2021 performance.

A review of our key innovation highlights.

And thoughts on how our culture will support our continued success.

After that and Matt will provide additional details on the quarter and his thoughts on the remainder of the year.

Nuvasive deliberate first quarter 2021 net sales of $271 $2 million and increase of four 4% on a reported basis or three 1% on a constant currency basis compared to prior year.

Throughout the quarter, there were continued signs of recovery and the global market as the impact of COVID-19 on elective surgeries lesson.

Typically within our core spine business across Europe, and Asia Pacific.

This was evident and our overall results with strong international performance and U S procedural volumes improving month to month.

And I'm confident and the deliberate investments, we're making and the right people innovation and.

Organizationally processes to globalize the business.

And particular U S spinal hardware delivered year over year growth led by.

The adoption of new product introductions and the interior portfolio.

Surge and demand with an invasive anterior cervical plate and.

And growth and pediatric fixation with rely and three D.

These results were offset by decline and our U S. Surgical support business line, where we experienced pressure from procedural mix on our biologics and intra operative neuro monitoring products.

I'm proud of our continued success and our global markets and Q1, 2021 we delivered low double digit growth on a reported basis with a corresponding business growing across all key regions.

And in particular Asia Pacific continues to execute and delivered double digit growth across all major geographies.

Especially in Japan, we saw further adoption of cervical and interior products tailored for the surgeons and patients in the market.

While we are still managing through the pandemic the signs of recovery, we're seeing and elective surgical volumes and patient and sentiment and pockets around the globe are promising.

And in order to fulfill our vision to change a patient's life every minute, we remain committed to investing and new innovation.

Year over year increase and R&D investment further supports our long held position as the innovation theater and spine.

This will result in new market, leading technologies across all procedural segments unlocking further opportunities for multiple vectors of growth across the business.

As we shared on our last earnings call, we closed the simplify and medical acquisition and February advancing our cervical portfolio with the most clinically effective technology and cervical total just replacement.

We received great response from our surgeon partners with this latest addition to our seed and 360 portfolio, which now includes a comprehensive offering for book anterior and posterior cervical surgery.

The simple by cervical artificial disc is designed to offer surgeons and best in class capabilities, including.

Radio logic design.

It allows for enhanced visualization through MRI postoperatively compared to competitive devices.

Various anatomic decide.

Including the lowest available at this site and the market.

And physiologic motion designed to balance mobility and stability.

Recently, the simple fight this received U S. FDA approval for two level cervical total just replacement, making it only one of three devices approved for this procedure.

And a two level F D. A investigational device exemption study the simple fight this demonstrated clinical superiority at 24 months compared to a C. D S.

The device achieved the highest overall clinical success rate at both one and two levels compared to any other approved cervical disc.

This is a milestone achievement demonstrates the value of our discipline and investment strategy and better positions us to take share and cervical spine surgery.

Which represents an approximately $2 6 billion dollar global opportunity.

We're working through integration efforts and commercialization of the simplified desk as we invest in sales training surgeon training and manufacturing to bring this product and more surgeons and patients around the world.

And tears spine surgery is roughly a $900 million global opportunity.

We are the leader and lateral and single position surgery.

And are well positioned to become number one and Eva.

The modulus implant is the latest addition to our advanced materials science portfolio, which features our modulus three D printed porous titanium technology.

And cohere porous peek technology.

This is designed for both supine Ala.

And the new basic X ayliffe procedure and rounds out our modulus operating across all procedures throughout last quarter. We continue to see success with the clinical evaluation of modulus a lift as we prepare for a full global commercial launch this summer.

Surgeon feedback has been extremely positive.

From the various important and sizes to the personal instrumentation.

And we look forward to bringing this technology to more patients.

Posterior spine surgery as another important growth driver for our business, representing an estimated global opportunity of $1 $6 billion.

We see tremendous runway and they'll close serious segment with the comprehensive relying fixation system earlier.

Further adoption of our mass T lift and mass Midland procedural offerings.

And our advanced materials science implant portfolio.

And enabling technology and the launch preparations for the pulse platform continue.

And we wait FDA, five 10-K clearance and CE Mark approval prior to our anticipated summer release.

We continue to build the commercial pipeline and have developed labs resurgence and engage with our R&D teams on this differentiated platform.

These labs give surgeons are hands on and opportunity to experience the power of pulses enhanced workflow and stimulated case.

We are preparing to start clinical evaluations with surgeons and hospitals that specialize and broad surgical approaches as we bring the platform to market.

Enabling technology remains a cornerstone of our long term strategy as we continue to enhance the pulse platform and future enabling technologies.

There remains a substantial opportunity to integrate enabling technology with spine surgical procedures.

With its ability to be utilized and 100% spine cases, we believe pulse can play a pivotal role and accelerating the procedural shifts to lessen invasive surgery with navigation.

Research and development continues on pulse robotics, which is one of many future applications supported by the pulse platform to help drive better clinical outcomes in spine surgery.

We had an increase and surgeons trained both virtually and at our state of the art West Coast's experience Center, and San Diego compared to Q1 of 2020.

From courses on X 360, X lift and mass pillar, we provide opportunities for CS and surgeons, along with residents and fellows to learn the clinical and technical skills behind new basis procedures.

Construction on our East Coast experience Center is ahead of schedule and we look forward to the opening of this facility and Q3 2021.

This new center will further our ability to train surgeons and the U S as well as other key global market.

On a less invasive surgical approaches integrated with enabling technology.

It is our goal through our clinical professional development program, coupled with the Premier training facilities at our experience centers to educate surgeons on new techniques to improve clinical operational and financial outcomes.

Finally, I'm excited to see our employees rally around our vision. The culture. We're building requires a shared mindset, where we collectively leverage our differences to best serve our surgeon and patients around the world.

We continue to advance our diversity and inclusion initiatives and better core values and improve organizational alignment, which will further our success.

Recently, we received recognition from Forbes as one of America's Best midsize employers a reflection on the people and passion here at new basis.

I'm encouraged by the current global market recovery and the momentum, we're seeing and our business.

The company's continued commitment to R&D investment furthers, our ability to deliver the strongest innovation pipeline and spine.

Our long term strategy provides opportunities for multiple vectors of growth and we will continue to operate with discipline.

Further globalize the business.

And proceeds realized each spine segment with market, leading technology as we work to become the largest spine technology company in the world.

I'll now turn the call over to Matt to discuss the company's financial results in more detail.

Yeah.

Thanks, Chris and good afternoon, everyone net sales for the first quarter, 'twenty, 'twenty, one where $271.2 million up $4 four per cent compared to prior year on a reported basis $3 one per cent on a constant currency basis throughout the quarter, we saw overall surge.

Volumes improved month to month with March being above our previous expectations. However, similar to the past year, we continue to see variability each week and around the globe, although not back to pre COVID-19 levels in Q1, the signs of recovery demonstrated in the quarter are encouraging and support our view.

But in 2020, one on a full year basis, we can deliver growth above pre COVID-19 results seen in 2019.

U S spinal hardware and net sales were $145 $2 million and quarter.

Up year over year by four 9% or six 5% when adjusted for one and two were billing day, notably pricing was a 1.2 per cent headwind.

The U S business saw growth from pockets of the thorough Columbia portfolio, driven primarily by strong results from modulus Ayliffe latest implant and our advanced materials science portfolio, and relying three D and our pediatric fixation portfolio.

Cervical reached growth over the prior year period, as we continue to see solid adoption of our ACP system and nominal net sales from the introduction of the simple so I guess.

The strength from our innovation and these procedural approaches was partially offset by unexpected slower recovery and our excellent franchise due to the impact COVID-19 has had on surgeon training and more complex surgeries.

Turning to U S. Surgical support net sales were $61 $2 million and the quarter down from $64 $3 million and the prior year period, representing a 4.7 per cent decline biologics and inter operative neuro monitoring product lines, primarily drove these results as they continue to experience.

<unk> pressure due to COVID-19 recovery rates and certain procedures, including excellent <unk>.

And are national net sales and the quarter grew $13 four per cent.

As reported over the prior year period, or seven 8% on a constant currency basis to $64 $8 million.

In particular these results were driven by strength and our Asia Pacific region, which grew double digits within the quarter with continued product adoption across all procedural segments. We saw our European region stabilized from the pandemic within our core spine business.

Non-GAAP gross margin for the quarter was 73, 6% up 130 basis points from the prior year period within the quarter. We continued to see solid benefits from Merck and source manufacturing efforts and supply chain efficiencies the improvement over prior year was driven by better management.

And before he controls and increased absorption from our manufacturing facility, which was partially offset by normal pricing pressures.

Moving down the income statement non-GAAP SG&A expense was $143 $5 million for the quarter, representing a 13, 3% increase compared to the prior year period, and 52, 9% of net sales.

Primary driver of the increase is compensation expense for variable income related to the increase and net sales during Q1, 2021 and.

Well as a reversal of compensation expenses that occurred in Q1, 2020 related to certain equity awards within the quarter. We also started to reinvest and many of the initiatives that were put on hold due to COVID-19 and 2020.

Non-GAAP research and development or R&D expenses increased to $28 million and the quarter.

This was an 18, 9% or $3 3 million dollar increase over the prior year period. The increase was primarily driven by continued investment and our technologies, including but not limited to the pulse platform and further build out of our advanced materials science portfolio as well as the simplified medical.

Recession.

Our goal is to deliver the strongest innovation pipelines and spine and we have consistently increased R&D spend and to do so.

First quarter non-GAAP operating margin came in at 13%, which was a decrease of 390 basis points when compared to the first quarter of 2020.

Non-GAAP other income and expenses for the quarter was $10 $6 million of expense down from $11 $1 million of expense and Q1, 2020.

The reduction for the quarter was driven by lower unrealized foreign currency losses, offset by higher cash interest expense associated with the convertible debt issued in 2020.

Non-GAAP tax expense and the quarter was $5 $6 million, resulting in effective tax rate of 22, 8% versus a tax rate of 22, 5% and the same quarter last year.

And the first quarter the company reported non-GAAP net income of $19 million or diluted earnings per share of 37 cents. This is compared to non-GAAP net income of $25 4 million or diluted earnings per share of 48 cents and the same period last year.

Turning to GAAP results GAAP net loss was seven and a half million dollars or diluted loss per share of 15 cents compared to GAAP net income of $5 $3 million or diluted earnings per share of <unk> 10 cents and the same period last year GAAP.

GAAP results are inclusive of an approximate 14 and negative impact due to unrealized foreign currency losses associated with intercompany balances and.

And contingent consideration liabilities for regulatory and net sales milestones in connection with a simple five medical acquisition.

Free cash flow for the first quarter was positive $6 $6 million versus negative $22 $9 million last year.

Want to remind you that the first quarter is historically, the lowest free cash flow quarter of the year and typically has negative cash flow.

The increase and free cash flow was a result of improved operating cash from better working capital management as well as reduced inventory purchases when compared to the prior year.

We ended the quarter with cash and cash equivalents of $233 $9 million within the quarter, we acquired simplify and medical and used $150 million of cash to fund the upfront payment in.

In addition, we paid off the $650 million principal amount of convertible debt that matured in March of 2021.

This reduced the principal amount of debt outstanding from $1.55 billion to $900 million.

Company also ended the quarter with an undrawn revolving credit facility of $550 million.

And now shifting gears and looking forward I want to provide some insight as to how we think the rest of the year will play out.

We continue to operate in a dynamic environment around elective surgeries and although monthly volumes increased throughout the quarter. There was still signs of volatility as COVID-19 research and so there's a per with US and mine, we anticipate surgical volumes to remain relatively stable throughout the second quarter of 'twenty two.

One is vaccine distribution continues and patient sentiment improves with the potential for even further improvement and the second half of the year.

Accordingly, our outlook for 2020, one remains consistent with what we share it on our last earnings call in February we.

We continue to believe the top line consensus plus or minus $1.2 billion is a good number to use for full year net sales and the quarterly cadence of consensus is in line with our own internal expectations.

This includes our most recent assumptions about foreign currency, which we expect to be an approximate $9 million additional headwind compared the prior internal modeling.

Before I hand, the call back over to the operator for questions I do want to briefly comment on the progress you're making on the simple by medical integration.

As Chris mentioned, we were very pleased with the recent F D. A to level approval for just simplify this.

However, this does not change our full year 2021 expectations of roughly $5 million of contribution and net sales.

The limiting factor on the net sales ramp remains implant and such supply and we continue to execute on our original timeline and integrating the supply chain into our Ohio and Memphis locations.

And we're excited about the long term prospects of the simplified desk as part of our <unk> hundred 60 portfolio to help change the lives of more patients around the globe 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.

Thank you if you'd like to register a question and please press star one on your telephone keypad and confirmation tone will indicate your line is and the question queue and ask your question has been answered and you'd like to withdraw your question. Please press star two.

Note that we ask that participants limit their remarks to one question during today's Q&A session. One moment. Please while we poll for your questions.

Our first question comes from the line of Robbie Marcus with Jpmorgan. Please proceed with your question.

Hi, This is actually a lily on for Robbie Thanks for taking the question.

And so I was hoping you could dive a little bit deeper into what you're seeing and the U S vs internationally.

You, obviously had a pretty good international quarter, and you guys sound a little bit more optimistic on international and Europe, specifically and then some of your peers, maybe do so and he.

Any color you'd be willing to share that would be helpful. Thanks.

Yeah. Thanks for the question, Yeah, Let me I'll kind of break it down and our U S business. We saw some choppiness over the course of the quarter. The good news is we saw a stronger than expected recovery late in the quarter. So we've seen the trends and the U S continually get better and that's that's also.

Extended now into April.

On the international side, we've been just been extraordinarily happy and and pleased with what we've seen and Asia Pac and through the course of the pandemic and into Q1 of this year really strong growth.

We've done a lot of work to provide countries like Japan specific technologies to support our unique needs.

It needs of their surgeons and so I think that's paying dividends for us as a company because I'm moving to the European market. That's been a bit choppy you know you've had kind of a tale of two countries at times, the U K and Germany have started to recover but it's been starts and stops across the board. So Europe collectively is getting better but there're still some geographic hotspots that are.

Popping up from time to time.

Asia Pac continues to perform very well and as I said with the U S. We continue to see positive signs of recovery still some hotspots, but in general recover we think is happening on a global level were very pleased what we're seeing internationally.

Thank you. Our next question comes from the line of Kayla Crum with curious Securities. Please proceed with your question.

And this can you check to see if your line is on mute.

Our next question comes from the line of Anthony Petrone with Jefferies. Please proceed with your question.

Mr. Petro and is your line muted.

Our next question comes from the line of Richard <unk> with SBB Leerink. Please proceed with your question.

Hi, Thanks for taking my questions Trust you can hear me.

And we can't thank goodness.

Other times and sharp.

So.

And maybe it's a tough and and you know congrats on seeing some of the progress here are I'm sure that's very encouraging from the.

And the organization, but I was wondering Matt maybe can you give us a little bit of color around how to how to think about the profitability outlook.

Margins in.

And in the past.

<unk> margin has historically been the low point relative to the fourth quarter, its usually and on.

Average over the last few years anywhere from three.

304 hundred basis point Delta between one and two at <unk> with <unk>, I mean is that a reasonable range and and and way to be thinking about the cadence of margin through the year and anything else you could provide would be helpful. There.

You bet rich.

And we try and unpack that question. So the first thing I would say is.

I want to reiterate what I said in the prepared remarks, which is from a top line perspective.

We are we feel good the consensus is and the right spot.

Both for the second quarter as well as from a full year perspective.

And obviously.

It remains to be seen COVID-19 impact as COVID-19 impact is lessened even further this quarter, then obviously, we might do better than that but still.

Still want to play that ball down the field.

With regard to your question around margins in General I'd say gross profit as a percentage of sales came in at a really nice place for us and we foresee that kind of staying in that 72% to 73% gross profit as a percentage of sales range throughout the year.

I would say from an SG&A perspective, the second quarter is going to have pressure.

And a lot of it has to do with the exciting product launches. We have obviously, we're already selling simplify but the bulk of that $5 million is going to be in the back half of the year. We've got see 360 that we're in the middle of launching we also have a pulse coming out here as well and so.

The second quarter is going to be from an SG&A perspective, a quarter of investment, but it's the right kind of investment and the fund kind of investments you want to be making right now.

R&D.

And that's going to continue to be very strong we've been messaging for some time.

That we were continuing to keep our foot on the pedal and you saw that in the quarter are.

Coming in at $28 million.

That kind of gets us above that $80 million number, whereas historically, we've been kind of below that that place. So all in all.

Expectations out there are pretty much in line with how we're thinking about the year.

Okay.

Thank you. Our next question comes from the line of Matt <unk> with Credit Suisse. Please proceed with your question.

Hey, thanks for taking our questions.

So one on.

And a comment you made Chris I think during your prepared remarks.

On pulse and and the robotic application being one of one of many.

Applications for its sales platform going forward and and I'm just.

And to get ahead of ourselves, but I'd love to hear sort of what's next on that front and I have one follow up on simplify if I could.

Hey, Thanks, Matt I appreciate it yeah.

Talked a lot we're happy with the progress we're making we've submitted regulatory approval both in the U S and in Europe from a regulatory for regulatory approval that we expect this year with launch as we've communicated.

And the summer months, and and hopefully generating solid revenue by the end of the year. We've also talked a lot about the extensibility of pulse. We view the pulse is the true platform that we can launch future technologies off of robotic being one and our near future, but not at all intended to be the final piece of.

And the puzzle so we built and we think about our <unk> strategy and having robust instrumentation robust implantables, adding and extending our relying posterior fixation system and now adding in things like navigation and robotics, but there are other technologies out there that we believe continue to accentuate and complement our procedural sedation.

Strategy. So when I talk about beyond robotics is simply just extending our procedure relation strategy to new and novel technologies that further complement that strategy. So we've got a healthy.

Pipeline of ideas, both organic and inorganic that we think could potentially fit in well.

And we will talk about those as they become real for us, but we very much and tend to create a system within pulse that is a living breathing system that continues to grow with the needs of our customers.

Yeah, and I would just say from a net sales perspective, nothing has really changed from a couple of months ago, and we did our last earnings call. We still feel really good about the $5 million and net sales it is.

Thank you. Our next question comes from the line of Canola crop true Securities. Please proceed with your question.

Hi, guys, sorry about that we're balancing a few calls Tonight and I you know this far into quarantine and still can't figure out the mute button.

Thank you for taking our question first and spine robotics has been on fire in recent quarters, and so I'd love to just know what conversations you're having with your customers and bodies and general and if theyre comfortable waiting.

Year to have a true robotics solution in house, and just just to be clear on the timeline I mean, what additional steps do you need to take to get the robotic system to market.

Yeah, Thanks, Ken I appreciate it.

Listen we speak obviously to our customers about our pipeline and honestly, we're encouraged by the market's response to enabling technology and politically robotics, and and I say that because of if you think about where we played a day and and and I think the transition we've taken on as a company moving from.

And what's traditionally been that excellent company to filling out the broader portfolio and an interior.

<unk>, now and and and with yet with the with the focus to lead in Ala and building out the cyclical portfolio do you think about where today's robotics are primarily and posterior we don't play heavily there, but now we've got coming and in the next several months and quarters I pulse system, that's a multitude of different technologies and integrated into our platform followed by.

The robotic launch so we feel that the timing of our launch around enabling technologies. This is it really fits and well with our broader segment strategy was and the space. We're.

We're working through the development process, where and the process of hardening the system now.

We're on track, we'll move into a verification validation process across the software and hardware and at a system level.

In the coming months and quarters and and as we've talked about communicated before look to be in cases in 2022, as we near some of the near term milestones within the heart and process and near into the verification and validation.

The aspect of the development timelines.

Timelines and what part of the communicate but we feel in general and I think our customers still are in general with us that we need to be and the game no question, but where we're focused a day and where we think robotics place a day, where we're and a good position clearly we want to apply and they've only technologies across the entire gamut of procedures, we've talked to.

That before and pulse to be used and 100% of spine cases to that and it's a very important part of our suite of technology to build better procedural solutions for our customers and I think they understand that.

And to be very clear, we're working with a sense of urgency to get the product and the market.

Thank you. Our next question comes from the line of Josh Jennings with Cowen and company. Please proceed with your question.

Hi, good afternoon, and thanks for taking my questions.

Yes.

Question on pulse navigation and just our checks suggest that there is some evolving and particularly on the face of low surgeon community and it was.

Just wanted to go fast and key approval from the original system and are you able to market and are you seeing the sales funnel build and proposed.

And the upcoming five 10-K approval.

And the integrated.

Solutions and pay for that system and then just a quick follow up on Taylor's question on robotics.

And then.

Josh and stone yet.

And I was just wondering on the robotics side.

What do you think it could be.

Potential clinical requirements are in terms of.

And what do you need and we will need to show the FDA took and robots motto improve.

Thanks for taking my question and set up there.

Yeah. Thanks, Josh.

I'm trying to think here on the pulse piece.

A couple of things there yeah. We we've continued along through the pandemic to have multitude of surgeons come in and test drive the system and through that we believe and the surgeons have commented and validated that we believe that categorically advanced navigation capability and pulse. We also have improved hardware and software with spear accuracy and <unk>.

Ability and overall performance, we think we have a spear visualization and as I've talked a lot about and adaptable intuitive multifunctional instrumentation set so we in and in light of that and and obviously in response to that we have seen demand build and we feel like we've got a very healthy pipeline of opportunities and I would tell you that.

During the course of this year and and the next the limiting factor for us will be supply not demand.

I think it's.

And.

And I am confident in saying that and I will clearly, we're looking to ramp up our capability not only to build our systems by support those systems and all of those systems.

But clearly, we're seeing a interest and and demand both U S and and internationally on the interest and pulse.

Youre robotic question was let me make sure I understand it a potential clinical requirements to get to the F. D. A.

And I'm not going to comment on that today I believe it's going to be because there's other predicates and the mark we've got to show comparative clinical capability versus those systems.

Obviously, we'll have to show the integration and the connectivity between robotics and <unk> and our pulse system, all things that are well and are our development pathway.

Net worth over a competent on so overall.

We don't feel there's a ton of surprises we don't feel there's a lot of ambiguity theres others that have gone before us that's actually one of the positive you're going to be late to market and you've got some predicates that you can build against and understand what performance characteristics are and we've done that work. So we feel pretty confident providing we can get there a hardening our verification and validation.

Go to design freeze and then we believe the regulatory pathway should be fairly straightforward and I want to say, a slam dunk, but fairly straightforward compared to what we've seen with others.

Thank you. Our next question comes from the line of David Saxon with Needham and company. Please proceed with your question.

Yes, thanks, good afternoon.

Question, just on T shirts, 360, and just put that ongoing launch and.

Just wondering when Youll have a full portfolio for cervical and then you've talked about cervical being $2 6 billion dollar market and new basis. I think you've said is kind of in and that low single digit market position. So once you do have a full portfolio with <unk> 360, and simple by now we're having a a T.

[noise] level indication can you just talk about your share expectations over the next three to five years.

Is that point of share annually.

Oh, thanks, so much.

Thanks, David.

Try to hit on as much of your question as I can.

First question is we should have a what we consider to be a full and an advantaged portfolio by the end of this year. We've we're in the process of fully launching see $3 60, and we have the anterior cervical plate going through that launch as well we've extended our posterior fixation to rely and see that's now and the process of being launched we then obviously have require.

And simplify medical and acquired the disc and it got to level approval checks that box off we've got a couple of other things that we're working through but in general we're confident they will have the most competitive of surgical portfolio in the market.

And by the end of the year and we believe we have and now a couple of things were still doing.

It's a great opportunity for us as I mentioned earlier, it's a $2 $6 billion segment, where we have a low single digit share position.

Our goal is to be the leader.

Hands down to be the leader in cervical and that's going to take some time I think the rate of uptake is still something we're working through but we've got we've got our aspirational expectations of how to grow this business.

Our commercial teams globally are extremely excited about this so it all and all we believe we've got a growth engine and cervical for the foreseeable future.

So that's all I'll say for now but clearly.

<unk> got a lot of work to do to get our sales prepare to truly deliver that aspirational growth, we need to get our manufacturing up on simplify and continue to build the sets required to really grow. The C. 360 portfolio, we continue to train, which and you educate as I mentioned in my prepared remarks, we're opening up and east coast facility to further our reach and training and.

Patients. So we've got work to do but I believe as I said before we've got the most competitive portfolio and cervical hands down and we expect to lead and the space.

Yes.

Thank you. Our next question comes from the line of Kyle Rose with Canaccord Genuity. Please proceed with your question.

Great. Thank you very much for taking the question and it.

Just wanted to circle back to the U S spine business and specifically some of the commentary around.

And the theoretical lumbar side of the business and and and and excellent and the Q1 and.

I think you talked about and that being a little bit slower than that and the cervical side of the business and maybe just help us understand how that had and what the trajectory and maybe the exit velocity of the X.

<unk> business was for the Q1 and kind of how that's trending and into the Q2 and just maybe the puts and takes of getting that back in line with the broader spine business.

You bet, Kyle and thanks for the question yes.

If we talk and the last quarter, you probably heard me talk a little bit about <unk>.

Coming out of 2019, we were poised to continue to deliver really strong organic growth based on our extra 60 focus and that was really driving a lot of growth throughout 2019 and into the first half or first couple of months of 2020 before the pandemic really hit us.

Pandemic really did disrupt our growth trajectory and our and our extra 60, because we ran out of the capability of our couldn't train new surgeons. So we had we were and deficit over the course of 2020 and surgeon training having.

Having said that we're now back to pre COVID-19 levels and training and the good news is even with some stronger comps we saw a continually better performance and our excellent franchise throughout the quarter.

And I said before with a stronger than expected recovery late in the quarter and I can just say, it's too early to comment on Q2, but the April trends have been very promising.

And the strongest weeks we've seen.

And since late and since late 2019, when we saw some really strong you know mid to high single digit growth and our excellent franchise. So.

We feel very good about the momentum that we're coming out of the quarter with we faced some tough comps on a monthly basis from the previous year before the pandemic hit and we faced some challenges without training capability.

And we've resolved those things and I think we're back to where we feel very bullish about continuing to drive our extra 60 portfolio and and continue our growth and excellent.

Yeah, and I would just add you know it's part of some of the comments made previously about how the back half of the year is going to be particularly strong for us. If you think about he got to see 360, you got simplify and you've got pulse and then you've got excellent all coming together for you. So that's why we're really excited on the year and that's why we.

Firm, but that $1 $2 billion range is a good one to use right now which.

His growth above 19 and 20.

Yeah.

Thank you. Our next question comes from the line of Joanne Wuensch with Citi. Please proceed with your question.

Yeah, Hi, this is Matt Henriksson in for Joanne.

Just kind of continuing with pulse move.

Moving to kind of the sales force side, the commercial strategy side.

Are there additional investments that you need to make or hire more sales reps between now and the launch and thanks for taking the question.

Yeah.

Thanks, Matt appreciate the question.

Simple answer is yes, we're continue to ramp up.

Capital specialists, we're continuing to ramp up service per.

Personnel.

So we will continue to add as we near and as we build out our internal capability from a manufacturing perspective, but.

But I would say that we've also done a lot of hiring we're poised and we brought in a lot of very strong commercial leaders.

And a very specific person to lead our capital sales process and has done a phenomenal job of building a robust pipeline.

We will still add and complement and we've got a hiring.

Plan, that's in parallel to our overall product growth plan. So the simple answer is yes, a little higher as we as we need to but it's more of a scaling and then it is a capability I think we've got core capability will scale those capabilities in relation to our to our product growth, yes, and Matt the only thing I would add is.

And forms kind of and my comments earlier about SG&A being pressured in the second quarter. If you think about it whether it's <unk> 360, simplify pulse, we're going to see the benefit of those net sales and the back half of the year, we've got to invest now and get those resources in because we think these products really.

Have a great outlooks over our strat planning period, and we want to make sure. We we invest to win during this period prelaunch, obviously, we did book some revenue per simplify.

And much higher than what we were expecting much.

Much like what Chris said earlier around pulse, which is getting units bill.

The the limiter for US is actually supply and we know the demand is far greater than that $5 million and we're doing everything we can to do those transfers into Ohio, and Memphis, but it's just going to take some time.

Yes.

Thank you. Our next question comes from the line of Matt Taylor with UBS. Please proceed with your question.

Hi, This is young Li in for Matt and Thanks for taking our question I guess.

Maybe just on the sources of upside or downside for the year and I'm, just wondering excluding COVID-19 and pass as much as possible.

What do you think are some of the biggest sources of upside or downside risk.

And simplify polls and upside or a biologic side and on the downside any color would be very appreciate it.

Yeah, Thank you and.

And you know you sort of answered my question for me I listen we continue to see building strength and the areas. We've just discussed we continue to see building strength in interior and we've got key launches we've talked a lot about pulse we've talked about <unk> hundred 60, <unk>, we've talked about simplify.

On the cervical side My day live and new product introduction.

Entering into the expandable portion of the market towards the end of the year.

More introductions on the posterior.

Space. So we've got a lot of things that we believe create upside draft force and I haven't mentioned a lot of and the past week.

Got the strongest innovation pipeline and have increased our R&D investment year over year. So we feel very good about the innovation pipeline that we currently in process and launching and what we've got coming and the in the coming months and quarters.

That's driving a lot of the dimensions of growth that we've talked about not just mentioned our ability to now grow our interior business and specifically, our cervical business and now entering and enabling technology space, which we think is a catalyst to further grow up post your business as well.

Geographic expansion is and also an area that we continue to be very bullish on it as far as downside listen we've seen drag and volume and our surgical support business were ramping that back up but it's been slower. So we need to see that you really come back to life on the biologic side and on our Inc.

NCS business.

We believe it will as volumes increase we believe that comes back but it will be and it has proven to be a little slower.

But all in all if you look at the sum of the parts, where net bullish on our opportunities and the back half.

Thank you. Our next question comes from the line of Jason <unk> with Northland Securities. Please proceed with your question.

Hi, Thanks for taking the question and it sounds like you're somewhat locked and loaded this year in terms of there's a lot of things that are kind of working on and you've got a pretty impressive pipeline, but your supply constraint on at least two of the big breakouts, which might be simplify and pulse, but if I look at into next year.

So and that's actually look further beyond beyond the next quarter.

You've got interior, you've got cervical and he got pulse all you know, we're very well set up.

Is that your view that kind of this is kind of a transition year and and 'twenty 'twenty. Two you really I mean, I, obviously, assuming COVID-19 is completely behind us really set to break out and see some outsized market growth.

Yeah.

Yes, Jason and I think you characterized it well. This is this is really a year, where we're setting up our strategic plan and when people ask me how are you going to get to your operating income targets that you've put out there.

We're going to deliver on.

And those targets with successful launches and couldn't be any more excited with simplified already ahead of schedule.

And we're working as fast and furious as we can to get as much supply, but it's not going to be we're not going to be able to get it to be a huge needle mover. This year, but we do think we will have worked our way through that transition as we're coming out of this year and moving into next year I said earlier on the call that I feel very good about the <unk>.

$5 million for pulse.

Again, it's going to be getting them produced after approval and such there's going to be really important for us. So it is a bit of a transition year. It's a very exciting year for the company and and and we've got a lot on our plate but.

We've got a great team to deliver on it and also just the adjacent and what one thing you know and I have to.

And now coming up on my third year anniversary here and a few months.

But we worked really hard on redefining our strategy and increasing the ways, we can grow the business.

Building that innovation pipeline, increasing our R&D investment and one of the other things that we've done a lot of work on and just building the right cadence of new product introduction, so not only feel good about we're launching now we've got a steady cadence over the next several quarters and not just not just this quarter and not just this year, but into 2020 two we're feeling and the blanks of $23 24 and 25 so.

And we've got a lot of longitudinal launch activities put in place we are building organizational capability to deliver on those some of those are enabling tech solutions that are new for us and we're building.

As we go but overall, we feel we've got we're set up well to deliver on and on the innovation pipeline going forward.

Thank you. Our next question comes from the line of Craig Bijou with Cantor Fitzgerald. Please proceed with your question.

Hey, guys. Thanks for taking my questions, maybe a follow up on the last one and you guys are obviously doing a lot of investing for.

And for the future.

Maybe a little bit more specifically on kind of the cadence of getting to those longer term operating margin goals that you have put out there and.

Any way or any color that you can provide.

And we should think about.

Margin improvement in 'twenty, two and then beyond is it is it more towards the 'twenty three 'twenty four range when you guys actually.

The launch.

The pulse robotics, and maybe some more pieces of the pulse system.

Yeah. Let me this is Matt let me try and kind of walk you through the P&L a bit.

The gross margin and we feel good about it and it will improve.

And in future years.

We said when we acquired simplify but that actually was accretive to our gross profit as a percentage of sales. So we will cease and improvement. This stuff does take time, though you just don't do it overnight.

A really successful launches here are really going to help us deliver on those those goals are.

Really driving the net sales for <unk>.

Simplify and pulse and see 360, continuing this international growth.

And that's going to give us hopefully some SG&A leverage not this year, but in future years down the road we.

We do think we have about $10 million and underlying savings.

And from learning and living through COVID-19 last year. So if you kind of look at our SG&A and the first quarter that we posted today, it's actually it's just marginally above what we did and 19 and so yes, we had some COVID-19 activity going on yes, we're going to have pressure on that line item and the second quarter.

But we feel pretty good that that.

And those savings have been realized and kind of the underlying base, but again, we want to invest to win.

And then from an R&D perspective, you should expect to see it continue.

To stay very strong.

A really large uptick.

About 19% and our R&D spend and as I mentioned earlier, we've been messaging and that's an area, where we're going to continue to invest.

Yes.

Thank you. Our final question comes from the line of Anthony Petrone with Jefferies. Please proceed with your question.

Hi, great. Thanks for fitting and sitting here and one question would be on <unk>.

The general underlying spine market.

And enabling technologies and then I'll have one quick follow up on on cervical.

Can you give us a sense of just how underlying spine.

Trends and the next two years, just given that we may still have some backlog and the pandemic is coming in and then on the Zimmer call they talked about enabling technologies.

Essentially bending the growth curve.

And large recon implants, and so I'm just wondering when you think of enabling technologies and spine what is the potential to bend that growth cold upward. The last one just on cervical and we think of cervical motion preservation vs fusion, how big could cervical motion preservation and be overtime.

And is that mostly level two surgeries. Thank you again.

Okay.

Thank you I appreciate the questions I'll take a shot and they have not come in as well.

And listen to the underlying spine market and enabling technology I guess to kind of address your first question. It's still early days.

It's a little bit hard to two two per trade that you've been in the overall growth curve I think the future of enabling technologies does potentially allow more consistent more reproducible and more predictable spine surgery, and that's what we're pursuing but kind of bringing us back to where we are today, you've got less than you know roughly 25 per cent of spine surgeries, a day or being.

Got it.

And we say plus or minus <unk> 15 per cent of operating rooms have a robotic system installed today and in that in that subgroup of operating rooms, and utilization is still relatively low. So I think it's a it's going to take some time I don't necessarily know what's going to happen over the next two years.

I do believe that the pursuit of enabling technology and the promise of advanced technology and spine surgery provides the opportunity to two and like I said to provide more predictability and more consistency more reproducibility and if we can do that then you potentially attract more patients and you actually increase the growth market, but I think that that's down.

Cervical motion preservation and listen this is a it's the highest sub segment growth and cervical and that's a fairly large as I mentioned before a $6 billion market. It continues to grow I think is more enter this market and we continue to see positive clinical outcomes as we talked about and our prepared remarks, and we actually saw that the.

Prefer or the best clinical outcomes versus the other two level just on the market.

And we think we see a strong growth opportunity against AC D. S and I think it is cannibalistic today.

How big it could be I think it's still a question, but the rate of growth continues to be strong the interest.

To be very very very strong our demand on this on this product since we since we purchase simplify medical or demand has continually increased.

And that would probably stop me here and our ability to supply that demand is still something we're working through but the interest and our and our and our server portfolio significantly simplify and motion preservation is is very high so I hesitate to put a number on it today, but I will just say that that it continued to show strong growth and the market's strong.

And in the market.

And we believe it continues to be a very strong growth for us and and cervical overtime.

Thank you Mr. Barry there are no further questions at this time I'd like to turn the call back over to you for Clinton and excuse me for any closing remarks.

Thank you and thanks for all of you participating in our earnings call today, and we will continue to focus on our executing our long term strategy and liver outcome driven innovation across all procedural segments and spine I look very much forward to speaking with all of you again next quarter.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

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