Q3 2021 SeaSpine Holdings Corp Earnings Call
Yeah.
Welcome to <unk> when he 'twenty, one third quarter financial results conference call.
At this time all participants are in a listen only mode.
Alan management prepared remarks, well hold a question and answer session. Just a question at that time. Please press star followed by one on you touched on Tom if anyone is typical to hearing the conference. Please press star zero for operator assistance.
As a reminder, this conference call is being recorded today October 'twenty eight 2021 I would now like to turn the conference call over to Lee Savo Investor Relations. Please go ahead.
Okay.
Thank you and thank you for participating in today's call joining me from C. Spine is CEO, Keith Valentine and CFO, John Best chance it.
Earlier today <unk> released full financial results for the quarter ended September 32021 during.
During this conference call, we will make forward looking statements within the meaning of federal securities laws in regard to our business strategy expectations and plans our objectives for future operations and our future financial results and condition. All statements other than statements of historical fact are forward looking statements. Such statements may include words, such as believe could would will plan.
Intend and similar expressions you are cautioned not to place undue reliance on forward looking statements, which are only predictions and reflects our beliefs based on current information and speak only as of today October 28 2021.
For a description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward looking statements. Please see our news releases and periodic filings with the SEC, which are available on our corporate website at dumped up that that she spine dotcom and dumped up at SEC Gov.
Our discussion today will also include certain financial measures just.
Such as adjusted EBITDA loss and adjusted gross margin that are not calculated in accordance with generally accepted accounting principles or GAAP.
Management believes that the presentation of these non-GAAP financial measures provides important supplemental information to management and investors regarding financial and business trends relating to the company's results of operations. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures.
Filiation to the most directly comparable GAAP measures are provided in the tables accompanying the news release, we issued today I will now turn the call over to Keith Valentine Keith.
Especially good afternoon, and thank you all for joining us.
Third quarter was marked by.
Significant disruption to our business starting in early August close by restriction.
Curious triggered by the rapid spread of the COVID-19 filter variant.
But we were encouraged by the increases in household debt capacity, we started feeding in October and many of our hardest hit state it.
It was cold cases, continuing to decline.
However, we remain cautious on our fourth quarter outlook.
We've seen an increase in hospital support staff shortages in certain pockets of the country.
The impact fourth quarter surgery volume.
While our past experience gives us confidence that our survey customers will eventually work through the surgery backlog that accumulated in Q3.
We are anticipating upside to the fourth quarter, because many surgeons schedules.
And what has historically been.
Order of the year.
Well, we fully expect to see surgeons worked through the third quarter spine surgeries. We believe it will begin in the fourth quarter and take the first half of 2022 to fully play out.
Notwithstanding our caution for the remainder of this year, we are very energized by the team's strong execution so far in 2021.
Some of the highlights include our great progress with integrating 70 surgical.
He's fine organization.
With the ongoing collaboration between the two organizations sales team is producing a number of lease.
To bear fruit in 2022.
Our signing of an exclusive distribution agreement with ortho pediatrics.
Could penetrate the pediatric spine market with seventies flash navigation system technology.
Our introducing a number of exciting new products and technologies, and adding more strategic distributors and she U S geographies.
And as well to accelerate our market share gains in the spinal implants and ortho biologics market in 2022.
Key product introductions include the full commercial launch of the Northstar posterior cervical fixation system and the alpha launches.
The Mariner adult deformity system.
Four different way for three D printed interbody systems to support post your lateral interior approaches and 70 surgical percutaneous find module for minimally invasive surgery.
We remain on track to launch a number of new products in the fourth quarter, namely the Admiral cervical plate system and the way she a inter body system, which will be important to our revenue growth goals in 2022.
Turning to the results for the third quarter total revenue increased seven 5% over the prior year period to $46 $4 million.
S revenue, which comprises approximately 90% of our total revenue increased five 5% year over year.
Growth in the U S was once again led.
Higher sales of our new and recently launched products, which comprise nearly 80% of U S spinal implant revenue and more than 40% of U S sports biologics revenue.
Surgery volumes increased by approximately 11% compared to the third quarter of 2020, but declined by roughly 5% sequentially compared to the second quarter of 2021.
Revenue per case declined in the mid single digits compared to the prior year.
Restrictions on inpatient and more complex surgeries shifted the revenue mix to a greater percentage of lower revenue surgical procedures, and we experienced mid single digit average price declines.
Consistent with the most recent quarter.
We continue to increase utilization of our spinal implant systems and ortho biologics products per procedure, averaging two products used per procedure or the third quarter of 2021 compared to 1.9 a year ago.
Turning to 70 surgical we generated $2 1 million of enabling technology revenue in the third quarter of 2021.
Pipeline for the fourth quarter is quite robust. It's the combined sales organization are capitalizing on the recent.
Oh gosh.
To put your changes find module for minimally invasive surgery, which is generating additional interest and earn out opportunities. We also expect to ship. Our first 70 units orthopedic metrics during the fourth quarter.
In September we welcomed the return to alive in person North American Spine Society meeting.
We were thrilled to be able to feature the seventies flash technology at our analyst day, and our Nast food.
We're surgeon and distributor interest was high.
We took advantage of this great opportunity to highlight prospective new surgeons and distributors.
Standing safety profile and extremely efficient workflow 70 flash technology, the timing for when we plan to expand that system capabilities beyond the U R into pre operative planning and post operative data analytics.
How we are integrating our spinal implants portfolio to work seamlessly with this enabling technology platform.
The positive feedback we received further confirm just how novel complementary and how complementary the 70 technology is and how big the future opportunity could be for us.
Handing off to John I want to reiterate our commitment to innovation and growth.
Despite the adverse short term impact of COVID-19 pandemic cat on the on the third quarter revenue.
We did not waiver from our plan to invest in the people development projects in additional inventory and spinal implant sets needed to take market share and consistently grow four to five times faster than the overall spine market.
In the third quarter of 2021, we invested nearly 11 billion in additional inventory and in spinal implant set to support growth in the form of launching new products deploy additional steps are high demand spinal implant systems.
Increasing safety stock.
Or ortho biologics products.
Building more 70 surgical system year to date that investment exceeds $32 million, which is more than double the amount invested in the comparable prior year period.
Additionally, we recently accelerated various development programs to advance the 70, enabling technology platform.
The operating room to include Preoperative planning and to develop a second generation camera system.
And finally within the past year, we have hired nearly 50 additional employees not including the 70 surgical team an increase of more than 10% to help enable.
That future growth.
Investments are so important to foster a confidence with our expanding distribution network that we can support.
Our and their aggressive growth plans as we emerge from the pandemic and now I'll turn the call over to John for more details on our financials.
And our financial outlook John.
Thanks, Keith and good afternoon, everyone.
As Keith noted earlier revenue for the third quarter of 2021 totaled $46 $4 million or seven 5% increase compared to the prior year period.
U S revenue totaled $41 $2 million of five 5% increase compared to the third quarter of 2020 and included $1 $5 million of enabling technologies capital sales revenue.
U S spinal implant and enabling technologies revenue in the third quarter of 2020 was totaled $21 $1 million, a 10% increase compared to the prior year period.
That growth was led by the acquired 70 surgical platform as well as new and recently launched products predominantly those products that were alpha fully launched within the past two years.
The rapid clinical adoption a whole list of recently launched products is a very encouraging sign for the growth they can drive in 2022.
U S ortho biologics revenue in the third quarter of 2021 totaled $21 million or one 3% increase compared to the third quarter of 2020.
That increase was once again driven by growth in the passenger stream plus product.
International revenue in the third quarter of 2021 totaled $5 $2 million or 26% increase compared to the prior year period.
$600000 of enabling technologies capital sales revenue.
Growth in Europe for spinal implants, and ortho biologics was particularly strong due to timing of stockholders.
We recently informed our European distributor partners are our plans to reorganize our sales and marketing support for that market.
Based from the U S. Similar to the successful model that we utilize to manage the Latin America and Asia Pacific markets.
This restructuring, which will result in the closure of our yellow in France office and the elimination of all the physicians based in the yellow by the end of this year is expected to generate more than $1 million in annual savings per year, starting in 2022.
We recorded severance and other restructuring charges totaling $1 $7 million in the third quarter associated with this restructuring.
In our news release, we also provide comparisons to our revenue results for the third quarter of 2019 as the impacts of COVID-19 on our business makes the comparison to that period, a useful supplemental metric to measure.
GAAP gross margin for the third quarter of 2021 was 16, 6% compared to 67, 4% for the third quarter of 2020.
The decrease in gross margin was primarily due to $1 million of technology related intangible asset amortization and $400000 of inventory purchase accounting fair market value adjustments associated with the 70 surgical acquisition.
Plus one $3 million and higher excess and obsolete inventory charges recorded in the third quarter of 2021 in connection with the full commercial launches in additional set deployments of numerous spinal implant systems in 2021.
Yeah.
We call that in the third quarter of 2020, we were still limiting our investments in additional spinal implant sets.
The uncertainty with respect to COVID-19, and the unknown timing for wave spinal implant surgery volumes rebound and how sustained it would be which resulted in an unusually low amount of excess and obsolete inventory provisions recorded in that quarter.
Adjusted gross margin, which excludes technology related intangible asset amortization and inventory purchase accounting fair market value adjustments.
64, 3% for the third quarter of 2021.
Consistent with the 64, 5% recorded for the second quarter of 2021, and it declined from 68% reported for the third quarter of 2020.
The ongoing execution of more full commercial product launches spinal implant systems in 2021 has generated a higher excess and obsolete inventory charges relative to prior years from the substantial investments outside implant inventory required with the set builds.
However that impact notwithstanding we believe that we can continue to expand adjusted gross margin by 100 to 150 basis points per year over the next two to three years.
Operating expenses for the third quarter of 2020 was totaled $46 $4 million or $10 $6 million increase compared to $35 $8 million for the third quarter of 2020.
It included $3 $4 million of operating expenses directly attributable to 70 surgical and at $1.7 million charge related to the information and restructuring of our European sales and marketing organization.
The increase in operating expenses was driven primarily by $5 $4 million and higher selling and marketing expenses. The substantial majority of which relates to 70 surgical operating expenses plus.
Plus increased commissions head count travel and trade show spending.
$2.7 million in higher general and administrative expenses.
Which included the $1 $7 million restructuring charge for Europe.
$400000 of 70, surgical operating expenses and $200000 in legal and other professional fees incurred in connection with the 70 surgical acquisition integration.
And $2 $3 million in higher research and development expenses, which included $1 $3 million of 70 surgical operating expenses at <unk>.
$500000 charge related to the acquisition.
Intellectual property applicable tourists spinal implants portfolio.
Net loss for the third quarter of 2021 was $17 $6 million compared to a net loss of 16 $6 $6 million for the third quarter of 2020.
Adjusted EBITDA for the third quarter of 2021, with a loss of $7 $4 million compared to a loss of $100000 for the third quarter of 2020.
The increase in adjusted EBITDA loss was primarily result, the result of a number of items, including the adverse impact on our revenue from the COVID-19 pandemic compared to our original expectations for the third quarter.
The $1.3 million increase in excess and obsolete charges I discussed previously.
The roughly one 7 million dollar dilutive impact 70 surgical had on the quarter.
And because we incurred significantly lower operating expenses in the third quarter of 2020, so essentially no travel or trade show activity and as a result of the many targeted head count and spending restrictions were implemented due to the ongoing uncertainty with respect to COVID-19 at that time.
As Keith mentioned earlier, we firmly believe that severe COVID-19 related restrictions on spine surgery volumes is a transitory event that will eventually pass and therefore, we are investing aggressively for the long term people development programs and assets, we need to take market share and grow four to five.
[noise] times faster than the overall market.
Adjusted gross margin and adjusted EBITDA loss, a non-GAAP financial measures that we believe provides valuable information on our operating results and facilitate comparability of our core operating performance from period to period and against other companies or industry.
A reconciliation of GAAP gross margin to adjusted gross margin and a GAAP net loss to adjusted EBITDA loss was presented in the financial tables of the news release, we issued this afternoon.
Cash and cash equivalents at September 32021 totaled $102 $4 million and we had no amounts outstanding under our credit facility.
Our free cash flow burn, which includes operating cash flows and purchases of property and equipment was $17 $9 million for the third quarter of 2021 of $10 7 million increase compared to $7 $2 million for the third quarter of 2000 employees.
And with $39 $3 million year.
Year to date 2021.
At $15 $7 million increase compared with $23 $6 million.
Comparable comparable period of 2020.
Those increases were primarily attributable to the larger adjusted EBIT EBITDA loss and higher investment in inventory and space.
And instrument capital expenditures.
Needed to support the greater number of full commercial launches in 2021.
And our expectations for accelerated revenue growth in 2022.
Turning to our financial outlook for 2021, we now expect fourth quarter 2021 revenue to be in the range of $54 million to $55 million, reflecting growth of 16%, 18% compared to the prior year period.
And 23% to 26% over fourth quarter 2019 revenue.
For full year 2021, we expect revenue to be in the range of $190 million to $191 million.
Selecting growth of 23% to 24% compared to full year 2020, yet to date and 19% to 20% over full year 2019.
Our revenue guidance contemplates that the situation is certainly improving and encouraging their longer term effects that result from immediate disruptions caused by Covid, we bill.
I'll leave that even after the immediate and direct impact side, it will take more than one quarter to fully recover.
In addition, COVID-19, it's still disrupting surgeries in certain geographies and hospital staffing shortages will likely adversely impact the usual seasonal spike in spine surgery volumes, we experienced in the fourth quarter.
However that were not.
Providing.
Our revenue guidance for 2022, we are more optimistic about spine surgery volumes returning to pre COVID-19 levels on a sustained basis in 2022 and that is.
Four to five times faster than the overall spine market as Keith mentioned earlier.
We expect our free cash flow burn for full year 2021 to be between $55 million is $58 million.
Which has influenced both by the adverse impact of COVID-19 on our revenue this year.
Along with the continued investments we have in place to continue to make in the fourth quarter.
It was in the form of additional inventory and spinal implant sets to support upcoming commercial launches such as admirable leaf tea as well as the deployment of more sets, although higher demand systems, such as like Northstar and wait for the three D printed interbody system.
At this point I'd like to turn the call back over to Keith.
Thank you John.
The acquisition of 70 surgical and the launch of many exciting and differentiated new products in 2021, we have transport she spine into an organization that we believe has the most clinically relevant spinal implants, and biologics and the most efficient and effective enabling technology to meet the surge.
Evolving needs.
And one that represents an attractive partner for distributors to grow their business, which over the long term.
Our commitment to invest for growth and innovation will not waiver and we will seek to remain nimble and agile leader in market share taker in spine and none of this would be possible without the more than 500 focused and dedicated employees, whose bodies a passion of what seaspan has become.
With that we will now open it up to questions operator.
Ladies and gentlemen to ask a question you will need to press. The Star then the one key on your patched on telephone.
To withdraw your question press the pound key please stand by while we compile the Q&A roster.
No first question coming from the line of Matt O'brien with Piper Sandler Your line is open.
Hi, This is screen on for Matt. Thanks for taking the question. So first on your commentary for Q4 can you just expand a little bit on some of the things you've been seeing that give you the confidence in that guidance range, but also touch on some of the softness in the <unk>.
And change versus prior expectations and then also on your commentary around 2022 what are some of the trends that you're expecting it to continue into early parts of the year and when should we start to see a return to more normalized volumes in 'twenty two.
Yeah. So.
Yeah, you bet. Thanks for the question. So you know.
Probably the best way to answer is to give a little bit of insight on what we discovered a task that the north American spine Society spent.
Time at the Booth was able to talk to a number of surgeons and every surgeon kind of asked a similar question in that you know how does this compare to typical non COVID-19 related Q4s and that's why we have the comfort that everyone said that they're you know they're quite booked up through Q4.
And the second part of that question for every one was you know do you see after the recovery last year, a number of hospitals, we're going to additional hours in the U R and they were going to even weekend schedules.
So the question was do you see some of that coming down the pike in the fourth quarter and typically most were answering that you know listen we don't have the staffing to be able to do that kind of stretch like we did last year and so we're just focused on you know the typical oh, our schedule that we have.
Right now I'm completely booked up so that's why the commentary behind that was we don't see I'm kind of a huge stretch going on in Q4, and we're still dealing with some intermittent slowdowns, but largely not like we were last quarter and so we still feel good about how the quarter will continue to wrap up.
I mean, we do have to face Thanksgiving and Christmas where last year that was a little bit higher of transmission going on but it certainly appears that it's very promising how things are are declining so.
When you look at it for next year kind of hard to tell but our feeling is is that most of that backlog should get consumed in the first quarter. If it is going to get consumed so.
We fully expect it will I just again, we have to see that that all hospitals are back in and they feel comfortable from a staffing and from a.
You know a better perspective.
That's super helpful. Thank you and then just one more on R&D can you just talk a little bit about the pricing declines that you mentioned is this strictly just due to the key snacks.
Or do you think that there's a trend that might persist longer into 2022 again.
Yeah, the pricing declines we talked is generally for the industry and even our own experience had been low to mid single digits more often than not we see low single digit price declines. This quarter was mid single digit like the prior quarter, but I don't I think it's too early to call. It a trend because we are launching new products and typically.
That's where you can get a price premium and maintain pricing. So I think we will shift back to sort of a low single digit price declines that we've seen in the past and that I think are slightly better than the overall spine industry, which is consistently seen you know year over year price declines.
Yeah.
And our next question coming from the line of Ryan Zimmerman with <unk>. Your line is open.
Hi, Good afternoon. This is actually Carolyn on Brian. Thanks for taking my question I, just kind of a biologic for a moment.
It just feels as though it's gotten a little less airtime as of late from the company and so he's got the biologic market I'm a little bit how is pricing holding in is the shift away from stem cell based products ongoing and any thoughts on non DBM products out in the parking lot yep.
Thank you.
Yeah, I'll, let I'll, let Bob.
Let's talk a little bit about the pricing side of things, but yeah, theres still been a very heavy focus we continue to be driving the science in and around you know what we have shown market leading D. B M. So we still feel very good about the market share taking strategies are absolutely continues we feel to be.
Declines in opportunity because of the the cell based challenges.
In addition to that yes, we are working on on future.
Opportunities and we'll have product launches.
As we get through next year and are on the synthetic side. So we continue to invest in R&D.
With biologic side, but feel very good about the continued momentum of our R. A D. B M for sure and also feel good about our supply stream and the efficiency of our manufacturing.
And on the on the pricing side, that's been historically, a more stable market in terms of pricing than the spinal implants market and we're seeing a continuation of that trajectory no no real change in terms of the pricing environment for the biologics pretty stable.
Thank you.
Okay.
Our next question coming from the line of Mathew Blackman with Stifel. Your line is open.
Hi, calling on for Matt, we spoken with a number of surgeons over the past month in particular.
Particular regions.
Regions are hit hard by Delta in a certain space out of those and we're hearing that the surgical calendars are pretty much booked 46 weeks out and at these docs in the hard hit areas, particularly we are hopeful that more people will be more like a pre COVID-19 environment with regard to volumes. So the first question is what are you hearing on volumes is it more complex than what I kind of just outlined.
And second we're hearing about staffing shortages like you, but we really haven't found docks, we've called that out as an issue are there particular regions or types of facilities, where this is a prominent issue just.
Any more color there would be really helpful. Thanks.
Yeah. So I I don't know if I can give you much more color than the previous question about you know us.
Having consistent dialog at NASS with the surgeons.
You know very consistently each and every surgeon talked about having a very solid book of business for Q4 book of surgeries already scheduled so I think that's consistent I just had a a dinner this week with a surgeon and he mentioned the exact same thing and from the Midwest area. So I I.
Do think that across the country. This is a typical Q4, but the challenge again goes to staffing and do hospitals have the ability to flex and work longer hours in the O R or maybe even work weekends and I think that's where we're seeing less and less hospitals, saying that there.
Are going to be able to flex time, and you can actually bring in more of the elective surgeries and they got pushed and I do see that continuing in the fourth quarter.
Pretty consistently across the country, but we will see I know I'm, having a conversation even.
A couple of weeks ago.
Detroit area.
They were commenting on the same thing that you now feel great about how busy it is but they really don't think they're going to get more hours or weekend time I'm out of out of staffing challenges.
Okay. Thank you and.
Another question you made two commercial announcements on 70. These last couple of months with the <unk> contract and the Pediatrics distribution agreement can you give us some context on the opportunities for each of these and how big of a potential contribution to your overall 70 business be student outcomes.
Could have over say the next 12 months.
Yeah, you know I think that both of them present, I think demonstrates specifically the uniqueness of the technology and I think also the ability of this technology to continue to scale and I think the the busy and certainly recognizes not only the importance of eliminating radiation.
Certainly extremely limited if not eliminating and then secondarily I think it's also about how consistent that team and that group had been about bringing a booth or bringing out new technology, whether that's software upgrades or actual entire modules that get into.
New areas of spine care, such as the newest minimally invasive.
Alpha launch that's going on and I think that was a you know.
A recognition now what it presents as we get a different conversation with that vision group of hospitals and so we're excited about taking advantage of that we're also excited about the fact that in a number of those accounts. We may not have very much business and so this gives us an opportunity to possibly have earn out work or.
Outright sale and.
Again, the secondary one went towards the pediatrics I think that they have demonstrated a real leadership in the market.
In this.
The pediatric space and I think it is.
It's a real benefit for them to also be able to offer an earn out.
Possibility not just only for pediatric spine, but also for other applications in their pediatric bag. If you will and whether those are trauma based or whether those are or other bone fixation opportunities. We look forward to advancing this system. So that it can also.
Do other applications of orthopedic.
Surgery in the pediatric setting and we feel good that it's it's a it's a strong partner. It's a partner that we also think is a very innovative company and we feel that you know, it's all about installed base and if we have a partner out there that's helping with the installed base it could be a win win for both their product line, but.
Also for our product line to if it's sitting in that hospital.
Awesome. Thank you.
And our next question coming from the line of Oliver with Canaccord. Your line is open.
Great. Thank you for taking the question so wanted.
Wanted to see if we could just touch on some of the trends are I guess through the month of October ads as a delta has wound down a little bit are you seeing those complex cases come back in and what the overall mix and procedures looks like and then a little bit of a big picture on 70.
It's good to see the $2 1 million in the quarter.
All of US understand you really what does that look like as far as you know our cross selling and the type of opportunities you have from a longer term perspective, there and how we should think about that trending into 2022. Thank you.
Yeah on the first question complex surgeries, Yeah, I'd say midway through October we started seeing a shift back to a more traditional mix of procedure volumes on the more complex surgeries.
That timed very well with our recent launch of the Mariner adult deformity system and an alpha launch so it's great to be able to.
Take advantage of the return of more complex surgeries with that.
New platform and extending the Mariner technology into adult deformity.
And you know without commenting too specifically on the October results. We are up over last year. If you recall last year you know it was a strong start to the fourth quarter.
So I'm encouraged that despite the fact that as Keith said, there are still pockets of of Covid related disruptions throughout the country and staffing shortages seem to be coming a bit more common in living the upside on surgeries I'm still happy to say that were up year over year, and I think that bodes well for the informed guidance we gave on them.
How we think Q4 shapes up because case.
Sorry, Covid cases continue to decline as we continued to see week by week more and more hospital capacity, we're not at normal yet, but I think we're training in the right direction, which gives us the confidence for 2022 getting back to pre COVID-19 levels on a sustained basis.
And on the second part of that question. There was you know the the opportunity with the Salesforce I think as you as you remember it's great that we've kept the sales force can be complete meaning the capital equipment side of the sales force for 70 remains complete and what we really focused on is continuing to better in a.
Great with our sales management teams and other item, we're doing is making sure that when we have coast visits whether that's for a distributor whether that's for the surgeon whenever guests come through the office.
We have a 70 demonstration and opportunity as well and so what we've seen is that there just isn't being a smaller.
Newer player on the market.
You can't.
Present, there can't be more awareness, meaning you have to constantly be showing the technology and what its benefits are and so we've been really excited by the fact that surgeons.
Surgeons that are coming through whether they're aware of it or not end up being very impressed with how the system works and the nacelle.
Necessity for radiation right, where we're doing a demonstration with with no CRM president and that really makes the profound impact and so we're seeing a great deal of leads being generated and we're working together now as both an implant team and a seven.
Seven D team to classify those leads and move them down the direction of whether its an outright capital sale or whether it ends up being an earn out.
Great. Thank you.
Yeah.
And our next question coming from the line of Brandon Folkes with Cantor Fitzgerald. Your line is open.
Hi, Thanks for taking my question.
Cool down a little bit more into your revised guidance for the year yeah.
A lot of the headwinds that are out there like obviously out of your control, but I'd love to get some commentary in terms of you know.
How do you feel about where procedures are getting done compared to your expectations at the beginning of the year for product usage.
You're talking about an average of two products per procedure during the quarter coincidence happened last year, but I'd love to just get insight into how does this compare you know from your expectations and how are you tracking that'd be great. Thank you.
Yeah, I think the utilization of our products and systems for procedures continued to creep up which is exactly what we wanted and expected as we tried to own or if we're going to have the inner body case, we want to have the post your fixation and if we have the post your fixation, we want to own the antibody and in both of those examples we.
Oney ortho biologics part of the procedure. So as we continue to expand the portfolio I think we've got greater opportunity to participate in more of the procedure and 70 only further enables that so we're increasing as anticipated.
In terms of surgery volumes for the fourth quarter compared to our original expectations for the year.
They're they're meaningfully down from where we thought we'd be mostly because COVID-19 right. We know that there are certain pockets of the country, where things are far from normal theyre still experiencing COVID-19 related disruptions, because there's too many sick patients and the beds, which is unfortunate but also because we're seeing an increasing number of staffing shortages.
That's not only impacting the ability to have upside procedures to work through the backlog, but our concern is is it risks the typical seasonality pattern of Q4 being the most.
The quarter of the year as Keith indicated.
I think some institutions, maybe strained just to be able to service the usual amount of procedures you see in a Q4 and that's why the guidance. We gave was you know what.
Arguing it's cautious it is below our original expectations for a number of reasons, but I still think be able to take that kind of market share and grow in this environment.
It's a testament to the great distribution. We've added this year to how we've really rounded out the portfolio with our three D printed inner bodies, now Mariner deformity and and all of the other products going into full launch this year like Northstar, we feel like we're in a great position and that's why we went to great pains to point out multiple times.
We think we're going to consistently grow 4% to five times the market.
We're the market lands this year because of the Covid disruptions, but we feel confident we'll grow four to five times that we're feeling more confident next year right as things continue in this trend that we could get back to a typical pre COVID-19 level of surgeries and whatever growth rate that is will be growing four to five times that so you know that that's there.
We're trying to convey and where were at as an organization with our products and distributions is to continue to aggressively take market share, but that being said Q4 is is definitely being impacted by COVID-19 in certain pockets, whether it's like I said sick patients taking up beds and limiting hospital.
The ability to do surgeries for staffing shortages that that's limiting that we're seeing it in various pockets of the country still.
Can I ask one more if you don't mind and I think the staffing shortages.
I think we can get.
Number.
Industry.
Thank you.
Get you come back and.
How do you feel about the supply chain, obviously, you keep a healthy inventory balance but.
Anything there we should be watching as we look out to the growth in 2022 that kind of thing.
May I have a knock on effect.
In a couple of months.
Yeah, it's something we monitor closely since the beginning of Covid I think the bigger or.
Better relationships that we've developed with our suppliers in the spinal implant side.
You know it helps the fact that we've placed orders since Covid started and increase those orders as we've invested for growth.
And you know I assume we're one of the few customers that's been increasing volumes throughout the COVID-19 uncertainty. So I think the fact that we've kept all orders in tact, we've increased our order in volume, we've tried to consolidate suppliers and become a bigger customer with those suppliers.
<unk> added a lot of head count to our supply chain team, particularly in the spinal implant side. So that we can pay closer attention to those suppliers and build better relationships. So unfortunately, we have not seen any disruption and we know from talking to those players week by week day by day, they've had some production capacity issues because of six <unk>.
Please because of Covid, but thankfully we have not missed a beat because we've been on top of them from day, one and continue to stay on top of it. So I feel good about what we've done there and the relationships. We built that being said, there's still obviously risk in the supply chain that we need to continue to monitor.
One other topic, we brought up in the past is just the chip shortage globally.
It does potentially have an impact on seven D. But right now we have enough chips in the house and chips on order and expect it to get chips in that it should not interfere with our growth plans for seven days.
But again, it's something very real that we're continuing to monitor demand versus supply and know that we've got orders in with other suppliers and based on their time for feedback to us on lead times, we don't anticipate it creating any issues, but it's something else we'll continue to monitor.
Alright, Thank you very much.
Sure.
Okay.
Our next question coming from the line of Jeffrey Cohen with Ladenburg Thalmann. Your line is now open.
Hi, Keith and John. Thank you. This is actually destiny on for Jeff This afternoon.
Hi, I just want to circle back to a couple of questions on 70, I know you've already gotten at times, but I'm curious.
Is your sales force, where we're just seeing a more rapid progression from the time of interest through.
The full process since the signing of a contract given that these hospitals are booked up understaffed and looking for efficiency.
Are you talking about from a.
The sales cycle for 70 or for general implants as well.
70, <unk> yeah, Yeah, we we haven't we haven't noticed a significant lag I mean, you know it's kind of interesting that if you look at all the different leads.
That some progress that are relatively.
Predictable pace, others may get pushed right, so the capital equipment budget or how.
How they're looking at other technologies may push it longer we've had a we've had a couple just recently that that also actually progressing quite rapidly so when.
When you look at it I don't know if we're able to say there's a.
Specific trend at present.
Okay got it. Thank you and then I'm just curious for the sales and marketing around 70.
It is significant so I'm wondering how how long do you think that type of investment is going to be required in order to really gain the commercial traction you believe you can gain.
I think we'll continue to make investments at that level.
But we also anticipate there's going to be paying off where we see increasing volumes.
70 units being sold or placed under an earn out. So I think it's just similar to the spinal implants business from a few years ago. We just we need more scale right. We want to continue to make those investments.
And the sales team the infrastructure the marketing team because we just need more scale to grow and I think that's what deploying those investments are and I don't anticipate the level changing but I do anticipate the revenue, increasing which would make them less dilutive.
In the near term.
Right got it. Thank you that's very helpful I'll jump back in queue.
And our next question comes from the line up.
Your line is now open.
Hi, guys. Thanks for thanks for taking the question I'll just.
Starting off with <unk>.
70 here.
If theres any.
So the operating metrics you can give us around the system or any color you can give us sort of around what you're seeing in terms of utilization christmastime or are in the mix of the C spine implants being utilized per case on the system just any kind of commentary you could give there would be really helpful.
Yeah, I think the one thing I'll say is even in the absence of an earn out where we've sold a unit. It might've been a unit sold in the past or one that the team is working on now.
The seventies capital sales team has introduced our sales management team and our local spinal implants, and ortho biologics distributors and we've seen non contractual pull through.
Even in the absence of an earn out so.
Those introductions are turning into.
Sales and I think we've had a couple of nice wins in the northeast.
Recent months so.
We're getting traction because of those introductions and some of those are units that were sold a year year and a half ago right, where we've got it the second D team has a great relationship and they're introducing our distributors because the surgeon really take likes the technology and we get an opportunity to show them, how we're integrating our implants to work seamlessly.
With the seventies system and it really you know, Texas is our interest in and vice versa will have a surgeon come here for one of our coastal visits where we give them a you know a.
One day overview of our products and systems.
And we have a 70 demo unit here and we've got one in the lab.
And you know a lot of cases, they may not come here very interested in the technology because they are more focused on on our spinal implants, and ortho biologics, but we put it as part of the agenda and once they see the technology.
They're surprised with.
Just how good the technology is in the no radiation, how seamlessly fits into the workflow being able to register patients from 30 days. So I think it's working both ways the introductions.
Of the 70 team towards distributors is paying off and the introduction of surgeons to use a set of new technology from a visit to see fine focus on me with the biologics and funding in place is paying off as well.
Great that's.
That's really helpful. Thanks, and then just with the you know congrats on the $2 1 million in the first full corn here you know, we we kind of think about that being about.
For units sold out right and even with that does that sound about right to you and then sort of any color you may have on.
Placements from earn outs and then just pulling.
Pulling back a little bit any kind of color on the.
Broader capital environment.
These staffing shortages coming up in a lot of resources being dedicated towards that side of that side of the island hospitals are you seeing anything coming out of capital budgets and in your discussions.
Hasn't hasn't come up as a gating item or an issue as Keith said before right. We still see the sales cycle that being the same and we're one five months into the acquisition now where both teams are fully integrated and working on the pipeline. So I suspect, we'll see more earn outs in the coming months, just because given a nine.
12 month sales cycle on the capital side, a lot of those deals that we're closing on that we're already in the pipeline for capital deals, but now both sides 70 sales team and our sales team are incentivized equally for an earn out versus a capital sale. So I think now you'll start to see an increase in some of the earn out opportunities given the typical sales cycle time.
Your line for piece of capital.
Got it and then I know you answered a lot of questions about staff or anybody else.
I ask you one more time to put a pin on it I know a lot of the discussion has been about an ability to flex up capacity in.
That eliminating the ability to realize backlog, but you know in your eyes is there is there any risk of.
Yeah, increasing staff shortages, leading to 2022, not being able to grow in line with more historical ranges or is it strictly a risk towards the backlog realization at this point in your eyes.
No.
Yeah, I think it would be at the levels, we've seen and it's anecdotal feedback from talking to our distributors and our sales teams I think the level of staff shortages that we've seen now is more of a constraining event on upside to Q4 or being able to hit the relatively high Q4 volumes I don't see a big.
Risk at this point unless something meaningfully changes in the future.
I don't see the staffing shortages that we've seen any impact they've had so far being a material limiter for next year. Because Q1 is typically the slowest quarter per year in terms of spine surgery volumes Q2, there was a big pick up but you know we still got five or six months before that becomes a risk, but I think again.
Based on the anecdotal evidence we've got it's just more of a limiter to the upside as Q4, and even being able to sustain that typically high Q4 surgery schedules is all we're seeing the risk for now.
Yeah.
Yeah.
And our next question coming from the line of Jason Wittes with loop capital. Your line is open.
Hi, Thanks for the questions. So you guys have you know.
<unk> been working pretty hard to upgrade and expand distribution.
Wanted to know what the latest was on that and specifically I'm sure. It's affecting this quarter, but are the anticipation that the dividends will be greater next year, given the amount of time and et cetera. It takes to get people back on board.
And expand the relationship.
Sorry, Jason you were cutting out there can you.
Part of that question.
Sure I was asking about distribution sales in terms of.
The progress you've made thus far and weather.
Sort of what inning, we're in in terms of.
Do we expect a further expansion next year also some of the changes you've made or are they more likely to pay dividend into next year than this year given the amount of time it takes.
To onboard and expand some of the distribution.
Yeah, I think you're thinking about that spot that you know a lot of the bigger moves that we've made this year.
Getting momentum, but you now see that next year will be the opportunity to really get.
Them being passed if you will that that learning stage.
Yes, and we are also planning and continuing to to recruit.
Quite aggressively.
Larger distributor models and so we feel good about it we feel good about how they want to partner how they want to commit and kind of gives a good backdrop to why we're making the investments we're making.
The inventory side to make sure that when we bring these folks on board. They are comfortable that we can keep up with their demand.
Okay.
So if I think about the growth you saw this quarter, obviously covered was an impact but.
Is there from a general ballpark standpoint, I mean, how much of it related to distribution how much related to all the new products that you're introducing.
It's impossible to quantify that.
Mid part of August all throughout September were meaningfully disrupted by Covid not just.
The surgery volumes, which is most impactful to revenue, but you know it also limited surgeon's ability to travel right. There at their hospitals were limiting their travel schedule. So the surgeons distributors that we wanted to get into Carlsbad weren't able to get in to get their hands on the product right to learn more about <unk>, which we reduce or cushion into the company.
Overviews, that's one of the greatest recruiting tools for distributors in spine surgeons, just get them in our lab to get their hands on the product meet the management team meet the company understand our culture and spend a day here in Carlsbad. So there was a pretty big gap in.
Some of the surgeon visits we had scheduled that got canceled and we're rescheduling.
The encouraging thing is where reschedule them and we're hosting multiple surgeons and distributors every.
Every week, we actually got a distributor here today in an unrelated surgeon here today. So we're seeing those come back and get rescheduled.
There was a.
Time period in August and September were not just spine surgery volumes were impacted but just the opportunity to meet new surgeons and distributors.
The impact of fourth quarter growth, because we just couldn't get demand because of travel restrictions.
Yeah, and I see too that you know the other the other difficulty to it too is there is the distributors are coming aboard and some of the larger ones that have an opportunity are dealing with kind of these fits and starts that are that are going on but that said I also think that there are also the ones that are most bullish.
The conversations that we're having with surgeons on how the recovery will look so.
Again, we feel we feel good that as long as we don't get another uptick that we're going to see continued strength for the fourth quarter.
Until we get some of that surgical backlog sifted through.
At the beginning of next year.
Okay, that's very helpful actually.
On the orthopedics.
Pediatrics relationship.
<unk> now fully functional and to work with some of the trauma products et cetera or is there some development work.
That still needs to be done there.
There'll be some development work that's part of the partnership is to customize some features of the system working with the with pediatrics team. So some of them some of that to come.
Okay and.
I don't know I think you were initially when you acquired 70 did give some kind of revenue contribution for this year.
Obviously August et.
Et cetera changed a lot of the outlooks for a lot of companies, including yours I don't know.
It did you give an indication for what the <unk> impact or.
Contribution might be for the fourth quarter and the guidance you provided.
We have not we have not we did provide 70 revenue contributions back in March when we.
Initially announced the Oh, sorry in May when we announced the closing of the acquisition but.
Covid had an impact on all of those expectations back from my end and we're not we're not providing color on uncertainty capital contributions because as we said on prior calls.
Every unit, we places under an earn out I'll be the happiest person in the room because of the ability to access accounts to stay in those accounts through an earn out period. So I don't want to set expectations for capital revenue number and if we end up placing more units under an earn out we might miss that capital revenue, but its better long term financially to happens or not so.
We're not going to provide that kind of color on 70 capital revenue contribution.
Okay understood. Thank you very much I'll jump back on queue.
Great. Thanks.
Okay.
I'm showing no further questions at this time I would now like to turn the call back over to Mr. Kipp Valentine for any closing remarks.
So again, thank you everyone for joining us and we will chat again sometime in the early first quarter. Thanks again.
Yes.
Yeah.
Ladies and gentlemen that does conclude conference for today. Thank you for your participation you may now disconnect.
Okay.
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