Q4 2021 OrthoPediatrics Corp Earnings Call
Thank you for your patience and please continue to standby the ortho Pediatrics Corporation fourth quarter and full year 2021 earnings conference call will begin momentarily. Thank you for your patience and please continue to standby.
[music].
Good morning, and welcome to Ortho Pediatrics Corporation fourth quarter and full year 2021 earnings conference call. At this time all participants are in a listen only mode. We'll be facilitating a question answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes.
I would now like to turn the call over to Matt basket from the Gilmartin group for a few introductory comments.
Okay.
Thank you for joining today's call with me from the company are David Bailey, President and Chief Executive Officer, and Fred Hite, Chief operating and financial Officer before we begin today, let me remind you that the company's remarks include forward looking statements within the meaning of federal secure.
These laws, including the Safe Harbor provisions of the private Securities Litigation Reform Act of 90 95. These forward looking statements are subject to numerous risks and uncertainties and the company's actual results may differ materially for a discussion of risk factors, including among others. The risks associated with COVID-19, the impact this pandemic may have on the demand.
The company's products and the company's ability to respond to related challenges I encourage you to review the company's most recent annual report on Form 10-K , which will be filed with the SEC soon.
During our call today management will also discuss certain non-GAAP financial measures, which are supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period over period for each non-GAAP financial measure referenced on this call. The company has included a reconciliation of the non-GAAP financial measures to the most directly.
Apparel GAAP financial measures in its earnings release. Please note that the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for or the pediatrics financial results prepared in accordance with GAAP. In addition, the content on this call contains time sensitive information that is accurate only as of the date.
Of this live broadcast March 3rd 2022.
Except as required by law the company undertakes no obligation to revise or update any statements to reflect events or circumstances, taking place. After the date of this call with that I would like to turn the call over to David Bailey, President and Chief Executive Officer.
Thanks, Matt Good morning, everyone and thank you for joining us, we hope you're safe and well.
Before providing a business update and review of the financials I'd like to highlight that we helped over 9500 children in the fourth quarter and approximately 38000 for the full year 2021, which was a record year for the company.
Since inception orthopedic metrics has helped more than 234000 children in total doing the right thing for children remains our top priority.
Consistent with our pre announcement on January 10th we generated quarterly revenues of $24 $8 million representing growth of 31% compared to the fourth quarter of 2020.
For the full year of 2021, we generated $98 million representing growth of 38% compared to the full year 2020.
We are extremely proud of our 2021 performance and believe we have navigated through the pandemic very well, which we view as a testament to our durable business and strong commercial execution.
Before commenting on each business segment I'd like to speak to some macro trends, we experienced in the fourth quarter and full year 2021 that have impacted the entire health care system and specifically the medical device industry.
The first being Covid.
While pleased with our 31% growth rate in the fourth quarter. It is important to point out that the spike in omicron variant cases in December deferred elective procedure volumes, which we estimate negatively impacted our growth by 10 percentage points.
As we entered the first quarter of 'twenty 'twenty 2022 headwinds associated with the Omicron Varian continues to negatively impact our growth in January and the majority of February .
In early March we're seeing signs of improvement with reduced Covid case volumes and the rescheduling of surgical cases.
We see this as an indication of progress toward a more normal operating environment.
And an opportunity to capture pent up demand.
Specifically, we believe theres, a sizable backlog of deferred domestic cases, which we expect will largely be worked down by the end of the third quarter of 2022.
This brings me to my second point.
While the backlog of cases has increased since September we believe the recapture of deferred cases will be flatter in 2022 compared to 2021.
Due to continued hospital staffing shortages.
We believe the underlying demand for our products remains strong and we are working closely alongside our customers to ensure that they have the necessary resources and support to operate through this challenging period.
Lastly, many of you asked about a possible disruption associated with the global supply chain and increasing inflationary risk, although we were not significantly impacted and our 2020 one by supply chain issues, we are starting to see inflation in pockets, where some of our vendors and extended lead times, while we view this as a mine.
The risk to our business, we believe we'll be able to offset increased costs with modest price increases to our customers over time.
And manage the extended lead times.
We are proud to say, we source approximately 90% of all materials and inventory domestically, which significantly reduces our exposure to global supply contracts.
Moving to our revenue segment.
In the fourth quarter of 2021, we generated quarterly trauma and deformity revenue of $16 $5 million.
Representing growth of 47% compared to the prior year period.
Despite increasing omicron headwinds in mid December our non elective trauma business delivered strong growth led by the high rate of surgeon adoption of our P. N P femur system as well as our new cannula did screw and Skippy systems, specifically P. N P femur and Cannulation screws continue to capitalize on positive customer preference.
And increased set deployment.
And the United States. We expect this trend to continue into 2022 supported by additional set deployment and continued surgeon adoption.
Additionally, we are planning a more robust launch of the P. N P femur and external fixation systems and key international markets.
In the fourth quarter of 2021, we generated quarterly scoliosis revenue of $7 $2 million representing growth of 8% compared to the prior year period, our core scoliosis business continues to be driven by our response to the system and the Onboarding of new users given the number of new accounts added added in the <unk>.
Back half of 2021 we view consistent adoption of response as a tailwind to growth in 2022.
Additionally, we are seeing strong growth from our small stature system from both existing customers and new users.
Turning to apathy X, we continue to make progress on patient registration and are proud to say, we surpassed our 2021 target of active commercial sites at year end.
Setting us up nicely for 2022.
Lastly, we're happy to see strong demand for the 70 surgical navigation platform, having completed several evaluations in the fourth quarter.
As of today, we have built a strong pipeline of leads and continue to view 70, as a transformative platform that will improve patient outcomes drive increased surgeon engagement and allow us to leverage our entire product portfolio to pull through sales of our other products.
Specifically within the international business the negative impact of Omicron was more pronounced since infection rate started to spike in late November late November while domestic infection rates accelerated in mid December .
In the fourth quarter of 2021, we generated quarterly international revenue of $5 million compared to $1 $1 million the prior year period.
It is important to point out that quarter growth with highly skewed due to dock region converting to an agency sales model and a $2 7 million dollar sales return in December of 2020.
As we move into 2020 . Two we believe we have a number of international catalysts that will be tailwind to growth, including several key product regulatory approvals in the first half of 2022 more.
More normal distributor set purchasing patterns additional.
Inventory deployment in agency markets such as Doc.
And a large backlog of cases, which we estimate is roughly 18 months.
I'll now provide an update on our key initiatives.
Since the beginning of the pandemic, we have adopted the mantra of controlling what we can control and have continued to execute on our five strategic pillars.
First we continue to focus on the top 300 children's hospitals, where the majority of pediatric orthopedic procedures are performed.
Given our strong relationships and positive reputation we can continue to convert more surgeons and to users of more of our products.
Which resulted in 2020 , one domestic revenue growth of 24% and continue the expansion of our market share.
After a successful year in 2020 , one we enter 2022 with more surgeons using more of our products than ever before.
Second we've made substantial progress towards our goal of surrounding pediatric orthopedic surgeons with an industry leading product portfolio designed specifically for children.
Our scoliosis franchise executed a full scale domestic launch of a response neuromuscular system.
While the trauma and deformity correction business, our largest saw tremendous revenue performance and the recently launched next generation Cannula did screw system and the slipped capital femoral epiphysis system.
Additionally, we continue to launch our largest trauma products P. M P femur and external fixation, both in the U S and markets around the world.
These two products are rapidly taking market share and we expect this trend to continue in 2020 two and beyond.
Third through the deployment of $14 million in consigned inventory and the addition of 19 U S sales professionals in 2020 , one we improved search and access to our products as well as improve the customer experience.
Given the level of demand across all 37 product lines, we are committed to leveraging our balance sheet to expand our market share and drive revenue growth.
While we've highlighted a number of product lines already it's important to remind everyone that in 2020 . One nearly every ortho pediatrics product line grew double digits, which is a testament to the strength and the breadth of our portfolio.
Fourth we made great strides in advancing innovation in pediatric orthopedics by furthering development of new products and early onset scoliosis and intramedullary nailing for fractures and rare bone diseases.
We continued to expand our external fixation portfolio with new products and preplanning software.
In 2020, we acquired the Israeli based company Amethyst, which boasts an innovative technology for non fusion scoliosis surgery.
This past year, we gained significant momentum and filling a patient registry for the United States.
We also took major steps in our digital transformation initiative by extending our long term partnership with Mighty Oak medical and the patient specific Firefly technology.
And we secure the pediatric rights to the 70 inter operative surgical navigation technology through a partnership with C spine.
Combining these navigation solutions with the breadth of our product portfolio. We believe there are material revenue synergies with each capital placements.
Moreover, we continue to add talented professionals and build infrastructure to accelerate the velocity of new product development.
We also took major steps forward in quality and regulatory that continue to improve the customer experience and will enable us to be E. U M. D are compliant in 2022.
Lastly, we are particularly proud of our execution on our fifth strategic pillar to help train the next generation of pediatric orthopedic surgeons.
In 2020 , one we continued our leading support of the major pediatric surgical societies.
And carried out more than 300 training events for health care professionals, our commitment to noncommercial clinical education keeps us true to our cause and signals our dedication to advancing the entire field of pediatric orthopedics.
In summary.
We believe our business is beginning to see fundamental improvements, while delta and omnicom deferred elective procedures. It's important to point out that these headwinds are temporary and that cases do not go away.
The reality is untreated deformities simply become more severe as they progress. These deferrals will be a tailwind for domestic sales through the third quarter and at least 18 months internationally. Meanwhile, we continue to increase surgeon conversions.
Acceptance of our new systems remains strong and the potential for apathy and or things have never been better and there remains an absence of focused competition in pediatric orthopedic space.
With that said I'll turn the call over to Fred to provide more detail on our financial results Fred.
Thanks, Dave.
Our fourth quarter 2021 worldwide revenue of $24 $8 million increased 31, 1% when compared to the fourth quarter of 2020.
Growth in the quarter was driven primarily by strong performance within the trauma and deformity segment offset by the unfavorable omni kron impact on elective procedures in December .
For the full year of 2021 our worldwide revenue of $98.0 million increased 37, 9% when compared to 2020 growth in the year was primarily driven by strong international recovery as well as the continued impact of new products and new users.
In the fourth quarter of 2021 U S revenue was $19 9 million and 11, 2% increase from the fourth quarter of 2020.
The growth in the quarter was primarily driven by our non elective trauma business.
U S revenue for the full year of 2021 was $77.8 million, representing an increase of 23, 5% when compared to 2020.
Growth in the year was driven primarily by continued growth of our non elective trauma business.
Response, scoliosis product benefiting by the Halo effect from Mapi's X.
Additional <unk> surgeons.
Ex fix users.
Growth across our legacy product lines as well as tell us growth.
International revenue for the fourth quarter was $5.0 million compared to $1 $1 million in the fourth quarter of 2020.
As Dave mentioned earlier growth was impacted due to the Germany, Austria, and Switzerland, converting to an agency sales model, which resulted in a $2 7 million dollar sales return in December of 2020.
International revenue for the full year of 'twenty, 'twenty, one was $23 million compared to $8 $1 million in 'twenty 'twenty.
From a geographical basis growth was driven primarily by strong sales in EMEA benefiting from our agency conversion as well as South America.
In the fourth quarter trauma, and deformity revenues of $16 $5 million increased 46, 5% compared to the prior year period.
Growth was driven primarily by the high rate of surgeon adoption of our P. M. P beamer system as well as our new Cannulation screw system.
Full year of 'twenty, 'twenty, one trauma and deformity revenue was $65 $8 million, representing an increase of 38, 1% when compared to 2020.
Growth in the year was driven primarily by continued growth of our non elective trauma business driven by P. M. P femur cumulated screws as well as ex fix users.
And growth across our legacy product lines.
These growth rates were also impacted by the previously mentioned $2 7 million dollar sales return in the fourth quarter of 2020.
In the fourth quarter of 2021 scoliosis revenue of $7 $2 million increased eight 1% compared to the prior year period growth was primarily driven by our response system and the onboarding of new users.
Full year 2021 scoliosis revenue was $28.0 million, representing an increase of 35, 2% when compared to 2020 growth.
Growth in the year was primarily driven by response product line benefiting by the Halo effect from Abbvie fix additional IP fixed surgeons as well as Firefly growth.
Finally sports medicine other revenue in the fourth quarter of 2021 was $1 $1 million, representing 10, 3% growth over the prior year period full year 2021 sports medicine. Other revenue was $4 $2 million, representing an increase of 56, 7% when compared to 12.
'twenty.
Growth in the fourth quarter and full year was driven primarily by strong tell us performance.
Turning to set deployment in the fourth quarter, we continued to execute our strategy of set deployment.
Specifically $2.4 million of sets were consigned in quarter four of 'twenty, 'twenty, one compared to $5 $1 million in the fourth quarter of 2020, we.
We did have a few late deliveries, which pushed deployment out of the fourth quarter of 2021 and into the first quarter of 2022 .
For the full year of 'twenty, 'twenty, one and $14 million of sets were consigned compared to $18 million deployed in 2020.
The slight year over year decrease is primarily driven by additional sets deployed in 'twenty 'twenty, despite flat revenue growth.
Plus better capital efficiency of the App effects and ex fix product line growth.
The demand for more sets continue both domestically as well as in the 14 agency countries outside of the U S and provides opportunity for us to fulfill more of that demand in 2022 and beyond.
Touching briefly on a few key metrics.
For the fourth quarter of 2021 gross profit margin was 72, 9% compared to 79, 9% in the fourth quarter of 2020.
For the full year of 2021 gross profit margin was 74, 9% compared to 77, 4% in 2020.
Both fourth quarter and total year 2021 gross profit margin was unfavorably impacted by a $500000 penalty for purchased minimums that being achieved due to COVID-19 and not getting any relief from a third party provider.
Aside from that unusual impact higher international revenue as a portion of total revenue also impacted the margin rate.
Total operating expenses declined $4 $2 million or 15, 1% from $27.9 million in the fourth quarter of 2020.
To $23 $6 million in the fourth quarter of 2021 .
The decline in operating expenses was driven by the fourth quarter of 2020 unusual $6 3 million dollar accrual related to multiple legal settlements.
Partially offset by an increase in employee related expenses and commissions.
Full year of 2021 operating expenses of $91 $4 million increased 11, 8% versus $81.8 million for the full year of 2020.
Fair value adjustment of contingent considerations benefited the P&L by $5 $5 million in the fourth quarter of 2021 compared to a charge of $1 $7 million in the fourth quarter of 2020.
This impact was generated from an updated Monte Carlo simulation from our third party valuation firm.
Full year 2021 impact benefited the P&L by $1.8 million compared to the full year 2020 charge of $3 $5 million.
We reported an adjusted EBITDA loss of zero point $6 million in the fourth quarter of 2021 compared to a loss of $2 $6 million for the fourth quarter of 2024.
For the full year of 2021, we reported an adjusted EBITDA loss of zero point $2 million compared to a loss of $5 $9 million for the full year of 2020.
The improvement in adjusted EBITDA was driven by higher revenue combined with expense management and would have been better without the unfavorable impact of Delta and omni kron in the second half of 2021 .
We ended the fourth quarter with $54 $9 million in cash and restricted cash and we continue to have $25 million available on our line of credit.
I also feel it is important to mention that the acquisition payable as well as the contingent consideration shown on our balance sheet only requires a minority portion to be paid out in cash and the remaining majority portion will be paid out in equity.
Finally, turning to our outlook for 2022, we are entering 2022 with several fundamental table wins, including an increasing active surgeon base.
A growing backlog of deferred procedures and expanded product portfolio the.
The addition of key strategic partnerships.
And pending international approvals. However, we remain cognizant of the unique external operating environment due to COVID-19, and its impact on elective procedures.
As well as the health care staffing levels.
Our 2022 outlook is highly sensitive to the assumptions on a steady global recovery, which anticipates case scheduling and elective procedure levels normalizing throughout the year.
For 2022 we expect annual revenue to range between 118 million to $121 million.
Representing year over year annual growth between 20% and 23%.
The guidance assumes first quarter of 2022 revenue growth in the mid single digits when compared to the first quarter of 2021 due to omni kron headwinds.
Lastly, we plan to deploy between 24 and $26 million of new sets in 2022, representing year over year annual growth between 80% and 90%.
This increase is driven by pent up demand for new product introduction systems.
Legacy systems.
As well as consignment of 70 intra operative navigation systems.
In addition, we expect to generate several million dollars of adjusted EBITDA for the full year of 2022 crossing a major milestone for our business.
At this point.
I will turn the call back to Dave for closing comments.
Thanks Fred.
I'd like to reiterate our optimism for the future during the last two years through uncertain times, we have doubled down on our commitment to pediatric health care and while case volumes have been negatively affected our company is stronger than ever.
In addition to the list of accomplishments mentioned previously we've organized ourselves internally to move with either even greater velocity in product development and have successfully positioned the company to comply with ever increasing international regulatory demands.
Given this strong foundation, we enter 2022, knowing the unshakable truths that there are now more children, who need our products.
And we have more surgeons using more of our products than ever before.
We are a company on the move striving every day to help more and more children with orthopedic conditions with that I'd like to turn the call back over to the operator to open the line for questions.
If you'd like to ask a question. Please press Star then one if your question has been answered and you'd like to move yourself in the queue press the pound key.
Our first question comes from Matthew O'brien with Piper Sandler Your line is open.
Oh good morning, Thanks for taking our questions.
Fred can we start with the I think what you just said on Q1 and what it implies for the rest of the year. So mid single digit year over year growth in Q1, I'm just doing really quick math, there I mean, they've got it wrong, but it implies 26% growth for the last three quarters of the year. So.
You know in a little bit more challenging environment. Generally speaking you know the confidence you guys have in hitting those numbers and I don't think the sets are really going to kick in in a big way until later this year, So where does that you know that big step up.
And the last three quarters really come from.
Yeah, No you have it absolutely correct.
First quarter and that single to high.
Mid single to high digit revenue growth year over year, which we're pretty pleased with given the negative headwind with omni Crown, which obviously was not here in the first quarter of last year.
And then the second half of 'twenty, two we have the easier comps right. So the third quarter and the fourth quarter of 'twenty, one was negatively impacted by Delta and omni crowd. So you are correct that the second half growth rate is going to be higher than given that first quarters can be pretty soft.
Okay. Okay. Thanks for that and then.
And the second question, sorry, I had a couple of parts to it but so at the fix what are you anticipating or the contribution there. This year as it is it really still more of a 'twenty three event really and flex just because they're still collecting information on patients, making sure you get optimal outcomes in the second part of the question is you know the Pn P. Femur launch I think you said.
Is your biggest one.
Is that going to be what are the bigger drivers. This year of overall growth or are there other products as well.
Hum.
Augment that growth thanks.
Yeah. Thanks, Matt. So we do expect Apple takes to have a material contribution to the scoliosis revenue I mean more than likely will double the number of procedures that we performed in 2021 and 2022.
The registry, which we're pleased with the progress although it has certainly been hampered by a by the resurgence of the pandemic here.
But certainly going to close out the registry and then we've added commercial sides in the fourth quarter, a little probably a little ahead of pace from a commercial site Onboarding standpoint, So we feel good about where we're at with Amethyst and its contribution and obviously, we continue to say this over and over but at to fix accounts are accounts that start with that product almost universal.
We see this halo effect that creates a more and more use of the rest of our slowly platform. So whether it's from billings directly from Apple fix cases, or just the association of apathy with some of these new accounts. We do expect to have a fix is present, along with the 70 technology and all the Halo that's created there to have a material impact.
Our our scoliosis growth when he turned to P. M. P. Femur, we're still very early in that product launch for the most part we havent launched that product outside of the U S and it's already our largest product within the United States. So our trauma Linda form our largest trauma and limb deformity product in the U S. So we know we're taking share there we have more and more <unk>.
Appointment coming and we like how P. M. P femur, along with Orthotics is also creating this really nice halo effect around the entire trauma and limb deformity portfolio. So you know we see the drivers here is P. M. P femur combined with <unk> and our ex fixed products.
Oh wait it's grew in PD foot and really the legacy products being pulled through and then on the skull side, the app and fixed technology and 70, obviously, the billings from that as well as the pull through of the entire scoliosis franchise, that's kind of how we're looking at it yes, I would just add David in your earlier comments you know in 2021 almost every.
One of our product lines are 37 product lines grew by double digits and so that's one of the strengths we see in the businesses, we're not dependent on any single product line and we would expect every single product line to continue to grow in 'twenty, two and beyond as well.
Got it thanks, so much.
Thanks, Matt.
Our next question comes from Rick Wise with Stifel. Your line is open.
Good morning, gentlemen.
Nice to see the solid finish despite the challenges.
I'm going to start with set deployment.
I don't know.
Sort of blown away by that number Fred $24 million to $26 million I mean, I don't know.
The biggest number ever I appreciate that there might be some pent up demand, maybe just talk about where those tests are going.
And it would seem to me that the implications of all of those sets and expanding pipeline and recovery.
As we start to contemplate 23.
I know, you're anxious to give us 23 guidance, but.
But can you give us can you help us think through what that could mean to the to the outlook truly all things equal.
I mean.
Dramatic set.
Set up for.
For 'twenty three.
No you're absolutely right a couple of things driving that right. The first is we're a much bigger business today than we were two or three years ago and as the business continues to grow and we want to maintain that high growth rate.
More sets or needed to deliver that growth rate and so youre absolutely right. The sets deployed this year is really setting the stage for 'twenty three and beyond so that's the first comment. The second is that 70 is new to this category. So right now I'm viewing.
If we can sign a unit into a hospital that would show up in our deployed that number because to me. It's just another investment that we're making in the hospital to drive future revenue growth and so there is a small impact a couple of million dollars probably impact from that.
<unk>, which was not there previously, but listen we continue to be encouraged by.
The long list of demands for sets both domestically as well as outside of the U S, which will generate revenue in 'twenty two.
More importantly to your point out into 'twenty three as well.
This is Dave.
You always ask me these questions about how the progress of key account conversion is going it seems like every year every quarter, we have that call.
And I would just say that without giving any specifics.
I think you can say that we can say that our confidence and how that's going is reflected in the volume of new capital, we want to deploy to those types of markets and you know my comments surrounding the number of active users of our products in us categorizing or are.
Now counting those metrics give spread and me a lot of confidence to know that we if we deploy this asset these assets they'll get used I mean, there's just a lot of demand in the field right now for additional inventory based on those factors.
Alright.
Just a couple more if I could.
I'm sure I'm not thinking about this.
Uh huh.
Correctly, but.
Help me understand the the O U S sales returns so you did $5 million.
In the quarter, you had the $2 5 million I think I'm remembering in terms of returns.
Does that imply that if that hadn't happened you would what would what would be sort of normalized.
Number of have been I'm, just trying to get a sense of.
What kind of recovery, we're seeing on a normalized basis I appreciate that's not a one to one number but.
And how we think about the setup for next year.
For this year I should say 'twenty two you out.
So the $2 $7 million negative sales was in the fourth quarter of 'twenty 'twenty.
When we converted docker to our agency and so yes in looking at the fourth quarter of 2021, roughly $5 million of revenue the growth rate, obviously was impacted by that but for the full year of 'twenty. One those revenues does not does not include the $2 $7 million.
Returns so it's a more normalized basis that we're looking at looking off up for 2022.
Gotcha.
And just last from me on just a few.
Sort of flesh out some of your P&L comments.
Gross margins.
Has been sort of in the 75 to four five ish area.
How do we think about 'twenty, two and the moving pieces in and same question really for Opex.
Given some of your comments about supply chain and inflation. Thank you.
Thank you Rick.
So yes, we are seeing a little bit of inflation in pockets. We don't think that's going to impact gross margin, we anticipate offsetting that with some small slight price increases so that would be neutral on the gross margin rate. The thing that may put some pressure on the gross margin rate is we're hoping that we start selling some more.
Sets outside of the U S. We saw some of that in the second half of 'twenty, one really none of it in 2020 or the first half of 'twenty. One so as set sales continue which we did see in the second half that that puts a little pressure on the margin. We think those sets are needed outside of the.
U S to start fulfilling some of this pent up demand outside of the U S. So that will definitely put a little pressure on the gross margin rate in 'twenty two compared too.
Unusually strong gross margin in 2020, when we were not selling those set but with that being said, we think that 75% for the combined business is probably where we will be operating here in 'twenty two and.
And probably beyond for the next couple of years.
Thank you.
Our next question comes from Samuel Brodowski with tourists. Your line is open.
Alright, thanks for thanks for taking the questions.
I'll just start with you know just kind of.
Characterizing the backlog if we could you maybe give us a little more granularity.
Where should we expect that to come in in terms of business line.
And sort of the you know.
Confidence you have in that kind of what did you see in your prior prior waves. It gives you confidence that you can see that fully come back in this year.
Go ahead Fred.
Yes, so you know.
Our business our trauma business has continued to perform very very well and continue to grow the portions of the business that are impacted the most are the deformity correction and scoliosis business. So those two lines were softer in the third quarter and the fourth quarter of 2021 and again in the first quarter here.
2022, so those pent up elective surgeries, we anticipate coming back on the books starting here in March in the second quarter and through the third quarter in.
In the past, we've seen that snapback very quickly, but here domestically, we think that's going to take longer to extinguish because of the staffing shortages at the hospitals.
Outside of the U S.
Mixed bag based on which country, you're talking about but we know, particularly in the U K and South America. Many of these countries have a large pent up demand that could take up to 18 months to extinguish. So domestically. We think it's about probably two and a half a million dollars of backlog, which will see them.
Benefit of that in the second quarter in the third quarter and hopefully extinguished that by the end of the third quarter and then outside of the U S. We think it's going to be all of 2022 and into 2023 before that's fully extinguished.
Yeah, maybe just put a finer point on that is that that two and a half is that fairly evenly mixed between the deformity and scoliosis lines or is there maybe more than one direction.
No I would say its pretty evenly mixed between those two product lines.
What's important here Sam is at these again these are progressive conditions, particularly on the elective.
Scoliosis side and the limb deformity side, one could argue that the limb deformity correction like our <unk> business. For example is most affected because those would be our most most elective procedures again, none of these are elective, but they can be delayed factors. These are progressive and so these procedures are going to have to happen. We believe that hospitals are going to ulta.
Emily prioritize these really complex elective procedures and while you know this is horrible for kids ultimately it certainly provides a tailwind for us as we get into Q2 and Q3.
Great and then just shifting towards the international launches.
Or how.
How should we think about the pace of the rollout there.
Can that.
Contributing to growth in them can be pretty pretty sizeable opportunity there or anything.
Yeah. So we think that the rollout both of <unk> as well as P. M. P. Can be you know a big portion of our story as things return to normal internationally.
Both from a.
Purchase standpoint, so most markets, where we are stocking distributors have not added the P. N P or X products I'd add that in Brazil. For example, I think we have a number of some six or eight new products that are not approved yet that we expect to prove some time here in the first half of the year and that's a set stocking distributor market. So we expect those.
<unk> all to contribute to growth as our distributors get back to a normal purchase more normal purchasing habits.
And then you know, we've really prioritized our launch of <unk> as well as P. M. P in markets, where we have agencies. So we've seen a lot of success in Australia, and Canada, starting to see success in Doc region with a number of new year's yours in Germany, and Austria, and Switzerland, and so it's very early and I think if we see there.
Type of response outside of the United States that we see in the U S. This this can be a substantial tailwind to growth.
Okay. Thanks, Great question.
Our next question comes from Ryan Zimmerman with B T. I G. Your line is open.
Hey, Dave Fred Thanks for taking the questions.
Just wanted to follow up on after you fix a little bit if I could.
You know it.
I Love, Dave you could just kind of talk about some of the the scaling up of the commercial sites.
Kind of how you know how to think about that in conjunction with the registry that's ongoing.
Just kind of the benefit that that can drive.
In parallel to the registry.
Yeah. Thanks Ryan.
So.
We are continuing to be conservative within these commercial sites and in making sure that we get a look at the X rays and we in fact prove the patient we feel like the technology is too valuable long term to get bad data out there because.
You know we've lost control. This interest is extremely hot and I think we have more than give or take Ryan I think we have about 10 commercial sites.
That are trained and either scheduling app of X cases, or capable of scheduling app of X cases, we actually ask the pace of that to add a few to five let's say a quarter throughout the balance of the year.
And again I mean, there's a lot of interest there and what we've been trying to do is prioritize people based on their obviously their interest in Apple fix their willingness to do.
More than a couple of surgeries, but their willingness to really go kind of all in on the technology as we get better data as well as their willingness to.
Two.
Show more interest in some of our other products and kind of create that halo. So.
Again, we'll knock out the balance of the registry here, which will have a pretty substantial impact on revenue this year.
And then probably you would think by Q3 Q4, it would be reasonable to think that more of the surgeries happening are happening out of our commercial sides and in fact are happening out of our registry sites.
Okay. That's very helpful. Dave and then I think I heard you might've been Fred.
You added 19 sales professionals in the quarter of the year I think.
Either way Youre kind of landing around that 190, or so number of them if I'm not mistaken and correct me if I'm wrong, but just help us understand where that could be going.
Over time based on certainly the SAP deployment numbers as maybe an indicator for where sales professionals as part of the agencies can go over time, thanks for taking the questions.
Yeah. Thanks, Brian Yeah, I was I think Fred and are very pleased to see our selling organization to be aggressive in adding new personnel in what was a pretty tough year.
And you know on uncertain year, so to see even back half ads.
As well as to see demand from our selling organization for additional set I think gives us a lot of confidence as we move into 2022, you know we said this a number of times that number of sales professionals that get added on a quarterly basis is not something that we Nash our teeth over around here on a quarterly basis, but generally speaking.
We would expect that number to increase as revenue increases you know when we see higher ASP products like like Apple fix in orthotics, it's possible that that will lag slightly behind our overall growth rate.
Just because of just the efficiency that we drive within the selling organization, but in talking to our our agencies in the U S in agencies outside of the U S.
I see people willing to invest and they're asking us to invest in sets and obviously, we're hoping that they invest in their sales force and so far that's worked in and really pleased to see that kind of adding in a in a challenging environment in 2020 one.
Thank you.
Thanks Ryan.
Our next question comes from Mike Matson with Needham <unk> Company. Your line is open.
Yeah. Good morning, Thanks for taking my questions I wanted to ask about the consignment of the 70 navigation systems.
It is the intention there the systems are there to do demos and things like that they would eventually be sold or are these essentially like your other instruments, where they're just gonna be blown out to customers that are using your products and you know.
In other words, I think its something that are going to generate revenue.
Arthur Pediatrics or is it more of a tool to kind of capture market share.
Yeah.
Yes, great question.
Equipment is new to us. So we're just getting our feet wet, but we think we think that about 80% of these units will be consigned to the hospital with earn out agreements so incremental market share will come.
For us Consigning those units there and the other 20% we will actually be capital equipment sales that will show up as incremental one time sales into those hospitals. So.
We really prefer the consignment model because they benefit we can deploy some capital and we can lock up some market share.
Okay, I hope that the dollar amount.
So 26 million.
For new sets if you take out the NAV systems out of that what does that number look like for just instrument sets.
Youre willing to disclose yet.
Yeah, I think theres, probably rounding a couple of million dollars in those numbers that would be associated with the 70 consignment.
Okay, Alright, that's lower than I would've guessed, but okay and then.
The the other question I had was just given the zim be spin off that just occurred and they had an investor day and they were talking up the tether product quite a bit. So just curious what your thoughts are on that and if you expect to see any kind of changes competitively now that as a separate company.
Yeah, I don't think we expect to see well, we don't expect to see any changes competitively.
And I think given how things have gone.
With the tether, particularly from the podium and the words that we hear in surgery with surgeons I think it's only strengthened our resolve that what we have to do is capture data in a transparent and honest way and then provide that data to our customers and let them make the best decision as to which product is safest and most of.
Sector for young children, and that's why you hear us over and over talk about our resolve around making sure that we're capturing good data with patients within the inclusion criteria I think if we do that that is one it's the right thing to do.
And when we do that.
This particular customer base who's very academic.
We will respect that and ultimately that'll be the key driver for adoption of this technology long term.
Okay, Great got it thanks.
Thanks, Mike.
Our next question comes from Dave <unk> with JMP Securities. Your line is open.
Hey, good morning, guys.
You mentioned, new new Doc on boarding school beside and I.
I was wondering if you might be able to give us a little color about how many.
Of these guys are new that you're adding either a you know in 'twenty, one and anything we should expect for 'twenty two and is it.
Is it the new products, that's driving these new surgeons are him onboard.
Yeah. So we've never given specific numbers, but I guess, what I will just say is that we started this year with a goal.
Particularly on some of the key products like orthopedics and and response.
And that goal was known to the selling organization into leaders within the selling organization and we either met or exceeded that onboarding goal in 2020 one.
And you know you can imagine that was spread out through the balance of the year. It wasn't all in Q1. It wasn't all in Q4, but again, it's an indicator of of what we think we can do in 2022 based on the volume of new users combined with the fact that we will inevitably have a goal in 2022 of new users that we want to onboard there.
And I do think that it's primarily an adoption on the skull aside of the response system.
And I think I think overall, though a lot of this is an adoption of continued adoption of the company. We continue to have double and triple down on pediatric orthopedics and pediatric orthopedic health care. We continue to do the things that we feel like are critically important to the customer not just new product development, but education.
Government and research and development all of the critical things that we are doing that no. Other company does and I think that is creating a building inertia around the entire product portfolio. When you add technologies like 70, and App a six P. M. P. In <unk> that also create an even greater technology profile and create this halo those are certainly.
Drivers for adoption of our scoliosis franchise in all of our trauma products. So I think it's a combination of all those things.
Got it.
I appreciate the color on the guidance that the large backlog you see.
And the comments you made about the comps you know as we look at the back half of the year from a cadence standpoint.
Do you think 'twenty two is a year, where you might actually be up sequentially as we come out of Covid.
In the back half versus some of that seasonality, sometimes you see in the third quarter.
Yes.
I would say that we still expect our third quarter to be the strongest quarter.
Of the year.
It has been historically prior to Covid and we're hoping that we can get this thing behind us and move on to more of a normalized schedule. So strong strong third quarter and fourth quarter, maybe down just a little bit as it has been traditionally, but obviously the growth rates can be very strong given the weakness in <unk>.
'twenty one.
I'd say, the only thing that could potentially disrupt that would be how fast we can get back to not just at normalized environment. The capture backlog and to me that's still.
That's still a.
Staffing related issue and that's why we are pretty confident this is going to this is going to create a.
A tailwind for a number of quarters here not just you know a couple of months, where recapture what essentially is a backlog that it started in Q3 expanded in Q4 and expanded further in January and February of this year.
Got it maybe maybe one last quick one here you may have said this via the five and a half million fair value adjustment that was specifically from what shall we think of that as sort of a you.
Your accrued a liability that was bigger than you know assume youre going to have to pay.
Yes, so that is associated with the Abbvie fix.
System for I'm, sorry year for system sales payment.
For the full year of 2021 that actually benefited the P&L by two by $2 million I think that's more of a $5 million charge in 2022.
So it'll be a pretty big swing on the P&L.
That is all related to the IP fix and updating of the Monte Carlo modeling assumptions that go into that.
Thanks, a lot.
Thank you.
No further questions at this time I'd like to turn the call back over to David Bailey for any closing remarks.
Great. Thanks, operator, we appreciate all of your time. Thank you for the good questions and we'll look forward to talking to each one of you over the course of the next several months. Thank you.
This concludes the program you may now disconnect everyone have a great day.
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