Q4 2021 SeaSpine Holdings Corp Earnings Call And Analyst and Investor Day
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Okay.
Yeah.
Lee if you'd like to start us off.
Okay.
Hello, and thank you everyone for participating in today's presentation.
C five co CEO , Keith Valentine CFO , Jon Jaffe, our president of enabling technologies, all Standish earlier today Seaspan released financial results for the fourth quarter and year ended December 31st 2021, and beliefs as well as the presentation, whether it'll be using today.
On the Investor page to find website.
Following the presentation well open the call for your questions. So we ask that you hold them until that time.
Did that sort of like Cyprus.
Okay.
Yeah.
During this presentation, 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.
Statements other than statements of historical fact are forward looking statements.
Statements May include words, such as believe expect anticipate should 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 reflect our beliefs based on current information and speak only as of today March 11th 2022.
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 release and periodic filings with the.
C C, which are available on our corporate website, that's left out that she's fine dot com and that jumped out that said that that included the press release, we issued today and the risk factors section in the 10-K, we will file with the SEC later today.
I would like to remind everyone that the press release and slide presentation related to this call are available on the investors section of the company's website.
You find that out.
In today's presentation certain remarks will be based on non-GAAP financial measures. The company believes that non-GAAP financial measures provide important supplemental information to management and investors.
Regarding financial and business trends relating to the company's yourself and operation teams.
Third of the non-GAAP reconciliation included with that slide presentation in the investors section of the company's website and the press release issued today for a reconciliation between GAAP and non-GAAP financial measures.
With that I'd now like to try to presentation over to Keith Valentine.
Thank you Lee and thank you all for joining US today. It's interesting this is not our usual.
Closure to the year, but this is exciting for everyone I'm speaking for John I'm speaking for both speaking for the entire organization, we're going to win.
Launching our new mission and vision and mission and vision has been a series of execution and a series of opportunities for us really to demonstrate how we're operating now and we're going to explain that throughout today, but I think it's an extremely important shift in how we now.
Execute into the you are in a much more meaningful way.
And so as we talk about this transformation and the solutions that we now have at every level. This has been a very.
And very deliberate pathway innovation is.
It's been one that we've worked on.
Have given indications for how we're going to expand our product portfolio, but what's really exciting is that as we added and are adding the enabling technologies of 70. We are now in a place to be addressing the needs in the or with our surgeon partners in a way we've never.
<unk> been able to do before it's truly about upgrading it to know everything that that is a valuable is now and youre going to see as we map out the product portfolio and we map out our pathway to profitability that we are able to do this in 2022 and beyond and we have the poor.
For you to execute this vision.
So as we move through this you've seen this before on how we envision navigation and that entire semneby platform really enabling all the investments that we've had over the past few years, but it really now has a complete solution.
The products that are in alpha as we speak moving into full launch this year our presence in the O. R has now changed its changed significantly and as we say we are operating in the now not only 70 and now because it's so active and seamless and how it integrates in EUR, but all of them assist.
<unk> now can come together to really transform and create a better surgical procedure that is more time efficient and best for the patient.
Yeah.
So as we kind of walk through some of the portfolio and how it integrates. This is a great example, this is how quickly we've been able to integrate more the key platforms of the organization, obviously everyone's very familiar with how important pedicle screw fixation is to the foundation of good fusion surgery.
This is one of the one of the early ways, we were able to integrate seamlessly and I think you know 70 as an agnostic system.
We applaud the fact that it can be used on <unk>.
With many different implant systems for the best of the patients. However, we have the most seamless way to integrate it and this is the kind of energy that we now have in the O R and as we speak of that energy and we speak of the synergy. This is another great Testament to how we invested in science, we invested in soup.
This technology and now you can see the progression of where we're going in the inner body portfolio. The interbody portfolio. Obviously, the core foundation for years has been narrow mentawais that was advanced to reef topography, which really created a different more integrating way to get stability fast and then it.
Of course, now we're launching our booth numerous launches in 2020 to go into full launch will be wave form and we form has taken off beautifully and alpha with great demand, it's complementary to where now mentally technology using using the same instruments and the ability to make the choices you need to make depending on the pace.
Well, depending on what particular material science, a particular surgeon enjoys using.
Speaking also.
Partnership and in synergies. This is a great one launched a new.
Interior cleaning system that obviously works really well with our inner body portfolio, but most importantly, it's the science and our investment in science and us being the only company that has consistently on the podium now talking about surface technology talking about ortho biologics and the meeting of the most cash.
Cost effective, but highly efficacious DBM in the business.
Yeah.
Another Great example of how things really came together this year in 2021, and a great opportunity for us in 2022, Northstar posterior cervical was a very important launch for US I think we've talked numerous times about how old the two legacy products that we had proposed jewelry or cervical fusion work.
But this particular system gave us even greater capabilities. It gave us the ability to address even deformities and the cervical spine, but on top of that our with our biologics group has a fantastic complement to it the north surface that fusion system, which uses fantastic and very effective DBM pellets to give.
Better fusion result in the post your spine and then on top of this we also have 70 that integrate so well. These procedures are difficult it's difficult because they're small amounts of bound to put a pedicle screw it when put into bone scoop and the important part to this is that debt 70 seamlessly integrates with <unk>.
Orientation to give a degree of ease to use less radiation in the O R and to provide a better overall procedure very important marriage and partnership.
Yeah.
Okay.
So I love this slide because I think that we have talked much about our investment innovation, we have talked a great deal about how we have to transform our product line, but you have to be accountable to metrics and this is a metric that I'm very proud of that metric is we know from Q4 'twenty one over 80.
Percentage of our revenues coming from new products, and we see that building and moving on to 90% or greater in the next year to two years ortho biologic speaks to the strength of that product portfolio. It's been the reason that the number two player in the market place is because it's had.
Hey, a deep user base, but the new products are continuing to expand and grow in there now from a Q4 'twenty one perspective over 40% are coming from new product revenue. This is a testament to the investments that we've made and the kind of growth, we're seeing in new product and the important.
Here too the other part of the return on investment here is this gives us the ability to attract.
<unk> better distribution partners and John will cover a good deal of how we're approaching that and more of our excitement is in that arena.
Yeah.
Okay.
So before I turn things over to John and then a bit in Boe.
I thought it would be important for us to kind of take a quick 2021 highlights at a glance.
Clearly there has been challenges throughout 2021, thanks to Covid I mean, you look at the disclosure statement when we kick things off.
Don't think anyone would have thought that you had mentioned COVID-19 three times in the disclosure statement, but it is clearly impacted the direction and challenges in our in our business and this was exasperated by the fact that we had we had also challenges in hospital beyond Covid that also were around staffing staffing.
Was tight and only became tighter because of the challenges that COVID-19 presented but with that we still had record revenue of $191 5 million.
The year over year growth was 24% considering the different fits and starts that we had throughout the year. Thanks to COVID-19 in different areas of the country shutting down or at least limiting elective surgery. This is a great result, and in that process. We still hit 16 product launches and that's what we're so excited about for 2022 and 2023 it will be.
Accountable to that return on investment and how we see new products continue to gain momentum revenue and interestingly enough. When you compare this back to 2019, two systems and products used per procedure, which we feel is a very important way we continue to get further leverage in.
And again, if we own the whole procedure and you are this number continues to rise I think it's important to look back on 2021 has some very important milestones happened with of course, the 70 surgical acquisition, which just to remind everyone that closed in may of 2021 and since that closure 70.
<unk> units placed post aggregate acquisition and I think most importantly, we had message that we want to not only take advantage of capital equipment purchases by hospitals, but it's important for us to gain market share in the O R or market share at all kind of accounts by earn out arrangements and we are.
We are now feeling that momentum there is there is a number of opportunities.
We are in the funnel.
We'll continue to see that percentage as a total grow now that $6 7 million of capital sales revenue, which on top of that which we love is $1 2 million in the future service revenue just just in regards to that.
We're also really proud to be partnered with.
Industry leader in Pediatrics. They are also a company who pediatrics.
He wants to ensure that they are the solution in the pediatric or and we have a five year exclusive distribution agreement with ortho pediatrics and we're really proud of how theyre thinking about advancing the 70 technology, which is good for not only patient care, but it's good for also how theyre going to gain market share in there.
Pediatric accounts, but with that comes a big investment. We can also made up and have all these procedural solutions and your if we don't have the trades, we don't have all of the implants and instruments necessary to be successful. Additionally, probably the number one question whenever we're talking to a large distributor how are you going to invest.
To me, what they're really saying there is how have you been invest in the inventory bill and I have to be comfortable to promote this product wholeheartedly into the or and so with that ending cash of just over $83 million, we still have access to our $30 million.
Line of credit and right now of course, no outstanding debt.
Okay.
So again as we continue down the pathway and I turn this over to John I really want to stress again that this is a transformational time for the organization. We are we are reapplying restating and driving forward, a new mission and vision for the company, we're holding everyone in the organization accountable to how we think.
We're going to gain greater advantage in E O arm and we're going to do this by obviously doubling down on growth, but youre getting youre going to see us, creating a different environment that seamless with our with our surgeon partners, but even more importantly, our hospital customer is going to be very excited about how we.
Transform their surgical solutions in the or and with that I'll turn it over to John .
Okay.
Hmm.
Okay.
Thanks Keith.
Yeah.
For 2021 achievements indicate throughout the uncertainty of Covid, we steadfastly invested for growth and scale and relentlessly focused on surgeons patients.
Patients payers and investors.
While keeping a close eye on maintaining a strong liquidity position.
For the past few years Covid undoubtedly had an adverse impact on our ability to achieve revenue targets and a further the operating leverage gains we achieved prior to the pandemic.
But as we move past the pandemic phase of Covid, We believe we've taken the right steps necessary to accelerate our pattern of market share, taking and to regain momentum in generating meaningful operating leverage across many parts of the organization in the P&L.
So how does our past execution and investment translate to the future.
The commitment to invest for growth and scale has always been a core strategy for <unk> and it has become an increasingly focus point for the investment community. So we want to share with you today, the key components of our long term operational and financial outlook.
It starts with deepening and expanding customer relationships and growing spinal implants revenue more than four to five times faster than the market.
We plan to achieve that through a focus on continuing to offer best in class spinal implants, and ortho biologics products.
The outcome of nearly seven years of product development focus and execution that has translated into more than 50, new products and line extensions launched.
Leveraging an enabling technology platform that is not only the safest and most efficient on the market, but one that allows us to deliver long term revenue commitments through the use of multi year capital efficient brand arrangements.
Further increasing revenue per surgery through greater participation and complex deformity procedures and increasing the number of seats buying products and systems used per procedure.
Delivering the best customer service to our distributor partners that is expected from a nimble pure play spine company.
And utilizing our experienced strategic accounts team to reach every major GPO and numerous ideas in the U S.
We also expect to realize benefits from the targeted initiatives. We highlighted on this slide some of which are already underway to generate sustained revenue growth and significant operating leverage on our path to profitability as measured by adjusted EBITDA.
So let's dive into more specifics on these initiatives.
Starting with cost of goods sold we anticipate expanding gross margin by more than 500 basis points by 2024 to nearly 70% through a variety of means including lower unit costs.
For our internally manufactured or the biologics products with increasing production volumes relative to the high fixed cost of our Irvine plant.
We also expect to launch our next generation, particularly DBM product line in 2022 with estimated 20% to 25% lower cost to manufacture compared to our third Gen DBM product lines.
We plan to generate more meaningful gross margin leverage from our U S. Spinal implants product line in the future through a combination of favorable sales mix of higher gross margin products such as <unk>.
From our recent efforts to lower manufacturing costs for our nano mentally franchise, which comprises more than 10% of our revenue.
Greater set utilization and inventory efficiencies from Onboarding, new exclusive and collaborative distributor partners that would turn our spinal implants, that's more efficiently.
And from the benefits of our recent upgrades implant base and inventory planning and management software, commonly used to meet with a PD space and can also be utilized by our spinal implants distributor partners.
And we've invested more than $1 million on a significant upgrade which went live in February and we're already seeing the benefits.
We're going to reduce complexity in the organization and decrease sustaining engineering and quality costs through a more aggressive discontinuation of legacy spinal implant systems with more than 15 systems Sunset date, and 20 more systems slated to be discontinued by the end of 2024 and.
We're going to further reduce organizational complexity and increase our focus on the U S spinal implant business by exiting the low gross margin European spinal implants market in 2022, which is expected to drive more than 60 basis points of adjusted gross margin improvement in 2023.
So turning to R&D, we are committed long term to investing in product development and clinical data at the historic rate of 9% to 10% of total revenue.
For the near term, though we're accelerating our planned investment in new and next generation enhancements for the 70 surgical flash technology platform, which we expect to drive R&D expense above 12% of total revenue for 2022 and 2023.
We firmly believe the return on this investment in terms of higher sustained revenue growth and benefits of scale justifies the short term trade off.
And with the most intensive effort and expense for 70 expected to be completed by the end of 2023, we expect longer term R&D spend to decrease back to 10% of revenue by 2024 more in line with historic rates.
And now I'll turn the presentation over to Bo who can provide more color on <unk> R&D priorities.
Thanks, very much John and thanks to everyone for joining today, our vision is clear our team is laser focused on providing real time clinically relevant information to our surgeons and the patients they serve.
If we look at the flash system itself. It all starts with technical innovation, we've leveraged our strong balance sheet and our appetite for innovation and have made an aggressive investments into the flash system. This is positively impacting our surgical workflows, we're reducing extensively radiation in the operating room.
All while allowing our surgeons to focus on the now to focus on their patients you can see on the right hand side here as a quick refresher the brains of the 70 system. We have several camera brakes on in that linear imaging head, which all can be controlled from the sterile field to do.
So let's explore several of these innovations that allow our surgeons to operate in the now.
Starting with the core technology, the ability to instantaneously three dimensional map patient's anatomy flashed registration is real time imaging, we've combined our powerful three D imaging hardware with proprietary intelligence software that allows our surgeons to register patients and less than 30 seconds talking about staying in.
Now compared to our competitors, who can take tens of minutes. This allows our surgeons to maintain focus on their surgical objectives and avoid cumbersome workflows.
Looking at specific features.
Those cameras I mentioned that are inside of that surgical light that the surgeon can control Sterling here, we're showing them and a great scale well, we can overlay information on top of the patient's anatomy.
I'm here as an example, if a patient is moved this is probably the most emotional component of any surgical procedure because a surgeon has lost registration accuracy.
They are now challenged with that difficult decision of do I spend tens of minutes expose my patients traditional radiation or do I abandon navigation altogether and used for us to pull your free.
We saw this as an opportunity leveraging the machine vision system, we can instantaneously retake a three D image of that patient's anatomy, usually only visible light and instantaneously correct for that new position of the patient's anatomy no radiation all within an Oklahoma only a couple of seconds and you can do this continuously.
Throughout the procedure navigation on demand.
Building further here's a new feature we've released called our re slicer. This is showing our attention to detail when it comes to software and a torturous spine such as here you can see the anatomy be realigned or how is this occurring we provide the ability for real time re slicing of the patient's anatomy such that the surgeon.
You can see true axial views true sagittal views. Unlike in this image, where it's keeps using what we're looking at and axial may look like a sagittal and the opposite is true all controlled by the surgeon in real time, so they can operate in Nevada.
The last feature that we're going to touch upon is our flash trajectory here. We can now see those video feeds on the bottom and in the procedure. These are real time videos, giving us low to medium X support type functionality.
We can see these videos and they can in fact, the expanded into the operating.
We can overlay digital information, creating that augmented reality experience for a surgeon in this scenario, we're getting real time implant sizing along with a virtual keywords such that they can now use a tap or a screwdriver without attractive rate and follow that for the accumulation previously used by April .
Finishing up with the unite enabling technologies group.
Group, let's talk about the future, where we are focusing on five areas of investment in five areas of products seamless integration of our spinal implants, ortho biologics and enabling technologies and keeps showed a couple of slides of where we've already achieved full integration of our merit implant sets along with the ability to.
New products, such as RF fusion.
We've also invested aggressively into new camera technology camera technology that we in fact are creating from the ground up and that we will own as proprietary information. This will allow new features including new visions of the surgical view higher data throughput for innovation with our intelligent software.
We're also expanding with our real time patient understanding to account for any correction or where we are correcting the patient in an operating room inclusive of preoperative planning and finally, which is really exciting truly excited we've developed these cornerstones of technologies for almost the last decade, they've now been accelerated by the overall spine team.
And for the first time, we're going to be deploying this technology outside of the operating into different departments within the hospital, creating completely new revenue streams for the organization. Thanks very much for your attention and I'll pass it back over to John .
Thanks, Bob.
Another critical strategic initiative for <unk> is implementing a direct sales strategy in the U S.
We're targeting to add at least five direct sales reps in the second half of this year and ultimately increase that to 30 reps by the end of 2024.
We're not planning on a broad based strategy to buy our distributors, but rather a targeted approach the higher end of the white space, where we haven't been successful in recruiting exclusive and growth oriented distributions.
Our expectation is to generate at least 25% of our U S spinal implant revenue and as much as 10% of our U S. Ortho biologics revenue minus direct sales organization as we exit 2024.
Okay.
So while the initial fixed commission arrangements that often come with hiring a direct sales rep will likely be dilutive to commission rates in 2023, we see an opportunity to extract 150 basis points of commission leverage by 2024 compared to 2019, the last year that commission rates Werent <unk>.
<unk> by Covid.
And with angled commission expense totaling more than $54 million in 2021, there is clearly a very large opportunity for <unk>.
The last initiative I'd like to cover is our recent decision to exit the spinal implants market in Europe , which has historically comprised about 3% of our total revenue.
Given our relatively small market share in Europe , coupled with a significantly higher cost to comply with the recently enacted MTR regulations, we simply don't have enough scale to overcome this higher recurring cost burden.
So what was once a relatively low gross margin, but modestly profitable business, we're operating at a loss for the foreseeable future for us.
After making the difficult decision to exit the EU spinal implants market, we gave our distributor partners an opportunity to place final stocking orders with which we can ship to them through September 2022.
So we received those final stocking orders placed corresponding periods with our suppliers and we expect to generate between $12 million to $13 million of revenue in the third quarter of this year for those orders.
After that will no longer generate any revenue from the sale of spinal implants in the European market.
So in addition to avoiding recurring operating losses, we expect to benefit from reducing the organizational complexity that came with managing the subscale business and from increasing focus on our U S business, which comprises 90% of our revenue.
Now keep in mind. This decision was limited to the EU spinal implants market. So we do not expect it to impact sales of our ortho biologics for enabling technologies in Europe .
Sales of any of our products from our Latin America Asia Pacific markets.
So the takeaway from all this is that we are consciously trading off some short term financial dilution from the acceleration of seventies development programs and the investment in the direct sales force will return for anticipated higher long term revenue growth and meaningful P&L operating leverage.
To recap some of these operational efficiencies and other highlights in 2022, we expect to generate between 226 and $230 million of revenue, which reflects 18% to 20% growth over 2021 and includes the $12 million to $13 million of revenue from the final EU spinal implant stocking orders.
For the first quarter of this year, we expect to report between 48, and a half and $49 $5 million of total revenue.
And despite a very very slow start to the quarter, particularly throughout the entire month of January because of the adverse impacts of coma Kron on hospital capacity and staffing capacity in bed capacity.
We still expect to report a solid quarter of growth ranging from 16% to 18%.
And even with the negative impact of the bolus of low gross margin revenue in the third quarter associated with the EU spinal implant stocking orders, we still anticipate delivering 150 to 200 basis points of adjusted gross margin expansion in 2022.
We also anticipate reducing our adjusted EBITDA loss by 15% to 20% compared to 2021 through a combination of more efficient revenue growth fueled by the onboarding of additional more exclusive and high quality distributors.
From a robust cadence of transform the product launches that Keith talked about earlier and from higher adjusted gross margins.
And consistent with amounts spent in 2021, we plan to once again invest more than $40 million of growth capital in 2022, and additional inventory and spinal implant sets needed to support the launch of more than 15, new products and line extensions this year and to enable long term growth.
We are on track to extend and expand our $30 million credit facility for another three years by the end of April as we demonstrated in the past. This facility provides real liquidity that extends our cash runway.
Longer term, we expect to generate revenue growth in the mid to high teens over each of the next three years, which should allow us to achieve adjusted EBITDA breakeven at an annualized revenue run rate of $300 million to $320 million as we exit 2024.
We expect to substantially reduce our free cash flow burn by more than 50% by 2024 and to Opportunistically raise more growth capital in the future to maintain a minimum two year liquidity runway.
But with the anticipated long term extension of our credit facility, we do not foresee the need to raise growth capital in Italy, we intend to use that credit facility in the near term to extend our liquidity runway, which allow us to wait until much later in the year before we have to approach the capital markets.
I'm really excited about this new path forward that we've mapped out today and I know that Keith and bow in the entire six by organization share the enthusiasm and we all look forward to charting our progress as we deliver on these short and long term objectives. So now I'll turn the call back over to Keith for closing comments.
Okay.
Okay.
Okay.
So in closing I hope everyone has been able to get a glimpse of how the mission and vision has changed for the organization, we love kind of our new direction.
Play on this that it's C D on because we are uniquely transforming the or we have the ability now to not only have deeper penetration in partnership in the sales field, but most importantly to really give our surgeon and hospital partners of different confidence on how they can deliver outcomes for their patients.
And the beauty to all of this coming together is we are doing it now so with that I would like to turn it over to questions.
Wonderful I see that our net O'brien has a question if you'd like to and yourself and asked that.
Sure. So you guys are missing.
We can.
Right.
Good morning, and thanks for taking my questions.
I guess Keith.
We've done this before on the flip from distributor to direct I'm, not saying Youre doing next year I hear that you're not but.
Just doing some really quick math.
This 25% number by the end of 2004.
Which seem like about half of the growth or maybe a little less than half of the growth youre expecting over the next three years three and a half years is really going to come from this.
These white spaces in direct reps. So first of all of those numbers somewhat accurate and then secondly, just confidence in the ability to plug in direct reps into these these geographies successfully keep.
And then and then grow their businesses.
Yeah, you bet.
I think you're thinking about it the right way Matt.
There will be a time lag for US you bring aboard direct reps until they kind of get their comfort with the feet on the streets, they get their comfort with getting hospital contracting and everything else resolved, but yes, we do view it that way that especially because we're looking at this and white space environments.
It will be areas that we don't have any store sales. If you will and so this will all be new store sales and the ability to really get effective leverage in those accounts now.
That said, we feel comfortable that this shift in strategy also comes because of.
Significant leadership gains that we now have in our sales of course.
<unk> that have also done this in other organizations and I think that's the key the key is is that we are going deeper with our distributor partners without a doubt. So this is not an affront to them. This is really our opportunity to no longer accept white space as a as an excuse but theres not good distribution, but instead.
Invest in that space and invest in a direct which gives us greater leverage points down the road as you know is baas kind of identified.
Youre thinking about the right way, you're thinking about the same way, we arent that the growth strategy, especially as we start getting.
Significant growth in implant revenue upon previous years of growth that that has to be done by getting market share in white space with direct sales folks.
Got it.
And then just two more from me if that's okay. The first one is just on 70 with those 17 placements, where all of those into existing seaspan accounts or two where you're getting into some newer countries hadn't been in before and can you just talk a little bit about what youre seeing as far as demand for that that system as you folded it in as you're adding these new features.
Yes, I can address the first part of the question so no they're not into existing <unk> accounts and that's the great thing is the combination of <unk> 70, and <unk> fine.
The introduction to new accounts is working both ways right. We're getting 70 into accounts, where we've got a strong relationship and starting to place units there, but 70 has its own capital sales force and they're penetrating into accounts, where <unk> had no presence and then what were tracking to is we're seeing ultimately non contractual revenue pulp.
And those accounts, where we had no ortho biologics or spinal implants presence, but 170 has a foothold in the door now that we're combined together the natural introduction takes place and we're starting to see revenue pull through simply because 70 gets our foot in the door. So now we can approach accounts.
Historically like we've done right with spinal implants will lead with or with the biologics now we can leave with enabling technologies and we're seeing ourselves getting pulled through the door and a greater opportunity beyond just seven days. So it's really working all three ways.
Okay. Thanks for that and last one for you Bob just on the gross margin side you know a.
A lot of companies will give these projections.
And you know to.
Feel comfortable with.
Looking out four years, it's difficult right now here's what's difficult so, especially in this inflationary environment.
Just the confidence level or maybe some of the wiggle room, you've built and to get to that 500 basis point plus improvement in gross margin.
Yes, there is certainly a risk of increasing commodity prices right titanium obviously is one of the larger ones repurchase. So we've accounted for some risk in that because of the inflationary environment, but there's a lot of opportunity Matt on just simply sales mix right with the growth rate of spinal implants and seeing what those gross margins are.
Today.
The lower cost of wave form.
It's pretty meaningful compared to the nano mentally and franchise, but we've also been able to reduce the unit cost of the nano meddling processing and that's 10% of our revenue. So I think theres a lot of opportunity just in the spinal implants portfolio because most of the historic gross margin leverages come from ortho biologics, but with spinal implants between wave form sales.
Mix lowering the nano meddling processing cost and then there is big investment that we made in implant base.
The ability to manage client inventory give our distributors visibility into the inventory track, how they're utilizing those sets where it's a whole another level of visibility that not only are our asset management team can see but our distributors can see and it just it really helps us look at how we're going to turn those assets more efficiently.
<unk> reduced the inventory.
That gets unaccounted for in the field because you can imagine there is a large amount of field.
Inventory quantities and just looking at how we launch products right. Some of the scrap we saw in 2021 was from redesign of implants, and that's going to happen, but I think we've got a better handle on how to manage that better against revenue expectations in the future. So.
Yes, there is inflationary risk on the gross margin, but there are so many different new levers we can pull on the spinal implant side that frankly wasn't even available to us two years ago or a year ago.
Got it very helpful. Thank you.
Thanks, Matt.
And we have a question from Matthew Blackman, now historically I mean yourself.
Good morning, Good afternoon, Keith and John Thanks for taking my questions can you hear me Okay. A person yes, we can thanks for joining us.
Thanks for having us.
A couple of 70 questions and then maybe a question on the cash runway.
Let's start off on <unk>, I guess I'm, a little surprised that only three systems replaced on earn outs, but how does that line up with with your expectations and how should that shape, how we should be thinking about modeling a full year of 70 capital sales in 2020 to maybe start there.
Yeah, No I think it's a fair question, but it's one that we messaged throughout last year and that Theres a couple of things that go on to good.
Earn outs on the map I mean first of all it is an integration with our implant and biologic sales force they they have to be comfortable.
Selling that opportunity. It's also a opportunity for the 70 capital equipment sales force to have a new kind of.
You kind of tool in their toolbox and so we we had message that more and more of this will happen, especially as we get our legs under us and understand the different options. There are to do an earn out now keep in mind.
There are there are a great deal of hospitals out there that are excited about earn outs. There is also a great deal of hospitals that unexcited because they felt they were hostage with some of our larger competitors, who had very large earn outs.
Hold on to these hospitals and so some hospitals just insist that is better for them to either lease something or it's better for them to buy it outright and so again.
The ultimate mission for US is placements and don't get US wrong, we love the earn out equation, we love the ability to know that we're going to have a market share shift but at the same time. The most important thing is getting this into the or integrating it into the or and really changing the way in the workflow of how a surgeon can.
Help their patients.
That makes sense I appreciate that and then.
And a key for you or Bo.
The types of cases, Youre seeing 17 in Houston.
And are you seeing I'll call it sort of workflow and outcome benefits that you've talked about.
Are those playing out in cases like shorter procedure times lower blood loss shorter hospital stays the same.
Out of way to frame.
There were 70, how 70 is being used in service instead of a first initial accounts and then one follow up for Jonathan.
So I'll, let I'll, let Bob address that because there is some interesting data that continues to be presented and shared and he is really the expert on ensuring that.
Thanks for the question, Matt. So if we look at the types of cases, we are a broad spectrum of spine system. So we support everything from lumbar procedures as to AI.
Guidance, we really knock it out of the park when it comes to cervical, especially with cervical meeting with our Northstar on platform. So we are broad broad spectrum. We're also now into our beta phase of the PERC module. So that was the last type of procedure that we are working on towards full commercial launch and the alpha and beta is gone.
Has gone extremely well when you think of outputs. This is where we really start to differentiate the technology versus our competitors. In fact, we had a publication published in the journal of spine.
Through an Australian study that compared our technology.
To an incumbent technology, bringing lab zim combination and we reduced ratings intraoperative radiation by over 95% that is a massive amount of radiation savings.
Building upon that we are in the current process of a journal submission. We're in a complex deformity center and Driscoll Children's hospital in Texas, we've reduced the average cases, thereby $63 six minutes. So think of that think of the last time, you've heard of and its just a technology reducing that amount of workflow typically are.
Competitive technologies are adding 30 to 60 minutes and were reducing it by that much and similarly, we're reducing blood flow that publication, where expected to be released to the market and the full findings later this year.
Great. That's really helpful. And then final question for me appreciate all the questions.
John I, yet again I appreciate your comments about cash runway, you're extending the credit facility for three years is there any opportunity to expand it that I guess really what I'm getting at is you know there may be a need to access capital markets, but other options or.
Our non dilutive options or opportunities that we should be thinking about.
Yeah, and part of the extension I think I mentioned in the presentation is we're looking to expand it as well because we did have a $10 million accordion feature on that credit facility and we're looking to restore that as part of this long term renewal.
And we're also working with Wells Fargo to increase our borrowing base.
Through higher borrowing capacity on <unk>, including international and some of our inventory accounts. So yes, we're definitely pursuing expanding our credit facility because as we've grown we think we can quickly grow into that higher capacity.
Capacity as we have it up to $40 million at one point okay.
Okay. Thank you so much I appreciate it.
And I see we have a question from Kyle Rhodes TGF beta meet yourself.
Great. Thank you for taking the question.
So I just wanted to follow up just a little bit.
On <unk> I appreciate the revenue metrics you gave for 'twenty one.
Wondering if you could just help us understand how we should think about that growth trajectory into 'twenty, two and maybe how you think about that progressing as you build out the direct sales team and just over the terms of the long range plan.
Yeah, I think for us, it's going to be a balance.
Of the capital sales revenue, but also placing the units under earn outs right, particularly in the U S and that capital sales revenue can come in the form of just the straight up capital sale or what was kind of dubbed a reverse earn out where accounts Kenneth purchased unit upfront and returns for.
Rebates down the road, but it requires them to actually increased their purchases of our spinal implants and ortho biologics to earn those rebates. So we really want to have a balance depending.
Depending upon what the hospital needs are so we'd expect to see the capital sales revenue grow as we penetrate deeper into the market.
But his bow and Keith.
Said many times is it.
We placed most of those units under an earn out economically that's the best opportunity for us to get new market share and also retain that new market share.
Because something Bose pointed out in the past is if you've got a three year earn out agreement with an institution, that's usually going to crossover a GPO contract extension or a local contract you've got with that group. So not only does it get you in the door, but it keeps you in the door. So we're still looking for a balance of higher capital sales revenue, whether it's a stray.
Capital sale or this reverse earn out where they can get rebates through increasing purchases our spinal implants ortho biologics.
Or even the original earn out we contemplated where we place the unit in a capital efficient manner in return for a fixed cutback commitment over a longer period of time to either starting to using our ortho biologics and spinal implants to get new store sales so to speak or above a baseline that is historically purchased so that we know that we're getting growth in return for that that free placement.
Okay. So I guess is it fair to say that that the contribution from some of those earn outs. That's included in your 2022 guidance when you talk about spinal implants exceeding 17%.
Yes.
Okay, Great and then.
Obviously the company has been prolific from a product development standpoint, you've talked about rolling out in additional I think it is at 15, new products and line extensions this year.
At the same time, you're also talking about rationalizing some products as well just help us understand how much of these are really filling white spaces or gaps in the market. When you talk about new product launches I'm just trying to understand you filled a lot of major gaps in the last several years just how much more is there to develop moving forward.
Yeah, I think there's a couple of different ways to look at it. So some of it you're right has been gaps in our portfolio in those gaps may have been from from products that are older.
We've messaged that one of our.
Our last larger products as to do partial or do people plasty and not for people to actually I'm, sorry, but typical body replacement.
And the products that are associated to that which are important to trauma.
So I would I would view those as more GAAP oriented the other products, though are really how you round out being a procedural company right. So.
None of us want only our interbody and not our pedicle screw.
Certainly want inner body with the biologic with pedicle screw for example, and then you know all of that coming together in a seamless way and better workflow with 70. So I think it really depends on what product we talked about whether it's truly a gap filler or its just an important part of completing the procedural solution.
Yeah.
Okay that makes sense. Thank you very much for taking my questions.
You bet.
Alright. Thank you we have a question from Ryan Zimmerman please limit yourself.
Hi, Good morning can you hear me okay.
Okay, and thanks for joining us drive.
It's great to be here. Thank you. So just on the P&L opportunities John that you laid out I mean.
I guess as I think about the 500 basis points, how does that kind of play out over the next few years and what do you see as maybe lower hanging fruit and easier to achieve in and what's maybe a longer term project.
The lower hanging fruit is the cost reductions, we talked about right nano meddling as 10% of total company revenue.
And now having a second source supplier and the ability to reduce the unit cost I think goes a long way in the short term as the low hanging fruit because we've already achieved those savings.
We go to wave four and full commercial launch right. The three D printing process, it's less costly than banana mentally process. So as we launch those three D printed implants, right and they're all expected to go into full commercial launch this year. The revenue pickup we get from full commercial launch given how it's contributed to revenue and just the alpha launch.
At that lower cost of manufacturing I think gives us the low hanging fruit in the near term.
Longer term, it's leveraging the investment in implant base and more.
More collaborative distributors, who understand the value of asset management, and and are willing to work with us to utilize those assets more efficiently and focus more on managing field inventory that we get the benefit from with greater visibility through implant base, but it's something we've got our supply chain and commercial operations teams really focus.
On.
Some with new leadership in supply chain and commercial operations in the last few years precede the asset management language right. They come from companies with long experience in dealing with SaaS utilization and tracking them and Thats something were putting a lot more emphasis on and as Keith said a lot more accountability on four.
Excess and obsolete inventory reserves field inventory scrap so we're really putting a lot more emphasis on accountability on it because we have the tools and the experienced resources within <unk> to really tackle that head on and where we haven't had that in the past.
Okay, and so just to just to put a finer point on that so 150 basis points. This year, maybe 150 to 200 basis points in subsequent years in 'twenty three 'twenty four is like does that assume kind of the cadence for margin expansion over the next three years, Yeah, I think it'll be linear.
Like that because we're going to see benefits.
Benefits from each of those different legs on the stool from lower manufacturing costs better inventory management sales mix. So, yes, I think it looks linear like that.
Okay, and then a follow up from Kyle earlier question, Keith you talked a little bit about kind of the contribution from capital sales.
If we if we think about the new absent the new Rep contribution.
The growth profile of the company for 2022 and beyond what's the composition of growth looked like in the legacy kind of ortho biologics and spinal implant business relative to the faster growth coming out of capital sales.
Yes.
Think about I think we've kind of mentioned the ortho biologics still has very good energy. There is no question that we have seen additional market share gains on the ortho biologic side, despite ortho biologics growing at a lesser rate than typical spinal implants are in the marketplace, but we've seen energy thanks to.
DBM being a strong replacement for the higher and more expensive cell lines right. So that we see that as a continued positive I mean, we'll be we'll be very happy with with high single digit low double digit growth on the ortho biologic side, it will depend from quarter to quarter.
But we still see that product portfolio, having strength I mean, a perfect example is we continue to offer new products, we talked about one new product coming down the pike on the BPM side, we're offering appellate in there.
The cervical spine.
Part of OCG. So it's there's a number of opportunities for them also to expand the product line, but just gained.
Gaining market share from cells gives us great confidence that evenly through 2024, we will see we will see strong growth on the ortho biologic side.
Okay.
That's it for me thanks for taking the questions guys you bet Brian .
Please email on the line with a question and keeping a neat yourself. Please.
Yeah.
Okay.
Hi can you guys hear me okay.
Yeah. Thanks, Okay.
Okay, sorry about that so first one I just wanted to ask on.
The comment you had made on expanding 70.
Beyond the hour I just wanted to understand what that means should we think about that is at 70 being used in other anatomies or end users in the hospital outside of surgery.
Thanks, Thanks for the question Samuel So I think the biggest takeaway.
Is moving the technology outside of the operating.
This is going to up open up both new procedure types, new anatomy and different departments in the hospital. So it's actually both.
How should we think that think about that and you know sort of relating to the to the broader implant strategy can you just kind of elaborate on.
Yeah, I think probably the way, except where that should go.
Yeah, I think the way you should you should kind of capture it is the wood Bose referring to is really the investments we're making in the technology that have applications for obviously, finding cranial which is what we largely sell now we are going to also make available and other specialties.
We will make decisions at that time as we move to Alpha beta whether it's best to seek partnership whether it's best for us to be at the at the forefront of driving it but.
It goes along with our strategy and I think that the higher level of care that the team in Toronto thinks about and that is it is it agnostic system, but it also has broad application and we feel strongly that that broad application is more meaningful.
Even outside of spine and.
But as we as we see those products get through the FDA process as we see them get into Alpha will of course share more information, but right now the focus is on advancing technology, obviously for for spine and cranial and then if that technology as one of their applications to also to also thoughtfully.
Pursue those.
That's helpful. Thanks, and then on.
On the percutaneous modules can you give us an update on where that is in terms of the commercial rollout. How are we how should we think about units being deployed going forward.
Yeah, I think I can take I can take this one.
Samuel So we completed our alpha just at the end of calendar 'twenty one.
We have now been in beta for just about a month and we are on track for full commercial release in early summer. So we have to go through the standard elements as required by data getting a cross state specific number of hospitals and in a specific number of circumstance, but right now everything is on track for that full commercial launch in early summer.
Sure.
And are you seeing any accounts, maybe delay either placement our approaches in the system.
Anticipation of a percutaneous module.
We're not we're seeing whereas the marketing opportunity because we can now fill that navigation.
That's all for me thanks, guys.
We have a question from Jeff Cohen.
If you could on yourself.
Thanks, and thanks for taking the question. So I guess I wanted to firstly, John if you could comment on.
On Capex and inventory and shifts that we should anticipate in addition to the on the slides we presented.
Yes, I think it's going to be very similar Jeff.
More than $40 million investment in spinal implants inventory and Capex and that was pretty evenly split in 2021, it was around $20 million each youll see a bit more of a shift.
Even though the total number is going to be about the same I think you'll see a bit of a shift more towards inventory versus capex, because we deployed a lot of <unk> line of products in 2021, and we've got more going to full commercial launch this year.
Particularly the way for our Mariner adult deformity, so you'll still see a healthy amount of capex for the steps, we're going to build but given the growth expectations I think youll see a little bit more of a shift of the mix to be higher on the inventory side.
To support the growth expectations, we have for this year, but also for the longer term growth rates, we want to make sure we have enough inventory in the stats on the shelf to be able to replenish that demand and they hit those higher revenue growth targets.
Okay got it and then secondly for BOE two items I guess, firstly, if you could give us a look back on the distributed platform and cross selling opportunities from previously existing accounts from Wendy.
The merger took place as far as our hardware and biologics are really pull through there and then as far as the.
The percutaneous model could you talk to us a little bit about how that plays out with our existing.
Existing accounts.
On.
Upgrades or sales as opposed to.
Full systems.
Yes sure so.
When we think about the cross selling opportunities with the 70 platform in particular, we've had some great results in the northeast where.
Where we have had historically a 70 system and now they have started to or fully moved over specific product lines, whether it's implants ortho biologics. So we are in fact, taking advantage of that cross selling opportunity and to build upon that from one of your earlier questions about the proportion of earn outs versus capital system placements and we.
We do see either an earn out or as a capital sale benefit because it gets that foothold in the door to explore.
Explore the surgeons use of our additional product lines and that's pretty true in <unk>.
Of our existing sites when it comes to the PERC module.
The way that will be marketed as it will be a upgrade for the hospital generating additional.
Revenue from the system and one of the actually the biggest.
Sell point of the percutaneous module, which is different than any other for continuous navigation is where vendor neutral when it comes to the intraoperative imaging technology. So for example, right out of the box or system can link up and does not required to be calibrated. It can just linkup directly to hospitals existing GE three four or their <unk>.
We're in or or whatever they have on site, we're seeing that as a huge benefit and hospital ecosystem is validating that because they don't have to go out and buy another imaging system. We can use that they currently have.
Yeah.
Thank you.
Welcome.
Okay.
And this is Ryan has had another question frequently used to buy it.
Yeah.
Okay.
Okay.
Yeah.
So we had.
Two questions.
Go ahead, Brian .
Sorry about that.
Anita myself apologies just circling back on one thing.
John you've historically talked about operating expenses, usually a year and as we kind of move into the next year and with the increase in the direct sales force I'm wondering if you can just give us your thoughts about kind of that incremental operating expense that you would expect for 2022.
Yes, if you think about sales and marketing right. It's the biggest line in the P&L.
And I don't think we don't anticipate the investment in the direct sales force to materially change that in terms of percentage of revenue. It's just.
We likely won't get a lot of leverage out of the sales and marketing line, particularly the selling component of that because of the commission amount. That's in there because of the fixed commissions that we're gonna be paying as we build this direct sales force. So I don't see it increasing sales and marketing as a percentage of revenue I just think it limits our ability to get leverage out of that.
Over the 2022 and 'twenty three 'twenty three time frame, but then by 2024, that's where you should start seeing the commission leverage because we're generating more revenue from that direct sales team and a lot of them are going to be past that fixed commission time period.
So that's kind of how we're seeing that play out we talked about R&D right short term increasing to 12% of revenue for 2022, and 2023 and back down to 10% for 2024.
And as far as G&A goes that's been one area that we've consistently gotten leverage on.
Over the last couple of years, because as revenues growing we've been able to keep G&A.
Adjusted G&A generally two or 3% to 5% increase year over year. So I think we'll be in a kind of a similar range and get more leverage at G&A in the coming years as well.
Alright, thank you.
Yes.
So there was a two questions written by Jason and thanks for joining us.
With loop capital. So the first question, Jason had was in and around the <unk>.
Yes.
Some questions through 70, which were just recently answered by BOE, but the second question was.
And I think it's a very reasonable question do you plan on keeping distributors in place or eventually phase them out in 2022 and beyond and so yeah I want to make it clear and I think I think buzz had mentioned some of this during during his slide remarks that this is in addition to I think that.
We're making it very clear that the distributor partners that were bringing aboard and I think we're making significant commitments to when I say commitment for the commitment of them.
A big Big.
Opportunities the real estate so to speak we're committing to them that we will buy and support them with the right amount of assets and in return we have high expectations of how they will get market share gains in that territory and so I view that as a very important part of our future partnership in one.
That doesn't get replaced just by a direct organization instead, if we're both investing in each other that continues to be a very strong strategy moving forward. Most of what we were referring to on the direct side is really taking advantage of areas. There isn't good distributor options or the options that are there.
Don't want to have a more focus for exclusive platform with us they want to they want to kind of have many different master so to speak and that's really not that's really not a direction that we think.
Is valuable for us.
Okay.
Uh huh.
Okay.
Okay.
It looks like CML based upon again, please limit yourself.
Okay.
Okay.
Hi, Thanks, I just had one follow up question.
Thinking about the mix of.
Complex cases in 2022 is it should we think about that normalizing versus.
Versus 2021, I know I know there had been some.
Some mix issues with that not getting back to a regular level with COVID-19 .
Yeah.
It's a great question and it's one that we're getting our arms around as well and and I think this is a very unique.
Experienced in the first quarter is as Bob mentioned it was it was a difficult close to the year as we talked about when we.
It started off the year. It was also a difficult start to the year.
As January slowdown was very real.
I feel very comfortable that there is a combination of things going on that.
The backlog of patients is real.
Some hospitals not all are able to accommodate this through maybe longer or time or even weekend or time, but most are not in they're not because they're staffing issues don't resolve overnight.
The good news is their staff is healthy the bad news is they may not have enough staff to do the kind of flexing that we want saw.
In our <unk>.
<unk> four for spine procedures. So so with that said, we feel obviously bullish that that it's going to be a strong year assuming that.
And shutdowns don't happen across the country for other reasons and that the hospitals are dealing with their staffing issues or at least trying to accommodate them in different creative ways, but I would go as far as saying that theres going to be huge flex time, and <unk> is going to dramatically increase I think it ends up being more.
Depending on the hospital system and depending on the area of the country.
Different source of flexibility or presented themselves but.
I'm certainly very encouraged that if you would have been talking to us in late January early February we were concerned about the intermittent slowdowns and it's been a robust.
We start if you will one that you see in the kind of results that we're predicting for.
The first quarter.
Okay.
Okay.
Okay.
Alright, it looks as though there are no more questions.
If not that will conclude our call. Thank you for joining.
Thanks, everyone for joining us.
Have a good weekend.