Q3 2022 SI-BONE Inc Earnings Call
Okay.
Good afternoon, and welcome to S. Iphones third quarter earnings Conference call. At this time, all participants are listen only mode. We will be facilitating a question and 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 Marisol buys from the Gilmartin group for a few introductory comments. Please go ahead.
Thank you for participating in today's call. Joining me are Laura Francis Chief Executive Officer, and also Maheshwari Chief Financial Officer.
Earlier today Si bone released financial results for the quarter ended September 32022, a copy of the press release is available on the company's website.
Before we begin I'd like to remind you that management will make statements. During this call that include forward looking statements within the meaning of federal Securities laws, which are made pursuant to the safe Harbor provision.
Private Securities Litigation Reform Act of 1995.
Any statements contained in this call that relate to expectations or predictions of future events results.
Or performance are forward looking statements.
These forward looking statements are based on the company's current expectations and inherently involve risks and uncertainties.
The risks include the duration of secondary impacts of the COVID-19 pandemic just facility staffing shortages, whether the COVID-19 pandemic will recur in the future and our ability to effectively commercialize new products going forward.
Other forward looking statements include our examination of operating trends and our future financial expectations.
Vacations for hiring surgeon training and adoption active surgeons, new products clinical trial enrollment and reimbursement decisions are based upon current estimates and various assumptions. These.
These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward looking statements.
Accordingly, you should not place undue reliance on these statements.
For a list and description of the risks and uncertainties associated with our business. Please refer to the risk factors section of our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission.
I say bone disclaims any intention or obligation, except as required by law to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise.
The conference call contains time sensitive information and is accurate only as of the live broadcast today November seven 2022.
And with that I will turn the call over to Laura.
Thanks, Marissa and good afternoon, and thank you for joining us for today's call I'll provide a business update.
I'm sure, we'll provide additional detail regarding our financial results.
Before I cover our third quarter results, let me provide an update on recently published CMS final rule for calendar year, 2023 hospital outpatient and ASC payment.
On November one 2022, CMS posted the calendar year 2023 rural for hospital outpatient and ASC payment.
Based on the final rule calendar year 2023 facility reimbursement for minimally invasive Si joint fusion procedures performed in the ASC and hospital outpatient settings will increase by approximately 26% to $17109 and 33% to 21.
$898 respectively.
Today, 80% of our minimally invasive Si joint procedures are performed in an outpatient setting or a surgery center.
These procedures continue to move to ASC, the higher reimbursement in 2023 could potentially serve as a tailwind to demand and also allow us to maintain our pricing at these sites of service.
Now moving to our performance in the third quarter of 2022.
I'm very pleased with our strong execution, which resulted in record revenue driven by continued acceleration in procedure demand and robust surgeon interest in our portfolio of solutions.
In the third quarter, we generated worldwide revenue of $26 $4 million, reflecting approximately 19% growth compared to the third quarter of 2021, and 3% growth to the second quarter of 2022.
In the U S. Our revenue grew 21% compared to the prior year period to a record $24 $6 million.
This revenue was driven by 25% U S procedure volume growth in the quarter.
The continued increase in our U S procedure volume throughout 2022, while the health care system has continued adjusting the staff limitations reflects strong demand for our solutions.
In addition to accelerating topline growth, we gained operating leverage across our organization as our revenue growth significantly outpaced operating expense growth alongside a material sequential reduction in cash outflow in the quarter.
With reimbursement talons expanded indications and strong surgeon engagement across our differentiated product portfolio I'm very excited about our potential to further accelerate growth.
Our strategic investments in scalable infrastructure over the last few years promote a strong foundation to support our topline growth and drive incremental operating productivity as we get into 2023.
Now, let me provide an update on our key initiatives as we look to extend our leadership position and drive strong long term growth.
Starting with our sales infrastructure, our dedicated sales force remains an important driver of growth as we expand our core market and grow our presence in trauma and adult deformity.
Our sales force at the end of the third quarter included 85 territory managers and 72 clinical support specialists.
With an increasingly seasoned sales force our average trailing 12 month revenue per territory manager has increased by more than 10% since the start of the year.
Our expanded portfolio, we're leveraging our growing distribution network for case coverage and selectively evaluating confinement strategies at high volume hospitals.
We're confident that this hybrid approach will complement our territory manager effort and create additional capacity to drive surgeon engagement ensure high quality support for our surgeons and continue to deliver strong and consistent top line growth.
Moving on the surgeon engagement, we ended the third quarter with a record active surgeon base of over 800 surgeons.
This equates to approximately 27% growth in our active surgeon base over the comparable period in 2021, and approximately 12% growth sequentially.
We've now seen seven consecutive quarters of double digit year over year growth, which is a testament to our focused execution in education and outreach over the last several years.
The adoption is one of the best leading indicators of long term procedure demand. Additionally, we continue to experience a growing surgeon overlap across our various products.
For example in 2022 over half of our active surgeons, who performed in adult deformity procedure also performed a minimally invasive Si joint fusion procedure using our solutions, we expect higher surgeon utilization as the synergistic surging base continues to grow over time.
With the trauma indication expansions for Ice's tour and the launch of ICU bed rock granted we're continuing to invest in surgeon education to drive engagement and activation.
We've also experienced a steady increase in the adoption rate of surgeons, who have been trained on the simulator, which remains a valuable component and our surgeon training program.
Moving forward, we'll continue leveraging our simulator training along with in person local training and regional training to drive cost effective surgeon engagement.
We continue to expand our academic programs to educate residents and fellows.
Since inception of the program, we've held training events at approximately 200 academic facilities in the United States and trained approximately 200 surgical residents and fellows.
We're also expanding our training center, new academic center as we've seen a growing interest in our products.
Among surgeons indicators in new facilities.
Education on bedrock and IQ Venrock granite in deformity are now in a room for each training and we're adding content on ice's towards common applications.
We're encouraged by the increase we're seeing in adoption by previously train residents and fellows as we start practicing year to date, the number of fellows and residents who have completed our first case has more than doubled compared to this time last year, while their procedure volumes have increased fourfold.
Turning to products and solutions are focused execution has resulted in nearly 3000 surgeons worldwide performing over 75000 procedures since the inception of the company.
Expanding our platform in secret public solutions to address our Si joint pain spinal pelvic fixation interpublic trauma has been a key tenant of our strategy and we've made substantial progress on this mission year to date.
With ICU three D icu's torque and now ICU bed rock granite, we believe that the value of our innovative versatile and complementary product portfolio provides surgeons with a comprehensive set of alternatives and positions us as the top choice for surgeons for <unk> solutions.
Ice's tour continues to exceed expectations with another quarter of record revenue.
<unk> has been an important addition to the portfolio and provides a complementary option to ICU <unk> for existing surgeons and it's been a valuable asset to convert users of competitive screw system.
Trauma, while preliminary we're seeing an uptick in the application of Ip's tour to treat Facebook for agility fractures based on the FDA expanded clearance in June .
There are approximately 120000 of these injuries per year in the United States most of which are currently not treated surgically the.
The fragility fracture market is a recognized unmet clinical need and its a strategic importance to us is the secret pelvic solutions leader.
Over 75% of patients with fragility fractures are currently treated with unrest with a high cost per rehabilitation and involving significant competency superiors Asian, and overall health status in many cases, and a 25% one year mortality rate.
In addition to orthopedic trauma surgeons, many fragility fracture patients are seen by our client surgeons.
We continue to invest in surgeon training and instrument tray confinement opportunities as we build out the trauma business, which we believe will be an important avenue for growth over the long term.
In September we also received FDA clearance for Iqs tour to include fusion in conjunction with spinal fixation.
Considering the successful launch of ICU bed rock granted this expansion was important as it allowed icu's torque to complement ICU bedrock granite and the second point, a fixation of the journey and the speaker Eyler iliac trajectory, which from a buyer mechanical perspective is important to attain infusion.
We're excited about the success of ICU bed rock granite driven by strong surgeon interest in adopting the product and making it a standard of care for stabilizing the base of long construct adult deformity procedures.
This was highlighted at a recently conducted spinal pelvic think tank meeting in San Diego. The meeting was hosted by Dr. David Polly from the University of Minnesota, Dr. Greg Mundus from Scripps and Professor John Charlotte Lewis from Bordeaux University and attended by approximately 20, leading spinal deformity.
Surgeons.
We're pleased with uptake of granite despite our early stage in the launch cycle. Additionally, granite is providing a significant pull through opportunity for the overall portfolio is a subset of surgeons, who are using some combination of our product <unk>.
Points of fixation across the Si joint on either side, resulting in a higher procedure average selling price.
Given the positive experience with ICU bed rock granite, we've seen surgeons expand the use of the product to stabilize the base of shorter multi level construct houston procedures to treat degenerative spinal conditions.
Approximately one third of our ICU bed rock granted cases have been used in two to four level procedures.
There are approximately 100000 short construct procedures to the pelvis per year in the United States.
Based on expanded use of ICU beds granted ensure construct for certification. This could result in an exciting opportunity for us to further expand our total addressable market.
Given the broad spinal deformity surgeon demand and support for our <unk> bedrock granted we continued to successfully work with major hospitals across the U S to get the product on the approved list.
This process, which is typically for new and highly differentiated products can take anywhere from a few days to a few weeks to complete depending on the hospital procedures.
We've also been working with our suppliers to optimize the workflow and address the challenges with near term delays in adequate availability of implants.
While the team is making significant progress on these workflows.
Both of these factors limited our ability to fully capitalize on the demand momentum in September and into the first half of the fourth quarter.
On the clinical research front in September we enrolled the first of the targeted 120 patients in our <unk> study.
As a reminder, the safran study is a prospective randomized controlled trial with surgery using <unk> torque device versus non surgical management in patients with debilitating sacral fragility or insufficiency fractures.
We anticipate results to be available in late 2024.
Talking about our patient awareness initiatives.
In the third quarter, we continued to see high website traffic robust patient engagement surgeon referrals and our find a doctor locator metrics, while our cost of acquisition steadily decline.
We view the find a doctor metric is a leading indicator of patient engagement and potential future demand. As a reminder, these outreach programs are targeted at patients in chronic.
The year end Si joint pain, we've been conservative care for an extended period.
Our goal is to connect patients with surgeons in their area, who perform minimally invasive.
Procedures using our products.
Before I turn it over onshore I'd like to provide an organizational update related to in addition to our international leadership team.
In September we appointed never warmer as the Vice President of International novel joined US from continent, where he was the general manager of the UK and Ireland and has 20 years of experience in the health care industry, including over a decade at Stryker novels.
<unk> experienced across orthopedics spine and trauma will allow us to stabilize and grow our business in Europe .
Spanned our international franchise and further accelerate top line growth.
I'll now turn the call over to onshore to provide more detail on our financial results.
Thanks, Laura good afternoon, everyone. Our third quarter 2022, total revenue was $26 4 million.
Representing growth of approximately 19% compared to the prior year period, and 3% growth sequentially.
U S revenue was $24 6 million, increasing 21% compared to the prior year period.
Both in the U S was driven by strong demand for solutions, which resulted in 25% growth in procedure volumes versus the prior year period.
The robust procedure volume and strong sequential increase reaffirms that the operating environment in the U S continues to normalize.
Our assay procedure volumes were in the low 20% range.
<unk> with the prior year period and sequentially.
International revenue was $1 8 million a.
A decline of 5% compared to prior year period.
Strong performance in France was more than offset primarily by the continued underperformance in the Germany, and the UK markets as well as from additional foreign exchange weakness.
Gross margin for the third quarter of 2022 was 84%.
The third quarter gross margin reflects a low single digit percentage decline in average selling price from procedure site of service and product mix as well as higher freight cost the.
The gross margin also reflects the higher cost of the new products and the increase in cost of operations, including higher depreciation from the instrument <unk> deployed to support the strong new product demand.
Operating expenses increased 9% to $35 8 million in the third quarter 2022, as compared to $33 million in the prior year period.
Increase was driven by higher commissions increase in travel and freight costs continued investment in R&D and higher head count.
On a sequential basis operating expenses decreased approximately 10% compared to the second quarter of 2022.
The sequential improvement in operating expenses reflects productivity gains from an increasingly seasoned sales force as well as leverage across the investments. We have made over the last few years to both a scalable platform to support strong top line growth.
Our net loss was $14 2 million or <unk> 41 per diluted share for the third quarter of 2022 as compared to a net loss of $15 $9 million of 48 cents per diluted share in the prior year period.
As of the end of the quarter, our cash and marketable securities were approximately $104 million and current and long term borrowings were approximately $35 million.
Our cash outflow in the third quarter declined sequentially to $10 million from $16 million in the second quarter.
Based on our anticipated investments in operating expense in.
In Q4, we expect cash outflow to be in the same range as the third quarter.
Moving to guidance.
We expect 2022 worldwide revenue to range between $104 million, and 105 million, implying year over year growth of approximately 16% to 17%.
The updated guidance assumes no international revenue growth for fiscal year 2022, based on foreign currency headwinds and recovery challenges, Germany and the UK.
As well as moderated upside in the U S from granted through the end of 2022.
The annual revenue guidance implies fourth quarter 2022 worldwide revenue to be between $29 5 million.
And $35 million.
<unk> growth between 17% to 21% over the prior year period.
And U S fourth quarter revenue growth of 18% to 23%.
With that I will turn the call over for questions operator.
Thank you and as a reminder to ask a question simply press star one on your telephone Star one one I apologize one moment, while we compile the Q&A roster.
Okay.
Our.
First question comes from the line of Kyle Rose with Canaccord. Please go ahead.
Great. Thank you for taking the questions.
I just wanted to talk a little bit more about the dynamic from transitioning from the Q3 into Q4, maybe just talk about the macro environment youre seeing as far as procedure volumes and staffing challenges.
And then if you can just comment.
More on the on the commercial side of the business.
Do you think about going after the trauma market.
More into the deformity side of things do you anticipate meeting additional specialized sales forces or I think you talked about a consignment model potentially just help us think about what that build out might be from a commercial perspective. Thank you.
Thanks, Kyle so.
Your first question was the dynamic going from Q3 to Q4, so what I would say from a Q3 perspective as the team executed really well and we achieved several record milestones. So if you think about the acceleration of the business worldwide.
In Q1, our growth rate was 10% in Q2, our growth rate 19 in Q3 was 19%.
Sorry, 15, 10 to 15 to 19, if you look at the U S. The U S was it Q1, 9% growth Q2, 18% Q3, 21%. So we're continuing to see this robust rebound in volume.
Well as dollars.
And so what I'm also excited about is the growth that we're seeing in our active surgeon base.
So hitting over 800 surgeons that performed at least one procedure.
During the third quarter, that's a 27% increase year over year, and it's a 12% increase sequentially. So that bodes really well for the future of the business and in fact, we saw that growth continue very strongly into the month of October .
You asked a little bit about some of our additional products torque had a record quarter and then granted we're seeing strong surgeon engagement with significant interest in granite for long construct and for short construct as well.
Which which has us excited overall for the business so from a top line perspective.
We're seeing that acceleration, but then if you look at the P&L and liquidity.
We're seeing strong operating leverage across the organization the revenue growth rate for the quarter was over double the opex growth rate and then we also saw a double digit increase in rep productivity.
<unk> in the quarter as well and that our cash outflow declined by 60% sequentially to around $10 million.
So all of that is good.
As I mentioned the international environment is challenging from a macro perspective in particular, but given the trends in the U S. It gives me a lot of confidence in our ability to finish 'twenty two strong and then.
Further acceleration into into 2023.
I'm going to talk a little bit on the commercial side too from a trauma and deformity perspective to answer your question there.
So from a deformity perspective.
The same surgeons that perform primary Si joint fusion also perform our adult deformity procedures.
And in fact are very strong overlap.
In my prepared remarks between those two procedures.
And so very very close symbiotic relationship in terms of the trauma opportunity. We actually are seeing a lot of these cases in our core market with orthopedic and neuro spine surgeons and in fact that is the area of focus for us with this particular product.
And so we don't see a need to separate out our sales force at this point in time because of the symbiotic relationship between the products.
Great. Thank you very much for taking the questions is very helpful.
Yes.
Thank you one moment for our next question.
And it comes from the line of Craig Visual with Bank of America. Your line is open.
Hey, Laura.
Sure.
Thanks for taking the questions.
Let me start with just the guidance.
Oh sure I think you said moderated upside from granite is just one of the.
Main reasons, why you took down the overall guidance.
So just wondering maybe a little bit more color there and does that have to do with those.
The challenges.
Availability of implants.
Maybe just following on that.
You've seen it through the first half of <unk>.
Q4, when do you expect that to be back to normal.
Hey, Greg.
Good to talk to you again, why don't I take the first half of the question on guidance and then I think it might help getting some more context from Laura what we're really seen under glass type because it's there's a lot of excitement there.
On the guidance side, our updated guidance of 141 O. Five if you look at it from a fourth quarter perspective, it implies a growth rate of anywhere between 17, and 21% worldwide versus the 19% we saw in the third quarter and in the U S. It would imply a growth rate of 18% to 23%.
Our expectations now based on Lora of your comments on EMEA.
Is expecting no growth out of Europe for.
For the fiscal year 2022.
So if you think about rough math Greg.
That means Europe had an impact of about a million and a half between Q2 to Q4.
And I would say 70% of that impact was in the second half of the year, So circa $1 2 million ish.
And it is evenly divided between the FX impact that we've highlighted previously on our last earnings call that we expected to happen, but also a slower recovery than we had expected.
Coming out of Covid, especially in the UK and Germany, and that's been a bit of a challenge for us.
And we think that challenge will continue in the near term and Neville is doing everything possible to make sure we stabilize the EMEA business and get them back to the growth trajectory. So what I'd say is that was the biggest driver in terms of adjusting our guidance.
Now.
Given what we had seen in the U S. Greg which was the continued acceleration in the business and this was the four granted launch at the end of May and the strong demand that we were seeing in grad it's for the.
The early part of the launch we felt pretty confident about that being able to absorb.
The shortfall out of Europe , both on the FX and also the.
The unknown shortfall from an operational perspective as well.
But.
With some of the new product launch dynamics that we had in our prepared remarks and Laura if you can go into the details.
We're sort of expecting a more moderate impact of it in the entire fourth quarter, even though we were seeing it coming into September and the first half of the quarter. We just want to make sure that we see that work its way through the process.
<unk>.
And then feel like going into 2023, we're positioned well.
So we think the adjusted guidance appropriately bracket the risks from Europe .
And also a potential upside from granted if you look at the range of the guidance.
And then Laura if you want to talk about just granted momentum and what's going on there yeah.
It's onshore said the the the challenge that we have is to just keep up with the demand that we're experiencing right now on an granted it has been exceptional surgeons believe it's going to become the standard of care for stabilizing the base of long construct.
We're actually seeing quite a few of our surgeons using the product in short construct as well depending upon the needs of that particular patient and it's also helping to drive deeper engagement with our surgeons given that over half of them are using.
Our our primary products <unk>, three D or torque.
In addition to granite.
It also has a nice pull through from the broader portfolio given that oftentimes surgeons are looking for two points of fixation on either side of the long construct so so all of those things bode well.
We're also being.
Very thoughtful about.
How we roll this out to other hospitals and what we want to do is to make sure that even though the timeline may vary in order to get the product on the approved list for a hospital. We've made great progress in a short period of time, when we want to make sure to maintain it.
And pricing on the product as well and so our team is doing a good job of doing both of those things. So we think granite bodes well for the future.
Of the business in 2023.
Great. Thank you both for all that color, let me move on to kind of the operating expenses and cash spend so good to see that it went down in Q3.
Maybe just wanted to understand where their spend where they are expenses that maybe you didnt make during the quarter.
That led to the lower cash burn in than women.
Think about $10 million a quarter in Q3 and Q4, how should we think about that rolling into 2023 should should we just kind of take that $10 million a quarter in cash spend and think about that for the quarters in 2003.
Yes, So Craig let me take the question on on our Opex leverage and the cash flow leverage that we saw in the quarter.
As we've talked throughout this year Greg.
We've made a lot of investments over the last 24 months.
Across our organization, whether it's building the commercial infrastructure building the operational apps and also making investments in R&D to to build a platform that can deliver strong sustainable growth.
And coming into the year over year, we were at an inflection point from a scale perspective, where you would see.
The fruits of those investments play out and they have with the accelerated topline growth. So overall there was nothing unnatural that we're focused on to get the leverage.
In our prior quarter, we had talked about Q3 being lower than Q2 from an opex perspective, because there were some timing spend in Q2, but overall with revenue growth being <unk> opex growth, we feel really good about it a lot of that is just driven by a more mature sales force. The fact that they have.
<unk> highly differentiated products, calling on a synergistic surgeon base driving density so that's having an impact as well and then as we think about Q4 as well we think that the opex leverage will continue and actually accelerate as we get into 2023.
As we continue to make progress towards reducing our GAAP in and making progress on the adjusted EBITDA profitability metric that that we are closely monitoring as well.
And even on the cash flow side.
Greg If you look at our PP&E Enernoc inventory.
We made a substantial amount of investment whether it's in pork trays or granted trays or toward compliance and.
Even though we are working through the supply chain, but granted we've made significant investment in black there too.
And now it's about deploying those assets in the field and Youre seeing the timing of that play out on the cash flow side, we do expect to buy more instrument trays because of the growth that we're seeing there and as we evaluate confinement opportunity in case coverage opportunity with distributors.
But we think we've got adequate capacity to be able to support the growth that we see ahead of us.
Now when it comes through 2023, Greg obviously, we're not going to provide guidance you know that it's too early.
But from our perspective, the operating leverage should continue into next year, because we get more and more mature on our Salesforce. We continue to drive the deeper penetration with all the ground game for us at this point.
And from a cash flow perspective.
As the operating leverage comes in you'll see the cash outflow also decline versus what you do in annualized in Q4.
Great. Thanks for taking the questions.
Thank you one moment for our next question. Please comes from the line of David Ross Scott with Truest. Please go ahead.
Hi, Thanks for taking the questions. This is Sam on for Chris.
David I'll just start off with.
With four Q.
When you're thinking about the high end of the range. It sounds like it's really the delta between how much of that pressure in EMEA ends up being and how quickly the granite.
Supply issues can get resolved or is that not the right way to think about it anything else in sort of core Si joint fusion market to think about there.
Yes, no what I would say is the range that we provided adequately bracket the risk.
That we see in EMEA, and we think that risk will take a few quarters to sort of work its way through the processes as level sort of puts together a growth strategy for that market.
The range Delta is effectively the potential impact that we could see from grant it.
In terms of how we keep working through successfully with the box well at.
At different hospitals to get this on the approved list and also on the supply chain side, making sure we can get the implants and.
Our focus is to end the fourth quarter strong, but more importantly make sure that the momentum that we have in granite, especially from a surge in interest standpoint.
That we could capitalize on it start in Q1 of 2023.
As aggressively as possible.
Got it and then just with.
With the final rule confirmation.
How should we how significant of an impact cannot be in 'twenty, three and where should we think about that coming through in the business. Most significantly should that be more on the ASP side or should we think about that more new surgeons or maybe even helping to reactivate Pryor currently inactive surgeons. Thanks for taking the questions.
Yeah.
A good question and this is a very significant increase in the facility payment bolt in the ASC environment as well as in the hospital outpatient setting.
Adding in the the total amount of the payments in both of those settings.
Is.
Is something of note as well and so we do think that.
These sorts of decisions that surgeons are making about adopting si joint fusion into their practices.
Part of it is just a regularly diagnosing these patients and then trading them.
And the health economics of that decision are.
Important and so as you know around 80% of our procedures are in an ASC or an outpatient setting we do think that it will attract new surgeons, who previously were not doing the procedure.
Also think that some surgeons, who have been inactive will reactivate because of this decision as well. So so we do think it's significant.
And and we expect to see that as a tailwind in 2023.
Thanks for taking questions.
Thank you.
For our next question please.
Our next question comes from the line of drew Ranieri with Morgan Stanley . Please go ahead.
Hi, Laura on onshore just maybe on the procedure volume commentary.
As you are kind of thinking about the year, 14%, 23%, 25% in the third quarter.
I think you mentioned that Youre seeing maybe even an acceleration even in the early days of the fourth quarter. So can you give us a little bit more commentary on that.
Just as you are thinking about 2023, I mean, you still have talked about having multiple tailings at your back I mean do you think that as you are looking at the U S business that these levels youre hitting in the back half of the year are sustainable into next year.
With potential pricing as maybe an offset.
Yeah. Thanks drew for the question. We are pleased with the revenue acceleration that we're seeing in the U S and if you just look at them.
The U S procedure volumes in Q1, you gave the number of 14%.
Volume growth in Q1, 23% volume growth in Q2, and 25% volume growth in 2000 in the third quarter.
And.
We did not talk about what we're seeing in the fourth quarter, thus far but we do expect to continue to see that acceleration continue partly from our core business, but also from our adult deformity business and from our trauma business as well.
So we do see this as a factor the other comment that I would make and it plays off of the question that I just received from Sam and that is with the increase in the facility payments in the ASC and hospital outpatient what we would like to do is is see us hold price in 2020.
Three.
Given that that should take some of the pressure off especially in the surgery Center environment.
Where we saw the most pricing pressure.
And then drew on your question about 2023.
Again.
It's not guidance because we'll wait for 2023 to come in before we provide guidance, but like Laura said.
Trends in the procedure volumes in the U S.
Do not underestimate the active surgeon growth numbers that we have seen 27% growth year over year, 12% sequentially quarter over quarter. There was a pretty massive numbers in terms of active surgeon base growth and they actually are very good forward looking indicator for us in terms of procedure demand as we go into the few.
Subsequent quarters so the.
<unk> U S business is actually fairly strong from a fundamental perspective.
We work through these these new product dynamics, we feel pretty good about the setup there.
You think about the.
U S growth, specifically and I'm talking revenues.
21% growth in Q3, and if you think about the Q4 range of 18% to 22% depending on the low end to high end range for the year.
Take the midpoint of that at about 21% that gives you a pretty good idea of the trend that we're seeing in the business.
No.
We will continue to be a bit of a challenge for the next few quarters and that may have an impact as we get into 2023.
But you were spot on do you think about 2022 talks had a record.
Quarter, It's continued to do well <unk> is a great product with those two together they are the market leading products for Si joint fusion the facility fee increase that Laura talked about the broader application of tour not just with the clearance for trauma, but also in adult deformity that we got them in the September period that August period.
Is.
Is a big deal to be able to deliver two points of fixation and complement granted.
So overall, we feel the setup was really really good in the U S and we just need to walk through some of these dynamics, we talked about today and deliver.
Got it.
And then maybe if we can talk a bit about.
The active surgeon number and you touched on this I think with your answer to soften a bit.
But as Youre looking at the 800 active surgeon base in the third quarter, maybe what are your expectations for the fourth quarter growth that you are potentially going to see.
And then as Youre looking at these new surgeons with the 27% year over year increase.
How does their utilization of our ramp up compared now than maybe what that looks like pre pandemic I guess I just wanted to get a better sense of how sticky are these procedures are and if these surgeons are.
For lack of better words, becoming like true believers in core issues or even some of the.
Adjacent products, thanks for taking the questions.
Yeah, Yeah. It is.
A great question and you're right. We're really encouraged by the continued increase in surgeon interest in our solutions and hitting that record 800, plus active surgeons in the quarter really highlights that.
I did note in my prepared comments that that trend has continued into the fourth quarter and you were asking about the stickiness of the procedure, we've seen double digit growth in our surgeon base for seven straight quarters at this point.
This quarter was particularly notable with a sequential 12% increase just between Q2 and Q3. So these adoption numbers are great forward looking indicator for demand trends. We're excited about the surgeon overlap between the different procedures adult deformity.
Minimally invasive Si joint fusion.
It really just reaffirm this comprehensive set of solutions that we have and that our focus on education and training is yielding results. So.
So we're excited about where we're at it it is a very important indicator. That's why we provide it and it's one of the most exciting metrics, we focus on to drive long term growth.
Okay.
One moment for our next question please.
And it comes from the line of Dave <unk> with JMP Securities. Please proceed.
Hey, good evening.
Well I'd love to just get your thoughts there.
Right.
Of the 50% or over 50 adult deformity also used items I mean, I was kind of thinking that.
Out of the gates it might be like higher meaning that you would hit your core times with some of the newer products.
Right out of the gates on that that might make that number.
Even more significant one.
Give me a call.
But I'd love to get your thoughts about that and where you think that's headed.
So David.
Let me, let me be clear about our surgeon base, Okay. So R. R.
Our adult deformity surgeons are orthopedic and neurosurgeons that do spine procedures.
And those that are doing adult deformity tend to be in an academic medical center. There are key opinion leaders. They tend to work on the most complex cases that are out there.
And so.
They are the same call point.
But you know what what often occurs is there will be certain surgeons in a practice that may be performing the minimally invasive procedures and those include iqs.
Iqs and then there are those that are focusing on the open complex cases like scoliosis cases that are using granite.
But what we're seeing is a significant overlap between the two and we're actually quite pleased with that number.
With over 50%, who have who have done.
Adult deformity procedure also doing a primary case.
So so it also once again going back to that point that I made there may be another surgeon within the same practice that is doing the iqs procedures, while the the kols at a.
<unk> site is doing the adult deformity procedures, so that 50% number does not capture that information within it but the point that I think is important to make here is that there is.
Significant overlap and synergies between the procedures that our surgeons are doing and that even does extend to these trauma cases as well pelvic ring for agility fracture. Many times. These patients are actually being seen by spine surgeons and historically they weren't sure what to do.
With those particular patients and what we're trying to do now is provide the education effort to say there is a solution for these patients and it is our torque product.
Got it and then active surgeon number.
Can't remember exactly how you define it but I mean, you have some folks in there that are.
Our new two probably all your products.
Gaining with some of these new products and would that be a fair statement is that fueling cabot increasing there.
No. That's that's correct and we did provide information that said, we now have over 3000 surgeons worldwide, who have performed at least 100 procedures. So we're seeing a significant increase here and its bold.
And as a reminder, enacted surgeon as a surgeon who performs at least one case during the quarter. So we had over 800 surgeons who performed at least one.
Procedure with with one of our products and and so it's an important measure and it shows that we are.
Educating training surgeons they are onboard and they are continuing to perform procedures. So we're we're very happy with that number because it it doesn't necessarily reflect growth in the current quarter, but what it does is it really helps you understand what the long term opportunity is for the business.
Got it thank you.
Thanks, David.
Okay.
Thank you and one moment for our next question. Please.
Our next question comes from the line of Ross <unk> with Cantor Fitzgerald. Please go ahead.
Hi, congrats on the quarter. So I guess just one from me at this point and kind of going off the last question. So looking at the trauma opportunity what pushback or questions do you get for potential torque users that are currently going down to better it's better asked Rob at this point or is it really just a function of educating surgeons and if so what do you believe surgeons needed.
Z to drive adoption.
Yes.
Thanks for the question Ross, we do believe that this is the educational effort because historically, 75% of these patients have been treated with that Ross.
The other 25% primarily.
The surgeons have used trauma screws.
And.
And so we're used to this sort of an educational sale it actually fits very well into our wheelhouse and.
How we've done this in the past is first of all we have a very innovative product that addresses the issue of sacral insufficiency and fragility fractures. So let's start there the product is already there than it is our educational effort with our medical affairs team and with our surgeons.
And so those those are the sorts of things that we need to engage in and finally, we did talk a little bit about our safran study and thats going to be very important as well because this is a randomized controlled trial that is showing the results of <unk>.
For patients that have received treatment using torque compared to conservative care and so this is the sort of information when youre going through an educational effort like this you require a high level.
RCT.
Clinical data in order to go back to surgeons and help them to adopt a new procedure.
Okay. Thank you and congrats again on the quarter.
Thank you.
Thank you one moment for our next question.
It comes from the line of.
Hum.
Can you hear my voice.
Yes, we can.
Okay perfect. It comes from the line of young Li with Jefferies. Please go ahead.
Alright, great. Thanks for taking our questions.
I guess.
So you've made a lot of progress this year with surgeon.
Hello.
Training.
New products.
Coverage and reimbursement.
I guess.
Sounds like qualitatively.
Rose can reaccelerate in the U S next year.
Are there any headwinds we should be mindful with the staff and our supply chain or any macro dynamics going forward.
The central recessionary impacts.
I think we've spoken about the challenges that we're experiencing right now and international obviously is one where we're seeing some headwinds there, but we're in the process of drafting and then as we said on granted it's really just a matter of of ensuring that we have the <unk>.
Lance and the instrument trades in order to meet the demands that are ahead of us. So those are really the couple of things that that were addressing at this point in time and feel very good about our ability to execute on those things.
Yeah.
Thank you and one moment for our last question.
And our last question comes from the 900, David Saxon with need Hamlin and company. Please proceed.
Hi, guys. This is Joseph on for David.
And just wondering if theres going to be any impact.
Six funds pending merger with orthopedics on.
Your <unk> grant partnership with these funds.
Yes. Thanks for the question, we don't expect for there to be any impact with that particular relationship.
Okay, great good to know.
And then I'll just squeeze this last one in here could you maybe talk about your expectations for a sales rep hiring here in the third.
The final couple of months of 2022 as well as 2023, and then maybe just on the P&L sheet some of the timing.
Of the higher cost inventory working through that and maybe some of the impact on gross margins in 2023 from that.
Yeah.
Sure So happy to take the question on the Rep hiring plans for the year.
Our expectation is to end the year with about 160 people in our sales force, which includes our territory managers in our territory representatives of Trs <unk>.
I'd say, our Tms will be anywhere between I'd say 88 to 90 people and the rest would be the Trs.
When we think about next year again, we're not going to be providing numbers there but.
We've made a lot of investment in our sales force. We think we will continue to make those investments, but at a moderated pace.
And then between consignment opportunities and also leveraging distributor network for case coverage. We believe we have the capacity to be able to support that looks strong demand that we see in the U S.
On your second question Joseph on the gross margin side and on the inventory side.
We came into this year.
We've talked about our gross margin trends and sort of expecting to end the year.
With the fiscal year 2022 gross margin in the mid <unk> range.
If you think about where we started the year.
Since then a few things have happened right, which we had already forecasted one was the introduction of the new products into the market with torque and granted these products generally have a higher cost since they're relatively new they're happy to be at a scale, where we can get cost efficiencies out of them. So that's number one.
And that will take some time as we build demanded scale of dose products. The second piece was.
We've aggressively invested in I talked about this earlier in the call as well on instrument trays, both for torque and for granted.
And these are more expensive than our traditional treaty trays as well.
But we're doing that because we see a strong demand ahead of us both for adult deformity and also with torque in our core business and also a trauma.
And this is going to lead to elevated depreciation we depreciate our trades over a three year period. So by the time you start seeing the trade turns to drive the revenue still seen the depreciation flows through the P&L and then the third piece is just general free degrees that everybody has experienced throughout this year. So.
Our gross margins are trending like we expected we expect Q4 gross margins to be closer to what we saw in Q3 and then in terms of 2020, we'll provide more guidance as we get into 2023, but some of the dynamics that I just talked about on new products and trade will continue to have an impact in 2023 as well.
Okay, great. Thank you so much congrats on a great quarter.
Thanks, Dave and thanks, David Thanks.
Alright.
Thank you and with that we conclude our Q&A I will pass it back to Laura Francis for her final remarks.
Thanks to all of you for joining the call today, we talked a lot about our revenue acceleration since the start of 2022 and it gives me a lot of confidence in our ability to capitalize on the strong demand for our solutions in a favorable reimbursement landscape and as we exit 2022, we have the infrastructure and the.
<unk> profile to deliver strong and sustainable revenue growth and drive operating leverage as we progress towards profitability. So thanks again for your time Goodbye.
And with that ladies and gentlemen, thank you for participating in today's program you may now disconnect.
Yeah.
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