Q4 2022 Orthofix Medical Inc Earnings Call
Speaker 2: Thanks for watching!
Speaker 3: Good afternoon and welcome to OrthoFix Medical's Q4 and full year 2022 earnings call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question-and-answer session. To ask a question, you'll need to press star followed by the number 1 on your telephone keypad.
Speaker 3: As a reminder, this conference call is being recorded.
Speaker 3: I would now like to turn the call over to Alexa Huerta, Senior Director of Investor Relations. Thank you. Alexfton Farshop, Senior Director of Consumer Relations
Speaker 4: Thank you, operator, and good afternoon, everyone. Welcome to the OrthoFix fourth quarter 2022 earnings call. Joining me on the call today are President and Chief Executive Officer Keith Ballantyne and Chief Financial Officer Sean Boschansic, as well as our Executive Chairman of the board of directors,
Speaker 4: are forward-looking statements, including any financial guidance we provide, and any statements about our plans, beliefs, strategies, expectations, goals, or objectives. And that's, there's our caution not to place undue reliance on such forward-looking statements, as there is no assurance that the matter contained in such statements will occur.
Speaker 4: Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risk factors disclosed under the heading risk factors in our form 10K for the year ended December 31st, 2022, filed this afternoon, March 6th.
Speaker 4: 2023, as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at Orthopix in Louisville, Texas. In addition, on today's call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short-term and long-term financial trends, we should perform an loses our
Speaker 4: We will begin today's call with commentary from Keith Valentine and John Bojanczyk on standalone C-Spine fourth quarter results, followed by John Srebovsk and Doug Rice who will speak to the standalone orthosix fourth quarter results. Keith will conclude the call with information on the newly combined company including...
Speaker 5: Before we get into each company's standalone results, I'd like to take a moment to highlight the recent closing of the merger of vehicles between North Ephix and C-Spine. This merger significantly advances our objective to become a surgeon's partner of choice in their efforts to increase patient mobility and quality of life together.
Speaker 5: portfolio, expanded commercial reach, and the capacity to make meaningful investments in organic and inorganic innovation. We believe our comprehensive product offering puts us in a highly differentiated position in the spy market by combining lean bone growth therapies enabling technologies
Speaker 5: worldwide. Turning to the results, C-Spine had a strong year marked by the consistent execution of our growth strategy, capturing a market share and the announcement of the pivotal merger with OrthoFix. We are excited by the momentum coming out of our fourth quarter results and the work our teams have done since the pandemic.
Speaker 5: of $237.5 million, up 24% year over year. US spinal implants and orthobiologics revenue grew 23% and 20% respectively in the fourth quarter over the prior year. Primarily from new products and expanded distribution as a result of our efforts in recent years to partner with larger.
Speaker 5: a testament to our commitment for increased competitiveness across global markets. In the fourth quarter, placed a record 12 units, five in the U.S. and seven outside the U.S. Of those placed in the U.S., three were earn-out arrangements, the largest quarterly placement of earn-outs since we acquired the technology. As you may recall...
Speaker 5: at a rate of $600,000 to $800,000 per year. To date, we have executed seven R&S that represent approximately $4 million in aggregate annual revenue commitments. I'd also like to call out the company's successful execution of further portfolio expansion through differentiated solutions across a broad spectrum of products and services in the fourth quarter.
Speaker 5: patient cases of mariner deformity system, which was built upon the strength and versatility of C-spine's modular mariner pedicle screw system to address the unique clinical requirements of complex adult deformity spine cases while also reducing the number of surgical trays in the operating room suite.
Speaker 5: Technology, I will now turn the call over to John Bosch ansec to review the standalone c-spine financial results for the fourth quarter and full year 2022 Thanks Keith and good afternoon everyone as Keith noted earlier c-spines total revenue for the fourth quarter of 2022 was
Speaker 5: revenue increased by more than 23 percent. Products launched or enhanced via line extensions within the past five years continue to grow revenue and accounted for 82 percent of U.S. spinal implant revenue in the fourth quarter of 2022. International spinal implant sales were down 57 percent in the fourth quarter.
Speaker 5: Our US spinal implant surgery volumes increased 23% compared to the fourth quarter of 2021, while revenue per case increased 4% compared to the prior year. Utilization of our spinal implant systems and orthobiologics products increased over 9% to 2.3 per procedure in the fourth quarter of 2022 compared to 2.1 a year.
Speaker 5: Gap gross margin for the fourth quarter of 2022 was 62.5 percent compared to 53.7 percent for the fourth quarter of 2021. Adjusted gross margin was 64 percent for the fourth quarter of 2022 compared to 61.8 percent for the fourth quarter of 2021.
Speaker 5: in the manufacturing of our biologics product lines. Operating expenses for the fourth quarter of 2022 totaled $59.8 million, a $10.9 million increase compared to the fourth quarter of 2021. The increase in operating expenses was driven primarily by $5.3 million in higher selling and marketing expenses attributable to most sales.
Speaker 6: in preparation for the merger with Orthofix. Net loss for the fourth quarter of 2022 was $19 million, compared to a net loss of $18.8 million for the fourth quarter of 2021. Adjusted EBITDA loss for the fourth quarter of 2022 was $5.7 million, an improvement compared to a loss of $6.7 million for the fourth quarter of 2021.
Speaker 6: adjusted gross margin and reconciliation of gap net loss to adjusted EBITDA loss are presented in the financial tables of the press release we issued this afternoon. Cash and cash equivalents on December 31, 2022, totaled $29 million and included $26 million of outstanding borrowings under the C-SPINE credit facility.
Speaker 6: revenue. The full year revenue was two hundred seventy five point nine million dollars for the full year 2022 . This spend is consistent with a large amount of inventory and set build capital expenditures necessary to support the recent and upcoming full product launches. As well as our above market US revenue growth. As for additional detail on the full year revenue results that Keith
Speaker 6: technologies franchise. US orthobiologic revenue grew 17% year-over-year in 2022. US spinal implant surgery volumes increased 23% compared to full year 2021 as revenue per case increased 4% over the prior year. Utilization of our spinal implant systems
Speaker 5: Thank you, John . As announced earlier in January , total revenue in the quarter was $122.2 million, decreasing 2% over 2021 on a reported basis and flat to 2021 on a constant currency basis. You'll see lease raises only twice.
Speaker 5: in our commercial channel and new products are paying off as global orthopedics and bone growth therapies continue their strong performance through the fourth quarter. Specific to innovation, we are encouraged by several new products we introduced in 2022. The Accel Stem Bone Healing Therapy for fresh fracture and non-union fractures.
Speaker 5: partnership with MTF Biologics. The Virtuos Lyle Graph, a shelf stable complete autograph substitute, and Legacy, a demineralized bone matrix. Turning to the performance of each of our product categories, starting with bone growth therapies or PGT, sales for the quarter were $51 million, up 3% on both a reported and constant currency basis.
Speaker 5: spinal implants, which includes both spinal fixation and motion preservation. Revenue is down approximately 7% on both a reported and constant currency basis compared to the fourth quarter of 2021. The decline is driven mainly by continued global competitive headwinds in our motion preservation area, as well as a decline in procedural ASPs in the spine fixation on flat volumes in the US.
Speaker 5: We saw declines coming from some of our Trinity accounts driven primarily by sales channel disruption and offset somewhat by sales from our newer biologic solutions. The results from the merger will help growth initiatives in these franchises going forward as we will be able to offer new innovation solutions to our customers as well as additional options.
Speaker 5: strategic investments in our commercial channels and momentum from new product introductions mentioned earlier. Now moving on to a few highlights from our strategic initiatives. Let's start with product innovation and differentiation. In the fourth quarter, we continue to see a cell-stem bone healing therapies gain traction. We are seeing a high rate of physician interest and now have access to new prescribing doctors.
Speaker 5: We are encouraged by our 2022 commercial rollout and revenue results. We have increased the number of sales reps 4% and added additional sales management to help grow our fracture channel with both fresh and non-union fracture indications. Currently our payer coverage for a sales dam includes over 80 million lives and we expect that positive trajectory to continue.
Speaker 5: and internationally to support continued growth. Now I'll turn the call over to Doug to review Orthofix fourth quarter 2022 financial performance. Doug. Thanks, John , and good afternoon, everyone. As many of the financial measures covered in today's call are on a non-GAAP basis, please refer to today's earnings release for further information regarding our...
Speaker 5: or $95.7 million or 78% of total revenue, down approximately 2% versus the prior year. The primary drivers were declines coming from competitive pressure in biologics and spinal implants as well as decreased procedural ASPs in spinal implants offset somewhat by growth coming from the BGT new product introduction of Excel STEM and...
Speaker 5: product introductions. Full year revenue came in at $460.7 million, up 1% at constant currency, and down 1% as reported. The highlight for 2022 was 11% constant currency growth in our global orthopedic segment as a result of the strategic investments we made in our commercial channels and new product momentum.
Speaker 5: from 46% in the fourth quarter of 2021. This increase is primarily driven by an increase in event spending due to the timing of trade shows as well as an increase in marketing and sales training spend to bring on new commercial distribution. GAP G&A expenses in the fourth quarter were 21% of net sales up from 15% in the prior year period. The increase reflects higher spending on
Speaker 5: was 13% of net sales down slightly from 14% of net sales compared to the same quarter of 2021. On a dollar basis, adjusted EBITDA on the fourth quarter was $15.8 million down from $17 million in the fourth quarter of the prior year. Now turning to tax. We reported GAAP income tax expense of $75,000 or 1% after 2 subscribers at the Pennsylvania Courtather you should view on your Carnal past terms at and due d adult
Speaker 5: without a corresponding tax benefit. In particular, we fully reserved our U.S. deferred tax assets in the fourth quarter of 2021, which was a significant component of the disproportionately high reported gap tax rate last year. For the fourth quarter, we reported a gap loss of 35 cents per share as compared to a gap loss of $1.65 per share in the fourth quarter of 2020.
Speaker 5: Regarding cash, our liquidity position remains strong with $51 million in cash at December 31, 2022, and nearly $100 million of current borrowing capacity under the OrthoFix credit facility. Our free cash flow burn was $34.7 million for the full year 2022 and included strategic investments in inventory and spinal implant set builds.
Speaker 5: plant set builds and leasehold improvements to our Louisville, Texas headquarters building. As of December 31, 2022, OrthoFix had no borrowings under its $300 million secured revolving credit facility. However, on January 3, 2023, OrthoFix borrowed $30 million under this credit facility in part to fund the full repayment of C-Spines' $26.2 million.
Speaker 5: merger integration related costs. I'll now turn the call over to Keith to provide closing comments and 2023 guidance. Thanks, Doug. As you've heard today, we are excited about the momentum both standalone companies generated coming out of 2022 and are very much looking forward to building a leading global spine and orthopedics company in the years.
Speaker 5: patient outcomes. We believe that the combined product portfolios are very complementary and that we can leverage the best in class technologies for each organization to offer the most innovative solutions along the continuum of care pre and post-operatively. OrthoFix will be hosting an analyst teach-in on March 13th at our Louisville facility.
Speaker 5: In terms of financial guidance, at this point we are providing a revenue range for the full year 2023 between 743 to 753 million dollars, which represents 7 to 9% year over year constant currency growth compared to the approximately...
Speaker 5: Because we are still very early in the integration phase, we suggest that investors and analysts set their expectations towards the low end of that range until we can provide more clarity later this year on how effectively we are managing the approximately $20 million of revenue disenergy risk.
Speaker 5: Additionally, we expect first quarter 2023 revenues in the range of 166 to 170 million dollars, which represents 7 to 10% year over year, constant currency growth compared to the approximately 158 million of pro forma combined company revenue for the first quarter 2020.
Speaker 5: more than two thirds completed. And because we are providing a fairly wide initial revenue range for the full year, we wanted to provide that additional data point on this call. Also note that any sales generated by C-SPI for the pre merger period of January 1st through January 4th, 2023 will not be included in the comp-
Speaker 5: from redundant corporate overhead included in G&A, redundant headcounted program spending and spinal implants R&D, sales and marketing, and from a meaningful reduction in IT system-related costs as we integrate a portfolio of very common, and in many cases, overlapping IT systems.
Speaker 5: Costs to achieve those synergies are expected to be around $40 million, but the majority of that spend occurring in 2023, 20% incurred in 2024, and the remainder in 2025. As we get further into the integration process, we will provide additional reporting and guidance metrics.
Speaker 5: Before closing out my prepared remarks, I would like to highlight an upcoming change to our board of directors. John Zurbuczik, our executive chairman, will not stand for re-election as a director of OrthoFix at the company's 2023 annual stock orders meeting coming up in June of this year. He will remain an employee of the company through July 5, 2023.
Speaker 5: We are very appreciative of the years of leadership and the contributions from John and I look forward to maintaining our friendship going forward. I'm extraordinarily excited about the prospects for OrthoFix and I know our team is already making great strides to create one of the broadest biologics and regenerative technology portfolios.
Speaker 3: in the industry. At this point operator, please open up the line for questions. As a reminder to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Matthew Blackman from Stiefel. Please go ahead, your line is.
Speaker 6: We've obviously worked with you before. We know your philosophy on guidance from your time at C-SPINE, but how should we think about your views now on guidance sitting in this new seed, in particular guiding during an integration? Is your philosophy, you put out guidance, we can hit guidance, we can beat.
Speaker 7: Is there any cushion in there perhaps for the unknown? And then just a quick follow up on that. I just wanted to be clear. It sounds like in the commentary from the press release at least that there are no revenue or no material revenue synergies baked into the 23 guide. Is that full 20 million?
Speaker 7: of disinerages baked into that guide and if so does that manifest largely in the global spine business and spinal implant business and then I've got one follow up question. All right that's a lot to unpack. Yeah first question on the guidance the Q1 number obviously were you know more than 2.30.
Speaker 6: mitigating the dis-synergy risk that seemed to be a lot of concerns when we first talked about the merger. For the four-year number, I think Keith's comments were spot-on that we'd expect everybody to kind of set expectations towards the low end of that range because it is still early and that's why we gave a fairly...
Speaker 6: Why range for the full year is to kind of set a baseline and yeah, you know us Matt and our Historical practice of wanting to make sure we set a realistic bar That we're not going to come under and so far
Speaker 6: The success we've had with managing that dis energy risk We feel really good about that two months into the merger The fact that all the portfolios on both sides of the company are growing in the first quarter I think is a good trend for the full year But yeah, we do want to be cautious about setting full year expectations for such a wide time frame
Speaker 6: because there is still the potential for disenergy risk. We think the timing of when we'll get spinal implant sets to create some of the upside revenue synergy opportunities is fairly extended lead times, which will probably be most impactful later in the year, Q4, to set a realistic timeframe. So we still need to manage those disenergy risks, and we don't see a lot of near-term opportunity.
Speaker 6: on the revenue upsides for the synergies. So we are being cautious about setting full year guidance and as Keith said, right, we'd expect everybody to start on the low end and hopefully we'll have opportunities to raise that as the year goes by and get past more of those revenue disenergy risks and continue to mitigate those, but also have better clarity as to what the upside can be.
Speaker 7: for the full year on the revenue synergy possibility as we get delivery of some of those sets that we've ordered on the spinal implant side. So, I think that's the rest of the thing you're asking. Yeah, I appreciate that John . I'll try to make this follow up a little bit shorter. Just curious, I think you've sort of touched on it here early days still, but maybe the synergies tracking as expected. Just any commentary?
Speaker 7: on Salesforce stability in 4Q after the announced deal and now into 1Q23. Just any sort of early commentary on retaining the folks you want to retain and any of the discussions going on with distributors moving in.
Speaker 7: to more exclusive or pulling in new distributors entirely. Just any color on that would be helpful. Appreciate it. Yeah, you bet, Matt. So, we are very excited how Q1 has kicked off. I mean, we gave some color to being two months in. And part of that is because there is
Speaker 5: opportunity for real synergy. And so we're already seeing cross cases. We're already seeing cases that go on that are using both legacy original company products together as a true merged company, including 7D as part of that as well. And I think that's a testament to how we're approaching it also from a sales management perspective. I think the sales management.
Speaker 5: of I think very interesting opportunities for us to take advantage of even greater sales penetration due to other opportunities out there from other companies merging.
Speaker 3: All right, I'll let other people follow up on that thread. Appreciate it, Keith, and thank you everybody. Our next question comes from Jeffrey Cohen from Lattenberg-Thalman. Please go ahead. Your line is open.
Speaker 7: Hi Keith, John , and Doug, how are you? Good, how are you? Great, Jeff.
Super. Congrats on the call and the merger. So I guess firstly, John , you knew this one was coming, but I wanted to ask about segmentation reporting going forward. How are you going to look at that? Is that going to be US international? Is it going to be hardware biologics, etc.?
Yeah, we're still in the evaluation phase of what the reportable segments will be like, because we got to figure out how we're going to run the business internally along portfolio line. So we'll definitely plan to give more color as to the segment reporting once we've made those final decisions and I think we'll have those.
by the first quarter reporting deadline. So no decisions made at this point yet, but clearly something we're evaluating as we go forward and look at how we want to run the business.
Got it. Okay. And then could you give us a sense of some of the GNA expenditures for and some of the signatures that we talked about? I look like Q4 had about 9 million higher at GNA from...
3 plus 6 from each side. How should we think about that for Q1 and then balance of the year before some of these energies start kicking in, at least on the G&A front?
So you're asking about how Q1 will compare to Q4 in expectations for deal costs? Yeah, I think as you're nine, it looks like about nine million spent in the fourth quarter. So does that tail off in the first quarter swiftly or not swiftly or is it kind of going to take a few quarters? I think it's going to take a few quarters.
So deal specific costs will probably be another heavy quarter in Q1 in terms of spend, right? Because there's still ongoing legal fees kind of right up to the end. A lot of the banker fees will get paid at post closing. So that's a Q1. That's a Q1 transaction timeline. Then we'll shift to more cost to achieve the synergies as Keith mentioned in his scripted.
costs and headcount costs occurring over Q2 and Q3 probably.
Okay, got it. It does for us. Thanks for taking the questions.
As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from Dave Turkely from JMP Securities. Please go ahead. Your line is open. Hey, good evening, guys. Maybe one for Boz. I don't want to put him on the spot here, but I guess what I'm trying to look at here is a.
Either something you know either range or targeted area for either free cash flow or earnings I imagine you're not going to want to comment on that and I understand but how about even timing like when do you think will be?
ready to sort of put this together and have sort of directionally some bottom line targets as well.
Yes. Clearly a focus for the first quarter to be able to get through the integration and now we're running our annual operating plan for the combined company and digesting the synergies, going through what we built into the deal model. So I think we have a good sense of the high level and talk about some high level financial metrics and expectations that we're built into.
got it and uh... i know that both the companies worked on the commercial uh... and i think that he spent
They focus on larger distributors of late. Will you guys combined be able to take advantage of all the changes you've made both on the Ofix and the C-Spine side? I think you said not a lot of overlap, but even some of these new changes, would that be true that you'll be able to maintain some of the new choices you've made on both sides?
I do, I do. I think that there's even opportunities where are we in some discussions of current territories that even there's light overlap and how they can combine together. I think there's been a fortunate, I think we're fortunate that we have a distribution team that are excited.
about what the company's new portfolio is and how broad it is, and they want to be part of this growth profile. So I do feel very comfortable that the continued innovation will drive excitement for them as well, because they see the future. They see the future is not just what the company looks like today.
but we have a two to three year plan of even more innovation that will be exciting for the marketplace. Maybe one last one if I could just squeeze one in. You mentioned on the C-spine part the exit from Europe and I know if it weren't to fix it's been, you know, some of the legacy sort of geography where that would California back up to something like less those are Organ aptly and American Star worth going at buy
certainly, at least in Italy and some other places was important, is that when you combine, do you wind up, you know, orthofix
still stays there and you cross out with them or what are your thoughts on Europe specifically if you
had just recently I think exited at least for some of your products. Yeah I think you know Europe Europe is a complicated challenge right now to be frank. There's there's a lot of regulation some of it's getting pushed down the road but still creates a great deal of I would say not even additional it's dramatic expense to
specifically has to deal with. And so we'll continue to evaluate, we'll continue to evaluate how the European regulatory groups drive forward with some new plans that they're promising. But at this time, we wanted to be a cost effective, a profitable venture to spinal implants in Europe .
and we'll continue to pursue it in such a way. Thanks, cut.
We have further questions in queue. I would like to turn the call back over to Keith Valentine for closing remarks. So, thank you again for joining us this afternoon. I'd like to say from over fifteen hundred dedicated employees in the ortho fixed family. We appreciate your interest in the call and joining us today.
We look forward to speaking to many of you throughout the rest of 2023 and hope you all have the opportunity to join us online at the Teaching Event coming up on March 13th. Have a great evening.
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