Q2 2023 OrthoPediatrics Corp Earnings Call

Speaker 1: Good morning, and welcome to Orthopediatrics Corporation's second quarter 2023 earnings conference call. At this time, all participants are in listen-only mode.

Speaker 1: 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 Tripp Taylor from the Gilmartin Group for a few introductory comments. Please go ahead.

Speaker 2: Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer, and Fred Hite, Chief Operating and Financial Officer. Before we begin today, let me remind you that the company's remarks include forward-looking statements within the meaning of federal securities laws.

Speaker 2: including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous risks and uncertainties, and the company's actual results may differ materially. For discussion of risk factors, I encourage you to review the company's most recent quarterly report on Form 10Q, which will be filed with the SEC.

Speaker 2: Please note that the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as substitute for other orthopediatrics financial results prepare in accordance with GAAP.

Speaker 2: In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast today, August 1, 2023. Except as required by law, the company undertakes no obligation to revise or update.

Speaker 2: any statements to reflect events or circumstances taking place after the date of this call. With that, I'd like to turn the call over to David Bailey, President and Chief Executive Officer.

Speaker 3: Good morning, everyone, and thank you for joining us on our second quarter of the 2023 conference call.

Speaker 3: As we start all earnings calls, I'd like to begin by highlighting that we held a record 21,000 children in the second quarter of 2023, and since inception, we have now helped over 670,000 kids. And more children remain the best measure of our success.

Speaker 3: In the second quarter of 2023, we generated record high revenue of $39.6 million, representing growth of 20% compared to the second quarter of 2022.

Speaker 3: Despite a challenging operating environment within Children's Hospital, we continued growing our business by taking market share and are encouraged by the momentum we've generated in the first half of the year. We are proud to have again generated growth of 20% against the strongest comparable period of the year, while deploying $9.2 million worth of set.

Speaker 3: Altogether, we are positioned favorably for the second half of the year.

Speaker 3: As expected, we are experiencing gradual, month-by-month improvements in the inpatient surgical environment where nearly all of our procedures are performed.

Speaker 3: As you may have read, many insurance companies have reported increased overall volume, but lower inpatient procedures.

Speaker 3: Our observations are consistent with this recent commentary and we continue to feel the impacts of lower than historical average volumes in the children's hospital environment.

Speaker 3: Nevertheless, execution of our historically successful strategy is leading to consistent quarter over quarter share game.

Speaker 3: and is producing sustainable growth regardless of market conditions.

Speaker 3: Therefore, we are reiterating our revenue guidance of $148 to 151 million dollars, representing growth of 21 to 23 percent.

Speaker 3: Moving to our revenue segment.

Speaker 3: In the second quarter of 2023, we generated total trauma and deformity revenue of $27.5 million, representing growth of 22% compared to the prior year period.

Speaker 3: Revenue growth in the quarter was led by strong performance.

Speaker 3: and deformity correction, and Pega products.

Speaker 3: The quarter saw a record X6 performance from our external fixation portfolio driven by RFX, the recently launched pre-planning software, and the new drive rail system.

Speaker 3: PD Foot, Defos Plating System, and PD Plates, a system we first launched in 2008. All were particularly strong in the quarter.

Speaker 3: Although the Trauma franchise grew slightly slower than it has in the last few quarters, PNP femur and cannulated screws continued their dynamic growth trend.

Speaker 3: Additionally, Pega product sales have been better than we ever expected.

Speaker 3: nearly doubling in the US, and we are just now seeing the early returns of additional deployed inventory.

Speaker 3: International PEGA revenue, while strong, has yet to reach its full potential as we are working through several conversions of stocking distributors to our agencies.

Speaker 3: We expect this to become a strong tailwind and a solid source of growth in the second half of 2023 and beyond.

Overall, strong PEGA revenue will continue to benefit the company for the next several years and we are very pleased with how this is trending.

Speaking of PEGA, in June we announced the limited launch and first procedure using the Giro system, developed by the PEGA R&D team in Montreal.

This unique tethering system utilizes guided growth, providing surgeons a new way to treat limb deformities without the need for osteotomy.

This system builds on our legacy of innovation and illustrates another reason why we are so pleased with the PEGA acquisition.

as it strengthens the orthopediatrics R&D pipeline.

Lastly, on the trauma deformity R&D side, we are eagerly anticipating the FDA approval and beta launch of our PMP tibia system.

which will be a first-of-its-kind pediatric rigid tibial nailing system modeled after our market-leading and largest Toronto product, the PNP Fener.

PMP tibia will serve as a follow-on to our largest and fastest growing trauma product, PMP, femur, and we are extremely excited about its growth potential.

If we see successful approval, we are targeting the first case late in the third quarter.

Within the TMD business, our non-surgical specialty bracing business continues to perform well.

In the second quarter, the non-surgical specialty-breaking business launched the Clubfoot Move Bar, expanding the MDO portfolio, which has received a very positive customer response.

We are eagerly awaiting the launch of several additional products from our team in Iowa, as well as the much-anticipated DF2 femur fracture brace, which recently proceeded to final validation and is launching this month. With respect to MDO, the addition of new products in existing markets and expansion into new markets is bolstering growth.

Now, slightly more than a year into launch, we have validated our thesis that orthopediatrics can and will build a large and profitable business in the specialty braising space.

Our customers are presenting us with several unmet needs in the areas that can truly impact care for kids.

And we're planning to further invest in R&D that can help deliver much needed solutions.

Our specialty braising business represents the most capital-efficient opportunity for growth in our portfolio and reduces the need for continual capital deployment.

While we are very early, we see this business growing to in excess of $100 million in the next several years, providing a new and exciting growth opportunity.

In the second quarter of 2023, we generated revenue of $10.9 million representing growth of 16% compared to the prior year period driven by a continuation of our strategy of promoting combined strength of apatix.

response, and 7D placement. The second quarter started uncharacteristically slow, but dramatically improved into May, and the usual summer seasonality started to show up in June , which we expect to carry forward throughout the summer. We also expect the multiple 7D units placed in GU2

along with our strong consignment and sales pipeline to bolster scoliosis growth in the second half of the year.

We're pleased to see the value proposition of the combination of Apofix, 7D, and Response, comprehensively addressing surge in needs and driving market share gains.

Again, total users in Q2 increased meaningfully compared to the prior year period.

enabling technologies such as additional 7B placement and ongoing firefly usage.

is driving share gain for our Response Fusion platform.

And Apopex Non-Fusion is helping expose new surgeons to all our scoliosis technology.

leading to new customer acquisition.

Apofix usage is growing, both in terms of new users and increases among existing users. Our scoliosis growth continues despite an absence of revenue from three of our largest sites as both surgeons have transitioned to new practice locations.

We expect this will normalize in the coming quarters. We continue to make progress on the development of Apofix's non-Fusion clinical data, which we believe will lead to increasing KOL support and podium presence.

For example, one year data of 148 patients was presented from the podium at Pawsman by Dr. Jeff Haft.

that showed just five of 148 Apopex patients went on to fusion.

and a low device-related reoperation rate of just 6.7%. We're pleased to see these results, especially given that these are the first cases done in the US.

As we learn more, work through the learning curve, and make further advancements on the implant and technique, we expect results will get even better in the coming years.

Given the early data, we expect to see several additional publications in the quarters to come.

On the R&D front, in Q2 we launched several key products and line extensions, including response power, response power torque, response cannulated screws, and response derotation instrumentation.

During the quarter, we performed several surgeries with each of these new products and received positive surge in feedback, with especially glowing commentary about our power system.

Lastly, we continue progress on our EOS suite of products and achieve major milestones on our EOS Guided Growth System here in Q2. We expect FDA submission of this key product by year-end.

Moving on to international.

In the second quarter of 2023, we generated international revenue of $10 million, compared to $8 million the prior year period, delivering 25% growth.

primarily driven by strong performance with our legacy products, slightly offset by slower MDO growth due to timing of stocking purchases by new MDO distributors that were very high in Q2 of 2022.

Agency market sales in Europe were particularly strong, signalizing a normalizing surgical environment.

And progress in our German direct sales model is a bit ahead of schedule.

We're pleased with this rebound and expect the strength to continue in the second half of this year.

While small at this time, we are at the very beginning of launching our scoliosis business Cobb here and here.

and expect this to positively impact revenue as early as 2024. Additionally, sales of PEGA products are just starting to contribute to revenue growth outside of the U.S. as we begin to transition stocking distributors to our agencies in 14 markets.

Once complete, we expect to see very similar results to that of the U.S. and believe this will be a major tailwind to international growth in the second half of 2023 and beyond.

Additionally, we've worked toward expanding our international distribution footprint.

expanding our international distribution footprint. And I have a few updates to share.

This quarter, we signed two new stocking distributor agreements. The first is for distribution of our scoliosis product in Brazil, and the second is an agreement to distribute the broader orthopediatrics portfolio in Peru.

These distribution agreements will strengthen our international presence and we expect them to contribute to our growth in the second half of the year and beyond.

Lastly, we've received positive audit feedback related to the long process of EUMDR compliance with Oracle Pediatrics products and expect to achieve EUMDR approval in the coming years, thus opening opportunities to launch several new to Europe products in 2024.

It is our intention to have the full suite of products compliant in 2024. That brings us to surgeon training and education. To support our goal of helping advance the entire field of pediatric orthopedics, we continue to prioritize outside support of pediatric orthopedic clinical education and training.

This pillar of our strategy is central to who we are as a company, and we believe signals to our customers that we're different than our competitors.

Throughout the second quarter, orthopediatrics held over 90 events, which included training sessions and educational programs reaching over 1200 healthcare professional.

In May, we unveiled our new Emerald sponsorship at Povna and Nashville.

solidifying our position as the leading supporter of the surgical society.

The 2023 meeting saw record attendance and the society continues to grow in both membership and prominence in pediatric healthcare.

Through our long-term commitment to PASMA, we are providing ongoing support of rigorous training events for surgeons and other healthcare professionals.

forwarding educational grants and scholarships, and have founded a Woman's Affinity group to support our combined efforts in diversity, equity, inclusion, and belonging across the subspecialty.

Additionally, we hosted interactive case-based seminars to discuss novel treatment options and adolescent idiopathic scoliosis utilizing our Apopix technology. And we celebrated our colleague and friend, retired Chief Medical Officer, Dr. Peter Armstrong.

as he was inducted into the Posner Hall of Fame. Lastly, before I turn it over to Fred, I'm delighted to welcome Dr. George Dyer to our Board of Directors.

He is a renowned orthopedic surgeon at Brigham and Women's Hospital in Boston, as well as being Associate Professor of Orthopedic Surgery at Harvard Medical School.

For 10 years, George was the program director of the Harvard Combined Orthopedic Residency Program, one of the largest orthopedic residency programs in the country.

His deep experience will allow him to contribute to our clinical training program as well as our product portfolio strategy.

With that, I'll turn the call over to Fred to provide more detail on our financial results. Fred? Fred L

Thanks, Dave.

Our second quarter of 2023 worldwide revenue of $39.6 million increased 20% compared to the second quarter of 2022. Growth in the quarter was driven primarily by continued share gains across our legacy portfolio as well as growth of our non-surgical specialty braising business.

U.S. revenue was $29.6 million, a 19% increase from the second quarter of 2022. Growth in the quarter was delivered across our Trauma and Deformity product line.

including our non-surgical specialty braising business, and across our scoliosis product line.

We generated total international revenue of $10.0 million, representing growth of 25% compared to the second quarter of 2022.

Growth in the quarter was driven by strong performance within our scoliosis product.

as well as our trauma and deformity product line, including the non-surgical braces.

In the second quarter of 2023, trauma and deformity revenue of $27.5 million increased 22% compared to the prior year period.

Grozen the quarter was driven primarily by shared gains across our entire portfolio with strong contributions from deformity correction.

In the second quarter of 2023, scoliosis revenue of $10.9 million increased 16% compared to the prior year period. The revenue was primarily driven by the combined strength of ApiFix, Response, and 7D.

Finally, sports medicine, other revenue in the second quarter of 2023 was $1.2 million, which increased 23% compared to the prior year period.

Turning to set deployment, $9.2 million of sets were consigned in the second quarter of 2023 compared to $3.4 million in the second quarter of 2022.

Year to date, we have deployed $12.2 million compared to $7.3 million in the first half of last year.

The increase was driven by significant new product development deployments, significant PEGA deployments, as well as multiple consigned 7D units.

Section briefly on a few key metrics. For the second quarter of 2023 and 2022, gross profit margin remained constant at 75.9%. So, operating expenses increased $6.9 million, or 24% to $35.6 million in the second quarter of 2023.

The increase was primarily driven by the addition of incremental personnel related expenses required to support the ongoing growth of the company, as well as increased sales and marketing expenses driven by the increase in revenue.

Sales and marketing expenses increased $0.7 million, or 6%, to $13.2 million in the second quarter of 2023. The increase was primarily driven by increased sales commission expenses. General and administrative expenses increased $5.1 million, or 35%, to $19.7 million in the second quarter of 2023.

development expenses increased $1.0 million, or 60%, to $2.8 million in the second quarter of 2023, driven by an acceleration of new product introduction efforts.

what the expectation is for, you know, quote, unquote, normalization in the pediatric space? Yeah, good question. So, yeah, we, it's still not normal, certainly. And we think that's just due to specialized staffing, particularly, you know, in the more complex procedures. We're not seeing the same throughput. And that's pretty consistent with what we've seen now for, you know, better part of a year. That said, and I think we've kind of moved beyond this in terms of not wanting to dwell on it. I mean, we have to continue to execute the things that we do to drive growth. And I think, you know, in the quarter, we saw really nice new customer acquisition that has really, you know, obviously producing 20% growth, we offset.

We see that very clearly. And now it's just a matter of, are we onboarding new customers fast enough to offset that? And as this improves, and again, it will, you know, maybe we have a couple more quarters here where this is a gradual improvement, you know, we'll be in a spot where, you know, just a better spot. But overall, I think we've tried to point it out, but not dwell on it, and, you know, we got to move forward. Yeah, very nice. And appreciate that. Maybe just you wait out a ton of new products, and there's a lot to kind of chew on, I think, for investors, as we think about.

a ton of the pull through because of deployed inventory. I would say in terms of share, in the United States, the FD product has a really high share, but what we're seeing is because it was limited access to the products, we're seeing the user profile of the products expand. More indications are being treated with the FD rod than I think were before when surgeons struggled to get it. And with respect to the rest of the products, as we said, there's six or seven products there.

six of them really haven't seen the light of day in the u.s. or international markets and so you point to all these new product launches and you're right but we're trying to pace all those new product launches with the new things that are going on with pegga because these products that are coming out of pegga to our customers are new to our sales force

and new to our customers as well there. So I guess that's why we have a lot of confidence that now is Pegab, you know, we're a year into this and we see the next several years, this opportunity with Pegab to continue to grow well and access to 20% yearly. And then, you know, we point out the international side of the business where we're going through a lot of transition from where they were only stocking distributors.

that results in. It's a gobbling of revenue in those markets that allows us to consign inventory. So super bullish on where that can take us. It's not just a back half of the year thing. I mean, we see this going on for another several years. Probably not at the macro.

level as big of opportunity as we see for the non-surgical specialty bracing business. I mean, we acquired MDO with the intent to make it kind of the launch of a new platform of growth for us in what we would consider a near adjacency in pediatric orthopedics and non-surgical specialty bracing. And as we've

done that, it is very clear that there are growth opportunities all over that market and opportunities with very limited competition, good reimbursement and, you know, doesn't take capital as much capital to deploy there. So. Again, not purely a 2nd, half thing, but I think as we get into 2024 2025.

We see the opportunity for this non-specialty bracing business to really, really accelerate for the next several years.

Lastly, on the Skoli side, I don't think the product portfolio is fully complete.

You know, we have three different projects right now on the R&D, in R&D that we're working on on EOS. So early onset scoliosis and that's an area of the market which we estimate is about 15% of the scoliosis market that really is untouched by our product portfolio.

And those areas are very complex. It's very complex surgery with the top KOLs and the top institutions.

And as we launch products in that space, probably the first product we'll see is our pelvic, our ribbon pelvic system, and then the guided growth system that I mentioned. We expect those products to obviously drive new, penetrate that 15% of the market.

But much like we're seeing with ApiFix and 7D, we expect that to pull us through and pull us into a lot of major institutions that are just dabbling with our products now.

Thanks for taking the questions. They're very helpful. You bet.

Please stand by for our next question.

Our next question comes from Matthew O'Brien with Piper Sandler. Your line is open. Your line is open.

Morning, thanks for taking my question. So, David or Fred, can you just fill down a little bit more on the domestic business in the quarter? It was a little bit softer than Q1. I know you still got some headwinds. How meaningful are those headwinds? Can you quantify it? I know you said deformity was a little bit softer than you expected. Or maybe just talk about how things built throughout the quarter. And then...

Can you delineate the share gains that you're seeing underlying some of these headwinds that you're facing? If things come back to kind of pre-pandemic levels, which I can't imagine they won't, or pre-RSV levels, how big a tailwind could that be given the share gains that you're taking?

Yeah, yeah, good question. Thanks, Matt. Yeah, so we've been doing this a long time and I think, you know, an indication that a marketplace is not completely behaving entirely rational is probably what we saw in Q2. You know, when we think about the build, we really, really struggled and we pointed it out in the call, we struggled in April . We had some big big medirmations, men and women and really little diced-out questions when thingsella gauged the market heels. We didn't, you know, grab NASDAQ, we didn't start seeing this commercial market or all of these other systems in and

you know, we just didn't grow the way that we would expect it for, you know, the month. And then we saw this major rebound in May. I mean, a very strong snapback. So obviously, Matt, the people that were, you know, our customers didn't leave us in April and stopped liking our products. They came back in May and then we saw kind of an ease into June in terms of the seasonality. And that's carried forward through the summer.

bit of pause to, you know, we like what we're seeing, we like the share gain, but even despite a lot of that share gain, we have a month and a quarter that just doesn't look normal or rational. And I think that gives Fred any both a bit of pause to not get out ahead of ourselves, not to be, you know, not to be guiding super aggressively because that's just not normal. Now, I think over the course of the next few quarters.

certainly into 2024, things will start to normalize. We were very pleased to see June , and we're pleased to see the seasonality in the business. I think there was some question coming into this quarter, particularly against a very difficult comp we had from prior year. We had some concern that could June be as big as it needs to be, given the staffing issues.

And it wasn't as big as it's ever been in terms of throughput, but it certainly was big and it's given way to a really nice summer here for us. So, you know, we haven't counted it all up in terms of what we think is going to happen when all of this comes back to normal. But you got to think that with more and more customers using more and more products and improving.

growth like we've delivered for years.

Got it. Appreciate that. And then as far as the, the bracing business, I, you know, you mentioned a 100Milliondollar business. Eventually. It sounds like more like 25. that's really going to start to ramp up significantly. But. Can you just talk about the investment needed, how you build that business to 100Million bucks and how you do that alongside.

R&D side. We knew that before we acquired MDO, but I think once our customers saw us make that acquisition and we started seeing the growth that MDO is producing just through the partnership of our people and their people and now us together.

It gave us a lot of confidence that we made the right decision. Move bar came out, we see in growth related to that. We got DF2 on the way. DF2 was featured prominently in some KOL papers that were awarded at Posna for the last two years. And there's just a lot of buzz around those product lines and there's very limited.

are less than our implants. And then, you know, some investment in the selling organization, we feel very strongly that we're going to be able to build that business and build it pretty rapidly. I think it's going to contribute in 2024. It's probably one of the factors that will contribute to, you know, continuation of kind of our 20% plus growth base.

But yeah, you're probably right, it gets much bigger in 2025, 2026. And Fred and I just want to point out that this is another area of growth we haven't talked a lot about, but it should give investors a lot of confidence that we've got another level of growth here in addition to all the things that we're doing on our surgical side that are going to continue to produce really nice revenue growth profit.

Don't require, it doesn't require, it can find inventory. Conserves cash, I would think that's everything we all have been aspiring towards.

Got it. Thank you.

Please stand by for our next question.

The next question comes from David Saxon with Needham & Company. Your line is open.

Yeah, good morning guys and thanks for taking my questions. I guess first I wanted to ask on Apifix. I know there's a competitive product launching. So, you know, are you seeing any impact around Apifix docs, trial and impact new product? I know you called out new and existing user growth but just would love to hear kind of what you're seeing from a competitive perspective.

And also just any update on at the fix and kind of just the expectations for the year.

Yeah, so we haven't actually heard. I'm sure it's a fine product. We just haven't heard anybody use the product in the US yet. I'm sure it's happening. But, you know, we were aware of the product internationally. I think it's been available for a number of years, but listen, I think our position on.

non-fusion surgery in general is that as other people enter the tethering space it just drives awareness patient awareness and surgeon awareness that non fusion surgery for pediatric scoliosis is is here to stay it's going to grow over time we view the market as fairly embryonic so right we're going to see new people enter no one can compete directly with what we do obviously

to start adopting the technology. You know, we added a number of new users. We have a number of sites that are applying for their first IRB to start using this product commercially. And, you know, I think this is a continuation. We think we'll see this product.

continue to grow as the marketplace grows. And the more people that enter the market, particularly on the anterior side of the surgical field, probably benefits us because it just raises awareness. And again, I think we stand by our claim here. We think this business has, you know, give or take doubles this year and probably does that again next year.

Well, and then just on OPEX, it was, I think, mid 20s percent in the first half versus last year. It looks like a lot of that R&D behind some new product launches and G&A. So, does that continue or can we see some more leverage in the model as we go into the back app? Yeah, we'll see some more leverage in the.

They mentioned earlier that lack of consignment on the non-bracing side. Those products are all sold basically through our e-commerce website, so we're not paying a commission on those bracing products, which gives us nice leverage on the sale and marketing side. R&D, we will continue to invest in that pretty heavily. And then on the G&A side, it's really the .com.

Depreciation and amortization that's driving that. We're getting leverage on the cash side of G&A. So, yeah, we should see some leverage continue in the 2nd half of the year and really into next year as we have different growth drivers, I guess, improving the top line. Okay, got it. And then just a quick.

So Pega was purchased July 1st of last year, and that was about a $6 million run rate business. So a million and a half ish pre acquisition.

Okay, got it. Thanks.

Please stand by for the next question.

The next question comes from Dave Turkely with JMP. Your line is open. Great. Good morning. Can you hear me? Okay. Thank you.

Yeah, yeah. Just to clarify one up front here, the month-to-month comment, I'm assuming that's typical in 2Q, but it may not be. I understand that it sounds like it started slow and got a lot better, but is that typical for you in 2Q, or is that not typical in terms of how it progresses?

Yeah, yeah, Dave, let me clarify. It is typical to see that ramp. I guess what we saw is growth rates. Uh, the comparables were.

not normal, at least as it pertains to April . Normally we see this night smooth ramp into June and then obviously you know June , July , August those are our big months in terms of volume but you know as we just look at what April did versus what April did prior year and frankly what April does prior years for in the past.

you know, we're still seeing that chop. That was what I was trying to point out, is not that there wasn't a steady ramp into the year that was normal. It was just that what we saw in the month was pretty inconsistent with what we historically see in terms of kind of the growth rates that we would see over prior year. And then we saw almost complete reversal of that in May where

you know, revenue shot up and carried us into the summer. Does that make sense? Yeah, totally. I get it. Thank you for that. And as a quick follow-up, you mentioned enabling technologies, you know, Firefly and 7D driving, even some response.

shot up and carried us into the summer. Does that make sense? Yeah, totally. I get it. Thank you for that. And as a quick follow up, you mentioned enabling technologies, Firefly and 7D driving, even some response. I guess I just like to get your thoughts on.

how your docs are adopting enabling technologies. What you expected is are they more willing, is it, you know, are they conservative and it's taken a little longer, just any color you could give us in terms of, you know, how that initiative is rolling out. Thank you. Yes, yeah.

There's no question that the pediatric orthopedic surgeons, particularly on the scoli side, are keenly interested in enabling technologies and particularly on the spine side. We see a real opportunity for that also on the trauma limb deformity side, which is why we really like this partnership. We think over time the partnership with C-Spine 7D OrthoFix will allow...

for navigation with very low radiation for pediatric patients is extremely high. I think one of the things that's held navigation back in the pediatric space is because historical navigation platforms involve so much radiation and, you know, the pediatric patient absorbs a lot of that radiation and it's not particularly good. And so now that there's a solution.

that is very low radiation and frankly it allows people in the operating room not even to have to wear lead and a long surgery, that's a big deal. I think the surgeon feedback, health care provider feedback across the board related to the enabling technologies particularly 7D is very high.

The only thing that I think we were a bit surprised by is, you know, we have never been in the capital market, capital equipment sales market. And so this is a bit new for us. And frankly, we were probably a bit naive in terms of how we thought that the hospital environment would allow for purchase or even consignment on contract.

some of these units. And so we've done a lot of work over the last year or so to put a lot of options in play. And we're starting to see, particularly Q2, and we think throughout the balance of the next year to 18 months, a number of these units that we have in sight start to go on contract from a consignment standpoint.

And we even have some sales, and we have some sales pending. May not happen in Q3, but we're going to have some capital sales here, we believe, in Q4. And so again, like what we see there, it's probably just maybe a little delayed in terms of not the surgeon adoption, but the hospital taking on the product and getting it going. Does that make sense?

some sales and we have some sales pending may not happen in Q3 but we're going to have some capital sales here we believe in Q4 and so again like what we see there it's probably just maybe a little delayed in terms of not the surgeon adoption but the hospital taking on the product and getting it going does that make sense yes and thank you for that

Sure. Please stand by for the next question. The next question comes from Sam Brodowski with Truist Securities. Your line is open. The next question comes from Sam Brodowski with Truist Securities.

Hey, thanks for taking the question and congrats on a good quarter. Just the first one, just to put a finer point on it, we're May and June sort of back to the normal inpatient dentist level that you're expecting, or still a little bit of room to go there, and then just relating that to guidance. The second half, still assuming that.

And we just look at the volume, total procedures done, revenue generated. We see in a lot of the big accounts, and you know, we cite these three places that were APA fixed accounts, but they're also SCOLI Fusion accounts. I mean, those accounts were, we had some accounts that were way off, comparatively, to prior year, and again, it's not, you know, we didn't lose share in those accounts. And so, you know, it isn't normal, but it's better, right? It was better in May and June , and April was kind of an enigma for us. It was an odd month all the way around. So, no, we're not signaling that, you know, just that it certainly got better. It still wasn't running kind of full tilt, like we would expect it to, you know, in the coming quarters.

Thanks, that's helpful. And then just one on the international scoliosis. Can you help us think about how big of an impact that could be? How much scale do you think you can have in 24 and international markets with scoliosis?

And should we think about sort of the whole portfolio being on to the nationally including Appafix or is that more just starting with?

Some of the core products and then going from there

Yeah, so, you know, probably most people don't know, probably, I guess I realized that we essentially sell no scoliosis products in Europe right now. And we do sell scoliosis obviously in Australia and in South America, Latin America and have a good business there. And we sell scoliosis products in Australia and in South America.

But, you know, the products we had never really launched Skully. Part of this is related to EMDR, right, and which products and what timing we were going to get EMDR approval. And so that's why we call that out. It's a good pickup, Sam, that we call this out that there's a number of products in Europe that, or a number of products in the United States that are very well accepted here in the U.S. that are not sold in Europe .

impact on the scoliosis of the overall business next year will be huge for Scoli in Europe . It's certainly going to take some time to build, but it definitely will impact the scoliosis growth rate next year, even if that number is, you know, say a few million dollars. Now with respect to Apofix outside of the US, we have actually pulled in accounts post acquisition.

The Apofix leadership previous had had allowed some people to do some procedures outside of the United States through stocking distributors that we have in fact halted because we're trying to capture data and want to make sure that that data is good. So we're a bit in the process of relaunching Apofix through our scoliosis strategy. And again, we expect to see a very similar dynamic, right? Apofix.

brings customers to our product portfolio. We follow that up with response and the full portfolio and kind of pull that through. We expect those dynamics to be similar in major European markets and again, not huge in 2024, but it will have an impact on the growth rate.

Thanks for the question.

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