SPNE (2020 - Q4)

Thank you for standing by and welcome to the Quarter Four, 2020 SeaSpine Holdings Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Hunter Investor Relations. Thank you. Please go ahead, sir. Unidenti

Thank you for participating in today’s call. Joining me from SeaSpine is CEO, Keith Valentine; and CFO, John Bostjancic. Earlier today, SeaSpine released full financial results for the fourth quarter and year ended December 31, 2020.

Good afternoon. And thank you all for joining us. 2020 was a challenging year due to the significant and volatile business disruptions caused by the COVID-19 pandemic. I have never been more proud of our team’s performance and their commitment to our mission to deliver cost effective, spinal implants in orthobiologics, procedural solutions to surgeons and hospitals to improve the quality of patient lives. That focus translated into the 19 product launches successfully executed in 2020, the most in a single year, and nearly 9% year-over-year U.S. revenue growth in the second half of 2020 with an increased percentage of our U.S. revenue from an expanded and increasingly exclusive network of core distributors. Those factors continue to be the foundational pillars upon which we are executing our market share taking strategy. The spine market was once again adversely impacted by the COVID-19 pandemic during the fourth quarter, second half of the quarter October, growing worldwide revenue per day by more than 17% over the prior year revenue per day, increasing more than 14%, both the U.S. spinal implants and orthobiologics portfolios generated double digit growth. This trend continued until mid-November when U.S. hospitals began to restrict or cancel elective surgeries due to the surge in COVID-19 cases. While U.S. revenue continued to grow year-over-year in both November and December, it did so at a slower rate. We saw those restrictions on spine surgery volumes to continue into January and early February. However, with recent decline in COVID cases, spine surgery volumes are improving once again, and many of our surgeon customers have communicated to us that they have once again accumulated a backlog of spine surgeries to work through.

Thanks, Keith and good afternoon, everyone. As Keith noted earlier, total revenue for the fourth quarter of 2020 was $46.4 million, an increase of 6.2% compared to the prior year. U.S. revenue increased 7.2% to $42.1 million, and international revenue declined by 3.2% to $4.3 million. U.S. Spinal Implant revenue in the fourth quarter increased 8.3% year-over-year to $20.7 million and was led by growth from new and recently launched products, particularly the Mariner MIS Revision systems, the NorthStar OCT system and our expanded line of NanoMetalene interbody devices featuring reef topography. Spinal implant surgery case volumes increased by more than 7%, and we were able to capture more revenue per procedure with our expanded portfolio. We continue to experience low-single-digit price declines. U.S. orthobiologics revenue in the fourth quarter increased 6.2% year-over-year to $21.4 million and was driven by growth in the OsteoStrand Plus product. Gross margin for the fourth quarter of 2020 was 62.8% compared to 64.2% for the same period in 2019. The decrease in gross margin was due to higher spinal implant excess and obsolete inventory provisions in the quarter, which, as we indicated on our prior call, can be volatile from quarter-to-quarter. The anticipated shift to more full commercial launches of spinal implant systems in 2021 is expected to generate higher excess and obsolete inventory charges in the future from a substantial investment in outsized implant inventory required with these set builds. However, that impact, notwithstanding, we believe that we can continue to expand gross margins by 100 to 150 basis points per year over the next two to three years. Operating expense for the fourth quarter of 2020 totaled $39.5 million, a $2.6 million increase compared to $36.9 million for the same period of the prior year. The increase was driven primarily by $1.8 million in higher selling and marketing expenses, the majority of which relates to selling commissions and spinal implant set depreciation and instrument deployment costs, $300,000 in higher R&D expenses and $500,000 in higher G&A expenses.

Thank you, John. Our priorities for 2021 are very similar to those, which I believe we have executed on very well in the past. Namely, to timely and effectively develop and launch clinically relevant products, to increase the number of core distributors and their exclusivity to SeaSpine, to generate above-market revenue growth through more efficient utilization of our spinal implant sets, and to further expand our gross margins. To that end, we plan to launch more than a dozen products in 2021, the most impactful being the alpha launches of the line extension of Mariner with an adult deformity indication and four additional 3D printed interbody systems and the migration of the many alpha launches we delivered in 2020 to full commercial launch. We expect to exit 2021, generating more than 75% of our U.S. Spinal Implant revenue from new and recently launched systems and more than 65% our U.S. revenue from existing and new core distributors. And we expect to generate between 150 to 250 basis points of gross margin expansion from more efficient utilization of our spinal implant sets and inventory and by gaining additional operating efficiencies from our Irvine manufacturing facility. We remain optimistic that we can once again return to sustained and long-term double-digit revenue growth as we emerge from the disruptive impacts of COVID-19. The optimism is fueled by the more than 400 passionate and dedicated employees of SeaSpine who are motivated by our past successes and are driven to deliver clinically superior, yet cost-effective procedural solutions that differentiate us with both surgeons and distributors in this competitive market. With that, we will now open it up to questions. Operator?

Your first question comes from the line of Matt O’brien from Piper Sandler.

Hi guys. This is Drew on for Matt. And thank you for taking the questions. I appreciate the early color on the ‘21 outlook, especially considering all the moving parts over the course of the year here. But, maybe you could kind of talk through some of those parts that we should be factoring into our models? I know you had previously discussed international has been a bit of wildcard from a forward perspective. smaller chunks of the business. But just wondering if visibility has improved there to a degree. And then, obviously, I think your spinal business here in the U.S. should be a key growth driver. But, what should we be thinking about from a mix perspective between your two businesses?

Yes. I think, international is still the area where we have the least visibility only because most of -- all of that business is done through stocking distributors. So, we don’t have on the ground marketing and sales support. We do think it will grow in 2020. But, given the lack of visibility we have, we don’t -- we can’t really dial it in, I think, any better than that at this point, given the continuing COVID uncertainties. But, I think you got it right on the spinal implants in the U.S. driving the growth, right? We expect both portfolios, ortho, and spinal implants to grow. But, I think you picked up on the fact that we’re investing in more spinal implant sets, launching a lot of products obviously and that we’re moving -- a lot of those we’ll be moving to full commercial launch. So, we are investing aggressively in deploying more of our existing sets but also deploying sets that come with those full commercial launches and we do anticipate spinal implants will be leading the growth in the U.S. portfolio.

Okay. That’s helpful. I just wanted to follow up on that comment on the new product side. Obviously 19 launches last year, despite COVID, obviously been a big driver for the top-line. I think, you mentioned 12 new launches here in ‘21. I guess, going back to those 19, what stage are most of those launches, as far as contributing to the top-line? And then, how many limited launches are you currently in that you expect to roll out more broadly in 2021? Thank you.

Yes. So, the full launches that were most meaningful to revenue last year and should be impactful going forward was the Mariner MIS and Revision system that allows us to participate in more complex deformity surgeries. So, those were two big contributors from an alpha launch, Shoreline with reef topography is another big addition. I think, that’s been a nice refresh to the Shoreline portfolio with that reef topography enhancement. And then, everything else was pretty much an alpha launch -- most everything else was an alpha launch. And we’ve called the NorthStar OCT system for posterior cervical as a particularly successful product in terms of driving growth. And that was an alpha launch in 2020, is expected to be one of the many products to go into full commercial launch in 2021. But, it even outperformed our expectations in an alpha launch in terms of the amount of revenue contributions. We are expecting good clinical intake by -- uptake by surgeons, given some of the features of the device. But, that was one particularly that I called out as exceeding our even our own internal expectations for an alpha launch with a limited number of sets we had. So all around a good year, led by full commercial launches, as you pointed out, a lot of alpha launches last year and more to come this year. But, we’re really excited about bringing all that technology in a full commercial launch, that you think about what we’re able to do is just Mariner Shoreline -- Mariner MIS Revision and Shoreline and what growth that generated, think about all the alpha launches in 2020 that moved to full commercial launch, including our 3D-printed interbody portfolio and what we can do there in terms of growth.

Your next question comes from the line of Kyle Rose from Canaccord.

So, I just wanted to just talk about the state of the commercial team. Keith, obviously, you’ve outlined plans to drive higher revenues coming from those core distributors. And then, your commentary at the end of the prepared remarks, you talked about 65%. I think, I heard that right, ‘21 revenues coming from that group, that’s up from where you ended the year at 56% into Q4. So, maybe help us understand what’s been happening behind the scenes that you’re seeing from the commercial team that gives you confidence to see the higher mix of revenues driving towards that channel when we think about 2021?

Yes. I think there’s really two things. The first one is, of course, we’re rounding out the portfolio and getting some, I think, big opportunity items that are very important to the more exclusive distributors. Perfect example is the posterior cervical was one of our last of very old legacy systems, two legacy systems that will now be obsolete as we continue to go into full launch with that opportunity. The other too is that over the course of the last year, we have brought aboard a number of new distributor partners that we feel good about that they will have -- they will be fully up to speed, there’ll be the training that goes along with it, just the ability from them to be more functional in the territory, representing us often takes 9 to 12 months to really become fully functional. And so, we feel good about the fact that the investments that we made a year ago or nine months ago will start paying off as we get into 2021.

Great. And then, when I think about the commentary about ‘21, I know you’re not providing formal guidance, but you did talk about revenue growth north of 20% weighted to the second half of the year. When I look at the performance you put in the second half of this year, almost a record quarter in the Q3, you did have a record quarter in the Q4, and you’re talking about growing 20% with presumably upside to that number in the second half. So, maybe help us think about the puts and takes first half to second half. Is it really just incremental COVID uncertainty in near term, or is there some sort of geographic focus that we should be thinking about as you move through the rest of the year as well?

No, it’s exactly that. It’s just -- it’s how we saw 2020 end and the continued COVID disruptions we saw in -- throughout January and even the early part of February. That has us cautious about the first half of the year, right? Things are trending well with vaccine rollouts and lower case counts. But, I think until we’re more widely distributed on vaccines and a little bit more stability is why we want to be cautious in terms of the back-end weighted growth. But that being said, we’re continuing to launch products and launch systems, as we talked about on the call. And we feel good about the annual number. And hopefully, we’re able to do more in the first half of the year, but I just feel like it’s the prudent thing to be cautious, given the fact that there still are near-term uncertainties presented by COVID, particularly what we saw in the first half of Q1 that we experienced as we wrapped up the year, but things are trending in the right direction since that time.

Your next question comes from the line of Ryan Zimmerman from BTIG.

Thanks for taking the questions. And congrats, solid end of the year. Maybe just on the guidance a little bit, and the back half weighting. Does your guidance contemplate any disruption in the market? I mean, we have a fairly large spinout coming from one of the major players. And so just trying to get a sense of kind of how you thought about that guidance in the context of maybe some of the market dynamics that could actually provide additional upside?

We haven’t specifically addressed what that disruption would be from the spin out, but we’re more focused on what we’ve done in terms of the distributors we brought on board. And the ones we’ve had in our pipeline that we’re managing and also the products that we’ve launched and will transition to full commercial launch. I think, it would bring us good opportunity for us to take even more market share opportunistically, if there is some disruption that comes out of that. But, I think our guidance is more just based on the things we control today and what we’ve been managing in terms of the distribution addition pipeline and new product launches.

Okay. Fair enough. That’s good to know. And then, Keith, I appreciate this metric around the number of products that you’re using today, 1.9 relative to 1.8 a year ago. Just broadly speaking, if you could paint a picture of where you think that can go over time, not as an indication of guidance necessarily, but kind of where you see maybe the opportunity to get incremental usage of your products and whether that could trend north of two, maybe even higher than there.

Yes. I think it’s a good conversation to have. And what goes on, Ryan, if you look back in 2019, where we were really around as we kicked off year in 2019, it was 1.5, 1.6ish moving into as we close the year -- closer to 1.8. And where really can go is you start getting into the ability to capture both the pedicle screw case, the interbody case as well as the orthobiologic and then you start getting into 3 and 3 plus, right? So, ultimately, 3 is phenomenal, because that means that you’re capturing the entire fusion case. And you could go beyond that if you were doing multispecialty, right, if you’re doing a longer construct. But, I think, the way we look at it, we want to start getting up over 2. We want to start having biologics continue to have a strong influence in the entire case. And we also, with -- as we just announced, all of the unique interbody offering that we now have, we feel strongly that we can now carry with the pedicle screw or the rod cases.

Your next question comes from the line of Kaila Krum from Truist.

So, just starting out, I mean we’re two months into the first quarter. Can you just speak to what you’re seeing year-to-date, really? What I’m trying to understand is, you guys have said that you plan to do high single-digit growth in the first quarter. I mean, do things need to get better from here, or do they simply need to be stable, or can they get worse and you’re still confident in that outlook?

Yes. A couple of things to think about it. Right now, we feel good about the fact that numbers are at something more manageable for hospitals that elective surgeries have kicked back in force. And so -- but there’s no way to be predictive. There’s no way to understand if there’s going to be continued ebbs and flows. I mean, there always is a time or there’s a concern that holidays create certain better spreading events. There’s always a concern that there’s new strands that may have to be addressed. So, the way we look at it, though, is that we love the progress that’s being made at the tail half of this quarter, and we love the fact that it looks like it’s going to be a strong book of business as we move forward because there’s a number of delays that are now getting rescheduled and getting back on the books. But, I still don’t -- we don’t feel we have the crystal ball to figure out whether we’re done with elective surgery slowdowns and whether there will be more coming forward.

Yes. No, that’s completely fair. That makes sense, Keith. And then, I know a lot of other companies are talking about sort of how well robotics in enabling technologies are doing. I know you guys have mentioned kind of 7D briefly on this call. But it would be great to just get more of an update there. What you’re seeing with that relationship and just how you’re expecting it could contribute in 2021? Thank you, guys.

Yes. I think that interestingly, we started that relationship in early 2020. And then, obviously, COVID hit, but it gave us a great opportunity to get better trained and to better understand how we can participate deeper with them. And I think as we exited COVID, we had a number of great training opportunities and collaborations that we’re now seeing a lot of different opportunities that we now need to close and help close with them. So, we see the relationship even stronger, obviously, than it was last year. We see a lot of excitement by both of our sales channels to collaborate and try to do the right things in hospitals. And if certain hospitals can purchase it outright, that’s a great direction. And if others need to work through a better way to get a unit placed and earn it out, then we’re in a great place as well to do that. And so, we really feel like the first half of this year, we’ll start to see additional placements. That will give us a great deal of momentum for next year because -- not next half of the year, so tail half of 2021, where I do think that we’re going to continue to see budgets open up and a greater opportunity. And we’ve seen certainly from other companies talking about their robotic sales that there is a robustness that’s going on right now as far as capital equipment being made or capital funds being made available by hospitals.

Your next question comes from the line of Mathew Blackman from Stifel. Mr. Mathew Blackman, your line is now open.

Sorry. I’ve got to learn how to turn off mute button. Apologies. Thanks for taking the questions. I’ve got several -- I’m a med tech analyst, not a tech analyst. Maybe to start, just curious about the procedure mix in the fourth quarter. Some of your peers have been talking about lower complexity procedures having gotten done, while the more complex procedures were disproportionately deferred. So, in essence, there was almost like a double headwind in the quarter on volume and mix. Did you see a similar phenomenon? And if so, are the surgeries that are being put back on the books now more complex in nature? And I’ve got one follow-up.

Yes. So, not a significant component of our business today is the more complex in deformity surgeries. I still believe it’s less than 10%. So, it doesn’t have the same impact on us. We typically do get the bump in Q2 and the height of scoli season and a little bit late in the year. So, it wouldn’t have the same impact on us, but we did see the mix shift a little bit. And we talked about most of the growth came from the procedure volume growth. That was 7%, a little bit of price decline, which has been pretty consistent throughout the industry. And then, we did benefit from mix, but not because of a tilt towards more complex deformity surgeries, the ASP per surgery. But as Keith was talking about earlier, it’s the number of systems used per procedure. So, we’re getting a higher revenue per procedure in the fourth quarter, mostly because we’re seeing an increase in the number of our products used per procedure. And I do think we’ll see a benefit, like probably other companies are talking about down the road as some of those more complex cases get rescheduled, and that becomes a more meaningful part of our business. And one of the reasons we’re making the investments in extending that Mariner platform into an adult deformity indication because I think that will allow us to take advantage of that if that dynamic does come to fruition in 2021, when those more complex cases start getting rescheduled.

All right. That makes sense. And then, my follow-up, just thinking about all the new product flow. Is there any way to characterize the early traction and/or interest in existing accounts versus new or under-indexed customers, or are these new products resonating more or less with either of these cohorts? I guess, what I’m really asking is the portfolio allowing you -- clearly, it’s allowing you to go deeper, but it’s also allowing you to go broader. Thanks.

Yes, it is. Actually, it’s a good observation, because there’s no question that our new product opportunities is giving us the ability to continue going to a deeper relationship in the hospitals we’re already in with those surgeons. But, what we’re also seeing and what’s certainly nice in alpha was a lot of new customers coming forward, right? And that’s because they not only -- they weren’t interested necessarily in our legacy products, but they’re also very interested in some of the new features that we’ve incorporated that other systems don’t have. And so, we feel good about the fact that both segments, if you will, are working for the new products, but we’re especially seeing new customers come aboard, and that will be our goal as we continue through this year and next year is continue to drive going deeper in those accounts that we’ve got an opportunity to finally participate.

Your next question comes from the line of Jeffrey Cohen from Ladenburg Thalmann.

Two issues I wanted to drill in a little bit. Firstly, calling on some comments on OpEx of like 2.6 extra items for the quarter, 1.8 sets 300 R&D, 500 G&A. So, that’s one time, the 2.6 out of the OpEx for Q4, and we shouldn’t think about that as far as modeling forward?

The depreciation and the instrument deployment expense, I don’t want to characterize any of it as onetime. But, it was particularly higher the spend in the fourth quarter as we were gearing up for all the upcoming product launches. So, that was the biggest increase in the OpEx. But, the G&A and R&D increases were more permanent in nature, recurring in nature, and reflect growth in the business and the infrastructure to support that. But I’d say, of the sales and marketing increase, the instrument deployment expense and depreciation will continue at an elevated rate as we continue to launch more products. But, it’s also more of the noncash expense because it’s just deploying the instruments or depreciating the instruments that are part of the historical capital expenditures of the business.

Okay. And if I try to correlate that over to inventory, you’d expect inventory up in the order of, what, about $5 million to $10 million for the year?

I mean off-the-cuff sets, inventory is going to go up for the year? Are you talking about 2020 or 2019? Sorry, 2021 or 2020?

‘21 versus ‘20.

Yes, inventory should go up again in 2021 versus ‘20 because it went up in 2020 versus ‘19 with a bunch of alpha launches, and with the full commercial launches, right, we’re typically doing 2 or 3x the number of sets deployed in an alpha launch. So, CapEx and inventory would both be expected to go up as we deploy all those full commercial launches.

Okay, perfect. Got it. And then as we think about the margins, you had a comment about 150 to -- 100 to 150 aspirational basis-point increase annually, and then, Keith was talking about 150 to 250 basis points. Could you clarify the differential between the two ranges?

Yes. The second one is just the estimation for 2021. We’ve been saying for a while, the long-term expectation to grow 100 to 150 basis points. That’s still intact. But, I think, we’ve got an opportunity to grow it even more in 2021. So, that was the genesis of the percentages Keith gave out.

Your next question comes from the line of Brandon Folkes from Cantor Fitzgerald.

Congratulations on a good quarter. Maybe just two from me. So, obviously, you had a fantastic pace of launches in 2020, and you started out 2021 as well. Without getting too greedy, how should we think about kind of 2022 and beyond in terms of new product launches versus sort of this being a bolus of launches, which is going to drive sort of near to midterm growth. And then, another one, just maybe on gross margin, any additional color you can give us on the phasing throughout the year would be great.

Yes. So, on the continuation of product launches, I think that we’re still going to see a very healthy pipeline as we’ve seen in the past couple of years. And also, as we move forward, it will be similar to 2021. The projects that we’re putting in place that will have momentum or launches in 2022 are as numerous as what we’re planning this year. I think in addition, though, what you’ll see is, you’ll start to naturally see us continuing to improve on existing product lines. So, updating and driving additional features and the ability to address different pathologies. We kind of messaged before that we will start moving into opportunities with tumor trauma, which are important goals for us, are very important to our distribution network as well, but it’s also one that we have taken a very thoughtful approach of when we would be able to effectively launch those and be at the right critical size, and we feel like now is the time to start that development process and direction.

And then, on the gross margin comment, there’s a couple of puts and takes. Overall for the year, we ended up having a higher E&O charge compared to 2019. And again, that’s a function of the number of sets deployed because you’ve got the so-called odd sized implants that you don’t expect to sell very many of, but you need to have one in every set deployed. And then, I would anticipate that to go up a little bit more again in 2021 because you’re doing 2 or 3x the number of sets for the full commercial launch in 2021 compared to the alpha launch in 2020. But the big savings for us, it’s tough to quantify, but the savings is the Irvine manufacturing facility of having slower growth overall in the cost of that facility, but absorbing more of those costs through the production of inventory, which ultimately we sold and orthobiologics inventory, I think, was down a little bit versus the end of 2019. So, we’re not just building inventory for the sake of absorbing overhead. But our overhead absorption as we produced at that facility, outpaced the increase in cost to produce the higher volumes at a really nice pace. So, that’s where we get the benefit from is just the lower unit cost to produce. And that’s a function of 2 things, right, higher production volumes, given the fixed cost of that plant, which is pretty meaningful, but then also a lot of the lean manufacturing projects we’ve implemented at that facility over the last 2, 2.5 years that you’re able to just produce things more efficiently on a variable cost basis as well, using the tissue more effectively and more efficiently. So, it’s hard to quantify where it came from, but it’s mostly coming from that Irvine facility because it’s a very scalable facility with more room to grow because of the fixed cost component and the fact that we could add a lot more volume without adding many more costs, fixed costs, at least.

There are no questions over the phone. Mr. Keith Valentine, please continue.

Thank you, everyone, for joining us. And we look forward to connecting with you after Q1. Cheers.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.