Hello, and welcome to the Q2 2019 SeaSpine Holdings Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today’s call, Leigh Salvo, Investor Relations. You may begin.

Thank you. And 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 second quarter ended June 30, 2019. During this conference call, we’ll make forward-looking statements within the meaning of federal securities laws in regard to our business strategy, expectations and plans, our objectives for future operations and our future financial results and conditions. All statements other than statements of historical fact are forward-looking statements. Such statements may include words such as believe, could, would, will, plan, intend and similar expressions. You are cautioned not to place undue reliance on forward-looking statements, which are only predictions, and reflect our beliefs based on current information and speak only as of today, August 1, 2019. For a description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward-looking statements, please see our news releases and periodic filings with the SEC, which are available on our corporate website at www.seaspine.com and at www.sec.gov. I’ll now turn the call over to Keith Valentine. Keith?

Thank you, Leigh. Good afternoon, and thank you all for joining us. We had another strong quarter marked by solid overall revenue growth and continued gross margin expansion. We are energized by the increasing launch dates of our new products and line extensions as well as the ongoing deployment of additional sets of our most highly utilized spinal implant systems. I am confident that the investments we have made in our product portfolio, along with the continued onboarding of more exclusive distributors, will translate into accelerated revenue growth in the second half of 2019. Based on this bullishness and a strong start to the third quarter we saw in July, particularly for U.S. spinal implant revenue, we are raising our full year 2019 revenue guidance to a range of $155 million to $157 million, reflecting year-over-year growth of 8% to 9.5%. Turning to our top line performance. Revenue for the second quarter of 2019 totaled $39.3 million, an increase of 8% versus the year-ago period, and in line with our expectations. In the U.S., growth was once again led by higher sales of recently launched products, including line extensions that were increasingly driven by our more exclusive distributors. These products contributed more than 55% of our U.S. spinal implant revenue and more than 20% of our U.S. orthobiologics revenue. Over the past several years, we have made consistent progress towards delivering what we believe is a platform of innovative, foundational spinal implant systems and efficient and reliable processes to support full-scale orthobiologics production. In addition, we continue to make meaningful investments and further product innovation that’s supported by expanded distributors, surgeon training and education programs. As a result, we were able to give our larger and increasingly exclusive distribution network the confidence that we can and will support the growth…

Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, total revenue for the second quarter of 2019 was $39.3 million, an increase of 8% compared to the prior year. U.S. revenue increased 7.5% to $35.1 million, and international revenue grew 12.3% to $4.2 million, largely on the strength of spinal implant replenishment orders. U.S. orthobiologics revenue in the second quarter increased 9.3% year-over-year to $18.2 million, driven by growth in recently launched DBM products, led by the OsteoStrand Plus product. As we continue to ramp up production capacity of the fiber space DBM products and broaden our sales and marketing efforts, we’re starting to see more of the expected and desired cannibalization of our legacy particulate DBM products. This controlled cannibalization will have a beneficial impact on our longer-term gross margins and cash flow management as we scale down production of the legacy products over time. Sales of our Mozaik collagen ceramic matrix product line stabilized in the second quarter, and with the addition of the recently launched OsteoCurrent product in May, we expect to generate growth in our synthetic bone graft substitute franchise in the second half of 2019. U.S. spinal implant revenue in the second quarter increased 5.5% year-over-year to $16.9 million and was once again driven by growth in recently launched products, led primarily by the Shoreline and Mariner systems and by our expanded NanoMetalene portfolio. Spinal implant surgery case volumes increased more than 10% but were somewhat offset by low single-digit price declines and procedural mix, more specifically the lower complex spine and deformity revenue, as Keith mentioned earlier. Gross margin for the second quarter was 63.6% compared to 60% for the same period in 2018. This expansion reflects the benefits of our focused efforts to reduce the raw material and manufacturing costs of our…

Thank you, John. We have tremendous opportunity ahead to significantly expand our share in the $10 billion-plus spine market as we remain relentlessly focusing on delivering clinically relevant, cost-effective procedural solutions that differentiate us with both surgeons and distributors in this competitive market. We are committed to continuing to grow at a rate that is at least 40x faster than the overall spine market and are confident in our ability to execute. We are off to a solid start in 2019, but the second half of the year will be pivotal for SeaSpine. We must continue to execute on the numerous product launches we discussed today as well as many others we have in the pipeline and continue to expand the reach and exclusivity of our global distributor network. I am proud of the solid foundation for sustainable growth we have established, which is supported by our organization of nearly 400 energized employees who are committed to providing high-quality, differentiated and complementary technologies that leverage our core competencies in orthobiologics, interbody devices and modular spinal instrumentation systems. With that, we will now open it up to questions. Operator?

[Operator Instructions] Our first question comes from the line of Matthew O’Brien with Piper Jaffray. Your line is open. Matthew O’Brien: Thanks for taking the question and congrats on the quarter.

Good afternoon. Matthew O’Brien: Good afternoon, guys. Would love to hear a little bit more about the back half confidence. Your comps are getting a lot tougher, which I’m sure you know, but you’ve got all these products coming and these new set deployments. Those typically take a little while to really ramp up. So what gives you all that confidence? Is it existing accounts saying, hey, I’m really looking forward to this one or two systems or these one or two systems, or is it the additional sets? Or can you just talk a little bit more about that.

Yes. It’s a couple of things, Matt. It’s the set deployments, right? That analysis we looked at that said the revenue per set generated stays pretty much constant as we add additional sets. So we’re seeing an incremental increase in revenue. We’ve onboarded a couple of more of the exclusive distributors this year, right? And they’re starting to hit their ramps, so they’re going to need to have those – more sets. So the timeliness of those deployment is really critical to the growth. And just the Mariner MIS kind of closing one of the big remaining portfolio gaps. I think there’s a lot of folks who have been kind of on the sidelines ready to work with us but just needed that MIS solution, and I think that’s kind of the final piece of the puzzle to go in place. So it’s all of those factors that’s contributing to the optimism for the accelerated growth in the back half of the year. Matthew O’Brien: Okay. And then…

One additional one, Matt. I think it’s important to note that we have progressively added to the Mariner system, as you know, and the midline cortical was an important part of entering into the MIS area. But the MIS – the full MIS launch really is very strategic. It’s becoming a bigger and bigger part of the market. It does have – typically, it can often have a nice premium, but it also is probably the fastest-growing part of the market as well as more and more people think about MIS, whether it’s mini open or MIS. It becomes a very important part of not only the excitement our distributors have of going after new accounts but also distributors that are coming through the door. And we have a different conversation with them about becoming part of our exclusive channel. So we knew this was an important add, but I think it comes at a very strategic time as we get into the second half of 2019. Matthew O’Brien: Interesting. Thanks, Keith. Sticking along those – the lines about the health of the business, especially on the hardware side. You mentioned this July strength, which is a little surprising just given that we’re in the summer months here and things tend to slow down a little bit. So where are you seeing that strength come from? Is it new accounts going deeper in existing accounts? And then just generally speaking, in spine, it feels like the market generally – and I know you’re a smaller player, but is getting – is better. So I’m wondering if there’s a couple of things you can point to. It doesn’t it sound like pricing pressure is becoming less of a headwind. Are there other things that are a little bit of a tailwind to the whole sector at the moment?

Yes. We feel like we wanted to mention it, Matt, because specifically, we were being very transparent on the deformity challenges that went on in Q2. But interestingly enough, the deformity side of the business, so the traditional customers for deformity, it appears they just had a scheduling of patients in July instead of June. And why exactly some of that went on, we’re not fully certain of, but it did show strength in July. When it comes to the other parts of July that we mentioned, I would categorize it as both. We’re seeing strength with new accounts and we’re seeing strength with existing accounts on the traditional degenerative business. So that’s a good sign. Yes, I agree with you. I think if you look at the history of Q3, Q3 has always been a point of caution or concern. And I certainly like the fact that it’s kicking off strong. Matthew O’Brien: Got it. And then, John, I may have missed this a little bit. But the gross margin improvement that you saw this quarter, the durability of that as you’re adding new sets and more inventory, I mean, how does that metric trend with some of these process improvements that you’re doing as well?

Yes. We expect the benefit of the process improvements in Irvine to continue to give us a lift on the margin. I think as we work to balance the pullback of the inventory levels on the legacy DBM portfolio as the newer fiber-based DBM product sales ramp up – I don’t know, but I would expect more upside to it because that will create a little bit lower absorption in – of all the fixed costs in the plant because we’re trying to balance the increase in the gross margin but also with the right cash management because as that legacy portfolio continues to get cannibalized, we’ll be bringing those inventory levels down. But we think it’s sustainable. Matthew O’Brien: Got it. Thanks so much.

Thanks, Matt.

Thanks, Matt.

Our next question comes from the line of Ryan Zimmerman with BTIG. Your line is open.

Thanks. This is actually Sam on for Ryan. How is it going guys?

Good. How’s it going, Sam?

Good. Congrats on a good quarter. Just a question on industry generally. With some of the consolidation we’ve been seeing in the market, how would you say your customer segments are responding? And what’s been the feedback you’ve seen in the market from your ability to work with new accounts and new customers?

Yes. I still say it’s a strong opportunity for us. I think we’re all familiar with the biggest of big players that have already reported. And it’s still a good opportunity not only for having strong conversations with new distribution, but I think also having conversations with surgeons who are a little frustrated just generally that any time there’s consolidation going on, there seems to be often a lack of communication or at least a lack of maybe their relationship base with the former company. And so I think that’s been – our ability to kind of navigate through that and make sure they’re aware that we have not only very engaged marketing and development, we have a very engaged senior team in those conversations and understanding of the marketplace, in addition to the fact that we’re going to be aggressive going after the best of distribution and offering them a different, and I think, a more focused opportunity.

Great. And then just looking at the portfolio following the Mariner launch, that’s a big, big piece there. But do you feel there’s anything else lacking in the portfolio that you’re looking at going forward? And where do you feel the development for that will be coming from, whether that be in-house or external at this point?

Yes. So there’s a couple of things that would be organic-based, and the organic-based would be – we have a pretty elaborate and moving-forward project with posterior cervical. As you may be aware, we have two posterior cervical systems that came from each of the Theken and original SeaSpine acquisitions by Integra. And so those are in need of updating, and we feel really good about the design team and the progress we’ve made on that system. We’ve already even done our first of a developmental cadaver lab with the early version of the system. So we feel good about the progress there. The other area that we’re not in fully is the areas of the trauma, a more complex spine area, which would be the ability for a vertebral body replacement. And that’s an area that we’re trying to navigate in time and figure out when it’s best to put the investment forward. The good part about that is it is a well-paying procedure. The difficulty with it is the set deployment because often, trauma has very short time lines for how quick the sets need to be there. So you need to basically have deployment in and around regions of the country that may sit for weeks and weeks until they’re requested. And so that’s a little bit – it’s not a challenge from an R&D perspective. We have the horsepower to do it. It’s more of when do we want to deploy our capital for that particular area.

Great. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Your line is open.

Hi, Keith and John. How are you?

Good. How are you?

Hi, Jeff.

Just fine. So firstly, have you done any cases with the Jazz system since the announcement in the spring?

So the Jazz system, there’s a couple components to it. It’s been a matter of, a, integrating. There’s been some – there’s a couple of different versions that we are working on. There’s one that’s traditional that I think people have seen in the marketplace. There’s one that will be proprietary to our own Mariner system. So there’s a couple different pieces to that. But in light of the traditional system, yes. But the proprietary system, that connection with Mariner, that’s not fully launched yet.

Okay. And when do you expect some sets of those to be out?

I’m sorry, when do you expect some what?

Some sets of those to be out? When do you expect that to be available with Mariner that’s compatible?

Yes. Yes. We are placing bets on fourth quarter of 2019, and a number of things need to get in place between approvals and our clearances and also a buildout. But we feel good that everything should be on schedule. It’s – they’ve already shown previous track record of success with integration with a screw system, so we don’t feel like there should be any major hangups.

Okay. Got it. And can you talk about any changes over the past quarter or two at the Irvine facility as the pickup in biologics kind of takes hold? I know you’re running probably half-ish as far as max capacity and throughput there. What’s changed? And is that going a little bit higher? How are you seeing things?

No. It’s materially the same. I think we’re just being more efficient with the process improvements that we’ve made because now, we’re at full bore production on both the fibers-based DBM and the legacy particulate. But overall, capacity-wise, just because of the efficiencies, we haven’t really moved up much from around 50% to 60% of the plant’s capacity.

Yes. I think, too, Jeff, you should know that between the development team and our manufacturing and engineering team, they’ve done a really good job. The first – kind of first task we put them out to was let’s make sure as we launch Strand that we’re really refining the process. And we’ve mentioned on previous calls that we feel our Strand is really differentiated because we have looked at every step of the manufacturing process to really maximize the product’s efficacy. And that’s an important first step. And now, the same folks are able to spend energy now making the process more efficient. And the first goal was let’s make it the best product in the marketplace with the right steps. Next part is let’s really take a look at the way we manufacture, that goes back two decades for some products, and let’s really evaluate how we make it more efficient in light of these process improvements we’ve made to make it more efficacious. And so that’s probably the most exciting part as we get in the second half of ‘19. We’re really starting to see some gains in both of those areas.

Okay. Got it. Could you talk a little bit lastly about case volumes and metrics that you’ve been seeing as far as number of surgeons, number of facilities, et cetera? And then also talk about any cross-selling synergies that you’ve seen. Any pickup on there with the past few months?

Yes. Year-to-date, case volumes are up about 12%. It was 10% in the first quarter. As we’d outlined in the script, there is a little bit of a mix shift. So volume’s up low single-digit, pricing declines. And then just the mix with deformity was down because of the decrease in the revenue there. But I think as we move into the back half of the year, we feel good that we’ll stay in that mid-double digits procedural volume growth with the new distribution that we’re adding and all the new sets that we’re deploying over the back half of the year.

Okay. Got it. And any commentary on cross-selling between the biologics and the hardware?

Yes. Actually, the cross-selling opportunity, we have a number of, I think, significant examples now of – we continue to see strength in the exclusive distributors, especially strength with the newer products. And that trend continues, which, I think, is extremely important. We’re also seeing an increased interest from more and more groups, especially new groups coming aboard, comparing our NanoMetalene technology – and now even NanoMetalene with reef with stranded technology. So that is, to us, the ultimate in cross-selling because it demonstrates not only – we feel strongly that having a orthobiologically friendly implant along with a better DBM will create a strong result as any other combination at a much better economic opportunity.

Perfect. Okay, that does it for me. Thanks for taking the questions.

Yes, thank you.

Thanks, Jeff.

I’m showing no further questions in the queue. I would now like to turn the call back over to Keith Valentine for closing.

So thank you, everyone, for joining us for this call, and I hope you all have a great evening. Cheers.

Ladies and gentlemen, that concludes today’s call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.