Good afternoon, ladies and gentlemen, and welcome to Fourth Quarter 2019 SeaSpine Holdings Corporation Earnings Conference Call. At this time, all participant lines are in listen-only mode. [Operator Instructions]. I would now like to hand the conference over to your host Ms. Leigh Salvo of Investor Relations. Please go ahead.

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 fourth quarter and year ended December 31, 2019. During this conference call, we will 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, February 26, 2020. 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, 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. 2019 was another year of solid execution for the SeaSpine team. We delivered on our commitment to pivot to double-digit revenue growth by posting 11% growth for the full year and more than 13% growth in the second half of 2019. We accomplished this through an aggressive cadence of new product introductions, including 10 new products or line extensions; and two full commercial launches. We also expanded our distribution footprint, both in the U.S. and internationally, with the addition of even more committed and exclusive distribution partners. Armed with the robust product pipeline, the opportunity to leverage 7D Surgical’s Machine-Vision Image Guided enabling technology and $92 million in net proceeds raised from an equity offering last month, we have never been better positioned to continue the momentum and gain additional market share. We remain laser-focused on our vision to develop surgeon-centric, cost-effective solutions that combine innovative spinal implant systems with industry-leading orthobiologics, which together, will drive improved procedural solutions and deliver clinical value to the surgeon, hospital and patient. As our recent global sales meeting demonstrated this month, the entire SeaSpine organization is steadfast in executing this vision, and we look forward to achieving even greater results in 2020. Turning to our top line performance. In the fourth quarter of 2019, we delivered the highest quarterly revenue in our history as a stand-alone company, posting total revenue of $43.7 million, an increase of 15% versus the year ago period. I’m especially proud of the 21% growth we posted for U.S. Spinal Implants in the fourth quarter of 2019, which is by far the highest growth rate in that portfolio to date. Total U.S. revenue increased 16% to $39.3 million, and international revenue grew 10% to $4.4 million. In…

Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, total revenue for the fourth quarter of 2019 was $43.7 million, an increase of 15% compared to the prior year. U.S. revenue increased 16% to $39.3 million, and international revenue grew 10% to $4.4 million. U.S. orthobiologics revenue in the fourth quarter increased 11% year-over-year to $20.2 million and was driven by growth in recently launched products, led by the Osteostrand and Osteostrand Plus products. U.S. Spinal Implant revenue in the fourth quarter increased 21% year-over-year to $19.1 million and was led by growth from new and recently launched products, particularly our expanded Mariner platform and NanoMetalene interbody systems. Spinal Implant surgery case volumes increased by more than 10%, and we were able to capture more revenue per procedure with our expanded portfolio. We continue to experience low single-digit price declines. Gross margin for the fourth quarter of 2019 was 64.2% compared to 60.6% to the same period in 2018. The increase in gross margin was due primarily to the favorable shift in geographic and product mix, with higher margin U.S. revenue growing faster than international revenue and higher gross margin Spinal Implant product revenue growing faster than orthobiologics product revenue and from lower amortization of technology-related intangible assets compared to the prior year. We also continue to see the sustained benefits of our focused efforts to reduce the raw material and manufacturing costs of our orthobiologics products. Gross margin for the full year 63.6%, in line with our guidance. Operating expenses for the fourth quarter of 2019 totaled $36.9 a $4.4 million increase compared $32.5 million for the same period of the prior year. The increase was driven primarily by $2.4 million in higher selling and marketing expenses, the majority of which relates to selling commissions, $900,000 in higher…

Thank you, John. SeaSpine remains one of the fastest-growing pure-play spine companies. We are firmly committed as an organization to continue to innovate and to drive accelerated revenue growth through aggressive commercialization of that innovation and to continue to take market share through outstanding customer service. We have an exciting pipeline of differentiated new technologies and a robust cadence of full commercial launches planned for 2020, and there still remains plenty of white space in the U.S. to color orange with the addition of new more committed distribution. With the many new systems and line extensions we plan to launch in 2020, we will be able to capture more of the surgical procedure and to address nearly $2.5 billion of additional market opportunity in the posterior cervical and lumbar fixation as well as the interbody device market segments. With the added procedural synergy from our advanced orthobiologics portfolio, we see almost $3 billion of new opportunity. We are pleased with our accomplishments over the past year and our goal to reposition SeaSpine for sustained and accelerated growth, which has been realized. We are led by the very experienced and focused leadership team that collectively has more than 230 years of experience in spine and orthopedics. And perhaps most importantly, the almost 400 employees of SeaSpine are more motivated and capable than ever to deliver clinically relevant, cost-effective procedural solutions that differentiate us with both surgeons and distributors in this competitive market. We are energized, yet humbled by our recent successes, and we are committed to continuing to grow at a rate that is at least five to six times faster than the overall spinal implants market. With that, we will now open it up to questions. Operator?

Thank you. [Operator Instructions] First question comes from the line of Matthew O’Brien of Piper Sandler. Your line is open. Matthew O’Brien: Keith, for starters here, as we look at the growth acceleration that you’re expecting this year, and I think you mentioned about a 10% growth in volume last year or maybe that’s Q4. How do we kind of deconstruct that growth as we think about 2020, between volume, more revenue per case? And then as you’re introducing – and I’m sure you’re not quite there yet, but as you’re introducing more differentiated technologies, I’m assuming that your pricing pressures will come down ever so slightly. So how do we think about that acceleration this year?

Hey, Matt, the growth is driven by procedural growth and then the mix, as you point out, right, capturing more of the procedure. And a good portion of the revenue, as we indicated, was in the fourth quarter, driven by capturing more of that procedure. And I think the growth in 2020, we anticipate, is going to continue to come from both volume increases and capturing more of the procedure with all the new products and systems that Keith talked about, right? If we’re in the OR, we want to have the orthobiologics, we want to have the fixation, we want to have the interbody and having something like this pedicle-based retractor that’s compatible with our Mariner MIS system, there’s no reason for someone to bring another retractor into the procedure, which just opens the door to our competitor. So we’re looking to continue to drive growth from both volume increases and capturing more procedure for revenue, which we were successful in, in 2019. So we expect that to continue in 2020as well. And in terms of price, we – with – as you indicated, with all the new products we’re launching and how that’s driving a lot of the revenue growth, we’re not seeing much price deterioration. On average, we said it was low single digits. But some of our franchises, we’re actually seeing overall ASP increases because of the new technology that we’re launching. And obviously, that helps with the revenue growth as well. Matthew O’Brien: Okay. And again, for – thanks John. Either John or Keith, that revenue per case opportunity. Can you help frame up where you’re at, at this point? If you’re thinking about, hey, we can get to eventually 100% of these certain cases. On average, are you at 70%, 80% of that I mean how much more runway do you have in those cases as you’re introducing more and more products?

Yes. I would say it’s a much smaller percentage than that, and we want to drive towards that. A couple initiatives that went on last year, Matt, that give us the ability to get better granularity, and we’ll be able to start taking a look at how that combination is more effective is because we have some ability now to do single invoicing with both of our – between our implants and our orthobiologics. So as the year progresses, I think we’ll start being able to get better granularity on some of that data. But I think it’s also important to note that in a number of accounts, we also may already have the orthobiologic on the shelf. And so we want to start figuring out how to get granularity when we’re using implants for orthobiologics that are already on the shelf as well, which is a little bit harder thing sometimes to get granularity on. But we absolutely want to be focused on how we’re getting a broader procedural sell, especially with some of the continued good news we’re getting out of Frank Vizesi and teams work on the effectiveness of our DBM versus competitors that are at two times the price. Matthew O’Brien: Got it. And then just two more for John. And I really don’t want to make a big point out of this first piece. But the guidance for top line growth in – from the release today versus the pre-announcement, the low end is 11% versus 12% in the pre-announcement. Is that just a currency thing?

No. It’s just because when we did the pre-announcement, we put the – I think it was a $400,000 range around the top and bottom, because it was day three. So, on the low end of the range, it got to 12%. But now that we’ve honed it on the final number, it’s 11%, just because there’s no range. So that’s just the math… Matthew O’Brien: That’s pretty straightforward I should have thought of that. And then secondly, your comments about more of the growth coming in the back half of the year or just a little stronger in the back half? I get that there’s new products, but you have easier comps in the first half. So generally, try to get into cadence is too much, but again, easier comps in the first half of the year versus the second half. What – how do we think about how things kind of marks throughout the course of the year?

Yes. I think there’s a few levers that we’re trying to give visibility to. I mean obviously, the one, Matt, is the number and the investment in significant full product launches that will have a very positive impact on the second half of the year. The other is just kind of this general phenomenon or at least in a micro environment and even macro environment, we’re seeing different signs of this as we talk to, do our own channel checks that there’s increasingly bigger opportunities in that second half of the year, specifically in the fourth quarter, and there seems to be this fall off that some clinicians we talk to say that the first quarter has a bit of a different fall off as patients start accepting the fact that they’re under new deductibles and what have you. And the question is, we just want to get through that first half of the year and feel very comfortable about the second half. And I think if you look at our history, we have typically shown that, that the first half of the year is a little bit, yes, different than the second half of the year. And we feel like that’s kind of how we’re going to see our progression, especially in light of the amount of set investments we have in the second half of the year. Matthew O’Brien: Okay, got it. Thank you so much.

Thanks, matt.

Next question comes from the line of Ryan Zimmerman of BTIG. Your line is open.

Hi, this is Sam on for Ryan. Thanks for taking the question.

You bet. Hey, Sam.

So I just want to dig a little bit into the 7D agreement some more, and just kind of if you could describe a little more of the strategic rationale, whether this was viewed more as something where you felt SeaSpine needed a imaging and navigation system? Or if it was specific to the 7D product that you felt it was additive to the company?

I think we have demonstrated that – especially the fourth quarter that – I don’t think you necessarily have to have an enabling technology to show very strong growth on spinal implant. But that said, I also do feel strongly that having an enabling technology, especially the kind of partnership with a like – cultured company, like 7D is, creates an opportunity for us to get into accounts that we’re not in right now or that we’re in at a very small market share. And I think the opportunity to provide accounts that are very interested in navigation or interested in some sort of additional technology that eliminates maybe some of the radiation in the OR or as, I think, many surgeons have demonstrated or have explained, it’s got to have a seamless workflow that over the course of the past 18 months, we’ve seen the progress that 7D has made and felt this is a great partnership for us to have the ability to place systems and work through certain earn-out structures that enable us to participate in a different way in that hospital chain. And so I think, again, it comes down to light culture. The reason this deal, I think, ultimately, in the direction it did is, because it’s like cultures, it’s companies that are very focused on innovation and have the wherewithal to make the appropriate investments to drive the innovation.

Great, thanks. And then separately, on the biologics market, we’ve seen some competitors have some issues in the stem cell and amniotic space. How do you kind of characterize the market going into the first half? And would you say there’s any competitive disruption you think you may be able to take advantage of? Thanks.

Yes. I think that some of the science that was presented at this past NASS has done a nice job of being able to be articulated and understood in the marketplace post NASS. I think additionally, there continues to be insurance providers that have concerns and have – I would say, sometimes in some markets, significant pushback on other higher-priced technology. And so I think that it’s our opportunity that the DBM space has been a long recognized space for many decades. It has full, if you will, support from a reimbursement perspective, and it’s our opportunity to keep demonstrating why we’re so differentiated and have the best technology in the marketplace.

Thanks.

Thank you. Next question comes from the line of Kyle Rose of Canaccord. Your line is open.

Great, thank you very much for taking the question. Congrats on the good quarter. I wanted to take a step back and just kind of think about the big picture. You’ve got all the stats – or you’ve got the new products that are opening up the incremental market opportunity. I guess how do you think about the medium-term growth? Is it more about you’re going deeper and capturing those – that extra dollar per case of the existing cases? Or do you see more from going out and taking competitive share, both from a distribution and a physician standpoint?

Yes. I think we’re seeing both. And Kyle, some of that may be kind of just the reality of how our more exclusives and committed distributors are evolving, right? I think that we continue to bring on new folks, and those new folks are absolutely going after competitive business first. And then we have existing folks and a number of those larger distributors that we were able to celebrate at our recent GSM that are doing both, right? They’re continuing to go after competitive business, but they’re absolutely becoming larger market share in the accounts that we already participate in. And so I still think there’s a balance of both. But certainly, as new distributors come aboard, it is absolutely about going after competitive accounts and going after – especially in areas that we have white space and we’re bringing in a new participant, if you will, or a new partner.

Okay. And then just – John, with respect to the CapEx guidance for the year. I guess I’m just trying to understand, you’ve got this opportunity. It sounds like you’ve got the improvements from a distribution perspective over the course of the last 24 months, more accountability from the core distributors, but still kind of consistent CapEx spending year-over-year. You just – you’re short up the balance sheet. I guess is that just more conservatism? Or is it just being prudent in the planning? Or is there an opportunity to, I guess, pull ahead some of that CapEx spending, build more instrument sets and kind of to take advantage of some of the disruption we’re seeing in the market from competitors, integrations and streamlining of commercial channels?

Yes. The $10 million is a combination of two things. It’s the investment in new set launches and the line extensions, the large pipeline, that Keith outlined, we plan to launch, but also it’s deploying more of our higher running sets in anticipation of that demand. So it does reflect the fact that there are market opportunities for us to continue to take market share from the competition by bringing on the new distributors because we still have a pipeline of those more committed distributors that we’re eager to bring on board, but also the ones that we have going deeper in their accounts, which requires more sets. So we map out what our revenue growth expectations are for the year, and then we tend to over budget on the number of sets that we’re going to deploy in addition to the capital spend on new product launches because to your point, we don’t want to miss out on those opportunities as they arise. Some of them are planned. Others are pleasant surprises. And that’s why we tend to over budget. So the $10 million, again, it’s the same as last year, but you do get some of the efficiency of, for example, the 3D-printed implants. We don’t have to have instrument set purchases for every implant set because some of those will be shipped out with a NanoMetalene implant set, and you only need one set of instrumentation. So even though it’s a very aggressive cadence of new product launches, we are trying to design them for the efficiency simply because of the cost of the instruments to go with those sets. But we are planning in our CapEx expenditures to capture additional market share beyond our stated guidance.

Okay, great. Thank you very much for taking the questions.

Thanks, Kyle.

Thank you. Next question is from the line of Jeffrey Cohen of Ladenburg Thalmann. Your line is open.

Hi, Keith and John. How are you?

Good. How are you, Jeff?

Good. How are you doing, Jeff?

Just well, I got a bunch of questions. I was just trying to knock out a few of them. So it looks like, John, you’re going to break out the S&M and G&A. So previous 68% to 71% is now 52.5% and 60% to 82% on the G&A. And I assume you’ll be doing that forward?

Yes, sir.

Awesome, okay. And then you talked about this $10 million investment. What should we expect happens with the inventory gains on the balance sheet from the $47.2 million for now? Does that go up like $10 million over the next four quarters or $20 million over the next four quarters?

No. I think you’ll see a little bit more growth than you did in 2019, because the overall inventory growth for the full year was around $6 million. I think that, that goes up a little bit just because we’re going to be supporting the accelerated growth rate in 2020, that greater than 15% plus launching all the new systems. I don’t think it hits $10 million, but I think it’s going to be a healthy number above the $6 million we put up in 2019 just because of the cost of the implants to put in the new sets we’re launching and also to support that greater than 15% revenue growth across the full year.

Okay, got it. And then two more if I may, just kind of big picture, whatever order you’d like. Firstly, talk about the portfolio freshness, as far as the products that are zero through two years or zero through three years from the launch and how that – we know it’s changed dramatically, but how you’d expect that continues to change over the next four quarters? And then perhaps a little bit of commentary as far as anything, from a macro standpoint, what you’re seeing on approaches as far as anterior versus lateral and any trends out there in the marketplace should we be cognizant of? Thanks.

Yes. If you don’t mind, let’s go – we’ll go reverse order. I’ll let John answer the first part. And the second part, I think from a trending perspective, we’ve seen some consistency on how that anterior space is continuing to evolve. I think that from a true lateral perspective or you have an OLIF approach perspective continues to still be a popular alternative. I think ALIF has become a very stable market. And also in addition to ALIF, I think, more and more is being done as you start thinking about the trends and opportunities for sagittal alignment and the trends and opportunities for adults, even in slight deformity situation. So still, I think, a very robust market. And one, that’s why we mentioned in the messaging that we’re continuing to pursue the next generation of products. So we’ve had great success in our Shoreline product offering. We’ve learned a lot from the modularity of that system and the features and benefits, and we feel like we have an extremely unique offering that we’re going to be able to do in the lumbar spine an extremely unique offering that we’re going to be able to do in the lumbar spine as well that builds off of, if you will, those learnings. And we think that’s going to be also a game changer for us as we continue to want to get deeper into, not only the interbody opportunity, but combining that with orthobiologics and the complete procedure in the screw system as well.

And then Jeff, the first part of that question is, where do we see new revenue growth as a percentage of total revenue? Was that…

Yes. Just a sense of the portfolio freshness, where over the past couple of years, a larger portion of your revenues just come from more recently introduced products. And how that looks a few quarters out with the newer introductions coming as well?

Sure. Particularly, with the full commercial launch of the extension to the Mariner platform with MIS and revision surgery, I think, will exceed 70% of U.S. Spinal Implants coming from the new products, particularly in the back half of the year. And I think total product revenue in the U.S. should exceed 50% of the year, including orthobiologics because we’re continuing to see a nice uptick in the fiber-based DBM products we launched two years ago. So overall, revenue and gets over 50%, and spinal implants should be well over 70% as we exit the year and probably over 70% for the full year once we get the traction of those full commercial launches of the Mariner extensions.

Okay, perfect. And one more, so I guess I have you on. So on the international front, it seems like you’re hovering around 10% and growing around 10%. As that relates as far as your FTEs and your financial commitment, ex U.S., I mean, would you expect that to continue to kind of hump along as is? Or is there an interest in kind of leveraging that up on the hardware side or status quo works for a while?

I think for the near term, you should assume it’s going to stay around 10% of the revenue, growing 10%. We’re selectively entering into new markets. It’s a pretty efficient business now because we have a sales and marketing office in Lyon, France. And obviously, the U.S. team spend some time focused on international. But it’s a pretty efficient business right now. And there’s not a ton of big market opportunities for us to enter into, but there’s plenty of opportunity with the recent entry into Mexico with the spinal implants portfolio, entry into New Zealand that we think 10% is a reasonable expectation for international in the near term. Longer term, we’ll see what opportunities might arise to create scale. But near term, I think it has a similar profile of what you’ve seen recently.

Okay, perfect. That’s it from me. Nice readout. Thank you.

Awesome. Thanks, Jeff.

Thanks, Jeff.

Thank you. Last question comes from the line of Shagun Singh of Wells Fargo. Your line is open.

Great. Thank you so much for taking the question.

Hey, Shagun.

Hey, Keith. So, I just wanted to focus on the 7D Surgical deal. And Keith, I think, having navigation access to is certainly the right step for the company. So this is a core marketing deal, and you will share the economics on the incremental systems placed on a go-forward basis. So Keith, can you help us understand what kind of success 7D has had so far in placing systems? What steps you plan to take on the marketing side? And do you expect the transaction to be meaningful in 2020? And then anything you can share with respect to the economics that you will be sharing?

Yes. A few questions in there, the first one is obviously, 7D is a private company. So obviously, we do know of all the installs they’ve had. I guess I can suffice it to say that over the last 15 months of being fully – 15 to 18 months of being fully available in the spine space for a – for the navigation module, they have had very good traction. I would – taking a look at being in other organizations over the years, the traction that they have been successful with and how they’ve been successful in getting it through, sometimes difficult capital budget, is extremely impressive. And that said, I will also say that the absolute premise of this partnership is they’re going to continue doing well, placing capital equipment with the successes in the process and the algorithm, if you will, that they already have. But we think there’s even additional opportunity is for those accounts or for those areas where they may not have the capital budget or the capital budget is such a lengthy process that perhaps there’s other ways to share in how we view additional market share at that account. And that’s where we come in and can help participate. And so from an economic perspective, I think we struck a very balanced opportunity where we can engage the hospital as well and talk about ways that can be earned out that gain additional market share and that also provide a fantastic utility for their surgeon base and for SeaSpine, in general. And every account we know is going to be different. So there’s not a standard plan. But I think that the way we have written this partnership and cooperation is that we have a great deal of flexibility on how we can approach accounts and a great deal of flexibility on how they can earn them out. And that’s the spirit of the partnership. The spirit of the partnership is, we also want them to place as many units and as they place units that we’re part of, we have the co-branding or co-marketing opportunities that make it a SeaSpine specific module or SeaSpine specific instrumentation in and around it, and that’s what excites us. It excites us – so that’s really the demonstration of the best kind of partnerships between enabling technologies and implant systems.

Okay, that’s helpful. And then just in light of the recent capital raise, how are you thinking about balancing the need to invest in your business to drive top line growth and your profitability targets? Do you still expect to be EBITDA breakeven at sales of, I think, you indicated $225 million to $250 million and then achieve cash flow profitability at $250 million to $275 million. And just from an internal perspective, does this pull forward your timeline to get there?

Yes. I think that, I’ll let Bos give certain specifics. But kind of how we manage through that raising process is there is a magic zone in around that $250 million, where we get to EBITDA breakeven. But I think you know that innovation and the ability to be able to invest in growth comes at a price of investing in inventory and investing specifically in sets. And so that does drive actually cash flow positive out by that $25 million to $50 million. But I’ll let Bos give some specifics on how we describe that from recent calls in early January.

Yes. At this point, we haven’t changed our expectations for the EBITDA breakeven and free cash flow breakeven. But the Orthobiologics business, as that continues to grow, that really helps fund some of the growth initiatives on spinal implants, because as you know, the scale is important. And as we continue to launch more differentiated products and have the enabling technology of 7D that gives us opportunities that we may want to spend more to continue to grow faster and achieve even more scale. But as of now, we have not changed those expectations. But as Keith indicated in the comments earlier, we’ll provide an update as the year progresses on what the opportunities of 7D are as they arise and then how we’ll capitalize them and finance them as well.

Okay, got it. And just last question from me. I’m just wondering if you guys are hearing anything in the field with respect to procedure volume. It looks like in Q4, the spine market – U.S. spine market actually improved on a stacked two-year basis, but growth was within the 2% to 3% range. But in recent weeks, it looks like the spine names have kind of taken a hit. So just anything you’re hearing about spine procedures in the field and your expectations for market in 2020? Thank you.

Yes. So, like we mentioned earlier, and again, this is sound checks, and we’ve had a great opportunity to be in front of a number of surgeons as the year kicked off. And to a key, every surgeon described that they’ve never had a busier fourth quarter, they’ve never been trying to, if you will, box out and gain more opportunity in the OR, and some of them even for the first time taking – doing surgeries on Friday, post Thanksgiving. And it was absolutely a very busy quarter, there’s no question. So that’s what a few of the surgeons had identified that they continue to see as the years progress, that there’s this buildup in the fourth quarter to try to get the decisions to do surgery because of whatever it is, higher deductibles and all the things that go in and around the higher cost of insurance and patients being more aware of that cost once everything resets in the new year. And so I think it really is some of it is in and around that phenomenon. And I think it has steadily been a more increasingly presence or issue as the years have progressed. But that said, I mean we see very robust signs, again, that we’re going to have another strong growth year in procedures in this marketplace, and I think you’re going to again see procedurally growth much higher. There will be some – giving – we’re giving back with some pricing concessions, obviously. But we still view it as a very healthy market of that, let’s say, 2% to 3% growth, overall. Yes, thanks.

Great. Thank you so much.

Thank you. I am showing no further questions at this time. I’d like to turn it back to Mr. Keith Valentine for any further comments.

Sure. Thank you, operator and thank you, everyone for joining today, and please have a great evening. Cheers.

Ladies and gentlemen, this concludes today’s conference. Thank you for participating, and have a wonderful day. You may all disconnect.