Alphatec Holdings Inc (ATEC) 2008 Q4 法說會逐字稿

Good day, and welcome to the Alphatec Spine, Inc., fourth-quarter, fiscal-2008 financial results conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mr. Peter Wulff, Chief Financial Officer. Please go ahead, Sir.

Thank you, and good afternoon everyone. Welcome to Alphatec Spine's conference call to discuss our fourth-quarter and fiscal-year ended December 31, 2008, financial and operating results.

With me today are Dirk Kuyper, President and Chief Executive Officer; and Ebun Garner, General Counsel.

By now you should have seen a copy of today's press release announcing fourth-quarter and fiscal-year 2008 financial and operating results. If you do not have a copy of today's press release, you can find it in the investor relations section on our website at www.AlphatecSpine.com.

Before we start, there are a couple of items we would like to cover. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available later today on our website and will remain available for at least 30 days following the call.

We would like to remind you that our discussions today include forward-looking statements. These statements are based on certain assumptions made by us based on historical trends, current conditions, expected future developments including business prospects, product development objectives, future financial performance, and other factors we believe to be appropriate in these circumstances.

Risks and uncertainties may cause our actual results to differ materially from these projected in these forward-looking statements. You can find a discussion of these factors or more information about us in our filings with the SEC including the risk factors section on our annual reports on Form 10-K and subsequent quarterly reports on Form 10-Q and periodic filings on Form 8-K.

These forward-looking statements are made as of the date of this call, and we assume no obligation to update these statements publicly, even if new information becomes available in the future.

This broadcast is covered by US copyright laws, and any use or rebroadcast of all or any portion of this conference call may only be done with our expressed written permission.

I will now hand the call over to Dirk Kuyper, Alphatec Spine's President and CEO.

Thank you Peter. Good afternoon, and thank you for joining us today.

As most of you know, we previously pre-announced our fourth-quarter 2008 revenue performance on Tuesday, January 13 of 2009. At that time we announced continued record revenue growth, a preliminary 2009 revenue and EBITDA guidance, announced the launch of OsseoFIX spinal fracture reduction system in Europe, as well as gave an update on improvements to our US sales distribution.

This afternoon we will provide additional highlights of our operating performance from the fourth quarter of 2008 as well as an overview of new product introductions and accomplishments that were achieved.

I will focus my remarks on updating you on the four primary drivers of growth at Alphatec -- first, the continued expansion of our core product portfolio; second, future product development initiatives addressing the aging spine; third, US sales force and distribution improvements; and forth, international expansion opportunities. I will then turn the call over to our CFO, Peter Wulff, who will provide a more detailed review of our financial performance. And following Peter, I will come back and discuss 2009 growth initiatives and review our 2009 financial guidance before opening up the call for questions.

Our revenue through the fourth quarter of 2008 were a record $28.4 million, representing a 33% increase over revenues for the same period last year. This represents the sixth consecutive quarter of record revenue and an accelerating growth rate over prior periods.

In the US we grew fourth-quarter 2008 revenues by approximately 29% over last year's quarterly revenues due primarily to the ongoing strength of our core business growth rate.

For the full year 2008, revenues were $101.3 million, an increase of 27% over the full year of 2007.

Full-year 2008 revenue for the US of $81.5 million grew approximately 22% over 2007 US revenues.

We had an extremely busy year in 2008 and are pleased with our accomplishments, especially in achieving record revenue and positioning Alphatec Spine for long-term growth through our focus on the aging spine.

We continue to grow revenues at rates significantly higher than the spine market through the introduction of innovative new products, improvements in our US sales force, and expansion of our international operations.

Highlights of 2008 regarding our four primary growth drivers are as follows. First, we launched eight new products throughout the year including line extensions and upgrades to our core product portfolio. These products include the new NOVEL cervical interbody and corpectomy systems, the Illico minimally invasive retractor and cannulated screw system, and our ProFUSE demineralized bone scaffold.

We are particularly pleased with the growth rate of our cervical business segment, which grew at greater than 50% in 2008 as compared to 2007. This sector includes the Trestle anterior cervical plate which was launched in late 2007 as well as the SOLANAS posterior cervical thoracic product line, which both continue to show strong demand.

Our new NOVEL cervical interbody system is used when performing an anterior cervical discectomy and fusion procedure. Our cervical corpectomy system, which we launched in mid 2008, outperformed our expectations, and we see continued growth in both products going into 2009.

The total non-bone, or allograft interbody, market in the US is estimated to be valued at more than $460 million in 2008, according to Millennium Research, and Alphatec has more than a 5% US market share in the interbody market -- in the non-allograft interbody market.

We continue to innovate and add to our product lines such as with the recently announced ALIF system that was launched at the AAOS meeting last week, and we plan to continue increasing market share in this segment.

The Illico MIS retractor and cannulated screw system was launched following the NASS meeting, and we are pleased with the initial performance. The retractor has been extremely well received by surgeons as easy to use, low profile, and versatile. We will continue to expand on this performance with the release of additional sets in 2009, and we have an ongoing development effort of a full percutaneous system, and we will provide additional clarification as to launch timing in mid-year 2009.

Finally, I want to mention our ProFUSE demineralized bone scaffold, as we believe this product has a substantial growth opportunity for the Company. ProFUSE comes packaged in our proprietary vacuum packaging system that allows for rapid and uniform hydration with any liquid, including proteins, bone marrow aspirate, blood, etc. Once hydrated, ProFUSE can be squeezed and formed much like a sponge and is designed to fit snugly inside our PEEK and allograft spacers providing our sales force the opportunity to pick up incremental revenue per procedure. When our spacers are used, ProFUSE has the potential of adding roughly $1,000 to $1500 per interbody.

Secondly, I'd like to update on our aging spine initiatives. We have successfully positioned Alphatec as the market leader in providing solutions for the aging spine, and throughout 2008 invested heavily in R&D to in-license, develop, and commercialize new and innovative products to treat the aging spine. The majority of these products will not make significant contributions to revenue until late this year, 2010, and beyond.

One of our key aging spine products is the OsseoFIX fracture reduction system. As most of you on the call know, and as we have previously stated, the FDA has requested clinical data to support our 510(k) application. We expect to begin our 510(k) clinical study in the second quarter this year and will provide additional information and an update on our discussions with the FDA later in the call.

We did receive European CE Mark approval for OsseoFIX and launched the product in Europe in the fourth quarter. We held our initial training in Europe with leading spine surgeons on the use of OsseoFIX at the University of Vienna in December. Over 30 physicians and selected distributors were in attendance where they received hands-on cadaver training on the safe and effective use of the OsseoFIX system.

The physicians represented a number of countries in Europe including the Benelux, Denmark, Greece, Italy and Turkey. These initial efforts resulted in modest revenues in the fourth quarter with significant interest from both distributors and surgeons. We are enthusiastic about the strong initial response to OsseoFIX and look forward to continued uptake of the product.

Our second training lab in Vienna is set for the end of this week, and we have 35 surgeons and a total of 50 participants attending.

Our third growth driver is our improving US sales force and distribution. We expanded and upgraded our US sales force significantly in 2008 to drive ongoing revenue growth. Our US distribution network continues to grow both in terms of absolute numbers and dedication. Our Company goal was to have 60% of our distributors be exclusive by year-end 2008, and as previously announced we've improved this ratio to over 70% of our total distribution network. This is an increase from the end of 2007, where only 40% of our sales force was exclusive.

We now have over 85 total distributor organizations in the US, which we believe represent over 240 individual sales representatives.

Our fourth growth driver is international expansion. We continue to expand internationally, and in 2008 revenues from Europe and Asia reached $20 million, representing a growth of over 49% versus 2007.

We're encouraged by early interest and uptake in OsseoFIX in Europe, which in a short -- which has in a short time driven new distributor relationships and surgeon adoption.

In Japan we added additional direct sales representatives, and we are driving a shift in revenue mix to increasing sales of higher-margin Alphatec spine products.

Throughout the year, we also strengthened Management team and consolidated functions here in Carlsbad in marketing, manufacturing, and research and development.

Lastly, in the fourth quarter we completed a $30 million credit facility through Silicon Valley Bank and Oxford Finance Corporation. This financing gives us the ability to pursue our business strategy and development efforts in both the core spine market and the aging spine market, as well as allow us continued expansion and upgrading of our distribution platform.

We are pleased that our business provides us with the ability to raise capital on reasonable terms in the current financial environment.

After a productive and busy 2008, we believe that we have created a platform to support the vision and leadership at Alphatec for continued success.

I would now like to turn the call back over to Peter to discuss the fourth-quarter and full-year 2008 financial results. And I will conclude with 2009 product initiatives, financial guidance, and concluding remarks. Peter?

Thank you Dirk. The following remarks are about our reported operating performance for the fourth quarter and the fiscal year ended December 31, 2008.

Consolidated revenues for the fourth quarter of 2008 were $28.4 million, an increase of 33.3% from the $21.3 million reported for the fourth-quarter 2007.

US revenues for the fourth quarter of 2008 were $22 million, an increase of 28.8% from the $17.1 million reported for the fourth quarter of 2007.

Asian revenues for the fourth quarter of 2008 were $4.8 million, an increase of 12.9% from the $4.3 million reported for the fourth-quarter 2007.

European revenues for the fourth quarter of 2008 were $1.6 million, versus no revenues reported in 2007.

Consolidated revenues for the full year 2008 were $101.3 million, an increase of 26.6% from the $80 million reported for the year-end 2007.

The US revenues for the full year 2008 were $81.5 million, an increase of 22.1%.

Asian revenues for the full year 2008 were $17.7 million, an increase of 33.2%.

And European revenues for the full year 2008 were $2.1 million versus no revenue reported in 2007.

Gross profit for the fourth quarter 2008 was $16.9 million, an increase of $4.2 million over fourth-quarter 2007 of $12.6 million.

Fourth-quarter 2008 gross margin of 59.2% was relatively consistent versus fourth-quarter 2007 gross margin of 59.1%.

Product costs did decline year-over-year but were partially offset by an increase in product royalties and the amortization of intangible assets.

Gross profit for the year-end 2008 was $64.7 million, an increase of $14.5 million over the year-end 2007 of $50.2 million.

Full-year 2008 gross margin of 63.9% represents a 120-basis-point increase over our 2007 gross margin of 62.7%.

Total operating expenses for the fourth quarter 2008 were $21 million, a decrease of $2.8 million compared to the fourth quarter 2007 operating expenses of $23.8 million. The decrease was primarily related to 2007 in-process research and development expenses of $6.8 million offset partially by increases in research and development, and sales and marketing expenses.

Total operating expenses for year-end 2008 were $92.5 million, an increase of $22.6 million over year-end 2007 of $69.9 million.

The increase in 2008 operating expenses was primarily attributable to Depuy Spine patent litigation settlement expense of $11 million as well as increases in both research and development, and sales and marketing expenses.

Research and development expenses for the fourth quarter 2008 were $3 million, an increase of $0.8 million compared to the fourth quarter 2007 of $2.2 million.

Research and development expenses for the year-end 2008 were $13 million, an increase of $6.6 million over year-end 2007 of $6.4 million. The increase in 2008 research and development expenses was primarily due to development activities relating to the development of the OsseoFIX, the OsseoScrew, and additional product development.

Sales and marketing expenses for the fourth quarter 2008 were $11.5 million, an increase of $2.8 million compared to the fourth quarter 2007 of $8.7 million.

Sales and marketing expenses for the year-end 2008 were $42.4 million, an increase of $8.9 million over year-end 2007 of $33.5 million. The increase was primarily due to the increased sales commission expenses related to the increased sales volume, increased sales management, as well as marketing activities to support the new product introductions.

General and administrative expenses for the fourth quarter of 2008 were $6.3 million, an increase of $500,000 compared to the fourth quarter of 2007 of $5.8 million.

General and administrative expenses for the year-end 2008 were $23.4 million, an increase of $2.8 million over year-end 2007 of $20.6 million. The increase in 2008 expenses was primarily attributable to stock-based compensation expenses and increased administration costs in Asia.

The net loss for the fourth quarter of 2008 was $5.1 million, or negative $0.11 per share, both basic and diluted, compared with a net loss of $11.2 million, or negative $0.24 per share, basic and diluted, for the fourth quarter of 2007.

Net loss for the year-end 2008 was $29.3 million, or $0.63 per share, basic and diluted, compared with a net loss of $20.2 million, or $0.54 per share, basic and diluted, for the year-end 2007.

On a non-GAAP basis for the fourth quarter of 2008, we reported EBITDA adjusted for stock-based compensation and in-process research and development expenses of negative $533,000. This includes two nonrecurring costs which total $590,000. First, we recorded US severance expenses of $425,000 as we streamlined R&D, manufacturing and marketing functions. Secondly, we reported $165,000 -- year-end accounting adjustments in Japan.

Excluding these items, adjusted EBITDA for the fourth quarter would've been a positive $57,000.

As of December 31, 2008, cash and cash equivalents totaled $18.3 million.

During the fourth quarter, we raised net proceeds of $12 million through our credit facility after paying down prior debts of approximately $14 million.

Our cash burn for the fourth quarter was approximately $4.5 million, and we expect our burn rate to decrease as we move through 2009.

Given our expectations for revenue growth through the year, coupled with reaching profitability in the third quarter of 2009, we believe that our current cash position and available debt is sufficient to fund the business through 2009, after which point we expect to be generating cash.

Now at this point, I would like to turn the call back over to Dirk. Thank you.

Thank you Peter.

A driver of our continued year-over-year revenue increase is the continued increase in the adoption of our products by the surgeon community. As of the end of 2008, we had more than 400 surgeon customers that are consistently utilizing our spine products in their medical practice. This represents a 30% increase since the end of 2007 and provides us with a solid platform for products launched throughout 2008 and as we release new products in 2009.

Of note, we pushed several products through the development pipeline in 2008, and as such had multiple products in various stages of discussion with the FDA.

Overall, we are pleased with our success. In many cases we exceeded our expectations of product launch and development timing, and in some cases we fell short either due to lengthened discussions with the FDA or longer than expected development cycles.

As such going forward, we will take a conservative stance on our timing expectations for upcoming product offerings and revenue contribution from key new initiatives, and we will provide periodic visibility on product rollouts through initial beta launch and full commercial release.

We expect to launch 15 new products in 2009, 11 addressing our core spine product portfolio and an additional four which address the aging spine market.

While our core product launches span the breadth of offerings, I want -- I'm going to take a moment to talk about our new, minimally invasive GLIF system, which we believe addresses a $225 million market in the US. Similarly I will take a minute to provide an update on OsseoFIX and OsseoScrew, as well as provide [a] overview of Helifuse and Helifix products that we recently licensed.

The GLIF, which stands for guided lumbar interbody fusion, is our breakthrough access system that provides a far lateral approach to the spine with the patient in a natural, facedown position. The GLIF is designed to allow surgeons to perform a 360-degree, minimally invasive procedure without the need for repositioning the patient. We believe that this design may reduce the length of the surgical procedure, reduce the trauma to the patient, and reduce the postoperative recovery period.

We recently accelerated development of GLIF and anticipate releasing the product to market in the second quarter of 2009.

As we announced previously, we recently launched the OsseoFIX system in Europe. In conjunction with the launch of OsseoFIX in Europe, we also plan to launch OsseoFix+ Cement and the complementary vertebroplasty system, which already has a CE Mark both in Europe and the US.

The OsseoFIX+ system has improved capacity for visualization under imaging, a self-contained mixing chamber for fume reduction, and a superior delivery system for cement introduction.

In the US, following discussions with the FDA, they have asked us to conduct a clinical study of the OsseoFIX system to support our 510(k) application. We had our most recent meeting with the FDA in the current quarter, and while final parameters and timing of the study are presently being discussed, we are optimistic that we will reach a conclusion shortly and anticipate our US 510(k) clinical study to begin in the second quarter of 2009.

The OsseoScrew system is our unique pedicle screw solution for treating patients with poor bone quality. We believe it has significantly increased pullout and holding strength as well as improved purchase in osteopenic bone. It can be used with or without bone cement, leaving room for revisions if necessary down the road.

And lastly, it can be used both open or minimally invasively and works as part of our current ZODIAC instrumentation.

As many of you may recall, we had originally expected to submit the 510(k) for the OsseoScrew to the FDA by the end of March. Although we are extremely comfortable with the FDA requirements, we decided to add an additional layer of testing in osteopenic bone to ensure product outperformance. We still expect to submit the 510(k) early in the second quarter and continue to anticipate US market launch in late 2009.

As many of you may have seen, we announced last week that we have entered into a license agreement with Helix Point, LLC, that provides Alphatec Spine with the rights to develop and commercialize both the Helifix and Helifuse proprietary concepts for two interspinous devices to treat lumbar spinal stenosis -- also known as LSS.

Helifix is a non-fusion, interspinous device designed to provide relief from the symptoms of spinal stenosis by providing flexion in the posterior elements.

Helifuse is similar in design to Helifix, but will be a fusion device that may be combined with percutaneous spinal fixation. We expect to submit Helifuse to the FDA for 510 clearance in the fourth quarter of 2009.

Helifix, as a non-fusion device, will likely require an IDE/PMA approval before it can be sold in the US, and we expect to launch the products initially in Europe under CE Mark in the first quarter of 2010 and subsequently submit a clinical trial protocol to the FDA thereafter.

Lumbar spinal stenosis arises from age-related changes to the facets and the intravertebral disc that can eventually lead to a reduction in the patient's quality of life. In 2008 in the US, more than 2 million people age 65 and older were diagnosed with spinal stenosis, and more than 145,000 laminectomies were performed as treatment options. Recently, less invasive, potentially reversible procedures have been adopted by many physicians, especially for the aging spine patient.

We expect that in 2009 the US market for interspinous devices will reach over $300 million.

The Helifix device will be unique in that it can be inserted and removed percutaneously. It is self-distracting and can be made from a variety of materials including titanium, PEEK, or bone. The Helifix can be inserted by spine surgeons and/or interventional radiologists, and the procedure can be performed on an inpatient or outpatient basis.

In addition to product launches throughout 2009, we expect ongoing improvements and selective upgrades to our US sales force as well as continued international expansion. While our goal was to end 2008 with 65% of our distributors exclusive, we exceeded that target, and as previously announced we ended the year with 70% exclusivity among our distributors.

We expect continued progress to this end, and our goal for 2009 is to achieve 85% exclusivity among our distributors and to grow from 240 to 280 individual representatives.

In Europe we are in late-stage discussions to add exclusive distributors in the Benelux, Denmark, Germany, and Italy; and expect to announce that at least one of these regions is signed by mid 2009.

Across Asia we are also looking to add exclusive distributors in key markets.

I'll now provide the financial guidance that we had previously released, which is to achieve full-year revenue of $123 million to $125 million in 2009, of this, $12 million to $14 million in annual adjusted EBITDA, and positive GAAP-based EPS will occur in the third quarter of 2009.

We expect gross margin expansion over the next two years, driven by manufacturing efficiencies as we scale up the business, from product mix and new product launches, or redesigns that are intended to reduce royalty commitments.

For 2009 we anticipate gross margin improvement through the -- throughout the year, and anticipate a range of 65% to 67% for the full year, which compares favorably to the 63.9% for 2008.

In summary, we are extremely pleased to have exceeded our goal of obtaining at least a 20% growth rate for 2008 and are confident that we can sustain this growth rate going forward while leveraging our platform to drive earnings.

One last comment before ending up the -- opening the call to questions. It is significant to note that our industry currently faces many challenges both relative to increased scrutiny on surgeon and Company relationships as well as on the broader economic uncertainty and the potential impact on procedure volumes.

We are pleased that our culture at Alphatec holds our employees and distributors to a high standard and that our selling practices are ethical and we believe would withstand any level of scrutiny.

As it relates to the broader economy, we are fortunate that our business continues to see substantial growth, and to date we have not seen a slowdown in procedure volume, product utilization, or desire for innovation. We have and will continue to monitor our surgeon customers to determine if there is a shift in practice.

Our mission is to be the leading independent, full-line spine Company with a focus on providing solutions for the aging spine. And our ultimate goal is to improve the aging patients' quality of life. We expect surgeons to increasingly shift their focus to the older population, and as such have invested heavily in proprietary products that will outperform in poor bone quality and which position the Company for a market leadership position in what we believe represents the fastest-growing segment of the spine market.

Thank you. And we'll now open it up for questions.

(Operator Instructions). Glenn Novarro, RBC Capital Markets.

Two questions. One -- and I asked this question on an earlier conference call today. I just wanted to clarify your comments about the overall market. Are you saying that the end markets in which you play are not slowing? In other words, the economy and perhaps the elective nature of the spinal procedure is not slowing because of the economy? Or are you saying that Alphatec is gaining market share, and because you are a smaller player within the market, your business is not being impacted by the broader market dynamics? That's question one.

And then two, I'm wondering if you can give us any more info on OsseoFIX? Perhaps somewhere in the ballpark of how many patients you think you may have to enroll. Is there a follow-up time? And maybe a range of when you can actually send in an FDA filing? Thanks.

Glenn, this is Dirk. In relation to your first question, we are obviously in constant contact with a number of our surgeons, and we have not seen a -- what I would call a substantial change in their practices. In fact, some of them seem to be as busy as ever. But that doesn't mean that sort of in the general economy there isn't a slowdown. We wouldn't know about that necessarily at this point.

But we are obviously grabbing market share. We're growing at three times the market, and so I don't see that necessarily having a significant impact on us this year. I think we can continue to grab market share and continue to hit our targets in relation to that.

Regarding OsseoFIX, we just had our meeting with the FDA. We're still in negotiation in regards to the questions that you asked, so it's hard to give you a firm answer. I think we can provide an update once we finalize the protocol, but we believe it's not a substantial change from what companies have been asked to do before, which is somewhere around 100 patients. And the follow-up is still in negotiations. So it ranges from nine months at the low end to 12 months at the high end.

That's great info. One last question just because we look at this spine as a $7 billion plus market, but within the $7 billion market there's various segments from fusion to non-fusion to biologics. I'm wondering, is it possible for you to quantify some of your end markets and how you see them growing in 2009? That's my final question. Thanks.

In the sort of our updated presentation, which -- are you talking about the market or our growth rates versus the market?

The markets in general.

You know, we see the overall market continuing to grow at around 10%, which is a little bit of a slowdown from a couple of years ago. But it continues to grow we think. Certainly the VCF, or vertebral compression market, continues to grow very nicely. The biologics market I think has a lot of growth in it, as well. The fusion market is probably a little bit less than 10% -- somewhere depending on the area, but within that MIS continues to pick up share.

That's very helpful. Thank you very much.

Bill Plovanic, Canaccord Adams.

A couple of questions here. First, on just from the operating cost standpoint, your gross margins were a little lower than we're expecting, and some of your operating expenses were a little higher. And it seems like first of all with gross margin, a couple of years in a row now I think you've gone down to a low point in the fourth quarter. Is that something that we should model in going forward?

This is Peter. Not necessarily. I think there was one adjustment that we had at the end of this year relating to the termination of the Scientex licensing agreement. We took a $357,000 expense in the fourth quarter there for the final termination of that agreement, which affected our overall margins about 125 basis points.

Okay. But you were running in the mid-60s all year, and then that would only get you to the low 60s. To what would the balance of that the attributable?

The other part of it is attributable to the sales mix between our US business, Asia business, and our European business. As you know, the European business has really sold to stocking distributors, so the margins there are slightly different.

Okay. And then that rolls down to my next question, which is -- in the sales and marketing, those expenses were up almost $800,000 sequentially. Your domestic sales were only up about $400,000. International is more stocking distributors. Outside of the one-time charges you called out, was there anything else incremental in the fourth quarter?

Are you speaking to operating expenses, Bill, or gross margin?

Sales and marketing.

Sales and marketing. Well, I think one thing everybody needs to be careful on is if you look at historical reporting, we had the Japanese sales and marketing expenses accounted for under G&A, and we reclassified those starting in the third quarter back to sales and marketing where it is appropriately classified. We have in our 10-K and 10-Q filings properly, consistently classified those back up to sales and marketing, but if you look at historical reports, you would see that as a switch.

I would say that overall, for example, for G&A we're holding our expenses relatively constant year over year on that.

So should I use this quarter in sales and marketing as the jumping off point in going forward? Was there any incremental commissions you're paying to the reps that you brought on in the fourth quarter?

No, no. There were no -- I would agree with that comment. There was no incremental -- now, one thing I would state, that as I mentioned to you on the EBITDA, there was $425,000 that we incurred in the fourth quarter in operating expenses for severance expense. So about -- a majority of that was actually expensed to sales and marketing.

And then just as you went through the quarter in Japan, what percentage of those sales were actually spine for the quarter and for the year?

For the year they're approximately 20%, and we continue to expand on that. I think for the quarter maybe in the 25% range.

Hi, Bill. This is Dirk. Yes, it's still sort of the minority, if you will, but it is -- it grew at about a more than 70% rate, and we plan on continuing that actually. Our goal for 2009 is to try to get that mix to 50/50. So we're not focused as much on pure growth of the top line in Japan as we are sort of growth in the mix of spine versus non-spine.

Okay. And then for the deferred revenue line, it came down about $1 million. It's about $1.6 million now. Has your agreement with your distributor changed at all where you might capture the balance of all that in one quarter? Or will it continue to roll forward?

Well, on the balance sheet you'll note there is about $1.9 million on deferred revenue recorded there. Our position is that that will roll forward as we get collections or payments from these distributors.

Last question is just, I think you mentioned you had $12 million in long-term debt that you've pulled down either from [SVP] or from Oxford, and I don't know if that's a combination of both there. And then what terms are that at with (multiple speakers)

Just to kind of re-summarize, we had a new credit facility completed jointly with Silicon Valley Bank and Oxford Finance Corporation for $30 million in total. In the fourth quarter we drew down about $26.5 million of that $30 million. Proceeds of that was approximately $14 million to use to pay off the prior existing debts with GE Capital Corporation. Thus the net amount added to our coffers was approximately $12 million.

The terms of the debt is broken down into two pieces. There's one $15 million piece which is a term loan due April of 2012. It's a fixed interest rate term debt that has an interest cost of about 11.25%. Then the other part of it is the working capital line of credit of $15 million. It's based on the Silicon Valley Bank's prime rate and 250 basis points. And again, that's due as well on April of 2012.

What's the interest rate on that right now?

It's about 6.25%.

(Operator Instructions). Seth [Summergy], Deutsche Bank.

So first I just wanted to stick with the margin question and specifically maybe on the pricing of implants, have you seen any negative pressure on implant pricing? And is that part of the reason why the margin is kind of depressed in the quarter?

Hi Seth, this is Dirk. In regards to the implant pricing, we do track that very, very closely obviously, and we have not seen a decrease in sort of our average selling price. Actually over the whole year it's held up relatively well. Obviously, within quarter to quarter there is some mix change, but that -- it's not due to any pricing pressure.

And then Seth, I would add in terms of the margin effect on it, I think everybody will recall that we entered into the settlement agreement with Depuy in the second quarter of 2008. So when you look at prior years, we did not have that royalty obligation at that point in time, and so we're seeing the effect of that rolling through into our margin into the -- in the second half of 2008.

And I think it's one of the things, as Dirk mentioned earlier on his prepared remarks, that we're actively looking within our product development group to look at other product designs that will help mitigate potential future royalty commitments as well, to manage that.

And what's the -- can you give the basis point impact from the royalty payments to Depuy?

Well, in terms of expenses, it increased quarterly approximately $1 million in expenses.

That's great. One last question. Just on the new NASS requirements for consultant disclosures, a lot of the larger players have been pretty proactive in taking a stance and saying that they are going to follow through with disclosures this year. Do you have any position on that, or do you plan on addressing that? Thanks.

Well, we have not made a decision yet. We've obviously seen what they're doing. And we're reviewing that right now. We obviously -- we believe that we're very much on sort of the far end of that, and probably it benefits us to disclose earlier rather than later. But we haven't made an ultimate decision on that yet.

We have no more questions at this time.

Okay. So again, thank you all for participating. We feel very good about our performance in 2008. We believe that we have set the stage for 2009 and the future. And we've established sort of our four core growth drivers for the Company being the core product portfolio, the aging spine portfolio, continued expansion of the US distribution network, and international expansion. And we see those being key drivers in terms of helping us reach our numbers and driving towards earnings and profitability this year.

So we look forward to continued future success, and thank you very much. Wish everyone a pleasant rest of the day.

We thank you for your participation on today's call, and have a wonderful day.

Thank you.