Alphatec Holdings Inc (ATEC) 2009 Q2 法說會逐字稿

Welcome to the Alphatec Spine second quarter fiscal 2009 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, Vice President and Treasurer. Please go ahead, sir.

Thank you, very much, and good afternoon, everyone. Welcome to Alphatec Spine's conference call to discuss our second quarter ended June 30, 2009 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 second quarter 2009 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 web site, at www.AlphatecSpine.com.

Before we start, there are a couple of items we'd like to cover. I'd like to remind that you this call is being web cast live and recorded. A replay of the event will be available later today on our web site 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 the circumstances.

Risks and uncertainties may cause our actual results to differ materially from those projected in these forward-looking statements. You can find a discussion of these factors and more information about us in our filings with the SEC, including the risk factors section on our annual report on Form 10-K and subsequent quarterly reports on our 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 U.S. copyright laws and any use or rebroadcast of all or any portion of this conference call may only be done only with our express written permission.

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

Thank you, Peter, and good afternoon, everyone, and thank you for joining us today. We're pleased to report revenues for the second quarter of 2009 were a record $32.3 million, representing a 35.3% increase over revenues from the same period last year. This represents the eighth consecutive quarter of record revenue and an accelerating growth rate over prior periods.

In the US, we grew second quarter 2009 revenues by approximately 36.3% over prior year. Which is more than 3 times greater than the estimated annual growth rate of the U.S. spine markets. Sequentially, US revenues grew by 10.8% over the first quarter of 2009. This performance reflects the ongoing strength of our core business.

We're proud to report that adjusted EBITDA of $2.8 million for the second quarter, reflecting our ability to demonstrate operating leverage, while continuing to drive strong, top line growth and still invest in our robust product development pipeline. We continue to grow revenues at rates significantly higher than the spine market through the introduction of innovative products, the strengthening of our US sales force, and expansion of our international operations. Additionally, we completed a $10 million private placement of common stock during the quarter, which strengthens our balance sheet, and enables us to continue to focus on growing our business through both internal R&D initiatives and strategic intellectual property acquisitions.

We finished the second quarter with $19.7 million in cash and equivalents. This afternoon, we will provide additional highlights for our operating performance from the second quarter of 2009, as well as an overview of new product introductions and accomplishments in the quarter. Consistent with our comments from previous calls, I will focus my remarks on updating you on the four primary drivers of growth at Alphatec, one, the continued expansion of our core product portfolio, especially in the area of MIS, two, product development initiatives addressing the aging spine, three, US sales force expansion, and four, international expansion. I will then turn the call back over to our CFO, Peter Wulff, who will provide a more detailed view of our financial performance. Following Peter, I will discuss 2009 growth initiatives and review our updated 2009 financial guidance before opening up the call for questions.

First, I'll discuss the continued expansion of our core product portfolio. After launching eight new products addressing our core product portfolio in 2008, we remain on target to launch an additional 11 products in 2009. We continue to expand our fusion product portfolio by introducing both new products and line extensions, as well as securing additional intellectual property.

I'll take a minute to highlight a few of these products. ALIF, our Illico SE percutaneous screw system, AlphaGRAFT ProFUSE, and AmnioClear. As we announced on our last quarterly call, in the first quarter, we completed our initial commercial release of our Universal Novel Anterior Lumbar Interbody Fusion or ALIF implant and instrumentation system. Recently, we also unannounced we entered into an agreement with International Spinal Innovations LLC, pursuant to which Spinal Innovations will provide Alphatec worldwide license rights to intellectual property related to a stand-alone A lift device.

The international Spinal Innovations license combined with intellectual property previously acquired from Spine Vision SA, allow us to develop and customize a zero-profile self-locking interbody device for both ALIF and cervical procedures. We expect to submit our stand-alone ALIF device to the FDA for 5-10 clearance in the first half of 2010. We also anticipate launching the stand alone ALIF product initially in Europe under its CE mark during the first half of 2010. The 2009 interbody fusion market in the U.S. is estimated to be more than $950 million.

The 2009 ALIF market remains the largest interbody segment in the US with an estimated 2009 market exceeding $350 million according to Millennium Research. We believe that a zero profile single-action locking implant is a substantial improvement over devices requiring screws or additional steps to lock. The stand-alone device well be unique in that it will be designed to be inserted and locked into the superior and inferior vertebral endplates in a single step. A simple insertion and fixation will result in a quicker procedure that should reduce the risk to the patient and cost to the hospital.

Next we secured the distribution rights to a tissue-based in-vivo wound covering product, initially called AmnioClear. AmnioClear is derived from the inner lining of the placenta, which is also known as the amnion. The amnion has natural anti-adhesive, immunogenic and anti-inflammatory properties and has been used for decades for corneal repair and as a protective wound covering. We believe there may be substantial opportunity in spine for the AmnioClear product. We anticipate launching this product in the third quarter of 2009.

We are also pleased to announce that last Friday, we launched our Illico SE Percutaneous fusion system to the market. This system, in combination with the Illico retractor, which was launched last year, completes our lumbar MIS portfolio, and will allow to us compete in the first-growing MIS segment for lumbar fusion. We're launching with 40 sets and already have all 40 committed to surgeons that are anxious to the Illico SE system. In the second half of 2008, we brought a number of distributors on board that had substantial MIS business, and we are pleased that we can now offer an elegant and simple solution that will allow them to convert this business to Alphatec Spine.

We believe that our ProFUSE demineralized bone scaffold provides us with a substantial growth opportunity. Our proprietary VIP packaging system allows for rapid and uniform hydration in the bone scaffold in any liquid, including proteins, bone marrow aspirate, blood, or any other fluid the surgeon chooses. Once hydrated, ProFUSE can be squeezed and formed, much like a sponge and is designed to fit compactly inside our Peek and Allograft spacers. This provides our salesforce with the opportunity to add additional revenue per procedure. When our spacers are used, ProFUSE has the potential to add roughly $1,000 to $1,500 in revenue, per procedure. We're pleased with the initial adoption of ProFUSE and expect to see an acceleration of sales going forward.

Next I'll discuss our second growth driver initiatives, addressing the aging spine. We believe throughout the last year and a half, we have successfully positioned Alphatec as the market leader in providing solutions for the aging spine. We invested heavily in R&D to end-license, develop, and commercialize new and innovative products to treat pathologies of the aging spine. The majority of these products will not make significant contributions to our revenues until 2010 and thereafter.

One of our key aging spine initiatives is the OsseoFIX spinal fracture reduction system. We're pleased to announce that the FDA has granted conditional approval to initiate our OsseoFIX spinal fracture reduction system 5-10 K clinical study. This is in line with previous expectations that we would begin the study in the second quarter of this year. We will enroll 100 patients at 15 clinical sites with a 12-month follow-up. We expect to begin enrolling patients in August, and our plan is to complete the enrollment by year end. As a reminder, we received CE mark approval for OsseoFIX and launched the product in Europe in the fourth quarter of 2008. We've expanded commercial adoption significantly throughout the first half of 2009, and as of quarter end, we have treated over 200 patients in Europe.

We were enthusiastic about the strong initial response to OsseoFIX and look forward to the continued uptake of our product. Our last training session, which was held at the University of Vienna on the 18th of July, had 53 surgeon participants, representing 8 countries, effectively doubling the number of surgeons trained on OsseoFIX. One of the early adopters of OsseoFIX presented on his first 32 patients with up to 6 months of follow up and the results were extremely positive. We also continued to invest in technology addressing the aging spine through several acquisitions of proprietary technologies. As mentioned earlier we acquired rights to several patents related to a unique zero-profile standalone inner-body technology for ALIF and surgical fusion, which has applications in the aging spine. Secondly, we continued to work on the development of the Helifuse and Helifix products for spinal stenosis, which we acquired earlier this year from Helixpoint, LLC. We anticipate applying for a CE mark for Helifix in the first half of 2010, and submitting Helifuse to the FDA for 5-10 K approval in this same time period.

Next, I'll discuss our third growth driver, our improving US sales force and distribution channel. In previous calls, I stated that we had added several key distributors throughout 2008. Through the first half of 2009, we saw incremental improvements in sales productivity from these distributors and we expect continued improvement throughout the remainder of 2009. As of the end of the second quarter, we have over 92 total distributor organizations in the US which we believe represent over 260 individual sales representatives, an increase of 11% over the first quarter. We remain committed to our goal for 2009 of achieving 85% exclusivity among our distributors in 2009.

Finally, I will discuss our fourth growth driver, international expansion. We continue to expand internationally. In the second quarter, we reported $400,000 in revenue from Europe and $5.5 million from Asia. We are encouraged by early interest in and uptake of OsseoFIX in Europe, which has in a short time driven new distributor relationship and surgeon adoption. We have executed distribution agreements in Belgium, Denmark, Germany, Italy, the Netherlands, Austria, Israel and Spain. We are particularly pleased that since launch, we have shipped over $1.5 million of OsseoFIX product to Europe.

In Japan, we saw early contribution from the direct spine sales representatives that were added in late 2008, and we continue to drive a shift in revenue mix to increase sales of high margin Alphatec Spine products. In the second quarter, spine revenue for API increased 47% from the same period in 2008. Overall, Alphatec Spine products now represent more than a third of all Asian revenue. We're pleased to announce that last week, we received clearance from the Japanese regulatory authorities for the SOLANAS Cervico-Thoracic system, as well as for our lumbar and cervical adjustable bridge systems, and we'll begin marketing all three systems immediately.

We're proud to have just reported our eighth consecutive quarter of record revenue and our second consecutive quarter of positive adjusted EBITDA. We believe that through the strength of our core product offerings and distribution that work, we will continue to expand both our revenue base and market share. We have created a platform to support the vision and leadership at Alphatec for continued success.

Now, I'd like to turn the call over to Peter to discuss the second quarter financial results and I will conclude with an update on 2009 product initiatives and financial guidance.

Thank you, Dirk.

The following remarks are about our reported financial results for the 3 months ended June 30, 2009. Consolidated revenues for the second quarter 2009 were $32.3 million, an increase of 35.3% from the $23.9 million reported for the second quarter 2008, an increase of 5.4% over the first quarter 2009. US revenues for the second quarter 2009 were $26.4 million, an increase of 36.3% from the $19.4 million reported for the second quarter of 2008, an increase of 10.8% over the first quarter of 2009. Asia revenues for the second quarter 2009 were $5.5 million, with an increase of 21.8% from the $4.5 million reported for the second quarter, 2008.

Recorded European revenues for the second quarter 2009 were $412,000. There were no European revenues recorded for the second quarter 2008. Deferred revenues recorded on our balance sheet as of June 30, 2009, were $2.9 million, of which $1.6 million relates to our European distributors. The deferred revenues balance increased during the second quarter, primarily due to the $1.2 million of sales shipments to our European distributors, plus the amounts of payments that were received for prior shipments. Consolidated gross profit for the second quarter 2009 was $20.9 million, an increase of $5.1 million over the second quarter of 2008, $15.8 million.

Second quarter 2009 gross margin of 64.6% was lower than second quarter of 2008 gross margin of 66.4%. The decrease in gross margin was primarily due to the effect of certain royalty expenses that we did not have in the full second quarter of 2008, and higher depreciation expenses on our growing installed surgical instrument base, partially offset by improved manufacturing efficiencies. Total operating expenses for the second quarter 2009 were $26.3 million, an increase of $7.1 million compared to the second quarter 2008 of $19.2 million. The increase in second quarter 2009 was primarily due to $4.5 million in process, research and development expense as primarily related to a a milestone payment for the OsseoScrew expandable pedicle screw system and the licensing of the IP related to the standalone ALIF Interbody Fusion device.

There was no in-process R&D expense for the quarter or for the second quarter of 2008. If you excluding the in process R&D expense, operating expenses would have increased $2.6 million, or approximately 13.8% over prior year second quarter. Research and development expenses for the second quarter of 2009 were $3.4 million, representing no change from the second quarter 2008 of $3 .4 million. Sales and marketing expenses for the second quarter 2009 were $12.8 million, an increase of $2.7 million compared to the second quarter 2008 of $10.1 million. The increase was primarily due to an increase in sales commission expenses related to our increased US sales volume and increased sales expenses in Asia.

General and administrative expenses for the second quarter 2009 were $5.6 million, a decrease of slightly under $0.1 million compared to the second quarter of 2008 of 5.7 million. Net loss for the second quarter 2009 was negative $6.3 million or negative $0.13 per share, both basic and diluted, compared with a net loss of negative $3.6 million or negative $0.08 per share both basic and diluted for the second quarter of 2008. Including the $4.5 million in-process R&D expense, net loss would have been negative $1.8 million for the second quarter 2009, compared to the $3.6 million loss for the second quarter 2008.

Adjusted EBITDA of $2.8 million was reported for the second quarter 2009, compared to negative $1 million for the second quarter 2008. Adjusted EBITDA of $2.8 million represents a hundred percent increase over the first quarter of 2009 of $1.4 million. As of June 30, 2009, the Company had $19.7 million in cash and cash equivalents. As announced on our first quarter, we spent considerable time evaluating our current future cash needs and established a goal of maintaining our cash position at or near current levels.

While we believe that the completion of the $10 million private placement in the quarter bolsters our balance sheet, we are pleased that we achieved our cash conservation objectives in the quarter. We are beginning to realize inventory efficiencies resulting from the realignment of our manufacturing operations and importantly, to heighten emphasis on receivables management, our US hospital DSOs dropped six days in the second quarter compared to the first quarter of 2009. We are pleased with the results of these internal measures and will continue to closely monitor our cash management efforts to ensure we meet our stated 2009 guidance.

Now, I'd like to turn the call back over to Dirk.

Thank you, Peter.

I will now provide a brief update on our 2009 initiatives and review our updated 2009 financial guidance before opening up the call for questions. As you may recall, we expect to launch 15 new products in 2009, 11 addressing our core spine product portfolio, an additional four that address the aging spine market. While our core product launches span the breadth of our offerings, I'll take a moment to talk about our exciting new minimally invasive ARC Portal Access System and GLIF technique, which we believe addresses a $200 million market opportunity in the U.S.. Then I'll take a minute to provide an update on OsseoFIX and OsseoScrew.

The ARC Portal Access System and instrumentation is our breakthrough access system that provides a far lateral approach to the spine with the patient in a natural, face-down position. The GLIF technique, which is an acronym for Guided Lumbar Interbody Fusion, is designed to allow surgeons to perform a 360-degree, minimally invasive procedure without the need for repositioning the patient. When augmented with posterior pedicle fixation, the ARC and GLIF are designed to reduce the overall lengths of the lateral lumbar procedure, thereby reducing operating room costs and trauma to the patient.

We recently initiated a limited beta launch of the GLIF ARC Portal Access System, for far lateral lumbar fusion and as of today, I'm pleased to announce we have successfully completed the first surgical case. We met our objectives and confirmed the system works. The purpose of this beta launch is to validate the system in real operative conditions, and to make any necessary final changes prior to full commercial launch. We remain well-positioned for a full commercial release following the North American Spine Society meeting in November 2009.

We continue to be extremely pleased with the launch of OsseoFIX in Europe and early uptake of the product. As I mentioned earlier on the call, we have received conditional approval to begin our 5-10 K clinical study in the US and anticipate beginning patient enrollment in August. We have worked closely with the FDA on the protocol for the study, and are confident that based on the approved inclusion exclusion criteria, that we can complete the enrollment by year end. The OsseoScrew system is our unique pedicle screw solution for treating patients with poor bone quality. We believe it has increased pullout and holding strength as well as improved purchase in osteopenic bone.

In addition, it can be used in open or minimally invasive procedures and works with our currently available Zodiac instrumentation. As many of you recall, we had originally hoped to submit the 5-10K for the OsseoScrew by the end of March, but we pushed out our timing to conduct additional testing. We are pleased to announce that the OsseoScrew 5-10K was filed with the FDA at the end of June. We expect to receive CE mark clearance in the fourth quarter, and will launch the product through our growing European distribution channel at EuroSpine in October.

In terms of financial guidance for 2009, we are raising our revenue guidance to $128 million to $130 million, up from our previous guidance of $125 million to $128 million to reflect ongoing strength of the core product portfolio and our strengthening US distribution network. We're reiterating our adjusted EBITDA guidance of $12.5 million to $14.5 million and we are confirming our expectation of positive GAAP based EPS occurring in the third quarter of 2009.

We expect gross margin expansion over the next two years, driven by manufacturing efficiencies, product mix and new product launches, or redesigns that are intended to reduce commitments to third parties. In 2009, we anticipate gross margins improving through the year in anticipated range of 65% to 67% for the full year, which compares favorably to the 63.9% gross margin in 2008. The board of directors and I are extremely pleased with the performance of the entire Alphatec team. We have a team of talented and dedicated employees that exhibit a can-do attitude every day. This team has excelled in every way during the second quarter.

They relocated our entire manufacturing facility while achieving record revenues, controlled expenses to build towards profitability, submitted OsseoScrew to the FDA, received approval to commence our first FDA 5-10 K clinical trial, launched several key new products, completed the development of the GLIF and Illico SE percutaneous systems, putting us in the forefront of MIS spinal surgery, supported the expansion of our European sales network, and completed a rigorous FDA inspection. We believe we are well positioned for the future and to continue to drive growth and shareholder value going forward. 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 desired for innovation.

As Peter discussed, we are pleased with our efforts to work down and manage our receivables, as evidenced by the drop in DSOs in the second quarter. Lastly, we are enthusiastic that we were successful in bolstering our balance sheet through an at-market sale of common stock and $10 million in proceeds to the Company. The center for Medicare and Medicaid services, CMS, issued a final rule regarding payment rates and policies under the in-patient prospective payment system for fiscal year 2010. We are pleased that spine reimbursement rates were finalized in an average increase of 6 to 8%. Across all major categories fusion rates increased favorably to 2009, ranging from 1.5% for 360 fusions to 6.9% increase for cervical fusions. Kyphoplasty received a 3.2% payment increase compared to 2009. Each overall category of spine also received an increase versus the 2010 originally proposed payment rates. This is a very positive development for the spine market in 2010.

We would now like to open the call up for your questions.

Thank you, sir. (Operator Instructions). We will take our first question from Bill Plovanic with Canaccord Adams.

Hi Bill.

Fantastic. That's the best quarter you guys have put up since coming aboard. You've done a phenomenal job. What do you think is this broad-based across thoracic, lumbar, cervical, or biologics, or is this skewed in any one way? What's really driving the engine here?

We're -- we're seeing a nice growth rate really across the entire platform, in particular Trestle, Zodiac continue to grow nicely. The new products are starting to have positive impact, especially ProFUSE, the VIP, Allografts, the ALIF, so it's really pretty broad-based, as well as the distributors that we added in the back half of 2008 are really starting to contribute more significantly.

And if you look at your kind of the existing distributors that have been with you for let's say more than 12 months, 18 to 24 months, are they still seeing growth and what are they seeing about procedure volumes with their surgeons?

We track that pretty carefully and procedure volumes, obviously our procedure volumes are up and we've not -- you may hear some anecdotal things, but nothing definitive, so in general, it seems to be steady as she goes in terms of procedure volumes, and we are seeing growth out of our longer term distributor base, especially with new products, as well as the new distributors that we put on, so we're really pleased with how the business is developing.

Okay. And then you mentioned that going forward, you expect the gross margins to increase. What are some of the levers that are really pushing it up? And when you say 65 to 67%, did you mean for the whole year or just in the third and fourth quarter potentially respectively?

Well, hi Bill, This is Peter. We're looking at the 65 to 67% for the entire year and we expect really several reasons for the margins to improve. One is the continued improvement in our production efficiencies from our new facilities here. And we're looking to that coming through in the future quarters. Secondly, is reduction in the existing royalty obligations that we have through product redesigns. Third is as we launch new product with higher margins, they run through our general mix here. And then also the revenue shift to spine products through our Asian subsidiary as well.

Okay. And then in terms of GLIF I think you said you'll have that in beta launch from now until roughly NASS. What exactly does that mean from the number of surgeons' hands it will be in to a revenue contribution that we could expect from it?

What it means is that we're keeping it in a relatively confined number of sites. Initially the four developing surgeons and then expanding out to some additional sites just to -- we want to control, we think it's a very exciting product but we want to control the rollout and make sure when it does hit full commercial launch, that it is ready for sort of the mass market. If you will. I don't expect any significant revenue contributions in 2009 from GLIF. We'll really start to see that in 2010 after we hit full commercial launch.

Okay. Last question then I'll jump back in queue, I believe you're guiding the EPS positive, is that the whole third quarter or sometime in the third quarter you kind of cross the threshold, and if so, is that assuming a sequential increase in revenues, and if not, is there something in the P&L other than gross-- even if you picked up 200 basis points in gross margin, that doesn't get you the $1.6 million, $1.7 million you'd need on a sequential basis to sustain revenues to get you to profitability.

Well, we do expect full profitability during the quarter and obviously our report results are for the quarter only and our confidence is based on our continued growth in the business and driving sales and improving our margins and maintaining control on our operating expenses.

Is it fair to say that you expect a sequentially up quarter? Is that what you're --

Yes, yes.

Fantastic. I'll jumping back into queue. Great quarter.

Thank you.

We'll take our next question from Glenn Navarro with RBC Capital Markets.

This will actually Brandon Henry on for Glenn today. Just a question on gross margins. They came in a little bit lower than our expectations. Maybe if you can you break out how much over the year over decline in gross margins was a result of one, the royalty agreements, two, the production efficiencies and three, the higher depreciation?

Thank you for joining the call. The decline versus prior year is primarily associated with the royalties for the -- related to products that we have. That was an effect of about 800 basis points. The instrument depreciation was also about 1.2 or 120 basis points and the net effect really of these increases are through the reduction in our improvements in our manufacturing efficiencies and reduction in overall product costs.

Okay. Great. And also, looks like US revenues came in pretty strong this quarter, but gross margins sequentially were down about 150 basis points. Can you kind of discuss that for us?

I don't understand the question. Maybe you can repeat that.

Yes. So it looks like US revenue came in pretty strong but when we looked at gross margins from 1Q to 2Q --

Okay. It's the same reason as mentioned before. It's really because of the Zodiac product line that we have the royalty obligations too, and the Zodiac product line has done very well year over year.

Okay. And then last question, we kind of found another tick-up in deferred revenues this quarter. When can we expect some of the $1.6 million in deferred revenues in the European distributors to be recognized -- is that a 3Q event? 4Q event?

The answer is yes to both. Depends on which distributor you're working with. Most of them are working under extended payment terms anywhere from 90 to 120 to 150 days, it depends on the product mix. So we do expect to see significant coming through the third quarter and some as well in the fourth quarter.

Okay. Great. Thanks.

Yes.

We'll take our next question from Tao Levy from Deutsche bank.

This is Seth for Tao. How you doing?

Great. How are you.

Great. So you know, first if we can start on the top line and just talk about the revenue growth, so since you're growing above market levels domestically, do you think you've benefited from smaller players exiting the market or do you think you've taken a bit of share from some of the larger players?

Well, I think -- I think it's a combination, Seth. We certainly with some of the smaller players exiting the market or dropping out, that certainly provides opportunities, but as you recall, we were successful in adding some key distributors in the back half of the last year, and those in particular, we've picked up some share from some of the bigger, bigger companies as well. So it's really both.

And then I guess just to continue that conversation, getting up to an 85% number at the rate you're going, it seems like it's not too far of a stretch, I assume.

For exclusivity, correct. I think we should be able to achieve that.

Okay, great. On the OsseoFix, you said you had about 200 patients that were implanted. I want to know if we can get some detail on amount per case and how many levels you did?

That's a good question. I don't know, we can get you the number of levels. Off the top -- we don't have that information right here. On average, it seems to be one to two levels, so maybe it would be somewhere between 1.5 to 1.8 or something like that, but that's off the cuff. The revenue is varying by country. If you recall, this is all sort of FOB sales, so we sell it to the distributor who marks it up in country. So what we shipped so far is about 1.5 million since we launched, 1.2 million in 2009 in OsseoFix product. So you can figure the in-market sales are obviously substantially higher as the distributors are marking it up. What we're very pleased about is sort of the number of countries that it represents and the rapid pickup in number of patients it represents per month are both very exciting for us.

Okay. Actually Dirk on that, I guess that's actually interesting because it seems like OsseoFix provides with you a pretty good in to some of these accounts that you probably didn't have relationships before. On the metal fusion side, are the economics a bit better when they start using your metal products?

Actually, the economics for OsseoFix are actually pretty good. And obviously OsseoFix has been the entree that has gotten us into a lot of these countries. They're very excited about the product and now we're starting to convert the standard business as well, and we're starting to see a nice pickup there, so in some of the countries we started with OsseoFix and now those distributors are coming back around because of the positive experience and are looking at the entire line, so we think we should see -- continue to see a nice pickup in Europe going forward.

Okay. Great. Just a couple more, if I could. Just on the balance sheet, I just wanted to kind of understand something. The so the accrued expenses are up to $22 million. Can you give us some color on that and also if you could see remind us how much debt is on the books, too?

Okay. The accrued expenses includes 3.5 million for the Osseoscrew mile stone payment that was, you know, charged into IPR&D. So we expect that to be discharged in the third quarter. And then we've got a little less than $30 million in total debt.

Okay. And then well just the remainder of the $22 million, is that a level that we'd expect for accrued expenses to stay at? Just curious. It's probably accrued in cash management.

Well, what's in there is our quarterly payments for our royalty obligations, our sales commissions expenses, things of that nature. Given that our top line continues to grow, you'll see some growth there as well for the commission payments and royalty payments.

Okay.

Overall, we would expect royalty to decline, as I noted to you dealing with our gross margins, but again the dollar volume is such that we have those accrued at every quarter.

Last question and I'll hop in. The AmnioClear product, can you tell us -- I think you said 3Q 2009 is your submission date, maybe a little bit more detail on what that's going to be used for?

We're launching it as a wound covering, which is what it's approved for. It is a biologic product. And we're launching it again in a controlled fashion to some early adopters. There -- are a number of surgeons have expressed very strong interest in the product because of sort of the natural properties of that tissue, it's immunogenic, anti-inflammatory, anti-adhesive. So we think it has some interesting applications but we're really targeting some early adopters who have expressed strong interest, we're going to do some more clinical work on it. But the product is basically ready to go, packaged. We have it in stock, so I don't anticipate substantial short-term revenue, but we think it's a very interest product long-term.

Is it something you might use for an adhesion barrier matrix?

That's really up to the surgeon but it has some interesting properties. It certainly would make it viable when you think about that, absolutely.

Great. Thank you.

(Operator Instructions). And we'll take a follow up from Bill Plovanic with Canaccord Adams.

Thanks. Just some color on Europe, if I got that right, you had, was it $1.2 million in deferred revenue in Europe right now?

The total deferred revenue on the balance sheet is $2.9 million and $1.6 million of it relates to our European market.

And as I look at kind of the quarterly progression of Europe, this quarter was down to levels not seen since the Q3 2008. Could this be viewed as a low point in a lot of that, 1.6 will be brought into the third quarter basically as you extended the terms and you're not likely to extend them again sort of thing?

We don't -- the payment terms are extended in general. They do not change. It just simply shows kind of the lumpiness of the business rolling out. The majority of it we expect will go into the third quarter, so we expect third quarter reported revenues for Europe to be greater than what we reported for the second quarter and we continue to grow the business as sales, repeat sales orders continue to come in.

Peter, would you say that -- kind of if I look at Europe from an ongoing basis, I know it's a little early, you've only gone through four quarters there, but what do you think, is this quarter indicative of what that sell-through is on the basis --

No.

No. You have got to look at how, when we sign these distributors up, they're stocking revenue and what you saw sort of in the fourth quarter of last year in particular was a lot of stocking orders, and we tend up front to give them long payment terms for that initial order as they ramp up the business. The payment terms on the reorders tends to be shorter. So it should even out. It's a little lumpy right now, but as Peter said, we have $1.6 million in deferred, in total shipments to Europe since we launched there already over $5 million, so I think it's progressing very nicely and more and more of them are coming back and wanting to add Zodiac and Trestle and look at our other products. We will be launching OsseoScrew at the end of the year, so we feel very good about how Europe is progressing. It's just unfortunately still a little lumpy until the reorders really start becoming a majority of the business as opposed to the stocking orders.

Was second quarter mostly reorder then?

The second quarter recorded revenues is really payments for orders that were made back in the late third quarter or fourth quarter of 2008.

Okay. I got you. And then last question, just some clarity on OsseoFix, you gave us the number of patients, number of sites, timing, I think that's great. Any other color relative to details as of end point, stuff like that?

Well, again it's a 5-10 K study, so it's really sort of a a safety study, it's not a -- an ID type study so we feel very good about what we've negotiated with the FDA. We feel very good about the inclusion/exclusion criteria and how we get patients into the study, so we feel very confident about our ability to enroll. As soon as we have all patients through the 6-month mark is when we'll start looking to analyze the data and start talking to the FDA. At the current time, what they're looking for is 12-month follow-up.

Is it to vertebroplasty or kyphoplasty or both?

No, it's not a controlled or randomized study. It's really just a safety study of OsseoFix on its own, so we're looking at disability scores, [Osquestria], all the sort of standard scores, but it's really just looking at the satisfactory and efficacy of OsseoFix itself. It's not specifically compared we don't have to do any other products as a comparison. It's compared to literature.

And then from a cost standpoint, I take it this is already built in the P&L and there's not a significant incremental cost except -- because VC has to pay for it, you just have to pay for the device and tracking the patients or is it --

The guidance we provided to everybody includes the expense for this study as well, and there is reimbursement as you pointed out.

Great. Good quarter and look forward to seeing you next week at our conference.

You bet. Thank you, Bill.

Thank you, Bill.

Mr. Wulff, there appear to be no further questions, I will turn it back to you for any closing or additional remarks.

Thank you. Just sort of in closing, our mission is to be the leading independent full line spine company with a focus on providing solutions for the aging spine. And our goal is to improve the aging patient's quality of life. We expect surgeons to continue to see a shift in their practices to increasingly older patients in line with global demographics. As such, we've invested heavily in proprietary products that will outperform current standards in patients with 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 in the future. So I'd like to thank all of you again. We look forward to future calls and continuing to share our successes with you as we move forward. Thank you.

Ladies and gentlemen that concludes our conference today. Again, thank you for your participation.