Alphatec Holdings Inc (ATEC) 2013 Q3 法說會逐字稿

Welcome to Alphatec Spine's Q3 2013 earnings call. At this time, all participants are in a listen-only mode until the question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded. If you have any objections, you may disconnect at this time.

I would now like to introduce you to your host, Christine Zedelmayer, Investor Relations.

Thank you. Good afternoon and welcome to Alphatec Spine's quarterly update conference call to discuss our third-quarter 2013 financial and operating results.

This conference call contains forward-looking statements that involve risks and uncertainties, including statements regarding the Company's expectations regarding its financial performance, strategies for revenue growth, development of new products, customer acceptance of the Company's products, and overall trends and economic conditions in the Company's markets.

The Company undertakes no obligation to update the information presented on the conference call. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. For more information about potential factors that affect our business and financial results, we suggest you review our filings with the Securities and Exchange Commission.

Throughout the conference call, the Company will reference some financial metrics that are derived in accordance with generally accepted accounting principles, or GAAP, while other metrics are not in accordance with GAAP. This approach is consistent with how management measures the Company's result internally. However, non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered a supplement to, and not a substitute for, financial statements prepared in accordance with GAAP. A reconciliation of the non-GAAP information to the corresponding GAAP measures is in the press release that was filed today prior to this conference call.

Now let me introduce the other members of the Alphatec management team that are here today -- Les Cross, Chairman and Chief Executive Officer; Mike O'Neill, Vice President, Finance, and Chief Financial Officer; Tom McLeer, Senior Vice President, US Commercial Operations; and Ebun Garner, General Counsel.

I would now like to turn the call over to Les Cross.

Great. Thank you, Christine. Good day, everyone, and welcome to Alphatec Spine's conference call to discuss our third-quarter financial and operating results.

This afternoon, our comments will build on the press release issued earlier today. In a few moments, Tom will provide an overview of our US commercial business. Mike will then provide additional details on the quarter's financial results and comment on our outlook and guidance for the remainder of the year.

When I took over as CEO, I focused the organization on the strategic goal of strengthening sales and profitability of the organization. Today, I'm very pleased to report another strong quarter of execution for Alphatec Spine, which demonstrates our laser focus and commitment to continuing to deliver on that strategy. I would now like to take a moment to reflect upon the numerous accomplishments we achieved during the third quarter.

Q3 represents another strong quarter of revenue performance. Q3 2013 total revenue was $50.2 million and represented a 7.2% growth over the third quarter of 2012, or a 10.7% growth on a constant-currency basis. We are extremely pleased with this excellent result, and this is in spite of of the continued implant pricing and reimbursement headwinds in the global spine market.

Our EBITDA for Q3 also came in strong at $6.7 million, or 13.4% of revenues, up sequentially from 9.6% in the second quarter of 2013. Again, this represents four solid quarters of execution, a testament to our focus and financial discipline and, further, to the strength of the team here at Alphatec Spine.

For the nine months 2013, revenues have totaled approximately $152 million on a reported basis, trending well ahead of 2012 by about 6%, or almost 9% on a constant-currency basis. We achieved this year-over-year growth despite having to cover contribution losses associated with the removal of our PureGen product from the market. Mike will talk a lot more about this in the financial discussion.

We are exceptionally pleased with our US revenue performance in the third quarter. US revenue was $33.7 million and represented an 8.8% growth over the third quarter of 2012. Excluding the effect of our recently discontinued biologic product, PureGen -- again, we will discuss in more detail later -- our US revenue was up approximately 14.6% quarter over quarter.

US hospital nonbiologic implant business was up 23.3% year over year and up 4.8% sequentially. This positive performance was the result of continued solid unit volume gains in our core hospital business and increased surgeon uptake across all our various product lines.

In addition, our international business continues to deliver strong results. Overall, international revenues totaled $16.5 million, representing a 4% growth as reported and almost 14% growth on a constant-currency basis.

This quarter, we saw strong growth across all our major geographies. We believe this is a testament to our leadership focus on execution and our well-established distribution and supply operations that support our overseas customers.

Japan continues to represent our largest international business. This is really driven by our ILLICO minimally invasive products and our Novel interbody devices. In the third quarter, Japan grew 21% on a constant-currency basis over the third quarter of 2012. We believe that Japan represents a market for continued growth, and we will continue to endeavor to take market share by leveraging our well-established team and distribution partners.

We are also very pleased with the performance of our product portfolio this year, and we are excited about the traction we are making with our new innovative products -- Alphatec Solus, our latest interbody fusion device; NEXoss, our next-generation synthetic bone graft material. In fact, internationally, we have received over 50 registration approvals this year to date. And we are anticipating further approvals in Brazil and China for key Alphatec products, perhaps towards the end of this year or early next year.

Clearly, we are making tremendous progress on innovation and geographic distribution expansion for our product portfolio. Tom will provide more in depth regarding the US products and portfolio in a moment.

To drive profitability, we have focused our attention on driving operational efficiencies throughout the organization. We have made some difficult but necessary business decision during the third quarter that are expected to drive overall improvements to gross margin and lowering our existing cost structure.

In September, we announced our intention to restructure our operation in France. This includes plans to discontinue commercial activities in France. This represents a significant decision for the Company's future, but it does support our key strategy of increasing profitability and improving shareholder value.

As a result of this plan, we expect to trade off an amount of unprofitable revenue in the near term in exchange for an increase in EBITDA of $6 million to $7 million on an annualized basis beginning in the second half of 2014. And again, Mike will talk a little bit more about this. We anticipate fully realizing the benefits of this decision at the end of the second year.

We are working closely with the French Council in France, and they are working diligently, as we are, to assist all affected employees and their families. We thank them for their efforts.

In addition, after ongoing dialogue with the FDA regarding our stem cell product, PureGen, we have made the business decision to discontinue the distribution of this product. This decision was not related to any safety issues with the PureGen product. Rather, it was related to our belief that the product should have been classified as a tissue and the FDA's final decision to classify it as a biologic.

As a reminder, together with the pull-through products, PureGen was generating close to $2 million per quarter in revenue prior from our decision to remove it from the market.

In order to continue to pursue further commercialization of PureGen, the agency would require us to conduct clinical trials in order to market the product as a biologic. We do not believe that significant investment of capital over a lengthy timeline is a great use of our resources or in the best interest of our shareholders. And, again, Mike will cover this a little more fully.

The foundation we've been building in the organization over the last year and half is really beginning to deliver results and position us to deliver long-term shareholder value. We have driven positive momentum in the top line again, and we are focused on operating efficiently and effectively while driving an overall positive Company culture.

I am extremely proud of the Alphatec Spine employees and business partners for delivering another excellent quarter and helping transform Alphatec Spine into a true world-class organization.

At this time, I would like to invite Tom McLeer, our Senior VP of US Commercial Operations, to provide some additional color around our US commercial strategy and results. Tom?

Thanks, Les. It was indeed a fantastic quarter for the US business. As I've mentioned previously, our US commercial strategy is supported by our core focus on increasing the breadth and depth of our technology portfolio. This includes the evolution of key products in our existing portfolio, as well as the development of new innovative options that supports surgeons in the future.

In Q3, the benefits of this focus was reflected in our results, delivering implant growth of 23% over the third quarter of 2012, as well as almost 15% growth in our biologics business, excluding the impact of PureGen. This growth was supported by our growing distribution channel, combined with an improved sales mix that includes our latest innovative products, as well as a focus on driving per-procedure revenue by offering a broad suite of products.

While we continue to experience mid-single-digit pricing pressures, as well as reimbursement challenges, we are successfully advancing our broad portfolio of products to address all aspects of a procedure to help offset these industry headwinds.

Our system enhancements to ILLICO and Zodiac, as well as our differentiated Alphatec Solus and Pegasus products, have allowed us to attract new surgeons and pull through many of our other core fusion products. In addition, our biologics portfolio provides outstanding options for our surgeon customers.

Now I'd like to give you a little more color around these products.

Alphatec Solus was successfully relaunched earlier in the second quarter of this year. And we began to see strong revenue ramp-up in the third quarter. Our zero-angle approach to locking the implant and the ability to deliver graft material postimplantation provides significant advantages over other anchored interbody implants. Feedback from surgeons suggests that they appreciate the quick and easy implantation of the device, as well as the benefits that it provides to patients for increased fixation and decreased operative time.

Pegasus, our new anchored anterior cervical fusion device that provides surgeons with a simplified approach to ACDF procedures, was just recently beta-launched in the third quarter. We continue to gather feedback from our initial beta sites and move towards full launch. Surgeons like the ease of insertion, which requires no impaction; deployment of both blades simultaneously; and the ability to reposition the implant if needed.

We have actively been addressing the ongoing shift towards more minimally invasive procedures with enhancements to our ILLICO MIS systems, called ILLICO Multilevel, which is intended to simplify the surgical procedure in longer constructs. We continue to see increased adoption by surgeons who are moving to less-invasive techniques which are designed to result in less operative time, decreased hospital costs, and improved patient outcomes.

Similarly, our Zodiac DVR Deformity System enhancements are providing consistent growth in both procedures and levels per procedure. We will continue to work with leading deformity surgeons to enhance Zodiac so that it will address even the most complex spinal pathologies.

Our broad biologics portfolio complements this implant business and offers increased per-procedure revenue opportunities. We continue to enjoy the steady growth of NEXoss, our newest biologic product that provides surgeons with one of the most advanced synthetic options on the market. Similarly, we continue to see year-to-date growth in our ProFuse Bioscaffold for those surgeons that prefer an allogeneic option. In addition, we are expanding our structural allograft options to address additional surgeon preferences.

To addres the increased pricing pressure, we will soon be launching Bone'X, a low-cost synthetic graft, as well as a variety of low-cost allograft chips, which will primarily be used by deformity surgeons. We are performing a field evaluation on an autologous point-of-care system, which creates a product that is designed to allow the release of the patient's own growth factors over an extended period of time. As has been the case in the past, we will continue to invest in new biologics options to support our industry-leading offering.

I'd like to take a moment to briefly provide an overview of the surgeon collaboration agreement that we announced in October. This collaboration clearly supports our mission to provide physician-inspired solutions that enhance the quality of life for patients. As we continue to expand our portfolio of innovative products, it's essential that we gather a wide range of surgeon experiences and preferences.

This collaboration agreement will help ensure that our products are relevant and appealing to all spine surgeons around the world. This team of surgeons is excited to work with us and will be partnering with our R&D team on a wide variety of innovative projects.

All intellectual property created from this venture will be owned exclusively by Alphatec. We are looking forward to working closely with this physician group as we continue our commitment to enhance the current products we market, as well as expand our future product portfolio.

In closing, over the past year we've created a very strong commercial organization in the United States to support our new technologies in biologics. Surgeon education and training labs for Pegasus, Alphatec Solus, and ILLICO MIS continue to be a key growth driver.

We're excited about our newest product additions to our comprehensive portfolio, and we look forward to continuing to develop innovative solutions that benefit both surgeons and patients. By providing an expanding portfolio of innovative products, a complete line of core fusion products, and an extensive line of biologics, we continue to diversify our offering, which should allow us to grow our customer base and increase our per-procedure and customer revenue. We will continue to build on this foundation as we look towards the end of 2013 and the beginning of the new year.

With that, I'd now like to turn the call over to Mike for a discussion of our third-quarter financial results.

Thank you, Tom. The following remarks are related to our reported operating performance for the third quarter ended September 30, 2013. We've already provided an overview of our sales performance. However, before reviewing the rest of the financial information, I'd like to provide some additional commentary with respect to France and our stem cell product, PureGen.

As communicated earlier in September and included in today's earnings release, Alphatec has made the difficult decision to restructure our commercial and operational activities in France. The planned restructuring will commence in the new year, once we have concluded the formal discussions and negotiations with our employee representatives in France.

The total cost of the restructuring activities covers the expenses associated with the employee severance program; other social planned costs for retraining, relocation, and other benefits; facility closing costs; restoration; equipment transfers; and contract lease termination and exit costs.

We anticipate the restructuring costs, excluding inventory write-offs, to be approximately $11 million. And these expenses will be recognized between Q3 2013 and Q2 2014. In addition to the $4 million charged in Q3 2013, we expect that approximately $4.7 million will be recognized in Q4 of 2013, $1.3 million in Q1 of 2014, and $1 million in Q2 of 2014.

As we incur these expenses in future periods, we plan to exclude them from our non-GAAP adjusted EBITDA metric as they are not expenses that are indicative of our underlying business performance.

As result of this planned restructuring, the Company anticipates improvements in the overall profitability of our international business by generating between $6 million and $7 million of EBITDA on an annualized basis beginning in the second half of 2014.

The overall initiative is designed to substantially improve our long-term financial performance of our international business. We will be providing financial guidance for fiscal year 2014 as part of our 2013 year-end earnings discussion.

In addition to the provisions we have identified associated with our restructuring activities in Q3 of 2013, we've also taken the decision, as Les has mentioned, to cease further activities with respect to PureGen, our stem cell product. As a result, we have included in costs of goods sold for Q3 of 2013 a $3.5 million noncash expense to cover inventory and intangible asset write-off costs. This provision has also been excluded from our adjusted EBITDA numbers.

While the expenses for these nonrecurring activities are substantial, the Company is demonstrating a continuing commitment to improve the long-term profitability of the Company.

Moving to gross profit and gross margin, the gross profit for Q3 of 2013 as reported was $24.2 million or 48.3% of revenue compared to $29.6 million or 63.3% of revenue in Q3 of 2012. After adjusting for the one-time items in cost of goods sold discussed earlier, overall gross profit improves to $32.3 million, or 64.3% of revenue, which compares favorably to both the prior-year and the sequential quarter's performance.

US gross margin was 58.6% in Q3 of 2013 compared to 68.9% in Q3 of 2012. After adjusting for the PureGen write-off, the gross margin in Q3 of 2013 was 69%. This was an improvement from the 67.6% US gross margin in Q2 of 2013.

Compared to the prior-year period, favorable channel mix and higher-margin new product sales more than offset the negative impacts of pricing and some higher obsolescence and product lifecycle charges.

International gross margins on a reported basis were 27.1% for Q3 of 2013 compared to 52.2% in Q3 of 2012. After adjusting for the one-time charges to cost of goods sold, the gross margin in Q3 was 54.7%, reflecting underlying favorable regional mix when compared to the prior period and improved manufacturing costs associated with continued improvement within our core supply chain activities.

As we highlighted in our second-quarter commentary, we continue to witness ongoing improvements throughout our supply chain as a direct result of the lean initiatives deployed throughout our business. Every week, our scorecards indicate improvements in cycle time, reductions in work in process, inventory levels, and back orders. Our customer service levels and response times are improving. And this is all being accomplished with improved quality metrics.

Our focus on these initiatives supports our continuing transformation into a global vertically integrated manufacturing facility in Carlsbad, which will support future growth and expansion of our product portfolio at lower overall costs and increased efficiencies. We firmly believe that we are becoming more efficient and effective in everything we do.

Now turning to operating costs, our total operating expenses for Q3 of 2013 were $37.4 million, an increase of $5.8 million compared to prior year of $31.6 million. After eliminating our restructuring charge of $4 million in Q3 of 2013, the underlying operating expenses were $33.4 million.

The primary increase in expenses were associated with higher legal costs for ongoing litigation matters, the medical device excise tax, and the variable selling costs associated with Phygen. It should be noted that no additional costs have been added to absorb the Phygen business beyond the variables selling costs, and the acquisition is already accretive to the Company.

Adjusted EBITDA, a measure we guide to, was $6.7 million in the third quarter of 2013, or 13.4% of revenues, compared to $6 million or 12.8% of revenues reported for the third quarter of 2012. Please note that our adjusted EBITDA was negatively influenced by the currency exchange impact of the Japanese yen on our profitable subsidiary in Japan.

Adjusted EBITDA represents net income or loss excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation, and other nonrecurring items such as our restructuring expenses, IPR&D, and transaction-related expenses.

GAAP net loss for the third quarter of 2013 was $14.5 million or negative $0.15 per share compared to a net loss of $2.5 million or negative $0.03 per share for the third quarter of 2012. Non-GAAP EPS was positive $0.01 a share for Q3 of 2013 and also $0.01 per share for Q3 of 2012.

Cash and cash equivalents were $18.7 million at September 30, 2013, compared to the $22.2 million reported at December 31, 2012. During the quarter, we have amended our credit facility with MidCap Financial to provide for a combination revolving line of credit and term loan that provide the Company with a maximum credit facility of $73 million. The flexible structure of the amended debt facility allows us to draw down what we need, when we need it. The Company's tax position at September 30, 2013, reflects utilization of $45.8 million of the $73 million facility.

Operating cash flow for the quarter was $3.9 million, offset by capital expenditures of $3.3 million. All other cash flow components were a function of the revised credit facility.

As of September 30, 2013, our net inventory position was $43.1 million, a decrease of approximately $6.7 million versus Q4 2012 and sequentially down $7.5 million versus Q2 of 2013. While operational improvements with respect to supply chain are yielding visible benefits to inventory levels, the write-offs discussed previously are a significant component of the change in net inventory.

Our net accounts receivable at the end of Q3 2013 was $41.7 million, which is essentially flat compared to both Q3 of 2012 and Q2 of 2013. We continue to manage days sales outstanding in a reliable and efficient manner with minimal write-offs.

Now for our guidance for the remainder of 2013. As we close out the year, the Company expects full-year revenues for 2013 to be approximately $204 million on an as-reported basis, which represents an increase of 3.9% from 2012 or approximately 6.5% growth on a constant-currency basis.

The implied Q4 2013 revenue estimate is approximately $52.3 million. The Company anticipates non-GAAP adjusted EBITDA to be in the range of $24 million to $25 million or approximately 21% to 26% over 2012 and representing approximately 12% of revenue.

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

Great. Good job. Thank you, Mike. I am very proud of Alphatec's performance thus far this year. The foundation we have built is clearly generating positive momentum, enabling Alphatec to execute on the strategy we laid out for the Company two years ago.

While we expect the global spine market to remain somewhat choppy, with continued price and reimbursement pressures, we are committed to continue to identify ways that we can drive topline results while continuing to improve our profitability through diligent, focused financial discipline and continue the lean journey.

In closing, I'd like to reiterate, along with Alphatec's fine Board of Directors and leadership team, we remain committed to creating value for our shareholders, our employees, patients, and the surgeons that we are focused on servicing worldwide. Additionally, I'd like to acknowledge and thank the employees of Alphatec and our partners, who work hard and are committed to enable the Company to deliver these excellent results. Thank you.

Operator, we'd like to open the call up for questions, please.

(Operator Instructions) Matt Miksic, Piper Jaffray.

Hi, this is [Yung Lee] in for Matt. Thank you so much for taking our questions. So, in the quarter, your US performance was significantly higher than our expectations, predominantly driven by volumes and key products. But can you talk about what else you are doing in the market that's contributing to the very good growth rate? Are you capturing some share from PODs as hospitals work with them less?

I think we're getting some from PODs, but really it comes through, as I mentioned, with our new products and driving those now to full launch and being able to then pull through some of our core product line in biologics. In addition, we are expanding our distribution and pulling over some competitive distribution.

Okay. Great. So, regarding the collaboration agreement with the surgeons, can you talk about the number of surgeons involved and how you're judging whether the transaction is tracking to your expectation?

It's really not a revenue-based transaction. It's less about how many surgeons, but it's more about the service hours and collaboration we get with them. So as opposed to some surgeons that would work on one specific project, we're going to work with them across a whole variety of products to get their experiences and input across the whole gamut of things that we're working on.

All right. Great. And one last question -- so I guess the guidance implies a deceleration in Q4 sales. Understanding there are impact from biologics as well as international sales, also a bit of a tougher comp in Q4, but is there anything else that should be noted as contributing to that decelerating growth?

I think you've got, obviously, currency for us on an as-reported basis compared to Q4 last year. PureGen, as you mentioned, was in Q4 last year. It's not in this year. Q4 is historically our stronger quarter, and that would be so, given this number, for Q4. And obviously, we are reasonably comfortable with where the number is right now.

All right. Great. Thank you for taking the questions.

Bill Plovanic, Canaccord.

Great, thanks. This is actually Kyle on for Bill. So I kind of want to build on the previous caller's question and just see if we can drill any further into the US strength. Obviously, there's strength in both volumes and then also it seems like mix. I wanted to see if you could break down how much of that is coming from new customers coming on board, through maybe more acceleration from the Phygen acquisition, and then how much of that is just positive mix from some of these new products that you've launched?

I would say, obviously, with Phygen, it's going very well. We had a slow start. It's now been accelerating. I think we will continue to see that, but it's already been accretive. So certainly Phygen has helped.

The new products, some of those aren't fully launched, but they're definitely pulling through a lot of the core products. So we're getting a lot of new surgeon interest with the new products. Then we can expose them to the other core products that we have, as well as the biologics.

So is is kind of a combination of both. Certainly Phygen has helped, but the new products are really helping to drive surgeon interest.

So, for example, if you looked at our biologics franchise, if you took PureGen out of the numbers, we're up double digits year over year in terms of biologics. So NEXoss is clearly contributing; ProFuse is clearly contributing to the growth.

Great. And then looking towards the development agreement, any more color there you can give us? Are there any product for gaps that you're trying to fill in the portfolio or anything that really motivated you to for bringing this group of surgeons on board?

And then I understand that it's early, but when should be expect to see some of these first products maybe come to market or get an idea of when some progress there?

So as we've discussed before, probably our biggest gap in our portfolio now would be on the lateral implant side. So that's obviously an area we'd like to grow on. But really one of the keys to bringing out new products is being able to have the product appeal to the broad base of surgeons all the way across the gamut of users, from neurosurgeons to orthopods to international surgeons. So, really, we're trying to get a great group of surgeons working with us, just to make sure that some of our existing and new products really appeal to the masses.

Great. And then just one last modeling question for Mike. Just wanted to see if you could give medtech tax in the quarter. And then, thanks a lot. I appreciate you taking the questions.

So, the medtech tax is -- so, on our US revenue, we pay substantially less than the 2.3%. I don't want to get into the actual number right now, but you should be modeling well less than the 2.3% on US revenue.

Great. Thanks a lot.

Glenn Novarro, RBC Capital Markets.

Thanks. Is it possible -- is there a way to quantify what Phygen contributed in the third quarter?

So, Glenn, one of the things that we have is that Phygen -- we were doing business with Phygen physicians prior to the acquisition. And so you've got a little bit of a challenge in terms of an apples-to-apples comparison.

I guess I would say, if you look at it like this, our hospital implant business is up 23% year over year. That's obviously beating the category. I think Tom has already addressed the question of is Phygen a big contributor. Clearly, Phygen, year over year, has been a big contributor.

When we get into dissecting how much of that growth came from Phygen specifically versus base products, it's a little bit of a challenge. But I think it's worthy of note that the business, we close out the year with Phygen very close to what we articulated when we did the deal in late 2012. We got off to a slow start. It is accelerating. As Tom's mentioned, it's accretive now, already, in Q3 of 2013. And it's definitely contributing to our underlying growth.

Okay, because that's what I was trying to get at, because almost 9% in the US, that's very strong growth. And obviously, Phygen is contributing. So I was just trying to get a sense of what the apples-to-apples or the organic growth was in the US. But --

You'll remember when, at the beginning of the year, I think we guided $15 million in revenue in Phygen. And we would expect the year to finish very close to that projection, if that helps.

Yes. That's helpful. And then I just wanted to ask a question on pricing, because you've talked about pricing being down mid-single digits. And when we talk to some of your other smaller competitors, we're hearing pricing is down more like low single digits. So maybe talk about what's driving mid-single digits for you, and what's the potential for you guys to get down to that low-single-digit pricing decline? Thanks.

Sure. This is Tom. You know, the majority of our business is still in the core business in the price-sensitive sector. So, we're seeing a lot of pressure there. As we start with the new product introductions and we continue -- none of them are in full launch. We're still working that out, particularly with Pegasus. And we will see what's the pricing impact as we get those MIS products, the deformity products, the Solus, Pegasus. Those won't have as much price sensitivity as the core products we have now.

And the price-sensitive segment of the market, just to clarify, you're really talking about lower-back fusion, right?

Yes, well, I wouldn't just say lower back. I guess I would say, you know, standard interbody implants, cervical plates, and pedicle screws.

Okay. Great. Thank you.

Imron Zafar, Jefferies.

Thanks for taking my question. First, I wanted to ask a broader market question. As you look to 2014, I know you're going to give guidance on the next call, but what are your expectations for broader market growth for next year, the way you see it right now in terms of just overall pricing --

You mean the overall category situation?

Yes, just the overall spine market, what your assumptions are as you formulate your operating plan and your targets for next year.

A lot of it is where do we anticipate pricing to be. I think for the -- I would call the meat-and-potatoes products, I think that mid-single-digit pricing decline on an annual basis is not unreasonable. I think then you've got demographics kicking in, and you've got category volumes that are going to offset that to some extent. I don't think the category, just my point -- or one person's point of view, I don't see the category being much more than low single digits. And I think that will be an integral part of our planning assumption for 2014.

Okay. And then given the restructuring of PureGen, is there an increased interest in maybe adding to your biologics portfolio via acquisition, or -- I know the business grew well, even net of that, in the quarter. I guess how comprehensive do you think your portfolio is, or does it need to be more so?

I think it's fairly comprehensive. We've had surgeons that have moved over to NEXoss with bone marrow [aspirate] as an option to PureGen. But obviously we're still looking to do licensing and acquisition and things like that to expand it out. And I mentioned a little bit about that as far as some atologous point-of-care therapies that we're looking at.

So I think we've got a very complete portfolio, but we're always looking to add new products on, keeping in mind the price pressures that we've seen.

Okay. And then lastly, just wanted to get your thoughts on artificial disc technology. There's obviously a lot of buzz about that at [mass], multiple products approved in the US now. Obviously, reimbursement's gaining adoption there. But I wonder how you think that would impact your fusion business, and secondly, whether you have an R&D program in that category.

Yes, that's a great question. We actually do have a disc in our portfolio. It's Scient'x's largest product outside the US. We have not, up to this date, invested in bringing it to the US because we had some basic permitting to take care of. But we have a device that has many thousands of devices implanted outside the US with excellent clinical results.

And I think now that we've got a lot of the basic knitting taken care of, it really is time to look at bringing that very successful and well-supported disc to the US in the future. But we're in the stage of evaluating exactly how to do that, the timing of doing that, and the cost of doing that. Perhaps we might have a little more color for you on the next call.

Okay. And then the potential impact on your fusion business when --?

Yes, I think it depends a little bit on reimbursement, which remains to be seen how that goes. I think it may have a little impact, but I don't really think in the next few quarters we're going to see a huge impact there. But that's my personal opinion.

Okay. Great. Thank you very much.

Mark Landy, Summer Street.

Thanks for taking my questions. Just briefly, Mike, on France -- and good luck with the employee representative -- are negotiations done, or are you still try to conclude them?

We are still -- one of the reasons we talk about the program as we're in the planning stage is we are not complete yet. That is a Q4 program in terms of final discussion. So it is still between the Company and the employee representatives in France at this point in time.

And let me guess -- a whole bunch of those guys were available for discussion in August, right?

Mark, given the timing of our communication with [book 1 and book due], there's a set timeline that we have to march through. And we're respecting that as best we can, obviously.

Okay. Fair enough. Just with that, and I know it's a really difficult process to go through, specifically with that representative, have you homed in on most of the issues, or are you still expecting some from outliers to be brought up in that process?

Mark, I think it's gone very much as we would have anticipated. The one thing I would like to add is we are impacting, or potentially impacting, a significant number of people's lives. The French team has actually been extraordinarily balanced as they've gone through this. And I think one thing we are very mindful of is that it's a substantial and difficult decision for the Company. There is a process we have to go through, which we are absolutely committed to. But it really is, from an organizational standpoint in France, the organization has actually responded incredibly well.

Okay. Fair enough. If I just move a little bit on to PureGen, and I guess it is rearview-mirror stuff, but with respect to the classification of 361 and minimally manipulated, what was the difference between your viewpoint and the FDA's ultimate viewpoint that led to you pulling the product from the market? I understand the process forward to clinical trial, the cost and the time thereof. But what were the differences that you couldn't reconcile with the FDA with respect to -- I'm sure it's minimally manipulative material.

Well, it came down to just a difference in opinion as to whether the primary function involved metabolic activity or not. So that was really what the discussion centered around. We felt it was a tissue and should be designated that way, and they felt it should be designated as a biologic.

Just going through that process, do you think that the FDA is becoming more rigorous in its implementation of that, or to perhaps maybe you think that some people who have previously went down the 361 route perhaps looked at it with a little bit more latitude?

Well, I can't speak for the FDA. But recently they have sent out several more untitled letters regarding stem cells. So it tells you that they are at least aware of the category and looking into the different products that are out there.

Okay. And then just lastly from me, the products that you're going to focus on with this core group of surgeons, Les, one of the strategies that you put in place was to perhaps turn away from products that had lengthy cycles through the regulatory system to focus more on upping the cadence of new products specifically as it related to I guess just updating products that you had in the market.

What is the focus with this group? I'm sure that there's a mix. But can you kind of explain how you plan to address the products with them? Is it just get a couple new things into the market, then start on development of longer-regulated type products? Or is this group really a strong group that's going to go for stuff that is going to move the needle in the longer term?

No, this group will be working on some new products and upgrading our existing products. But these will all be 510(k) type projects. So they will have an impact quickly rather than over the long term.

I think long term, we talked about a disc. We talked about some biologics. So it's a mixture. But right now, you remember, we talked a year ago how we went from 30 R&D projects down to eight, so that we could focus our resources. We launched those eight products. We've now identified our eight next programs. And this group will help us work with those to make sure they're home runs.

I guess the last thing on that, there were a couple of these Scient'x products that you were hoping to bring to the US or your predecessors were hoping to bring to the US, which I think kind of got shelved. Which ones are you going to revisit? Which one of those projects gets started up again? Or have you just kind of shelved all of that for now and started with a clean slate?

No, I think I mentioned the disc. The artificial disc, Discocerv, is clearly one where now that we have the capacity, we're spending time exploring the opportunity. That is actually Scient'x's number-one-selling product worldwide. And with this now starting to get some reimbursement, we think it's time to look at that particular product. And we can talk more about that next quarter.

And we're looking at some other products. They have an expandable cage and a few other items like that that might provide the opportunity to go to 510(k) quickly and be sold here in the United States.

All right, guys. Congrats on a good quarter, and thanks for answering my questions.

Josh Jennings, Cowen and Company.

Thanks, gentlemen. Just to start off with the ceasing commercial operations in France, is that something that gets done -- can you quantify any type of revenue headwind that that creates? I know you're not giving guidance for 2014, but any lost revenues there, and does that impact your Q4 guidance at all?

It does impact our thinking as it relates to 2014, because obviously we do have a business presence in France that will factor in. And we will be able to articulate that because we think about 2014 when we end 2013.

As it relates to Q4, right now everything in France is on track. I mean, there's a specific reason or there's many reasons why I wanted to identify the contributions of the organization in France, and that's one of them. So the business right now is on track.

Okay. And then if we could just revisit your Q4 guide, $204 million for the year, it assumes a deceleration, as was asked earlier in the call. But could you just help us sort through -- you do have the hardest comp, most difficult comp, year over year, in 2013 in the fourth quarter, and you don't have PureGen. But looking at that type of deceleration, is there anything else that you guys can call out to help us get our arms around the Q4 guide?

Well, the one thing that's worth pointing out or reiterating is the impact of the yen on our business in 2013, we said when we closed out Q2 was about $3 million in Q4. So it's about $1.5 million per quarter. So that's the hit that we're overcoming in terms of the operational improvement in terms of the Japanese yen.

PureGen is out, but as you look at the run rates as we're coming into Q4, the business is on solid footing and we're accumulating unit volumes and revenue. So it's historically our strongest quarter, and I think that you look at the as-reported growth of 3.9% and the 6.5% in constant currency, it speaks to where we've been all year.

Great, that helps. And then lastly, and you've had some significant strength in your Japan business over the last number of quarters, I just was hoping you could give us a little bit of -- or just detail the sustainability of that strength and what's driving it there, and how much run do you have? Thanks a lot for taking the questions.

Yes, it's a great question. Our Japanese business is doing incredibly well. In fact, they have quite a large market share in Japan already. They only launched their interbodies earlier this year. So that's really just ramping up.

Japan -- the government in Japan is going to take another price cut next year of something around 8% to 10%, we expect. But even in the face of that, we expect our Japanese business to deliver solid growth next year.

(Operator Instructions) Jens Hasselmeier, First Berlin.

So not so much left for me. I just wanted to ask if you could please repeat the costs that are associated with discontinuation of the French activities. And I was also wondering how much of the long-term liabilities are interest-bearing, and that's it.

So on France, it's $11 million for restructuring. We took $4 million in Q3. We estimate $4.7 million in Q4, $1.3 million in Q1, and $1 million in Q2. That should get you to $11 million.

If you're asking relative to the indebtedness, the new debt structure, it's all interest-bearing. We actually have an amortization schedule of three years on the term loan of $3 million a year. And that's all delineated in our disclosure.

Okay. Good. Thanks.

Thank you. And with no further questions in queue, I'd like to turn the conference back over to Mr. Les Cross for any closing remarks.

Great. Thank you very much. Well, I think that concludes the questions and our time today. We thank everyone for their interest, for their questions. And we look forward to talking to you again when we report our year end. Thank you, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.