Alphatec Holdings Inc (ATEC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alphatec Spine fourth quarter and fiscal year end 2013 results conference call.

(Operator Instructions)

As a reminder, this call is being recorded. If you have any objections, you can disconnect at this time. I would now like to introduce your host for today's conference, Christine Zedelmayer, Investor Relations. Please go ahead.

Good afternoon, and welcome to Alphatec Spine's quarterly update conference call to discuss our fourth quarter and fiscal year 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 material 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 results 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 as a supplement to, and not as 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; Mike Plunkett, Chief Operating Officer; and Ebun Garner, General Counsel. I will now turn the call over to Mr. Les Cross.

Thank you, Christine. Good day, everyone, and welcome to Alphatec Spine's conference call to discuss our fourth quarter and year-end financials and operations. This afternoon, our comments will build on both press releases issued earlier today.

In the interest of providing ample time to review and discuss our results as well as our settlement of the OrthoTec matter, and the Deerfield Credit agreement that we have announced today, we will shorten our comments regarding 2014, and give further comments on our first quarter call, which should be held before the end of April. After my introductory remarks, Mike will provide additional details on the fourth quarter and full-year financial results, and provide more details on the outlook and guidance for 2014.

2013 was a pivotal year for Alphatec, and I am very pleased by the record results that the organization delivered. During the last two years, our strategy has been to strategically improve the overall operations of the Company, in order to strengthen sales and overall profitability. I am very proud to say that 2013 demonstrated our ability to deliver and execute to that strategy.

We have streamlined our R&D process to deliver valuable innovative solutions into the marketplace. We have also strengthened our US and international sales leadership. At the same time, we continue to seek to increase our bottom line profitability, by implementing operational efficiencies and effectiveness throughout the supply chain, manufacturing and all back-office operations.

We feel as though our strong execution in 2013 established positive momentum for us to grow the business in 2014, and provides us with an extraordinary opportunity to maximize shareholder and stakeholder value this year and beyond. We will provide more details about our strategy for 2014 later in the call.

However, before I provide these key highlights for our fourth quarter's performance, I would like to provide an update on the press release we issued this afternoon regarding our settlement with OrthoTec. In February, we announced that a California jury had delivered a $47.9 million verdict plus interest against Scient'x subsidiary, Surgiview. In the OrthoTec versus Surgiview litigation, we also noted that a second trial would be scheduled within 60 days of the jury verdict to determine if Alphatec could be held responsible for the damages assessed against Surgiview.

Today we announce we have reached a global settlement agreement with OrthoTec for $49 million. Pursuant to the settlement, the parties provide each other with mutual releases, and a dismissal of all OrthoTec-related litigation matters in which the Company and its affiliates and directors are defendants. While we remain confident in the strength of our arguments, we believe that settling the matter expeditiously is in the long-term best interest of all stakeholders.

Removing this long-standing legal matter today removes a significant level of current and future uncertainty. It eliminates further distractions across the organization, and reduces our future legal expenses and human resources associated with continuing a very lengthy litigation process. Based on our future cash flow projections, in addition to the funding that we announced today from Deerfield and the support from our senior creditor, MidCap Financials, we believe in our ability to meet both the short-term and long-term obligations set forth in the settlement agreement.

We were able to settle this in a structured long-term manner that provides for a one-time upfront payment of $17.5 million in the second quarter of 2014, and quarterly payments beginning in the fourth quarter of 2014 of $1.1 million, or $4.4 million per year for the next seven years. In Mike's section, he will discuss the terms of the new debt facility in more detail. With that behind us, I would like to now take a moment to reflect upon the numerous accomplishments that we achieved during the course of the fourth quarter and full year of 2013.

Q4 represented another strong quarter for revenue performance, a record quarter in fact, here at Alphatec. Q4 2013 revenue totaled $53.1 million, and represented approximately 1% growth over the fourth quarter of 2012, or 3.4% growth on a constant currency basis. We are pleased with this result, given some of the expected softness in our international revenues as a result of our Q3 decision to discontinue commercial operations in France, and the loss of our PureGen product, as well as continued core implant pricing and reimbursement headwinds in the global spine market.

Our EBITDA in Q4 represented all-time record for us as well, coming in at $7.5 million or 14.1% of revenues. This was up 51% over the fourth quarter of 2012, and over 11.5% growth sequentially from the third quarter of 2013. This now represents five solid quarters of operational execution, and delivering strong results in this challenging spine market. This demonstrates that our internal transformation has gained traction, and created the positive forward momentum that we believe will fuel our journey and strengthen our competitive positions in the global spine market, and ultimately drive stakeholder value.

I am also pleased to report a record year of revenues for Alphatec. For the full year of 2013, revenues totaled approximately $205 million on a reported basis, trending well ahead of 2012 by over 4%, or over 7% on a constant currency basis. We have achieved this year-over-year growth despite having to cover contribution losses associated with the drop of sales in France, and the removal of our PureGen product from the market for most of 2013.

Likewise, our financial discipline and focus on streamlining operations have delivered a record annual adjusted EBITDA for 2013. We delivered over $25 million on annual adjusted EBITDA, representing over 12% of revenue, and a growth of over 27% over 2012. I am extremely pleased with these results, as they demonstrate our commitment to building a track record of operational execution, and delivering consistent reliable results. Mike will cover the financial results in greater detail in a few moments.

We are pleased with our US revenue performance in the fourth quarter of [2013] and the full year. US revenues for the fourth quarter were $35.7 million, and represented approximately 5% growth over the fourth quarter of 2012. Excluding the effects of our discontinuation of PureGen in early 2013, our US revenue was up 10.5% quarter-over-quarter.

US hospital non-biologic implant revenue was up almost 20% year-over-year and 6% sequentially. On an annual basis, US revenue for 2013 were $135 million, representing a 3.4% growth over 2012. When adjusted for PureGen, US net revenues grew 8.3% over 2012. 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. As we have previously discussed, our decision to restructure our commercial operations in France also includes discontinuing sales of Alphatec and Scient'x products in that country as well. We anticipate some softening in our French business as a result of this announcement. However moving forward, we expect to trade off an amount of unprofitable revenue in the near future from France in exchange for an annualized increase in EBITDA by $6 million to $7 million, which begins in the second half of this year.

With this backdrop, international net revenues for the fourth quarter were $17.4 million, down 7% compared to the fourth quarter of 2012, or up almost 1% on a constant currency basis. When this is adjusted for contributions from France and the impact of currency, international revenues grew 4% versus the same period in 2012. Overall, international revenues for the full year of 2013 totaled $69.8 million, representing 6% growth as reported, and 15% growth on a constant currency basis.

In 2013, international revenues accounted for 34% of our total revenue. Japan represents our largest international business, where we currently hold a top four market share position. Our Japanese business continues to consistently deliver strong growth with revenues of over $28.4 million in 2013, representing an impressive 19.4% growth on a constant currency basis. This growth is the result of surgeon uptake and adoption of our minimally invasive products, ILLICO minimally invasive, and ILLICO multi-level, as well as the recent adoption of our Novel PEEK spacer system.

Europe continues to have double-digit revenue growth, and recent product and instrument approvals in Brazil and China will aid in the expansion of our business in those markets. Looking forward, we will continue to seek to deepen our international penetration while expanding into select markets in Latin America and Asia-Pacific which we believe will represent the future growth opportunities for our innovative products. I am very proud of our international leadership team and our distribution partners. Their focus on market expansion, new surgeon training, and the commitment to advancing our international business continues to reinforce Alphatec as a competitive participant in the global spine market.

We are also very pleased with the performance of our product portfolio in 2013, and the pull-through opportunity for those products in the coming year. We endeavor to continue to gain solid traction with surgeon adoption of Alphatec Solus, our latest interbody fusion device, as well as our ILLICO minimally invasive surgery platform, including ILLICO multi-level instruments for the longer constructs, the BridgePoint for spinous process fixation.

As I have previously mentioned, a key strategic focus for Alphatec last year and continuing into 2014 is on minimally and less invasive surgery platforms and products, coupled with the positive benefits of biologics to promote bone healing and spinal fusion. We believe that this is clearly a trend in the industry as it benefits the patients, hospitals and the surgeons alike, and we have some exceptional products that fit very nicely into this growing area. In fact, our minimally invasive product portfolio grew over 26% in the US in the fourth quarter, and 20% globally for the full year of 2013.

Expanding our international market share through registration and approval and launch of key Alphatec products is a significant lever for our growth strategy for 2014 and beyond. We continue to actively pursue international registrations, and I am pleased to report that we have received over 80 international approvals in 2013. At the end of the fourth quarter, Epicage system was approved in Brazil. We also received approval in China for our Discocerv, our motion preservation cervical disc prosthesis product. Latin America and China represent significant market growth opportunities for us, and we anticipate additional approvals in these regions for our Alphatec products in the first half of 2014.

Training is another important area of focus for us internationally, and to attract and retain surgeons. We have trained close to 400 surgeons globally in 2013, and just recently hosted our first training lab for surgeons from Mexico and Brazil. These accomplishments, again, are a testament to the tremendous progress, and to the commitment we have to innovation and expansion of our product portfolio.

To drive future profitability, we continue to deliver significant improvements in our vertical integrated global manufacturing and supply chain operations. The significant strides we made over the last 18 months in leaning out our inventory, reducing lead times, appropriately managing WIP, and substantially reducing backorders are the foundations for driving future operational leverage. Coupled with these improvements, our strategic decision to restructure our French operation which was difficult, but necessary to yield long-term positive benefits for the overall gross margin of our business.

We are well underway with the restructuring transition of the operations, and remain on target to start delivering annualized increase of $6 million to $7 million to EBITDA, beginning in the second half of this year. Even though we have experienced top-line pressure associated with the industry headwinds for pricing and reimbursement in 2013, we have been able to drive meaningful leverage and manage our cost structure accordingly. I am pleased with the tremendous progress that we have made operationally to improve our bottom line and drive efficiencies within the business.

To summarize, Q4 was a record finish to a very successful year for Alphatec. We achieved solid growth in a challenging market, increased operational efficiencies and effectiveness, while advancing our portfolio of innovative products. Our 2013 results provide proof that we have driven our performance to higher levels, and established a [plan] for delivering consistent repeatable results. At this time, I would like to invite Mike O'Neill, our Chief Financial Officer, to provide additional comments around the fourth quarter. Mike?

Thank you, Les. As Les has already provided the key revenue highlights, for both the fourth quarter and fiscal year for 2013, I will focus the majority of my remarks on the reported operating performance for the fourth quarter and full year ended December 31, 2013. I will then provide full-year 2014 guidance.

As is quite clear from the press releases today, there is a significant number of moving parts impacting our financial results for the fourth quarter and full-year 2013. I encourage you to look at the non-GAAP reconciliation tables accompanying our press release for more detailed information. These measures represent important metrics that we use to manage the ongoing operations of the business. As I go through this review, there are a number of adjustments that I will need to highlight, in order to give you a better understanding of the underlying performance.

Before I provide additional details on the fourth quarter and fiscal year 2013, I would like to provide some additional commentary with respect to the OrthoTec settlement, and the debt facility with Deerfield that we announced earlier today. Under the terms of the secured loan facility with Deerfield, Alphatec has the option to draw up to $50 million in one or more increments by January 30, 2015.

This facility matures in five years at an interest rate of 8.75%, payable quarterly in cash following the execution of a drawdown. Alphatec issued Deerfield 6.25 million warrants upon initial execution of the facility, and will issue an additional 10 million warrants on a pro rata basis as the facility is drawn down. With each disbursement, Deerfield will receive a transaction fee equal to 2.5% of the amount disbursed.

I would like to take the opportunity to thank both Deerfield and MidCap Financial for their flexibility and commitment to the future success of Alphatec. I also want to reiterate the earlier comments from Les, that the Company is comfortable with forward-looking cash flow and covenant projections that allow the Company to service the new incremental debt, as well as the financial obligations associated with the OrthoTec settlement.

Moving to gross profit and gross margin, the gross profit for Q4 2013 was $35.3 million or 66.4% of revenue, compared to $32.1 million or 60.9% of revenue in Q4 of 2012. After adjusting for the French restructuring of $1.1 million, overall gross profit improves to $36.4 million or 68.6% of revenue, which compares favorably with both the prior-year and the sequential quarter's performance.

US gross margin was 74.4% in Q4 2013, compared to 66.3% in Q4 2012, and 69.0% in Q3 of 2013, demonstrating continued underlying performance improvements. International gross margins on a reported basis were 50.1% for Q4 of 2013, compared to 51.1% in Q4 of 2012. After adjusting for charges to cost of goods sold incurred as part of the French restructuring, the international gross margin for Q4 was 57.1%.

Gross margin for the full year 2013 was 60.7%, compared to a prior year of 63.1%. The cumulative restructuring costs in France, and for PureGen that we wrote off in Q3, overall gross margin for the year would have been 65.2%. The US gross margins were 67.7% for the full year, compared to 68.5% full year 2012. After adjusting for the PureGen write-off, our full-year US gross margin would have been 70.3%. International gross margins were 47.3% for the full year of 2013, compared to 52.3% in 2012. After adjusting for charges incurred as part of our French restructuring, the gross margin for the full year would have been 55.4%.

Our underlying cost improvements associated with our ongoing lean activities, combined with favorable channel mix and higher-margin new product sales more than offset the negative impacts of pricing and reimbursement.

Total operating cost expenses in Q4 2013 were $91.3 million, an increase of $55.1 million compared to the fourth quarter of 2013. Excluding the OrthoTec settlement costs of $46 million, trial-related expenses of $3.7 million and French restructuring costs of $5.6 million, our underlying operating expenses of $36.4 million were essentially flat when compared to the $36.1 million in Q4 of 2012. The operating expense reconciliation is included in the non-GAAP condensed consolidated statement of operations table in our financial schedules accompanying this press release.

Total operating expenses for full-year 2013 were $197.8 million, an increase of $64.2 million, compared to the full year 2012 of $133.6 million. Excluding the aforementioned fourth quarter costs, and previously recorded third quarter French restructuring costs, our underlying operating expenses were $137.8 million. The year-on-year increase of $4.2 million in operating expenses is essentially the result of legal expenses incurred in the first nine months of the year, directly associated with the OrthoTec legal matter.

Adjusted EBITDA, a measure we guide to, was a record $7.5 million in the fourth quarter of 2013, or 14.1% of revenues compared to $5 million or 9.4% of revenues reported in the fourth quarter of 2012. Similarly, we achieved record adjusted EBITDA of $25.2 million for full-year 2013, or 12.3% of revenues compared to the $19.9 million or 10.1% of revenues reported for 2012.

Please note that adjusted EBITDA for the fourth quarter and full year of 2013 excludes settlement expenses, trial-related litigation expense, and French restructuring expenses as outlined in the reconciliation of non-GAAP financial measures table in our financial schedules accompanying the press release. Adjusted EBITDA represents net income or loss, excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation, trial-related litigation expenses, and other nonrecurring items such as restructuring expenses, IP, R&D and transaction-related expenses.

Net loss when adjusted for litigation and restructuring previously mentioned, as well as other non-GAAP adjustments was $1.9 million for the fourth quarter of 2013 or negative $0.02 per share, compared to a non-GAAP net loss of $1.4 million or negative $0.01 per share for the fourth quarter of 2012. Non-GAAP net loss for the full year of 2013 was $2.3 million or negative $0.02 per share, compared to a non-GAAP net loss of $0.5 million or negative $0.01 per share for the full year 2012. Cash and cash equivalents were $21.3 million at December 31, 2013, compared to $22.2 million reported at December 31, 2012.

With that, I would now like to provide some forward-looking guidance for 2014, and how this fits into our strategy for 2014 and our long-term goals. Our guidance is based on a broad assessment of the macro variables associated with the overall spine market, as well as our strategic focus for the coming year. Based on the foundation that we have diligently built, and the momentum that we have generated over the last 18 months from solid, consistent execution, we are excited about the opportunities that lie ahead in 2014 for Alphatec.

Our strategy for 2014 will be to grow revenues slightly ahead of the overall spine market, through procedural revenue gains, especially leveraging our strong MIS and biologics offerings, new surgeon acquisition and retention, and our broad suite of innovative products. As we do this, we will continue to expand margins through improvements in ongoing mix, our French restructuring initiative, and continuing to drive efficiencies throughout our business.

In 2014, we expect full-year revenues for 2014 to be in the range of $208 million to $215 million. This represents approximately 1.6% to 5% growth over 2013 on an as-reported basis. This represents 4.5% to 8% growth, when adjusted for the prior year's contribution from French commercial operations.

We anticipate first half, second half revenues to be weighted towards the back half of the year, attributable to continued growth of recently introduced and new products as the year unfolds. You should anticipate Q1 being the lowest quarter of the year, and sequentially down from Q4 of 2013, as a result of the cessation of business activities in France, and bad weather across much of the United States.

We anticipate non-GAAP adjusted EBITDA to be in the range of $30 million to $33 million or approximately 19% to 31% over 2013, and representing approximately 14.4% to 15.3% of revenue. Adjusted EBITDA guidance assumes that there are no further ongoing trial-related litigation expenses associated with the OrthoTec versus Surgiview legal matter.

Our forward-looking guidance for 2014 is consistent with our stated longer-term objectives of growing revenues at twice the rate of the market, and a target adjusted EBITDA of approximately 20%, our annual revenues driven primarily by the continued expansion of our gross margins and leveraging of our operating expenses. In summary, we are very pleased to report both record quarter and full-year results for 2013. We have made great strides as an organization over the past couple of years, and we look forward to executing on our business plans as we move into 2014 and beyond. Now I would like to turn the call back over to Les.

Thanks, Mike. Good job.

As I look back on my second year with Alphatec, I am extremely proud of the tremendous progress the team has made. With this strong foundation that we have built, our team now has an opportunity to provide greater focus externally on gaining market share and expanding our global business, and continuing to establish long-term stakeholder value. I am excited about the opportunities that lie ahead for Alphatec. We have great confidence in the momentum as we enter 2014.

In closing, I would like to reiterate that along with the Alphatec Spine Board of Directors and leadership team, we are committed to executing our plan, and creating even greater value for our employees, customers, patients and shareholders around the world. Additionally, I would like to acknowledge and thank our employees and our distribution partners whose hard work and commitment has enabled the Company to deliver the record results for this quarter and the full year. So with that said, operator, let's take some questions.

Thank you.

(Operator Instructions)

And our first question comes from Raj Denhoy with Jefferies. Please go ahead.

Hello, good afternoon.

Hello, Raj. How are you doing?

I am doing good okay, thanks. I wonder if I could ask a little bit about the settlement? I am curious about -- as we have talked about it before, as you described it before, there was still some questions in terms of where the ultimate liability might rest in that issue, and whether it would be with you, or perhaps previous parties that might have some exposure. And I am curious what led you to ultimately decide that you should settle for the entire amount, or at least some amount with OrthoTec?

Hello. This is Ebun. I think when we looked at it, it really came down to five basic factors we were looking at. Number one, there could have been a significant amount of interest attached to the verdict. Two, to get to phase two, you would incur at least a couple million dollars of legal expenses to win phase two.

You also had exposure in New York. There were certain Directors of Scient'x that were defendants in New York, and there were indemnification obligations with respect to those Directors.

Even if after you get through all of the trial stage matters, you still had what would prove to be a lengthy appeal process, if we were successful in all of this. And then finally, just the added distraction of our resources and management, through what was destined to be a multi-year process still to come.

Okay. But that basic idea, I mean, you sort of assumed all of the liabilities would eventually rest with you? I mean, was it sort of decided along the way, that whether it was HealthPoint or even the previous Scient'x organization, whether there was any liability that might have rested with those parties, as opposed to passing all the way through?

Well, I mean, we purchased all the stock of Scient'x. And so, any liabilities that were -- would lie with Scient'x, eventually would lie with Alphatec, because we consolidate their financials into ours. So it is not as if, we are in a position where we could just leave Scient'x hanging with a large liability.

And I suppose similarly for HealthPoint?

No. It is not similar for HealthPoint.

Okay. Well, I will leave it there. We can chat off-line about it.

But then, the other point of it was the -- the way you structured the deal, in terms of Deerfield getting I think it was 6.25 million warrants at $1.39. How did you arrive at that, both the dilution you are willing to take, and also the valuation that that $1.39 implies?

Yes, I think one of the things we did was, we obviously looked at a number of institutions that were potentially in a position to be able to give us some support on quite a short amount of time. So we actually had some competitive bids and competitive offers to be able to see what we could do here, and Deerfield came through with a highly competitive offer, and certainly, they have been great partners all the way through the process today.

I think at the same time, you have to acknowledge we have a senior lender in MidCap Financial, and obviously, you have to consider their willingness and ability to entertain subordinated debt. I think overall, we have a very good solution between both of our lenders and the Company.

Okay. Fair enough. Maybe just lastly on the business, I wonder if I could ask about -- the EBITDA performance in the quarter was certainly good. And as you look at out into 2014 and beyond, it strikes me that you are making significant progress there.

And I am curious, if you could give us a sense of where you think you might end 2014 on a run rate basis on EBITDA? Do you think you could be pushing $10 million a quarter, as you get out of the year?

Well, I think our guidance range for EBITDA would suggest that that's a little aggressive for the final quarter of the year. I think what we have been comfortable saying, is that we continue to make a lot of progress on our gross margin expansion. Certainly, the actions that we have taken in France would legitimize that statement, and we expect our gross margins to improve as each quarter of the year unfolds.

I don't want to get into specific quarter guidance at this point in time. But I think it is fair to say that Q4 is likely to be one of the more profitable quarters, from an EBITDA basis that we would see in the year.

Okay. Fair enough. Thank you.

Thanks, Raj.

Thank you. And our next question comes from Matt Miksic from Piper Jaffray. Please go ahead.

Hello, thanks for taking my questions.

Hello, Matt.

So maybe just to follow-up on the warrants, and sort of what this is going to do in terms of dilution. And maybe I missed it, but did you give just sort of a round number as to what we should expect this year for weighted-average shares outstanding?

Yes. So upon execution of the agreement today, you will see -- so it is 6.25 million warrants at $1.39. So that is effective with the signing of the agreement. To the extent that the Company is in a position to draw down against the $50 million facility, we will issue pro rata up to a maximum of 10 million warrants.

So if we pull down, for example, a bullet payment is $17.5 million. If we pull down $17.5 million, you will see a pro rata warrant adjustment for that. But you can think of the worst-case scenario, in terms of that number would be 16.25 million shares at the end of the year, if we were to draw down the full amount of the facility.

Okay. I mean, is that a pace or rate that you would expect to execute on this facility, or is it --?

I don't want to get into the specifics of how much we are going to draw down, as we go throughout the year. Obviously, the facility is in place for a reason. We want to be in a position to use it, but I am not prepared to commit at this point exactly what number by when.

Sure. And just to push it a little bit on that, Mike, I mean the nature of your business, the cash you are generating, I mean is it fair to say over the term of this agreement, that you would be more likely to use it a little bit more heavily in the beginning?

No. I think clearly, we have an initial payment that is due on the settlement. We also have access to some growth capital, working capital within the facility, and I think that that's clearly an opportunity for us to think about utilization of the cash that we have, as well as contributing to more cash in the event we need it. I think it is fair to say that we are going to use the facility in quite a substantial way at this point in time.

That's helpful. A couple of follow-ups on the fundamentals.

You mentioned ILLICO clearly driving some of your -- in particular, some of your international sales in Japan. I would love to understand maybe what of your new products were sort of making a significant contribution here, in what we saw in Q4, and which products and maybe when throughout the year, we should start to think of them having an impact heading into this year? I am thinking of Pegasus and Solus.

Hello, this is Tom McLeer. So I would say, in the US ILLICO has continued to drive things. Internationally, the same sort of situation, with the continued training we have.

So getting longer constructs on the MIS side, Solus certainly has moved along nicely for those surgeons that believe in a A-lift approach, so we continue to focus training there. And then, with some of the new biologics we launched in the Pegasus cervical implant, I think those are all going to be contributing factors throughout the year.

So as I hear you talk about it, we should kind of expect ILLICO maybe to be -- remain the biggest driver this coming year? Is that fair?

Yes. I think that, in addition to some new products that we will launch second half of the year. But certainly, ILLICO continues to be a strong driver as we train more and more surgeons.

Okay. And then, just last for me, if you could -- I think you mentioned Mike, the weather somehow, it might have impacted your guidance in some way. It is -- obviously a lot of talk about that last week in -- at AAOS. I am, wondering in terms of pace of the year, should we be expecting kind of a little bit of -- more than a seasonal dip here in Q1?

I think as we came into 2014, to the extent that there is a seasonal dip -- and our data may not be consistent with the rest of the industry -- I think we certainly were impacted with the cancellation of a number of procedures in the January February time frame. What I think we are looking at right now, is when and does -- when does that come back?

Great. Okay. I will hop off there. Thanks again for taking the questions.

Thanks, Matt.

Thank you. And our next question comes from Bill Plovanic from Canaccord. Please go ahead.

Great, thanks. Good evening. Can you hear me okay?

We can hear you, Bill.

Thank you. So just, the $1.1 million you are going to pay quarterly, you start that in Q4. When do the Biomet payments roll off?

It rolls off in Q4 of 2014. (Laughter).

Okay. So you are swapping one out for the other?

(Laughter). Yes, it is not lost on me. Yes.

Okay. And then, so kind of that increase to margin goes away, it is just one for the other. The 74.4% I think it was on the US gross margin, how sustainable is that at current levels? I mean, is there -- can we keep that at 74%, or is that going to bounce around at certain levels?

Yes, we have -- we definitely had a strong fourth quarter in the US. Our mix was good. In addition, unlike prior periods and prior quarters, I think Mike and his team have done an absolutely tremendous job managing the -- some of the inventories, the obsolescence and the excess.

And so, we are not seeing any extraneous charges come through that bury the gross margin. So as Tom indicated, our strength in ILLICO and Solus helped, but overall, we had a good quarter.

So the way I should think about this, is maybe a 70% or higher is how I should think about the US going forward? And then, any improvements as you talk about gross margin improvements for the year, would be coming via the changes going on for the International businesses?

That's true. That's fair.

Okay. And then, as we think about, I kind of -- there is a lot of cross winds in your revenue line. So we have got, I think annualization at the PureGen play being pulled off the market somewhere halfway between Q1, and then now you have got the French business coming off.

Like how much per quarter was the French business in 2013? How much are we going to have to pull out of our numbers for 2014? I just want to know how to think about that.

So you have got essentially $5.5 million coming out from France

For the full year.

For the full year. (Multiple Speakers).

And then, just pulling that --

Just under $1.5 million a quarter.

Is there any opportunity to replace that with a stocking distributor over time?

We are still in the process of restructuring our French operations. So that is not something that we are planning on in the near future.

Okay. And the PureGen headwind is what, about $1 million?

It's about $1 million that came in Q1 of 2013.

Okay. So maybe it is about close to $1 million that -- coming off? Okay.

Yes.

And then, the last question is just on guidance. As you look at the guidance you are giving, how much of that -- is it getting a distributor in France, new products that have yet to be launched? Any change in the macro?

So I think the -- in terms of macros, I think we are looking at US category growth of low single-digits. We are continuing to forecast mid single pricing declines in the US, and that is actually a consistent assumption across many of our international markets as well.

I have talked in terms of some of the prepared remarks, in terms of the back half versus the front half. So products that we launched in 2013, Solus, ILLICO, multilevel, Zodiac DVR, Pegasus, they all contribute and build throughout the year. And obviously, we have some launches tailored for the back half of 2014, that kind of drive that second-half number higher than the first half.

But I think, Bill, to answer your question, there is nothing in the US budget that requires FDA approval --

Right.

That we don't have. The only approvals we are waiting for are Brazil and China.

Yes.

For rights to sell our products. But there is nothing in the US numbers that could go south because of the FDA.

But Brazil and China are not in the guidance.

Right. Brazil and China are not in the guidance.

And so, the last part of the guidance is -- I mean, I think just on the POD business, you have less than 10%, less than 5% -- I don't know what the number is today. If I think about the numbers, that is the only potential headwind you could see, if the two companies that you supply that are PODs, you end up not supplying anymore?

Yes.

Or is that already in your guidance?

It is less than 5% in 2013.

All right. That's all I had. Thank you very much.

All right. Thanks, Bill.

Thank you. And our next question comes from Mark Landy from Summer Street. Please go ahead.

Good evening, folks.

Hello, Mark.

Hello, can you hear me okay?

Yes.

Oh, excellent. I will start with the easy questions. Mike, I think you said normal litigation expense in 2014. How should we think about that, kind of either through the quarters, or for the year relative to 2013?

Relative to -- so I think we highlighted a difference in litigation expenses of $4 million through the first nine months. We backed out $3.7 million of pretrial costs in adjusted EBITDA for Q4. So we would be -- I am looking at G&A as getting back to normalized legal expenses, which is probably going to be in the $3 million to $4 million range, as opposed to what was an exceptional period in 2013.

Okay. So can you kind of give us a blunt number, Mike?

I thought I had gave you $3 million to $4 million?

Okay. Sorry, my bad. And then just looking at the adjusted kind of EBITDA for the full year, can you give us what the estimate for depreciation, amortization and stock-based compensation is?

Oh, hang on a second, Mark.

I thought those were my easy questions. (Laughter).

Yes, right? (Laughter). I don't know that I have got that on my fingertips right now.

All right. You can give it to me off-line.

I can follow-up off-line with you. There is nothing -- depreciation comes down, because we are out of the French market.

Right.

And our amortization doesn't change, the amortization schedule is the same.

Right. And then -- (Multiple Speakers).

And then, obviously, we will figure out where the settlement expense goes. We took that expense now, so it will be cash going forward, not P&L.

Exactly, and then just stock-based comp.

No significant changes versus, what was reported in 2013, may go up a little bit.

Awesome. All right, Mike. I guess, at the risk of drawing some ire here, I am going to ask the next question. If we go back to some of the judge and the jury and appeals rulings on the OrthoTec and Scient'x litigation back in California, there is mention of fraudulent activity. So the way you have settled this -- how do you deal with that, with respect to perhaps legal action going forward, and [D&O] insurance, et cetera, et cetera?

I think you are confusing -- this is Ebun. I think you are confusing what we generally refer to as your run-of-the-mill fraud with a fraudulent transfer, which is nothing more than you -- what the verdict held was that assets were bought of a distressed company for less than their fair market value. That is a far cry from the general allegations of fraud, that it seems like you are talking about, and in California, it is actually called constructive fraud. So it is actually a different cause of action entirely than your run-of-the-mill fraud.

Okay. Don't get me wrong. I am not insinuating fraud. I am just reading transcripts, the legal transcripts.

And I guess, the comment is that insurance companies are not in the charity business, and they are going to look for every opportunity to try and renege on what they have to pay up. So I guess, my question is, that you are quite comfortable now that any issues that will come out of a shareholder lawsuits, anything going forward will be covered by the insurance that you have in place?

Right now, there are no shareholder lawsuits. We have been dealing with this litigation since 2009 and into 2010. There haven't been any shareholder lawsuits related to this litigation. And so, to the extent that there is one, we will address it at that time.

Right. But it is fair to say that the rulings have only (inaudible) handed down in the last couple of months, right? Because the lawsuits have been going on, but the awards are recent, and it takes time for these things to get momentum?

Thus far, we haven't seen any activity that would lead us to think that a shareholder lawsuit is imminent or even being planned.

All right. We can pick it up when that happens, if it happens. I hope it doesn't. Thanks.

Thanks, Mark.

All right. Are there any additional questions?

There are no further questions. I would now like to turn the call back over to Mr. Les Cross for any further remarks.

Great. Thank you very much. That obviously concludes our call, and our question and answer section for today. So I thank everybody for their time and attention and attention today, and assure you have our commitment to continue to improve the performance of this Company on a go-forward basis. So thank you, everybody.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.