Alphatec Holdings Inc (ATEC) 2014 Q3 法說會逐字稿

Welcome to the Alphatec Spine third-quarter 2014 earnings call. (Operator Instructions) As a reminder, this conference call is being recorded. If you have any objections you may disconnect at this time.

I would like to introduce your host for today's conference, Christine Zedelmayer, Head of Investor Relations at Alphatec Spine. Please go ahead.

Good afternoon and welcome to Alphatec Spine's quarterly update conference call to discuss our third-quarter 2014 financial and operating results, as well as provide an outlook for the remainder of 2014. This afternoon our comments will build on the press release we issued earlier this afternoon.

Before we begin I would like to remind you that 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 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 a supplement to and not as a substitute for financial statements prepared in accordance with GAAP.

Now let me introduce other members of the management team that are here with me today from Alphatec: Jim Corbett, President and Chief Executive Officer; Mike O'Neill, Vice President and Chief Financial Officer; and Ebun Garner, General Counsel.

The agenda for today's call will include a business update from Jim, a review of our third-quarter financial results from Mike, and closing comments from Jim. We will then open up the call for a question-and-answer session. I will now turn the call over to Jim Corbett. Jim?

Thank you, Christine. Good day, everyone, and welcome to Alphatec Spine's conference call to discuss our third-quarter operating results. As detailed in our press release this afternoon, we continued to make steady progress in Q3 towards our goal of profitable global growth.

During the quarter we also completed the first phase of our beta launch of Arsenal, our new spinal fixation system. Feedback continues to be very positive and we believe this will be a key lever for us to achieve our strategic goals in the future. Later in the call I will provide you with more insights into the initial beta launch results and our plans for expanding the launch.

Q3 2014 consolidated revenue totaled $51 million, representing approximately 2% growth as reported over 2013. Adjusted EBITDA for Q3 was another record for the Company, coming in at $8.2 million or over 16% of revenues. This represents growth of 23% compared to the third quarter of 2013 and approximately 8% growth sequentially.

In fact, this represents the third quarter of sequential growth and adjusted EBITDA, which is consistent with the strategy that we have laid out previously. Mike will cover the financial results in greater detail in a few moments.

As we continue to evolve at Alphatec, we are placing more emphasis on globalization, advancing our products and services in the US and internationally, and becoming a more high-performing organization both in what we do and how we do it.

To support these goals, during the third quarter I am pleased to announce that we've added two new members to our executive leadership team. In July, Kristin Machacek Leary joined our team as a Senior Vice President of Global Human Resources. Kristin joins us with over 20 years of global HR experience.

Most recently, she was the Vice President of Global Talent for Quintiles and prior to that has held senior management roles focusing on global talent and executive leadership with Hewlett-Packard and Boston Scientific. Kristin has worked extensively in emerging and mature markets worldwide, specializing in the areas of organizational development, talent and performance management, leadership, and HR strategy. Kristin will be responsible for transferring our company's culture, developing our talent bench across the globe, and professionalizing the human resource function.

In addition, in late September, Mark Bullivant joined Alphatec as our new Senior Vice President of International. Mark is an exceptionally strong global leader with over 20 years of experience in the medical device field. He has worked across many functional groups including sales and marketing, clinical, and educational training.

Originally from Australia, Mark has applied his international experience in roles of increasing leadership in multiple organizations such as St. Jude Medical, Ulthera, and Terumo Heart. Mark will be responsible for developing and implementing the overall international growth strategy. He will be working closely with our international management team and distributors to take our international business to the next level of growth and performance.

We are excited to have Kristin and Mark joined the Alphatec team and the breadth of business and leadership experience they both bring to the organization.

With that, I will now provide more details about our Q3 performance and an update on our Arsenal beta launch. Our US revenue performance grew steadily in the third quarter of 2014. US revenue in the third quarter was $34.8 million, up more than 3% over the third quarter of 2013.

Growth in the US year-over-year is attributable to increased uptake across our broad portfolio of spinal fusion technologies as well as our extensive Biologics product suite, which grew 18% in the US year-over-year.

International net revenues in the third quarter were $16.2 million, representing a decline of approximately 2% as reported when compared to the third quarter of 2013. Our international business during the third quarter of 2014 represented 32% of our consolidated revenues and continues to represent a significant lever for future expansion of our business moving forward.

With Mark Bullivant now on board, we have a dedicated, internationally-experienced leader focused on working closely with our international management team and distributors to develop and execute an international strategy that's focused on both short and longer-term success.

Moving now to our product portfolio. Launching new, innovative products is a core component of our company strategy. On our last call we mentioned that we had initiated the first phase of our US beta launch of our newest innovative spinal fixation system, Arsenal.

The Arsenal system provides a complete solution to treat the most complex degenerative pathologies and was thoughtfully designed to provide operational efficiency and speed, biomechanical strength, and surgical simplicity, while enhancing the overall experience for the surgeon. This is a significant launch for Alphatec and represents the largest launch in the Company's history.

The Arsenal system is designed to handle a broader array of cases in the thoracolumbar section of the spine and we will be entering into what we estimate to be a $3.5 billion global market. As a result, we are taking a measured, methodical approach to our launch of Arsenal to ensure that we have established the appropriate product capabilities and are able to scale the product launch appropriately to both new and existing customers within the broad thoracolumbar market.

In line with this plan, I am pleased to report that we have successfully completed our initial phase of the Arsenal beta launch. Our key focus for this initial beta release was to assess product capability, functionality, and gather clinical feedback. To support this we launched 25% of the instrument sets that we intend to have at full launch in early 2015, successfully completed over 200 clinical cases, and initiated development of a novel instrument set utilization and replenishment process that is intended to drive overall improvement in asset management and efficiency.

With this initial limited market release, we averaged over 50% of new business versus existing surgeon customers. As a result of the positive results and increasing product demand from the initial beta launch, beginning in early November we will initiate our second phase of the limited market release. Our key focus for this second beta release will focus on scalability and developing the processes and systems to expand adoption and uptake.

To support this we will release an additional 25% of the instrument sets intended for the full launch. Our objective again is to gain over 50% of the uptake from new surgeon users as opposed to converting existing surgeon customers during this phase. We anticipate completing the second phase of the beta launch late this year and anticipate a full launch in early 2015.

We are excited about the future global opportunity for the Arsenal platform. We believe that Arsenal will be the key platform that should fuel our future pipeline and establish a foundation for innovation in the years to come. As we move forward in the coming months, we will continue to update you on our progress.

Now turning to our operational results, Alphatec has built a strong operational platform over the last couple of years that is expected to provide a solid foundation for delivering profitable growth in the future. As a result, in the third quarter we were again able to deliver a record adjusted EBITDA margin that exceeded 16% of consolidated revenues and improved 274 basis points over prior year. We will continue to focus on our lean enterprise implementation, asset utilization, and efficiencies as well as global cost savings initiatives with a goal of maintaining this momentum and driving a meaningful leverage in the future.

At this time I would like to invite Mike O'Neil, our Chief Financial Officer, to provide additional comments around our third-quarter financial performance and our future outlook for the remainder of 2014. Mike?

Thank you, Jim. As Jim has already provided the key revenue highlights for the third quarter of fiscal 2014, I will touch briefly on additional background related to our top-line results and focus the majority of my comments on the reported operating performance for the third quarter ended September 30, 2014. I will then provide some comments with respect to our future intentions related to the Deerfield debt facility and conclude with an update on full-year 2014 guidance.

Q3 2014 consolidated revenue grew 2% as reported to $51 million and our US revenue grew 3% to $34.8 million over the prior quarter. While we are obviously pleased with the performance of our Arsenal spinal fixation system, the beta launch which was initiated in the third quarter contributed only modest revenues for the US business.

International net revenues in the third quarter were $16.2 million, which represents a decline of 1.8% as reported. When adjusted for the impact of currency, primarily as a result of the Japanese yen, international revenues were up over prior year by approximately 1%. International sales of our less invasive products, including Illico MIS, grew 35% year-over-year.

Overall we were able to achieve consolidated top-line growth despite the absence of revenue contributions from France, which accounted for approximately $1.3 million in Q3 of 2013. It is important to note that while we are driving long-term improvements in our ongoing operating performance and adjusted EBITDA as a result of the French restructuring activities.

When revenues are adjusted for prior-year contributions from France, our international business grew approximately 7% versus the same period in 2013, which is traditionally our slowest period of the year. It should also be noted that a significant percentage of our international revenues are currently driven through stocking distributors, which have a natural unevenness in demand.

Our gross profit for Q3 2014 was $36.3 million, or 71.2% of revenue, compared to $24.2 million, or 48.3% of revenue, in Q3 2013. A significant portion of the improvement in gross margin was a result of one-time charges to cost of goods sold in the third quarter of 2013, including the French restructuring and the discontinuation of the PureGen product. One-time charges from the third quarter of 2013 accounted for approximately 18 percentage points of improvement.

Additionally, the elimination of the amortization related to the Cross Medical settlement contributed another 2 percentage points. The remainder of the improvement, approximately 270 basis points, is primarily attributable to ongoing operational improvements and consolidation of the French supply chain activities into Carlsbad. These combined improvements were offset by unfavorable variations in regional product mix.

US gross margin was 75.8% in Q3 of 2014 compared to 57.3% in Q3 of 2013. Again, a significant portion of this improvement is a result of one-time charges to cost of goods sold related to the discontinuation of PureGen in Q3 2013 as well as the reduction in costs associated with the ending of the Cross Medical amortization.

As a reminder, while the amortization expense associated with Cross Medical has ended, the $1 million per quarter cash payment obligation is not set to expire until the third quarter of 2015. When adjusting for the one-time items in 2013, the underlying US gross margin improved in 2014. Lower depreciation for instrument sets and lower implant reserves, reflecting improved asset utilization, in addition to reduced milestone expenses more than offset the impact of product mix.

International gross margins on a reported basis were 61.3% for Q3 of 2014 compared to 29.9% in Q3 of 2013, with a significant portion of the improvement due to one-time charges to cost of goods sold related to the French restructuring in the third quarter of 2013. Excluding these one-time restructuring costs in 2013, we were able to achieve an operational improvement of approximately 390 basis points as a result of ongoing cost and supply chain management directly attributable to our restructuring activities.

Total operating expenses for Q3 2014 were $34.6 million, a decrease of 8%, or approximately $2.8 million, compared to the third quarter of 2013. When compared to prior year, general and administrative expenses in Q3 of 2013 included higher nonrecurring legal expenses. Favorability and G&A in Q3 of 2014 was offset by increased R&D spending, primarily related to product design and development activities and the beta launch of our Arsenal spinal fixation system, as well as IP R&D expense.

Our ongoing R&D expense profile will continue to reflect the investments associated with our major platform technologies. In addition, we closed some modest technology investments that resulted in IP R&D expense of $500,000.

Adjusted EBITDA, a measure we guide to, again came in strong for the third quarter at a record $8.2 million, or 16.1% of revenues, compared to $6.7 million, or 13.4% of revenues, reported for the third quarter of 2013. This represents a 23% improvement over prior year and demonstrates a continued commitment to improved profitability across all aspects of our business.

Adjusted EBITDA represents net income or loss, excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation, and other nonrecurring items, restructuring expenses, in-process research and development, and transaction-related expenses.

We have completed the activities associated with our French restructuring and estimate that all expenses relating to these activities have been booked. We do not anticipate any further material cost impacts for the remainder of 2014.

Having generated a GAAP operating profit for the second quarter in a row, our GAAP net loss position is primarily a function of our debt structure and the associated interest expense. GAAP net loss for Q3 2014 was $3 million, or negative $0.03 per basic share and negative $0.04 diluted, compared to a GAAP net loss of $14.5 million, or negative $0.15 per share basic and diluted, for the third quarter of 2013.

Unrestricted cash and cash equivalents were $20.2 million at September 30, 2014. This compares to the $19 million of unrestricted cash reported at June 30, 2014. In addition we have $2 million of restricted cash reserved for the ongoing Orthotec settlement obligations.

Today we also announced that the Company has initiated a final drawdown of $6 million from the Deerfield credit facility to service the quarterly Orthotec settlement obligations through mid-2016. The significance of mid-2016 timing is that it coincides with the need for the Company to refinance its current senior secured debt. This plan's draw would be to bring the total balance from the Deerfield facility to $26 million.

Based on what we know today regarding our business plan and anticipated business expenditures through January 2015, the Company does not anticipate taking down any additional portion of the remaining $24 million available under the facility and plans to let the facility expire on January 30, 2015. Under the terms of the Deerfield facility, with this planned drawdown of $6 million, we anticipate issuing an additional 1.2 million warrants to Deerfield.

The incremental cash interest expense of servicing the additional debt is approximately $500,000 per year. We are confident that the cost of servicing this debt is well within the Company's capacity to manage, without diminishing our ability to meet the ongoing operating plans of the business.

With that, I would now like to provide an update to our forward-looking guidance for 2014. As we close out the year, the Company expects full-year revenues for 2014 to be towards the lower end of the previously established guidance range of $208 million to $212 million.

Our fourth-quarter thinking has remained quite consistent as the year has unfolded. Similarly, the Company expects full-year 2014 non-GAAP adjusted EBITDA to be towards the lower end of the previously established guidance range of $30 million to $33 million, or approximately 19% to 31% over 2013.

In summary, we have continued to make positive changes this quarter towards our goal of global profitable growth. Our gross margins and operating margins are showing tangible improvements and our cash flows reflect this progress. Looking forward to the rest of this year and into 2015, we remain focused on expanding our global business while continuing to drive underlying operational efficiencies that could improve our bottom-line and cash flow performance.

With that, I would now like to turn the call back over to Jim.

Thank you, Mike. Indeed we did take positive steps forward this quarter towards our strategy of profitably growing our global business.

This quarter we achieved significant growth in our earnings in the context of a globally soft procedure quarter for us. Continued delivery of strong improvements to our bottom line as we did this quarter is fundamental to our pursuit of profitable growth. In addition, during the quarter we took significant strides forward in the very important beta launch of Arsenal and are seeing product demand and interest increase in the market.

Having said that, we realize that we still have a lot more work ahead of us. The organization remains focused, committed, and energized to executing on our corporate strategy with a sense of urgency.

Before we open the call for Q&A, I would like to mention two other items. First, we are very excited to once again participate in the upcoming 29th annual North American Spine Society meeting in San Francisco, November 12 to 14. We will be hosting a technical exhibit booth in the Moscone Center as well as an educational symposium and a less invasive solutions lab course.

This year we are very excited to be showcasing Arsenal as well as our broad portfolio of spinal fusion products at NASS. We look forward to seeing you there.

Secondly, I'd like to thank the global employees and stakeholders who worked so diligently to deliver our third-quarter results, including the launch of Arsenal. With that, I would like to turn the call over to the operator to open up the call for any questions you may have.

(Operator Instructions) Matt Miksic, Piper Jaffray.

Thanks for taking our questions. Wanted to ask a question on some of the international mix first. You do have a larger-than-average contribution from OUS.

When you think about the bottom end of the range of your guidance for the end of the year here, is that -- how much of that is FX? How much of that is sort of tone of business? Any color you could provide would be helpful.

I think it reflects the fact that we continue to see a very positive contribution from our Japanese operations, albeit admittedly we had some negative currency effect towards the end of the quarter. It didn't affect the early part of the quarter.

And I think that we are obviously looking, and certainly with Mark's arrival, although I'm not going to ask them to contribute right away, we are looking for some contributions from the international regions around the world. I don't think the plans that we have in Q4 are any different than what we have previously been thinking.

Okay, that's helpful. The other question was on the way you're balancing cash investment, inventory investment, and this rollout of Arsenal versus your goal of driving more cash flow and EBITDA obviously. Did a pretty good job here in the quarter, but as we head into next quarter, next year, maybe give us a sense qualitatively or quantitatively of what the impact of rolling out a new system like this is. Understanding, of course, it's also an important growth driver.

I think, Matt, you are describing the balance really quite the way we see it. One reason we rolled it out in basically four 25% increments was the first increment is designed to validate and verify that we basically have it right. And we learned a lot during the beta launch and it caused us to make some adjustments, but none that were very significant -- that I would describe as highly significant, but they were still important.

As we move into the second phase and then the third and fourth phase, one of the reasons we're taking this approach is we wanted to be able to fully consume everything that we launch. And so it won't help us to put a lot of inventory on the shelf, because it takes -- the process of initiating a new customer or converting a present customer it takes some time and effort. So we staged it almost precisely for the balancing reason you are describing.

We will be rolling it out over the next two to four months in a way that will allow us to maintain a high monthly utilization of each instrument set and keep them fully utilized. That, of course, causes the cash offset as I think you are identifying. Am I answering your question?

That's very helpful. Then I guess finally, with this new rollout, how should we think about your bandwidth for other new products either coming up here at NASS or coming into next year? I know this is a big launch for the Company. Wondering the kind of gas you have in the tank here.

Well, you know we, of course, have products in our development pipeline, but the breath of Arsenal and the opportunity associated with it I think is going to keep us occupied well into 2015. We will have some product launches along the way, but it remains the single-biggest opportunity. As they say, focus on the big opportunities and we will let the smaller ones follow. So our bandwidth is adequate for what we have in mind but we will stay very focused.

Great. Thanks for taking our questions.

William Plovanic, Canaccord Genuity.

Great, thanks. Good evening. A couple questions here. Just first is you have now exited France. What are your distribution plans for France going forward?

Well, part of our exit from France involved both an operational and a commercial exit that is somewhat a social law issue with how we went about it in France. Later next year we will have the opportunity to reenter if we choose. We right now don't have specific plans to talk about or present, but we will be getting back into France someday.

Okay. How would you characterize your growth internationally, excluding France, versus the rest of Europe, Asia, and rest of world? What type of growth were you seeing in what geographies?

I think we -- without getting too specific, our European business apples to apples, excluding France, we are quite comfortable with what the growth rates we saw there.

As a reminder, for the rest of our businesses in Latin America and Asia and Middle East, they are exclusively stocking distributors so there is some unevenness in terms of the ordering patterns that we have. Obviously, as it relates to registrations, if there were registrations that were worthy of note, we would have spoken about them. So I think it's uneven, but I am anticipating I think a much broader application of the Alphatec portfolio as we think about future.

Okay. Lastly, just on the US business, your Biologics continues to do extremely well. It looks like, just kind of parsing up some numbers, your domestic business, metal business was probably flat sequentially. And I am just trying to get a little color around it was probably flat year-over-year if you look at the growth numbers.

What is impacting that US business? Is this the last of the stocking distributors in the US kind of washing out and all the pod business you used to do or what is really going on? Just trying to figure out when we kind of hit the floor in a ground base to run off of and grow off of. Thank you.

You know, Bill, that was like four questions so let me try and position it as we see it.

Actually, although we were -- I would describe as a touch, a little bit soft in the quarter, we actually -- on a consecutive basis, for example, price played a less role than it has any time in the last two years. We feel very strong about how Arsenal is going to provide a growth vehicle for us. Yes, you are right the Biologics grew very strongly.

All-in-all I think our US business, our view, was quite solid for the quarter in terms of kind of how we want the business to run. We are making choices that are designed to keep profits slightly ahead of revenue as our primary objective, so we do make those choices and we are going to continue to make those choices. They will affect our growth a bit, but they -- as you can tell, each of the last two quarters you absolutely see that choice being reflected in our profitability.

Okay, that's all I had. Thank you.

Imron Zafar, Jefferies.

Good afternoon. Thank you for taking my question. I wanted to first ask about the recent trends in the US business. You've seen overall growth, pretty reasonable growth, and I wonder if you can just help us contextualize where that growth is coming from. Is it simply higher revenue per surgery? Is it more penetration of your existing surgeon? Is it expansion of the surgeon base?

I guess what I'm trying to get at is what impact Arsenal could have in terms of driving growth acceleration given your commentary around new customers being a majority of volumes there early on.

Where we see our US business there's two or three relevant ways to think about it. Number one, what you see in Biologics reflects us selling into the procedure deeper. We have a very broad product line and Biologics is typically the last product used in the procedure or often is. And that reflects that strategy.

With respect to the go-forward growth, I think we mentioned the fact that we are very carefully rolling out Arsenal such that we don't just go out and cannibalize our existing business, we use it as an opportunity to grow. Walking into a surgeon who has not previously done business with you before and having them choose to use a new system that is used in several levels -- typically during this limited market release we had cases that would go from two to 10 levels. So just really that's not something that a surgeon takes slightly.

When we think about it, the fact that 50%-plus of the cases we did were with new surgeons and we are in the early phase of the launch, we think that does give us a bit of a bellwether towards what we can expect going forward, which is that this will provide us access to physicians who previously didn't find our products, in their eyes, what they wanted exactly. Their reaction to Arsenal has been very positive.

The reason we are balancing it is on one hand we have customers who want to convert from the zodiac, which they've been using for some time. And at the same time we have a product that is very attractive to new customers, so we are balancing it and we are able to do it. We were fully consumed during the limited market release during the last several weeks in terms of utilization and expectations for a set. So we are feeling quite, I'd say, optimistic about the potential for Arsenal in the coming six quarters for example.

Okay, thanks. Then I think I heard you say that you saw some volume softness in the quarter. Any particular reason for that beyond seasonality? Was it the broader market? Was it salesforce churn? Any detail you could offer behind that comment would be helpful.

We didn't really see any actual trend other than it was just slightly soft. There wasn't any material changes in our sales channel, no material losses in any distributors or sales agents, so it was just a softness across the board. Not any specific region we could identify.

Okay. Then last question on pricing. Any changes to the trends you are seeing on implant pricing in the third quarter relative to the first half of the year?

We've seen the recent industry reviews that have been published by several and I think those -- I think we are operating within sort of the middle of the curve of how those reports were presented. So nothing outstanding for us in terms of expectations on pricing.

Okay, that's it. Thank you very much.

Glenn Novarro, RBC Capital Markets.

Thank you, good afternoon. Two questions. First, Biologics clearly a standout in the quarter in the US, up 18%. How sustainable is that? Is this something that you think continues to grow double digits into 2015? That's my first question.

Then for Mike. When we look at the P&L, the gross margin is a standout; came in better than expected, too. How sustainable is that? Should we be thinking gross margin going forward north of 70%? Thanks.

Two questions, right? So when we think about -- let me start with Biologics. Without giving guidance on it, the answer is, yes, we think it continues to be a growth vehicle for us. There's still quite a -- we have a broad portfolio, as we shared with you previously.

We compete nearly every segment of Biologics and we continue to take on new customers. We continue to become more effective at selling through the full product line in the cases that we participate in, so we think that it continues to be a growth vehicle for us in the coming year.

Regarding gross margin improvement, gross margin is very complex. There's manufacturing costs. There's reserves you take for all kinds of different reasons when you have an instrument business like we do.

Suffice it to say, however, that we have a really rather comprehensive effort to continue to improve our cost position, continue to be more efficient, continue to limit the inventory losses we might have occurred in the past. We really have a very diligent process to continue to be better.

So when you try and combine that with what happens in a market on selling price and all those types of things, I think you can expect to see us improve our cost position. How that gets reflected in future quarters is really harder to predict, but I think we are in a place where we were pleased with this quarter's improvement over prior. We now will strive to do better.

This is Mike. Just also, if you look at the last four quarters to the US -- 74.4%, 72%, 71.8%, 75.8%. Yes, Q3 was good, no doubt about it, for many of the reasons that Jim has alluded to. I don't think that is a -- that's the new low-water mark I think is the point I would leave you with; is there's a lot of moving parts that happen here.

But I think we've demonstrated over four quarters consistently above 70% in the US. A lot of that can be influenced by mix of our business, but we have made the ongoing operational improvements and we are seeing that over an extended period of time. And we expect that to continue. Whether it is a step function change from Q3 of 2014 I would say not, but whether the overall picture for 2014 into 2015 is an improvement picture for gross margins, I would say yes.

Okay, great. Thanks, guys.

(Operator Instructions) Josh Jennings, Cowen and Company.

Thanks, gentlemen. Just two quick ones from me. One, first just looking into 2015, I know you are not giving guidance, but you've done a nice job laying out how Arsenal is going to contribute. Can you talk about some of the other product line drivers for 2015? Where do you expect to see some products adding growth?

It is a good question and I would rather answer it with a little bit of framework for you rather than -- because it's complex. We have a broad product portfolio that is on the market in the US. Our growth is going to be driven, though, by the consequence of products and new markets.

So if you think about it this way, there are countries in the European Union in the order of seven to 10 where we currently do not play and so entering those markets will produce growth for us. We are currently awaiting, although we do not project timing and therefore not revenue with. We believe we are in the final stages of approval on many of our products in China and we will expand our China footprint significantly in terms of product offering, so that will be another geographical expansion for us.

In terms of Brazil, we have almost an identical product portfolio expansion, it's just very full, where we literally expect approval any time. If it happened today I wouldn't be surprised, and if it happens in three months I won't be surprised. So we haven't incorporated that into our early plans.

So, for us, we see in a global marketplace a number of growth opportunities. One of the reasons we invested in strengthening our management team was to be able to really have the focus to execute on that.

So in the US I think the coming year we are going to talk about Arsenal and Biologics. We do have many other products, but those are the ones that deliver the growth for us. I think when you go internationally it's a matrix of new market entrants. Is that helpful?

Very helpful, thanks. And just my last one is a follow up. Just thinking; I know you've mentioned that you've got some product development in the pipeline, but maybe you can just talk about where the holes are in your portfolio. And I know you don't want to give out specifics about internal development or external business development initiatives, but can you just talk about where you feel your portfolio is weak and where that can strengthen over the next 18 to 24 months? Thanks a lot.

I think our goal -- we define ourselves as a spinal fusion technology company and I think you will see us continue to do really two things. In Biologics, we will continue to stay abreast of that rapidly changing market. Now we will produce new product entrants into our portfolio.

Also, we actually participate in nearly all segments of spinal fusion in terms of fixation and stabilization. We will be upgrading some of those and we do have them in a pipeline. We haven't planned yet our public communication of that and I think we will just continue to get more confidence in our timing before we do that.

Great, thanks so much.

Thank you. I'm not showing any further questions in the phone queue. I would now like to turn the call back over to Jim Corbett for any closing remarks.

First of all, thank you for -- all of you for attending. I think that concludes the questions and our time for today. Thank you again for your interest and your questions.

Ladies and gentlemen, thank you for participating in today's conference. Everyone, have a great day.