Conformis Inc (CFMS) 2015 Q2 法說會逐字稿

Good morning, my name is Candace, and I will be your conference operator today. At this time I would like to welcome everyone to the ConforMIS second-quarter 2015 conference call.

(Operator Instructions)

Before we begin, I'd like to remind you that Management will make statements during this call that include forward-looking statements within the meaning of the federal securities law which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be considered to be forward-looking statements.

All forward-looking statements, including without limitation, our examination, operating trends, our future financial expectations and statements related to our partial-knee and total-knee implants and expectations of the commercial launch of iTotal PS in the US and Europe are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the risk factors section of the ConforMIS prospectus filed with the Securities and Exchange Commission in connections-- with this initial public offering on July 1, 2015. Accordingly you should not place undue reliance on these forward-looking statements.

While ConforMIS may elect to update these forward-looking statements at some point in the future, ConforMIS disclaims any obligation, except as required by law, to update or revise any financial projections and forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 11, 2015. I'll now turn the call over to Philipp Lang the Company's President and Chief Executive Officer. Philip?

Thank you, operator, and thank you all for participating in this morning's call. Joining me on this call this morning is Paul Weiner, our Chief Financial Officer; and Marc Quartulli, our Vice President of Clinical Affairs. We have a lot to share with you on today's call, so let me start with a brief agenda and then we'll jump right in.

I'll give you a high-level review of our second-quarter results. Paul will walk us through a detailed review of our financial performance on our FY15 guidance, which we introduced in this morning's earnings press release. Finally, I'll share our strategic priorities for the rest of 2015. Then we'll open the call for your questions.

Our second quarter was quite productive. We demonstrated strong performance and progress in many areas. Financially, our Q2 revenue performance continued the strong trends we have posted in recent quarters and we are very pleased with the progress that we've made in driving the adoption of our customized implants in the US and Europe.

Product revenues were $15.8 million in Q2, a 50% increase year over year on a constant-currency basis. Our growth was driven by the acquisition of new surgeon accounts, as well as increasing penetration in our existing surgeon accounts. As of the second quarter, more than 30,000 patients have received ConforMIS implants in the US and Europe.

Let me turn to an update on our limited launch of our latest implant, the iTotal PS knee replacement. Remember, this is an extremely large opportunity for ConforMIS, as this new implant nearly triples the addressable market of knee replacements from approximate 28% to 83%. The clinical feedback from the surgeons exceeds all of our expectations and we are extremely happy with the results so far. Importantly, our progress with iTotal PS was not limited to the US in the second quarter. We received [see emark] for our iTotal PS in Europe in Q2.

We are very pleased with the early progress we are making on the iTotal PS, but I'll remind you that this is a limited launch and is not yet making a meaningful contribution to our overall results. We're very encouraged with the number of surgeons participating in the limited launch. These surgeons will be the training sites from which we will scale the broad commercial launch of iTotal PS and we continue to expect that the broad commercial launch will coincide with the American Academy of Orthopedic Surgeons in March of 2016.

We anticipate that our product pipeline in 2016 will be further bolstered with our introduction of our customized primary hip implant, the iTotal Hip. Primary hip replacement represents more than two-thirds of the $6.3 billion hip replacement market. We're very pleased how the development of iTotal Hip is progressing. This product will also leverage our efficient delivery model. Similar to our knee replacements, we believe it will offer clinical and economic benefits for our patients, surgeons and hospitals.

In addition to our strong revenue results driven by our commercial traction this quarter, we also had notable highlights which I would like to review now. On the IP front we entered into two worldwide license agreements, one each with Wright Medical and MicroPort. In both cases we granted perpetual irrevocable non-exclusive licenses to use patient-specific instrument technology covered by our patents and patent applications with off-the-shelf implants.

The license with MicroPort provides for attractive royalties on sales over the term of the agreements, including both the instruments and the off-the-shelf implants used. Importantly, neither one of the license agreements extends to customers' implants. We have further expanded our IP portfolio into two by receiving five new issued patents in the United States.

Operationally we've made solid progress in Q2 by moving to our new manufacturing facility in Wilmington, Massachusetts. We expect that our move to the Wilmington facility will support our growth through 2018, and should have a positive impact on our gross margins by reducing our manufacturing and overhead cost structure.

Finally, we completed an initial public offering and began trading on the NASDAQ global select market in July. We appreciate the confidence that the investment community has demonstrated in us by investing to support our future growth objectives. Pricing our offering and ringing the NASDAQ bell speaks to the progress that ConforMIS has made in developing our technology platform to manufacture and deliver customized joint replacement implants to patients suffering from knee osteoarthritis.

Turning to our progress toward clinical validation, we had a really strong presence at the 2015 Pan Pacific International Congress for Joint Reconstruction. I would like to ask Marc Quartulli to share some highlights. Marc?

Thanks, Philipp. We're pleased to see an elevated awareness of ConforMIS at the orthopedic conferences, as evidenced by that level of interest and outreach from surgeons, as well as many references to our products in other presentations. The Pan Pacific International Congress for Joint Reconstruction, or ICJR, was no exception.

In total, six different clinical studies on ConforMIS products were presented at ICJR. Our press release on August 3 provided details on each of these compelling studies. Together, we believe these studies represent important clinical validation for our innovative knee replacement technologies.

This morning we want to review the highlights from one of these studies. Dr. Robert Tait reported the results of an ongoing blinded US multi-center study. Researchers at seven US centers performed an interim analysis of 295 consecutively enrolled total knee replacement patients, using a variety of functional tests and the Knee Society Score, or KSS, a validated testing instrument used to assess patient outcomes.

By way of background, the objective component of the KSS measures factors such as range of motion, alignment and stability, which are important for gaining functional abilities. Importantly, we believe this is the first study ever in orthopedics directly comparing different knee replacement systems using the 2011 Knee Society Score and functional outcome measurements. In this multi-center study, patients with iTotal CR knee replacements were 1.7 times more likely to achieve an excellent or good objective KSS, whereas patients with off-the-shelf knee replacements were 2.6 times more likely to achieve a poor objective KSS.

This multi-center study also included a separate validated functional test known as the aggregated locomotor function test, or ALF. In this test, blinded test administrators assessed the patients' abilities to perform various activities of daily living, including walking, standing from a chair and climbing stairs. Patients with iTotal CR knee replacements showed a statistically significantly better ALF score than patients with off-the-shelf knee replacements.

In addition to achieving an overall better ALF score, the data also showed statistical significance in one individual component of the ALF test. Patients with iTotal CR knee replacements walked statistically significantly faster than patients with off-the-shelf knee replacements. There were several other studies presented at ICJR and I would encourage those interested to review the summaries provided in our press release from August 3. With that, I'll turn it back to Philipp.

Thank you, Marc. We're very excited that these clinical studies further corroborate that ConforMIS' customized iTotal CR knee replacement demonstrate superior functional outcomes compared to off-the-shelf knee replacements. We have plans for additional clinical data releases in the second half of this year and early next year from several of our ongoing studies. In Q2 we have also kicked off our double-blind trial comparing the ConforMIS iTotal CR against leading off-the-shelf knee replacements and we expect to begin patient recruitment in Q4 of this year.

As you can see, our second-quarter performance was quite strong and we are making progress towards many of our strategic goals. With that, let me turn the call over to Paul for a detailed financial review. Paul?

Thank you, Philipp. We thought it would be helpful to provide additional information on the composition of our business mix as an introduction to our financial results and to supplement the financial details provided in today's press release. Total revenue for the second quarter of 2015 increased $8 million or 72% year over year to a total of $19.2 million on a reported basis, and 81% on a constant-currency basis compared to $11.2 million last year.

Historically, our revenue results consisted of our product sales in the United States and in the rest of the world. Beginning with the second quarter of 2015, our total revenue (technical difficulty) [includes] non-product revenue as well.

Specifically, our total revenue this quarter includes royalty revenue of $3.5 million related to lump-sum payments from Wright Medical and MicroPort, paid upon the signing of non-exclusive worldwide license agreements in the connection with the settlement of patent litigation. The $5.1 million balance of the payments received from Wright Medical and MicroPort was allocated to deferred revenue and will be recognized ratably through 2031. In addition, MicroPort agreed to pay an ongoing fixed royalty at a high, single- to low, double-digit percentage of net sales of patient-specific instruments and the associated off-the-shelf knee implants.

Second-quarter product revenue increased $4.6 million or 41% year over year to $15.8 million on a reported basis, and 50% on a constant-currency basis. US product revenue increased $3.8 million or 48% year over year to $11.9 million. Despite the weakening of the euro, rest-of-world product revenue increased $700,000 or 24% year over year to a $3.9 million on a reported basis, and 54% on a constant-currency basis.

As detailed in our press release this morning, second-quarter product revenue from sales of iTotal CR, iUni and iDuo increased $4 million for 36% year over year to $15.2 million. Second-quarter product revenue from sales of iTotal PS, which we launched on a limited basis in the US in February 2015, was $600,000.

Second-quarter US product revenue represented 75% of total product revenue compared to 72% of total product revenue in the same quarter of 2014. Second-quarter rest-of-world product revenue represented 25% of total product revenue, compared to 28% of total product revenue in the same quarter of 2014.

The rest-of-world product revenue includes revenue from the UK, Germany, Austria, Ireland, Switzerland, Hong Kong and Singapore. For modeling purposes, our largest exposures to changes in foreign currency rates are related to revenue in the UK and Germany, our two largest markets outside the US.

Second-quarter GAAP gross margin was 45% of total revenue compared to 36% of total revenue in the same quarter of 2014. The increase in GAAP gross margin as a percentage of total revenue was driven primarily by the addition of royalty revenue from the license agreements.

Our second-quarter non-GAAP product gross margin, which excludes royalty revenue, was 32% compared to 36% in the same quarter of 2014. The primary driver of the change in non-GAAP product gross margin was foreign currency impact. We have included a detailed reconciliation of our GAAP to non-GAAP gross margin in our press release.

Second-quarter total operating expenses increased $4.8 million or 33% year over year to $19.4 million. Sales and marketing expense accounted for $2.7 million of that increase, the majority of which came from increases in personnel costs as a result of our hiring of additional direct sales representatives, and sales support and increases in commissions as a result of the increases in sales volume. General and administrative and research and development expenses accounted for $1.5 million and $700,000 of that increase, respectively. Net loss was $10.9 million or $2.51 per share, compared to $10.5 million or $2.49 per share for the same period last year.

Turning to a discussion of our 2015 financial guidance, which we introduced in this morning's press release. For the full-year 2015 the Company expects total revenue in a range of $72 million to $74 million, representing year-over-year growth of 50% to 54% on a reported basis and 57% to 61% on a constant-currency basis. The Company's total revenue guidance includes approximately $3 million of currency headwind in our revenue results.

The Company's 2015 revenue guidance assumes the following: product revenue in a range of $68 million to $70 million, representing year-over-year growth of 42% to 46% on a reported basis, and 48% to 53% on a constant-currency basis; royalty revenue of approximately $4 million, including the $3.5 million recognized in the second quarter related to the patent litigation settlement. For modeling purposes for the full-year 2015 period, we expect flat gross margins compared to 2014, also our stock compensation expense of approximately $3.5 million. Philipp?

Thank you, Paul. I would now like to spend a few moments reviewing our commercial strategy to help investors better understand how we plan to drive our growth in our key milestones over the balance of 2015.

Our commercial strategy is focused on the following three priorities: increasing sales force productivity; demonstrating the potential economic benefits of our technology to the hospital; and executing on our targeted regional marketing strategy.

First, we expect to continue to leverage our existing sales force into increasing productivity by adding new surgeon customers, increasing account penetration and introducing new products like our iTotal PS implant to our commercial portfolio. We're seeing the benefits of the three drivers as evidenced by the improving trend in our growth rates. We posted constant currency product growth of 43% year over year in Q1 and 50% growth in Q2.

Second, we expect to continue to leverage our compelling single-package delivery model for knee replacement and to demonstrate the potential economic benefits of our technology to the hospital. As our clinical data is demonstrating, the economic benefits are real and include, among others, shorter surgical time for the surgeon, potential savings in OR set-up and tear-down time for the OR staff, which together offer the potential for additional surgeries in a day. Potential additional economic benefits for the hospital include shorter length of stay and reduction in adverse event rates.

We have further focused our strategic efforts in this area by establishing a second sales channel, focusing on C-level executives in large hospitals, hospital groups and integrated delivery networks. This focus strategy is already showing success in the form of strong pricing trends. While it is early, we believe that as our current account penetration increases, we are well positioned to see continued strength in our average selling prices.

Our third commercial priority is in executing our targeted regional marketing strategy. This strategy entails targeting select metropolitan statistical areas, or MSAs, with the goal of achieving more than 10% market share in knee replacements, and we are showing significant progress. We are selecting these MSAs based on procedure volume and surgeon density. Our sales force is typically focusing on high-volume influential surgeons in these markets. This is tailored with a marketing strategy to increase consumer awareness directing patients to surgeons who are offering our customized knee replacements.

Exiting 2014, we believe ConforMIS reached at least 10% market share in 14 US metropolitan statistical areas. By the end of 2015 we expect that we will have grown the number of MSAs with more than 10% market share by more than 50%. Notably, this growth is primarily driven by our established product, iTotal CR, iUni and iDuo, with an addressable market of only 28%.

iTotal PS is still in limited launch. With the broad commercial launch of iTotal PS, we will nearly triple the addressable market. In 2016 we will be able to address more MSAs and we expect to increase our market share in the existing MSAs where we already have more than 10% share.

In closing, as you can see, we had a very productive Q2 and we are excited about the rest of 2015. This is all about commercial execution, leveraging our unique iFit Image-to-Implant technology, which has the potential to disrupt the $15 billion orthopedic industry. We are holding to that mandate and remain focused on driving our growth through our differentiated technology and compelling delivery model. Our growth will be progressively supported by iTotal PS, in particular as we will go into the broad commercial launch in Q1 of 2016.

Importantly, the latest clinical data are a powerful tool for our sales force to acquire new surgeon accounts and to increase the penetration usage with our existing surgeons. Last but not least, this is our first earnings call as a public Company and we really want to thank our new investors who participated in the IPO last month. We appreciate their confidence in our long-term growth story.

Operator, let us please go ahead and open the line for questions.

(Operator Instructions)

Chris Pascal, JPMorgan.

Wanted to start with the PS launch. Can you talk a little bit about what your goals are for that product this year, while you're in this limited launch phase? Are you targeting a certain number of trained surgeons or procedures? What you're looking for?

Thank you, Chris. This is our newest product and we believe it's a game changer. What we're doing in the limited launch is two things: first, we are soliciting feedback from surgeons; and second, we are creating the training base for 2016 for the broad commercial launch. With regard to the feedback, the feedback really exceeds all expectations. So we're very happy how we are tracking on the implant and what the surgeons are reporting back to us.

With regard to establishing the training base, we are creating a geographically diverse group of key opinion leaders, high-volume surgeons across the United States who use the implant now. Who will continue ramping their own volume this year and next year, but would then basically, they'll create the basis for us to train many other surgeons. That's the key objective here. The objective is not about volume, that's not material at this point. Although we are tracking very much to plan, the objective is creating that broad infrastructure to enable the broad launch next year.

Thanks, that's helpful. And then one for Paul. What's your level of visibility into improving the gross margin from here? And what are the important milestones from a manufacturing standpoint or whatever over the next 6 to 12 months that are really going to help drive that improvement from where we see it today?

Yes, Chris, we're comfortable with the product gross margins as far as increasing in the second half of the year to be pretty consistent with what we've done last year. The increase in the second half of the year over the first half of the year will be driven primarily by volume increases. As we look out further, then we're looking at vertical integration to assist with the increasing gross margins. So for the second half of the year, it would be primarily driven by volume increases. Also keep in mind that in addition, we have a lower overhead cost structure with the move to the Wilmington facility, paired with the streamlined operations that Wilmington offers, which will also help in this regard.

Great, thanks, guys.

Kristen Stewart, Deutsche Bank.

Hey, guys, congrats on a great quarter and a good IPO as well. I was wondering if we could talk a little bit about pricing trends in the quarter. I was wondering if you could comment on how you're feeling. One of the comments that I had heard from Dr. Tait was on the strength of some of the data that he was getting from things like staff in some of the studies and outcomes that he's had. His hospitals are actually able to go back to some of their managed care payers and start to negotiate some better pricing on the outcomes that he's been seeing versus some of the off-the-shelf, given the fact that he's having some very positive data. So can you just comment on how your pricing is tracking?

Kristen, both Paul and I will respond. Paul will comment on the overall pricing trends and then I'll come back. I'll be using some of the most recent data. Paul?

Yes, so Kristen, the ASPs that remained relatively flat first quarter, second quarter, we are anticipating that they should remain stable in the second half of this year. And Philipp can explain to you how we're using some of the clinical results that we've been receiving over the past year to maintain our ASPs where they are, and potentially even have increases in ASPs over time.

Okay.

So we have multiple data releases now. Example, this most recent data release with the study that was presented at ICJR. What they show is, example, the functional results are superior, patients are 1.7 times more likely to have an excellent or good KSS score in total versus an off-the-shelf. If you receive an off-the-shelf you're 2.6 times more likely to have a poor result using the same metric.

The implication for the surgeons is that they're getting a much more reproducible result. The implication for the hospitals are really multi-fold. On the one side we are offering all of these efficiencies in the operating room. So faster set-up and tear-down time, faster turnover, reduction in sterilization cost. That's huge.

On the other side there is what's happening with the patient. We're seeing that significantly more patients go home in less than three days. We're seeing that the adverse event rates are greatly reduced. In the recent study involving 248 patients, the adverse event rate for iTotal was 1.6% versus 13.9% for the off-the-shelf. 13.9% for off-the-shelf is very consistent with the published literature. What this means for the hospital is that a significant per-procedure savings when you look at the total spending that the hospital has with each procedure. And that really helps us now that we are directly negotiating with C-level executives. It's a huge difference. You're not looking at implant price like off-the-shelf companies, you're really looking at the overall savings across the entire continuum of the procedure, and there's a significant savings here.

It goes a step further. In a recent study that was presented at the World Congress of Arthroplasty, the total cost of care savings, and now we're looking at the payer, was more than $800. That's a very, very significant savings, and that really positions us well in these negotiations. And that's the key reason why hospitals are willing to enter into these pricing negotiations with us, which have been very successful through the last two quarters.

As a follow-up on that, what are your thoughts on the CMS proposal on the bundle? Your technology may play pretty well into that, thinking about some of the savings. I know that's more on the post-acute care side, but any savings would be certainly pretty positive. I think Dr. Tait had talked about he was seeing faster recovery times as well with your product, relative to some of the others.

We're really excited about this development. It plays right to the strength of our technology and what ConforMIS can offer. I mentioned the reduction in total cost of care savings and the estimated summary around $800 in that recent study. When you look at what Medicare announced here, with the new bundling program, we estimate based on the data that they are looking for savings somewhere north of $200 per patient. We are tracking based on the data that were published earlier this year, we're tracking much better than that.

And so again, as the hospitals now look to achieve these cost savings, we have a really compelling solution. And that's something that we are really looking forward to leverage in 2016. It's a very exciting development for us.

Okay, I'll get back in queue.

Larry Biegelsen, Wells Fargo.

Good morning, thanks for taking the question. Philipp, since the iTotal PS is such an important roll-out for you guys, I thought I would start there. I know this is a limited launch this year, but if we look a little bit further out, can you talk a little bit about how you expect the adoption of the iTotal PS to differ from the iTotal CR?

Larry, we're not commenting yet on 2016 guidance. We have modeled it conservatively. And again, currently looking at the limited launch, it's all about creating the infrastructure and the base for the broad commercial roll-out. If you look at going into 2016, we're confident that we'll have that training base. We're replicating that we're doing with CR. We're holding to our conservative approach to this. We're certainly, based on the feedback that we're getting from the surgeons, we're very excited how this is all developing. But again, we can't provide 2016 guidance yet.

Understood. And then obviously I'm sure you saw Stryker recently got approval for their total knee application with Triathlon on their Mako robot. Can you talk a bit about how you think that might have an impact on the adoption of the iTotal? And I had one additional question after that.

Larry, we're laser focused on introducing these innovative customized joint replacements for our patients and surgeons in hospitals. And there is really nothing comparable in the market. Since you asked specifically about robots, let me address that portion of the question. The robot is still using the same off-the-shelf implant. And if you don't change the implant, we believe you cannot change the outcomes. And the outcomes today with off-the-shelf implants are that one in five patients are dissatisfied with the results of the surgeries. In some studies that's tracking even higher. The implication is patients have pain, they have limited range of motion, they have functional problems. Basically we can offer a solution that is much more differentiated.

In addition to that, you have a significant up-front hurdle with greatly increased costs, with the upfront cost for the robot. If you look at that for the overall procedures that a hospital is doing on an annual basis, you're actually increasing procedure costs. So going back to Kristin's earlier question, I think they were defeating many of the savings that they're looking to, that Medicare is looking to do with bundled care. Our approach is really different, I believe. It's a customized implant. We have a much more compelling solution and economically we have a much more compelling solution. So we're holding to our plan and it's not really effected but what is happening here in the external field with regard to that.

That's helpful. Let me just switch gears and ask about the hip implant. So can you tell us when you expect to file for clearance of that? Could you give us a little bit of color on what you think the clinical or economic benefits of the hip implant might be? And could you remind us if there's any plan to develop, or what the plan is, for clinical data for the hip implant? Thanks for taking the questions, Philipp.

Thank you, Larry. We're not going forward. We are not providing guidance as to the regulatory filings that we're doing, but we will advise our investors when we actually receive clearances. Let me say the hip is really progressing how we had planned it, and we're very pleased with the progress. And also some of the data in that context, that we are collecting, and we will update everybody in due time.

Now with regard to the clinical problem, the clinical problem in the hip is different than in the knee, but there are some very significant clinical problems. Those are basically the issue of implant dislocation, soft tissue impingement caused by off-the-shelf devices and leg length discrepancy. And what we're doing here with this device is we're coming with a very differentiated solution, similar to what we're doing in the knee. This is going to be a customized femoral and acetabular component paired with our unique pre-navigated patient-specific instruments. We'll deliver it with the same type of very efficient delivery model to the hospitals. So the implications for the surgeon is that we believe this implant can address the clinical problems that we're seeing today in hip replacement. On the other hand, the implant can provide similar -- we believe it has the potential to provide similar economic benefits that we're realizing today in the knee replacements.

Thanks for taking the questions, guys.

Bill Plovanic, Canaccord.

Couple questions, most of them have been answered but. One specific for Paul on the PS, the $600,000. Was that all US? Or was some of that o-US? And if so, a little granularity would be great.

And then second, the IPO has definitely raised your profile with the competitive landscape. I was just wondering if they've gained any of their tactics now that they see how big you are and where you are in the market over the last six months. That's all I have. Thanks.

Okay, Bill, this is Paul. So as far as your first question, all the PS sales were in the United States in the second quarter. We plan to move the start of the sales of the PS in the second half of the year, starting in the third quarter actually.

And Bill, I will respond to your second question with regard to the IPO and raising the profile and competitive response. I don't think it's really been the IPO. I think we are clearly seeing a change. We're seeing a competitive response, but I believe it's more driven by the data. There is such a wealth of clinical data coming out now compared with the economic data. And if you take a step back, the off-the-shelf orthopedic companies, they typically don't do direct comparisons, they shy away from that. Typically you're seeing comparative trials were they look at the safety of the new implant compared to the prior implant, looking at safety profiles. But you're not actually comparing direct head-to-head on key clinical and functional outcome metrics like the Knee Society Scores or can patients walk faster. And we are doing these direct comparisons and that's being noted in the industry.

I was recently at the International Conference of Joint Replacement on an industry panel, and so here the four largest orthopedic companies representing roughly somewhere around 90% market share worldwide. What was really striking to me is how in multiple presentations by these Company executives, all of a sudden they're benchmarking in relationship to our patient-specific instrumentation technology, or they're benchmarking to customized implants. What that tells me is that the industry clearly sees there is a paradigm shift here, and I think it is something that's very difficult to address and we're seeing that more and more reflected. So I think that's the competitive response that we're seeing at this point. I anticipate there'll be more competitive response down the road. If you look at the overall comparative data that we're generating now with a lot more clinical data releases forthcoming, I think we're very well positioned to address those.

Last but not least, it all comes down to the patients and the surgeons. If you talk to a surgeon, if the surgeon has a message with this device you are getting a much more consistent outcome. Again, I'm referring back the probability to have an excellent or good Knee Society Score is 1.7 times greater. That's a very compelling story. The surgeon talks to a patient and he can communicate recent studies have indicated that you can walk statistically significantly faster if you receive these implants, I think patients will consider that very seriously in their choice of implant.

Great, thank you.

Steven Lichtman, Oppenheimer.

This is Will Pryor in for Steve. Can you hear me okay?

Yes.

I just want to follow up on Chris's question earlier. Can you talk about some of the milestones to vertically integrate by either bringing more manufacturing in-house through 3D printing or other means? What are the next steps there in the first half of 2016 and beyond that?

Yes, Will. We're giving guidance certainly for the second half of this year and not getting into specifics beyond that. But some of the things that we're doing as far as the vertical integration is related to the 3-D metal printing, which we are ramping up to start. That will progress in 2016 and beyond, which will continue to drive our margins in the forward position as well as the volume that we're seeing. And then labor efficiencies. So those three areas, the main areas, that are going to drive our gross margins over the coming years.

So specific, Steve, with regard to the Wilmington facility, we've now really created the infrastructure, the operating base from which we can scale up our vertical integration. And that will include the 3D printing, where we print the nylon instruments on the one side, and then on the other side the metal implants. And we are progressing there with regard to -- within our plan, which is that we'll be shipping the first 3D printed metal implants in the second half of this year.

Thanks. And can you talk a little bit about international expansion plans over the next 12 to 24 months? What are your biggest incremental opportunities there?

We have a strong commercial base in Europe, as we speak, with Germany and the UK being our largest markets. We have other market presence, for example, in Switzerland and Austria. Using our CE markets now also includes iTotal PS, so we have a dynamic that's very similar to the US from currently addressable market 28%, we have now all of a sudden expanded into an addressable market of 83%. So that said, given the currency headwinds that everybody in this industry is facing, we'll be very diligent and thoughtful with our approach in Europe. With the much larger opportunity of iTotal PS, the first objective will really be to continue increasing the productivity of our sales force over there simply by leveraging this implant with the terrific feedback that we're receiving on it in the European market. Going forward, we'll certainly look also at adding additional European markets, but we'll be very thoughtful there, calibrating that against our spending in Europe in relationship to the opportunity size.

And then last but not least, outside Europe we will -- we are already active in Asia. It's still early commercially. For example, we are selling implants in Hong Kong and in Singapore. We have a couple of regulatory approvals pending in Asia. But again, here we'll very carefully calibrate the commercial opportunity versus, example, average selling prices and the cost structure required in some of those countries. So we'll update on that as things progress.

That's all for me. Thanks guys.

(Operator Instructions)

Kristen Stewart, Deutsche Bank.

Hey, guys. Try to get back out of the queue, but I'll throw one more in. Thinking longer-term, Philipp, at what point do you decide to add substantially to the sales force? Or how should we think about sales force additions? And are you seeing any disruption early on with Zimmer and Biomet merging? Or any excitement with the buzz out there with your platform and any notable resumes coming across as people get excited with the ConforMIS platform?

We have today a hybrid sales model, Kristen. We are working with direct reps and distributors. We have a plan for the second half of 2015 how we're going forward and we're very disciplined how are executing on this plan. Now, I totally agree with what you just said, there's a very interesting situation, a very unique opportunity in the market with all of this disruption going on. What this means, what this translates into is that all of a sudden there is a tremendous amount of sales talent, both direct and independent sales agents becoming available. And we'll certainly be opportunistic as we evaluate that. We're open, potentially, to accelerate plans.

But as I said, we'll be very thoughtful how we go about that, and we'll be very disciplined in terms of the geographic areas where we do that. The overarching theme that we follow is this targeted regional marketing strategy. So we're very disciplined with regard to these metropolitan statistical areas, how we execute on that, how we want to go deep and build share. We'll add reps or independent agents opportunistically in these markets as the opportunity arises.

Okay. And then in terms of criteria for these MSAs, I know you're looking at them in terms of surgeons, but what are the different criteria that you look at? Is it just the percentage of individuals over 65? Is it the population growth over 65? Is it density of surgeons? How do you look at what makes an MSA attractive?

We're looking at a number of things what makes an MSA attractive. We're looking at, as you say, the overall procedure volume, the number of partial and total knee replacements that are being conducted that are being performed in the market. We're looking at the surgeon density. We are also looking, in fact, how these surgeons are tracking with regard to their existing volumes. And then historically, we really looked at CR versus PS, because we didn't have a posterior-stabilized product available. That barrier to entry is now going away. Last but not least, we're looking very carefully at price. So we are really targeting markets where we're confident we can achieve an attractive average selling price.

Okay, great. Thanks very much.

I'm showing no further questions at this time. 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 day, everyone.