Conformis Inc (CFMS) 2015 Q3 法說會逐字稿

Good afternoon. My name is Nicole and I'll be your conference operator today. At this time, I would like to welcome everyone to the ConforMIS third-quarter 2015 conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Before we begin, I would like to remind you that the 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 fact should be considered to be forward-looking statements. All forward-looking statements, including without limitation statements about ConforMIS strategy, future operations, future financial positions and results, market growth, total revenue and revenue mix by product and geography, gross margin, operating trends, the potential impact and advantages of using customized implants, the commercial launch of iTotal PS and the impact of our voluntary recall are based on our current estimates and various assumptions.

These statements involve material risk 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 final prospectus filed with the Securities and Exchange Commission in connection with its initial public offering on July 1, 2015 and its quarterly reports on Form 10-Q.

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 to accept, as required by law to update or revise any financial projections, any forward-looking statements whether because of new information, future events or others wise.

This conference call contains time sensitive information, is accurate only as of the live broadcast today, November 2, 2015. I would now like to turn the call over to Philipp Lang, the Company's President and Chief Executive Officer. Please go ahead.

Thank you, operator. And thank you all for participating on this afternoon's call.

Joining me today is Paul Weiner, our Chief Financial Officer, and Amita Shah, our Senior Vice President of Regulatory and Quality Affairs.

We have a lot of ground to cover today, so let me start with a brief agenda. I will begin with the high level review of our third-quarter financial results and an update on the resolution of our voluntary recall.

Amita will provide you with a detailed review of the root cause analysis and the corrective actions that have been put in place. In short, we will review all of the key components that led to the resolution of this issue, according to our originally expected timeline, which was completed in less than two months.

Paul will then provide us with a detailed review of our financial performance for the third quarter and the first nine months of FY15, followed by a summary of our FY15 guidance, which we reaffirmed in this afternoon's press release.

Finally, I will then provide you with an update on our progress in the third quarter towards our long-term strategic goals. Then we'll open the call for your questions.

The third quarter of 2015 was challenging in light of the voluntary recall. But it turned out to be a very productive quarter for the Company. We reported total revenue of $13.9 million, up 16% year-over-year on a reported basis, and up 20% year-over-year on a constant currency basis.

This is worth repeating. We posted 20% constant currency revenue growth in Q3, the quarter in which we navigated the challenges associated with the voluntary recall. I believe this is a remarkable achievement that speaks to not only the strength of our organization, but also the power of our compelling technology and its impressive clinical results.

Let me briefly summarize why we initiated the voluntary recall that we announced on August 31. We initiated this action in response to three complaints of moisture on the patient-specific instrumentation. In all three instances the knee replacement procedures were completed without incident. Importantly, there have been no additional complaints of moisture on patient-specific instrumentation. Only those three.

With that background, let me turn the call over to Amita Shah, our Senior Vice President of Regulatory and Quality Affairs. Amita is an extremely knowledgeable medical device executive who brings more than 25 years of experience in the areas of regulatory and quality affairs with companies including C. R. Bard and Covidien.

I've asked Amita to discuss the root cause investigation and the corrective actions that have been put in place for final resolution of this issue. Amita?

Thank you, Philipp.

We announced our voluntary recall due to three reported cases of moisture on our patient-specific instrumentation. We quickly determined that the moisture likely was residual ethylene glycol. We conducted an investigation that included a range of tests and analyses to establish the root cause.

This root cause investigation showed that the excess water was present during the commonly used ethylene oxide sterilization process and resulted in residual ethylene glycol on some patient-specific instruments. Through the root cause investigation, we also determined that the excess water was present during the outsourced ethylene oxide sterilization process beginning on or about July 22. Additional testing showed that it was not observed prior to that date.

As part of the investigation, an independent testing laboratory determined that the ethylene glycol residue on the affected instrumentation posed no significant health hazard to patients. Notably, any ethylene glycol present was well below acceptable concentrations and consistent with the applicable ISO standard for ethylene oxide sterilization and related chemical residues.

Further, an independent laboratory performed cytotoxicity testing on live cells using the affected instrumentation. The lab concluded that there was no effect on these cells and that there was no observed cytotoxicity in these tests.

Sterility testing was also performed on affected product. All sterility tests were negative, meaning that all products were found to be sterile. The root cause investigation also found that no residue was present on any of the implants tested. Based on the results of this investigation, we communicated to our surgeons and the FDA that no additional monitoring of patients is necessary.

Corrective actions to the ethylene oxide sterilization process have been implemented and validated. Testing of these corrective actions has confirmed that ethylene glycol residuals are below detectable limits and we have resumed manufacturing with this process at full capacity. Finally, we have had regular communications with the FDA throughout and we have submitted our recall completion letter to FDA.

With that, I'll turn the call back to Philipp. Philipp?

Thank you, Amita.

It is remarkable how fast we were able to identify and resolve this problem. We have visibility into each and every one of our patient-specific components. We know the date each was made, the machine that was used and even the operator running the process. This visibility into the process allowed us to identify the root cause of this problem quickly and efficiently.

With just three complaints, we initiated a full investigation and we were able to identify this problem and solve the problem, all within a matter of a few weeks. And now we have restarted operations at full capacity. So as you have heard, we have completed the recall in the time frame that was originally communicated to our investors. We were able to achieve 20% constant currency year-on-year growth in Q3 while the recall was ongoing, which I believe is quite remarkable, a remarkable achievement that reflects on the strength and dexterity of our organization and the dedication and hard work of our employees.

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 third quarter of 2015 increased $1.9 million to $13.9 million or to 16% year-over-year on the reported basis and increased 20% on a constant currency basis.

Historically, our revenue results consisted of our product revenue in the US and in the rest of the world. Beginning with the second quarter of 2015, our total revenue includes non-product revenue, as well.

Specifically, our total revenue results in the second quarter and third quarters include royalty revenue of $3.5 million and $400,000 respectively, related to lump sum payments from Wright Medical and MicroPort, paid upon the signing of a non-exclusive worldwide license agreement in connection with the settlement of patent litigation and related ongoing royalty payments.

Third-quarter product revenue increased $1.5 million to $13.5 million, or 12% year-over-year on a reported basis, and increased 17% on a constant currency basis. US product revenue increased $1.7 million to $10.5 million, or 19% year-over-year.

Rest-of-world product revenues decreased $200,000 to $3 million, or decreased 6% year-over-year on a reported basis and increased 11% on a constant currency basis. As detailed in our press release this morning, third-quarter product revenue from sales of iTotal PR, iUni and iDuo increased $700,000 to $12.7 million or 6% year-over-year on a reported basis and increased 10% on a constant currency basis.

Third-quarter product revenue from sales of iTotal PS, which we launched on a limited basis in February 2015 was $800,000. Third-quarter US product revenue represented 78% of total product revenue compared to 73% of total product revenue in the same quarter of 2014.

Third-quarter rest-of-world product revenue represented 22% of total product revenue compared to 27% of total product revenue in the same quarter of 2014. 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 exchange rates are related to revenue in the UK and Germany, our two largest markets outside the US.

Turning to review of our results across the rest of the P&L, third-quarter gross margin was 26% of total revenue compared to 39% of total revenue in the same quarter of 2014. The decrease in gross margin was primarily caused by the additional production costs and decrease in revenue due to the voluntary recall. Additionally, changes in foreign exchange rates compared to the prior year, affected reported gross margin by approximately 200 basis points in the period.

Third-quarter operating expenses increased $4.8 million to $19.8 million, or 32% year-over-year. Sales and marketing expense accounted for $3.1 million of that increase, the majority of which came from increases in personnel costs as a result of hiring additional direct sales representatives and sales support, and increases in commissions as a result of the increase in sales volume, and an increase in marketing and other expenses. Research and development expense declined $80,000 or 2% compared to last year, and general and administrative expense increased $1.7 million, or 44% year-over-year due to public Company-related expenses and various other expenses.

Net loss was $17.1 million, or $0.45 per share compared to $10.4 million, or $2.44 per share for the same period last year. The change in net loss per share compared to last year was impacted by an increase in our weighted average shares outstanding, specifically, weighted average shares increased to 37.9 million shares in the third quarter of 2015 from 4.3 million shares in the third quarter of 2014.

The increase in shares relates to the issuance of shares in the initial public offering and a conversion of outstanding shares of preferred stock into shares of common stock. For the nine-month period ended September 30, total revenue increased $13.8 million to $47.8 million, or 41% year-over-year on a reported basis.

Revenue increased 47% on a constant currency basis. This growth was driven by the combination of an increase in product sales of $10 million, or 29% on a reported basis, and 36% on a constant currency basis, and royalty revenues of $3.9 million related to our settlement with Wright and MicroPort and related ongoing royalty payments.

Gross margin for the first nine months of 2015 was 36% of sales compared to 35% of sales last year. Including the impacts of changes in foreign exchange, our gross margin for the nine-month period would have been 39%. Net loss was $42.3 million, or $2.69 per share, compared to $33.6 million, or $7.95 per share last year.

Turning to a discussion of our 2015 financial guidance, which we reaffirmed in this afternoon's press release, for the full year 2015, the Company expects total revenue in a range of $64 million to $66 million, representing year-over-year growth of 33% to 37% on a reported basis and 39% to 43% on a constant currency basis. This revenue guidance includes an $8 million revenue impact from the voluntary recall. 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 $60 million to $62 million, representing year-over-year growth of 25% to 29% on a reported basis and 31% to 35% on a constant currency basis. Royalty revenue of approximately $4 million, including the $3.9 million recognized in the first nine months of 2015 related to the patent litigation settlement and related license.

For modeling purposes, for the full year 2015 period, we expect gross margins in a range of 34% to 35%, stock compensation expense of approximately $3.5 million, and fully diluted weighted average shares of approximately 39 million. Note that this full year weighted average share count assumes approximately 45 million shares in the fourth quarter of 2015.

Philipp?

Thank you, Paul, for this detailed update.

I will now turn to a discussion of our progress towards our strategic initiatives, specifically our strategy to drive growth in the number of new surgeon users, our pricing strategy, which leverages the economic benefits of our products, our targeted marketing strategy in key metropolitan statistical areas, or MSAs, the limited launch of our newest product, iTotal PS, and expanding our intellectual property portfolio. In each of these categories we were able to achieve significant progress in Q3.

We continued to expand our surgeon user base in the third quarter. We believe this is a direct reflection of, the clinical benefits that our implants offer to patients, paired with the economic benefits to the hospital and the intraoperative benefits to the surgeons, creating the strong brand recognition by new surgeon users and the loyalty by our existing surgeon users.

Not only that, our commercial team was successful in placing more vendor agreements with hospitals and hospital groups in Q3. These new vendor agreements represent strong validation of the early success we are seeing with our pricing strategy. Specifically, most of the new vendor agreements signed this quarter were at a premium to our 2014 average selling price.

By way of background, our strategic initiatives regarding pricing involved two phases. In the first phase of our pricing strategy, which ended in 2014, our prices were competitive with the industry and our average selling price was comparable to that of the off-the-shelf implants.

During that first phase, our objective was to develop a base of a few hundred surgeons who were using our implants, and with their help, to generate strong clinical and economic data demonstrating the superiority of our iTotal CR product. In the second phase of our pricing strategy, which started in 2015, we are now leveraging our powerful clinical and economic data, much of which has been presented in various publicly presented or published studies.

Our studies have shown, among other results, that when one compares iTotal CR with off-the-shelf implants, the iTotal CR knee replacements involve less blood loss, more patients being discharged in less than three days, and fewer patients being referred to acute care facilities, such as skilled nursing facilities.

Further, and more importantly, in our published study of 248 patients, the adverse event rate is greatly reduced, with iTotal CR at 1.6%, as compared to off-the-shelf at 13.9%. We believe these benefits translate directly into a hard dollar savings for the hospitals and even the payers and that additional savings for the hospitals are found in lower sterilization cost, reduced inventory management cost, reduced operating time, fast OR turnaround time with the potential for more procedures in the same period of time and the potential for more revenue in the same OR resource.

These are some of the benefits of our differentiated business model and the strong clinical support for our iTotal CR that we're leveraging now with individual hospitals, as well as hospital groups as part of phase 2 of our pricing strategy. We believe that our ability to secure improved pricing in these new vendor agreements with hospitals and hospital groups in 2015 reflects our early success in phase 2 of our strategy.

Now clearly, it will take some time for these new contracts to show an impact on our overall ASP, since these new accounts will need to start ramping procedure volume with us. However, we are confident that we will be able to maintain ASPs and possibly see improving trends in ASPs going forward.

We realize these are strong goals to have, especially given the pricing headwinds that industry participants have reported in recent years. Our confidence in this strategy, however, is further enhanced by an exciting new development announced by CMS earlier this year: the comprehensive care for joint replacement model.

This model looks at bundled payment and quality measurement for an episode of care associated with hip and knee replacements to encourage hospitals, physicians and post acute care providers to work together to improve the quality and coordination of care from the initial hospitalization to the recovery. Economic savings, along with better outcomes, including lower adverse event rates, are the key objectives of this program. These objectives are directly aligned with the value proposition we believe our implant system offers. So we believe that we are extremely well-positioned to address the goals of this bundled care program by CMS.

In regards to our target marketing strategy, this initiative involves targeting metropolitan statistical areas, or MSAs, based on knee replacement procedure volume, surgeon density, surgeon preferences and prevailing average selling price for knee replacement. At the time of our IPO on June 30 of this year, we shared that exiting 2014, we had achieved at least 10% market share of all knee replacements performed in 14 MSAs in the US. In some of these MSAs we had achieved more than 20% market share. We continue to make significant progress on this front and are happy to report that we remain on target with our goal to grow the number of MSAs that ConforMIS has at least 10% market share by more than 50% by the end of the year.

This is a remarkable achievement in particular since these results are driven by our current product line, with partial knee systems, which serve roughly 6% of the total addressable market and our iTotal CR total knee system which serves roughly 22% of the total addressable market. This is an example of how disruptive our technology is and why we believe we can continue to take market share. In particular, as we leverage our most recent clinical and economic data.

The broad commercial launch of iTotal PS will further enhance this opportunity. iTotal PS triples our addressable market of knee replacements from approximately 28% to approximately 83%. We expect the iTotal PS will be our biggest product for years to come and it will help us to make more inroads with MSAs.

Now let's spend a moment on iTotal PS. The feedback on iTotal PS that we continue to receive from the surgeons who participate in the limited launch far exceeds our expectations. Surgeons report excellent intra operative stability through the range of motion, which is very unusual for PS knee implants, many of which suffer from mid-flexion instability, one of the most common causes of patient discomfort and dissatisfaction after PS knee replacement.

We are on plan for the broad commercial launch of the iTotal PS at the annual meeting of the American Academy of Orthopaedic Surgeons in March 2016. The broad commercial launch of iTotal PS will be the next major growth driver for ConforMIS, leveraging our technology now into an approximately three times greater commercial opportunity that we could not address up to this point.

Last, let me turn on to intellectual property. On the IP front, we've also made strong progress. We believe that our IP portfolio gives us a long-term sustainable advantage over the industry as it provides a significant barrier to entry.

In Q2, as you heard, 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 agreement, including both the instruments and the associated off-the-shelf implants. Importantly, neither one of these license agreements with these companies extends to customized implants.

At the time of the IPO, our patent portfolio consisted of approximately 470 issued patents and pending patent applications in the US and abroad. Since then, in just a few months, this portfolio has grown to over 500 issued patents and pending patent applications.

In Q3 alone, we received eight newly issued patents, which cover, for example, patient specific instruments we use in the knee, the hip, the shoulder, and the ankle joint. This progress will help us protect our technology for years to come.

In summary, while third quarter presented notable challenges, as you all know, but overall we believe it was an extremely productive quarter. We successfully navigated an unexpected production issue within the time frames that we had communicated and returned to full operations in October.

We reported 20% year-over-year revenue growth on a constant currency basis, which we believe is impressive in light of the challenges we faced in the period. We also continue to progress towards our strategic initiatives, which together we believe enhances the foundation for the Company's growth going forward.

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

(Operator Instructions)

Our first question comes from the line of Mike Weinstein of JPMorgan. Your line is now open.

Thanks. And maybe let's start kind of big picture with the impact from the disruption this quarter. If you think about the trajectory of the business and the disruption that you saw this quarter, and obviously some of that carries over to the fourth quarter. Do you think come the first quarter, you're kind of back at a steady state run rate in terms of your growth or do you think that takes another quarter for you guys to be back fully up and running?

Yes, Mike, this is Paul. Yes, so like you said, the effects of the recall certainly affected our Q3 numbers. We should also see that, an effect from the recall into fourth quarter as well.

Starting with the first quarter, the recall should be behind us and any of the effects related to the top line revenue or gross margins that relate to the recall should be behind us for us to be able to move forward in 2016.

Okay. And with the recall, it had some modest impact on your ability to do some of the beta launching that you've been underway with the PS product. As you're now ramping back up, anything changes going into AAOS with the PS launch? Anything different in your view on how you're going to roll that out next year versus your prior plan?

No, Mike, there's no change to the plan. As we mentioned during the prepared remarks, we're very pleased with how the limited launch is moving forward and remain absolutely on track for full commercial launch at AAS 2016.

The surgeon feedback exceeds all expectations. We are training a lot of new surgeons. We're focusing there primarily on PS surgeons, so a whole segment of surgeons that we have traditionally not been able to approach because we didn't have this product.

We have significant progress there. We will have, in regards to the number of surgeons trained and the training sites for next year for the broad launch, we're absolutely on plan to deliver on that target.

Okay. And what about -- this is still a ways out, but it's something we'll be talking about a year from now certainly is the iTotal Hip. Any change in your thoughts on the timing of when you want to introduce that? Because you're obviously going to have it ready before you're really looking to launch it because the PS is obviously the focus next year.

But what should we be thinking about in terms of timing of, A, the kind of the beta introduction of the hip product and then a more broader -- more broad rollout? Thanks.

So, we continue to make excellent progress on the Hip also. We're very excited about that product. And we are staying with our goal that sometime late in 2016, we would start with limited commercialization.

Okay (multiple speakers). And then any update on the sales force and kind of where you stand and where you want to be going into the full PS launch?

Yes, so we're still making progress as far as hiring sales reps on a quarterly basis. It doesn't change specifically related to the PS launch. Every quarter we've been hiring sales reps.

We plan to continue to do that, and as you know, about half of our sales in the United States come from our direct sales force and the other half come from independent sales agents and we plan on continuing the hiring of direct sales reps on a quarterly basis moving forward.

Okay (multiple speakers). Any update on your -- on the business development activity outside the US? In terms of how you were thinking about going after some of those markets?

So as you know, we are currently commercializing in several countries in the European community and we have early commercial sales in Asia and we have not changed plans as we move forward. So we look at the commercial opportunity in terms of procedure volume, surgeon density and prevailing average selling prices and, again, those plans are very consistent with what we've communicated in the past. No change there.

Okay. I'll let some others jump in. Thank you, guys.

Thank you. Our next question comes from the line of Kristen Stewart of Deutsche Bank. Your line is now open.

Hey, everybody. Can you hear me?

Yes.

Oh, perfect. Sorry about that. I was wondering if you could maybe just help quantify if you can what the impact from the disruption was this quarter or just kind of how you're feeling about that $8 million and whether you think it's the right number still.

This quarter was actually still pretty good in light of the recall, probably better than what I was thinking and it seems like everything is tracking quite well. How do you know that that kind of $8 million number is the right number?

Yes, so, based on analysis that we had done right when the recall happened, back at the end of August, the analysis as far as how many surgeries would have to be postponed because of our manufacturing capacity limitations and estimating how many surgeries that need to be postponed might end up being cancelled, as well as potential commercial disruption as far as any new orders coming in.

And our third-quarter numbers came in line with where our internal expectations were and we feel comfortable with continuing with that $8 million reduction in guidance from the first half of the year, based on the recall and the effect going into the fourth quarter. So we feel pretty comfortable with the $8 million reduction related to the recall.

Okay. Perfect. And then just with respect to gross margins, how do you feel about your ability to increase those going forward just with the changes made to the process now? Do you think that you can still see a reasonable step up in gross margins next year?

Yes, the change in the process should not affect gross margins, the change in the process related to the recall and the EO sterilization, we're still using EO sterilization. It's still our primary and will be our primary source of sterilization going forward. So we don't see any effects long-term, mid- to long-term, past this year related to the recall, on our gross margins.

Okay. Perfect.

And we will continue executing on the same levels of gross margin expansion that we've previously communicated. Paul, maybe if you want to summarize those briefly, those three.

Sure. So the components are related to material reductions and that's related to vertical integration. We're already fully vertically integrated with the patient-specific instruments, as far as 3D printing and nylon.

The next step will be 3D printing in metal for the thermal components. So that we plan on doing starting towards the end of this year and into next year and moving forward.

The second piece is related to labor and more efficiency related to the labor piece. And then the third part is related to, as volume increases in overhead absorption, we should be able to continue our expansion of our gross margins.

Okay, perfect. That's it from me. I'll get back in the queue. Nice quarter, all things considered.

Thank you.

(Operator Instructions)

Our next question comes from the line of Larry Biegelsen of Wells Fargo. Your line is now open.

Good afternoon, guys. Thanks for taking the question. So let me ask one of the earlier questions a different way. I think, at the time of the recall, you expected the growth rate in 2016 to be similar to the pre-recall level of about 50%, I think consensus assumes right now about 52%, let's call it about 50%. So is that still a fair way to look at things? And I had a follow-up.

Larry, we haven't given guidance as you know for 2016. When we were talking about the growth rates, we were talking about our internal projections and forecasts as far as what we saw as far as growth rate.

So we don't see any changing in the growth rates in 2016 from what we internally had projected. Obviously we are starting from a lower base so that would affect our internal projections in 2016 and beyond. But as far as our growth rates, we don't see that changing anything.

And then clinical data, upcoming publications or data being presented at conferences, that would be helpful to hear from you. And just lastly, on the gross margin, it looks like you're about 40% in the first half of the year. The guidance today I think is 34% to 35% for the full year, Paul. I think that's total, for total sales.

So is it safe to assume that the recall negatively impacted your gross margin by about 500 basis points for full-year 2015? Thank you for taking the questions.

We'll answer the gross margin question first. Paul?

Yes, so when we ended the first half of the year and we had our second-quarter conference call, we had given guidance related to our gross margins and we were looking at flattish gross margins compared to last year.

So we were looking at about 36% gross margins. So if we're comparing 36% gross margins that we had projected at the end of the second quarter, prior to the recall, post recall we're talking about 34% to 35%. So you're talking maybe 200 basis points difference for the year related to the recall.

That's helpful. And then on the data?

Yes, let me answer the clinical question, Larry. We had one published manuscript in Q3 that reported a direct comparison of the biomotion, the motion of iTotal CR compared to one of the leading off-the-shelf brands, and for several of the key outcome measurements, iTotal was statistically significantly superior, moving more like a normal knee.

We have several additional manuscripts, I believe it is three, that have been submitted for publication during this period. We also had four presentations in Europe at the German National Orthopaedic Conference.

Three of those to my knowledge were investigator initiated and not ConforMIS funded. In regards to some of the pivotal trials, I can update you that the single time point study that looks at functional outcome measurements, example of walk test, iTotal patients walk faster than off-the-the shelf patients, was one of the [interim] results.

And knee society scores a probability to have a better result, much higher within that total versus an off-the-shelf. That study continues progressing. We had previously indicated that we are hoping to have approximately 500 patients as we exit 2014. I think we're on track for that.

We are also progressing with the recruitment into the double blind randomized trial and I'm confident that, consistent with what we had previously communicated in Q4, we will have the first patients recruited into that trial. So that's all progressing very favorably and you're going to see several additional clinical data updates during the first half of next year.

Thanks for taking the questions, guys.

Thank you. Our next question comes from the line of William Plovanic of Canaccord Genuity. Your line is now open.

Great, thanks. I'm going to come back to the recall impact on the commercialization of iTotal PS. Did you have to scale back that during the recall in either the US or O-US? And that's my first question. Then I have a couple more.

So what happened, Bill, is that iTotal PS depends on ethylene oxide sterilization, so it was impacted similar or actually a touch more so than the other implants, the iUni, iDuo, and iTotal CR. So there was a temporary impact on volume that was performed, volume of procedures that was performed, in Q3 but the objective of the limited launch has never been to do volume.

The objective of the limited launch is that we obtain surgeon feedback and second that we train, primarily, PS surgeons to create the training platform from which we can then go into broad commercial launch for 2016. I can share with you that the feedback on the implant exceeds all expectations. We're very excited, in fact, from what we're hearing back from the surgeons.

And separately we are very much on plan in terms of the surgeon training and that's both in the US, as well as outside the US. So, I think we will have the full platform, the training platform, the surgeon visitation sites in place for the broad commercial launch in the 2016. So there's no -- there's a temporary effect on volume in Q3, but there is no impact on the broad commercial launch.

Perfect. And then, at this point, is there any instrumentation, redesign, any implant redesign, anything that needs to be done on the iTotal PS or is the only gating factor kind of surgeon training before you hit AAOS? Are there any other gating factors to that commercialization today?

So there has been some feedback from the surgeons where they suggested -- first of all, they love the instrumentation that they saw in the OR, because it's based on the instrumentation that they're using with the CR product, which is already multiple product generations into the process because we're basically innovating on a continuous basis based on surgeon feedback since this business model has no inventory.

So whatever we learn from iTotal CR was baked into the earliest release of iTotal PS. So you're looking at an implant that, at limited launch, was actually for those reasons already very mature.

So there has been some minor feedback suggestions related to instrumentation and those are basically the key changes that we're implementing now and those will all be fully available at the time of the broad commercial launch at AAOS.

As it pertains to the implant, we're not planning for any major changes there. Again, a couple of minor changes that are not material and all of that in place at the time of AAOS 2016.

And then on the -- thank you. That's excellent. And then on the (multiple speakers).

Let me give you one more tidbit on that, in that context. We are so confident on the implant that at the time of the American Association for Knee and Hip Surgeons, we have a ConforMIS symposium and we are actually doing a prerelease.

We're introducing aspects of the implant and of the technology and the surgical technic there to surgeons and that's all built because we are so confident with what we have today with this implant. It's really exceeding the expectations so we decided we're going to show the surgeons that are attending the symposium. They're going to get to see the implant.

What day is the symposium?

I have to check on the date. It's later this week. We can e-mail you.

Okay. And then my last question (multiple speakers).

Friday morning.

Excellent. And then my last question is you mentioned that full manufacturing capacity is back online. When exactly did you get that back online and give that information to the sales force?

So on October 6, we issued a press release where we informed our investors that based on the results of the investigation, we believe there is no significant health hazard and that's basically also the information that has been communicated back to the FDA.

From there, what we said in the press release that we had identified the root cause. We needed to complete final testing of corrective actions. We did that. We had to validate those, implement them and then, subsequent to that, basically we communicated back to the FDA what root cause, corrective and preventative actions were. And then later in October is when we resumed full operations.

Great. Thank you very much.

Thank you. Our next question comes from the line of Steven Lichtman of Oppenheimer. Your line is now open.

Thank you. Hi, guys. Just one question from me. On the pricing, you talked about data certainly playing a big part in the firm pricing you've seen. I was wondering how the sales channel you mentioned last quarter, if that's focused on the C level, has helped on the pricing front as well. Where are you in the rollout of that initiative across the country?

So we have a dedicated, aside from our independent agents and our more direct reps and the sales management, we have a dedicated team now that's specifically focusing on vendor agreements, hospital contracts and these large integrated delivery networks.

And that's where we see all of this traction that we're seeing on phase 2 of the pricing strategy. On many occasions, they actually go in first. They reach out. So it can be that there's initial contact with the surgeon, but then very quickly we have this C level team basically on the ground that does negotiating with the hospital administration.

There are quite a few occasions where they go first because they've identified an interesting opportunity, an interesting hospital network where we feel we can really make a difference with some of these potential economic benefits that have been reported and published.

And so that's the dynamic. And it's really the C level team that's driving our phase 2 pricing strategy and what we're seeing quite successfully so.

And so far that's been focused on new accounts, not going back to current accounts. Is that right?

Well, actually they're focused on new accounts, yes, but they're also working with existing accounts. When we started out a few years ago with some of the existing accounts, we didn't have any of these economic data and so a key focus there with existing accounts as agreements come up, we like to share these data.

We like to share with the hospitals and invite them to do their own modeling, what some of the cost savings are, and that's very successful in terms of how we extend these vendor agreements or negotiate follow-on agreements.

Great. Thanks, Philipp.

Thank you. And our next question comes from the line of Kristen Stewart of Deutsche Bank. Your line is now open.

Hi, thanks for taking the follow-up. I just wanted to just go back, Paul, I was wondering if you could just give us -- I know you have the balance sheet in the release, but what was the cash burn in the quarter?

The cash burn from operating activities was about $12 million.

Okay. Great. Okay, perfect. And then Philipp, just in terms of the number of MSAs, can you give us a flavor just for where you stand now?

I know that you had wanted to get up to I guess double the number by the end of this year. Where are -- how many MSAs are you in right now currently?

So we had 14 MSAs as we exited 2014, Kristen, and what we had said we would provide guidance on an annual basis and the goal is that we add another 50%. So we would achieve at least 21 as we exit the year.

And that's quite remarkable because when you think about it, iTotal PS is still in limited launch, so it has only a very small contribution, so the bulk of this penetration that we're getting there in some of these MSAs is really driven by the existing product.

The partial knee was about 6% addressable market and iTotal CR with 22% addressable market. And even though the total addressable market share is only 28%, and we're going up against significant competition in some of these markets, you can see how with the limited product portfolio, we've actually been able to really take share and take more than 10%, and in some markets even beyond 20%.

So we hope we can improve on that next year as we launch iTotal PS, but we're very confident that we will achieve the original goal of increasing these MSAs by 50% or more.

Great. And that's even with the recall, I guess, impact too?

I'm sorry, say that again.

I said that's even with the recall impact.

Yes, that is correct. Even with the recall. I mean, that's what really was so encouraging to us through this whole period. Our sales force added surgeons. Our C level team added vendor agreements.

And we kept expanding MSA during the whole thing and on a constant currency basis the Company grew 20% year-on-year. So it just shows you how much traction we're getting with our clinical data and with the existing surgeons who have experienced the benefit, how sticky these products are and how much the in roads are that we're making.

Are you also going to managed care? Are you doing much managed care contracting as well and showing the clinical data to support also helping hospitals get contracts from that perspective?

We've started doing some of that, yes.

Okay, great. All right, that's it for me. Thanks very much.

Thank you. I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference.

That does conclude today's program. You may all disconnect. Have a great day, everyone.

Thank you all.