Conformis Inc (CFMS) 2015 Q4 法說會逐字稿

Good afternoon, my name is Brian. I will be your conference operator today. At this time, I would like to welcome everyone to the ConforMIS Fourth Quarter and Fiscal Yearend 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 meanings 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 limitations, 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, the targeted regional commercial strategy, and the impact of our voluntary recall are based upon 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 in 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 accept 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, February 11, 2016.

I will now turn the call over to Philipp Lang, the Company's president and chief executive officer. Philipp?

Thank you, Brian, and thank you all for attending this call today. Joining me on the call this afternoon is Paul Weiner, our Chief Financial Officer. There have been many notable developments at ConforMIS since our last earnings call on which we will update you now.

Let me define a short agenda at the outset. I will briefly summarize our Q4 financial results along with our 2015 financials. Paul will provide you a detailed review of our 2015 financial performance and will review our guidance for the 2016 fiscal year.

I will then update you on our plans for the broad commercial launch of iTotal PS at the American Academy of Orthopedic Surgeons in March, the growth achieved with our targeted regional commercial strategy in select metropolitan statistical areas, the progress made with our C-suite selling approach and pricing strategy, and our progress at hospitals that will participate in the Medicare Comprehensive Care for Joint Replacement bundling program, about which we are very excited. We will then open the call for questions.

The fourth quarter of 2015 showed stronger than expected revenue growth, exceeding the high-end of our revenue guidance provided August 31, 2015, driven primarily by a shift in surgeries from prior quarter. Total revenue was $19.1 million, up 34% year-over-year on a reported basis and up 38% year-over-year on a constant currency basis.

Product revenue was $18.8 million, up 33% year-over-year on a reported basis, and up 37% year-over-year on a constant currency basis. US product revenue increased 39% year-over-year. Rest of World product revenue increased 15% year-over-year on a reported basis and 31% year-over-year on a constant currency basis.

Full-year 2015 revenue grew by 39% on a reported basis and 45% on a constant currency basis, despite the commercial disruption in the third and fourth quarters associated with our voluntary recall in the third quarter. While we achieved significant progress with our commercial goals during 2015, the second half of the fiscal year was challenged by the impact of the Q3 recall announcement. Despite the fact that we resolved the specific operational issues related to the recall expeditiously by the end of October, we saw a decrease in the rate of orders that continued after October, which we believe resulted from the business disruption the recall has caused our surgeons.

Since the middle of January, we are now starting to observe a progressive increase in order from our surgeons. Our 2016 revenue guidance range will present our current expectations for the timing of a return to normalized commercialization activity over the next two quarters. If commercial activity picks up faster than the current trend, it may allow us to achieve results closer to the high-end of our guidance.

Importantly, we have multiple positive drivers in 2016 that will drive our growth in 2016 and beyond, including the broad commercial launch of iTotal PS, the progress with our targeted regional commercial strategy in select MSAs, the success with our C-suite selling and pricing strategy, and the Medicare Comprehensive Care for Joint Replacement.

With this background, let me turn the call over to Paul for a detailed financial review. Paul?

Thank you, Philipp. Total revenue for the fourth quarter of 2015 increased $4.9 million to $19.1 million, or 34% year-over-year on a reported basis, and increased 38% on a constant currency basis. As a reminder, beginning in the second quarter of 2015, our total company revenue results include non-product revenue related to the settlements of patent litigations from Wright Medical and MicroPort. Total revenue in the fourth quarter of 2015 included $233,000 in royalty revenue, which did not exist in the results in the same period last year.

Fourth quarter product revenue increased $4.6 million to $18.8 million, or 33% year-over-year on a reported basis and increased 37% on a constant currency basis. US product revenue increased $4.1 million to $14.6 million, or 39% year-over-year. Rest of World product revenue increased $544,000 to $4.2 million, or 15% year-over-year on a reported basis, and increased 31% on a constant currency basis.

As detailed in our press release this afternoon, fourth quarter product revenue from sales of our iTotal CR, iDuo, and iUni increased $2.9 million to $17.1 million, or 20% year-over-year on a reported basis and increased 25% on a constant currency basis.

Fourth quarter product revenue from sales of iTotal PS, which we launched on a limited basis in February 2015, was $1.7 million. Fourth quarter US product revenue represented 78% of total product revenue, compared to 74% of total product revenue in the same quarter of 2014. Fourth quarter Rest of World product revenue represented 22% of total product revenue, compared to 26% of total product revenue in the same quarter of 2014.

For modeling purposes, our largest exposures to changes in foreign exchange rate are related to revenue in UK and Germany, our two largest markets outside the United States.

Total fourth quarter revenue was impacted by approximately $600,000 due to changes in foreign exchange rates compared to last year.

Turning to our review of our results across the rest of the P&L. Fourth quarter gross margin was 37% of total revenue, compared to 39% of total revenue in the same quarter of 2014. The decrease in gross margin compared to the prior year was primarily caused by additional production cost, including higher cost associated with a limited launch of the iTotal PS.

As we previously discussed, we expect the iTotal PS cost to improve over time with progressive software animation, vertical integration, and increased growth. Changes in foreign exchange rate compared to the prior year also affected reported gross margin by approximately 200 basis points in the period.

Fourth quarter operating expenses increased $4.4 million to $21.9 million, or 25% year-over-year. Sales and marketing expense accounted for $2.1 million of that increase, the majority of which came from increase in personnel cost 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.

R&D expense increased $800,000, or 21% compared to last year, and general administrative expense increased $1.4 million, or 28% year-over-year, due primarily to public company-related expenses and various other expenses, which did not occur in the fourth quarter of 2014.

Net loss was [$15 million], or $0.37 per share compared to $12.1 million, or $2.83 per share, for the same period as last year. The change in that loss per share compared to last year was impacted by an increase in our weighted average shares outstanding.

Specifically, the fully diluted weighted average shares outstanding, for EPS purposes, increased to 40.8 million shares in the fourth quarter of 2015 from 4.3 million shares in the fourth quarter of 2014. The increase in shares relates to the issuance of shares in the initial public offering and the conversion of outstanding shares of preferred stock into shares of common stock.

For the 12-month period ended December 31, total revenue increased $18.7 million to $66.9 million, or 39% year-over-year on a reported basis. Revenue increased 45% on a constant currency basis. This growth was driven by the combination of an increase in product sales of $14.6 million, or 30%, on a reported basis and 36% on a constant currency basis, and royalty revenues of $4.1 million related to our settlement with Wright and MicroPort and related ongoing royalty payments.

US product sales for the fiscal year period increased $12.9 million to $47.2 million, or 38% year-over-year, and our Rest of World product sales increased $1.7 million to $15.6 million, or 12% year-over-year on a reported basis. Rest of World product sales increased 33% on a constant currency basis this year.

Gross margin for the 12 months of 2015 was 36.6% of total revenue compared to 36.4% of total revenue of the prior year.

The gross margin in 2015 includes 500 basis points related to the patent license royalty. The product gross margin in 2015 was 32%. The decrease in product gross margin compared to the prior year was primarily caused by additional production cost, including higher cost associated with the recall and the limited launch of the iTotal PS. Changes in foreign exchange rates compared to the prior year also expected reported gross margin by approximately 300 basis points in the period.

Net loss for the 12-month period was $57.2 million, or $2.60 per share, compared to $45.7 million, or $10.78 per share last year. Turning to a discussion of our 2016 financial guidance, which we introduced in this afternoon's press release; for the full-year 2016, the Company expects total revenue in a range of $84 million to $87 million. The Company's 2016 revenue guidance assumes the following; product revenue in a range of $83 million to $86 million, representing year-over-year growth of 32% to 37% on a reported basis, and 33% to 38% on a constant currency basis. Royalty revenue of approximately $800,000 related to ongoing patent license royalty revenue.

For modeling purposes, for the full-year 2016 period, we expect gross margin in the range of 40% to 41%. Product gross margin in the range of 39% to 40%, as compared to product gross margin of 32% in 2015. [Stock] compensation expense of approximately $5 million, and fully diluted weighted average shares outstanding for EPS purposes of approximately 41.5 million shares.

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

Thank you, Paul, for this detailed financial update. On the significant progress with our commercial goals in 2015 to second half of the fiscal year was challenging due to the impact of the voluntary recall of some of our products in the third quarter.

Despite the fact that we resolved the specific operational issues related to the recall expeditiously, it caused significant disruption to the practice of our surgeons. On the positive side, most patients affected by the delays associated with the recall elected to wait and postpone their surgeries, which we believe is an indication that patients and doctors appreciate that we have a highly differentiated product. These patients opted to wait rather than receive an off-the-shelf implant. This willingness of patients and doctors to stay with ConforMIS and reschedule surgeries helped us with our Q4 results, and resulted in stronger than expected revenue growth in that quarter.

Importantly, we have not lost any of our higher volume surgeons as a result of the recall. These surgeons have demonstrated their belief in the product, and that they see the difference in clinical results they can achieve with the ConforMIS iTotal, such as fast recovery, better functional outcomes with a more natural-moving knee, and higher patient satisfaction, which have been reported in different clinical studies directly comparing the ConforMIS iTotal CR to leading off-the-shelf implants.

However, given the high operative volume of some of these surgeons, the lack of availability of our products during the recall, the temporary lead time extension for shipping products from ConforMIS from 66 to [86], which has only reasonably returned to 66 again, paired with the lead time for the surgeons, or many of the surgeons had to resort to off-the-shelf implants for a subset of their patients.

Thus, the disruption of the business of our surgeons resulted in a decrease in scans and orders after October. However, since the middle of January we're starting to see a progressive increase in order volume from our surgeons.

Our 2016 revenue guidance range represents our current expectations for the timing of the return to normalized commercialization activity over the next two quarters. This commercial activity picks up faster than the current trend. It may allow us to achieve results closer to the high-end of our guidance. Importantly, we have multiple programs and catalysts that we expect will drive our growth in the second half of 2016 and beyond. Clearly, our goal is to do better by leveraging some of these unique opportunities.

These include the broad commercial launch of iTotal PS in the first week of March at the American Academy of Orthopedic Surgeons. The growth achieved with our targeted regional commercial strategy in metropolitan statistical areas, the progress with our C-suite selling program and pricing strategy and the progress of hospital contract in areas that will participate in the Medicare Comprehensive Care for Joint Replacement bundling program, or CJR.

We are on track for the broad commercial launch of iTotal PS at the American Academy of Orthopedic Surgeons in the first week of March. We have defined the target paired surgeons to ourselves for the first two quarters after the launch. These PS surgeons represent a much larger surgeon segment, which we can only access now with the availability of iTotal PS.

iTotal PS approximately triples the available market for ConforMIS. Our sales management is approaching this large opportunity in a disciplined and methodical way, and they're prepared to execute on the significant growth opportunity. Following AAOS, our sales force will focus on converting and training new PS surgeons, which we expect will start to result in an increased ramp in sales in the second half of the year continuing into 2017.

Our target regional commercial strategy involved identifying metropolitan statistical areas, or MSAs, based on knee replacement procedure volume, surgeon density, surgeon preferences, and prevailing average selling price on knee replacements. Once we have identified an attractive MSA, we work with regional key opinion leader surgeons to help develop our presence in the MSA.

At the time of our IPO on June 30, 2015, we shared that exiting 2014, we had achieved at least 10% market share of all primary knee replacements performed in 14 MSAs in the United States. Our goal for 2015 was to grow the number of MSAs where ConforMIS has at least 10% market share by more than 50%, which we achieved.

The recall meant a temporary setback. However, even with this setback, we were able to increase the number of MSAs in which we have at least 10% market share of all primary knee replacements to 22% at the end of 2015.

Perhaps even more impressive, in seven of these markets, we were able to exceed 15% market share of all primary knee replacements. The 15% market share benchmark includes sizable markets, such as Miami and Boston. Of note, Boston was below 10% market share at the end of 2014, all of this despite the recall-related challenges in the second half of the year. This is a remarkable achievement in particular, since these results are primarily driven by our current product line, which does approximately 28% only of the addressable knee replacement market. Our partial knee assistance served roughly 6% of the total addressable market, and our iTotal CR total knee assistance is roughly 22% of the total addressable market. You see iTotal PS coming into full launch now. We expect our addressable market to grow [accreshidly].

This shows how disruptive our technology is. This also shows that in markets that we target, ConforMIS really takes share. This is an impressive result in an industry that has seen little share shift in the last decade between the different established large orthopedic companies. We believe we can expand on this result in the second half of 2016 as we leverage the different business catalysts for 2016 and beyond.

Our C-suite selling efforts have also made significant progress in 2015. Let me briefly reiterate what our strategy has been. For 2014, we priced our implants intentionally comparable to the average selling price of off-the-shelf implants. The purpose of this first phase of our pricing strategy was two-fold. One, build a critical fluid and customer base of several hundred surgeons to create market awareness; and two, work with these surgeons to generate pivotal clinical and economic data demonstrating the benefits of our implants.

In the second phase of our pricing strategy, which started in 2015, we are now leveraging the economic data from the iTotal CR economic study to achieve premium pricing. The economic data have been presented and have now been submitted for publication in the peer review journal. The final data analysis is summarized as follows. There were no statistical differences in the demographics such as age, sex, and body mass index between the off-the-shelf arm in the ConforMIS iTotal CR arm. In performing a risk adjustment for various comorbidities, the investigators found that patients in the iTotal CR study arm were 5.5 times more likely to be discharged to home rather than a rehab or other post-acute care facility then patients in the off-the-shelf arm.

Patients in the iTotal CR arm were 4.4 times more likely not to experience an adverse event during the initial hospitalization, and they were 2.5 times more likely not to experience an adverse event up to 90 days post discharge than patients in the off-the-shelf arm. This attests to the lower adverse event rates observed in ConforMIS iTotal CR patients compared to patients receiving an off-the-shelf implant.

This data show that the iTotal CR is a state implant. There's no adverse event rate, which is important both for our patients and our surgeons. These benefits are also important to the hospital where they can translate into significant per patient savings, which may be further accentuated by savings in and around the operating room offered by our Just-in-Time delivery model on iJig, which includes faster overtime and published studies and, on average, approximately five fewer reusable medal trays with a potential to reduce instrument sterilization and reprocessing costs. As a result, our C-suite sales team has been successful in using this economic value proposition, now pricing negotiations in 2015. Our average price for both new and renewed hospital contracts in 2015 has increased over our historical ASPs.

Of note, most of these contracts are three-year contracts. This will take some time for the new hospital contracts and accounts to ramp volume and affect our historical ASP. However, we feel confident that our pricing strategy will at least help us maintain pricing in the near-term with a potential to do better over time, all of this in an environment where price decreases are common across the orthopedic industry.

We are very excited about the new Medicare Comprehensive Care for Joint Replacement model, CJR, in which we are leveraging our economic value proposition to the hospitals. Let me briefly summarize what the CJR program is and what this entails. Beginning 4/1/2016, 792 hospitals in 67 metropolitan statistical areas will be subject to the new CJR Bundled Payment Program. Each year Medicare will set a target episode of care prices for each hospital participant, which includes payment for all related services received for Medicare beneficiaries through 90 days post operatively. Hospitals will continue to be paid as they are now. However, Medicare will reconcile actual versus target prices. Hospitals will either keep savings for all Medicare for price overages on a yearly basis. This will result in a bonus or penalty to the hospital. As a result, CJR will require hospitals to manage post-acute care costs.

The data from the iTotal CR economic studies show that ConforMIS patients are 5.5 times more likely to be discharged home into a lower cost setting than off-the-shelf patients. This is really important. The most recent data indicate also that ConforMIS patients are 2.5 times less likely to suffer from adverse events during the 90-day post-operative period, with a potential for additional cost savings in post-operative care. Our C-level sales team has begun leveraging our economic value proposition, including potential cost savings in the OR and during the 90-day episode of care with hospital CEOs and CFOs who will be involved in the CJR bundled care program.

In a few months, since the announcement of the program in July 2015, we have signed new contracts that allow us access to more than 50 additional hospitals that will participate in the CJR program. This is a remarkable achievement in particular when one considers that the program only become effective as of April 1, 2016.

In 2016, we're planning to add more hospitals that are involved with the CJR program, and we are adding participation in the Medicare CJR as an important criteria on our targeted regional commercial strategy, where we will be specifically targeting also MSAs that are part of Medicare CJR. It shows how positive to view this important Medicare program for ConforMIS.

Other notable developments pertain to iTotal Hip. As we previously discussed, we have planned to submit an application of our iTotal Hip system to the US Food and Drug Administration for 5/10-K clearance. The submission occurred as planned, and we have since received common stock from the FDA. Beyond the process of addressing those comments, we anticipate that the limited launch of iTotal Hip may be delayed past 2016.

We are enthusiastic about the progress with our vertical integration strategy, which will help drive reductions in material cost for our implants and instrumentation, and which is one of the key drivers of our gross margin expansion. We are successfully executing on this vertical integration strategy, with a focus on [TLC] machining of our metal tibial trays and polyethylene inserts, 3D printing of our patient-specific iJig instrumentation, as well as 3D printing of our metal thermal components.

We've been manufacturing a portion of our metal tibial tray component in-house starting in 2014. In 2016, we have plans to expand the vertical integration for our metal tibial trays. iTotal PS, which we expect to be our key growth driver in the second half of 2016 and in 2017 currently has low growth margin caused by the low volume during the limited launch, the earlier stage of software automation, which is progressing favorably, and primarily outsource supply chain.

As the first step in the gross margin expansion for iTotal PS, we have begun manufacturing the iTotal PS metal trays in-house. In addition to that, we have recently completed the validation of our in-house polyethylene insert manufacturing process. We anticipate that the scale-up of this capability will help us in the second half of 2016, and subsequently with regard to gross margin improvement. We are also advancing the direct metal printing of our thermal components.

In summary, full-year 2015 revenue grew by 45% on a constant currency basis, despite the commercial disruption in the third and fourth quarters associated with our voluntary recall. We're excited about our prospects after the American Academy of Orthopedic Surgeons, as we will build our growth in the second half of 2016 and for 2017, leveraging several important programs in business catalysts that will support our growth, including the broad commercial launch of iTotal PS in the first week of March at AAOS 2016.

The expansion of our targeted regional commercial strategy in select MSA, now also leveraging iTotal PS to take more market share from the off-the-shelf companies our C-suite selling and pricing strategy, which is further enhanced by the Medicare Comprehensive Care for Joint Replacement model.

iTotal PS tripled our commercial opportunity. It is our single-biggest focused commercial, and operationally, we believe this will have significant impact during the course of this year or next year.

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

My pleasure. (operator Instructions) We ask that all participants please limit yourselves to one question and one follow-up so that we may accommodate everyone. If you would like to ask additional questions, we welcome you to rejoin the queue.

Our first question comes from the line of Mike Weinstein with JP Morgan. Your line is open. Please go ahead.

I wanted to maybe start to get a better sense of what you saw in the fourth quarter and in what's implied by your 2016 guidance here. In the fourth quarter, your product revenues grew 37% constant currency and were negatively impacted by the recall.

In 2016 you'll have the recall issues behind you. You'll have an easier comp sale in the third quarter, and you're about to do the full launch of PS. So the guidance for revenue growth for 2016 is hopefully conservative at 33% to 38%, relative to what we just saw in the fourth quarter. But it does sound like there was some turndown in your orders in the fourth quarter, so we'd like to have a better read on that and what that means for the first quarter performance.

As you said, we had provided a document guidance of around $8 million in the second half of the year due to the recall. In Q4, less surgeries were actually canceled than it originally anticipated, and more surgeries were rescheduled than was incorporated into our revised guidance. So we saw greater than expected commercial disruption related to new orders after October that are reflected in our 2016 guidance expectations. This was caused by the disruption at offices of our surgeon customers.

The high operative volume of some of these surgeons lack of availability of products during the recall and the temporary lead time extension for shipping products from ConforMIS in Q4, paired with a lead time for the surgeon's ORs, led to a disruption greater than anticipated. We are seeing since the middle of January that it's progressively - we are seeing a progressive increase in orders.

In regards to the question about the 2016 guidance; if you look at the current trend of orders today, that will point us to the low-end of our range, the $84 million. So at this snapshot in time, the current trend, that's where we believe you would end up.

There's a number of programs to increase the order with our surgeons to increase that business that have been affected here for this disruption. If our programs to increase the order rate pick up faster, it may allow us to achieve results closer to the high-end of the guidance. And then importantly, these programs and catalysts, such as the broad commercial launch of iTotal PS, our MSA strategy, the C-suite selling, and CJR; those are the things that we hope will help us ultimately to do better. But when we look at it today, we can't promise that yet.

Right. And just to clarify a few things, too; we know that the first quarter is affected by the recall disruption. As we are into the middle of February, we could see about two months ahead as far as the orders and scans coming in.

We are starting to see a pickup in the orders, which should help us with modest increases in the first half of this year. And we do anticipate that the full launch of the iTotal PS to have a positive effect on our revenues in the second half of this year.

That's going to be the key growth driver.

So, help me with the picture of in the last few months what your existing customers have been doing and what you think your share has been doing with your existing customers and what your ability has been to add new surgeons over that time.

In regards to the existing customers, what we saw that we, effectively, because of some of the delivery issues during the recall, the extension of our own delivery time paired with, typically, Q4 at some level of seasonality. Q4 is the busiest quarter for the surgery - therefore surgeries for the surgeon. There are year-end deductibles and other things at play. These surgeons basically have - where a subset of their patients - they have to go to off-the-shelf implants in order to maintain their business.

That means we effectively lost some penetration during this period. And we saw that trend basically after October, and we then initiated programs to directly address that in - [we started in] November and December into January, and we now have seen the fruit of that work. We're seeing that penetration return. And currently with the current trend we're anticipating that will take us somewhere around two quarters or so from here. Again, I'm hopeful that will go faster, and this is basically - if that happens, that could get us to the high-range of the guidance.

In regards to your question about new customers, we did actually acquire new surgeon customers during this period. Clearly while the recall was ongoing in September and October, the sales force was on the defensive focusing premiere on preserving the existing business while we were managing through this. But even during that period, in fact, we've got a number of new surgeons who were trained and who were since become active, and we had quite a few more surgeons during the remainder of the fourth quarter, so that activity continued, and that activity is now back to the levels, basically, in terms of new surgeons acquisition, is back to the levels where we were before.

The big focus now here is, again, AAOS, the iTotal PS launch. At that time, basically, the focus will be on all of these new surgeon targets, which have been identified for Q2 and for Q3, our sales force, our direct reps, the agents have specific targets for every quarter.

We will track that performance, how they're bringing in these new surgeons and even the level of interest that we're seeing in the implant and given the sheer market size and the surgeon-base that's so much larger, we anticipate we'll see a significant acceleration coming out of that.

Sorry, Paul, did you give bottom-line guidance for the year?

I did not, no.

Can you give us some expectations for bottom-line which you think your burn will be?

I mean, we're comfortable with the cash position now. Our operating - just to give you some - as far as our action on operating expenses, which would help; operating expenses to remain fairly consistent with where we are in the fourth quarter on a quarterly basis in 2016.

And so, what does that imply in terms of operating loss for you guys for the year?

We're not giving out that specific loss, but obviously, we're giving guidance to the revenue as well as the margins and I just gave you some general direction as far as where our operating expenses should end up on a quarterly basis throughout 2016.

And then just the last question; so you ended the year, I think it was $117 million in cash, you seem to be in pretty good shape. Do you anticipate for any reason you would be coming back to the capital markets in 2016?

Not necessarily. We're comfortable with our current cash position. We'll continue to evaluate potential cash needed to re-execute our business strategy in the future. But no, we don't have any plan to go back to the market in 2016 as of now.

(Operator Instructions). Our next question comes from the line of Kristen Stewart with Deutsche Bank. Your line is now open. Please go ahead.

Just wondering if you could comment on, just in terms of AAOS, and are there any - obviously, you have the iTotal PS launch, are there any other presentations that we should be looking for?

You had mentioned in the prepared remarks some of the positive data that came out or will be coming out in journal; could you be very specific in terms of what journal it will be published in perhaps, or if that will be presented at AAOS?

Yes. Specifically AAOS, we have a lot of activities, so as it pertains to the booth, we are taking the same approach that we did last year. We are pre-scheduling a lot of the surgeon visits to the booth, so we're much less focused on just whatever booth traffic comes through.

We're looking to really fully utilize and leverage our existing resources with regards to the sales force. And so, most of the meetings are being pre-scheduled. There are multiple events during the course of the meeting. Most of these events will center around iTotal PS. And the key focus here is all about the new PS surgeons. That's really where we see the growth opportunity. And then when you think of the dynamic, as these surgeons are being introduced to the product now and then converted by the sales force and subsequently trained, we would expect a significant uptick in orders basically exiting Q2 and then that should translate in an increased ramp in surgeries in Q3 and Q4, and I think well into 2017. I think this product is going to drive our goal for the next several years.

In regards to the clinical data, there will actually be multiple clinical data presentation that take place at the booth. This will be primarily about data that has been previously presented because, again, we don't want to jeopardize the peer review publication.

There are multiple peer review papers pending as we speak. So you're going to see a lot more activities on that front, and you'll also see more clinical data when we sit through in the course of 2016.

And then we had some calls recently with several of the high-volume doctors who already have access with the iTotal PS and they've been very positive on the product and the prospects going forward for that.

How should we just think about the sales coverage? Are you going to be using existing reps to go out and now cover all the PS surgeons out there, or will they just be covering PS surgeons and existing kind of CR accounts, so just kind of spreading more with any existing hospitals and franchises? Is there any risk that you might have a little bit of slowdown in CR at the expense of growing your PS sales?

Well, historically I can share with you - if you look at a couple of years back when we went from partial knew sales to the introduction of iTotal CR, that was a challenge because we had a sales force that was not fully in tuned with - some members of our sales force were really familiar with total knee. Many of our sales reps have more of a [sports] background.

If I look at the sales force today, we have a very experienced sales force in total knee sales and where we have a unique opportunity for ConforMIS specifically now is that these sales reps have been selling the CR product since 2011. The PS is built on the same design rationale. So, we're leveraging the same sales force and we have now a highly trained sales force working with this new product. And we're supporting that sales force by providing them very detailed target, target solution, target specific that these surgeons have been profiled.

We have done surgeon segmentation, market segmentation through that. And so, we're directly sending this highly trained and experienced sales force basically into this new account.

We don't anticipate any type of slowdown on that front. On the contrary, again, we haven't modeled in an approach as such, but I'm hopeful that we can really see a significant tick up here in the third and fourth quarter.

In regards to cannibalization, I think you will see this with any new products to some extent, but that's the reason why we're primarily targeting new PS surgeons, because really, these two different groups of surgeons; they have the CR surgeon, they have to use PS when the [posterior cruciate] ligament is damaged, when it's gone, so in about 26% of the patients that use the PS, but we are really focusing on the PS surgeons who basically use PS for most of the indications for most of the patients, so this is a whole new surgeon segment that we're opening up here, so we don't anticipate a lot of cannibalization.

Thank you. Our next question comes from Larry Biegelsen with Wells Fargo. Your line is now open. Please go ahead.

Let me start on the guidance. Paul, could you give us any color on the cadence throughout the year? And more specifically, how should we think about Q1? It looks like your product revenue growth was 37% in Q4. Do you expect in Q1 to be below the guidance range of 33% to 38%?

Yes. So, I guess as far as the cadence throughout the year as it relates to the guidance, we know now that we're in the middle of February, and again, we get our scans in and the surgeries generally takes place on average about 60 days or two months later, so we can see ahead certainly the first quarter.

We know that based on the scans that have come in through the middle part of January, we could see the effect of the recall on the business disruption and the scans coming in. Starting in the second half of January, the scans did start to pick up. And now that should bode favorably, or at least start to bode favorably, for the second quarter. We are, with the starting of the pickup in the orders, we should see modest increases in the second quarter as well as even in the first quarter over what we did in the fourth quarter.

And then we anticipate, as Philipp was talking about, the full launch of the iTotal PS with AAOS in March with the sales force then having access to the iTotal PS and be able to start bringing new surgeons, really, in the second quarter and even into the second half of the year, we should start to see the positive effects on our revenue in the second half of the year related to the iTotal PS full launch.

Paul, let me just ask a clarification question on that because I think it's important. You said a modest increase is in Q1 and Q2 over Q4. You were talking about absolute revenue, you weren't talking about the growth rate, is that correct?

That is correct, Larry.

Would you expect the growth rate in Q1 on the constant currency basis for product revenue to actually be below the guidance range of 33% to 38%?

Yes, based on modest increases in the first half of the year, first quarter, second quarter, then yes, when it's picking up in the second half of the year, yes.

And can you give us any color on what percent of revenue should we expect from PS in 2016, any additional color?

Yes. As we go and as we have been, we'll continue to give you the breakout between the iTotal PS and the rest of our product line, but we're not giving specific guidance on the split moving forward with our guidance in 2016. It will be our key growth driver, Larry, during the year.

And just lastly from me, guys; obviously, there was a lot of focus on the safety this quarter. Do you have any information you can share with us on revision rates at this time and how you think they compare to off-the-shelf implants?

There are a number of different ways to look at it. If you look at the [mock] database in regards to adverse event rate, the answer is simple. When you go on the FDA website, the FDA says expressly you can't use it to establish revision rates, or adverse event rates.

And the key issue is there is a lot of under reporting. For example, if you have an off-the-shelf total knee and there is an infection, the surgeon may simply elect to change out the implant component, take it off the shelf. And basically, that gets reported back to the Company at the end of the quarter that this component was used, but the Company wouldn't even know what it was used for. So, the extent it's underreporting is because simply the Company have no means of knowing if it was used, when it was used, for whom it was used and for what indication.

In the case of ConforMIS, we report the vast majority of such cases, because if the surgeon needs a replacement component, he or she actually has to request this from ConforMIS and we have to custom make it for the application.

But ultimately, what really matters is the direct comparative data. And I mentioned this final data analysis from the iTotal CR economic trial. And that's a direct head to head comparison that looks at the adverse event rate in the hospital and then within the 90-day period. And one of the key metrics in this context is the adverse event rate, that includes any adverse event related to the patient, but certainly all adverse event rates have related to the device. In there, we're seeing that we are 2.5 times less likely with the ConforMIS device actually have an issue compared to the off-the-shelf device.

I can also reference data from our iUni trial, which we presented last July at the International Congress for Joint Replacement. And what was shown there was that the revision rate example at two years, we're at the very, very low-end of the published data for the industry. So once again, in these comparisons we have a safe device with very low adverse event rates that, in fact, the example in the iTotal CR study tracks significantly lower than the industry.

Ultimately, you need to have direct comparative data and I believe we are one of the few possibly the only companies that have this direct comparative data and that's where the truth lies in data.

Thank you. Our next question comes from the line of Kyle Rose with Canaccord. Your line is now open. Please go ahead.

I wanted to circle back on the guidance. You know, it sounded - obviously, a slow down post the recall as far as new scans coming in. But you also mentioned some programs that you put in place in November and December that helped turn around those growth rates.

I just wanted to see if you could give us a little more color around that. I mean, it sounds like it had a necessarily quick impact with orders trending better, and now you've got into January and February here. But I just wanted to see what those were, and then also how much of that slowdown in orders was a factor of just the extended timeline from six weeks to eight weeks, and now you've gotten passed that if we can see for that growth trend accelerate through the Q1 and into Q2.

Yes, Kyle, so that's actually - I'll answer your second question first. The extended timeline was the key driver. The six weeks, that's our traditional delivery time. You know, specifically in [seat spots], most surgeons schedule the surgery seven, eight weeks out.

If you are delivering eight weeks out, today, it's too long. And for many surgeons in particular, at the yearend, again, the yearend deductibles are coming; it's the busiest season for the surgeon in terms of surgery volume. If you're delivering in such a long lead time, you are pre-programmed to give up a significant amount of volume and orders. And that's basically what happened here, and that impacted us.

What other programs to re-establish that? Well, one of the very first programs is as we saw this happening, we re-evaluate very carefully how to develop all of these re-scheduled cases that maybe have to go to our manufacturing facility, so there were also some capacity constraints simply to manage that volume.

But we developed a plan; how can we quickly and efficiently re-establish six weeks? And we basically did that exiting the year. We came back to normalized delivery time. I think that was the single most important thing that we have to do.

There are other thing of the more soft nature, call it, like simply reaching out to the surgeons, working with the surgeons and installing confidence, including some of our key surgeons, a visit by the CEO and so forth; all of those saves confidence and instilling. And the key point is bringing home the point that we have a clinically superior device in published studies with higher patient satisfaction with lower adverse event rate and engaging with the customer and asking them for their trust that we want to work with them supporting their business, and going back to the penetration rate that we had previously.

And then from a margin perspective, obviously, you had the recall in the quarter, but then also you had the manufacturing push to get everything back to the normal six-week timeline.

What were gross margins, excluding the impact of the recall in the Q4? I wanted to see if you could break that out for us, or a better way to out that question is, what was the impact on gross margins of the recall in the quarter?

Yes. So, it really didn't have an impact in the quarter. It certainly had a significant impact in the third quarter gross margin. The fourth quarter, it didn't really have an impact. We're anticipating potential impact related to additional cancelled cases going into the fourth quarter. But what happened was a lot of the cases got rescheduled, so we ended up having less cancelled cased than anticipated. A lot of the additional costs that we had as far as, obviously, writing off the cancelled cases, as far as the inventory, additional rework; all those types of costs were already factored into the third quarter.

At the end of the third quarter, we weren't sure how much more of an impact we might have in the fourth quarter, but it actually really ended up rather favorably with mostly re-scheduled and not cancelled cases and not additional rework costs in addition to what we already had in Q3.

And then just lastly, I understand that the major driver of growth in 2016 will be from the iTotal PS, but you touched on the iHip likely being pushed into 2017.

I just wanted to see, can you talk about what kind of questions the FDA is asking and what specifically is going to get pushed out in that timeline? And then when we think about 2017, we think about that as an early 2017 event or is that something that may be more of a back half of 2017 just from a growth initiative standpoint?

Those are difficult questions to answer, because there's an active communication with the FDA. So you will understand that we can't really comment on that. I think we need to leave it and that we need to assess exactly how that dialog is going. And then if and when we get a clearance, we will advice exactly where this would put us from a timing perspective.

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

First, latest thoughts on sales force ads as we go through 2016. And then, for PS, certainly, most of the focuses you mentioned will be on new surgeons. I was wondering what kind of training will be needed for current surgeons that are CR predominantly, but use PS in a smaller percent of the cases. Would that be a relatively quick potential uptake for those current surgeons?

Now, let me answer the second question first. The iTotal PS is based on the design principles of our iTotal CR. It has the exact same design features, it has the customized shape that recreates the natural J-curve, the curvature that lay inside and the outside of the knee to bring back the natural kinematics of a normal moving knee unlike their off-the-shelf devices that have a fixed prosthetic shape that cannot do that.

That said, the surgical technique is also based on the principles of iTotal CR. We are now internally on the eighth product generation with the CR products so we have a very mature set of jigs and instruments highly accurate.

The key difference there that towards the end of the surgical procedure, you basically have to remove the bone to accommodate the box in the thermal component. Everything else looks, and smells, very much like an iTotal CR. So, if you are selling this device, if you're offering this device to an existing CR surgeon, he does have to use the PS in 20% of their patients where we would currently lose that business to an off-the-shelf company.

Again, those 20% in the ligament, for example, is damaged or the deformity is more advanced, he or she can literally use the same surgical technique only with the added steps of removing that small piece of bone on the femur to accommodate the box.

The learning curve for a CR surgeon who is currently using iTotal CR is extremely low. We are not planning to duke it out a lot or anything like that for CR surgeons in order to start using our PS. I think they're pretty much set to go.

In regards to the first part of your question, I think we're entering a very interesting period in 2016, because many of the competitive reps in agents are being relieved after some of the big acquisitions that we've seen in the industry. We're seeing a high level of interest from some of those parties in ConforMIS as they're looking where they're going to be in the future. And so certainly, I think we'll be very opportunistic as some of these opportunities arise. Those things are rapidly evolving in the external environment that I think Paul needs to assess that as we go and we can advise on that a bit later.

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

I just wanted to make sure I understood just kind of the timing again for bringing everything in-house. I know you've kind of talked about it in the prepared remarks, but maybe if you could just go over that again in terms of when things come in-house and then also the cadence of gross margins throughout the year since it is a pretty significant step-up.

Yes. Well, I'll talk through how we are bringing things in-house, and I'll have Paul then in that context explain the gross margin.

The near-term opportunity for us that gives us the fastest gross margin expansion is by making more of our metal trays in-house. There is a significant opportunity from material cost reduction on that front, so we're looking to expand that. And so, if you look specifically at iTotal PS we were primarily outsourced, taking that activity in-house, we're doing that now today; it is a significant cost saving going forward. So, that's where we're focusing in the near-term.

Then we just completed another near-term opportunity. We just completed the internal manufacturing validation to take the polyethylene manufacturing in-house. We have external vendors currently, everything is outsourced. We will continue working with some of those vendors, but as the volume grows we really want to also scale up the in-house capacity. And what we're seeing is that we can basically manufacture that polyethylene at a substantially lower cost structure, which will also help us with some of the external pricing.

And then the other component clearly is we are expanding what we're doing on the jigs manufacturing. There is actually a number of exciting developments on that front coming with the 3D printing. And we are progressing also with the 3D printing of the metal thermal component. We're the only company that has FDA-approval to print these implants with chromium-cobalt molybdenum, and we are looking to scale that up on the road. The near-term opportunity is metal trays and polyethylene, because that's where we see the quickest gross margin expansion.

And you said you already had the FDA-approval for the 3D printing for the femur component already?

Yes, we do, yes.

Yes, as far as far as that cadence throughout the year, well, one of the things that iTotal PS as far as the cost related to the iTotal PS, they are higher than our iTotal CR at this point in time.

We do plan on software releases to minimize the design time. With those software releases, the COGS will come down as well as product cost will come down throughout the year as material prices come down. Still, even with the software that we're looking to implement with a full launch, you'll still take more time than the CR, but we'll continue to come up with more softer releases throughout 2016 and 2017 to continue to drive the cost of the PS down, and especially as we ramp up in volume.

But we do see, with the vertical integration and the increased volume that Philipp was talking about [some fees] throughout the year, we should see remarkable improvements in our gross margin throughout the quarters.

I know there's been some concerns, I guess, on big capital side in terms of bringing things in-house. Can you give us any approximation of what you would expect your CapEx to be, roughly?

Yes. CapEx that we've got right now for 2016 is about $5 million plus or minus.

Thank you. Our next question comes from the line of Greg Chodaczek with CRT Capital. Your line is now open. Please go ahead.

Just regarding your clinical trial that's currently going on comparing the CR to the off-the-shelf replacements, can you give any update on that, when we may see data on that? Because it's going to be very important once that comes out.

Yes. There's actually several trials, Greg, and we have - in the interest of time and in the prepared remarks, we didn't elaborate on that., but briefly, so we have under one side that single time point study that looks at blinded functional evaluation of patients at the one-year timeframe direct comparison, again, off-the-shelf versus ConforMIS.

That is progressing. We are progressing for total goal of 500 patients. And you're going to see an update on the results in the second half of the year. And we are very excited about that trial, where that is going, and we have all of the major brands in that trial. The double blind trial of the iTotal is progressing.

Again, direct comparison; all of the major brands included. Obviously, the operating surgeon knows, which implant they are using but all of the pre-op and post-operative objective evaluations of the patients are done by a blinded person, such as the PA or a second surgeon and then the patients are also blinded for the treatment. So, that's progressing.

We are actively recording into that study. We have, actually, also in addition to that multiple more kinematics studies coming forward were in live patients, investigators, academics are looking at the motion of the median off-the-shelf patients with ConforMIS patients. This is where we had again multiple of the big off-the-shelf brands direct comparative data that show that the ConforMIS iTotal CR moved much more closely to a normal knee in many of the key metric, statistic is significantly superior, so you will see more of those studies forthcoming in the near future.

And then the iTotal CR economic trial has been submitted for publication. Again, all - and that the key thing is all of those studies are direct comparatives unlike to what most companies are doing in the industry. We want to compare also directly with by market size with the leading brands. Ultimately, truth is in data; we have those data, we are building that data platform, all direct comparatives. And you're going to hear quite a few more updates during the course of the year.

The trial that I'm calling a 544 trial, which is a direct compare, which is the trial you were first talking about in your answer, we won't see any data until the second half and probably fourth quarter sometime this year, but we should expect to see something this year?

Again, these are investigator-initiated trials, so it's funding from ConforMIS, so ultimately we don't control the data. The example, that study, that step study, the principal investigator is Dr. Mary O'Connor at Yale University. But I would anticipate that you're going to see an update midyear, definitely before the fourth quarter.

And last but not least, responding to a report that came out several weeks ago; you're talking about bringing the printing in-house. Can you explain how difficult or how easy that printing will be as compared to your outsourcer? I mean, is that something you turn on, you're good to go? That doesn't seem to be the way that it was described in this report.

I'm not sure in regards to the report, but it is not something that you simply turn on. We've actually been at this since 2012. We're one of the technology leaders, specifically with the metal printing it's possible that we are actually the first company to who actually did this.

We did it together with a number of - we developed the technology together with a number of academic collaborators over in Europe, and that ultimately then led to the 5/10-K clearance. We are the only company that has a 5/10-K clearance for chromium-cobalt molybdenum in orthopedics. That's very important because that is the most widely used and most widely accepted alloy for orthopedic surgeons.

We're very familiar with the process. We were probably the first company to print these Nylon jigs, or plastic disposable jigs, for patient-specific instrumentation. We also have the core patents related to that, and very similar as it comes to the metal printing. We have multi-year experience in the process; have, in fact, also developed our own intellectual property related to that process. And so, we're very familiar with it.

And you're right, it's not something that you simply turn on. That's the opportunity. This is a very sophisticated manufacturing process. And we're very proud that we have, over the last several years, developed a lot of unique knowledge and technology related to that.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and you may all disconnect. Everybody, have a wonderful day.