Conformis Inc (CFMS) 2016 Q1 法說會逐字稿

Good afternoon. My name is [Taquia]. I will be your conference operator today. At this time, I would like to welcome everyone to the ConforMIS First Quarter 2016 Earnings Conference Call. (Operator Instructions)

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 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 limitation -- including, without limitations, statements about ConforMIS' strategy, future operations, future financial position and result, 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 results of broad commercial launch of iTotal PS, the company's 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 ConforMIS' public filings with the Securities and Exchange Commission. Accordingly, you should not place undue reliance on these forward-looking statements.

While ConforMIS may elect to update these forward-looking statements at some point in the future, ConforMIS disclaims any obligation, except as required by law, to update or revise any financial projections and forward-looking statements, whether because of new information, future events or otherwise.

This conference call contains time-sensitive information and is accurate only as of the live broadcast today, May 12, 2016.

I will now turn the call over to Philipp Lang, the company's President and Chief Executive Officer. Philipp?

Thank you, Taquia, 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 developments at ConforMIS since our last earnings call on which we will update you now. I would like to start out by defining a brief agenda for today's call. I will briefly summarize our Q1 financial results. Paul will provide a detailed financial review of the first quarter, along with an outlook on the remainder of the year. I will then update you on our overall commercial progress, the progress made with our C-Suite selling approach and pricing strategy, our progress with hospitals that will participate in the Medicare Comprehensive Care for Joint Replacement bundling program or CJR, about which we're very excited, progress with our clinical programs with more clinical data releases, the broad commercial launch of iTotal PS at the American Academy of Orthopedic Surgeons in March and the progress that we have made since the launch. And finally, we will also provide an update on our plan to enhance our management structure. We will then open the call for questions.

First quarter of 2016 showed strong revenue growth, with product revenue up 36% year-over-year on a reported basis and 39% year-over-year on a constant currency basis. Product revenue growth in the first quarter was driven primarily by strong contributions from the limited launch of iTotal PS and benefits from improving order lead times and rescheduled cases from the second half of 2015 related to the voluntary recall. While we are pleased with the first quarter results, we are mindful that the reduction in order lead times and rescheduled cases following the recall benefited this quarter's result and we do not expect this to continue. Paul will provide detail for our revised product revenue guidance for 2016.

In the interim, I would like to emphasize the fact that our revised product revenue expectations for the year reflect the impact of a slower-than-expected ramp in new orders for iTotal CR, iDuo and iUni, our base business, but not for iTotal PS. To that end, we are very pleased with the performance of iTotal PS in the first quarter of 2016 and have seen strong demand for this innovative product following the broad commercial launch in March 2016.

We continue to anticipate strong growth and increasing contributions for product revenue from our iTotal PS over the balance of the fiscal year.

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

Thank you, Philipp. Total revenue for the first quarter of 2016 increased $5.6 million to $20.3 million or 38% year-over-year on a reported basis and 40% on a constant currency basis. As a reminder, beginning in the second quarter of 2015, our total revenue results also includes non-product revenue consistent of royalty related to the settlements of patent litigations from Wright Medical and MicroPort. Total revenue in the first quarter of 2016 included $268,000 in royalty revenue related to these settlements, which did not exist in the results in the same period last year.

First quarter product revenue increased $5.3 million to $20 million or 36% year-over-year on a reported basis and increased 39% on a constant currency basis. Product revenue for the first quarter was positively impacted by the post-recall order lead time reduction, from eight weeks, back to our standard six weeks, and cases that were rescheduled into the first quarter following the recall.

U.S. product revenue increased $4.4 million to $14.7 million or 43% year-over-year. Rest of World product revenue increased $900,000 to $5.3 million or 20% year-over-year on a reported basis and 28% on a constant currency basis. As detailed in our press release this afternoon, first quarter product revenue from sales of iTotal CR, iDuo and iUni, our base business, increased $3 million to $17.6 million or 21% year-over-year on a reported basis and 24% on a constant currency basis.

First quarter product revenue from sales of iTotal PS, which we launched on a limited basis in February 2015 and initiated a broad commercial launch in March 2016, increased $2.2 million to $2.4 million year-over-year.

First quarter U.S. product revenue represented 74% of total product revenue compared to 70% of total product revenue in the same quarter of 2015. First quarter Rest of World product revenue represented 26% of total product revenue compared to 30% of total product revenue in the same quarter of 2015. For modeling purposes, our largest exposures to changes in foreign exchange rates are related to revenue in Germany and U.K., our two largest markets outside the United States.

Total first quarter revenue was negatively impacted by $391,000 due to changes in foreign exchange rates compared to last year.

Turning to our view of our results across the rest of the P&L. First quarter gross margin was 35% of total revenue compared to 36% of total revenue in the same quarter of 2015. The decrease in gross margin compared to the prior year was primarily caused by unfavorable changes in foreign exchange rates compared to the prior year.

First quarter operating expenses increased $2.8 million or $22.2 million or 14% year-over-year. Sales and marketing expense accounted for $1.9 million of net increase, the majority of which came from increases 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.

Research and development expense increased $400,000 or 10% year-over-year compared to last year. And general and administrative expense increased $500,000 or 9% year-over-year.

Net loss was $15 million or $0.37 per share compared to $14.3 million or $3.32 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, the fully diluted weighted average shares outstanding for EPS purposes increased to 41 million shares in the first quarter of 2016 from 4.3 million shares in the first quarter of 2015. The increase in shares relates to issuance of shares in our initial public offering and the conversion of outstanding shares to preferred stock and to shares of common stock upon the closing of the IPO.

Turning to a discussion of the update to our 2016 financial guidance, which we introduced in this afternoon's press release. For the full year 2016, the company expects total revenue in the range of $76 million to $81 million from previous guidance in the range of $84 million to $87 million. The company's 2016 revenue guidance assumes the following, product revenue in the range of $75 million to $80 million compared to previous guidance in the range of $83 million to $86 million; royalty revenue guidance of approximately $800,000 related to ongoing patent license royalty payments has not changed.

Previous product revenue guidance for 2016 reflected our expectations for measured growth in the first half of 2016, with improving growth in the second half of the year. This growth trend reflected the uncertainty related to ongoing impacts of the recall on sales of iUni, iDuo and iTotal CR. This outlook was supported by the early trends in order rate that we had experienced through mid-February and had assumed improving order trends for iUni, iDuo and iTotal CR over the balance of the year. To date, we have not experienced this rate of improvement in orders.

We are, however, seeing strong demand in iTotal PS. Orders to date for iTotal PS have exceeded our initial plans and we anticipate continued strength throughout 2016 now that we have initiated the broad commercial launch. In fact, based on the strong market response in the first couple of months of broad commercialization, we have modestly increased the expected contributions to full year 2016 results from iTotal PS in the revised product revenue guidance.

For modeling purposes for the full year 2016, we have also updated our gross margin expectations as follows, gross margin of 39%, previously in the range of 40% to 41%; product gross margin of 38%, previously in the range of 39% to 40%. The change in gross margin guidance is driven by the impact of lower-than-expected product revenues.

Regarding the second quarter revenue guidance, which we introduced in our press release this afternoon, first, let me say that providing quarterly revenue guidance is a onetime deviation in our guidance strategy. Second, given that the extent to which the changes in order trends compared to our original expectations have informed our decision to revise our full year revenue guidance, we felt it would be prudent to share our near-term expectations for revenue based on both the procedures that have already taken place and the visibility into orders we have in hand for the balance of the quarter.

Accordingly, we expect product revenue in the range of $17.5 million to $18.5 million, representing product growth of 11% to 17% year-over-year, on both a reported and a constant currency basis.

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

Thank you, Paul, for that detailed financial update.

Paul has explained how our base business with iTotal CR has not fully returned to its pre-recall growth rates. Despite the setback, we have seen an expansion of our estimated market share in cruciate-retaining total knee implants in the U.S., from 1.5% in 2013 to 2.5% in 2014 and 3.5% in 2015, notwithstanding our small sales force that is dwarfed by the sales forces of our orthopedic competitors and that only covers select regions or metropolitan statistical areas in the U.S. and does not have nationwide coverage.

The steady progression in market share in an industry that has seen little share shift in recent years speaks to the disruptive nature of our products in a market that has lacked significant innovation in the last two decades. We have also made great progress with our C-Suite selling approach and pricing strategy. Our C-Suite sales team has been successful in leveraging the benefits of our technology, allowing for a reduction in OR time, potential for faster setup and turnover time and reduction in sterilization costs with fewer instrument trays as well as reduction in inventory management.

These benefits are further supported by our economic data. In one direct comparative study with off-the-shelf implants, for which we provided financial support, the economic data showed that a statistically significant lower percentage of patients in the iTotal CR study are better discharged to rehab or other post-acute care facilities rather than home as compared to patients in the off-the-shelf arm. Patients in the iTotal CR study arm were 4.4 times more likely not to experience any adverse event during the initial hospitalization, and they were 2.5 times more likely not to experience an adverse event up to the 90-days post-discharge than patients in the off-the-shelf study arm.

By utilizing this data, our C-Suite sales team has been able to achieve an average contracted price, which is higher than our historical average selling price. This increase in average contracted price is a remarkable achievement in an industry that has experienced progressing -- experiencing progressive downward pressure on implant prices.

We have made further progress with hospitals that are participating in the Medicare Comprehensive Care for Joint Replacement bundling program or CJR. As of today, we have signed new contracts that allow us access to nearly 100 contracted hospitals that participate in the CJR program. This shows how interested hospitals are in using our technology in view of the opportunity for reduced adverse event rates in the 90-day episode of care and for reduced referrals to post-op-acute care facilities, including rehab facilities, after the hospital stay.

Our clinical programs have also made significant progress. A recent publication in a peer-reviewed orthopedic journal reported that iTotal offers a significant bone preservation advantage over off-the-shelf implants. The average bone resection increase for all tested competitive implants from major manufacturers compared to the iTotal CR, regardless of implant size, was 28%. In small patients, such as, for example, petite female patients, the bone resection increased. With off-the-shelf implant, it was 49% compared to iTotal CR. The investigators concluded that the ConforMIS iTotal patient-specific implants preserve significantly more bone than standard total knee replacements due to both the thickness of the required bone resections as well as the implant thickness being tailored to each patient's individual needs. This means that more native bone will be available in the event that a patient requires a revision. The hope is that this customized approach may enable revision to a standard primary total knee in the feature rather than a revision implant.

We have also made significant progress with our Single Time-Point, STEP, Study, for which we previously reported interim results in August 2015. Here, we have recently surpassed a major milestone with more than 500 patients recruited. In this trial, patients who have received an iTotal CR compared directly with patients who have received an off-the-shelf implant with regard to patient-reported knee outcome scores and functional measurements of knee performance measured by operators blinded to the treatment arm. We expect to report updated data from the study in the second half of 2016.

The broad commercial launch of iTotal PS almost triples the available market of ConforMIS. We are really thrilled about the progress of iTotal PS. The broad commercial launch occurred as scheduled at the American Academy of Orthopedic Surgeons in March 2016. Our sales force is training and converting new PS surgeons as we speak. Our new surgeon training labs for iTotal CR and iTotal PS are heavily subscribed, which we believe will help us in the second half of the year as these surgeons start ramping volume.

In Q1 of 2016, while iTotal was still in limited launch, the number of surgeries completed using iTotal PS exceeded our expectations by more than 20%. Although, it is still early, we are seeing a similar trend in the second quarter.

Last, I would like to update you on important plans, how we would like to enhance our management team in the future. As many of you know, I founded the company in 2004 together with Daniel Steines, our CTO, and I've run the company since 2008 in my capacity as CEO when I led it through the global financial crisis. Over the years, we have developed an impressive portfolio of customized knee replacements, including iUni, iDuo, iTotal CR and is our latest and most important product, iTotal PS.

It's taken the concept into the hip and we are developing our first product in that segment. We anticipate to have a similar impact in the hip replacement market. In short, our goal is to disrupt the $15 billion joint replacement industry with a truly impressive product portfolio. Surgeons have demonstrated clinical superiority of iTotal CR in multiple critical trials, directly comparing our product with leading off-the-shelf devices. Our surgeons are sending powerful messages to our patients regarding the superior performance of our products. The disruptive nature of our technology and the data supporting its superiority have helped make ConforMIS one of the fastest-growing medical device companies. I believe this is only the beginning of an opportunity that can be much bigger. This is a technology platform company applicable to many different applications in the orthopedic industry.

The last nine years as CEO have been tremendously gratifying. My passion for the company is the same as when I founded it. It is actually even greater because now we have proven that we really make a difference in the lives of our patients and that this is what this is all about.

After nine years at the helm, I have entered into discussions with the board and we have a great look for a successor in my role as a CEO. As the board and I collectively move forward with a search for potential candidates, we have no time constraints. It doesn't matter how long the search will take because we're searching for the best-qualified and available person for the job. I will remain CEO until that candidate assumes the role. The intent is to identify a highly experienced new CEO who will bring deep commercial expertise in a high-growth environment to ConforMIS to help us strengthen the team and accelerate our growth plans.

In the meantime, I will be available to our surgeons who have helped us develop our product and the many, many surgeons who helped build this great company. I will also be available for our shareholders, many of whom have supported us for years and to whom I feel personally greatly indebted for all of their support and their passion for ConforMIS.

Upon the appointment of a successor, I will remain fully committed to the company. I will serve in the Board of Directors and offer advice and counsel and support the new CEO. I look forward to this next stage of the company's growth, and I remain as enthusiastic as ever about ConforMIS and the technology, our employees and the surgeons that are supporting it.

In summary, the first quarter of 2016 shows stronger-than-expected revenue growth, with product revenue of $20 million. Our base business with iTotal CR, iDuo and iUni have not yet returned to the growth rates that we saw in 2015 prior to the recall. We are, however, seeing a gradual recovery which we're actively supporting through a number of management programs. We are very excited about the continued progress with our pricing strategy and the progress with hospitals that participate in the Medicare CJR program. We believe we will be able to further support this progress with our growing body of evidence corroborating clinical superiority of our devices in multiple direct comparative studies. We are thrilled about the reception that iTotal PS is receiving in the PS surgeon community. While it is still early in the ramp, we are excited about the growth that we're experiencing with this highly differentiated and disruptive product.

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

(Operator Instructions) And our first question will come from Mike Weinstein of JPMorgan.

Thank you. So my first question is your new guidance for 2016. What does it imply for growth in all products ex the PS? So what are you assuming in that for CR and Uni?

Yes, Michael, so we're anticipating continued growth in the base -- let's call it, the base business, the iTotal CR, iUni and iDuo for this purpose. So we did have growth from the -- in the first quarter. We're expecting growth from the -- in our guidance from the first quarter into the second quarter as far as new orders are concerned. And we are expecting continued growth going into the second half of the year on our base business at a level that's not at the same ramp rate as what we were seeing when we had our year-end call. And that's the cause for the adjustment in the guidance.

I'm sorry. So can we put some numbers behind it? I mean, what's -- so your guidance now, I assume, is what for the base business?

We don't have -- we don't give the guidance specifically for the, let's say, the base business versus the iTotal PS. I could tell you that we have increased, in our numbers, the guidance, the part that relates to the PS. With the CR, we do have continued growth in the base business that would bring us to the midpoint of the range. To help you with a little bit more details, if we exceed that number, certainly, I think we could be in the high end of that range. If the ramp in orders flattens out and we do not see growth through the rest of the year, that would bring us to the bottom end of the range. Again, which is not what we're anticipating. We're anticipating somewhere in the middle of that range.

Okay. Can we try and get a little better inside into what's going on in the business? So a few things that are probably helpful is to understand, number one, what's going on, on the distribution side, specifically, if you could talk about your sales force and turnover; number two, this kind of drop-off in orders for CR and Uni is -- could you just describe that a little bit better? Are you losing surgeons that were previously ordering? Or are there surgeons lowering their allocation to ConforMIS versus where it was, say, pre-recall in your expectations coming out?

Michael, let me answer the first question, and then I'll come to the second part. So there were no significant changes in our sales force over this affected revenue in Q1. Clearly, we're opportunistic. Example, for underperforming reps, we make changes from time-to-time with more stronger talent. We're also opportunistic with some of the distributors' relationships. But on that front, there were no significant changes that affected the result.

With regard to your second question, what's happening in the base business, basically, after the disruption related to the recall, what we're seeing here is the business has not fully recovered yet. Specifically, the expected -- what we're seeing is that the expected number of iTotal CR surgeons, the CR surgeons continue to order, but they're ordering at a lower rate. And so we have -- yes, go ahead.

So I understand that. So the number of surgeons that are ordering from you is -- looks relatively constant over this period, but the rate at which they're ordering has come down, meaning, they're just allocating less share of their practice to ConforMIS?

That's correct. As it pertains to the base business, I would like to emphasize that we believe we haven't lost any of the key customers and the -- so what we're seeing is really the fact that such a disruption really caused to the business, contribute to this lower order rate.

Okay. And then lastly, and then I'm going to let some others jump in here, could you just update us on the hip product?

So with regard to the hip, we are actively progressing with our plans. There's no significant change from what we shared on the last earnings call. And so the manufacturing development is progressing and we are planning for a resubmission to the FDA. We'll update on that in the second half of the year.

Yes, Mike, just going back to your last question, to clarify something, you had mentioned lost share to competitors, it's not clear that we have lost share to competitors, it's a multifactorial fact. So it might also be that -- I don't believe that we've lost share. It's just that the surgeons that we are working with from indications that we've gotten had not been ordering at the same rate that they have over the last few months, and that's what we've been seeing in orders. We would expect them to potentially increase orders if we haven't lost share, which we don't believe that we have.

The key point there is also we are clearly seeing a recovery in the base business, but what we've experienced now that recovery was -- we saw a significant uptick between mid-January and mid-February. And we had anticipated continued improvement which then, however, we didn't see. Overall, we're clearly seeing that there is improvement in the business, but it is happening at a slower rate.

Understood. I'll let some others jump in, thank you guys.

And our next question comes from the line of Kristen Stewart from Deutsche Bank.

Hi, thanks for taking my questions. Just wondering to what extent have you seen or are you seeing any sort of cannibalization of PS from CR. I know originally all the surgeons that you had targeted for CR were pretty much CR surgeons, but is that at all impacting your forecast?

So Kristen, we have factored into our forecast some level of cannibalization, but it's quite small. And the key reason is -- so why any cannibalization at all, that is because in some of the existing accounts, if you have an indication for a -- so CR accounts, if you have a patient with an indication for PS, PS may be used, and we're seeing a few select customers who are really excited about this PS product now and who've actually increased that in relationship to the CR, but that's really the exception. So in that regard, the business is very much as expected.

We are really focusing with the sales force on the PS surgeons. And so let me take a step back there, we have two groups, the CR surgeons. CR surgeons use -- and the majority of their patients is CR, but then they have patients where, for example, a ligament is damaged or the deformity is too advanced then they have to use a PS. And then, the other category is the PS surgeon. And PS surgeon use PS really in the majority of their cases unless they do the occasional partial knee. And we are focusing now specifically on the PS surgeons and this is the sales force and this is one of the reasons why overall we are not anticipating -- we're really not seeing much cannibalization.

Okay. And do you feel the PS launch has taken away the focus on the CR side then? And could that be some of the explanation for, perhaps, the slower reorders? Or is it just in a way the surgeons just are more reluctant to go back to using the iTotal post the recall? Just trying to a sense for what you're hearing in the field as to why they are not reordering at that bigger rate.

I think the order rates for the base business, that's really sort of a different issue. There's clearly a lot of excitement about the PS in the field and with our field sales force, and what they have to be mindful -- what's really great is how these new PS surgeons are being onboarded, that's fantastic. And as we penetrate this account that creates really a terrific opportunity going forward, but that volume is basically deferred volume because there's a lag -- first of all, there's a 60-day lag period from the time they are seeing the patients to the actual surgery.

More important is the lag period typically over the course of 12 months how the surgeons progressively ramp the volume with us. And so this forward investment in PS doesn't help the business in the near term, it will help the business in the second half of this year, and I believe in 2017.

Okay. And then just, Paul, for you, I was wondering if you could just talk about your cash burn and expectations going forward and then, secondly, maybe update us on the transition with the vertical integration for manufacturing.

Yes. There is cash burn. It should be somewhat similar to what we've experienced, I think, in the first quarter for the rest of the year, somewhere in that range.

What was that, again, sorry?

That's around $13 million, I think, was the total difference in cash. So it could be somewhere between, I would say, $13 million to $15 million, somewhere in that range. I'm sorry, the second part?

Just the transition with the vertical integration with manufacturing.

Let me answer that. So the vertical integration is progressing nicely as scheduled. We had previously shared that we are -- again, for background, this company is a company that still has, in 2015, have the majority of its component outsourced, and it still does as of today in regards to the implant components. So the focus for us to reach attractive material cost levels is really this vertical integration we are progressing very nicely there with the vertical integration of our tibial trace. And we are on track with regard to the plans there. We are progressing very nicely with the vertical integration of our in-house polyethylene manufacturing, of which we have none in 2015. That is on track. And literally, with all of the other key activities, they are progressing as we have planned.

Okay, thank you. I'll let others jump in, get back in the queue.

And our next question will come from Larry Biegelsen from Wells Fargo.

Hi, guys, thanks for taking the question. Any chance, Paul, you'll give us the number for the amount of the catch-up in Q1 from Q4, so we can have kind of underlying base business sales and growth?

Not that number as far as direction -- directionally, the two items that affected the Q, first quarter, as we had mentioned, one was the rescheduled recall cases, that's to one extent. To a larger extent was the reduction in the lead times from the eight weeks post recall to six weeks, those additional couple of weeks for the most part affecting and benefiting Q1.

If you look at the numbers without those in there, then we have -- in our Q2 guidance and in the orders that we have received and receiving and, in fact, Q2 versus Q1, we are seeing a growth in orders from our base business from Q1 to Q2.

Okay. And then as a follow-up on Kristen's question earlier, do you think you have enough cash to get to profitability?

Again, as we have said in the past, we'll have to evaluate that as we get closer to that point. It really depends on what -- we are really concentrated on reduction of costs as far as increase -- decreasing COGS and increasing gross margin as well as looking at our operating expenses as far as where we can reduce cost, and that's where we're really driving in 2016. The variable that we will have to continue to look at is the revenue growth, that will also affect use of cash throughout this period of time and we'll have to continue to evaluate that as we move forward.

And we're very, very nimble on that front. So example, when we saw now that in the base business, the order rate, while growing was not growing at the rate we had anticipated, we actually implemented changes already. By the same token, what, as CEO, I really personally hope for, is that we are seeing a significant recovery in the second half of the year. Where we are today, I can't say this. And by the same token, I very much hope that the iTotal PS will continue at the current same strong trend, which is exceeding expectations. And if that were to happen then we're certainly nimble to make adjustments to meet that volume ramp. So by all means that's the intent, but we have to work off what we're currently seeing in the business.

Just lastly for me, two quick ones. PS added $2.4 million-or-so in the quarter. Can you talk a little bit about what percent is coming from new surgeons versus current CR users? And just lastly, Philipp, the recall, can you talk about -- the recall, obviously, it hurt you. Can you talk about why you think the recall has impacted the base business? I mean, on the surface, at the time, it seemed pretty benign as far as recalls go. But what do you think is happening there?

Let me answer the question related to iTotal PS. So you asked what percentage of these are new surgeons as compared to CR surgeons. So from the get-go in the limited launch, we had really focused on our new surgeons, those are PS surgeons, to solicit the feedback with the product. We had existing CR users in there, but the sales force -- so clearly, we were opportunistic with regard to working with some of our surgeons who supported the company strongly for years and we're very grateful, but the sales force and the product management team really focused on those new PS surgeons. So that was the focus all along, that continues to be the focus.

So some of these new surgeons, they're not new today anymore because they've been with us now for a year through the limited launch, and were -- actually, with some of those, were really deeply penetrated into the account. What we thought on Q4 and Q1, those are, obviously, all -- I think, you would call new surgeons.

With regard to the recall, I think the fundamental issue is really this disrupted the surgeons' business, and I think the difficulty here was to really have good visibility into how quickly we can get that business to recovery. I think that is what this all comes down. And what we're seeing today is, clearly -- recovery is clearly happening except not quite yet at the rate that we had anticipated. That's the reason why we elected to adjust the guidance.

Thanks. Thanks for taking the questions.

And our next question will come from Steven Lichtman from Oppenheimer.

Thank you. Hi, guys. Just one question for me as a follow-up. Philipp, you mentioned that you are initiating programs to try to further reaccelerate that growth in the base business. Can you talk a little bit more about sort of the outreach to your customers and what you're doing to further accelerate?

So I think the key here in the base business is instilling confidence and being with the customer. And that's what our sales force has done, and that's what our marketing has done. And we've initiated a number of different programs so we have these really exciting clinical data releases, which I shared here with you. Some of them, there was actually even more than that. And so example of these types of data we reach out to the customer is reinforcing how good the product is, how much better it is compared to the off-the-shelf brands.

And then, simple stuff, being in front of the customer, the reaching out from the CEO, which I personally run quite a bit, and our senior sales team being in front of the customer, those types of things. And we continue to do that. And I think that's why we're seeing the recovery, but I have to admit it, it's been a lot harder than we had anticipated.

Okay. But, overall, the message is -- in terms of the majority or the key customers, you haven't lost any, it's just a sort of reduction at this point in terms of their volume?

That's exactly right, Steve. So their order volume has decreased. Not everybody, but there are quite a few key customers of our top surgeons whose order volumes has decreased. We're seeing the recovery there now. They're clearly, getting the traction and -- but as I said, that is taking us longer than we had anticipated.

Okay, got it. Thanks, Philipp.

And our next question comes from Kyle Rose from Canaccord.

Great. Thank you. Can you hear me all right?

Yes. Hi, Kyle.

I appreciate you taking the questions. And I apologize if I'm redundant, I was jumping between a few calls, but I just wanted to follow-up, on the previous questionnaire, just trying to understand, when you think about the step-down and the longer lead time to return to historical run rate from the underlying business, has there been any changes from a field standpoint as far as rep turnover or a loss of any major customer? I'm just -- if I'm a big -- if you got a big user and they're just doing less cases, I mean where are those cases going? What are those specific high-volume users asking for as far as to bring that business back? I mean what's the big step-down here? And how do we -- how does that turn around?

So let me ask -- let me answer the first question, Kyle. So I mentioned it a little earlier that there are no significant changes that occurred in the sales force that would have affected revenue in Q1. Clearly, like all orthopedic companies, we are opportunistic, we're making changes as we go. If we have an opportunity to find a stronger performer in a particular territory, we certainly do that, but there were no significant changes on that front. And yes, we haven't lost to our knowledge any of the key customers. What we're seeing are these lower order rates.

With regard to the question what is it that we have to do to bring them back? That's a situation I can tell you that's really highly variable from surgeon to surgeon, that's the example where you have to be in front of the customer. So there's different factors. There was this baseline disruption, so to say. But then there are different factors, different type of feedback that may drive how we have to respond here. And this is why the sales force is so proactive and they've done a stellar job including -- starting with our senior VP of sales and the two Vice Presidents that we have, they've been super proactive being out there, working with each customers. We have for each individual customers basically detailed reports, what their concerns are. And then we have been working and we continue working, and that's also a big part of my job, of how we can address these concerns and make sure that these customers are satisfied and that they're increasing the order rate again.

And again, we are seeing that, but it is going more slowly than we have anticipated. It's harder to do that.

Right. So we're looking at a point in time where we are today. And again, when we had our year-end call, we saw our run rate as far as the orders coming in, and that's what set our guidance for the rest of the year. At this point in time, or since then, we're seeing a different a ramp rate in orders. And so at this point in time, we want to give you as much visibility as possible along the lines that we can see it, and that's why we've adjusted our guidance for the full year, and giving you insight into the second quarter as well.

Okay. I appreciate the additional color. And then turning to a different focus. I just wanted to talk about the broader IP strategy of the firm. Obviously, you got the royalty now and the agreement last year with Wright Medical and MicroPort. In Q1, I believe, you initiated some IP litigation against Smith & Nephew, I just wanted to -- if you could give us some insight into that process and then what your overall strategy is from an IP standpoint, from the broader market stance and expectations moving forward.

So Kyle, you are correct that we did initiate a legal action for infringement of our intellectual property as it pertains to the use of off-the-shelf implants with use of patient-specific instrumentation, in this case, by Smith & Nephew. That is ongoing, active litigation. As you will understand, I can't comment on how that is progressing. And the broader strategy is clearly we believe we have key intellectual property related both to patient-specific instrumentation, which you can use with off-the-shelf implant or with the customized implant such as ours. We have an even stronger IP position pertaining to customized implants, and we are completely open to license as it pertains to PSI. And this is now certainly, we've entered into that phase, the first step was this Wright and MicroPort. And the intent is that we -- ultimately, we will have the benefit from this intellectual property that has been created here.

Okay, thank you for taking my question.

And we have a follow-up question from Kristen Stewart from Deutsche Bank.

Hi. Thanks for taking the follow-up. A couple, I guess, questions I'll run through. Are there any publications or data announcements coming up over the next couple of months? I know there's the Pan Pacific conference, but anything that might help give comfort to physicians just in addition to what has already come out that might help the trajectory?

Yes. There is actually a lot coming out, and that's the reason more why I'm very -- we've adjusted the guidance today, but I can tell you I'm very confident in the fundamentals of this business. And data are key to driving that long-term success. So you will see, for example, our clinical data presented at the International Orthopedic Meeting, there's the ICJR, Pan Pacific. There's a whole list of different meetings that will be upcoming where we have plans to be present or where our abstract has been submitted or accepted. So you're going to see a lot of continued activity. There's also update on the double-blind randomized trial. We are -- personally, we're actually very pleased with how that's progressing. And that will -- that trial will ultimately not only yield clinical and functional outcome measurements in a double-blind fashion and direct comparison to some of the major brands, it will also yield, in due time, economic data with regard to potential hospital savings and so forth. So you'll see a lot on that front.

Okay. And just more specifically, what will be the update on the double-blind trial? And just where does that stand, enrollment wise?

So on the double-blind, specifically, we haven't planned an update yet. I think that's going to be sometime probably first update in 2017, I would anticipate. And that's a longer-term study. Also, the recruitment is clearly more involved than with some of the other trials. Interestingly, the fundamental challenge that we're seeing in our recruitment is that many times when patients hear that they customize Wright with an off-the-shelf device and the surgeon explains the differences, many patients may actually shy and say: no, I don't want to participate in the trial, it's like they have that customized device. Irrespective, actually, our clinical team has done a really good job moving the trial forward. But as I said, that's going to be a while until we can share data on that.

Okay. And then just with respect to the announcement of you stepping down as CEO, will you remain on the board as Chairman or just remain on the board as just a board member?

No, I will be -- I will continue to be heavily involved with the company. First and foremost, I am the CEO. We have no immediate plans. I've been running the company for nine years. I'm heavily vested and invested in this company. And I have all intent to support it wherever possible. The way -- how we look at this really is that we've brought it to this commercial stage, it's a hyper-growth company despite some of the issues that we have seen, and the company has all of the fundamentals to continue along that path. So we're looking for someone, Kristen, who comes preferably from the orthopedic industry and has experienced, has a proven track record of scaling a business, for example, from a $100 million to $250 million to $500 million in a high-growth environment. And really take the company through that, to the next level.

And from my perspective, my role will really be then once we found that person is to support that person and support the team. We have a terrific senior management team. And as I said, take it to the next level.

So just more about finding someone with a little bit more commercial experience within orthopedics?

Yes. But specifically, hyper-growth situation and proven scale up experience.

Okay. Perfect. And then the last question I just want to go back to, not to beat the dead horse, but the comments that you made going back to this ramp and order timing, on the last call you had said, in the middle of January, you're starting to observe this progressive increase and that you're going to get to this normalized commercialization activity over the next two quarters. But is there any way, I know Mike had asked this, just to better quantify this in terms of this increase in order, so just to help us understand exactly where -- where you were seeing things in the middle of January and kind of where things are now, just so people don't necessarily think orders have declined? Or is it just a ramp and now it's flat? Are you back -- I think the perception is going to be that we don't have a good sense in terms of what the ramp is, and I think the fear for the market is going to be that it's flat or moving backwards. Let's talk about that.

Okay. So let's start with the bottom, to try to help you with that. Let's start with the bottom end of the range, okay? So the bottom end of the range, which we're not anticipating, we're looking at the middle of the range. The bottom end of the range would be, if we're flat to the rest of the year in our base business, okay, right, so that gives us some indication as far as where we are, where we have been over the last couple of months since our year-end call. Prior to that year-end call, as I said, middle of January to the middle of February, we saw an increased ramp in orders. And if we continued, not at the same ramp rate because there was a higher ramp rate, but if we continued at a certain level, we would have ended up in the middle part of our original range, okay?

That ramp that we're expecting or the increased number of orders that we're expecting did not happen over the coming last couple of weeks or months, I should say. And so we're taking a more conservative approach as far as bringing down the number of orders that we expect from our base business over the rest of this year.

So what we've modeled internally here and where our guidance is, is in the middle of that range based on our -- what we anticipate the potential growth to be. Again, if it's flat from here on out, then we're talking about the low-end of that range. And certainly, if the ramp does increase in the second half of this year, then we would see the top end of that range. So I hope that's helpful as far as at least starting with the bottom assumptions that bring us to the bottom end of that range.

Okay. So you haven't seen the ramp go negative, I guess, because flat is still kind of sounds not very encouraging, I guess?

No. We have not seen it go negative. We have seen the rate of orders increase, again, from what we brought in the first quarter and recognized in the first quarter to the leading orders that are now going into the second quarter, and that's why we can give you visibility into the second quarter. And there is clearly growth there. So if we continue at that type of a growth rate or similar then we're talking about the middle end of the range. We are looking at the bottom end of the range only if it actually slowed down from where it is today and was flat. That is not what we are anticipating.

Okay. So your flat is you're speaking to that 11% to 17% growth, it's not flat as in zero, it's just that pace of growth is flattish?

11% to 17%, that's your -- that's the -- you're talking about the year --

Yes. When you're saying flat, it's in terms of the growth trajectory is flat?

Yes, for the base business. So remember, there's iTotal PS also.

Right. That's right. So we're only talking about the base business here, the iTotal PS, we've actually increased the expectation there within the guidance. So literally if it is, if the base business, iTotal CR, iUni, iDuo, is flat as far as the number of orders that we are receiving then we expect to be recognized in revenue in Q2. If that same level of orders continues, not an increase, but just flat, that goes into Q3 and Q4, then we would end up at the bottom end of the range. But again, we are not anticipating that.

No, I'm meaning flat in terms of dollars sales, just the order growth rate?

No, flat as far as from what we -- from what we're anticipating into Q2. If that same level, both orders and revenue recognized on the base business continues through the third quarter and the fourth quarter, that would bring us to the bottom end of that range.

Okay. All right. Thank you.

The intent clearly is working with our existing customers for the base business and, in the second half of the year, achieve better growth. But where we are today is -- we're not seeing that and this is basically how we have developed the guidance.

Okay. All right, thanks very much.

At this time, I am showing no further questions. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect.