Conformis Inc (CFMS) 2017 Q4 法說會逐字稿

Good afternoon. My name is Kevin, and I'll be your conference operator today. At this time, I would like to welcome everyone to the ConforMIS Fourth Quarter and Year-End 2017 Earnings Conference Call. (Operator Instructions)

Before we begin, I would like to remind you that management will make statements during this call that include forward-looking statements within the meaning of the federal securities law, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that are not statements of historical fact should be considered forward-looking statements. All forward-looking statements, including, without limitation, statements about ConforMIS' strategy, future operations, future financial position and results, gross margin, product margin, operating trends, financial guidance, market growth, total revenue and revenue mix by product and geography, the anticipated timing of the launch -- of the limited launch of our hip product offering, the potential impact and advantages of using customized implants, business initiatives and transitions in our commercial operations are based upon current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the Risk Factors section of 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, February 7, 2018.

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

Thank you, operator, and welcome, everyone, to ConforMIS' Fourth Quarter and Year-end 2017 Earnings Conference Call. With me on the call today is our CFO, Paul Weiner. During the call, Paul and I will share our prepared remarks on a variety of topics, including our fourth quarter financial and operating performance, our financial outlook and guidance for 2018, which we originally introduced in our press release of January 8. Additionally, I thought it might be worthwhile to reflect back on my first year at ConforMIS. Following the prepared remarks, Paul and I look forward to answering your questions.

We are pleased with the fourth quarter results as we beat our revenue and gross margin guidance. The U.S. sales organization management changes are now in place, and our patient engagement campaigns continue to bear fruit. Our vertical integration, including the Broad Peak asset acquisition last August and operational initiatives, are driving gross margin improvement. We've continued to report positive clinical results, such as the paper by Dr. Gary Levengood, which was published in the peer-reviewed Journal of Knee Surgery during the fourth quarter and which I will discuss in more detail later.

I would like to take a moment to briefly reflect on my first full year since joining ConforMIS as CEO. To me, the most important thing to note is that just as I related a year ago, we believe our technology is highly differentiated and offers clear advantages as compared to the products from the rest of the industry. I hear this regularly from physicians and patients alike. The clinical data we have compiled continues to confirm this. What's also true is what I related early on. We have to do a better job from a commercial standpoint in telling our story and connecting with physicians and patients.

Due to that wide commercial execution remains a critical imperative for us, we have made changes in people talent across the field sales management, marketing, national accounts and market access teams towards this goal. We operate in a very competitive industry that is highly concentrated among a few significant players. We have to be that much better.

Second, as I mentioned a year ago, I believe we have an opportunity to demonstrate significant patient satisfaction, health economic benefit improvements over off-the-shelf knee replacement surgery. The June publication in Arthroplasty Today of the study by Dr. Steven Culler that favorably compared adverse event rates and cost of care for customized implants against certain off-the-shelf implants, is an example of this. Today, I continue to believe that this is an important opportunity for us. We believe that the current industry trends towards value-based episode of care analysis and contracting favor us, and we will be aggressively exploring ways to exploit this.

Third, let me comment on our imperative around gross margin. A year ago, I talked about how this would be a point of emphasis for us and that my early assessment was that there were opportunities to achieve significantly higher gross margins. We have made significant strides down that path in 2017, putting us on track to focus on further gross margin improvement. We have made personnel changes and investments to bring about a culture of focus on leading out our processes. We have an aspirational plan to achieve greater than 60% gross margin and have identified specific projects and plans that we believe can help us achieve that goal. As well, we will continue to evaluate and seek additional opportunities to be on specific construction projects that have already been identified.

Lastly, I'm often asked what has surprised me over the last year. I would say that I've had 2 surprises, 1 negative and 1 positive. The negative one is quite easy. The Germany partial knee reimbursement change negatively impacted our international business. Coming in as the new CEO, this was a disappointing and a challenging headwind to deal with over the first year. However, while we will continue to impact -- however, while this will continue to impact our business in Germany, we expect that our financial year-over-year comps will stabilize with respect to this issue after Q1 of '18.

The positive surprise was our strong patient engagement. Coming to ConforMIS a year ago, I had heard that patients like the technology, but I had no idea just how engaged they actually are and can be. The fact that we have patient ambassador volunteers that give of themselves and their time freely to tell their story is amazing to me. Just as amazing, we have had a patient travel all the way from Australia to the U.S. to have her knee done with our system. She said she's so happy that she's coming back to get the other knee done later this year. As I have mentioned previously, though our direct-to-consumer market -- through our direct-to-consumer marketing initiative, we are exploring how we can leverage this high engagement and turn it into a larger patient activation campaign for ConforMIS. This is truly a differentiated opportunity for us.

In summary, I kicked off 2017 saying that it would be a year of transition investment for ConforMIS, and it has been that. We believe our changes in investments during the past year will have a positive impact for us both commercially and operationally throughout 2018.

With that, let me turn the call over to Paul for a detailed review of our 2017 financial results and our '18 guidance. Paul?

Thank you, Mark, and thank you all for joining us. We reported fourth quarter revenue of $20.8 million, representing a decline of 4% or $900,000 year-over-year on a reported basis. Excluding the positive impact of changes in foreign currency exchange rates of $169,000, the company's revenue declined 5% on a constant currency basis. Revenue in the fourth quarter of 2017 and 2016 included royalty revenue of $252,000 and $238,000, respectively, related to patent license agreements.

Fourth quarter product revenue was $20.5 million, representing a decline of 4% or $936,000 year-over-year on a reported basis and 5% on a constant currency basis.

Sales of the company's iTotal PS increased $1.1 million to $5.7 million or 23% year-over-year on a reported and constant currency basis. Sales of the iTotal CR, iDuo and iUni products declined $2 million to $14.8 million or 12% year-over-year on a reported basis and 13% on a constant currency basis. iTotal PS represented approximately 28% of total product revenue in the fourth quarter of 2017 compared to approximately 22% for the same quarter last year.

U.S. product revenue remained consistent at $17.7 million year-over-year. U.S. product revenue was driven by strong sales of our iTotal PS product, which increased 22% year-over-year, offset by an 8% year-over-year decline in sales of the company's base business product lines. Fourth quarter U.S. product revenue represented 86% of total product revenue compared to 83% for the same quarter of 2016.

Rest of World product revenue was $2.8 million, a decline of $900,000 or 24% year-over-year on a reported basis and 29% on a constant currency basis, which was affected by sales of the base business product line, including the Germany partial knee reimbursement rate change and weakness in our iTotal CR sales. Fourth quarter Rest of World product revenue represented 43% of total product revenue compared to 17% in the same quarter of 2016.

Turning to a review of our results across the rest of the P&L. Fourth quarter gross margin was 42% of revenue compared to 37% of revenue last year, a 500 basis point increase. The increase in gross margin year-over-year was driven primarily by cost reductions as a result of vertical integration and manufacturing efficiencies. Gross margin improvement has been a point of emphasis, and we are now seeing the positive impact from the hard work that has gone into the cost-reduction programs. As of the end of 2017, we in-sourced all of our iTotal CR and PS metal tibial trays and polyethylene inserts. Earlier in 2017, we began manufacturing of our polyethylene inserts for iTotal CR and have ramped up to producing internally 100% of these poly inserts. In December, we completed the vertical integration of iTotal PS poly inserts, which should have a positive impact on gross margin beginning in the second quarter.

We continue to make significant progress with the development of new processes for the 3D printing of our patient-specific instruments, resulting in print cycle time reductions and lower powder utilization. We expect that this will reduce our capital outlays for 3D printers in 2018.

Our multiyear plan to offshore some of our CAD design work, as well as our continued improvements in design software and CAD automation should continue to provide additional gross margin expansion. In short, we have experienced substantial progress in our cost-reduction programs, which we believe will yield continued gross margin improvement as we move forward.

Fourth quarter operating expenses decreased $1.6 million to $20.4 million or 7% year-over-year. The decrease in operating expenses was driven primarily by lower general and administrative costs due primarily to a reduction in patent litigation expense, strategic consultant expense, severance, business insurance expense and other administrative expenses, and lower sales and marketing costs due to a decrease in personnel costs.

Net loss was $11.9 million or $0.27 per share compared to $15.7 million or $0.37 per share for the same period last year. We reported 12-month revenue of $78.1 million, representing a decline of 2% or $1.8 million year-over-year on a reported and constant currency basis. 2017 gross margin was 36.9% of revenue compared to 33.4% of revenue last year, a 350 basis point increase. Net loss was $53.6 million or $1.24 per share compared to $57.6 million or $1.39 per share for the same period last year. As of December 31, 2017, we had cash and cash equivalents and investments totaling $45.2 million compared to $65.5 million last year -- or for 2016.

Regarding our recent financing activity. On January 29, we closed our follow-on public offering, in which the company received $23 million in gross proceeds from the sale of 15.3 million shares of common stock. Net proceeds were $21.6 million before legal and accounting expenses. This included an offering of 13.3 million shares of stock plus the exercise by our underwriters of the full overallotment, or greenshoe, of 2 million shares.

Turning to a discussion of our 2018 financial guidance, which we introduced in our press release on January 8. For the full year 2018, the company expects total revenue in a range of $79.6 million to $83.6 million, representing a year-over-year growth of 2% to 7% on a reported basis and 1% to 6% on a constant currency basis. The company's 2018 revenue guidance assumes the following: product revenue in a range of $79 million to $83 million, representing year-over-year growth of 2% to 8% on a reported basis and 2% to 7% on a constant currency basis; royalty revenue of $600,000 related to ongoing patent license royalty revenue. A product revenue constant currency growth of 2% to 7% assumes growth in the United States in the mid-single-digits percentage to low teen percentage and a decline in the rest of the world in the low 20s percentage to the high teens percentage on a constant currency basis.

For the full year 2018, the company expects total gross margin in a range of 44% to 46% as compared to 37% in 2017. For modeling purposes, for the full year 2018, we expect depreciation and amortization expense of approximately $4 million, stock compensation expense of approximately $4 million and fully diluted weighted average shares outstanding for EPS purposes of approximately 59 million shares. We expect our first quarter total revenue in a range of $19.1 million to $19.8 million, representing year-over-year decline of 6% to 3% on a reported and constant currency basis and product revenue in a range of $19 million to $19.7 million, representing year-over-year decline of 7% to 3% on a reported and constant currency basis. The first quarter will be the last quarter that revenue will be negatively impacted on a year-over-year basis due to the change in the customized partial knee replacement reimbursement in Germany. We expect gross margin to be comparable to the fourth quarter of 2017 of 42% or 900 basis points above the same period last year.

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

Thank you, Paul. I've given fairly substantial comments earlier in the call. The important thing to focus on is what we need to do in 2018 to be successful. I think there are 3 operational objectives: These are meeting our top line revenue guidance, continuing to improve our gross margin and successful limited launch of our ConforMIS Hip System later this year. It is worth mentioning that our 4 strategic priorities here at ConforMIS, which I outlined early last year, won't change in 2018. They remain commercial execution, gross margin improvement, innovation and talent management. I've already commented on the investments and changes that I believe will allow us to improve our commercial execution and achieve our guidance. Namely, we will continue our focus on sales execution, direct-to-consumer marketing programs and expanding our clinical and health economic results.

Further to that last point, Q4 saw the publication of accuracy of coronal plane mechanical alignment and a customized individually made total knee replacement with patient-specific instrumentation. In the December edition of the Journal of Knee Surgery, this article by Dr. Gary Levengood, which studied 63 patients, showed no postoperative outliers that were greater than plus or minus 3 degrees in neutral, the industry standard. This study adds to our clinical results, demonstrating that the iTotal knee replacement system is very accurate.

Paul has already detailed much of our gross margin activity, and I have commented that we have longer-term aspirational goals of greater than 60% gross margin. We have given guidance of 44% to 46% for 2018, and this will be a critical year in our journey towards that aspiration.

Regarding innovation. Our ConforMIS Hip System remains on track for a limited launch in the second half of this year. We continue to work on the next-generation of our IKNEE partial knee replacement system and anticipate the limited launch in the first half of 2019.

Furthermore, in the second half of 2019, we anticipate the limited launch of our next-generation iTotal knee replacement system. We are particularly excited about new features that will be available in this system, such as new cutting-guide technology, new poly insert options and optional longer stems on the tibial component. I've been pleased by the surge of engagement and interaction with the company around the development and commercialization of all these new product programs.

Finally, regarding our recent financing. The cash we raised gives us additional runway to execute on our commercial strategy and continue our gross margin expansion as well as to explore other opportunities. We have a great team here at ConforMIS. We consider ourselves agents of change in the field of orthopedics and are committed to producing the best total knee system available. We are passionate in our belief that everyone should have access to our technology.

We look forward to a successful 2018. Thank you. Operator, over to you.

(Operator Instructions) Our first question comes from Michael Weinstein with JPMorgan.

Let me just start. So you gave your first quarter guidance. Should I assume that after you get to that last tough comp in Europe, that, that revenue growth does turn positive in your model like in the second quarter?

That is correct, Michael, yes.

Okay. And just -- can you just circle back? I think I missed your -- just your commentary on your product cadence between the next-generation knee and the hips. I just want to make sure we heard exactly what you guys were expecting.

Yes. So Mike, we're on track -- this is Mark. We're on track for the limited launch of our ConforMIS Hip System in the second half of this year, so 2018. And then in the first half of '19, we'll have our next-generation, what we call our G3, of our iUni. And then later on in 2019, we'll have the limited launch of the next generation of our iTotal with some of those feature attributes that I outlined.

Got you, okay. And Mark, could you spend a few minutes just on the distribution right now and the personnel in place? And the -- obviously, we've spent some time talking about the shift in your distribution from more of a 50-50 direct distributor model to one that's now more heavily weighted towards the distributors. Can you just talk about what you have in place right now and the plans to grow it in 2018?

Yes, absolutely. So you're right, there has been a shift. And I think we've said before we're -- somewhere between 75% and 80% of our revenue is in distributors, and the remainder is in direct agents.

As far as -- one of the things I think we struggled and we talked about in '17 was just we were able to work out underperforming reps in territories and get new management in. But we didn't really add as many people as we would have liked in 2017 because we were making those management changes. So we're very pleased with Dan and the leadership team he's put in place. As I've said before, the market access and national account executives brought in are really high-quality talent. We're seeing really good things from them. The key now is to attract good talent at the street level in terms of distribution and, in some cases, still direct agents. And we have a plan to grow our feet on the street by approximately 20%, 25% throughout 2018. So that is a key point of emphasis for us going forward.

Okay. And just as we think about the timing of bringing those people on, how would you think about it, first half versus second half?

Well, I'm pushing to kind of have it be done on a quarterly basis and it'd probably be kind of pro rata. You can't predict these things, but the team's aggressively out with those targets looking now. So I wouldn't think in terms -- because I think I see the question you're asking, but I don't see it all being front-loaded. I think we're going to see some over the quarters as we go.

Yes. So as Mark said, it should be over the quarters, but we are trying to front-load it as much as possible and getting them in here as soon as possible. Maybe we've hit the 20% mark on the third quarter, and that's basically our goals.

Our next question comes from Kristen Stewart with Deutsche Bank.

I was just wondering how should we think about cash flow usage during the course of the year? I know you guys really trimmed back the use of cash throughout 2017, and saw that definitely with the improved profitability. But how should we just think about cash flow use during 2018?

Yes. So in the fourth quarter, we had about $9.3 million in cash usage, which is like the lowest amount we've had in -- maybe ever. And in 2018, we are making some investments in various areas, including the launch of the hip. So we would expect that in the first quarter to be a bit more spending, a little bit higher than maybe the rest of the year. And then the rest of the year should be around -- somewhere in the range of around $10 million plus per quarter.

Okay, perfect. And then is there anything that we should be focused on for AAOS? Or it should be a relatively quiet meeting for you guys?

I think it'll -- Kristen, this is Mark. It's a good question. I think it'll be, I hope medium, so to speak. We plan on certainly interacting with the analysts, and we will talk a little bit more about our hip system and maybe give a little more color and detail to that. So you should see us talk about that. We'll also be talking, obviously, about some of the generation 3 products as far as what we anticipate in '19. So it's not a huge splash in the sense that there's something going to come out that we haven't talked about before, but I particularly think the hip will be interesting because we'll be able to get a little more granular on how the product concept's going to roll out.

Our next question comes from Kyle Rose with Canaccord Genuity.

This is actually Brandon Vazquez on for Kyle. First, if I could just ask, in the fourth quarter, did you guys experience any more of the headwinds from CT scan reimbursements? And I guess, looking forward, do you think that's something that -- are you guys contemplating an impact from that in 2018? Or is that kind of behind us now?

Brandon, this is Mark. No, it's about the same as far as we could tell. Again, this is not as accurate or specific as you like, but as best we could tell, it's about the same. And it will continue -- if you recall, it should continue certainly through the Q1 because as we talked about, middle of last year, it kind of got operationalized towards the end of Q1, beginning of Q2. So I would expect to kind of anniversary out of it in Q1, from that perspective. But it certainly hasn't gotten worse by any means. It's about the same. And again, as I've indicated in the past, we've actually made some headway in a couple of states with a couple of commercial suppliers. So I feel pretty good. And again, I have no news to suggest anything would change going forward in this year as we stand now.

Great. And one other question if I could sneak one in here is just in terms of just to dovetail off of the sales force comments that you were making earlier. When -- do you -- are you kind of guiding for 2018? Or are you planning for 2018 growth to come more from maybe increased utilization from your current accounts? Or is it increased street on the feet -- feet on the street, excuse me, is going to kind of expand territories and drive growth that way? And just one part off of that as well is how long you'll expect it to take for these new reps to become fully productive?

Well, the answer to the first part of your question is yes. It's both of those. We anticipate that we will seek to do better with our existing ConforMIS users and hopefully grow as a percentage share of their surgical value. And then certainly, we want to add people. And then to your question part as how long does it take to get people up and running. It's a great question. It's a complex question. If it's somebody who comes over very experienced, they can sometimes get up and running quicker. If it's somebody that we're training, depending on the circumstance, it can take longer. One of the things we have done under Dan's leadership is put a particular emphasis on how we onboard sales reps and sales rep training and the modules thereabout. So we've kind of upped their game there with the aim of hopefully making them more effective and productive sooner, rather than later.

Our next question comes from Larry Biegelsen with Wells Fargo.

I wanted to start with the guidance. The U.S. guidance of mid-single digits to low teens for 2018. In the quarter, Q4 was flattish; for the year, it was up slightly. What are you assuming for the U.S. that drives that improvement in 2018?

Well, there's a couple things. One, as Mark had mentioned and we've been talking about, we had a couple headwinds through the first quarter. So that -- those will anniversary out after the first quarter, so that'll help us as far as year-over-year comps. And the other area is certainly, we are looking to -- our iTotal PS has been doing well. Certainly in the United States, we plan on continuing to drive that. We plan to stabilize our iTotal CR and base product line as far as the sales are concerned. And we've made all the changes or most of the change as far as sales management in 2017. So 2017, during that transition period, it was a difficult year as far as on-boarding new surgeons and adding feet on the street, at the same time you're changing sales management. So now that, that is done, the company and the sales team are concentrating on, as Mark said, adding feet on the street and onboarding surgeons and penetrating deeper into those accounts. So I think that is -- our hope is that as 2018 progresses, we should start to see that come to the top line and certainly into 2019 is our plan.

Yes, Larry. That's really good question. If I can just add another comment. The other thing is just continued improvement in our consumer messaging and our direct-to-consumer. You had heard us talk about the pilot program. Last year, we identified a number of patients and had what I would call limited success in converting them to ConforMIS surgeons and really making sure they kind of got the full story. We're rolling out next month an upgrade in our website in the platform technology it's based off of as well as making some investments in that area. So our goal will be to be able to be more effective at really connecting up patients with surgeons that can give these patients who are interested in ConforMIS, the ConforMIS technology. As you can imagine, given our market share we're at, there's a lot against these patients as far as trying to get to the right surgeon to get them the technology they want. So I think we'll do better at that in '18 than we did in '17.

That's helpful. Just one follow-up on that and one other question. So for the stabilizing the base business, should we assume, Paul, that the base business is flat on a year-over-year basis in 2018? I'll just pause there. That's my follow-up. I just had one other after that. So what's the assumption for the base business in that 2018 guidance?

Yes. Well, in the United States, after the first quarter, we (inaudible) from, say, year-over-year headwinds in the comps, we would expect it to be relatively flat in the base as well coming from the PS. Internationally, that we would anticipate still some continued weakness in the base business, with growth -- with some limited growth in the PS.

That's helpful. And then just lastly, Paul. On the raise, I think you said net $21 million. Can you talk about why that was the right number? I think you said that gets you through 2019. And just some additional thinking on your capital needs would be appreciated.

Yes. It was really a balance between obviously, it's a dilutive transaction as far as the raise was concerned, and there was a balance between getting additional runway and dilution. So we wanted additional runway. We had enough cash to get through 2018. This additional cash will allow us more time to be able to execute on that top line as well as show continued improvement in the gross margin. So yes, we would anticipate at some point in time needing to have additional cash, whether it's dilutive or nondilutive way to raise capital. But we just wanted additional time, if you will, to be able to execute on the top line and gross margin before we either -- before we -- again we do a nondilutive transaction or to raise capital or a dilutive transaction. And hopefully, what we would again hope would be at higher valuations.

Our next question comes from Bruce Nudell with SunTrust Robinson Humphrey.

Just to clarify, the mid-single-digit to low teens growth in the U.S. next year, is that inclusive of hips? And if it is, to what extent would you expect knee growth to be in the U.S.?

Yes. So that is inclusive of hip, but the hip is not material to our guidance. So I would take a look at those numbers as being really knee market. Again, our guidance does not include a lot of hip that you would have to be concerned about in your numbers.

Okay. And then just thinking about the sales force adds, and that it's principally distributors, traditionally in this industry, when people buy another company, there are always dis-synergies because the surgeons go with the distributors. In the sense that you're adding mainly distributors, will they have captive surgeons that will adopt this? Or is this going to be a piece of their knee business, as it were, wherein it won't be full conversion but rather partial conversion? Or people just don't have books of business right now?

Well, Bruce, this is Mark. Appreciate the question. It's a little all over the board. I mean, the key -- obviously, there's a deep connection and relationship that runs through distribution in orthopedics, which anybody who follows the industry appreciates that as they get into the industry dynamics. And it's all different. I mean, when we -- you look for a bunch of different things to distributor. Certainly, your preference to have someone that really knows total knee and total hip arthroplasty and understands the technique and the procedure and can easily translate the value proposition of ConforMIS from traditional off-the-shelf systems. And you hope that with that individual, there comes some reputational benefits and knowledge and connections in the geography that they're going to cover. And that helps get you the right access and exposure and opportunity to explain your value proposition. So that's what you look for in an ideal surgeon. I don't know that I would call it captive business, but I would call it relationships or the ability to really represent you in a good way. And one of the very frustrating things for the smaller-share players like us is due to the noncompetes and the other stuff, it's very hard to find distributors that meet kind of -- or check all those boxes. So a lot of times, you find yourself working with very good distributors but maybe they don't have quite the experience specifically in knees or hips. They're coming from another part of the business, and you train them up and you do that or maybe they move geographies. So they do bring hip and knee experience, but they don't have as much of the relationships in new geography. So all those situations exist. And what it behooves us to do is to try to support those new agents as best as possible depending on what they need.

I guess, Mark, just one follow-up. Like what will you be looking for in 2018 in terms of commercial execution that lets you know you're turning a corner and that the clinical outcome story is beginning to resonate where you could begin to gain serious momentum?

Yes. Well, it's a great question, Bruce. There's a number of things I'm going to be looking at. But probably the critical ones are, are we meeting our goals to add distribution, because we have to do that. That's number one. Number two is what do the "same-store sales" look like? Do we feel like we're penetrating with surgeons and getting meaningful increases in their business? Those are really kind of the 2 big things from that standpoint. And then obviously, we'll be laser-focused on new surgeon prospects and how we onboard them in a good way. And we did a little bit of that last year, but we're still not at the level that we would like. And then there's a lot other things that come around to support it, but I do want to mention again this consumer piece. I think if we can do a better job on really helping those surgeons over here, I will tell you that we continue to see really good engagement and marketing ability with helping surgeons build their practices. We continue to just get so many positive stories and stories that are much more persuasive, frankly, than traditional knee surgery. It's just, it's hard breaking through, but the patients are really seeking this out, and we have to continue to do a better job of -- and a good job of, like I said, helping to convert that interest over to action with the ConforMIS surgeon.

Our next question comes from Steven Lichtman with Oppenheimer.

Mark, just building on that last point relative to DTC. Can you talk a little bit more about what the programs will look like in 2018? I know patient ambassadors have been a big focus to date. What type of DTC are you looking at ahead?

So there's a couple pieces, Steven. First off, we've had a limited pilot, and that was a very modest spend in the new wave of advertising through social media platforms, through engagement around that and getting your message in front of interested and targeted users. Going forward with our knee platform, we're going to be able to better target those users to serve up to them more tailored messaging and information. And frankly, we plan to increase our spend a bit, so that we'll actually increase the number of leads that we get. But then beyond that point to your question, Steven, is what are the things we can do to measure to make it easy for that patient to get connected with or get engaged with a ConforMIS surgeon? And we hope to pilot some things around that in 2018, which I'm not prepared to get into the specifics on, but I'm pretty excited about some of the ideas that we're coming up with. And now it's a question of if we can execute with our marketing team and our advisers and consultants that help us kind of put some of these programs in place.

Okay, great. And then are there additional papers that you expect to get published in 2018? And if not specifically this year, are there key data that you could point us to specifically that are being collected this year that you're building for publication in the future?

Yes, that's great question. So it's a balance, right, because doing clinical studies and good clinical work is expensive. And so I'd really sought through '17 to kind of cone that down to the vital ones, and we still have a fair amount. I would argue that we're -- for the size of company we are, we really have made a strong commitment to continued support of demonstrating not just clinical evidence, but importantly, health economic evidence. There are a number of things. I guess, the thing I would point to the most, I can't obviously guarantee publication. I would actually say that it's been -- we've had really good research by our clinicians and really good papers put forth, and it's a crowded field. And it's remained very frustrating because there's more stuff that I believe should be published that hasn't made it through that peer-reviewed process yet. Having said that, we have some health economic work that we're putting the finishing touches on our manuscript, and I would hope to see that in certainly the first half of next year, which will corroborate and confirm my expectation. I'm seeing the manuscript. Some of the work that was published previously by Dr. Culler in the 248 patient study that came out in June in Arthroplasty Today. So that to me will be big deal because that will help us continue to support the value proposition for those institutions that are interested in episodic care cost analysis, value-based initiatives and that are participating in those. So that's a key kind of first half thing. We're going to continue to enroll patients in our comparative study and other studies around that. So I can't -- as I said, I can't predict when those things will get published, but we certainly have a number of manuscripts that we expect to submit in the first quarter and actually even in the second quarter, and hope that they'll get published in a timely manner.

Okay, great. And the economic study, was that the first half '18?

Yes. Again, I can't guarantee it'll get published, but it will definitely -- I guarantee it will get submitted, and it'll be more in a health care finance type publication than a traditional orthopedic clinical outcomes journal.

Our next question comes from Ryan Zimmerman with BTIG.

Great. So I just want to talk -- follow up on the sales strategy a little bit here. And has your sales strategy changed? I know you've certainly changed your leadership. But in terms of these C-suite selling and reverted that back to more MD-focused selling, if you could just comment kind of on where that -- you had it -- I think a targeted sales force going after the C-suite before, maybe kind of where that is today.

Yes, Ryan. Well, just like -- just a clarification on that. I think from a C-suite selling and contracting standpoint, as I said early in Q1 or in Q1, we brought in some people that lead that organization. And they have done, in my mind, a very good job in bringing about some processes and a structure and approach to that. And we actually, from that standpoint, do a pretty good job in getting access and in responding to pricing proposals and contracts as well as getting the C-suite to the right larger organizations. Now we now have with the Culler article and some other stuff, some more interesting data to support that. And that's helped, and that's where, if you recall, I talked about the market access investment that we've made and has been helping us to generate the data to support those initiatives. As well as this article I just referred to that's coming out of the work that was done in '17. So that continues, and that's not a change. That's always been there. And I feel like we're, in some respects, Ryan, ahead of the curve there on the performance metrics. The feet on the street selling is the one that's harder. And for all the issues we've talked about with getting good distribution and whatnot. And the real change there was, as you said, was bringing in Dan in the middle of the year of '17 to really kind of do a more lasered and professional focus on the selling organization and making the management changes that we needed to make. And unfortunately, we need some time to have that play out. And we have to demonstrate that we are making those market improvements on a quarter-by-quarter basis throughout 2018. And I will tell you we just had a national sales meeting. The team's excited and pumped, and all of us who are part of the ConforMIS family, whether they're direct W-2 employees or some of our very good distribution agents and partners, kind of get it and have -- continue to remain committed to doing this. And we're also very -- we're very, very excited as well about the fact that we're going to get the hip out and some additional product innovation because that's an important part of growth, and we didn't talk as much about it in '17. But you did hear me talk about innovation as one of the imperatives. And by nature, it takes a little longer, but that's got to be an important part of our growth story going forward. I mean, you guys have to remember, we're -- as far as I know, and you guys follow the industry just as deeply as I do, we're kind of the largest one-product orthopedic company out there, with just the knee. So the hip is going to be a nice shot in the arm for us, even though it'll be a limited launch and won't be as material, as Paul said, in this year. But it's such an important growth opportunity for us in '19 and beyond.

Sure. And just as a follow-up to that point, you kind of answered my next question. But how long do you anticipate the limited launch of the hip? Is that -- should we think of that as a 6-month beta -- process in beta? Or should we think of that to extend maybe into '19? And that's (inaudible).

Yes, no, I think it's 12 months and hopefully, not any -- it could be as long as 18. And you will get from me transparency, and we'll talk through that. And hopefully, you guys will modulate in your models and stuff. The real key will be how many iterations I have to do, and I say I; I should say we as a team have to do on the patient-specific guides. Because part of what we're committed to here is doing the right thing by our surgeons and our patients. We're very excited about what we have. But we also recognize the industry has gotten a black eye in the past sometimes by rushing products to market and not having the best outcomes, let's just say. So we are innovating with some exciting opportunities here, Ryan, and we think we're on mark. But my experience and my close to 30 years now med device history is that something's going to probably need to be changed in my guide to fine-tune where we're at. That's why you do a limited launch. And the real question is will it be a minor change and 1 change or will it be a mid-major change and maybe 2 tweaks. So 12 to 18, I'm hoping we can keep it around 12, but you'll hear more from us in the second half of '18 as we launch. Right now my big thing is to make sure we get into these beta sites, and we're able to do those first patients and really get the feedback to figure out where we're at.

Our next question comes from Josh Jennings with Cowen.

I was hoping to just follow up on the iHip platform. And if you could help us just think through in terms of get through the limited launch. The low-hanging fruit seems to be your current customer base that have adopted ConforMIS iTotal knees. But can you just talk about how you -- framing up the opportunity post limited launch? And also the value proposition of a custom hip?

Well, let me try to take those in reverse. So from a value proposition, and again, we'll share more of this at Academy, and certainly can answer more detailed questions. But just kind of high level, we certainly see this very consistent with the ConforMIS brand and where we're at. We're going to do their preoperative CT scan. We're going to provide a very detailed presurgical plan for the physician. We are going to be able to provide a custom stem as well as a custom cup with screw holes around the fixation on the acetabulum side. And it is going to be hip in a box. We're going to have hip with the implants and patient-specific instruments that you need to do that procedure in 1 box and 1 small instrument tray. So we're pretty excited about that. The key here, Josh, I think is actually on the patient-specific instrumentation. We are going to have, in my estimation, the most comprehensive and well-thought out set of patient-specific guides that will help the physician really innovate and do that procedure with a lot more confidence and a lot more accuracy than they would historically be getting with off-the-shelf instruments and off-the-shelf guides. So we're pretty excited about that. That's a big part of the value proposition. And what I can tell you is we've had really good surgeon interest. So initially, we'll be in our few SAB sites, and then what we call our MAB, Medical Advisory Board, which are those beta sites that our non-designers usually use. And we have had good interest from people that want surgeons specifically that are -- that want to get on board. And I will tell you we're executing clinical agreements. We're executing contracts with their facilities to get in to them and be part of that as we speak, and I've been very pleased with all the efforts around that. So we've got full court press from the team, both operationally to deliver on this, with IT, as you can imagine, getting our ordering systems changed and up running, as well as our clinical team. We've already got our clinical study, clinical protocol established, so we can collect data early on to validate our accuracy what we're doing. And we've had really good engagements from the physicians. The people that are working with us there are real excited. So more to come, and it's up to us to execute and hit the mark now.

And just to follow-up just on the pipeline, the iTotal G3 limited launch I think you referred to in the second half of '19. You gave some detail that I hope you don't mind, if you could just kind of reiterate some of the features and the design evolution? And should we be assuming that you guys can get the order to implant timing down less -- under 6 weeks by then? Or is that -- do you need full vertical integration in the manufacturing process to get there? And then I assume you're listening to physician feedback on the current Gen. And I guess, what's been incorporated in iTotal Gen 3 that you can share?

Sure. So I just want to comment on iUni first. I know it's a smaller market, but it's one of the key things in iUni, there's a couple, but a couple key things that are neat is, on our current iUni, we don't use a faceted-cut approach on the implant. So you have to kind of scrape cartilage. And that's something that has I think prevented it from gaining broader adoption. So we're going -- what we found when we did the iTotal, Josh, is we referenced off the osteophytes. And as we can see from our alignment papers, that's highly accurate for us. So part of what the iUni G3 is going to bring to the table is faceted cuts, and will reference off the osteophytes. So people are excited about that. That's the iUni. On the iTotal, we actually have already made some software changes and introduced those going forward. But the big things that I talked about was what you're seeing with our iTotal G3 was actually we're merging our tibia plateau platform, so that we don't have 2 separate tibia components and we can work off similar design. With that we'll allow new insert options for our CR product, so we can go to single poly if people want to choose that. As well as we've got some interesting stuff, which I don't want to let the cat out of the bag yet, but we're making kind of our next-gen guides. So we're innovating with some new guides for iTotal, which I think our surgeon feedback has been really positive about. And also it'll provide cost savings for us as well as clinical advantages. Because like anything else, as we've gone through the experience of doing what is now well over 60,000, probably close to 70,000 patients, we're learning more about the process and what we're doing. And then the other thing that we're particularly excited about, which most players in the industry have different tibia stem length options for surgeons, especially if they have kind of a high BMI patient or they've got some concerns around fixation on the tibia side. So we're going to be able to offer that with our G3 Total launch in late -- second half 2019 as I talked about.

Yes, and Josh, as far as your other question regarding order time. So our order time to surgery, as you said, was 6 weeks. And we actually moved that up to 5 weeks due to the vertical integration we've done, now that we're manufacturing more in-house. We've already moved from 6 weeks to 5 weeks, the time from order to surgery. And we believe it's possible and as we complete the vertical integration towards the latter part of this year or the beginning part of next year, that it's possible we can get down to 4 weeks. But keep in mind that the average time frame from order to surgery is 8 weeks. So we're well within the period of time that most of the surgeons are booking their OR. But certainly, it's better, but we'll continue to drive that time down as we vertically integrate the manufacturing process.

Our next question comes from Larry Biegelsen with Wells Fargo.

Mark, you guys had made a really good progress on the gross margin in 2017. I'm just curious how these new products, particularly the hip might impact the gross margins. I'm just asking because obviously, when a company comes out with a new product, sometimes the margins are initially lower. So are you going to -- is that the case? I mean are you going to be able to kind of continue to make good progress on the gross margins despite coming out with these new products?

Yes. Thanks, Larry, and thanks for acknowledging the success we've had in gross margin. And we've got more to go, clearly. And yes, all the guidance we've given you, both -- certainly for this year incorporates that hip. But even the aspirational guidance, which you heard me mention in the prepared remarks of getting to 60%, incorporates the hip in there. So we don't expect the hip in '19 to be dilutive. It should certainly -- we've got it in there where we think, so we have to execute, as well as we've thought through kind of the G3 products both for the Uni and the Total. And like I said, some of the changes we're making are consistent with those gross margin opportunities and also delivering clinical benefits. So all that's factored in. And again, barring any major dislocation or miss in execution, I feel confident in the aspirational opportunity. And I would say part of what we're hoping is through continued expense management and hopefully continued overachievement in how we hit the gross margin, we'll do better on that cash piece and whatnot. But we've been, I think, prudent in the guidance we've given you, but we'll continue to update you on that journey every quarter.

And there are no further questions. At this time, I'd like to turn the call back over to our hosts.

Okay. Thanks, operator. That's it, and thanks again for the questions we had. With that, we'll end the conference call.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.