Globus Medical Inc (GMED) 2013 Q1 法說會逐字稿

Welcome to Globus Medical's first quarter earnings call. At this time, all lines will be on mute and a Q&A session will be held after the prepared remarks.

Joining today's call from Globus Medical will be David Paul, Chairman and CEO, Dave Demski, President and COO, and Richard Baron, Senior Vice President of Finance and CFO of Globus Medical.

I will now turn the call over to Richard.

Thank you for being with us today. I will now read our required legal disclaimers. During this call, certain items may be discussed that are not based entirely on historical facts. These items should be considered forward-looking statements and are subject to many risks, uncertainties, and other factors that are difficult to predict and may affect our business and operations. As a result, our actual results may differ materially and adversely from those expressed or implied by our forward-looking statements. A discussion of some of these risks, uncertainties, and other factors is set forth in our form 10K filed with the Securities and Exchange Commission on March 5th, 2013, and in our periodic reports on file with the SEC. These documents are available at www.sec.gov. We undertake no obligation and do not intend to update any forward-looking statements as a result of new information or future events or circumstances arising after the date on which it was made.

The financial information discussed in connection with this call reflects estimates based upon information available at this time and could differ materially from the amounts ultimately reported in our first quarter 2013 form 10Q. Our revenue, earnings, operating margins, and similar items are sometimes expressed on non-GAAP basis and have been adjusted to include certain items, including, among other things, interest expense, depreciation, amortization, taxes, provision for litigation settlements and stock-based compensation. The comparable GAAP financial information and a reconciliation of non-GAAP amounts to GAAP can be found in the tables included in today's earnings release which is available on the Globus Medical Investor Relations web page at www.globusmedical.com.

I will now turn the call over to Dave Demski, President and COO.

Thank you, Rick. I will provide commentary on our overall performance for the quarter. Rick will give some additional color on our financials, and David Paul will provide his insight into our product development efforts.

We are pleased to announce record sales of $105 million for the first quarter of 2013. Adjusted EBITDA was $35.5 million. GAAP net income was $19.9 million, and fully diluted EPS was $0.21 per share.

Sales in Q1 were 11% higher than Q1 2012, well above the industry as a whole and a strong performance given 2 fewer procedural days in the quarter and an extremely strong Q1 last year. More significantly, our sequential sales growth in Q1 was 4.5% over Q4 2012, which, in turn, was 6.1% higher than Q3.

This consistent steady financial performance has been a hallmark of our company, leaves us well-positioned for a great 2013.

Adjusted EBITDA was 33.8% of sales for Q1 2013, compared to 35.9% in Q1 2012, a reduction of 2.1 percentage points. 1.7 percentage points of this delta is attributable to the medical device tax, which began on January 1, 2013.

In addition, the net impact of Algea Therapies reduced adjusted EBITDA by 0.7%. But for these 2 items, our adjusted EBITDA would have improved by 0.3% over Q1 of last year, which is a result of our continued steadfast focus on (inaudible) that has allowed us to deliver consistently superior profit margins from and [increasing] sales base.

Recruiting activity in the quarter was exceptionally strong, and we have been able to attract several high-quality sales reps from our larger competitors. While we don't share specific numbers in this area, those of you who are familiar with our story recognize this as one of the key drivers of long-term growth. We are very pleased with our ability to attract and retain successful sales professionals to the Globus team and have been very encouraged by the activity in Q1.

International performance remains strong. Our OUS sales grew by 30% in Q1 over the comparable period last year, and we began doing business in 3 new countries in the quarter, bringing the total to 27 countries.

Performance of Algea Therapies, while modestly improving, remains challenging. Last week we launched our second VCF product, the Shield Vertebral Compression Fracture System, which we acquired in 2012. As we indicated last quarter, we expect to see meaningful improvement in Algea Therapies during the second half of this year.

The three Ps that define much of the business climate for our industry - pricing, payer pushback, and PODs, all continue to improve modestly. Pricing is still under pressure, although the severity has lessened over the past year and remains in the low to mid-single digits. Payer pushback on procedures also seems to have reached a steady state. Patient advocacy remains the most effective way to combat this phenomenon, and we have increased our efforts in this area in the last 6 months by investing in the support infrastructure to assist patients and physicians in obtaining approvals for necessary procedures.

Finally, we received some positive news on PODs during the quarter, as the OIG issued a special fraud alert on March 26th, that voiced significant concerns about the legality of POD structures. We think this action may cause some physicians, and, more importantly, hospitals, to reconsider their participation in business ventures with these entities, given the heightened risk subsequent to the OIG's special fraud alert.

In summary, we are very pleased with the first quarter. We have seen record sales, maintained strong profitability, and our recruiting in product development efforts leave us well positioned to have a successful 2013 and beyond.

With that, I will turn it over to Rick to discuss our financial performance in more detail.

Thank you, Dave. Today I will review our performance for the first quarter of 2013, as compared to the first quarter of 2012, for key elements of the income statement, balance sheet, and statement of cash flow.

Our worldwide sales for the first quarter of 2013, were a record-setting $105 million. This was 10.9% increase over the then record-setting and exceptionally strong first quarter of 2012. Our growth continues to be driven by sales of our disruptive technology products, which increased this quarter to $43.7 million, or by 31.5% from the prior year's quarter.

Sales in the United States for the first quarter of 2013, grew to $96.3 million, or by 9.4%, while international sales grew to $8.7 million or by 30% from the prior year's quarter. Overall growth in sales was attributed to expansion of both domestic and international territories and greater penetration in existing territories and countries.

Gross profit for the first quarter of 2013, was $81.5 million, or 77.6% of sales for the current year's quarter. This is an improvement of $5.2 million from the $76.3 million gross profit from the prior year's first quarter. The percentage in the current quarter was unfavorably affected by 1.7%, or $1.8 million, due to the medical device excise tax.

Research and development expenses this quarter were $6.8 million, or 6.5% of sales as compared to 6.$7 million, or 7.1% of sales for the same period of 2012. The increase in spending from the prior year quarter was due to the increase in cost for clinical trials, supplies, and outside services.

Selling, general, and administrative expenses were $45.4 million, or 43.2%, compared to $41.2 million, or 43.5% of sales for the prior year's first quarter. A percentage of sales is a slight improvement as compared to prior year sales.

The increase in SG&A dollar spend was primarily due to the increase in sales and related sales compensation, which included the hiring of additional sales representatives. GAAP operating income increased to $29.2 million, or 27.8% for the first quarter of 2013, as compared to $28.1 million, or 29.6% of sales for the prior year's quarter.

Without the medical device excise tax, the operating margins would have been 29.5%. Adjusted EBITDA for the first quarter of 2013, was 33.8%, or $35.5 million, as compared to 35.9%, or $34 million in the prior year's quarter.

Both operating income and adjusted EBITDA for the current year quarter were unfavorably impacted by the medical device tax, or $1.8 million and 1.7% of sales.

Our income tax rate for the quarter was 32.6%. This is approximately 400 basis points lower than the normal income tax rate for the company. This rate was favorably impacted by the timing of the reenactment of the R&D tax credit for 2012, in January of 2013.

I realize the guidance we provided last quarter was less than crystal clear. To simplify, we are comfortable with the consensus estimates as reflected in First Call for the remainder of 2013.

Net income and GAAP EPS was $19.9 million, or 18.9%, or $0.21 per share on a fully diluted basis in the first quarter of 2013. This compares to $17.6 million, or 18.6%, or $0.19 per share on a fully diluted basis, for the prior year's quarter. Net income was unfavorably impacted by the medical excise tax expenses for the quarter.

Fully diluted share count for the first quarter was $93.6 million and $90.9 million as of March 31st, 2013, and 2012, respectively.

The cash, cash equivalents, and marketable security balances combined were $224.1 million as of March 31st, 2013, as compared to $212 million for December 31st, 2012, a net cash increase of $11.7 million during the quarter.

Total investment [in] CapEx, was $6.8 million and $6.3 million for the quarters ending March 31st, 2013, and 2012, respectively.

We continue to remain debt free.

I will now turn the call over to David Paul.

Thank you, Rick. We're pleased to report our first quarter performance with industry-leading metrics. Once again, our ability to deliver innovative products, attract top sales force talent, and maintain financial discipline has enabled us to consistently deliver superior growth and profitability.

Not only did we produce exceptional financial results, our sales recruiting efforts were strong. We launched 2 new products during the quarter. And our product development pipeline remains robust, with at least 5 to 10 new products planned for launch in 2013, across all segments of our portfolio.

As alluded to earlier, our ability to take market share is directly correlated to our ability to deliver innovative products and attract top sales force talent. Dave touched on our strong performance on the recruiting front.

I am going to highlight 3 product launches over the last 18 months that should provide some insight into how we look at opportunities to innovate in the future. One of the products we launched this quarter, the FORTIFY Integrated Expandable Corpectomy Spacer has provided surgeons with a unique device for trauma and tumor indications that is unmatched in its scope and versatility.

We have led in this space from the very beginning, XPand cage in 2005, and have continued to provide market-leading technological improvements for these indications. This is a comprehensive solution that allows for various approaches, including anterior, anterior lateral, and lateral, with offerings both in titanium and PEEK, that can specifically benefit patients who are treated in the leading trauma and oncology centers around the world.

Second, the launch of the RISE Endoscopic Spacer System has provided patients and surgeons with a less-invasive method of performing TLIF and [CLIF] surgeries. RISE is designed to minimize nerve retraction and can be inserted through an 8.5 millimeter window, regardless of height needed for a given level. RISE builds on our growing franchise of expandable technology that has already been used in over 15,000 levels in the US alone. More than 75% of spine surgery is still performed through a posterior approach, and having this leading technology enables us to further gain market share in the largest procedural segment of spine surgery.

Third, the launch of CALIBER-L has provided patients and our surgeon customers with a unique solution in the lateral space. CALIBER-L expands in situ and is designed to maximize foraminal distraction, while minimizing impaction and the risk of subsidence common with impacted solutions.

This technology has enabled Globus to continue to take market share in the lateral space and set our lateral platform further apart from the competition as the new standard in lateral approaches.

We continue to develop multiple techniques, instruments, and implant solutions in this area to further improve the outcomes from this procedure and help to reduce the risk of [site pain] and [palate] seizures.

All three of these products are designed to be utilized through MIS approaches with in situ expansion. This enables surgeons to exhibit precise control required to avoid contact with nerve roots, custom fit the spacer into the patient's disc space with minimal impaction to avoid the risk of subsidence.

Golbus has been and continues to be the market leader in expandable technology. Success in the surgical suite is directly related to our ability to continue to take market share and grow at rates far in excess of our industry.

I am very confident that our product development team will continue to produce cutting edge technology into the foreseeable future. We are excited about our prospects in 2013, and beyond, as we continue to execute on our discipline strategy of profitable growth.

Thank you. And we will now be happy to take questions.

(Operator Instructions) Your first question will come from the line of Bill Plovanic. Your line is open.

Congratulations on a good quarter, gentleman. The questions I have, I'll just start out with Rick on guidance. You just came off a very good quarter. If I look at Q2, the Street's sitting at 106, it's up about 1% sequentially. But you were short a couple selling days in Q1, and you'll pick a couple up in Q2. Any color surrounding that?

We were definitely off the couple days in Q1. We felt that everybody compensated for that appropriately during that period. And at this point, we really feel most comfortable reiterating the consensus that is in First Call for the year. And that is 432.34 revenue, and it is $0.81 for EPS.

Okay. I'm going to switch. You did also provide some color on distribution. And I think a lot of the contracts (inaudible) are coming up in the next couple of months. While you've had a lot of success so far, do you see a windfall for the industry as a lots of those shuffle around or do you think some of that's already happened?

Pill, this is Dave. I wouldn't want to predict for the future. There's been a lot of activity, but it's hard to say when it will end.

Okay. And then just last, regarding the OIG fraud alert, I was wondering, in your script you mentioned about the docs and the hospitals and their response. I was wondering if you could provide us with just any more granularity or color or anecdotal thoughts on what's happened so far. Have you seen any hospitals transition already and shut off the PODs? Have you seen any physicians come back to you that had left you? And that's all I have. Thanks.

Thanks, Bill. I'll take that also. Nothing material up until now. Anecdotally, a lot of concern on the part of both hospitals, especially hospitals, I would say, as well as physicians. So it's hard to predict what their actual actions are going to be. But they're, I think appropriately concerned by the risk that they're taking by participating.

Thank you.

Your next question comes from the line of Matthew O'Brien. Your line is open.

Thanks for taking the questions. Was hoping we could start with the strength we saw in the disruptive category this quarter. Can you just give us a sense for what's driving that? Is it were broad-based versus just a couple of products? And then specifically on SECURE-C, just any kind of update on how you're doing with that product.

From our perspective, given the number of launches over the past couple of years, it is a broad-based, I guess expansion in that area. It's not really attributable to anyone. Just as a reminder, we're looking at singles and doubles, not anything that is overall (inaudible). Dave, do you want to talk a little bit about SECURE-C?

No. It's performing according to our expectations. I think we've been conservative in our predictions about that product, particularly given the fact that we have to do surgeon education, we have to do training, and that creates a natural time lag in the adoption of the product.

We've been fairly favorably pleased with the coverage of the device when people are trained and want to use it.

Okay. And then just as far as one of your competitors provides a revenue-per-rep number, and I'm sure you don't want to give us that, or maybe you do. But just your sense on expanding the revenue that you're selling per rep going forward. Do you have any kind of target that you're aspiring to?

Actually, we don't. We look to move all reps, our most successful reps, our ones that are on full commission. So the target there is really more on the way that we look at costs, the way that we look at their compensation. So it's not a per-rep basis. We have a fairly wide variability upon the reps that are on full commission, so it's not a target per se.

Okay. But just a little bit further on that. I mean, do you get the sense that there's significant room to increase the revenue per rep as it stands today?

Absolutely.

And just finally real quick, internationally, very strong growth there. Would you mind letting us know which countries you added in the quarter? And then was there any kind of material stocking to any of those new countries?

We really don't comment on individual countries. It was 3 countries. The effect actually of those countries was limited due to timing. We don't have issues at this point on any stocking type distributors in the way that I think you're concerned with. So the sales were normal, plugging along, expanding into new territories, couple new reps, and that type of a thing internationally. Same story there as it is in the US.

Okay. Thank you.

Your next question comes from the line of David Roman. Your line is open.

Thank you for taking the question. I wanted to start on the margin side of the equation. And understanding that the medical device tax negatively impacted gross margins as expected, it still looks like on an underlying basis gross margins are down year-over-year. Could you maybe just talk through the dynamics influencing that number?

As you noted, the major item, of course, was the device tax. Adding that back in, I believe we were at 79.6 and change, perhaps, versus around 80% in the prior year in a gross margin.

We don't see it's anything, per se, indicative of anything other than quarter-to-quarter that has varied. I don't believe it's a long-term trend. Little bit of it is the weight of OUS versus US. A little bit of it is product mix. But there's nothing there that I think signals anything prolonged in the future.

We're totally concentrating on the bottom line as far as operating margins and adjusted EBITDA. So on a long-term basis, David, I think the only thing that affects us is the device tax.

So along the same lines, R&D looks like it's, as percentage of revenue, one of the lower numbers that that's been in some time, but absolute dollar still pretty consistent. I assume it just has to do with sales volumes being better, no change in your spending priorities and product development?

Not at -- No change at all in the priorities. R&D, from a dollar perspective, has the risk of occasionally bouncing around as to spend for trial or spend for an investment, that type of a thing. I think you still keep within the range that we've been within the past year.

Okay. And then last question would be, if I look at the sales line, a very strong number in disruptive technologies up against a very tough comp. But that does imply, I think that the innovative fusion segment was roughly flat year-over-year. How should we think about that going forward? [Is it] just have to do with where you're concentrating your business on sort of the more disruptive technologies, and that's going to then lead to further convergence [within] the 2 as a percentage of revenue? Anything specific to call out that drove that flat, that business to be flat in the quarter?

Overall, just we're able to take market share with the disruptive technologies. To some extent, there's some cannibalization going on within our own portfolio. So we would expect disruptive to grow much faster than the innovative fusion bucket in the future.

Okay. I'll get back in queue.

Your next question comes from the line of Bob Hopkins. Your line is open.

Congratulations on a really good number this quarter, especially relative to what we're seeing out of some of the other spine players. So a couple quick questions, and I apologize, I've been bopping around on a couple calls here. But the pricing dynamic in the quarter, was that different than it has been the last couple?

It's been about the same, Bob. It's about low to mid-single digits.

Okay. And then, when in the course of this year do you expect that the next generation Algea product can come to market?

Well, we launched another product last week called Shield, which is a contained balloon that can take [cementing]. So we launched it last week, and we're eagerly looking forward to seeing the update with that product. We continue to work on several other products for the Algea Division, and that will come out later this year and into next year.

Do you think this product is one that can really get some share momentum going or do we need to wait for some of the other launches?

It's too hard to predict, Bob. We really are thinking that this product has significant benefits over the existing treatment of care. It's able to contain cement in a much better way than using just a balloon. But we're waiting to see, as reimbursement is pretty challenged in that space right now. A lot more competitors than before. So we're waiting to see how it pans out to the marketplace.

Great. And just --

Just to remind people on the call, when we talked about that product, either in conferences or passed calls, the timing that we'd always suggested was sometime late in this half. So it occurred in May versus June. So we're pretty much on time with that. So it's effect was already anticipated in the numbers that we've talked about.

And the drag for the year, Rick, from Algea spend?

The first quarter of last year, we essentially had -- we had very little spend. So its disruption in the number last year comparatively was relatively low. We see it mitigating. It was about seven-tenths of a percent this quarter in the change year-to-year. It's something that I think on a comp basis, in the future, we probably won't talk as much about it. Our purpose in the past was to make sure everybody understood the anomaly. We've always said that we would move towards profitability over the course of this year into next year. And we feel as though we're on track for that.

Okay. Thank you for that. And then just on sort of a longer-term question on profitability and your EBITDA margin. And obviously, you've got the medical device tax and some spending going on this year. But as you look out further into the future, I mean, do you expect to get kind of incremental leverage on that line as you go forward or is kind of the 35%, 36% level, you think about as high as you can run the business. Where ultimately do you think you can get?

I think the US metal business has some improvement left in it. Of course, we're fighting the pricing issue there. I think we have a significant opportunity for operating leverage, OUS, as we're just ramping up there in a number of countries. And then, obviously, the Algea piece, it needs to get positive. So I think there's room to move it over time.

All right. And then just one last question. Rick, on Q2, Q3, Q4, is that even selling days for each one of those quarters year-over-year?

I believe Q2 has one more selling day than last year. And, but I'd have to check the calendar.

Sure.

I think the rest of the year is even, while ultimately over the course of the whole year, of course, it's even, except for leap year, which was lat year. That was one of the extras days in Q1. But it's minor from here on in.

Great. Thank you very much.

Your next question comes from the line of Matt Miksic. Your line is open.

Can you hear me okay?

We can hear you, Matt.

Great. So a couple follow-ups. I think, Dave you had mentioned in your prepared remarks -- I appreciate the color on the pricing pressure and the payer pressure. I don't want to split hairs. But did I hear you right in that you said pricing seemed like it may be just very slightly?

(Inaudible) about the same. It's kind of low to mid-single digits.

Okay. I just remember you consistently saying mid-single digits for some time. So don't want to sound too hopeful, but appreciate that. And then on the payer pressure, I think you mentioned stable. Can you talk a little bit about maybe what's changing there, if anything? Is it docs are just -- gotten used to it and it sort of is where it is? Or any dynamics, I appreciate. Then I have a couple of quick follow-ups.

Yes, I think that the docs understand better how to respond. And again, we're investing in some resources here to help them through advocacy programs, them and their -- and their patience. And then I think we're just -- we went through a cycle where it had an impact where it reduced procedures. I think now we're against the comps of that which are lower. So it's not getting worse.

Okay. And then on the margins, Rick, I think it sounds like you said, was it about 70 basis points of pressure from Algea in the quarter.

That's a --

Or investment, I should say?

That's a net change from the prior year.

Okay. So the impact on the quarter was what about, if you could share that.

It was about 2.3, but in the first quarter, we also had the effect, obviously, the math was there.

say that again. I'm sorry.

In the first quarter of 2012, there was about 1.6%.

Right. So ---

So --

Okay. I'm sorry. Go ahead.

And as we said before, we're more focused on the change versus -- and we feel as though we've progressed now that we can see the light towards breakeven and profitability at some point into the future.

And remember what we've said as far as -- and this also may be also helpful to Bob's question earlier, the 34%, 35% range is where we feel we can be sustainable over the period of time. We'll take that extra leverage that we have over time and we'll reinvest it into projects like OUS, which we did historically, and projects like Algea.

Great. And come back to Algea in just one second. But on these international, was that also sort of a net investment in your sort of EBITDA line this quarter? Was that the way we think about it? Or was it breakeven or was it positive yet?

It's positive, but clearly lower than average.

Got it. So on Algea, I heard your comments about the new products, which is great. But could you refresh our memory here as to what you think the key catalyst for success there are? In other words, is it that you're missing a product that can sort of attract surgeons or is it more of a -- is it still kind of more of a contracting sort of access to account kind of issue? I appreciate the color.

Sure, Matt. Primarily, it was a say contracting issue. But also, we had some products that we needed to fine-tune. So we've done that across the board and made some adjustments to the products themselves.

We're not missing anything. I think we line up very favorably with the competition at the very top end, and our guys are armed with very good products. And we're fighting through those contracts. And we're seeing some success on the front. So that, again, we're helpful second half of the year we'll start to be able to deliver there.

Matt, one thing to clarify about the question you had earlier on pricing and payer pushback. What we are trying to say is, we're not see dramatic improvements, but we are seeing modest improvements in the pricing that we've been facing. And that's why we're not yet ready to declare that the pricing issues are gone away. We are seeing modest improvement, and that's why we modulated that from mid-single digit to low to mid-single digit.

Totally understand. That's helpful. And then the last thing, again, just on the products front, you called out RISE, the titanium, expandable, low-profile air body. Cut you talk a little bit about, we get so used to seeing all thee PEEK spacers in the market and all this plastic. And this is a titanium spacer, essentially, albeit low-profile and expandable. Is this, from your experience so far, is this a [niche] kind of product? Can this potentially be a broader product? Any thoughts you have on what you've seen so far would be helpful.

Okay. The primary reason people were leaning towards PEEK, and we have a lot of PEEK spacers, is the radiographic visualization. When we designed RISE, we were able to design it in such a way that in the lateral and AP image, the surgeon can visualize bony fusion much better because of the open windows that the product has. So that is the main reason for going to PEEK.

A second reason is the modulus of elasticity. That can be modulated by the design. Surgeons like RISE because of its incredible power on the distraction, as well as the ability to visualize the placement of it much clearer than a PEEK device with tantalum beads.

So we have been, frankly, quite surprised that the amount of uptake of the device made out of pure titanium. And we are hearing more and more comments, started first in all US markets, but now more in the US, that surgeons are liking to see the devices made from titanium.

And that's because sort of the bone friendliness of titanium versus PEEK?

The bone friendliness of titanium and the ability to visualize placement into the space.

Great. That's very helpful. Thank you, David. Thank you, Matt.

Your next question comes from the line of Richard Newitter. Your line is open.

Thanks for taking the question, guys, and congrats on the solid quarter. Just 3 quick follow-ups. First, forgive me, I missed the first few minutes of the call. If you said this, I can follow up offline. But did you guys call out the selling day impact this quarter on a percentage growth basis?

We didn't call it out, Rich. But our average for the quarter was about 1.7 per day. So if you assumed the 2 days would've been at the same average, would have added about 3.5 points to the growth. We would have been about 14.5.

Okay. That's helpful. Just secondly, Rick, you kind of gave of sort of the top and the bottom line for a consensus. Can you just tell us your understanding of adjusted EBITDA margin is in the consensus?

Yes, we're most comfortable, in looking at what First Call has. And at this point, the information that we have there is really top and bottom line. We're kind of in a unique position within our category, in that I think that the GAAP EPS is a really good measure of overall profitability for us. So we're going to stick with those two items and hopefully et into the appropriate pattern into the future.

Okay. And then maybe just with respect to, I appreciate you don't want to necessarily give quarterly guidance. But can we kind of think of the first quarter and EBITDA margin kind of as the low point of the year? Is that a fair statement?

Our targets for EPS or for growth has always been in that, the range that we've discussed historically. As I think everybody's aware of now, a little bit by the number of words that was said on the last call, Q1 last year, 2012 was just a really tough comp for us, especially on the top line. We feel as though we performed really well against that. We feel, as Dave said earlier, that there is potential additional leverage as we go forward. We're not going to be happy with just having things where the device tax leaves us on a net margin basis. So we're going to take some of that leverage that we can get out of increased margins on OUS and Algea, we're going to take it and we'll perform at a slightly higher level over the course of the next several quarters. You're not going to get it back all in one quarter though.

Got it. And then just lastly, just can you update us on anything on the legal front, litigation you have outstanding, right now, (inaudible) or Synthes, and should we expect any variations in legal expenses with those initiatives and activities?

I'll comment on that Rich. The most significant upcoming event is we're scheduled to go to trial with Synthes in June. Those are -- on the integrated plate spacer, patents. Those things can get rescheduled and moved out. We still haven't had a Markman ruling there. So that'll be a challenging trial without the Markman ruling.

So that's about the only thing of significance. The other litigations, moving along, as you might expect. We don't see a big change in our litigation expenses from our past in the next couple quarters.

And we tend not to call them out. It's what we consider, unfortunately, part of the operating expenses.

Okay. Great. Thanks a lot. And good quarter, guys.

(Operator Instructions) Your next question comes from the line of Steven Lichtman. Your line is open.

Thank you. I wanted to ask on SECURE-C, Dave, I wonder if you could comment on what you're hearing from surgeons as the training sort of begins here in terms of their overall interest in cervical arthroplasty, given reimbursements improved. Is it inline with what you expected? It's it better than expected? And maybe some updated thoughts on where you think that segment of the market can go over the next 3 to 5 years?

I think, let me take that. First, over for the next 3 to 5 years, I think that that can be a really exciting segment in the market. But there are some factors that are still a drag for that. And one of that is physician reimbursement for that procedure. Physicians are still reimbursed more for an 80 ACDF than for an arthroplasty. While reimbursement has improved, but many of the private payers, it's still not a slam dunk for any of the payers. And quite frankly, that's an extra bother for the patients and for the physicians to battle the payers. And so that's also being a drag.

The clinical outcomes have been great. As you've noticed, in our clinical study, we have overall superior at the recent [ISAS] meetings in Vancouver. Overall, cervical arthroplasty is, for sure, here to say, and it's going to have a lot more uptick.

In 2014, in the first quarter, we think that the bundling [code] for an ACDF procedure is going to have a significant impact when the payment to a facility is going to be the same, regardless if they use an ACDF or cervical arthroplasty device.

So there are still some factors left before arthroplasty can really take off in the US.

Thanks. And then just my second question is on Japan. Are you guys still on track for potentially starting there in 2014?

At this point, we don't have anything to disclose. We're still working through and seeing how we're going to enter Japan. We will be sure to comment on it once we have more clarity on it.

okay. Fair enough. Thanks, guys.

There are no more questions at this time.

Thank you, all, for joining the call, and see you again next quarter.

This concludes today's conference call. You may now disconnect.