Globus Medical Inc (GMED) 2016 Q3 法說會逐字稿

Good evening. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the Globus Medical third-quarter 2016 earnings release conference call.

(Operator Instructions)

Mr. Brian Kearns, you may begin your conference.

Thank you, Crystal, and thank you, everyone, for being with us today. Joining today's call from Globus Medical will be David Paul, Chairman and CEO; Dan Scavilla, Senior Vice President and CFO; Anthony Williams, President; and Dave Demski, Group President of Emerging Technologies. This review is being made available via webcast, accessible through the Investor Relations section of the Globus Medical website at www.globusmedical.com.

Before we begin, let me remind you that some of the statements made during this review are or may be considered forward-looking statements. Our Form 10-K for the FY15 and our subsequent filings with the Securities and Exchange Commission identify certain factors that could cause our actual results to differ materially from those projected in any forward-looking statements made today. Our SEC filings, including the 10-K, are available on our website. We do not undertake to update any forward-looking statements as a result of new information or future events or developments.

Our discussion today will also include certain financial measures that are not calculated in accordance with generally accepted accounting principles, or GAAP. We believe these non-GAAP financial measures provide additional information pertinent to our business performance. These non-GAAP financial measures should not be considered replacements for, and should be read together with, the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are available in the schedules accompanying the press release and on the Investor Relations section of the Globus Medical website. With that, I'll now turn the call over to David Paul, our Chairman and CEO.

Thank you, Brian, and welcome to everyone on the call. Our worldwide sales for the third quarter of 2016 were $135.7 million, a decrease of 1% over the third quarter of 2015. Excluding sales from Alphatec, sales decreased 3% in the quarter compared to the third quarter of 2015. Non-GAAP earnings per share were $0.29 in the third quarter of 2016 and adjusted EBITDA margin for the third quarter of 2016 was 37%. Overall, we had strong profitability in the quarter while top-line performance was below guidance objectives as we continue to work to reestablish the momentum of our sales force expansion.

Integration of the Alphatec International business is on track, and we are pleased with the progress thus far. We expect the impact of integration to be marginally accretive in 2017, as we work through transition and integration, and expect to provide up to $0.08 per share in incremental EPS in 2018 and beyond. As we look toward 2017, we are confident on growing both are top and bottom lines above market rates within our core spine business. We are particularly proud of our margins as they continue to be best in class within the industry, with this marking Globus' eighth consecutive year of mid-30%s EBITDA margin.

We will continue to execute on are long-term strategy for success as we drive toward $1 billion in sales. First, we plan on driving innovation across the spectrum in spine to address unsolved clinical problems and to improve clinical and economic outcomes. Second, propelling sales force expansion in the US and international markets to grow Globus distribution channels worldwide, and compete more effectively with larger competitors. Third, continue to build-out emerging technologies, including robotics and orthopedic trauma. Fourth, putting our balance sheet to work by pursuing strategic M&A to augment internal efforts and fuel incremental growth.

On today's call, I would like to update you on several areas, efforts to rekindle sales expansion in the US and international markets; new product introductions; the Alphatec International integration efforts; and progress on new emerging technologies. Sales force expansion, as I noted in our previous two calls, we have not been satisfied with the pace and productivity of our US sales force expansion efforts. Although net positive in territory growth, this process is taking more time than originally thought, and we are working our way to getting this back on track.

We have identified three key areas for improvement, recruiting, new territory development, and better retention of sales talent. First, we are being more aggressive in our efforts to hire competitive reps, while also accelerating non-competitive reps hires who serve as a pipeline for future territories. Second, we are realigning the goals of our sales management team with primary emphasis on sales growth and new territory development. Third, we are taking an active management role in rep retention, as we strive to bring attrition rates down. We're confident that this sets us on a long-term path of sustained meaningful territory expansion. I expect these efforts to produce considerable increases in our sales growth rates in 2017.

International sales growth of 38% in constant currency was driven by the Alphatec acquisition and strength in the UK. Within the direct countries, India, Germany, and Australia had difficult quarters due to management changes and country-specific pricing issues. About a year ago, we embarked on aligning all of our business processes globally to help manage pricing, contracting, and inventory. The Alphatec International acquisition added 19 countries and we expected to add about $40 million in annualized revenue, almost doubling our international presence.

Of particular importance is our entry into Japan. We have an aggressive plan to gain approval of key Globus products in 2017. Even with the acquisition, we will have only about 3% market share outside the US, so there remain ample opportunities to grow at rates higher than the US market over the near to midterm. The acquisition provides meaningful scale and presence in certain markets, giving us a stronger base from which to expand going forward. I expect us to return our core international business on the path growth exiting this year and into 2017.

New product introductions, we launched seven new products in the third quarter of 2016 for a total of 15 year-to-date. I will comment on two of them, INDEPENDENCE MIS and QUARTEX. First we launched INDEPENDENCE MIS, an integrated ALIF plate spacer system, designed to simplify implant insertion and fixation, to solve a common challenge inherent in the ALIF procedure.

Most integrated ALIF systems either use only screws, which tend to require a much larger surgical access to insert due to the orientation, or wide blades impacted into the bone that can be hard to retrieve. The INDEPENDENCE MIS System features advanced instruments that deploy three pre-loaded anchors through a small protected corridor no larger than the implant itself. Initial surgeon feedback has been positive, and we look forward to seeing this product grow our ALIF business.

The second significant new product is QUARTEX, a posterior cervical system that offers a variety of solutions to the challenges associated with posterior OCT fusion, while delivering reliability and ease of use. QUARTEX screw heads offer 90 degrees of cortical angulation and except 3.5 or 4 millimeter rods in either titanium or cobalt chrome alloy. QUARTEX allows surgeons to take full advantage of thoracic anatomy through the use of large diameter screws up to 5.5 millimeters. Refined instruments facilitate construct assembly with efficient reduction options and intuitive screwdrivers. The early positive feedback from our surgeon customers and the rapid adoption of the technology has created more demand, generating the need for more sets in the field.

Ongoing innovative product launches have been the lifeblood of our growth since inception. We intend to continue that trend in the rest of 2016 and 2017, as we have several products that our on deck for launch. Further advancements to our best-in-class posterior stabilization systems, as well as lumbar and cervical stand-alone interbody offerings are expected to launch in 2017.

To date, the CREO platform has been used in approximately 25,000 surgeries worldwide. Our lumbar and cervical stand-alone interbody devices have been used in approximately 87,000 levels and our expandable cages have been used in over 70,000 levels. Surgeon feedback has been exceptional, and we see many opportunities for gaining market share in these major spine segments.

I will now give you an update on the integration efforts of Alphatec International. We have begun to integrate IT and business processes with the direct entities and expect this to be completed within the next few months. We have began negotiating new agreements with the various distributors, and our goal is to execute final agreements by the end of 2017. A new sales structure has been created to better align our resources to exploit the opportunities presented by 19 new countries.

Further investments in sets and replenishment inventory are anticipated, as we transition the customer base to Globus products. Immediate access to the Japanese market and organizational structure enables us to accelerated the introduction or of Globus technology and quickly become a significant player in this important strategic market. This acquisition demonstrates our commitment to using our balance sheet to address key strategic needs in a responsible and profitable manner.

Emerging technologies, we recently showcased the Excelsior's GPS system at the Euro Spine and NASS conferences and continue to make steady progress on the robotics platform. The excitement we have been hearing from surgeons on our product and how it integrates well into spine procedures make us bullish on future applications and synergies. We intend to file with FDA in the fourth quarter and expect to launch this product in the US pending FDA clearance.

Recent announcements and acquisitions by some of our competitors continue to confirm our view of the potential for this technology to improve patient outcomes. Ours is the only product designed with optimized workflow for the operating surgeon and staff and fully integrate with our implant technologies.

On the trauma side, we have begun filing with FDA and expect to begin launching these products in 2017. We have begun building out the commercial organization, and will accelerate this effort into next year. These emerging technology opportunities will enable us to further strengthen our business and create a larger footprint within customer hospitals and institutions, while contributing to increasing sales growth rates to reach $1 billion in sales over the next few years.

In summary, as we invest and build towards our long-term goals for creating a diversified musculoskeletal growth company, we remain highly focused on the opportunity to grow our spine business worldwide. We are excited about our prospects as we continue to execute on our growth strategy of rapid new product introductions and worldwide sales force expansion while maintaining our focus on profitability and cash flow. Over the next few months, we're looking forward to getting our sales force expansion back on track; launching innovative new spine products; integrating the Alphatec International business; and taking our first steps into the robotics and trauma markets. I will now turn the call over to Dan.

Thanks, David, and good evening, everyone. As David mentioned, Q3 sales were $135.7 million, down 1% as reported versus Q3 2015. We are pleased with the continued financial strength of our business. Our gross profit increased to 76.8%, net income margin was 19.3%, adjusted EBITDA margin improved to 37%, and non-GAAP diluted EPS was $0.29 per share, consistent with prior year and prior quarter, while continuing investment in our long-term growth initiatives, such as emerging technology.

US sales for Q3 were $120.5 million, a 4.1% decrease versus Q3 2015, driven by slower sales force expansion, territory attrition, and increased pricing pressure. International sales were $15.2 million, a 34.1% increase as reported or 38% in constant currency driven by the Alphatec International acquisition, which added $4.8 million. Disruptive technology sales increased to $67.2 million, or 4.1%, due to continued strength in our expandable technology, CREO MIS and Biologics. Innovative fusion sales for Q3 were $68.5 million, or a 5.5% decline, driven by primarily by US territory attrition and pricing pressure.

Turning to the rest of the P&L, Q3 gross profit was 76.8% versus 76% in Q3 2015. Improvements are from the med device tax suspension, continued Branch Medical benefits, and cost improvement programs and logistics. This is partially offset by the continued shift in product mix driven by Biologics, expansion of international markets, inclusion of acquisition-related costs and single-digit pricing pressure. The Branch Medical benefit was $1.1 million in Q3 2016, and will continue to contribute as a strong counter lever to pricing and mix challenges as we continue to increase production capacity.

Research and development expenses for the third quarter were $10.3 million, or 7.6% of sales, as compared to $9.2 million, or 6.8%, in Q3 2015. The increase is driven by continued investment in robotics, trauma, product development, and research capabilities. Investments in emerging technologies impacted Q2 EPS by approximately $0.03. SG&A expenses for the third quarter were $54.2 million, or 40%, as compared to $52.2 million, or 38.1%, in Q3 2015. The increase is driven by the inclusion of Alphatec International cost on our P&L.

Other income and expense for the third quarter was a favorable $1.2 million versus $254,000 in Q3 2015, resulting from notes receivable and investment interest income, plus favorable transactional currency versus prior year. The income tax rate for Q3 was 32.5%, a 280 basis point reduction compared to 35.2% in Q3 2015. The change in the effective tax rate is primarily due to the reorganization of our domestic legal structure and the research and experimentation credit, which is now included earlier in the year due to the change in tax regulations. The full-year tax rate is projected to be approximately 34%, reflecting the ongoing benefit of the new US structure.

GAAP third-quarter net income was $26.2 billion and non-GAAP net income was $27.8 million, adjusting for acquisition-related costs. Q3 GAAP diluted earnings per share were $0.27 and non-GAAP diluted earnings per share were $0.29. Adjusted EBITDA for the third quarter was 37% compared to 36.9% in Q3 2015. We ended the quarter with $322 million of cash, cash equivalents and marketable securities, net cash provided by operating activities in Q3 was $41.9 million, and free cash flow was $24.6 million. The Company remains debt-free.

The Company today issued new guidance for full-year 2016 sales of approximately $560 million, including the Alphatec International acquisition, with GAAP diluted earnings per share of approximately $1.13. Guidance for non-GAAP diluted EPS remains unchanged at $1.20 per share. The 2017 full-year sales projection is $625 million, including $40 million from the acquisition. We will provide updated 2017 guidance during the fourth-quarter call. We will now open up the call for questions.

(Operator Instructions)

Your first question comes from Jonathan Demchick.

Hello, thanks for taking my questions. I wanted to start off on the top line. We talked about sales force expansion issues during the first two quarters. It appeared that this may be a little more isolated, and that it looked to impact both the first and second quarters at similar levels.

However, when we look into 3Q, it's a pretty noticeable step down. Has anything incremental happened here? Or, is competition doing anything different in terms of retaining reps that has made recruiting a little more challenging going forward?

Thank you for the question, Jonathan. As we had said in the last two quarters, we were not happy with our performance on the pace and productivity of our growth with the sales force. In Q4 and Q1 of last year, Q4 of last year and even into Q1, we had some attrition that was more than normal, but since then we have not had attrition different from our normal rates of attrition.

We haven't been able to continue to grow as fast or recover as fast as we would like too. We have analyzed the situation now, and we feel like we have our finger on exactly how to move forward with these changes. I identified them in my prepared remarks. One, we want to be much more aggressive on hiring competitive reps. We have also accelerated the non-competitive reps hires along with it. Nothing different has happened since Q2 or Q3. It's just that we haven't been able to get back on track as quickly as we would have liked too.

Thank you. That's helpful.

I guess as I look at the trajectory of the deceleration, and the even declines in the third quarter, is there nothing else that's -- what would you attribute the step down into the third quarter to, and do you think we've reached a bottom? Is there any visibility there?

John, it's Dan. I would tell you a couple of things.

I think we see the continued impact of those reps as David called out and I think Q3 probably is right around the bottom from everything we're looking at. There's certainly other things that we talked about before, the rate of recruitment taking a little bit longer as we look to go after some more seasoned folks and some bigger hits. Different items like that will continue that way.

We're not looking at anything that seems unusual, whether that be a shift in attrition or any other impacts that way that we are looking at. We really do think this is a continuation, something that has taking longer than we anticipated, and we're just being transparent with our approach to go to close that gap.

Thanks. As I think about guidance for -- updated for 2016 and into 2017, backing out Alphatec and any sort of emerging technology contribution, should we be thinking about some sort of an underlying growth of around (technical difficulty) business? Is that what looks to be in red in there?

You actually cut out, but I would tell you that very similar to past years, especially this early on, we tend to look at 2x or 2.5x, the category growth. When you look at our core, that's what we're putting out for next year. So pretty consistent with what we've done in the past.

Understood, thank you.

(Operator Instructions)

Your next question comes from Matt Taylor.

Thank you for taking the question.

Thank you, Matt.

I wanted to see if you could expound a little bit more on these three initiatives that you talked about in terms of stabilizing the sales force. When you say be more aggressive, does that mean changing the comp plans or putting more focused on it? Maybe you can give us some insights into your initiatives around those three things that you think could help it stabilize?

Thanks for the question, Matt.

On the three initiatives we are taking on hiring competitive reps, we definitely want to be more aggressive, whether it comes to comp plans or geographies, we want to be more aggressive in bringing those folks in. We've also accelerated the non-competitive reps hires.

We've talked about it in past calls that we have not had a lot of success with those hires, but we have new training programs in place and we have a program in place that will help bring that into our system, and then be mentored under senior reps and then go on to have their own territory. We've put that in place. We've already hired more than a dozen folks into that program. We are doing many things different to get the incoming pipeline larger.

Secondly, we are trying to realign the goals of our sales management team with really primary emphasis on sales growth and new territory development. In the past, we have had goals that are a little bit more diffuse. We are trying to really focus in our sales management folks to get their attention to really focus in on those two items.

Lastly, when we speak about rep retention, the attrition rates we have normally had are folks in our system based on our comp plan, when someone really doesn't make it to straight commission at some point, they tend to leave. It's a self-selecting process. That's one type of attrition.

The other attrition we've been calling out in the past few calls in Q4 of last year and even to Q1 are some more successful reps who have had success in our systems that we've lost. For that, we've analyzed, make sure we have done exit interviews. We've got lots of rep feedback. We've made changes in internal processes, and we've put a lot more management focus to eliminate both of those types of attrition.

Now, we are going to have some normal rate of attrition over time, but our goal is too really put the focus in on it, and minimize this attrition. When you look at in a wholesome manner with the recruitment and then with the focus of our sales management team and then stopping attrition, we think that we will have a long-term path of what I'd call fixing this problem.

Thanks for the detailed answer. One follow up and (technical difficulty). You've kept on track with launching some of your trauma and robotics products and appear to be submitting them on time. You talked last year at the analyst meeting about how to think about the contributions from emerging technologies long term. If you could offer some updated thougts on that, or maybe how we should think about contributions to next year from those two areas?

Matt, this is Dan. Yes, again, we haven't filed through everything nor have we received approval. So of course we are going to be tentative as to can or want to commit for with those things. Not that we anticipate any issue, just a matter of conservatism. We have a modest placeholder put into next year that we would do.

Really, where we think is that we would expect to see some strong up-take within robotics and then later on with trauma as we get through penetration and back to our initial strap plan, looking for those things to be as large 15% of our oversized sales, probably towards 2020 so. So upwards of $150 million out of our $1 billion that we would see going forward.

Great, thank you.

Your next question comes from Matt Miksic, USB.

Okay, thanks for taking the question.

Again, I am going to have to follow up on the sales question, because I think that it is a little bit hard for folks to get their mind around what's happened. First, Dan, if I could understand the back-half guidance. When we reduced the guidance in the second quarter for the full-year, did that -- I guess, what kind of assumptions were baked into that in terms of hiring? How has that changed? Maybe you can explain that a little bit. Then I had one follow-up.

Yes, as we looked at what that was going to be, Matt, it really looked like it will be closer to about a 4% growth in the second half of the year. That would have assumed you had locked in recruiting into Q3 and Q4 and driven that forward as one of the main things. As you look at it now, and we just see where we are tracking through Q3, this current adjustment just is a more realistic reflection of where we exit and therefore start the base for next year. It is really based on the timing of recruitment more than anything as the main driver and that's the real shift between the assumptions of Q2 versus Q3 in our guidance.

Is it fair -- is it the right way to think about this -- I remember you mentioned a couple times in different settings that you felt like you had some folks lined up, there were folks that were taking a little longer to get in the door. The impression I think we got and the others I think got was that these were seasoned reps, competitive reps. Is it fair to say that those just didn't come in and weren't able to close that and that's why we are where we are?

Matt, some of that observation is partially true. Our pipeline is filled with a lot of seasoned reps that we've been recruiting, and they just haven't come on board as quickly as we would have liked. We're still in the process of trying to close these down. We've got some but we still have more to go. That is partially the reason.

Like I said earlier on, in some of the other attrition also adds up. Then as Dan alluded too in his prepared remarks, we did see a slight uptick in pricing pressure in Q3 with some of our contracts anniversarying and also some of our new products having a little bit more pricing pressure than in the past. You cobble all of those things together and that's what ended up with our results in Q2.

Okay. Last one on the sales question for me is, at what point, if we were to just -- and I understand don't want to get too aggressive, can't fit every new rep in. This is not a -- I'm sure it's not an easy process to wrangle these folks in and make a deal that works. At what point do we get to a quarter where we start to annualize the impact of the reps that did depart in 2016 or early 2016? Is that in Q4 we get partial impact? Q1 do we annualize just to get us back to core growth and then whatever you can add on the sales rep side?

Matt, I would say it's closer to Q1 into Q2, just even kind of what we did even this year where we walked out and said there was a partial impact Q1, a little bit more fuller into Q2. I think the way I'm modeling it now and based on the way we're moving forward with recruitment, I would look towards a more stabilization as we exit Q1.

Great. Thanks for taking the question.

Thank you, Matt.

Your next question comes from Matthew O'Brien with Piper Jaffrey.

Thanks for taking the questions.

Just a couple here. Just to keep following up on the sales force issue, it just seems a little odd to me it's taking longer for you guys to add these reps just given you have one of the broadest portfolios of hardware in this space. Are there are things that you're missing from a technology perspective: 3-D printing, some kind of integrated navigation, et cetera that you think you need to add in to potentially get back to taking some share here? Or is there something more fundamental going on? Are you losing some of the premium in some of your expandables or other areas?

Good questions, Matt. This is David.

I don't think from a portfolio and from a bag perspective, I think we have the best bag in the industry. I don't think that's in anyway detrimental to our bringing on new folks. As I mentioned before, we are making some fundamental changes in hardware, approaching this in a wholesome manner. I think that will change how we are able to wrestle some of these guys down.

We do need to get a little more aggressive on some of the competitive folks, and we're doing that. We've always been focused on having aggressive growth but aggressive profitability also. As we balance those things out, we feel we need to be a little more aggressive in our recruitment now.

Okay, fair enough. A question for Dan. As everybody's going to be focused on the top-line on this call, I think as you think about next year, the buffering factor for your stock, tomorrow is going to be on the profitability side. It sounds like, and I think your saying that you are probably going to pay up a little bit more for the sales reps going forward or change comp plan so that it increases.

You're also launching, and correct me if I'm wrong on that, but you're also launching trauma and robotics, so there's going to be more and more expense coming next year. As we think about earnings and into -- or EBITDA into 2017, can EPS still grow in 2017? Can it even approach the recorded revenue growth target that you guys are putting out this evening?

Matt, it's a great question and I think so. I wouldn't come off of what we've been saying before, which is we're going to manage the Company into that mid-30%s EBITDA. We always have the range 33% to 37%. We certainly think that, as we've talked about openly, we start doing the pre-commercialization recruitment of our commercial teams for both trauma and robotics they'll be a continued impact for us. That's reflected in everything were putting out.

Again, I think we can still come through with that mid-30%s EBITDA, even into next year. We would look at some level of EPS growth, but at no point would we attempt to outstripped that versus sales growth. We're going to look to do right investments, get these up, get these things launched, still deliver a strong bottom line not necessarily dilute our earnings in the EPS or EBITDA.

Got it. Thank you.

Your next question comes from Kaila Krum, William Blair.

Thanks for taking my questions. I'll start on 2017. Can you just help us understand your visibility at this point into the sales number at this point in time? What specifically has changed over the last three months or so that would prompt you to lower that $640 million number to $625 million.

Kaila, it's Dan. Really simple. It's just the exit points. We're adjusting down our guidance $15 million here for 2016. I'm just rolling that into 2017 at this point to be realistic. That's the real driver and the only difference is what we're seeing coming out of our anticipation of Q4 plus our actual Q3 results coming in.

Okay, so no change as far as Alphatec contribution and contribution from trauma and robotics?

No.

Even looking at the fourth-quarter guidance, excluding Alphatec, is it fair to say you're still expecting a $5 million to $8 million sequential increase in the core spine business? What gives you confidence in that expectation?

In the core business, I would say just the natural hockey stick that would occur at the end of the year that we normally see as people want to use up their high deductibles and their medicals would be the main driver of that. Very similar to what we've seen last years as we monitor them out. It's just the anticipation of the natural curve that goes on, plus the continued recouping as we do get folks off garden leave and into contributions coming out.

Okay, thanks, guys.

Thank you.

Your next question comes from Craig Bijou, Wells Fargo.

Hi, guys. Thanks for taking the questions.

I want to start with 2017 and, Dan, maybe your comments that you made before about 2x or 3x the market growth rate. I appreciate your comments on being more aggressive on sales force and training new reps, or getting non-competitive reps. Just given the ramp for non-competitive reps to get productive and then, particularly, some non-competes with competitive reps. What are some of the specifics that are really going to drive that acceleration if some of the sales force that you are going to train may have to sit on the sidelines for a little while?

Craig, I think it's a decent question. A couple of things. I think certainly even this year when you annualize where we are and when we said we're going to exit, we are in a growth position here for the year. All were saying is we're going to improve from that. I'm calling out two times the category growth for us once we stabilize sales force given our history and our product portfolio does it seem that unreasonable.

We have been recruiting through the year. We have candidates who will be coming off garden leave and coming in and having contributions going forward. You do have continue momentum of products and especially even the two that David just called out tonight with INDEPENDENCE MIS and even QUARTEX. There's a lot of things that are going to move that momentum forward that I think is going to allow us to get to where we think we are with this estimate.

Okay, thanks. That's helpful.

If I can switch over to Alphatec in Japan. I just wanted to get -- obviously, it's uncertain, and you guys don't know definitively, but how should we think about the timing of you getting Globus products approved in Japan? Is that a 2017 event? Would that provide upside to your $40 million estimate for Alphatec in 2017? Is there some cannibalization that will go on there?

Craig, it's Anthony. Thanks. That's a good question.

We have started the process of Globus product registration, but as you are probably aware, in Japan that's a lengthy process. We do think that we will get a significant number of products registered in 2017, but probably not until around the middle of the year or maybe early into third quarter. Probably not a ton of upside in 2017 from those sales, given that much of it will be more likely cannibalization of the existing sales to Alphatec customers.

Okay, thanks for taking the questions.

Your next question comes from Bob Hopkins, Bank of America.

Okay. Hello?

Hello, Bob, we hear you.

Great, sorry about that. A couple of questions, if okay. First I want to make sure on the guidance. Excluding Alphatec, the guidance for Q4 on core underlying spine growth, it sounds like that's pretty similar to what you experienced in Q3.

For 2017, I guess you are saying somewhere in the neighborhood to 4%, 5% organic? I want to make sure I heard the guidance right.

You did, Bob. This is Dan. You heard it right. I think you would see something similar to Q4, Q3 as you did to Q4 this year and then as you come into next year you would look at a core that probably with that exit point is closer to between 5% and 6%.

Okay. How much worse is pricing? I'm curious relative to your comments. Where was pricing and where is it now?

Pricing has always, as we have been calling out since I've been here, in the mid-single-digit range. It still remains in the range. We had a slight uptick for a couple of reasons. We're actually renewing some fairly critical contracts. We're making sure we are competitive.

We also had an anniversarying of a contract that was favorable to us we exited it in the prior year and that's kind of come back. Really those two factors have had a slight lift into it. Again, as you see with that we're still delivering close to a 77% GP. We're hitting the 37% EBITDA. It's things that we're able to work through the different counter levers we have in place.

Okay. The last question is for David and it's a big picture question. You listen to this call and all of the questions around the sales force, and you guys have really focused people on the sales force as the primary issue that's affected growth of the Company. I'm just kind of curious, you only have single-digit market share in spine right now, and you have a very capable sales organization.

I'm just curious, why can't you grow the business without adding salespeople? You have a very small market share today. You have a good suite of products. The emphasis on the sales force, I get that at one level, but at another level it seems like you should be able to grow this business without adding salespeople. I'm curious if you could address that.

Sure, thank you, Bob. That's a good question. If you look at our competitors, look at Medtronic, they outnumber us still about five to one in number of sales territories in the US alone. At some level, there's a bandwidth issue with having a salesman have more than about -- between $1.2 million and $1.5 million of sales. After that it becomes pretty hard for one salesman to cover that much of business.

That's really why at some point you can only grow so much organically with your current number of salesman. We need to be able to have -- to at least get on a trajectory to go head to head with Medtronic and our larger competitors with the number of sales territories. That's why believe that's key to our growth is growing our sales force.

We also have -- where we have full penetration of salesman in different geographies. We have market share either comparable to Medtronic or we're number two in several places. Then we have green space, open space where we don't have much coverage. That's what we want to keep focusing on making sure we can compete on an even playing field when we have that type of volume of salesman.

In the US, how many salespeople, roughly, do you have, then, if Medtronic is five times the size? I'm just curious.

We don't share that number, Bob, but we have pretty good market intelligence on where we think Medtronic is, and that's kind of how we based, when I say the ratio of five to one. If you look at our US sales and our estimation of Medtronic sales, and they are also about five to one with us in our US sales.

Okay. Thanks, guys.

Thank you, Bob.

Your next question comes from Richard Newitter with Leerink Partners.

Thank you for taking the questions. I wanted to just follow up on the pricing comment.

I know that sometimes we all get confused companies different companies prefer to pricing in different ways. Sometimes it's pure pricing for like-for-like products, year over year; sometimes it net of mix. I think you said pricing was more trending in that mid-single-digit negative range, maybe a slight uptick from prior. Is that net of mix or with the positive mix shift from new products, you were able to get that down and with that what would that number be?

Thanks for asking and clarifying. It's actually an important point to call out and I apologize for not having done that earlier. Keeping in mind the way we're doing this is we actually do this by SKU. If we had, had a product last year and it's active this year, we look at that change of price. There are other competitors who may look per procedure and in that build in mix as well as new products and different things like that. This is really a pure look at just our products that were there last year. What is the price impact going forward and we calculate them out. It seems to be a little bit snarker, but it's a very different methodology than I know other people use.

Okay, I just a follow-up on that. You had a slew of new products looking at NASS. You called two out on the call. Should we be thinking as the mix shift potential as helping to alleviate that incremental price burden moving in 2017, or should we think of this as the new norm?

No, I think you are spot on with that. That's one of the secrets and one of the benefits in the past couple of years is when we're launching out these products and start out with a premium that helps with the mix to negate some of the stuff. Keep in mind as well what we've always called out, the power of the Branch Medical acquisition as a counter lever.

That will continue forward. Certainly, if needed, the benefit of med device tax. While we look at this and certainly we'd expect to be competitive where make sense on price and launch new products, we're still committed to having that strong mid-70%s GP and mid-30%s EBITDA, even with us adjusting price as appropriate.

Okay, that's helpful. Dan, I just want to follow up. You mentioned that you think for 2017 you're talking to a, I think, what did you say, about 5 % or 6% organic growth rate for the year, but that you think you should be able to see growth stabilize in the first quarter of 2017.

I'm just tying to figure out, what does stabilize mean? Does that mean that it stops accelerating and getting worse, but we still see a negative organic rate maybe in the first quarter, and it's going to be that much steeper into the back-half of next year? Or are you saying more stable in line with market growth rates? What was that comment supposed to guide us too?

Thanks, Rick. A couple of things. I do not think that suddenly, January 1 we come out and launch out at a plus-6% growth. I think it's a big you work into as you get through the year, and that's what I'm trying to signal.

I really don't have the splits clearly laid out as to what Q1, 2 or 3 would look like just yet. I'm just saying I think what we see, and I'm signaling down 3%-plus in Q4, I think we could have something in that range or neutral as you get into Q1 and then start seeing growth in Q2. I will tell all of you that as we launch trauma and robotics and stabilize core, I expect to have a heavier second half of the year then probably what we have historically seen for those reasons.

Okay, thank you.

Your last question comes from Kyle Rose with Canaccord.

Thank you very much for fitting me in. Can you hear me all right?

We can hear you, Kyle.

A lot's been asked, but a couple of questions quickly. Coming out of NASS we saw a lot of focus on 3D printing technology and 3D printed products, specifically in the spine area. Just wondered if, David, you could give us your thoughts there. Also from a longer-term perspective from a tax rate, you've got the Alphatec acquisition, which should drive higher OUS mix. Wonder if you guys could provide some updated medium-to longer-term thoughts from a tax perspective there.

Thank you, Kyle. I'll just take the 3D printing piece and pass the tax piece to Dan. On the 3D printing, we've investigated this over the years. We think that there's a place for 3D printing in spine. Primarily, I look at that for custom implants, customized to either scoliosis in very young children or people with abnormal anatomy. I still don't see the benefit of having 3D printed implants for the vast majority of the procedures just because the cages that we have and everyone else has, has space for bone growth.

The benefits of 3D printing is that you can have porosity through the cage. Now, us and a couple of other companies already have surface coatings that you have boney on-growth. Having thin spicules of bone growing through the cage doesn't really add any stability. When we've looked at it, we really felt this doesn't make a whole lot of a sense for our entire cage portfolio.

That being said, we are investing in 3D printing equipment. We want to keep looking at places where we can make parts that are more customizable to patients, but we still don't see that as being a really big clinical need yet. Let me pass the tax question to Dan.

Thanks, David.

Kyle, we have done the acquisition with tax optimization in mind. Of course, we're one month into it and we have many things to do before we can throw the switch. Certainly, it's part of our long-term strategy. As we said this year, we've optimized that US and we're getting those benefits as we mentioned. We should be able to have further benefits not yet quantified that we would see just through this acquisition, a sourcing strategy, and again, longer term, as we stabilize that we'd even potentially migrate into manufacturing if that were the right move for us.

As we go through our strategic planning horizon into 2020, we are looking to affect that tax rate. You are correct that there could be a potential for next year. It's just too early too call right now so we will look at that and factor that in as we give 2017 guidance at the fourth-quarter call.

Okay, great. One last question on the sales force. You talked about, on the last call you talked about higher net adds in the Q2 than you had all of 2015. Can you remind us, historically, what the type of productivity curve has been for whether it's a competitive reps that's sitting on the bench for a year before they come on versus a new rep that you guys are training internally? How does that -- is it 12 months, 24 months? How should we think about the hiring we've seen to date and how we should see that contribution in 2017? Thank you very much for taking the question.

Sure. First, keep in mind we already have competitive reps who are on -- they're non-competes or just rolling off their non-competes already in our system. On those competitive reps, just the fact that they leave their territory, we tend to get some business. Not always, but sometimes we get some business from them. We really don't start getting on full cylinder until their back in their territory meeting with their customers. On average, I'd say we can get about 20% to 30% of their business in the first year. After they come back, you can get growth from there to back to their normal levels.

On the non-competitive reps, we feel like we're not yet at the position -- at the point where we can repeatably predict this. We're hoping that we can get them all productive and on straight commission within three to four years. That's the current thinking with the training programs that we have in place. They are more of a longer-term play. As I alluded to earlier with Bob Hopkins' question is, that, that's the second piece of the puzzle is, how can we keep growing our sales force at rates much higher than our competition so we can get to that level of sales coverage throughout the US.

With no further questions, we will now concluded the Globus Medical third-quarter 2016 earnings release conference call. Thank you all for joining us. You may now disconnect.