NuVasive Inc (NUVA) 2020 Q4 法說會逐字稿

Greetings, and welcome to the NuVasive, Inc. Fourth quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Matt Harbaugh, Executive Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you. Welcome to NuVasive's Fourth quarter and Full Year 2020 Earnings Call.

The company's earnings release, which we issued earlier this afternoon, has been filed on Form 8-K with the Securities and Exchange Commission. We have also posted supplemental financial information and an overview on the acquisition of Simplify Medical we announced yesterday on our website in the Investor Relations section to accompany our discussion today.

Joining me on the call is NuVasive's CEO, Chris Barry. Chris will provide opening remarks, and then I will share additional details on our financial results before we open it up for Q&A.

I would like to remind you that discussions during today's call will include forward-looking statements, which are based on current expectations and involve risks and uncertainties, assumptions and other factors, which, if they do not materialize or prove to be correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements. In particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic on the company's business, operations and financials. The COVID-19 pandemic continues to evolve, and it is important to note that our commentary reflects our best estimates as of today. Risks and uncertainties related to Simplify Medical and additional risks and uncertainties that may affect future results are described in our recent news releases and in other releases and periodic filings with the Securities and Exchange Commission.

NuVasive assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. This call will also include a discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these non-GAAP financial measures. Many of the financial measures covered in today's call are on a non-GAAP basis, unless noted otherwise.

These measures include non-GAAP gross margin, selling, general and administrative expenses, research and development expenses, operating margin, other income and expense, tax expense, net income, diluted earnings per share, free cash flow and net sales reported on a constant currency basis.

Reconciliations to the most directly comparable GAAP financial measures may be found in today's earnings release and the supplemental financial information, which are accessible on our website in the Investor Relations section.

With that, I would like to turn the call over to Chris.

Thank you, Matt, and good afternoon, everyone.

Before we get started, I want to take a moment to thank our employees for their continued resilience and commitment. This past year revealed the true character of NuVasive. I'm proud of how our people showed up and continue to serve our surgeons, providers and patients during a challenging year for everyone around the globe.

Earlier today, we reported fourth quarter and full year 2020 financial results, and yesterday, announced the acquisition of Simplify Medical. On today's call, I'll provide an overview of full year 2020 results then turn to the investments NuVasive is making to deliver what I believe to be the strongest innovation pipeline in spine. Then Matt will share additional details on the fourth quarter, thoughts on how the first quarter is taking shape, and how we're thinking about 2021.

Full year 2020 net sales came in at $1.051 billion, a decline of 10.1% on a reported basis or 10.2% on a constant currency basis compared to the prior year.

Around the globe, elective surgical volumes have largely been impacted by COVID-19, which is reflected in the company's results. Specifically, this led to the declines in the U.S. spinal hardware and U.S. surgical support business lines.

Despite COVID-19, we had solid performance in key international geographies. In particular, Asia Pacific delivered double-digit growth for the year. This is a testament to our commercial execution, leadership and investments in the region and aligns with our continued focus on globalization.

While I recognize the challenges last year brought, it also offered us opportunities to invest in infrastructure, talent and innovation to better position the company to deliver against our long-term strategy and create value for our shareholders. NuVasive has always been and will continue to be the innovation leader in spine. In 2020, we increased investments in R&D to continue advancing our leadership position in less invasive surgery, expanding our full line portfolio, and integrating enabling technologies to offer comprehensive solutions for our surgeon partners.

This is evident in the 15 clinical evaluation and commercial launches we released in 2020 and aligns to the key launches we have planned across all procedural areas in 2021. Looking ahead, NuVasive will utilize its industry-leading expertise to procedurally integrate each surgical approach, anterior, posterior and cervical with differentiated technology, just like we did with X360.

We will continue to target the largest subsegment in spine, giving us tremendous runway to continue expanding our global reach and growth opportunities. Anterior spine surgery represents a $900 million global market opportunity and continues to be a key driver for the company. We are the leader in single-position spine surgery and are well positioned to become the ALIF market share leader with the continued portfolio enhancement slated for 2021 and beyond.

We continued to invest in our proprietary Advanced Materials Science implant portfolio, featuring the Porous PEEK family Cohere and porous titanium family Modulus, which are designed with unique surface and biomechanical properties to improve fusion. Our Cohere portfolio includes implants for anterior, posterior and cervical, and now features Cohere XLIF, the first Porous PEEK interbody for use in our clinically validated XLIF and X360 procedures. This is already garnering significant surgeon attention following the launch late last year. To help drive continued growth in the ALIF market, we plan to commercially launch Modulus ALIF in the second half of 2021, for use in supine ALIF and XLIF approaches. In addition, our R&D teams have applied the fully porous in-plate design for Modulus to a new expandable implant portfolio [Mod X] for both lateral and posterior surgery with clinical evaluation starting this year.

Turning to cervical. We launched the C360 portfolio late in the fourth quarter of 2020. This is our comprehensive procedurally integrated portfolio for anterior and posterior cervical spine surgery, a key driver to our long-term growth strategy. For ACDF procedures, the recent NuVasive ACP system launch was one of our largest commercial introductions and features 3 profile designs to help reduce common post-operative complications. This includes the thinnest plate currently on the market at 1.6 millimeters.

The cervical segment of the global spine market represents a $2.6 billion opportunity. The company is well positioned to take share with our C360 portfolio, together with the upcoming commercial launch of our RELINE cervical or posterior cervical fusion integrated with the Pulse platform.

As announced yesterday, the strategic acquisition of Simplify Medical further advances our cervical portfolio with the most clinically effective technology in the cervical total disc replacement procedure segment. Simplify's team has spent more than 10 years developing innovative technology designed to offer surgeons best-in-class capabilities, including: optimized design with PEEK in-plates and ceramic materials, which allows for enhanced visualization through MRI postoperatively compared to competitive devices; anatomic disc heights in 3 options, with the lowest available disc height in the market; and proprietary technology to balance mobility and stability. The Simplify Cervical Artificial Disc is backed by Level 1 evidence through the FDA investigational device exemption study and was found to be clinically superior to ACDF in the randomized controlled trial. This device currently has a 1-level FDA approval and pending a 2-level approval.

In addition, a large number of cervical total disc replacement surgeries take place in ambulatory surgery centers, providing opportunities to extend our full line portfolio in this expanding market segment. Coupled with our C360 portfolio, the Simplify Disc positions NuVasive with a leading offering of procedurally integrated solutions for cervical spine surgery, providing surgeons best-in-class technologies to support their preferred procedural approach. This acquisition aligns with the company's capital allocation strategy to acquire highly differentiated technology, it will be a long-term growth and margin driver for our business and supports our commitment to transform surgery, advance care and change lives.

Throughout last year, we continue to make progress with the commercialization of Pulse, our integrated technology platform to enable better spine surgery. We utilize this time to accelerate the scale of the launch and are now planning for a global release of the platform. We recently submitted our application for 510(k) clearance to the FDA and anticipate CE approval in the first half of 2021. Based on these time lines, we anticipate the first cases with Pulse to be in Europe.

As previously communicated, Pulse will include, upon launch, 3D navigation, intraoperative neuromonitoring for iGA and Bendini applications and integration with the leading 3D-imaging technologies. In addition to the software and component level hardware updates made last year, we expanded the upcoming commercial launch to include: our proprietary LessRay application, which is designed to reduce radiation exposure and helps improve OR efficiency; enhanced functionalities with our neuromonitoring application to support complex spinal pathologies; improved measurement capabilities, available with our iGA applications; and an integration of our Bendini rod bending system and the Pulse camera technology. These additions demonstrate our commitment to deliver innovation that helps improve clinical and operational outcomes.

The extensible architecture of Pulse allows for future applications like robotics to be integrated and accessible from a single platform in the operating room to drive better spine surgery. This also allows for opportunities to collect and disseminate data both before and after surgery to improve patient outcomes.

The ability for this platform to be utilized in 100% of spine procedures is a differentiator over competitive offerings in the market. We believe the Pulse platform will be one of the most transformative technologies in NuVasive's history and remain committed to our launch timing of summer 2021. While much of our attention is focused on ensuring a successful launch of the Pulse platform, we continue to make steady progress against our Pulse Robotics time line and our expectations for first-in-human use in 2022 remain unchanged. Despite COVID-19 travel challenges, we've maintained our R&D evaluation and trainings with both our surgeon partners and commercial teams to prepare for the upcoming Pulse launch.

R&D and cadaveric labs, along with surgeon demonstrations continued, providing opportunities for real-time feedback from our customers. These labs have been critical in the development process, allowing surgeons to experience a differentiated platform. We've also provided an early indication of demand as surgeons look to bring this technology to their hospitals and practices. In addition, we have continued to educate our global sales teams on the procedural benefits of the Pulse platform with virtual trainings hosted by surgeon partners to help prepare for a successful commercial launch.

As we announced earlier this month, we are on track to open our East Coast Experience Center in the New York metropolitan area in Q3 2021, expanding our clinical professional development and market-leading surgeon education programs. This experience center will host competency-based courses in cadaveric trainings on our procedural solutions. It will also include a lab dedicated to enabling technologies, which will feature the Pulse platform to support the launch and trainings of surgeons and clinical staff as well as introduce our technology to hospital administrators.

Lastly, we've made key investments in leadership and infrastructure to strengthen our commercial execution and customer engagement capabilities. Without a doubt, we have one of the most talented and clinically trained commercial teams in spine. We've made key additions to our commercial organization that leverages both long-standing, internal talent and new external additions in key regional leadership roles, capital sales and clinical professional development, to further align and deliver on our strategic commitments.

As I look to the year ahead, I cannot be more excited about the innovation we are bringing to the market in 2021, which includes the expansion of our cervical portfolio with a Simplify Disc. NuVasive is developing differentiated procedural solutions that deliver clinical, financial and operational outcomes across our entire portfolio. We continue to gain operational efficiencies across our supply chain to improve how we provide products and services to our customers.

The investments we made in 2020, coupled with our strong innovation pipeline, position NuVasive well to make continued progress on our long-term strategic plan and fulfill our vision to change our patient's life every minute of every day.

Now, I'd like to turn the call over to Matt to discuss the company's financial results in more detail.

Thanks, Chris, and good afternoon, everyone.

Net sales for the fourth quarter 2020 were overall in line with our expectations at $291.8 million, down 6% compared to prior year on a reported basis, 6.7% on a constant currency basis. As we entered the fourth quarter, case volumes were relatively stable and market volatility had flattened. However, as we exited the fourth quarter, we once again experienced market disruption from the resurgence of COVID-19. In particular, December experienced a significant decrease in procedural volumes as elective surgeries were delayed or canceled and patient sentiment declined, most notably in parts of the United States and Europe.

U.S. spinal hardware net sales were $155.2 million in the quarter, down year-over-year by 8.1%. Pricing was a 1.4% headwind, in line with our annual performance while having the same number of billing days as compared to the prior period. The business saw growth from portions of our thoracolumbar portfolio, driven primarily from a continued adoption of our Advanced Materials Science implants with strong results from the clinical evaluation of Modulus ALIF and RELINE 3D within our pediatric portfolio. This progress was offset by declining case volumes as a result of COVID-19.

Our cervical portfolio was down double digits from prior year compared to a particularly strong quarter in 2019. This was sequentially flat from Q3, which shows continued momentum within our new C360 portfolio, offset by headwinds from legacy ACDF products.

Turning to U.S. surgical support. Net sales were $67.4 million in the quarter, down from $77.3 million in the prior year period, representing a 12.9% decline. This performance was driven by the impact from NuVasive clinical services experiencing a similar reduction in case volume to our U.S. spinal hardware business, along with the challenging billing and collections comparison from the prior year period. In addition, we did not see typical levels of stocking orders within our biologics or interoperative neuromonitoring product lines due to the pandemic's resurgence, driving additional pressure in late December.

International net sales in the quarter grew 8%, as reported over the prior year period, or 4.6% on a constant currency basis to $69.2 million. As we previously discussed, parts of Europe continue to be heavily impacted by the pandemic. Countries like the United Kingdom and Spain saw significant year-over-year declines. This was offset by continued strength in our Asia Pacific region where we saw strong double-digit growth driven by new product introductions in the cervical portfolio and lesser impact from COVID-19.

Non-GAAP gross margin for the quarter was 71.6%, down 160 basis points from the prior year. Within the quarter, we continued to see elevated levels of inventory reserves compared to the prior year as a result of updates to estimates and assumptions about future demand for certain spinal hardware products based on current market conditions. This headwind, along with volume reductions, was partially offset by underlying efficiencies we continue to gain from our supply chain.

Moving down the income statement. Non-GAAP SG&A expense was $142.5 million for the quarter, representing a 9.8% decline compared to prior year and a 48.8% of net sales. This is a 210 basis point improvement as a percent of net sales. The organization continued to execute on initiatives to drive disciplined expense management and reduce discretionary spend, which helped offset the margin impact from the pandemic. Some of these expense initiatives are temporary. That being said, we don't believe these will impede our short- and long-term financial commitments.

Non-GAAP research and development, R&D expenses, increased to $2.3 million in the quarter. This was an 11.2% or $2 million increase over the prior year period. As we stated at the beginning of the year, we not only maintained R&D investment levels in light of the pandemic, but increased our investment throughout the year. We will continue to invest in R&D to best position the company for the future, taking this time to advance our innovation pipeline.

Fourth quarter non-GAAP operating margin came in at 15.8%, which is sequentially flat to third quarter 2020. This demonstrates the company's commitment to our margin profile despite headwinds from the macro environment and continued investments in R&D.

Other income and expense for the quarter was $6.3 million on a non-GAAP basis, up from $4.5 million in the prior year. This increase is primarily related to interest expense on the additional $900 million in convertible debt issued in 2020.

Non-GAAP tax expense in the quarter was $9.4 million, resulting in an effective tax rate of 23.6% versus a tax rate of 16.8% in the same quarter last year, which included a onetime benefit due to a release of a historical tax reserve.

In the fourth quarter, the company reported non-GAAP net income of $30.4 million or diluted earnings per share of $0.59 compared to non-GAAP net income of $38.5 million or diluted earnings per share of $0.73 in the same period last year.

Turning to GAAP results. GAAP net income for the fourth quarter of 2020 was $1.7 million or diluted earnings per share of $0.03 compared to GAAP net income of $29.9 million or diluted earnings per share of $0.55 in the same period last year. Notably, free cash flow for the fourth quarter was $44.8 million versus $46.3 million in the prior year. The decrease in free cash flow was a result of reduced net income, offset by strong accounts receivable collections and controls implemented around both inventory and capital expenditures.

With solid free cash flow and timely access to the market in 2020, we ended the quarter with cash, cash equivalents and short-term investments at over $1 billion. As announced yesterday, we acquired Simplify Medical and used $150 million of cash on hand to fund the upfront payment at closing. We remain well positioned to repay the $650 million principal amount of convertible debt due in March of 2021. The company also ended the quarter with an undrawn revolving credit facility of $550 million. With this in mind, our capital allocation strategy remains unchanged.

Looking to 2021, I'd like to address the outlook for the year and provide some insight into what we are seeing within the business. As you know, we continue to operate in a highly variable environment due to the impact of COVID-19 on elective surgeries.

In January, we saw a continuation of the headwinds that we experienced in late December. However, in certain markets, we saw improvement as geographical restrictions eased and vaccine distribution widened. We anticipate improvement in surgical volume over the first half of 2021 as the vaccine becomes more widely distributed and patient sentiment improves but at a rate below 2019 market conditions. With this continued variability in the market, we are not providing guidance at this time. We will continue to operate in a diligent manner, investing strategically in the business to fuel growth and deliver on our commitments.

Finally, before I turn the call over for Q&A, I'd like to discuss the announcement of our acquisition of Simplify Medical. As Chris mentioned, we are excited to have the Simplify team join our company and add the most clinically effective technology in the cTDR procedure segment in our global commercial channels. We believe this acquisition makes NuVasive's portfolio a leading provider in cervical and positions us to participate and take share in this faster-growing subsegment of the cervical market. We expect this share gain, together with Simplify Disc's favorable margin profile, to accelerate our top line growth and margin expansion.

The acquisition is expected to provide minimal net sales in 2021 and be accretive to non-GAAP diluted earnings per share starting in 2022. However, this technology is in an early stage of commercialization. We must train and convert surgeons and need to continue clinical studies to further validate the benefits of the Simplify Disc. Therefore, we will have an approximate $10 million headwind to operating margin in year 1, while the net sales ramp.

On the total consideration front, in addition to the upfront payment previously mentioned, there are future payments contingent upon milestones related to regulatory approval and net sales from products incorporating the Simplify Cervical Artificial Disc technology. We are excited about the opportunity to take further share in the cervical market, deliver continued growth for our shareholders and ultimately, help change more patient lives.

With that, thank you for your time today. I'd like to turn the call back over to the operator to start the Q&A session.

(Operator Instructions) Our first question is from the line of Matt Miksic with Crédit Suisse.

So one on Pulse and a follow-up on Simplify and cTDRs. So on the Pulse time line, could you -- because it has been a sort of conversation for a while and leading up to sort of the launch here in mid '21. Maybe just expand a little on the time line you expect.

You mentioned first cases in Europe, likely in the first half. But maybe how the cadence of Europe and U.S., how you expect them to play out and maybe ramp into the second half to give us some sense of how you see this year playing out? And then I have one follow-up.

Sure. Thanks, Matt. Thanks for the question. Yes, we're excited. We've now submitted 510(k). So we're really under the regulatory time line in the U.S.

As far as Europe, we're also on track to secure CE mark. So just the way that the regulatory approval process works, we expect to have cases in Europe first. That doesn't, in any way, shape or form, preclude us from hitting the time line we've talked about with cases in the summertime in the U.S. Now clearly, everything we can do to pull that ahead, we will. But once we kind of get into the regulatory time line, we sort of follow it from there.

But the fact is, we believe we'll be in clinical setting in both the U.S. and Europe over the summer and launch later in the year. So that's the clarification. Like I said, I think we're very, very happy with the progress being made. We've actually expanded the applications within the system, as we talked about in some prepared remarks, but very excited about the technology, hitting the time lines that we committed to and are on track to deliver what we said we would this year.

Excellent. Excellent. That's exciting. So -- and then the follow-up on Simplify. Maybe just -- you mentioned minimal sales, net sales in '21. A couple of things. Maybe if you could frame out what you think this segment is currently in terms of dollars and then maybe where it can go? I know that's been a topic of debate for some time, how big can cervical disc replacement actually get. But with coverage improving, I suspect that that's also kind of improving.

And then, Matt, I think you had mentioned something about the launch of C360, positive, offset by some offsets in legacy cervical products. And maybe give us a sense of what that dynamic looks like when you're net positive or are you net positive? And how we should think about growth, if there's going to be sort of an offset of legacy ACDF products as well?

Thanks, Matt. Listen, we're super excited about the Simplify opportunity. And again, let me just kind of back up in the context of the broader strategy we laid out going all the way back into August in our 2019, we kind of did our Investor Day, us moving from sort of the XLIF company to taking -- continuing our leadership on anterior but also complementing our organization through innovation in cervical. C360 was just launched, and it was sort of launched in the teeth of the pandemic early in the December time frame. So we're still ramping up that opportunity.

Simplify is a great complement. And again, if you look at the entirety of the cervical market, it's a $2.6 billion segment, huge segment where, as NuVasive, we enjoy low-single-digit share position. And it has just -- has not been an area of focus. So today's market size, I think it's somewhat a moving target. Clearly, you're seeing a transition of ACDF procedures to disc replacement. The indication today is more narrow, but increasing over time.

So I think it's still a question of what this -- what the size of this market could become. But clearly, within Simplify, it's somewhat precommercial. So we even look at today's market of, if you say $250 million, $300 million, huge upside for us with what I consider to be a differentiated technology in many ways. So I think what Matt was saying earlier is the initial launch of C360 compared with our legacy products. The growth we saw with C360 still being somewhat drugged down by the predicates. We expect that to shift over the course of the next couple of quarters and see substantial growth in the back half.

Our next question is from the line of Joanne Wuensch with Citibank.

I want to circle back to your commentary that you would expect the first half of '21 revenue to be lower than the first half of 2019. I want to make sure that I heard that right. And just for setting up models and expectations, any way to put a parameter of how much lower?

Sure. Thank you, Joanne. So on a full year basis, we actually think that current consensus is a reasonable range to be in plus or minus right now. So on a full year, the numbers look pretty good.

What we are concerned about is the first quarter because of the continuing impact from COVID, and to a lesser extent, some of the weather challenges we've had in the U.S. So as we're thinking about the first quarter, we think we'll be roughly plus or minus flat with what we did in the first quarter last year, that number was $216 million.

So we do think in the second quarter, things will get better. There'll be less impact from COVID and then the back half of the year, we'll have very strong results that kind of get us to that $1.2 billion mark that I mentioned earlier. And a lot of that has to do with Pulse being launched, success with C360, the Simplify Medical addition, a lot of that net sales is going to manifest itself in the back half of the year.

Excellent. And then as a follow-up question, how do we think about Pulse contributing financially, dollars and cents, in the second half of the year and then into 2022?

Yes. It's going to be similar to Simplify. It's going to be in the $5 million net sales range, plus or minus. So it's not going to be hugely impactful on this year. But obviously, that gets us well set up for future years.

Our next question is from the line of Josh Jennings with Cowen.

I had a follow-up on Pulse Robotics and understand that first demand is still on track for early 2022, are you willing to share any development kind of time lines after first-in-man and when we could potentially see, assuming all things go well up to first-in-man, when we could potentially see a submission? And I believe -- can you just help us understand again the submission pathway?

It's still -- Josh, thanks for the question on Robotics. Clearly, getting Pulse out, we've taken a parallel pathway to continue to develop along the pathway for Robotics. We feel confident that the time line we've put out on first-in-man in 2022 will -- is within the time line that we're pursuing today and we feel comfortable.

As far as some of the broader milestones, it's just a little early for us at this point to lay those out. I think as we go through this year, we want to make sure that we're seeing the things we want. We've got to make sure we have a firm understanding of all the regulatory pathway -- the regulatory pathway in general that we need to pursue. So it's a little early to comment on some of those milestones today. But over the course of this year, I plan on letting you guys know kind of where things are going with that project.

Excellent. And then just a second question on Pulse. It -- our check suggests that about 30% to 35% of surgical cases in the United States, surgeons use navigation one form or the other. NuVasive hasn't had a navigation system. Most NAV systems aren't exclusive for the manufacturers' implant technology. But can you just help us understand the headwind NuVasive is faced in that kind of 30-ish percent or 1/3 of the market, 1/3 of the surgeries that use navigation? And I understand Pulse, Matt said about $5 million-plus or minus in 2022. But just on the procedure pull-through potential for Pulse and getting into that the navigation segment?

Sorry, multiple questions in one there. But if you get the gist, would love some help just thinking about that dynamic.

Yes. I think you're kind of hitting on an area that I think is important for us to talk about, which is sort of this idea that what's the remaining opportunity in the market for enabling technologies, whether you're talking about navigation or you're talking about something like Robotics.

We still believe it's early days. You kind of mentioned that 30%, 35% of cervical cases are using navigation. That's in line with generally the ballpark of what we see. It's inconsistent, I think, and where it could or should become standard of care, we still think there's an opportunity to drive that.

That's why we think the integrated nature of the Pulse technology provides a great entrance into an operating room where you utilize that platform in 100% of spine cases. And I think the key for us is thinking in terms of utilization.

Same thing on the Robotics side. If we look at just the number of robots in play today, maybe 10% to 20% of the available operating rooms have access to a robot. But when you look at that, the utilization is still less than 1 a week if you really do the macro level math. So our ability to drive an integrated system, to drive a superior performance in our system, we think gives us an opportunity.

So the navigation, as far as the exclusivity for us, we're being used in a lot of those cases that use navigation today. So there's no necessarily a proprietary nature for using anybody's navigation with their own products. I think performance-wise, it will be advantage with our products, but we very much look at the opportunity, both in navigation and Robotics as in early days where there's still a significant upside opportunity for us as a company.

(Operator Instructions) We have a question from Robbie Marcus with JPMorgan.

This is actually Lilly on for Robbie. So something we've heard from some of your peers is that new product launches really just aren't seeing the same sort of traction that they normally would because of COVID. So could you give a little bit of color on how receptive doctors and the hospitals have been to new products like C360? Or are people putting off on adopting these sort of things until trends materially improve?

Thanks, Lilly. Thanks for the question. It's really hard to say, honestly, in the eyes of COVID, because there's been such volatility, both U.S.-based but also globally. I can tell you that the demand and the excitement from our surgeons still remains unchanged. There is a significant excitement on C360. And we're ramping up our assets to fulfill that demand over time. There's still a significant excitement on our Pulse technology. A lot of the technology we're launching this year, including our Modulus expandables. There's significant excitement there.

It's hard to say what 2020 represents to us because of just differentiating between a lack of an ability to bring in a new product versus just volatility as a result of COVID. It's truly hard to discern that. But I would just say that in this space, innovation still carries significant interest. That hasn't gone away. It won't go away. Getting past the situation we find ourselves in with still some impact from COVID, I think will give us a clear picture.

But I don't think anything fundamentally changed in 2020. I don't -- I think surgeons are still looking for better ways to treat their patients. They're looking for innovation that's meaningful. And as I said in my prepared remarks, we are dedicated to driving clinical, financial and operational results that meet their demands.

And so to that end, kind of hard to look back, but looking forward, I still believe the demand is very high, and we've got a strong pipeline.

Our next question is from Richard Newitter with Silicon Valley Bank.

One clarification question and then a follow-up. You had mentioned, Matt, plus or minus $5 million around Pulse and Simplify. I just want to make sure, was that a second half '21 comment for the Simplify? Or is that a 2022 comment?

2021.

2021. Yes.

Okay. Okay. And then, Chris, maybe just on 2 things as it related to the fourth quarter. International is trending strong. Obviously, U.S. is still weak. I mean is that really more or less the way we should be modeling the first half? U.S. significantly pressured and keep some of the strength in international?

And then secondly, I appreciate that you have some product holes in cervical. But last quarter, you called out geographic mix relative to the rest of the industry might have been impacting you guys a little bit more harshly. I guess, I'd love some updates there on how that trends into the fourth quarter. And if you could also just talk to what your actual X360 growth rate was and what your growth rate was perhaps by region?

Thanks, Rich. I'll give a shot at some of those. On our Q4, obviously, you said that we saw continued strength even in the face of certain markets internationally that were down, but offset by those markets. Again, some of the diversification that we've looked at geographically is starting to pay dividends for us. So we're happy with that.

U.S. continued to see some headwinds, and we looked at the volatility of COVID, it did impact us, and you're kind of mixing this up with the second part geographically. So we saw intense pressure in certain parts of the U.S. versus others. Now towards the end of December and into early January, we saw a pretty uniform reduction almost across the board.

As far as Q1 and kind of the first half of 2021, I expect to continue to see increasing levels of strength internationally, but I expect to see also see recovery in the U.S. and again, you also got to think about the U.S. business. We're coming off a back half of 2020 that reflected some pretty strong comps for 2019. We had some of our strongest U.S. growth quarters that we'd had in recent history.

So I still believe that we'll see strength in international markets. I think you'll continue to see ongoing recovery in the U.S. business and hopefully, less geographic impact.

As far as X360 and some of those specific growth, we don't really go into that. But I can just say that the runway for X360, we didn't make a lot of progress in 2020 because of the volatility and some of the challenges we face with bringing new people in and training. But the demand is still there. And as we talked about in some of our prepared remarks, we're increasing our capacity to train and educate through our East Coast Experience Center. We've got a healthy number of folks that want to come in and be trained. We're obviously offering now C360 and then ultimately, Simplify, and then launching Pulse later this year.

So we've got a strong pipeline of innovation coming out of Q4 and coming into this year, we're looking to get out from under the volatility of the market, but I feel very, very good about the direction we're taking.

Rich, the only other thing I'd add to Chris' comments is that I mentioned in the prepared remarks around stocking orders, and we did not see typical stocking orders, largely driven because of COVID in the latter part of December. That would have impacted our U.S. results by a little below $10 million in net sales. So that also was kind of a onetime impact, which I think you were kind of alluding to. We didn't see anywhere near that sort of one-timer in our international results.

Our next question is from Ryan Zimmerman with BTIG.

Yes. I have just 2 brief questions. I just want to follow up on Rich's comment there that you were referring to. So that $10 million was specifically related, I think, the biologics. But can you just quantify the impact of COVID on your U.S. hardware business a little bit more? If I think about one of your closest competitors who grew north of 10% and called out a 5% impact. I'm just trying to understand kind of the full impact of COVID for you guys kind of late in December?

Yes. So we were doing pretty well until we got to mid-December. And December is always our strongest month historically for the company. It's where we book the most met sales. And so what we saw was COVID really started to impact us in the last weeks (inaudible) see the ramp right around biologics as far as the orders that didn't manifest themselves in the quarter.

We, in turn, saw that trend from mid-December continue into kind of that (inaudible) better, but we still have volatility out there. It is getting better. But part of the reason why we aren't giving guidance today other than my remarks earlier around the first quarter and the full year is that we just want to play this out a bit further and make sure that we're in a place where we feel really comfortable with where things are at.

And then maybe just to kind of tie this up on our Q4. If you just look at the year and we triangulate it again across all competitors, we estimated that the overall impact of COVID was around 9% to-- anywhere from 9% to 11%. And we -- that's about the impact we experienced. We grew out of the 10% mark.

So volatility is within the quarter, volatility geographically, volatility globally. But overall, if you just -- if you sort of spread it out, we believe we were in line with how the market was impacted and obviously, ready to move forward in 2020.

Okay. I think it cut out there. But I think you said between 9% and 11% there, Chris?

Correct.

And then -- okay. And then just lastly for me. You guys, back in '19, Chris, when you stepped in, you put a target of about $1.6 billion out there in 2024. By my math, that's about a 10% CAGR from here to there. And so is that still on the table, in your mind, or is that -- we shouldn't be thinking that especially with 2020's impact?

No. I mean, 2020 is a bit of a lost year. But the innovation pipeline and what we're pushing, it's still in the ballpark. If it takes us another year to get to that number. But clearly, the growth rates and the strategic plan we put in place, we believe, gives us a healthy runway, not only in anterior but also in cervical and taking advantage of our low position in posterior. And then also, obviously, we're doing it with enabling tech and our globalization.

So still in the ballpark. Clearly, 2020 and the impact of '20 and how quickly we recover in 2021 and get back on track is still a bit of a question. But I believe it's still in the ballpark of where we think we're going.

We have a question from Matthew O'Brien with Piper Sandler.

When I look back at LDR and when they launched Mobi-C in the U.S., in the first full year that they were on the market, they did just under $30 million in revenue that year.

So as we look into '22, Chris or Matt, is that a fair kind of expectation that investors should have, you'll have a 1 and 2 level indication? Or if you're not willing to go kind of to that extent, I mean, isn't it fair to think that Simplify should add 150 to even 200 basis points of growth over the next couple of years at a minimum?

Yes. Listen, we're getting this technology sort of precommercial. So we're ramping up our capabilities across the board. Clearly, the manufacturing and the R&D will be an internal integration. We're getting our sales force up and trained, getting curriculum built to support our product with also our professional education. All things, we'll do in '21.

In 2022, I mean, you're saying something that's generally in the ballpark. Again, it's a little early for us to comment. But we're very, very optimistic about the opportunity that we have here. And it's a -- it's an opportunity in a market that's somewhat been set. You'd mentioned LDR. They created the market. We have an opportunity with a very differentiated product, both from how this shows up under visualization, specifically postoperatively on the MRI, the proprietary 4-millimeter size of this technology, and we think that's a broadening of the potential patient population that are -- that could present for this type of technology.

And then lastly, striking the balance between what's in the market today with a technology that sort of strikes a right balance between mobility and stability, and we're getting overwhelmingly positive comments from our key surgeons that we've spoken with.

So listen, I'm optimistic about 2022, very optimistic. I'll be hesitant to put a number out there yet because we've got to walk before we can run. But I can tell you that it's going to be a key focus for us as we move forward.

Yes. And then you -- on margin profile. The Simplify Medical deal is very, very attractive. It does improve our gross margin over time, and it gets better throughout the life of our ownership because some things we're doing to -- from a manufacturing perspective, to lean it out further. And the operating margin is also significantly accretive well above kind of our (inaudible) rate.

We have a question from Kyle Rose with Canaccord.

Chris, just wondered if you could talk just about the overall mentality and stability within the sales organization. I mean 2020 has been a tough year, I think, for everybody. You've talked about some of the big product launches over the past several years, maybe being more training focused. So being impacted from an execution standpoint in 2020. Just where does the stability of the sales force fall right now? And have you lost anybody -- any key distributors? Anything along that perspective?

Yes. Thanks, Kyle. Appreciate the question. Listen, I spent a lot of time, and I actually -- I mentioned this in some of the prepared remarks. We brought in some fresh faces that complement just a tremendous amount of knowledge and know-how in the spine industry. And I think -- that those things coupled together starting to mesh what I consider to be a very healthy mentality, a very healthy culture.

2020 was hard for everybody. I think it was specifically hard for our commercial teams, but I was proud of the company. We stepped up and bridged the gap in compensation. And I think that there's an acknowledgment of that within our sales channel. And then you said it, our innovation and what we've got coming down the pike, I think people see it clearly.

Simplify was well received. I was with a lot of our RVPs this morning, actually, and some of the newer leadership I've brought in more recently. And I can tell you that there's a growing excitement, a growing level of bullishness on where we're taking things. And clearly, coming up a year like 2020, it's welcome to get together and actually get to sit down and talk to one another.

As far as turnover in the sales force, I mean, we have turnover, and we have competitive gains every year. I've kind of said this before. It's a part of the industry. We'll continue to try to lead our advancement to attract talent through our innovation. And I think if you're a competitive rep out today and you see what we're doing with Simplify, what we're doing in cervical, the opportunities we see with enabling technologies, hopefully, you'll see this is a place to want to come to, and we continue to see interest and pick off key talent from our competitors. And from time to time, we lose talent. So the churn is not meaningfully different. I think the innovation pipeline and some of the cultural changes that we're feeling now are better than they have been.

So I'm actually bullish -- more bullish now than I was when I started with the company 2 years ago about where we are in our commercial organization.

We have a question from Shagun Singh with Wells Fargo.

So I guess the first one is on margins. Matt, I think previously, you had indicated that we should think about 2019 operating margins of about 15.8% as the floor, and you would expect a modest step-up from there. And I think today, you've indicated that we should assume an additional $10 million from Simplify. So what does that net out to? Should we still -- should we expect you to be flattish year-over-year? So that's question number one.

And then secondly, just on M&A. It looks like you do have additional firepower to do deals. How are you thinking about other areas of interest as well as deal size?

Thank you. So yes, margins, we've said all along that the operating margin improvement that we talked about in 2019 was back-end weighted from a strategic plan perspective. And so this year, with a COVID impact, it's a bit unclear as to how this all is going to shake out. Our operating margin should be lower in the first half this year, and then we'll pick back up in the back half. And yes, the $10 million is a clear headwind from the Simplify add. But as we said in the prepared remarks, we're really excited about it, and we're excited about the fact that it becomes profitable next year. So we don't have to wait that long to start driving the bottom line. And as I said earlier, the margins are very attractive on this transaction.

And then finally, from an M&A perspective, yes, we do have additional firepower. We envision generating positive cash this year, much like we did last year and the years before. We have not touched our $550 million revolver. The debt capital markets are incredibly attractive right now. So we don't feel any constraint. We just want to find really good deals like the one we announced yesterday.

Our next question is from David Lewis with Morgan Stanley.

This is Drew Ranieri on for David tonight. Just a question on international, to start. But just you broadly sound confident on reaching your 2024 LRP and international. It seems like it's a bigger component of that for revenue. But just with the resurgence lingering globally, I know we have ongoing vaccination. Is there anything that changes in your thinking about international? Do you need to make any more investments to drive potential incremental revenue there? Or are there even more attractive regions or countries that look more attractive today than they did a year ago or 2 years ago?

Thanks. The simple answer is we're still very excited about international opportunities. And nothing material has changed. And I still think that the opportunity to grow in those markets -- I do think there's ongoing investment that is taking place as we speak today and will continue going forward. But I believe we continue to add strength in our key markets, the performance of our Asia Pac team this year, inclusive of Japan. Even through the COVID crisis, we saw pockets of strength in Europe and just a resiliency across the globe, really, to deliver during this time to the extent that they could based upon their situation.

So generally speaking, I still think there's significantly in our existing markets. And as I've said before, there's still various attractive markets that we're not participating in today. And some of those are within our short-term reach and some may be within the mid- and long-term rich based on portfolio. Things like Simplify may accelerate our opportunities in certain markets, and we're also looking at M&A opportunities like Simplify or maybe other things that would accelerate our opportunities in some of these key markets.

But we're still committed to the globalization opportunity. We saw, I think, strength amongst our competitors, significant strength within our business over the course of this year, which was a disruptive year, which gives me even more confidence of our ability to deliver our commitments over the next several years.

Our next question is from Kaila Krum with Truist.

This is Sam on for Kaila. Just wanted to ask one on reimbursement and the updates around preauthorization for cervical fusion. Want to start to see if you -- have you seen any impact on that in your fusion business? And is that playing in at all into the Simplify transaction? And if you think that this could benefit or the disc market more broadly could benefit from those reimbursement changes?

Thanks, Sam, for the question. Generally speaking, no, we don't see any impact to our cervical fusion business because of prereimbursement -- preauthorization, I should say.

We do believe and do believe that changes in reimbursement over time could benefit the Simplify acquisition. We think we've seen those changes over the last few years. A lot of these -- this is a procedure that we mentioned earlier. Many of these are done in the ASC. There was some deficit there early on. I think that's being neutralized now with some of the reimbursement decisions made. There's still work to be done there. And we'll be an active participant to ensure that we're supporting that -- those changes from a reimbursement as we move forward.

Our next question is from Craig Bijou with Bank of America.

Just a couple of quick follow-ups on Pulse. So you mentioned the $5 million in '21. So just wanted to see if you guys can provide a little bit of color. Is that capital sales revenue, disposables? Just how to think about that?

And then in '21, can we see that $5 million from Pulse double? Or is it a multiple higher than that? How -- sorry, in '22, how should we think about Pulse revenue in '22?

Yes. So the way we're thinking about Pulse is the plus or minus $5 million, I think, is reasonable because, obviously, the launches later this year so we start to see the benefit. We'll get a full year sales cycle next year. So yes, (inaudible)

We're going to be as flexible as we possibly can as to whether it's capital sale or a cash sale, lease to buy, whatever model it is. We have kind of a mix in our numbers. in our assumptions as to how that's going to play out.

I would also add that we see units sold this year, both here in the United States and in Europe in that number.

Our next question is from Jason Wittes with Northland.

First off, on -- I appreciate your conservatism on the Simplicity Disc (sic) [Simplify Disc]. That said, it does seem particularly well positioned potentially to take quite a bit of market share. Is that a fair assumption? And is there the gatekeeper just training the field out there to be able to capture that share?

Yes. Thanks for the question, Jason. Generally, I would say that it's really just -- it's precommercial. We got to commercialize the product. So we've got to train up our existing sales organization. We've got to make sure we integrate the company effectively from a manufacturing, from an R&D perspective, that will be ongoing. We got to make sure that we train on how to use the product properly. We want to make sure that we do what's right and build our curriculum to train our surgeons and educate along the way.

So it's really just amping the product up. It's an implantable technology, and we want to make sure that we are approaching it the right way. It's within a warehouse of what we always do, and these things do take time.

We're also looking for the Level 2 approval this year. I think that will further accelerate the growth of the product. So that comes early, there's potential to outperform. But the fact is we're on a time line. I think it's the right time line. And as we move forward, we do believe, as you said, it's a significant opportunity to take share.

We have a question from Anthony Petrone with Jefferies.

Hope everyone is doing well. We're hopping between calls, apologies if a couple of these were asked. But the first one would be maybe to just level set where you see the underlying spine market in terms of volume growth at the moment, even considering that COVID's a headwind. And maybe the latest trends on price, and if you can give an update on where NuVasive share is exiting 2020?

And then the follow-up on Pulse would be the system is modular and it's coming out ahead of Robotics. And so how do we think about adoption when you factor in the 6 modules that are available? Will it be offered as a complete suite? Or do you think a lot of accounts will accumulate piecemeal?

All right. Let me try to hit on some of these. So the underlying spine market, we thought the market pre-COVID was growing in the in the 0% to 2% range. I don't think that's necessarily changed. I think the COVID dynamic obviously slows the market down and had an impact in 2020.

Moving through this year, we think we'll get back to previous volumes, which reflect those numbers that you've probably seen in the past. Pricing, I think, has remained relatively unchanged versus what you may have seen in the past. Our share position remains relatively unchanged. We consider ourselves a #3 share position player in the market, slightly behind the pew with our sights squarely set on changing that over the next year or so.

Pulse, will it be for all the applications. Listen, on Pulse, just again, we believe that the runway is still substantial, that the relevance and the utilization of things like navigation and Robotics in the market today is still early. We think the integrated nature of this technology provides an opportunity to be used in 100% of spine cases. I think that is a gating item that gives us a competitive opportunity. And by installing Pulse and what both Pulse represents with neuromonitoring, imaging, Bendini, LessRay, iGA, then adding a robotic application, creates a truly unique platform in the market, and we're dedicated to bring that to market over the next 24 months.

And we have a question from Matt Taylor with UBS.

So I wanted to ask one, just about your decision to not give formal guidance this year. You gave us some color. But why not just give conservative guidance that you think you can hit? What's your philosophy behind guidance going forward? And when do you think you might be able to start to reinstate it?

Yes, this is Matt. We decided not to give formal guidance because as we track our net sales, there is some volatility that I mentioned earlier, both from COVID and also weather, and we wanted to give it a little more time. This being said, I would just echo what I said earlier, which is we do think our first quarter will be plus or minus in line with what we posted last year. Last year, we came in at $260 million. So COVID impact there. And then on the full year, consensus is -- makes sense to us, plus or minus, we're in the zone of where consensus is right now.

So just wanted to give ourselves more time before putting something out there that is formal. But I think we've given you enough to have a good understanding of how we're thinking about the company this year.

And Mr. Barry, there are no further questions at this time. I would like to turn the call back to you for your closing comments.

Thanks, Scott, and thanks, everyone, for your questions. Thank you, all, for participating in the earnings call today. I'm confident that the investments we've made in 2020 and how this position NuVasive, to continue to make progress against our long-term strategy will continue to unlock value for our stakeholders.

So with that, we look forward to speaking to you all next quarter. Thank you.

That concludes the call for today. We thank you for your participation, and we ask that you please disconnect your line.