NuVasive Inc (NUVA) 2020 Q2 法說會逐字稿

Greetings and welcome to the NuVasive, Inc. Second Quarter 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, Suzanne Hatcher, Vice President of Internal and External Affairs. Thank you. You may begin.

Thank you. Welcome to NuVasive's second quarter 2020 earnings call. The company's earnings release, which we issued earlier this afternoon, is posted on our website and has been filed on Form 8-K with the Securities and Exchange Commission. We have also posted supplemental financial information on the IR website to accompany our discussion. We're going to begin with prepared remarks from our CEO, Chris Barry; and CFO, Matt Harbaugh. Then we'll open up for Q&A with Matt Link, President, joining us during that portion of the call.

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 around the duration impact of the COVID-19 pandemic on the company's business, operations and financials. The COVID-19 pandemic continues to evolve, and it's important to note that our commentary reflects our best estimate as of today's date. Additional risks and uncertainties that may affect future results are described in NuVasive's news release 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 those as non-GAAP financial measures. These measures include our cost of goods sold, gross margin, sales, marketing and administrative expenses, research and development expenses, operating margin, non-GAAP earnings per share, free cash flow and EBITDA. Reconciliations to the most directly comparable GAAP financial measures may be found in today's news release and the supplementary financial information, which are accessible from the Investor Relations section of NuVasive's website.

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

Thank you, Suzanne. Good afternoon, everyone, and thank you for joining us. I hope all of you, your family and friends can continue to stay healthy and safe during these times. Moving through the second quarter and now into the third quarter, we continue to make forward progress on our business, financial and operational strategies while keeping the safety of NuVasive employees and customers at the forefront. This is particularly important as we adjust to operating within a new normal, including extending work-from-home options for our employees globally, and implementing safety protocols at our physical sites and amongst our build teams who serve within a hospital setting.

I continue to be impressed with the level of productivity and adaptability our employees have demonstrated. NuVasive is also taking steps to support the local communities we live and work in to help minimize the spread of COVID-19 by instituting processes that meet or exceed the health agency and local government guidelines.

I'd now like to turn to discussing the second quarter 2020 performance, which is in line with the preliminary financial results announced on July 20. I will share further commentary on the quarter and how the remainder of the year is shaping up related to our priorities. I will then turn the call over to Matt Harbaugh, who will discuss our second quarter 2020 financial performance and liquidity and cash position.

As with nearly all med tech companies, we experienced a temporary but substantial impact on the business due to the COVID-19 pandemic as a large portion of surgery cases supported by our technology and services are considered elective. The decline in procedural volumes in April was, as expected and communicated on our last earnings call, the hardest hit month-to-date, which drove net sales down nearly 70% from prior year. The good news is volumes increased at a significant rate through May and continued to improve throughout June. While June still represented a low double-digit year-over-year decline in net sales in the business, there were pockets that returned to growth in the month based on geographical impact from COVID-19.

Local procedural volumes for July remained fairly steady and similar to the exit rate from June. We continue to actively engage with our surgeon partners and short data on a regular basis that gives us a better understanding of what the business may look like over the next few months. While procedural volumes have gradually improved over the second quarter and into July, it is important to understand the trend line is starting to taper, and it remains uncertain whether the business will return to growth by the end of the year. While I remain optimistic in reaching pre-COVID-19 volume levels, this hinges on several factors with many of them out of our control.

To start with, hospitals continue to work through the backlog of patients signaling an ongoing demand for spine surgery and better-than-anticipated patient willingness to go into the hospital for surgery. However, many of the surgeon partners say that new patient clinical volumes continue to remain suppressed, creating uncertainty in the level of future volumes. On a positive note, hospitals are broadening their service lines, and we're seeing a greater variety of spine surgery cases occurring now compared to when elective surgeries first resumed in May, including multilevel fusions, complex and deformity cases, in addition to the simpler fusion cases. With the more recent increase in positive COVID-19 cases in certain cities over the last few weeks, localized government mandates and hospital responses continue to lack uniformity with hospital protocols and procedures varying in certain situations between hospitals that operate within the same city.

Looking even further ahead, it's uncertain how some broader issues may affect health care, including unemployment and loss of insurance coverage. Again, the takeaway here is that I'm optimistic overall given some positive signs pointing to a pre-COVID level recovery of the spine surgery market. But it's uncertain how long it will take given the variables that we need to see further play out.

Now I would like to transition to discussing the company's innovation efforts and other priorities for the remainder of this year. As communicated since the start of the pandemic, NuVasive is committed to maintaining the level of R&D investment budgeted for at the beginning of the year to continue to make solid progress on our technology road map. We remain highly focused on executing against our 5-year strategic plan through differentiated spinal hardware solutions and enabling technologies to continue our position as the innovation leader in spine. The X360 system and our focus on less invasive surgery continues to be a key growth driver for the company.

Last month, NuVasive launched a less invasive spine surgery campaign titled, It's Time to Evolve. This campaign includes new online resources and enhanced virtual training capabilities to educate health care providers on the benefits of less invasive surgery over traditional open posterior approaches, including reduced operative time, blood loss and length of stay, all of which are key efficiencies that are more important to hospitals and surgeons than ever before. As part of the new resources, NuVasive's clinical professional development team has expanded its online training and development courses on less invasive techniques through targeted peer-to-peer engagement, interacting learning modules, cadaveric trainings and weekly webinar series. Our recent webinar series have been positively received and viewed by thousands of health care partners. In addition, we have seen in-person training requests increased globally over the last quarter.

Turning to our innovation road map. We're excited about the new technologies that have recently launched or will launch in the second half of the year. The Reline 3D posterior fixation system for pediatric patients suffering from spinal deformities launched in Q2. The system unifies current deformity techniques involving multi-step single-plane correction into one holistic procedure, enabling surgeons to overcome current inefficiencies in the operating room and further expands our global complex spine portfolio.

In addition, alpha launches are still gaining traction with surgeons despite the pandemic and elective surgery shutdown earlier in the year. We continue to be the innovation leader in lateral surgery and will soon kick off the alpha phase of our next-generation MaXcess retractor as the latest advancement to the X360 system. This lateral retractor will offer surgeons enhanced functionality, streamline workflow and a simplified user interface to help surgeons better address both degenerative and deformity cases. We're also preparing to commercially launch an interior cervical plate and posterior cervical fixation system to help treat degenerative trauma and deformity pathologies by the end of the year. In addition, NuVasive will continue its momentum in transforming the TLIF market by entering into alpha launches for coherent TLIF-O and TLIF-A, rounding out this portfolio with the clinical benefits of our proprietary course peak technology.

Finally, I'd like to give a status update on the Pulse system and Pulse Robotics application. As it relates to Pulse, we have shifted our time line slightly and now expect to wrap up testing and obtain required FDA clearances in the summer of 2021 compared to the previously indicated first half 2021 time line. This is due to several factors, including software and hardware updates following beta testing, as well as the impact of COVID-19. As previously communicated in February, we pulled back the system for beta testing in hospitals to further refine the system. We have since instituted technology enhancements that require additional submissions to the FDA to obtain 510(k) clearance, and given the impact of COVID-19 on the current environment, we've allowed additional time in our time line for further beta testing in the clinical setting. We remain confident in the Pulse system and market opportunity and still anticipate recognizing revenue from the Pulse system in the back half of 2021, as previously communicated.

To keep our commitment on the above time line for release and revenue generation from the Pulse system, we had to shift robotic application resources to work on Pulse full time. We also experienced some hiring challenges related to the COVID-19 environment. As a result, we expect a delay in the first-in-man use of robotics applications likely into the 2022 time line. Our progress relative to development milestones over the next 3 to 6 months will better inform this time line. We are also looking for additional opportunities to bring the development time frame forward, as robotics is a key priority for our imaging, navigation and automation strategy.

Finally, global operations continue to execute well, including leading the manufacturing and distribution demand from customers to help them work through their backlog of patients. In addition, several milestones were achieved this quarter to address European MDR readiness, including a pilot launch of a sterile packaging deployment process and an important regulatory certification was obtained. The company is also leveraging the opportunity to further our focus on operational excellence with warehouse optimization, automated warehouse scanning and supply chain improvements in both the European and U.S. distribution centers. These are critical steps to help enable our long-term international growth plan strategy.

With that, I want to reiterate the company's fundamentals and long-term strategy are sound. The need and demand for life-changing spine procedures remains high. And while impacted by COVID-19, it's not going away. As global efforts are made to control the spread of COVID-19, we are optimistic that procedural volumes can continue to improve and stabilize throughout the third and fourth quarter. We'll continue to navigate this new business environment to advance our market leadership position in spine with innovative technologies, educate on the benefits of less-invasive surgery and fulfill our purpose to surge in the patients around the world.

With that, I'd now like to turn the call over to Matt.

Thanks, Chris, and good afternoon, everyone. Before we get started with the financials, let me remind you that many of the financial measures covered in today's call are on a non-GAAP basis unless noted otherwise. Please refer to today's earnings news release as well as the supplemental financial information on www.nuvasive.com for further information regarding non-GAAP reconciliations. For the second quarter 2020, net sales were $203.6 million, down 30.3% year-over-year as reported and 30.2% on a constant currency basis driven by the widespread deferral of elective surgeries due to COVID-19. These results represent a continual recovery throughout the quarter from April's low point through June as regions around the globe began to reopen and demonstrate varying levels of recovery. Although we did not reach net sales growth versus last year in any individual month within the quarter, we were encouraged by the improving trend.

Turning to the business results in particular, let me provide some further color. U.S. Spinal Hardware net sales declined 29% year-over-year to $113.8 million. Certain portions of NuVasive's product portfolio, such as cervical and pediatrics, were less impacted by the pandemic and experienced quicker recovery throughout the quarter. As more deformity and complex surgeries come online, X360 continues to be a key driver for the business, and we expect this trend to continue for the remainder of the year.

Innovation continues to be a key differentiator for this business and a pillar to NuVasive's ongoing and long-term market leadership. The contributions of several alpha products this quarter, including Cohere XLIF and Modulus ALIF, further validate the company's strategy to maintain budgeted levels of R&D funding during this uncertain time. Equally, it demonstrates surgeon willingness to utilize the latest technology advancements to continue to adopt less-invasive surgical solutions with the end goal of improving patient outcomes.

Net sales from U.S. surgical support came in at $47.2 million, a 36.2% decline over prior year. This result was primarily driven by the impact of COVID-19 and NuVasive clinical services payer mix dynamics. The NuVasive team remain very responsive in support of our customers as volumes improved throughout the quarter, all while navigating the new hospital working environment. In addition, NCS continued to drive business and operational efficiencies during this time.

Turning to international. Net sales were $42.6 million for the second quarter, declining 26.4% year-over-year as reported and 25.7% year-over-year on a constant currency basis. Similar to trends we saw in March and discussed on our last earnings call, it is evident the impact and recovery is not uniform across all regions and continues to evolve based on local response to the pandemic. In particular, we saw a solid performance from Australia, New Zealand, parts to Northern Europe and Japan throughout the quarter, while other geographies like Southern Europe, the United Kingdom and Latin America were more negatively impacted.

Turning to the rest of the P&L. Non-GAAP gross margin for the second quarter was 60.5%, a decrease of approximately 13% when compared to prior year. This decline included $21 million in incremental inventory resulting from pandemic-related impacts. We assess the adequacy of our inventory reserves every quarter. After examining a number of factors and assumptions, including quantities of inventory on hand, historical turnover, product life cycles, previous and continuing efforts towards new product introductions and uncertainties around anticipated future demand, it led us to increase our reserve for excess and obsolete inventory in the quarter, which was primarily focused on older product lines. As you know, NuVasive prides itself on continual product innovation, which inherently could obsolete some products prior to the end of their previously anticipated useful life.

Non-GAAP SG&A expenses decreased by $24.9 million compared to prior year to $124.8 million. This was primarily driven by variable expense reductions from the impact of COVID-19 on net sales, coupled with actions taken by management in April to deliberately decrease operating expenses.

As we noted earlier in the quarter, we implemented actions to reduce expenses, including compensation reductions for our Board and executive officers as well as reducing discretionary spend across the organization.

Non-GAAP research and development or R&D expenses totaled approximately $18.2 million or 8.9% of total net sales in the second quarter. A 300 basis point increase over prior year further demonstrates our commitment to maintaining R&D investment even in this uncertain environment to continue developing innovative technologies that shape the future of spine care. Second quarter non-GAAP operating margin came in at negative 9.8% or a $19.9 million loss as compared to a gain of 16.3% or $47.6 million in the prior year. Non-GAAP tax benefit in the quarter was $5.5 million, resulting in a non-GAAP effective tax rate of 21.2% versus the prior year tax rate of 23%.

In the second quarter, the company reported a non-GAAP net loss of $20.4 million or non-GAAP diluted loss per share of negative $0.40 compared to non-GAAP net income of $32.8 million or non-GAAP diluted earnings per share of $0.63 for the same period last year.

Turning to GAAP results. GAAP net loss for the second quarter of 2020 was $50 million or a GAAP diluted net loss per share of $0.98 compared to net income of $15 million, or GAAP diluted earnings per share of $0.29 in the same period last year.

Finally, free cash flow for the second quarter was $3.9 million versus $37.5 million in the prior year. Our positive free cash flow in the quarter was a result of our focus on reducing both operating and capital expenditures to mitigate the impact of COVID-19 while at the same time, maintaining stable working capital metrics. Notably, throughout the quarter, our cash collections remained strong, particularly in the United States. As it relates to guidance for the remainder of 2020, at this time, we are not reinstituting guidance as visibility for case volumes continues to be limited given countries are in various stages of their Phase III opening and response to the pandemic can vary by region, state and even hospital. The company is unable at this time to predict when or how quickly case volumes will return to more normalized levels. We are speaking with surgeons, hospital administrators and our commercial teams on an ongoing basis to garner information on the local market recoveries to help shape our evolving forecast for 2020 and beyond.

Before I discuss NuVasive's cash position, I want to give some insight into how we are thinking about volume trends for the third quarter. From what we have seen in July, surgical volumes remained stable from where we exited in June. And we anticipate this to continue throughout the third quarter, unless things take a turn for the worse. The good news is that we are far off from lows that we saw in April and continue to see hospitals and patients push forward with spine surgeries. Obviously, if things take a turn for the worse, surgery volumes could decline, but we are optimistic that current volumes will hold.

As Chris shared, there are still many variables such as patient sentiment, effects of unemployment and loss of insurance coverage that directly impact the rate at which the spine market could return to more normalized case volumes.

Now turning to the company's cash position. NuVasive maintained a strong cash and liquidity position and ended the quarter with $927 million of cash, cash equivalents and short-term investments on hand, along with an undrawn revolving credit facility of $550 million.

In late May, NuVasive took steps to further solidify our capital structure and completed an additional debt offering of $450 million of convertible notes due in 2023 in preparation for repaying the $650 million convertible notes due in March 2021. In addition, the company entered into an amendment on its $550 million revolving credit facility to provide additional flexibility in determining its financial covenant leverage ratios for the second and third quarters of 2020. This additional capital raise, along with improved flexibility to access the revolver, provides us liquidity to meet our short-term financial needs and plan for long-term investments.

I am confident in the overall financial health of the business, the disciplined approach we are taking with our balance sheet and how this allows NuVasive to navigate the current environment. In conclusion, NuVasive experienced the most acute impacts of the COVID-19 pandemic to date in April but recognized case volume improvement at a far faster rate than originally anticipated in early May with further improvement in June. We are encouraged by this momentum and remain cautiously optimistic from the shape of recovery for the remainder of 2020.

NuVasive's long-term strategy and innovation road map continue to guide our team's work who are using this time to develop alternative approaches to continue delivering on our commitments to surgeons and patients.

Lastly, I want to take this opportunity to recognize our global teams who rally to meet the uptick in demand for surgeon customers and patients throughout the quarter and their resiliency in overcoming the challenges within this new working environment. It is with this collective strength and commitment, NuVasive continues to uphold our purpose to transform surgery, advanced care and change lives of patients around the world.

Thank you. And with that, I'd like to turn the call back over to the operator to start the Q&A session.

(Operator Instructions) Our first questions come from the line of David Lewis with Morgan Stanley.

Well, great. Chris, just want to flesh out how you're seeing the recovery a little bit here. I mean you obviously talked about July stable with June. I'm just sort of wondering in the month of July, do you think that stability reflects more resurgence in certain pocket areas? Or any dynamics as it relates to the backlog as it relates to reschedule patients versus de novo patients? And then kind of related to that, you've been consistent in looking for recovery more in the early part of '21 versus your peers in 4Q. And just maybe help us understand some of the assumptions that go into that view as we trend through the remainder of the year,

Thanks, David. Thanks for the question. As we -- as I kind of talked about some of the prepared statements, we saw continuous improvement through June and have seen that continue through July. I would say, though, that we're still looking for sort of a month-over-month, if you will, uniformity to the recovery. So I still believe that although we saw good acceleration of recovery through June, that's continued to into July. Although it has tapered, meaning that you're seeing more normalized volume, we're still yet to really crest that previous year of volume. And to the -- I think some of the June volume and that acceleration was truly a lot of the backlog of patients. I think you're seeing a significant mix now in July. The question I have in really in Q4 is that less 5%, 10% of volume to get us back to previous year's volume, I think that's going to be challenging with some of the uncertainties that we see. Specifically, the impact of potential election, the unemployment, the potential loss of insurance. There's still, to me, certain variables that are challenging for me to see how we get fully back to previous year's volume by Q4. I don't think it's out of the question, but I think everything would have to go fairly well with some of the resurgence you're seeing in certain markets. Although those markets are not anywhere near where they were in the April time frame, so they're being creative. We still don't truly understand the impact of what you're seeing in areas like Florida and California that may reflect into September, October and into the back half of the year. So I'm optimistic and more optimistic than I was at this time when we talked last quarter. But I'm still somewhat uncertain as to our ability to truly climb back into previous year's volume by the fourth quarter because of those uncertainties that I spoke of.

Yes. David, this is Matt Harbaugh. Sorry, David.

No. Go ahead, Matt, you're more important to me.

No, no, no, not at all. What I was just going to say is, as we're thinking about the back half of the year, which kind of really gets to your core of your question, I would say for the third quarter, when we look at consensus, we see the business a bit stronger than kind of where things are at. And it appears that the fourth quarter is returning more to normalized levels. And I would say hard to really predict Q4 right now to all of the points that Chris just made.

Our next question is coming from the line of Matt Miksic of Crédit Suisse.

Yes. Just wanted to follow-up, Chris, if I could, on your comments on the Pulse pipeline, the beta testing that you need to get done and the commercial time lines that you've laid out. If you could maybe -- because that's been -- there's been a lot of moving parts. I understand the environment is changing. Access to docs and reps and putting reps and centers to get the beta feedback that you need is more difficult. I guess at this point, how confident can you feel in the commercial time line? Just maybe help us understand what allows you to hold that, but maybe push some of the other elements to the time line. And I have one quick follow-up, if I could.

Sure. Thanks for the question. As I kind of mentioned, we expect to wrap up our testing and obtain all the required FDA clearances in the early spring and summer of 2021. The updated time line, although not drastically different than what's been previously communicated, we did add some time there. Again, some of the factors, including software and some partner updates following some of the beta testing that we discussed last quarter. Making some software and component-level hardware updates does require some additional FDA approvals. So we have built a little bit of time in there. We've also resourced it up over the last several months to make sure that we're staying very close to that time line.

Now there's some obvious environmental challenges that we see from COVID-19 but all things that we built in the time line, I think, provides the level of buffer to get back into the clinical setting early in the year, progressed through the FDA and the clearance process, and still maintaining those time lines as I communicated around summer. If you remember right before, it was first half, we built a little bit of buffer to that because of all the things that I just mentioned plus with the COVID-19 environment and some of the challenges from the clinical setting and getting some of these things done. But I believe we have a clear line of sight to our plan around beta testing. I think we get sites on the queue. So I feel very confident. It's been a clearly a learning process for NuVasive.

But having said that, this is a very unique platform. It's a one of a kind. It, obviously, as we talked about, innovative platform providing independent wireless access optimized guidance and surgical workflow, open imaging, customized to each one of our unique needs. So this is a fairly sophisticated system. But as we've worked through it over the last several quarters and years, we're getting to that point now where I think every day (inaudible) risk and our confidence goes up.

So I don't know, Matt Link, if you had any comments on our line of sight to the actual pathway to commercialization?

Yes. Chris, I think you hit on all the major points, which are -- we have continued to be able to make progress against critical milestones. I think we've appropriately accommodated in our updated time line consideration for the current environment, which certainly has some level of variability with respect to our access and the like. But given the time line into the first half of next year into summertime, I feel confident that, that has been appropriately taken into consideration for our milestone. So we will continue to work towards that end. And at this point, I feel like we've -- as you commented, Chris, appropriately resourced and derisked our approach to that time line as we look forward.

That's super helpful. And then just quickly on the follow-up. Just any color you can provide on some of the digital strategies or things you're doing differently in this environment to kind of help keep interactions up and continuous with surgeons and whether X360 and the efficiencies that, that system brings have been a catalyst or have been a part of helping centers be more efficient in this environment.

I'll take the first part of it, and then I'll have Matt comment on how our customers are and our surgeon partners are embracing X360 and how that, I think, has actually been accentuated by this crisis.

On the first question, this has been, I think, a bright spot for us as an organization. They work specifically with our clinical professional development team. NuVasive, I think we've prided ourselves on providing top-notch education and support to our certain partners in the clinical staff. And we've done that historically through one-on-one engagements. People coming on-site in San Diego, us going to the hospital setting. And clearly, that was a limitation or basically was an impediment for us delivering that support and continuing that education. So the team was very creative. We really, I think, accelerated our online capability and our digital capability with the webinar series that the team developed, our ongoing virtual training sessions. All of those things -- I mean, the numbers were incredible to me. And the receptivity of our surgeons and their response has been overwhelmingly positive. So that has also driven what we're now seeing, which is a much more, let's just say, vetted surgeon population, and our requests for one-on-one training has never been higher, coming out of this crisis.

Now we're still somewhat limited in some of our locations. But our capabilities and the work that went into CPD, our clinical professional development team and what they did, I think will be a best practice for us and something we'll build upon going forward. So that's the capability that I believe we needed. I believe that it enhances not only our domestic education programs, but also really gears us up for some of the global expansion that we -- are a clear part of our strategy. So I'm impressed with how we've responded and the creativity the team has shown. And I think it's a core capability that will pay dividends for us in the future. Matt, do you want to talk on the X360 piece?

Yes. So again, I'll echo all the comments you made, Chris. I think the team has done a remarkable job pivoting to a digital platform both with respect to training and education, but also to think about how dramatic the shift has been in our sort of traditional commercial model and engagement with our customers and showcasing our products and technologies through sort of the historical trade shows and conferences, all of which have shifted to a virtual environment as well. And so developing these digital platforms and digital strategies have been critical. As it relates to XLIF and X360, that has been a key pillar within our digital strategy, both in terms of sort of training and education, but also clinical indication for different applications of the procedural approach, leveraging our existing faculty and our editorial faculty that has helped build and train -- and develop the training criteria.

As many of you, if not all of you know, we were prepared at the early part of this year to open and showcase a new training and customer experience center. And while, to Chris' comments, the environment have caused some limitations in terms of our ability to engage groups of surgeons for training. We have been able to do small groups and individuals. And the other aspect of that training center and experience center is a technology platform that allows us to share and broadcast both didactic as well as cadaveric training from that facility out to sites and learners across the U.S. and around the globe. And so certainly, we've seen a pretty significant shift with respect to our traditional curriculum. We're leveraging further trainings that are local, utilizing non-NuVasive facilities to bring that training closer to our customers and mitigate obviously the risk and concerns associated with travel.

And then over the last several weeks and months as the market has opened up, we've seen resumption of a higher number of scheduled and elective surgeries. We have been able to leverage our field organization, including our commercial development team focused on XLIF and X360 to get out and do targeted training and development activities with surgeons who are either in the process or interested in incorporating XLIF and X360 to their practice. And that's not just in the U.S., but we're starting to see a more open and permissive environment for those types of engagements and training activities in Europe as well as Asia Pacific.

Our next questions come from the line of Josh Jennings with Cowen.

I was hoping to just start by asking about some intra-quarter trends. And as you look into July, Chris, you mentioned that you're seeing more complex cases getting into the mix. Can you help us think about that trend and where you sit today? Because if you think about those multilevel degenerative cases, more revenue per case for NuVasive. And where are you relative to pre-COVID as you're exiting June and in July relative to that recovery pace, is it on par? And then just on the follow-up, just to ask about your sales force incentivization. It sounds like during the downturn, you treated your sales force well. You help support them during those April and May months. How are you thinking about incentivizing them here as we move into the back half of '20 into '21? Are you thinking about year-over-year growth targets, sequential growth targets? Anything that you can help us think about the sales force incentivization in this period would be great.

Thanks, Josh. I'm going to -- Matt is closest to this one, so I'm going to have Matt Link speak to the revenue per case, so I'll just pick at that. It's generally in line with pre-COVID levels. So that -- the mix of cases is now more normalized. It's really just a volume question, at least the way I look at it, coming out of June where it was more skewed to simpler fusion cases. Now we're seeing the more robust cases, which is a promising and -- which brings us a lot of optimism that the full-service lines are now engaged. So we're roughly -- and Matt, you can check me on this. We're roughly at a pre-COVID level in revenue per case. As far as the sales force, Matt, I'll let you speak to that one.

Yes. Just to confirm your comments. Our revenue per case and a sort of sub indicator of revenue per case or number of levels per case are back in line with pre-COVID levels. We've seen a steady recovery with some of the more complex procedures. We saw a little bit of an earlier rebound and sort of the lower risk population of patients, which would include some of the adolescent pediatric, and we've seen that start to flow back through to the adult and complex deformity now.

Yes. Fortunately, for us, as it relates to sales force incentives and compensation, our compensation and incentive design naturally supports the -- I think the appropriate targeting and activities that we would want to see as we think about recovery in the back half of the year and we think about recovery really through 2 primary dimensions participating fully in the recovery of volume. So that's in part reflected to the breadth of technology portfolio able to support all types of cases, and in some instances, maybe become a further preferred technology supplier because of the focus on less invasive and minimally invasive procedures.

And then, look, we also want to continue to execute against our plans we had coming into the year as it relates to market share shifting activities and competitive conversions. And all of those are supported within the existing compensation design we had for our teams. And so no material changes. But I believe the incentives as we look not just across the U.S., but the markets outside the United States, certainly support the incentivized growth and continued improvement that we would expect to see, as Chris said, through the back half of the year and into 2021.

Our next question comes from the line of Matthew O'Brien with Piper Sandler.

Just to put a finer point on the Pulse Robotics commentary. You're not the first company to suffer a delay on the robotics side. Globus did. I think, Chris, when you were at Medtronic with the robotic surgical system there, there's been delays there. So that's not overly surprising. But when I hear software issues, the hardware stuff is fixable, but the software commentary is a little bit more concerning to me because I think that's been the area that's been difficult to fix. So how much of the delay is software-related? And how strongly are you convicted that you have that piece of the equation figured out going forward to get to that summer 2021 time frame? And then without the robot, maybe for a few months, how do you feel about continuing to be in a position to take share in this market with a couple of other companies out there having a robot, really being able to focus on that and get market share? Can X360 and the cervical products be enough for you to keep taking share as you're waiting to get that system on the market?

Yes. Great question. And clearly, software for -- I think a lot of med tech companies becomes the Achilles heel and learning how to become a better software developer. In this particular case, we actually had a component level issue. So the software changes are related to the component change. And so the overall architecture of our software is stable, very stable. We feel very good about the integrated software that has been developed with this case. But when you have a component level change, that does change the software requirements that we then had to go back and adjust. That really didn't spurred the 510(k) extension. And as robotics as an application within the Pulse system, we got to get Pulse figured out first. We're running parallel pathways, but then we obviously pulled resources over to the Pulse system to mitigate some of the (inaudible) that was created. We pulled that back. But now we're left with a bit of a gap on the robotics program.

Now I sit here today, understanding that I had some resource changes and also had this situation with the COVID-19 and our organizational commitment to maintaining as much financial stability as we could. All of that being said, we'll know a lot more about the robotic application over the next 3 to 6 months. So I will feel much better when we have a chance to really get more assessment about what can we do not to pull the robotic time line back into an earlier date. As I sit here today, it's just -- it's not -- it does create that delight.

Now having said all that, today's environment, one of the few things that works in our favor is today's environment and some of the capital restraints we're seeing in certain markets. Right now, robotics, although don't get me wrong, we're dedicated to our navigation, automation and robotic strategies, but they're not hurting us per se today, at least not -- they're probably -- they represent an opportunity cost. But we're able to continue to take share and grow our business, at least today, without the robotic application. We're laser focused, but the current environment has given us some level of their cover. Now how long that will last? We don't know. So we're being as creative and as aggressive as we can on making those assessments and bringing on new talent and making sure we have the most talented engineers working on our projects.

But as I look into the first half of next year, the last half of this year, first half of next year, I'm not overly concerned that we won't be successful. We've got a fairly significant amount of new products. We continue to do very well and continue to proliferate X360 technologies. The new products that we've launched in Q2 where we're launching in later this year. And our cervical portfolio are showing great signs of growth, and we're seeing good receptivity in the market. So I'm confident we can mitigate the gap that we see within these projects for the time. And I think COVID-19 situation actually works in our favor on this regard. But to be clear, we need to get these products onto the market. There are gaps in our portfolio. Our proceduralization strategy are inclusive of these technologies. So for us, it's not a question of if it's when and we're pulling every lever we can to bring these time lines the closest as we can.

Our next question comes from the line of Kyle Rose with Canaccord.

Great. Just 2-part question for me. One, in line with some of the Pulse questions, I understand the reasoning for the delay. Maybe if you could just also help us understand how you think about the commercial model there. Some of the competitors, maybe on the total joint side or the robotics side have talked about customers increasingly looking towards the placement model or the utilization model or leasing as well as some increased interest in the outpatient market. Just wondering how you see Pulse in the robotics application from a commercial model perspective? And then historically, you've also provided some color around X360 or the percentage of surgeons using that, and then the opportunity to capture the other parts of that business, I wanted to see if you could give us an update there.

Sure. I'll cover the first piece. And then, Matt, again, I can have him speak to any changes that we've seen in X360 over the course of the last several months. I don't know if there's been a lot. As far as the commercial model, yes, you're seeing a lot more placement models. I think that will continue as hospitals will have, in my opinion, will have a significant hangover from some of the revenue gaps that they're facing. I think they'll be constraining capital where they can. That will precipitate a placement model. Now having said that, I think the spine market, specifically, the fragmentation of the market, for me, it's an opportunity. I'm more than willing to place systems at some point for greater share of wallet, for more share and more predictable share. So I -- we consider the Pulse system and ultimately, the robotic application, as part and parcel to our hardware technology, our monitoring capabilities, the whole proceduralization strategy. And we want to try to capture as much of that surgical geography as possible to really then leverage our technology to create the most -- the best possible patient outcomes.

So I think that will continue to proliferate within the world of robotics and specifically in spine (inaudible) have seen it. I think the current environment will accelerate that, if it already hasn't. It will continue. And then as you have more competition, including our system coming in and with the -- as I said before, the relative fragmentation within the spine market, I think all signals would point to placement in exchange for volume commitments. And we're going to be as flexible as possible coming into the market with the idea that we're looking to increase our position across the entirety of our portfolio. So Matt, you want to comment on X360 and any changes we've seen?

Yes. So to your comments, Chris, I don't think we've seen any material shift or change with respect to our strategy. The caveat of that being, we've obviously seen a pretty profound impact in Q2, specifically with respect to how we're able to access our customers and interact with them from a training perspective, and we've already covered that in a prior question. What I will say, though, is for those who have been trained, we continue to see the benefit of increased pull-through and decreased procedural leakage, so capturing more of the entire procedure. And as we continue to train surgeons and expand their clinical indications for lateral and single-position surgery in their practice, we can also address a wider range of pathologies in larger cases. So I think that's a critical component and consideration as well.

As we've touched on in our prior comments, despite the disruption in training and in particular, in-person and on-site training for large groups. We have been leveraging digital platforms and digital learning environments. We are seeing a continued interest from customers to incorporate these techniques into their practice, and we're leveraging not just the digital platforms but also remote learning environment. And one of the other things we're looking to leverage a little further with the, I think, ongoing concern around travel is how do we leverage local faculty to collaborate with learners within their local or regional geographies in a peer-to-peer environment, either in a cadaveric setting or within the clinical setting. And that's something we're seeing, again, not just in the U.S. but outside as well.

So I think we've got a significant runway. And again, despite some of the challenges in the environment, we are continuing to see robust demand and adoption for those that have been trained.

(Operator Instructions) Our next question comes from the line of Robbie Marcus with JPMorgan.

This is actually Allen on for Robbie. I just had a quick one on the P&L expectations in the back half of the year. I know you called out something like $20 million of incremental cost of sales incurred this quarter related to COVID-19, and I'm just curious like kind of what your expectations are for the back half of the year. To what extent should we expect you to kind of return to that low 70s that you were at previously? Will that be in the second half of the year? Or will it take until 2021, given your expectations for a return to kind of normalized volumes in 2021? And I guess, like kind of similarly on the SG&A side, where do you see like OpEx going in the balance of the year?

Yes. Allen, I'll take that. This is Matt Harbaugh. Thank you for the question. So look, on inventory, that was definitely pandemic-related. We have a normal quarterly review process that we perform. And so we'd look at quantities of inventory on hand, historical turnover, product life cycles, all the usual suspects. You can think about older product lines. And so really, the calculation is pretty sterile. We've been looking at this for many, many years, obviously.

And with our continued focus on R&D investment and new product introductions and the fact that you look at just the amount of revenue that was lost over the course of the last, I'd say, 4 months, April through the end of June, we don't envision another incremental inventory right off to the tune of the $21 million that we posted in the quarter. But obviously, if COVID were to come back very strong, once we would true that up in future quarters, we would review it at that point in time. So what you're seeing is some older products that are slower and moving have now been pushed out particularly in the international regions. And so if you kind of step back and dig into the math, it makes a lot of sense.

As it relates to your question, if you were to add back the $21 million, you'd be -- you'd have a 7 handle on the math. And so yes, as things smooth out, and I think you should anticipate us to be, in any given quarter, in that low 70 to 73 range depending on mix shift in any given quarter.

Our next question comes from the line of Richard Newitter of SVB Leerink.

On the Pulse robotics piece that got just delayed here a little bit. I think in your opening remarks, you characterized it as it may extend into 2022, and I guess I'd like to just kind of get my arms around that time line a little bit. The first-in-man may extend to 2022 versus end of the year 2020. It seems like a pretty long period. And I'm curious, you also said that you're looking for additional opportunities to bring the development time line forward. Does that mean time line forward from 2022? And maybe just talk a little bit about those time lines. And what exactly the resource allocation kind of tripped up in terms of that or a magnitude of push out?

Okay. Rich, thanks. Let me clarify. So basically, the series of events that have led us to make the statement that it will -- as of now, it extends into 2022. And the reason for that is when we encountered the component level issue with Pulse, during the COVID situation, we weren't bringing a lot of engineering talent into the building, and we weren't in the building, so we took a lot of resources and deployed them against Pulse to bring that time line back into where we've roughly had it originally. That created a gap, that plus the component level issue itself, creates a gap because as we talked about, robotics is an application within Pulse. So Pulse has to be stable for robotics then to work off of Pulse. So point being here is the time line is impacted by us shifting resources to fill the gap and bring the Pulse system time line back into roughly what it was before and maintain our commitment to revenue in the back half of '21.

As we look now at the gap created in robotics, that extends our time line into 2022. We are actively looking to go back now and resource. We're actively searching and looking to up the resourcing around robotics. The mark -- as we -- obviously, there's been some resurgence. But coming somewhat out of the COVID-19 situation, we're now having people back on our campuses. The environment is more conducive. So we're putting the robotics program under a microscope. We're looking to how do we now bring that back in? What's going to be re-required? How much -- is it resourcing? Are there time lines, verification validation milestones that we can somehow bring in? That's what I'm saying. It's a culmination of moving resources to accomplish what we needed to accomplish with Pulse, which I feel very confident about. But in doing so, we traded the time line for robotics for the time line for the Pulse, at least in the short term.

Now I'm looking forward on what I'll be able to update you guys on, this time next quarter, is a much greater assessment of what can we do now to ensure that we're bringing that as close back to original expectations as possible. It's just -- for me, to give a finer point on the dates right now would be irresponsible because we need to take a hard look at it. We haven't had a chance to have everybody sit down in San Diego and really go through it in some time. We've been on the phone. We owe ourselves that meeting, and we're scheduling, as we said, to have that done, plus bringing on additional resources to support it. So that's the story of Pulse and Pulse robotics and how they're related as we look at the projects today.

Okay. And then just on the ASC and the trend -- the potential trend to increasing spine surgery procedures in the ASC setting. I'm curious, what have you learned as you move through the recovery? And to what extent is X360 actually starting to push the envelope more in that care setting?

Yes. Matt, why don't you cover the ASC conversation?

Yes. So I think when we talk about the ASC in spine, we need to be really deliberate around what specific procedural opportunities are best associated with that type of shift in the site of care. And so you have a segment of uninstrumented lumbar procedures, decompressions, discectomies and the like that are currently commonly done on an outpatient basis or potentially in the ASC as well some cervical fusions. We are seeing some continued and growing interest in the ability to do more simple and straightforward degenerative lumbar fusions in an ASC setting. And those are absolutely the types of procedures that benefit from a less invasive intervention like XLIF and X360 as well as many of our other MAS interventions like MAS TLIF or MAS PLIF. And so that is absolutely part of our focus moving forward.

As you heard Chris mentioned in his remarks previously, in the opening comments, that we have an ongoing campaign, It's Time to Evolve, really focusing on the incorporation and integration of less invasive techniques into surgeon practices. Reducing the risk and morbidity associated with those procedures in the inpatient setting, but also then making those fusion procedures, candidates to be identified as a potential area to shift side of care from a traditional inpatient setting to an outpatient or ambulatory surgery center setting. So it's really -- when you think about that specific subset of procedures, which, again, are sort of degenerative lumbar fusions. It's first continuing to build proficiency within the clinical practices to utilize MIS techniques or less-invasive techniques for those pathologies, and then partnering with surgeons and how they can shift those procedures to an ultimate side of care in a very cost-effective and efficient manner. And I'd say that in general, as we see across other surgical specialties, including orthopedics, there's absolutely a desire to leverage those alternate care setting, both on the side of the individual providers as well as the health systems themselves to increase their capacity to serve all patients and all medical and surgical conditions leveraging a wider range of care settings, both inpatient and outpatient.

So we're continuing to lean in. We see strong surgeon interest there. I think there are certain other procedural interventions, as I mentioned in spine, either uninstrumented lumbar procedures or even potentially cervical fusion, as well as other orthopedic types of procedures that maybe lend themselves to a more rapid shift to that alternate site of care. But it's clearly, I think, an opportunity that all of us are interested in as it relates to degenerative lumbar spine fusions as well.

There are no further questions at this time. I would like to turn the call back over to you for closing comments.

Thank you, and thank you all for participating in today's call. I hope you all stay healthy, and we look forward to speaking with you on our next quarter's call. Thank you.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening.