NuVasive Inc (NUVA) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the NuVasive, Inc. fourth-quarter 2006 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Nick Laudico of The Ruth Group. Thank you, Mr. Laudico, you may begin.

Thanks, operator. Welcome to the NuVasive fourth-quarter earnings conference call. NuVasive's senior management joining us on the call today will be Alex Lukianov, Chairman and Chief Executive Officer; Keith Valentine, President and Chief Operating Officer; and Kevin O'Boyle, Executive Vice President and Chief Financial Officer.

NuVasive cautions you that these statements included in this conference call are not a description of historical facts, are forward-looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or prove correct, could cause NuVasive's results to differ materially from historical results, (technical difficulty) or implied by such forward-looking statements.

Potential risks and uncertainties that could cause actual growth and results to differ materially include but are not limited to the uncertain process of seeking regulatory approval or clearance for NuVasive's products or devices, including risks that such process could be significantly delayed; the uncertain process of administering a clinical trial, such as that underway for NeoDisc, including the risk that the trial is delayed or produces data suggesting that the device is not sufficiently safe or effective; the possibility that the FDA may require significant changes to NuVasive's products or clinical studies; the risk that products may not perform as intended, and may therefore not achieve commercial success, the risk that the Company's financial projections may prove incorrect, because of unexpected difficulty in generating sales or achieving anticipated profitability; the risk that competitors may develop superior products or may have a greater market position, enabling more successful commercialization; the risk that additional clinical data may call into question the benefits of NuVasive's products to patients, hospitals and surgeons; and other risks and uncertainties more fully described in NuVasive's press releases and periodic filings with the Securities and Exchange Commission.

NuVasive's public filings with the Securities and Exchange Commission are available at www.SEC.gov. NuVasive assumes no obligation to update any forward-looking statement to reflect events or circumstances arising after the date on which it was made.

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

Thanks, Nick. Thank you, everyone, for joining us this afternoon for our fourth-quarter 2006 call. We are extremely pleased with our operating and financial performance during the quarter and full year. 2006 marks the achievement of several important milestones that we believe have positioned NuVasive for robust growth in 2007 and beyond. Most important was the completion of our transition to an exclusive sales force that is focused on deeper market penetration.

During 2006, we remained on track training surgeons on our MAS platform, launched a total of nine innovative new products and made encouraging progress on our clinical trial for NeoDisc. We also recently announced the acquisition of an exciting biologic platform that we believe will provide our sales force with additional valuable products for gaining more of a spine surgeon's business. The addition of this biologic has allowed us to increase our total potential revenue for one-level lumbar fusion surgery by $1,500 to a range of $12,300 to $13,600. This, combined with our ability to perform more multiple-level procedures, including thoracic fusions and the treatment of adult degenerative scoliosis, will allow us to capture a greater proportion of a spine surgeon's business than ever before.

Before outlining our operational progress during the quarter, let me take a moment to briefly review our strong financial performance. Revenue for the fourth quarter was $30.5 million. On a sequential basis, this is an increase of 21% from the third quarter of 2006. This brings our full-year revenue to $98.1 million, compared to $62.6 million in 2005. NuVasive also reached profitability in the fourth quarter on a non-GAAP basis, with earnings per share of $0.02.

I will now take a few minutes to review our progress on a number of important strategic initiatives that we believe will continue to fuel growth in 2007. Most important was the completion of our transition to an exclusive sales force. When we began this transition, we stated our belief that an exclusive, focused sales force would bring tremendous leverage to product penetration in the market and revenue growth through a vertical integration strategy. This percentage of hospitals vertically integrated stood at 45% at the end of the quarter versus 39% at the end of the third quarter.

Our sales force now totals approximately 200, including management personnel. During 2007, we are striving for our sales force to generate increased penetration with existing hospitals, as efficiencies are realized and additional products are released. We see a significant opportunity for our sales force to more deeply penetrate our customer base, as their knowledge of our products and the Company grows. Although this is a gradual process, and it may take a sales representative over a year to reach full productivity, we will continue to track our key metric of vertical integration, as it provides insight into our ability to deepen customer relationships.

Continued innovation and making our own products obsolete remains an important focus at NuVasive. We launched a total of nine new products and product enhancements in 2006, which once again placed us further ahead of the competition and provided our sales force with more fuel for growth.

In addition to always staying ahead of the competition, one of our major goals, as it relates to product launches, is to continually broaden our MAS product suite to address a wider range of spine pathologies. The products we introduced to surgeons in 2006 and our planned launches in 2007 will increase our penetration into a spine surgeon's business by moving further up the spine into thoracolumbar and adult degenerative scoliosis cases.

An important example of this is SpheRx II, which was available on just a limited basis in the fourth quarter, and is set for a full launch in the second quarter of 2007. SpheRx II provides us with access to multiple-level cases as well as thoracic procedures.

We are further enhancing our pioneering access technology to the thoracic region with our new MaXcess thoracic system, which will allow us to apply our lateral approach to higher levels of the spine. This is complemented by our CoRoent thoracic implant for fusion as well as our CoRoent revision implants to address TDR revisions.

Taken as a whole, the product enhancements made in 2006, plus those slated for 2007, contribute to the perpetual development of what we believe to be a product suite that is at the forefront of minimally disruptive spine surgery. We are particularly excited about the upcoming full launch of our XLP lateral plate to leverage the uptake in the use of our unique XLIF procedure. This plate allows surgeons who typically rely on spacers alone to achieve additional fixation through the same incision, while providing NuVasive incremental revenue per procedure to those particular surgeries. It also allows surgeons an alternative to posterior pedicle screw placement, eliminating the need to reposition the patient and saving surgery time.

Our planned cervical product launches will also provide pull-through to capture additional sales with our new surgical plate offerings. In 2007, we will offer two new profile cervical plates offering surgeons additional fixation options and improved ease of use. We will also leverage our embroidery technology from the NeoDisc acquisition, and expect to evaluate new product opportunities throughout 2007.

NeuroVision is a key differentiator for the Company, and 2007 will see additional functionality, including the incorporation of motor-evoked potentials or MEP technology, which allows for complete monitoring of nerve activity in the thoracic and cervical regions of the spine and the introduction of wireless remote monitoring, allowing for greater case coverage. NeuroVision's MEP capability was fully launched in January of this year, and remote monitoring is currently in clinical evaluations and will be fully supported in the second quarter of 2007.

We most recently added an exciting new biologic platform through the acquisition of technology and assets from Radius Medical. The acquisition includes exclusive technology and marketing rights to an osteoconductive biologic product called Formagraft. Although Formagraft has a limited commercial history, we believe the collagen, ceramic and mineral-enriched product will deliver impressive fusion results in both lumbar and cervical spine fusion surgery procedures. Formagraft provides a physical scaffold for bone growth, and possesses superior handling characteristics that allow for optimal graft placement. We are currently in the process of transitioning product sales from its current distributors to the NuVasive sales force and working with our manufacturing partner to build inventory.

Let me now turn to our continued success in surgeon training. During the fourth quarter, we trained 109 surgeons, for a total 569 in 2006. Over the past two and a half years, we have been focused on promoting the lateral access technique through our surgeon training program. To date, we have conducted over 1,200 training sessions on our MAS platform. As we look forward to 2007 and the surgeon training program, our major focus will be leveraging our exclusive sales force to achieve deeper product penetration through our vertical integration strategy. At the same time, we will remain focused on the proliferation of our MAS platform in the US.

We believe that a target of approximately 100 surgeons per quarter will deliver superior returns on our training investments, and allow us to achieve deeper penetration by addressing close to 10% of the spine surgeon population annually. We will continue to evolve our training programs to promote safe and reproducible MAS surgery, utilizing our differentiated technology and providing advanced courses to the growing list of indications for the lateral approach.

In 2006, NuVasive introduced the Society of Lateral Access Surgery, SOLAS, to support the evolving needs of surgeons and define and advance the science of lateral access surgical applications through peer-to-peer communication, clinical education and research. In 2007, SOLAS will initiate two prospective XLIF studies and compile several retrospective XLIF studies examining different indications to add to the growing list of scientific articles and reference book chapters. A surgeon education faculty of prominent XLIF users will assist and support those new to the XLIF technique through NuVasive's marquee visit program and peer-to-peer networking. Additional education efforts will assist both surgeons and patience with more thorough understanding of the benefits that result from lateral access surgery.

Let me now briefly address our motion preservation initiatives. First, we are encouraged by the progress we have made on the enrollment of the clinical trial of NeoDisc. As of today, enrollment stands at 100 patients, with all 20 sites currently enrolling. If ultimately approved, NeoDisc could be the first elastomeric cervical motion preservation device on the market. To firm up our ownership and control over NeoDisc, in the third quarter of 2006, we satisfied all of the contingent payment obligations related to the acquisition of NeoDisc and related technology, including the reduction of royalties. The NeoDisc clinical trial is an important strategic initiative, and we look forward to gathering clinical trial data on this innovative device, as well as building out offering of cervical fusion and motion preservation products.

In the lumbar area, Dr. Luiz Pimenta, one of the primary innovators of our XLIF technique, has completed a series of cases with our lateral access TDR outside of the US, with positive initial results. We are planning to file an IDE for this device in late 2007. We are also anticipating filing an IDE with respect to an elastomeric lateral TDR, which is based on an embroidery design, by early 2008. Lastly, our cervical ceramic-on-ceramic TDR, Cerpass, remains in biomechanical testing, and we expect to be in a position to file an IDE for its US clinical trial in the second half of 2007.

As a relates to our international strategy, we intend to make our initial entry into the international marketplace in 2007. Key countries we will focus on are Germany, Australia and the United Kingdom. Our strategy for our European entrants involves leading with the introduction of NeoDisc as a truly differentiated cervical product that we believe will command significant surgeon attention. We also expect to introduce our Cerpass cervical TDR internationally in 2007.

These cervical TDRs, along with our anterior cervical plates, will be delivered principally to distributors, armed with what we believe to be a formidable offering, including both cervical motion preservation and fusion products. Following the introduction of this suite, we plan to pave the way for XLIF training in key international markets, allowing us to introduce both fusion and lateral lumbar total disc replacement outside of the United States.

Let me now turn the call over to Kevin O'Boyle for comments on our financial results.

Thank you, Alex. Our revenue for the fourth quarter 2006 was $30.5 million, a 62% increase over Q4 2005 and a 21% increase over Q3 2006. Gross margin for the fourth quarter was 83.1%, compared to gross margin in the fourth quarter of 2005 of 82.5% and a gross margin in the third quarter 2006 of 80.5%.

Our Q4 2006 net loss was $2.7 million, or a loss per share of $0.08 on a GAAP basis. On a non-GAAP basis, the Company reported net income of $631,000 or $0.02 per share. Our non-GAAP net income calculation in the fourth quarter of 2006 excludes stock-based compensation of $3.2 million and amortization of intangible assets of $135,000.

Operating expenses for Q4 2006 totaled $29.5 million, a 28% decrease from the third quarter of 2006. This decrease primarily reflects costs associated with the third-quarter trade shows and product launches that took place in September and $9.6 million paid under the NeoDisc buyout agreement.

R&D costs were $3.7 million for the fourth quarter, excluding stock-based compensations. The decrease in the R&D spending from Q3 was again related to the product launch activities that did not carry over into the fourth quarter.

Sales, marketing and administrative expenses totaled $22.7 million, excluding stock-based compensation, which further reflects costs of the sales force, the Q4 marketing launch of our new product introductions, surgeon training and administrative support costs. The stock-based compensation charge for the quarter of $3.2 million was recorded in our operating expenses and allocated as $550,000 in research and development, with the balance of $2.6 million in sales, marketing and administrative expenses.

Our key performance indicators, or KPIs, for Q4 2006 are as follows -- number of surgeons trained, 109, therefore 569 for the year; percent of vertically integrated hospitals, 45%, up from 39% the prior quarter. As a reminder, we define a vertically integrated hospital as one purchasing products from each of our three MAS product lines of NeuroVision, MaXcess and specialized implants.

As of December 31, 2006, we had $117 million in cash, cash equivalents and short-term and long-term investments. Our operating cash burn was $6.4 million for Q4, which broadly reflects the development of our MAS product pipeline, including motion preservation and the buildout of inventory and instruments to support future growth. Our operating cash burn is defined as cash used for operating activities, plus additions to fixed assets.

Days sales outstanding or DSOs were 57 days in Q4 2006, compared to 55 days in Q3 2006. The increase in DSOs is related to the 21% increase in revenues.

I will now provide guidance for 2007. For the full year 2007, we expect revenue to be in the range of $136 million to $141 million, representing a 39% to 44% increase over 2006 revenue. Included in this guidance is the recently acquired Radius biologic product portfolio, which is expected to contribute between $4 million and $5 million of incremental revenue for the full year 2007. We expect full-year 2007 gross margins to be in the range of 81% to 82%. Non-operating income, principally consisting of interest income, should be approximately $5 million to $5.3 million in 2007. We expect full-year [2000] non-GAAP earnings per share to be in the range of $0.03 to $0.07 a share.

The 2007 earnings per share guidance takes into consideration expenses related to the following items, which have a significant effect in the first half of the year -- the accelerated enrollment of the NeoDisc clinical trial, the full launch of the company's SpheRx II pedicle screw system and its XLP lateral plate, and the integration of the Radius Medical acquisition into the existing NuVasive sales structure.

It is our policy to provide only annual guidance. However, in the context of what we expect to be an uneven distribution of earnings per share across the four quarters of 2007, we are providing the following.

For the first quarter of 2007, we expect revenue to be in the range of $31 million to $32 million. During the first quarter 2007, we expect a non-GAAP loss per share in the range of $0.07 to $0.08, with a smaller loss per share in the second quarter, then a return to non-GAAP profitability in the third quarter of 2007.

Therefore, the 2007 non-GAAP earnings per share is weighted to the second half. The uneven distribution of our earnings per share guidance takes into account an accelerated NeoDisc enrollment in relation to our expected quarterly revenue growth throughout 2007. Based on the current enrollment, we see a possibility for a completion of the enrollment one to two quarters ahead of schedule.

As a reminder, our previous guidance for enrollment completion was the first half of 2008. This potential acceleration moves costs in the range of $0.07 to $0.10 per share into 2007 from 2008. We believe the ability to launch such a differentiated product with an earlier timetable will provide NuVasive with a significant competitive advantage.

We expect earnings in the second half of 2007 to benefit from product introductions in the first half of 2007. These include the full launch of the Company's SpheRx II pedicle screw system and its XLP lateral plate, together with the integration of the Radius Medical acquisition into the existing NuVasive sales structure.

Our key performance indicators for 2007 targets are as follows -- number of surgeons trained, 100 per quarter, or 400 annually; and the percent of hospitals that are vertically integrated by year end to be in the range of 58% to 62%.

Our total sales force of 200 is where we completed Q4 2006. Again, that includes management and administrative personnel of about 20% to 25% of the total sales force.

Then, by the end of 2007, our total sales force headcount should increase in the range of 10% to 20%. Our surgeon training KPI guidance of approximately 100 surgeons per quarter should be consistent throughout the year. As you know, in prior years, training surgeons was a major driver in building revenue and gaining visibility among leading spine surgeons.

Given the success we have had in reaching a critical mass of the spine surgeon population, we believe that we are now at a sustainable and consistent number of 100 surgeons per quarter. Therefore, on a go-forward basis, we will no longer be reporting this as a key performance indicator.

I would now like to turn the call back over to Alex for closing commentary.

Thanks, Kevin. 2006 has clearly been a successful year for NuVasive. We believe the progress we have made during the year will serve as the foundation for achieving robust growth in 2007 and beyond. Let me outline some of our major initiatives for the coming year.

First, we plan to achieve greater leverage with our exclusive sales force, challenging them to reach deeper levels of market penetration with increased pull-through of NuVasive products. The primary focus of our sales strategy is to increase the use of a broad suite of NuVasive products by each surgeon, with a secondary focus on the broadening of product use across the full US spine surgeon landscape.

This strategy builds on what we at NuVasive feel truly separates us from the competition, a focus on what spine surgeons want. This process of deepening relationships and providing the utmost in service is embedded in our absolute responsiveness culture, and permeates our entire sales organization. We remain excited about the potential of our elite team in 2007.

Concerning our motion preservation products, we anticipate accelerating the clinical trial enrollment for NeoDisc, and have the potential for completion one to two quarters ahead of our scheduled enrollment. As a reminder, our previous guidance for completion of enrollment was the first half of 2008. Although this strategy will bring accelerated costs in 2007, the potential of bringing NeoDisc to market earlier in the cervical motion preservation landscape would be a major competitive advantage, by giving us the opportunity to offer the first elastomeric motion preservation device on the market. We also expect to be in a position to file IDEs for Cerpass, our cervical TDR, as well as our mechanical and elastomeric lateral TDRs by the end of 2007 or early 2008.

NuVasive continues to maintain a robust product pipeline, and in 2007, we will release innovative new products and product enhancements. As mentioned previously, our cervical offering will include two new plating options to be launched in the fourth quarter. For our MAS line, we will fully launch SpheRx II and our XLP lateral plate in the second quarter. We will also introduce our MaXcess thoracic system and thoracic [corn] implants in the fourth quarter. Additionally, in the fourth quarter, our dynamic rod system will be launched.

NeuroVision enhancements for motor-evoked potentials are currently available, and our remote monitoring feature will be fully supported in the second quarter of 2007. Our culture of absolute responsiveness has developed our reputation as an organization that is focused on rapidly meeting the needs of spine surgeons and providing them with unmatched products and service to assist in the delivery of top-notch patient care. Our exclusive sales force is one of the best in spine, and is well-positioned to achieve deeper product penetration.

Our many planned product launches for 2007 have already begun to generate positive feedback from surgeons, and we continue to build the infrastructure for expanded distribution. We also see significant promise in our strategic projects, including our NeoDisc clinical trial and our newly acquired biologics platform. All of these efforts are being undertaken with special focus on promoting and increasing our operational efficiencies.

We continue to expect profitability for the full your 2007, and are confident we will achieve this profitability in balance with continued innovation and organic growth. We see a tremendous opportunity to develop new products based on technology we have acquired or internally developed. We intend to be extremely opportunistic in what we consider to be a very dynamic spine environment. Our entire team of employees -- or shareowners, as we call them -- is focused on perpetuating these operational and cultural priorities.

In summary, we are extremely pleased with our performance in the fourth quarter and the full year. We have completed our transition to an exclusive sales force, launched new products to provide that sales force with the innovations they need to penetrate more of a surgeon's business, and continued the proliferation of our MAS platform by training spine surgeons.

Our motion preservation initiatives are on track, and we look forward to establishing our international presence in late 2007, while continuing to grow our US market share. We estimate our 2006 market share to be in the 2% to 3% range of of the overall US spine market. This provides a platform for us to expand the operating capabilities of our company.

Specifically, we will expand our distribution capacity, further develop our IT and operating platforms to increase the scalability of our business and invest in the development of products and technology to keep us ahead of the competitive curve for years to come. We believe these efforts will create a technology-focused, financially sound company that will become a dominant force in spine. We believe this can provide the platform to help us achieve a goal of $500 million in sales in the years to come.

We would now be pleased to answer any of your questions.

(OPERATOR INSTRUCTIONS). Michael Matson, Wachovia Securities.

I guess I'll start with your international expansion plans. I think if I recall correctly, you had said that you were not really going to move in international markets until 2008. So it sounds like that's happening a little earlier now. Is that correct?

No. That is actually consistent with what we have talked about. The activity is going to really take place in the fourth quarter of 2007. So we're going to be scaling up and seeding things for 2008. So the revenue will be minimal.

The ExtendSure product -- we haven't heard much about that lately. I was just wondering what's going on with that. Have you launched it? If so, what are the plans to roll that out?

We have launched, as you know, basically two offerings. One is an allograft version, and the other is made of PEEK. So what we have been doing, largely, is basically laying back and watching how that market develops, to see what the surgeon acceptance will be. Obviously, there has been some pretty good success on the part of competitors in that area. But we feel very comfortable in advancing the allograft opportunity when it comes to ExtendSure, but less so on the PEEK side.

So what we don't want to do is to advance any kind of products from an off-label perspective, with regard to marketing material. So we're really taking a position of focusing on the allograft opportunity.

Is there any IP risk here with Medtronic and the [Mickelson] patents? I was just listening to their conference call, and they kind of keep reiterating the point that they're really going to go out and try to crack down on some of the smaller companies out there, in terms of IP issues and so forth.

Well, I guess what I can tell you is that we feel that we have a very secure IP platform. We do not have any kind of litigation taking place in that arena, so we're very comfortable. We have quite a few patents, nearly 50 patents. We have very close to 200 patents pending, so we have been extremely aggressive, I think, as well as thoughtful in how we have put together our portfolio. So we feel that we are in very good shape.

Matt Miksic, Morgan Stanley.

Just one clarification on ExtendSure. It sounds like you're going after the allograft market or a segment of that business, because that's where you have the data. Is that right?

That's where we have the data, and that's where we feel it's pretty straightforward to move towards a fusion. So this is not an interbody fusion application, as you know. So it's a slightly different approach than some of the other companies are taking.

It's something you might consider expanding later into PEEK, or you are just taking this sort of -- it sounds like you are being cautious about it. But are you giving up on the PEEK opportunity? I just want to understand it.

We are not giving up on it. It's secondary in terms of our focus.

On the pipeline products you mentioned, for embroidery technology and biologics, is there anything else you can tell us about where you might be pursuing those?

Well, as far as embroidery is concerned, there's a number of different things that we are thinking about. I think, as the year develops, we would like to talk about that some more. But I think that it allows us to do quite a few things from a strut perspective. So we will see how our testing continues, and how some of our clinical data looks over the course of this year and then talk about it.

I think, with regard to biologic, I would like to get Keith to jump in for just a moment and talk a little bit about what we see as the upside opportunity in that arena.

What we talked a little bit about is our excitement that the Formagraft material is a good building block and a good platform for us. So, as we move forward for the next 12 to 18 months, I think the greatest opportunity is exploring and expanding on the Formagraft itself, and then looking at other ways you can add on that building block -- whether that's other proteins or stem cells or future technology peptides, what have you, just making sure that we're looking thoughtfully at other ways you can add, if you will, supercharging that particular graph material. So I think that the playing field is open, as far as what directions to take, but we're just going to take it very methodically as far as growing the product line out, and then looking at ways to supercharge it.

One question on the sales force, just so I understand this. You mentioned you went from 175 to 200. In the press release, it says exclusive sales force, but that's the whole sales force including sales management, correct?

That's correct.

First of all, should we think of there being any non-exclusive reps in your sales force at all, at this point?

That number is probably in the neighborhood of a couple percent, and that's in markets that we think are well-served with that kind of relationship. So it's a very vast majority.

Then another clarification on that one. You said growing 10% to 20% by year end 2007. You're talking about the 200 number, or you're talking about -- in other words, does the sales management stay constant, and you're growing that quota-carrying piece, or are you growing the whole 200 piece?

I think what we would like to do, to avoid any confusion when we talk about our sales force, is to talk about it in total -- I think no differently then everybody else talks about their sales force. We're happy to give some additional color on it, but we're talking about it in total.

So 220 to 240, with 20% to 25% of that total being in management?

That's correct.

Ben Andrew, William Blair.

I'm looking at the sequential increase that you showed in Q4, and it was pretty significant versus Q3, which was also strong. What are the dynamics, as you look into Q1, that suggests sort of a flattish performance versus continued sequential upside?

Well, we need to get some rest, quite honestly. No, I think, in all candor, I think that we had a terrific push to the end of the year. So I think that that's part of the normal seasonality, at least to some degree, of what we normally see after a very strong fourth quarter.

In terms of the revenue contributors in Q4, is it adult scoliosis? Is it lateral plate? Was it everything sort of firing on all cylinders in the quarter?

Yes. I think we were very strong across all of our platforms, across all of our product lines. So it was a very nice, well-balanced quarter for us. I think that speaks very well about our prospects for 2007.

Maybe a question for Keith. The biologics inventory -- it sounds like that's going to be an issue for a couple of quarters here. Is that something where you get a real pent-up demand into the sales force when you get that supply back to normal levels in the summer?

Yes. Well, I think really it's a nice transition, because we're transitioning right now from the existing distribution channel that was available for Formagraft to ours. In addition to that, at the same time, we're also ramping up from a manufacturing perspective on two fronts -- one, in the amount of our order and the process of getting that through, but also the team in Taiwan is also ramping up themselves to greater manufacturing capability with new equipment. So it's going to come to a nice point in the summertime where you are going to have the sales force completely trained, ready to go and the supply stream coming and the ability to have enough product out in the field. Largely the way biologics are sold, there's a great field inventory level and we're going to be able to satisfy that, so it's going to come together nicely.

Something that has popped up just last week -- Medtronic announced a new lateral system. Is that something significantly different than what they have had, if you have had a chance to see it? Or is that more of the same with their [NMS] technology that's not real-time?

I think this is the 12th announcement, so it's pretty much more of the same. It's been going on for about 15 months, I think, in terms of the announcements.

It should be fully rolled out by now?

I would think. We can talk about that some more, if you'd like, but we see that as a pretty old technique in terms of what they are doing. Without having NeuroVision, available, there is just no way that they can reproducibly do that technique. That's what drove us to develop NeuroVision in the first place, some four or five years ago.

Robert Faulkner, Thomas Weisel Partners.

I wonder if you could comment on the role of the cervical opportunity in the thoracic, kind of scoliosis opportunities to drive growth over the next year or two?

Sure. Well, I think that it's a wonderful pull-through opportunity for us. I think we're very pleased with the performance we have seen on the MAS front and on XLIF. We expect that to continue at a robust pace. But I think, as we consider getting further into the cervical arena, we chose to do that largely with NeoDisc. Of course, in the meantime, since that is a fusion market, we have moved forward with our first plate.

So we think that we can start to move that percentage of business and that growth opportunity up pretty significantly, in terms of double digits over the next couple of years, and give us a very formidable platform with regard to anterior plating, with regard to total disc replacement, with regard to the first nucleus-like product. So I think that there's a lot of upside in this whole platform.

When you say, maybe to clarify for me the double digits, are we speaking of plates in the near term? Or is that a long-term assessment of all those types of products together?

The new plates that we're launching are coming at the end of the year. So we're seeing that more as catapulting us into 2008. We expect to have some pretty good growth on the cervical side from existing technology, from Gradient Plus. But we see that playing a bigger role as we move into 2008.

The scoli market, thoracic market?

Well, really what we're talking about is adult degenerative versus pediatrics, per say. I think there are some opportunities for us in pediatrics, and we're evaluating those for straight scoliosis, just because of the versatility of our platform moving into the thoracic spine.

So the way that we have talked about this is that if you consider the XLIF opportunity directly addressed probably about 20% to 25% of the lumbar market, what we're seeing now from the thoracic involvement is that that number is increasing more to 30%. That may even potentially grow to 35% as we continue to move down the pathway of rolling out additional product. So we're very excited about what it gives us as an added foothold.

Then on ExtendSure, maybe I missed it, but when do you expect to put the foot on the gas, on the allograft product?

What we are doing, as Alex described, is really we have been having the allograft out there for greater than a year. We are following up those results, and then we're focusing those results on additional data, and then, if clinicians are also separately -- we're providing and collecting data on the CoRoent line as well.

So we're coming from two different directions, but we want to ensure two basic things -- one, the clinical data is driving good, effective processes, and also good instrumentation. During this process, we have also been modifying and advancing the instrumentation, to ensure that the technique is reproducible.

Where do you think that leaves us, in terms of timing for putting it in broader daylight, if you will?

Midyear.

Steven Lichtman, Banc of America Securities.

Just a few questions of some of the new products. Alex, can you talk a little bit more about some of the specific benefits and uses of the NeuroVision remote monitoring, when that hits the market?

I'm going to have Keith jump in here and talk a little bit more about that, since he is a formidable expert in the area.

There's a couple of different directions remote monitoring can take. One particular direction is that it can assist at existing hospitals that already have a department that does reading and does neurophysiology assistance. So what it provides is the ability to have the setup in the OR, the surgeon still interpreting some of the data real-time. But it also has the ability to pipe information into a central location, which is often common for neuromonitoring. With that central location, you have a neurologist that could be interpreting the data as well, and any kind of issues that may be arising in the OR, you have a real-time mechanism with an expert to provide feedback.

The way the tool works is you can actually chat between the remote monitoring location and the location in the OR, or you can even have the ability to -- if there's a certain circumstance that comes up, they can actually, obviously, go to the OR for further guidance. So that's one mechanism.

Another mechanism is, of course, if there are neuromonitoring companies that want a simpler designed unit. One of nice things about our unit is that, because of the proprietary algorithms, those algorithms give a much better and quicker utility of interpretation of results. So, with that, you can set up the same kind of mechanism that I just described that can be set up for a hospital department can also be set up for a neuromonitoring group, a separate group outside of the hospital.

They also can have it piped back to a central location, so that you do have an expert reading any kind of situation that comes up that needs further verification. But at the same time, you have a very easy, quick interpretation in the OR. So there's a number of different directions we can take to expand it.

Can you talk a little bit more about the dynamic rod that you expect to launch later this year, indications, when it looks like, et cetera?

Yes. The dynamic rod -- you will be seeing more information about it as we get to the fourth quarter. We are really working hard to make sure that any early clinical results that we have and clinical usage that we have narrows down and gets down to specific indication. One of the challenges, as you know, that has been out there even in the literature and on the podium is defining what the best indications are for dynamic rod usage. So we are being very careful throughout the process and ensuring that when we get to the fourth quarter, we have very clear indications of how to launch that.

[Likely on display at MAS, though]?

Yes, absolutely.

Lastly, can you give us any estimate on timing for a lateral TDR filing overseas?

Yes, the lateral TDR filing, in a way, parallels very closely to what we are doing in the United States as well, with the filing to the FDA in the second half of 2007. At that point, there's enough data and enough material to also submit for the CE marking. So they are very close to one another.

So a potential launch there at some point in 2008, in Europe?

Yes.

Lennox Ketner, Lehman Brothers.

This is Lennox Ketner, in for Bob Hopkins. Just a few follow-up questions on the sales force. I just want to clarify, and I'm sorry if I missed this. But I know you said you have 200 reps now, and that's going to grow about 10% to 25% in 2007.

10% to 20%.

Okay. Are you expecting management personnel to grow at that same rate, or should management personnel stay flat?

It's going to be pretty consistent as a percentage of the sales force. So it's still right around that 25% level.

Just in terms of productivity, I believe you had said last quarter that you were hoping to have productivity around $100 million in revenues per rep by 2008. Is that still a fair assumption?

That would be awesome. $100 million per rep would be really (multiple speakers). That's generally how we hire, and how we think about it and what we're driving toward. So I think that you can't just do the simple math on that to arrive at what the revenue output is for the Company, just because of the blend of management, different types of reps, where they are in their growth curve, where they are in establishing the relationship. But that's clearly the direction that we're taking it, as far as are sales force's concerned, of driving them actually $1 million and ultimately even more than that per representative.

So for the sales reps that are up to full productivity in 2008, that would be kind of the ballpark?

Yes.

Steve Ogilvie, ThinkEquity.

A few product questions. On the thoracic system, is that like a full hook system, or is that just a thinner diameter screw for adult scoliosis?

Well, it basically allows us to move up into the thoracic spine with different diameter screws, different rod diameters. There's some other things that we can use to latch onto the spine. So yes, that's generally the direction that we are taking it with multiple levels.

So it's more of a buildout of existing sets. You don't actually create a new system or a new set for that.

Well, it's really both. There's some things that are utilized, but there's obviously quite a few different implants and instruments that go with it. So it's a blended set that you end up with.

Maybe I missed it, but you didn't talk about the anterior lumbar disc. Is that something that you're not aggressively pursuing right now?

The anterior lumbar disc?

Yes.

You mean in terms of our lateral disc?

Well, I know you've talked about the lateral. But at some point, you did have an anterior in the pipeline.

Yes. That has been quite some time. We abandoned that really, before, I think, the NeoDisc acquisition and have stayed true to wanting to get into cervical first, as we see that as the larger opportunity for a total disc replacement. Then what we decided was it would make more sense just to be entirely focused on lateral access for total disc replacement in the lumbar spine.

Did you say when you expected EU approval for NeoDisc?

What we said is that -- I don't think we actually talked about a date, but we said that we would be in a position to launch it for revenue in the fourth quarter of this year.

Looking throughout 2007 in terms of expenses, is it safe to say that sales and marketing expense as a percent of revenue will fall down, but with the two or maybe three IDEs you plan to start in the back half of 2007, R&D expense as a percent of revenue will probably be stable, despite the revenue growth?

R&D should be pretty consistent throughout the year. In terms of sales, marketing and administrative expenses as a percent of revenues, that should continue to decrease quarter over quarter, as we get to the end of the year.

Then just one last thing. What was the total number of patients you needed in the NeoDisc trial?

500.

Matt Miksic, Morgan Stanley.

Just a quick follow-up on some of the expense, the SG&A expense, you talked about 67% to 70% of revenues spending on SG&A in 2007. I'm trying to think if I missed maybe an update to your sales force number. Was 200 where you expected to end the year? Or have you sort of added, tweaked that up a little bit? As a result, should we see things moving into the upper range of that 67% to 70%?

We did add a bit to that number in the fourth quarter from what we had expected, for sure. I think, as we get into 2007, the 67% to 70% range is kind of an average for the year, right, where it would be higher in the first couple of quarters and then lower, obviously, in the last two, and therefore averaging closer to the higher end of that 67% to 70% range.

In terms of the sales productivity, if you bring sort of a new tranche of people on at the end of the year, should we think about -- I don't want to get too scientific about this, but just intuitively, it feels like the sales productivity per rep maybe should moderate a little in the first quarter, because you are bringing in a bunch of people who are just now starting from zero, basically. Is that a reasonable way to think about it?

Yes, I think is.

It is, and as it relates to revenues in the first quarter, it's about 4% or 5% increase over Q4, and that's exactly what we had in the prior year, the same two quarters, in terms of revenue growth. So that should be pretty consistent.

John Putnam, Dawson James Securities.

I wondered if you might just expand a little bit on your plans for NeoDisc overseas, when you think you might be able to have that on the market?

Our plan is to be able to launch that in the fourth quarter of this year, and then to escalate our presence internationally in 2008, do the same thing with our other motion preservation products and offer a suite that way. So that's the plan.

So you will start, then, in the UK, Germany and -- did you say Australia?

That's correct.

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

Thanks, everybody, for your time. We'll talk to you on the next quarter.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.