NuVasive Inc (NUVA) 2007 Q1 法說會逐字稿

Greetings Ladies and Gentlemen and welcome to the NuVasive Incorporated 1st Quarter 2007 Earnings 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, Zack Kubow, of the Ruth Group. Thank you Mr. Kubow, you may begin.

Thanks, operator. Welcome to the NuVasive 1st 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 the statement made in this conference call are not a description of historical facts and 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 or those expressed or implied by such forward-looking statements. The 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 possibility that the FDA may require significant changes to NuVasive's products or clinical studies; the risk that the company's financial projections may prove incorrect because of unexpected difficulty in generating sales or achieving anticipated profitability; the risks that products may not perform as intended and may therefore not achieve commercial success; the risk that competitors may develop superior products or may have a greater market position enabling more successful commercialization; the risks 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.

Thank you, Zach. And thank you everyone for joining us on our first quarter conference call. We are extremely pleased with our operating and financial performance during the first quarter. Our robust quarterly performance reflects the increase effectiveness of our exclusive sales force and the continued adoption of our MAS product platform. This momentum of both sales force performance and product penetration continued to make major contributions to our growth and success. Before outlining our operational progress for the quarter, let me summarize our strong financial performance.

Revenue for the first quarter increased 68.8% year-over-year to $33.2 million. On a sequential basis this represents a 9% increase. Our gross margin for the first quarter was a robust 82.8% in line with our fourth quarter gross margin. Our strong first quarter performance reflects continued uptake of XLIF procedure and then increasing effectiveness of our exclusive sales force.

Most important during the quarter, we made significant progress on our strategic initiatives that will drive our future success. We began to experience increased efficiencies of our exclusive sales force seeing the initial effects of the leverage we ultimately expect from this focus team. Our results were also driven by the continued adoption of XLIF procedure as well as early success of SpeRx II, XLP lateral plate, and Formagraft.

As a reminder SpeRx II is our new pedicle screw system that allows us to expand from simple I and II level fusions to multiple levels including up into the thoracic spine. XLP lateral plate is an alternative to pedicle screws which can be placed through the same single incision following our CoRoent implant during XLIF procedures. And lastly Formagraft is the new biologic graft extender that we acquired in late January which can add an incremental $1,500 to a fusion procedure. These three new products were available on a limited basis during the quarter but contributing to our strong sequential revenue growth. We also launched NeuroVision MEP, Motor Evoked Potentials, on a limited basis in January which allows for a complete monitoring of nerve activity in the thoracic and cervical regions of the spine. The spine surgeon feedback on these products has been particularly strong. We remain excited about all of these products and their anticipated contribution to revenue growth in the second half of 2007.

Our focus during the second quarter is to build the necessary inventory for each of SpheRx II, XLP lateral plate and Formagraft to support more complete launches later this year. This inventory building process will place us in a strong position to derive further growth from these products in the second half of the year.

Additionally we remain on track with our product launches in the third and fourth quarter of the year including our strategy of advancing our proprietary XLIF procedure into the thoracic region of the spine with the MaXcess thoracic retractor and CoRoent implants designed specifically for thoracic surgeries. We also plan to expand our cervical product offering through the introduction of two new low profile cervical plates which offer surgeons additional fixation options for anterior fixation.

Our sales force continues to further deepen NuVasive product penetration into hospitals, strengthening existing relationships and generating new relationships in the spine surgeon community. These relationships reflect continued positive reception from spine surgeons to our high level of service as well as our innovative products and the benefits they provide to surgeons, hospitals and patients. The focus of our sales force on increasing repeat surgeon usage of our products in combination with new product introductions is driving our robust revenue growth. This focus was demonstrated in the first quarter as we maintained our strong vertical integration level of 45% while adding approximately 75 new accounts in the quarter. Our ongoing development initiatives will continue to provide surgeons with the tools to treat a wider range of spinal pathologies. These new product development efforts remain on track for release later in the year and I will discuss the highlights in my closing comments.

I would now like to turn the call over to Kevin O'Boyle who will further discuss our first quarter financial results and key performance indicators.

Thank you, Alex. Our revenue for the first quarter 2007 was ($6.2 million), a 68.8% increase over Q1 2006 and a 9% increase over Q4 2006. Our strong sequential revenue growth was driven by continued adoption of our MAS platform including our excellent procedure as well as early success from our limited launch SpheRx II, XLP lateral plate and Formagraft products.

Gross margin for the quarter was 82.8% compared to our gross margin in Q1 2006 of 80.3% and gross margin in Q4 of 2006 of 83.1%. Our Q1 2007 net loss was $4.4 million or a loss per share of $0.13 on a GAAP basis. On a non-GAAP basis the company reported a net loss of $935,000 or $0.03 per share ahead of our stated guidance of a loss between $0.07 and $0.08 per share. The better than expected non-GAAP loss per share is due to a strong gross margin, $0.02 of R&D expenses for products and development that we expect to incur in Q2 rather than in Q1 and realizing initial sales force efficiencies. This shift of R&D expense recognition does not affect our planned product launch timelines.

Our non-GAAP net income calculation in the first quarter of 2007 excludes stock-based compensation of $3.1 million and amortization of intangible assets of $341,000.

Operating expenses for Q1 2007 totaled $33.8 million a 14% increase from the fourth quarter of 2006. This increase primarily reflects increase selling expenses related to high sales, NeoDisc enrollment and new product development initiatives.

R&D costs were $5.2 million in the first quarter excluding stock-based compensation. The increase in R&D spend from Q4 was related to the enrollment of subjects in the NeoDisc clinical trial and development efforts related to next generation products.

Sales, Marketing and Administrative expenses totaled $25.4 million excluding stock-based compensation. This increase broadly reflects costs of the sales force, the Q1 marketing activities for our new product introductions, surgeon training and administrative support costs.

The interest and other income for the quarter of $1.9 million is comprised of $1.5 million in interest income and $400,000 we received from RSB who we purchased our Cervical plate from in 2005 for waiving our right to purchase a specific piece of technology.

The stock-based compensation charge for the quarter of $3.1 million was recorded in operating expenses and allocated as $516,000 in research and development, with the balance of $2.6 million in sales, marketing and administrative costs.

Our key performance indicators or KPIs for Q1 2007 are as follows -- (80%) percent of vertically integrated hospitals, 45% with their guidance for the year of 58 to 62, and total sales force of 207 at the end of Q1 '07 with our guidance of 220 to 240 by year end.

While the percent of vertically integrated hospitals held steady over the last quarter we have seen growth in the number of hospitals using our products. In the first quarter we added approximately 75 new accounts while maintaining our strong vertical integration level of 45%. We have also increased our volume of sales to existing customers driving deeper into these accounts. This success does not impact our vertical integration metric, however, because these accounts were already considered to be vertically integrated. To illustrate this point if one particular account became vertically integrated during Q4 '06 performing one vertically integrated surgery and then performed six vertically integrated surgeries in Q1 '07 he would not move this KPI metric. As a reminder our definition of a vertically integrated hospital is a hospital that purchases products from each of our three MAS product lines of NeuroVision, MaXcess and Specialized implants.

As of March 31, 2007 we had $106.9 million in cash, cash equivalence and long term investments. Our operating cash burn was $4.8 million for Q1 '07 which broadly reflects the development of our MAS product pipeline including motion preservation and the build-out of inventory and instruments to support future growth. Our operating cash burn is defined as cash used operating activities plus additions to fixed assets.

Days Sales Outstanding or DSOs were 58 days in Q1 '07 compared to 57 days in Q4 2006.

As it related to 2007 guidance we anticipate our mid-year product launches will provide for a strong second half. Therefore we are increasing our full year 2007 revenue guidance for a range of $139 million to $143 million from the range of $136 million to $141 million. As a result of our increased operational efficiency related to our exclusive sales force momentum we are also increasing our full year 2007 non-GAAP earnings per share guidance to a range of $0.05 per share to $0.09 per share and our GAAP loss per share guidance to a range of between $0.36 to $0.43 per share.

Another contributor in improving our GAAP earnings per share for the year is the reduction of our stock-based compensation costs. The range for 2007 is now $14 million to $15 million from our previous guidance range of $15.7 million to $16.5 million.

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

Thanks Kevin. In summary we are continuing our robust growth by building on the successful completion of a number of important strategic initiatives started in 2006. We are beginning to see the increased effectiveness and market penetration capabilities that a fully exclusive sales force provides. Our sales force has grown to a total of 207 in the first quarter of 2007. We have progressed in the initial launches of SpheRx II, XLP lateral plate and Formagraft and continue to build inventory for full launches expecting strong contributions to third and fourth quarter revenues.

We will challenge our sales force to reach deeper levels of market penetration, constantly raising the bar for this elite team. The confidence of the spine surgeon community in NuVasive products is growing and we continue to be on the cutting edge of the latest technology and tools helping surgeons to provide the best possible care to their patients. Our marketing and R&D teams work diligently to obtain as much feedback as possible on our products for purposes of improving quality and future development. This is core to our culture of absolute responsiveness which differentiates us in the market place and allows us to rapidly develop and introduce truly unique technology and products. Our highly talented sales, marketing and R&D teams are focused on making great strides in innovation and market penetration.

Following the launch of NeuroVision MEP in the first quarter we look forward to the multiple launches on the calendar for 2007 including in the late second quarter our SpheRx II, XLP lateral plate and Formagraft, in the second half of the year our new MaXcess thoracic retractor system and CoRoent implants designed to advance our proprietary XLIF approach into the thoracic region of the spine, and also in the second half of the year, the expansion of our cervical plate offering. Further, we remain on track with our motion preservation initiatives in both the US and OUS later in the year. Our NeoDisc clinical trial enrollment is progressing as expected and we remain excited about the prospects of the device. NeoDisc is an important component of our motion preservation strategy and, if ultimately approved, could potentially become the first [elastomeric] cervical motion preservation product on the market. We are currently approximately through the enrollment process which has proceeded on schedule and we expect a complete trial enrollment in approximately 9 to 12 months.

Additionally we are on track with our international strategy to cede our differentiated motion preservation suite of NeoDisc, Cerpass and Lateral TDR along with XLIF. We look forward to reporting progress on these initiatives in coming quarters.

Our culture of absolute responsiveness has never been stronger. Every share owner is focused on our long term goal of becoming a powerful force in spine and delivering the very best products to enable the very best patient outcomes. We are excited about the remainder of 2007 and what it will bring for the future of NuVasive including increased operational efficiencies and meeting our full year profitability goal on a non-GAAP basis. We would now be pleased to answer any of your questions.

Thank you. Ladies and gentlemen at this time we will be conducting a question and answer session. (Operator Instructions) Our first question is from the line of Bob Hoskins with Lehman Brothers. Please proceed with your question.

Thanks very much and congrats on the successful quarter guys.

Thank you very much.

First question I have is on the XLIF procedure. I'm not sure if you have these data, so maybe it would just be if you could give us a sense, especially in your fully integrated or vertically integrated hospitals. Do you guys have a good sense as to the magnitude of the change recently in the percentage of cases that are XLIF versus other cases that are using your technology? Do you have any sense for that at all that you could share with us?

We don't have that in terms of absolute terms or absolute numbers. What we have seen is just an increased uptake in XLIF cases and similar to what we have talked about in the last quarter is surgeons applying it for more indications moving up into the spine. So I don't have a number for you per se, but it continues to move at a robust pace and we are ceding more and more centers.

Okay, and a couple of other just quick ones then. I know you are not giving quarterly guidance here, obviously you have got a lot going on in the second half of the year, but should we expect an up sequential quarter in the second quarter or most of the growth with the new guidance coming in Q3 or Q4?

I would expect, Bob, most of that growth to come in Q3 and Q4 and very little in Q2.

Okay, so maybe a flat-ish quarter in Q2. On the--sort of a big picture SG&A question for you, Kevin. When we look at some other companies in your space losing defined they are a little bit more mature and further along in their life cycles. You see SG&A ratios anywhere from high 30s to low 60s as a percentage of sales. As we look out into the future what do you think the model is for NuVasive in terms of percentage of sales. Where do you think you can get to on an SG&A ratio? And I am talking longer term here. But I just want to get a sense for how you are thinking about that.

I think longer term Bob we can get into the top end of those ranges that you mentioned for other people broadly in the space that have been out there for some time. I think that is a reasonable expectation.

Okay. And then, Alex, can I just ask you to give any comments you might be willing to offer us on the spine market generally and what you see out there competitively in the market place with some of your smaller competitors or bigger competitors? Just any thoughts on what you have seen over the last three months in the spine market generally.

Well generally what we are seeing, Bob, is a very robust market place. And I think we continue to see a lot of growth. We continue to see a shift away from some of the bigger players. I think if you take a look as what is happening with market share there are obviously a lot of spine companies out there. Not all of them are very well differentiated I think unlike our story which is certainly different. But what we are seeing is I think an on-going shifting of market share towards companies like ourselves away from some of the larger players. We are also seeing I think an increased appetite for minimally invasive spine surgery. I think clearly not only are surgeons excited about XLIF and we have more and more top name surgeons from competitive companies wanting to come here to be trained but I think the whole phenomenon of moving up into the thoracic spine has gotten a lot of attention for us. So we are very excited about that. But I think generally the market place is very robust. And I think we continue to take market share more from the larger players then really mixing it up with the smaller folks.

Thanks so much, guys.

Okay, you are welcome.

Our next question is from the line of Steven Lichtman with Bank of America Securities. Please proceed with your question.

Thank you. Hi guys. Just a few questions. I was also wondering if you could talk about some of the early feedback on the lateral plate. What kind of data are you showing doctors and are they comfortable that they are getting that same level of fixation rather than flipping their patient over and going posteriorly?

Well I think that as I mentioned in my remarks the feedback has been very positive. I think that the level of fixation is different. It's not as robust as a pedicle screw. It is not intended to be as robust as a pedicle screw. But I think what we have seen is that there is quite a few surgeons that are focused on having stand alone sort of indications for XLIF and then there are those that are looking for supplemental fixations. So I think where we find ourselves with XLP is that it kind of falls right in between that. It is kind of a nice bridge for surgeons where they don't want too much fixation and they are also relying on the fact that because it is a minimally invasive or an MAS approach there is not a lot of dissection involved. So the integrity of structures of really ligaments, muscles and so forth remain in tact so you don't need as much fixation as I think most surgeons are accustomed to thinking about with open procedures. But we are very pleased with the robustness of the uptake so far. We have not had enough inventory to meet demand but we are working on that and as we talked about we expect to see a very strong uptake as well as further increased demand in the second half of the year.

And then on the NeoDisc trial you had said previously that you may be able to complete that by the end of the year. Now it sounds like maybe early next year. Any update on that? And are we expecting that R&D to be first half of the year loaded in terms of the acceleration on that clinical trial?

I don't think--we haven't changed really what we are thinking about in terms of NeoDisc. We said that it was going to be finishing up probably first part of '08. And there was certainly a chance of finishing it earlier. So I think we are still in the same ball park of what we talked about initially which is by the early part of 2008. We obviously have some additionally expenses associated with that acceleration. And so I don't think that is much different than what we have talked about. I think we anticipate that there may be a small overhang into 2008 but we will know that obviously as we get further into the year

Okay. And then lastly just a clarification. Even as you are adding new accounts it sounds like you are maintaining that goal of vertically integrated for the end of the year even as you are adding those new accounts. Is that right?

Yes we are. And we are very pleased with the way the first quarter went because we added approximately 75 new accounts and maintained our vertical integration and Kevin went into greater detail on that. We think with the higher revenue rates in the second half of this year that we are also going to see the increase in vertical integration in concert with guidance.

Thanks guys.

Our next question is from the line of Mat Miksic with Morgan Stanley. Please proceed with your question.

Hi, thanks for taking the question.

Hey Matt.

A question on the build, the inventory build you talked about in Q2, and I guess also a question about gross margins. You had given a guidance of 81 to 82 and came in sort of north of that. Is there something that you see that is going to moderate gross margins in one or more of the quarters going forward? How should we think about that?

Our guidance was 81 to 82; we seem to outpace that in the last couple quarters. I would like to go a couple of more before we guide into a higher amount. And then in thinking about that, Matt, there is also as we start selling internationally I think that will temper the margins to some degree closer to the guidance number that we talked about. So I am a little hesitant to guide higher for a couple of quarters and then bring it back down by maybe a hundred basis points. So we are still obviously very comfortable in the 81 to 82 range.

Fair enough. And the build next quarter isn't going to--that does not affect you one way or the other because those are--are they outsource builds? They are not the kind of absorption you would normally see with an inventory build.

Well that inventory build will start depreciating those the moment they go into our distribution process or our loaner process. So that gets depreciated over three years and starts running through the cost of sales numbers. So that is how we have always traditionally done it so no changes there and no expected changes.

Okay, question on R&D. Other than NeoDisc can you give us an idea of what some of the other things that you are going to be spending significantly on are maybe throughout the year and how what the pace of those numbers look like for the year?

A couple other products that we are certainly looking at is along the lines of dynamic rod. We are going to be spending money on some other low profile cervical plates as well as some other thoracic type implants, CoRoent thoracic implants and our MaXcess thoracic retractor system. So those are the main highlights that we will be spending R&D money on as we continue through the year.

Okay and they come mostly, just to be clear--

(Inaudible) timeframe and some into shortly thereafter in Q4.

And then, Alex, kind of a general question on the market and how you--first I would love to hear how the 75 accounts compares to the prior quarter. But also what we have come to understand is that it sounds like--it certainly seems like you have something unique that you can present to surgeons, a number of unique products and so on that you can present to surgeons that you can present to hospitals as you approach new accounts. We are starting the year I guess that it is getting harder for some of the smaller spine players that don't have some differentiated wis-bang product to get--access is becoming a problem for these new hospitals. Is that--are you seeing that in the market place?

Yes, I think that is right and I think that to answer the first part of your question, first quarter was very robust for us in the way of new accounts. In the last quarter that number was approximately 50. So it was a nice increase. And I think what we are seeing generally speaking in the market place with the variety of companies that are out there is that number one they don't have--XLIF is more than just a unique play to get into the hospital. XLIF is a new surgical technique; it is something that surgeons are seeing that they have to have as part of their (inaudible) so it is much different than walking in with some kind of a new gadget and trying to get the attention of the hospital or the surgeon. So I think we are differentiated in terms of our scope and all of the other things that we are now putting through that access and moving up into the thoracic spine. I think that not to rest on our laurels because we have a lot of work to do and we have a lot of people in our rear view mirror. But I think our story is becoming very well accepted by the surgeon community and I think that they appreciate the scope of our product offering and the uniqueness of what we have put together.

Okay, and not to disparage the value of XLIF but I guess what I am trying to get at is do you find the--as you are pursuing new accounts as you are pursuing share held largely by the larger players, are you seeing less of the smaller players or are you seeing more of the smaller players going from now say 6 to 9 months ago.

I think it is along the lines of what I talked about before. There are certainly a bunch of smaller players out there but I think that we compete most effectively with the larger players; that's really where our big accounts are starting to move from and I should say accounts with large potential--big surgeon targets. So we really feel that most of our competition is happening in sort of the upper echelon of the spine market, size-wise.

Alright. I will hop off and let some other folks ask some questions. Thanks.

Thank you Matt.

Our next question is from the line of Ben Andrew with William Blair and Company. Please proceed with your question.

Hi, this is [Li-Pen Ty] calling for Ben. I wonder if you guys can give us a little bit more color on sales of Formagraft products, like was your capacity constrained a little before the quarter or were you able to meet demands?

We were not. What we talked about was, don't forget that we have Formagraft very late in January so we essentially only had two months of sales and we were constrained by the amount of inventory that came over in the acquisition so it was a fairly small amount. Every piece of inventory pretty much that we got was sold so we were very, very excited about that. And I think what we are seeing right now is new inventory coming in in the second quarter but it is not going to get us to the point of being able to do a national launch until we get closer to summer.

I see. Would you be able to give us any sales figures?

Well we are projecting for the year $4 to $5 million on Formagraft and I think that given where we are with the ramp we are sticking with that. We will give an update later in the year as we gain more traction but we feel like that is a good projection.

Great. Thanks.

You are welcome.

Our next question is from the line of Steve Ogilvie with Zinc Equity. Please proceed with your question.

Hey guys, great quarter.

Thank you very much.

On the cervical plate and the agreement with RSB, and I reading that correctly that you are deciding to do the two cervical plates in house and that you are not going to go with the thing that RSB recently got approved.

Yes that is correct. The new plates and in fact the whole cervical offering that we are working on for the future is organically developed. And what we talked about was, Kevin talked about was actually giving up the rights on a product that we felt that we didn't need to put into our armamentarium and so that went back to RSB for financial consideration.

Okay. And then on the Formagraft. Now if I understand correctly you took some ownership of that manufacturing facility. Are you guys going to maybe contribute some Cap-X increasing their capacity?

Well we just began that whole relationship so we will see how that unfolds over the course of the year. But we did. We have in the neighborhood of--we are at a 20% interest in that entity and so we will be scaling that up over the next few years in terms of our ability to extract more product from it and I think we are especially interested in some development opportunities in conjunction with that as well.

Sorry, I want to correct myself. That number is more like 10%. It is $2 million and about 10%.

And then just from a strategic point of view on the Formagraft. Is that kid of the long term vision to vertically integrate or was that equity stake more to wrap up exclusivity and to be just closer with them in terms of R&D?

Yes.

Yes. All of those things. I think we clearly want to make sure that we maintain a very strong source of supply and clearly as we have talked about before we believe that there is a lot of up side in terms of new product development.

Okay then last thing. Recently there have been some headlines and some doctors that have gotten into issues with doctor-owned companies and what not. Are you seeing a change in the environment as far as doctors are concerned with the smaller companies? Are they approaching you and other companies with a little more hesitancy or concern? Or is there really no impact?

You know it is kind of a hard thing to get your arms around but my impression is that a lot of the doctors that I talk to seem to be more risk-adverse with regard to spine-surgeon owned companies. So we are hearing a lot less chatter about them. Certainly we are not seeing much momentum coming out of those companies so I think generally speaking the tide seems to have changed.

Okay, great. Thanks guys.

Thank you.

Our next question is from the line of John Putnam with Dawson James Securities. Please proceed with your question.

John Putnam. Yes, thanks. I wonder if you might make a qualitative comment on your surgeon training if it has changed at all, if it continues to be training surgeons to be trainers of their peers. Kind of how that whole effort is going out.

Sure. Well I think we are doing both. We are emphasizing train the trainer. We have done quite a bit of that over the course of the fourth quarter and into the first quarter and we continue to stay focused on being able to bring approximately 100 surgeons here every single quarter. And that has been very in line with the way the first quarter has unfolded for us so we still expect to have in the neighborhood of 400 surgeons coming through here, most of whom are coming in for initial training.

Okay. How many of the trainer positions to you have in your stable would you guess?

It is in the neighborhood of about 50 that are focused on training and are linked in with our group called SOLAS.

Thanks very much.

You are welcome.

(Operator Instructions)

We have a follow up question from the line of Bob Hoskins with Lehman Brothers. Please proceed with your question.

Thanks. Can you hear me okay?

Yes, Bob.

Okay great. I just wanted to follow up Alex on the thoracic opportunity. Could you just talk about that in a little more detail in terms of where you are right now and where you might be going with it and just some more details there?

Sure and I would like to bring Keith in on that as well but I can just tell you just very generally, we have done quite a bit of work in the cadaver OR over the last several months and really developing this whole line of moving up into the thoracic spine. I think we have--all of our designs are really pretty much close to set; that is why we feel very comfortable about being able to launch in the second half of the year. So I think we have come up with the implants that we are looking for which will allow us to again address the different anatomical configurations needed for the thoracic spine. Also to be able to do revision cases for a failed TDR is one of the other implants that is accessible that way. And then of course there is a whole new retractor system that facilitates coming in and being able to work around the lung and gaining access to the thoracic spine. Along with that is the SpheRx II system which launches and I think just so that that is not really lost in the shuffle here too, SpheRx too allows us to do multiple levels of fixation and allows us to move up the spine. So we are very far along. We have started to do some initial clinical cases as well and we expect pretty strong launch at (inaudible).

I'm sorry Bob, I don't know if Keith if you wanted to add anything to that.

What I was going to add is that a lot of the benefits that we have seen with the XLIF style approach and the minimal tissue distraction and the up takes you get from a recovery perspective; we also have some unique gains as well because of that access for a thoracic. And keep in mind--I think Alex brought up a good point with SpheRx II how that is a great expansion opportunity from an implant perspective into the thoracic spine--but also the MEP expansion for NeuroVision gives a great deal of patient safety features as well for that thoracic approach. And then of course catering a MaXcess style retractor specifically for the thoracic spine gains even greater access options. And so we are seeing--in the patients that we have done so far we are seeing some really nice gains in recovery just as we saw (inaudible) over the years. So we are very excited about this expansion and this expansion plays very well with the other product lines that are also expanding, as I mentioned the MEP with NeuroVision, SpheRx II and of course MaXcess.

And Keith what would you estimate as the percentage of total fusions that go on. What percentage are in the thoracic region?

That is a little bit more difficult to calculate and the reason why is that a lot of these procedures are scoliotic related or they are related to thoracic trauma. And so what we are seeing though clearly is that there is going to be expansion opportunity just like we saw in the lumbar spine--how XLIF really expanded the opportunity for that approach and is now really challenging into what we originally thought the entire A line market was. So we are still getting our arms around the total opportunity but it clearly has already the chance of expansion. I think that is what we are most excited about.

And then one other question if I may in terms of you talked a little bit about sales opportunity outside the US. Can you just remind us of your strategy outside the US because typically obviously it is not a place that you have done much business by design. I'm just wondering if you could update us on your plans for outside the US.

Yes. Our primary focus is really to take a narrow approach with limited launches scheduled for the fourth quarter in German speaking countries as well as the primary English speaking countries. So that will be our primary areas of focus. And the way that we are going to go about it is not to launch the entire armamentarium but to move forward more with motion preservation. Those markets as you know are much more advanced with regard to the products that they have seen in the last several years. So our plan is to be able to take a NeoDisc, take a Cerpass, offer our fusion alternatives too for the cervical spine and have a complete offering to come in with that way. And then on the XLIF side to be able to come in with XLIF indications for fusion and the equipment to go with that obviously. But then also to do motion preservation laterally. So those are the two major areas of focus but what we are not going to do is we are not looking to do a huge market launch in 2008. What we really want to do is to scale up with centers of excellence, build strong surgeon support no differently than I think how we have cultivated the US market over the last several years. We plan to do the same thing in the markets that I mentioned that we are targeting.

Great. Thanks so much for the comments.

Okay, you are welcome.

We have a follow up question from the line of Matt Miksic of Morgan Stanley. Please proceed with your question.

Couple of questions on some products that I don't think I heard you mention. There was, I remember some commentary about leveraging some of the woven technology that you had picked up with NeoDisc for some new products. If you could give us an idea of how that you think will fit and when we might start to hear more about that. And then the other is something that I keep circling back to which is ExtendSure. If you could give us an update as to where you are there.

Well we will split these two in half. I will take the woven and then Keith can take ExtendSure. So with woven, what I would say is that it is a very important development area for us and what we are planning to do is to work our way through a number of applications of that technology in 2007. So I think if we have some very favorable outcomes and we feel that we have something ready to launch then that may be something that we are able to introduce towards the late part or early of '07 early part of '08. But we are still working through that. But there is definitely some excitement about what we are seeing but again I don't want to get too far ahead of ourselves until I can give you some very specific applications as well as time tables for those sort of products. And I know Keith wants to give you his thoughts on ExtendSure.

ExtendSure--we are still in the same path that we talked about on our last call. And that is that we continue to expand gradually with the product line with the intent that we are continuing to accumulate clinical data for it and our goals are still to see some of that clinical data to be presented in the second half of the year to early part next year. As to how things are looking longer term for patients with ExtendSure. So we are still very pleased with the progress of the device and we still feel like we want to continue to accumulate the clinical data to show its efficacy.

Okay, so we will look for data towards the end of this year.

Yes.

Terrific. Thanks for the update.

Okay, you are welcome.

We have a follow up question from the line of Steve Ogilvie with Zinc Equity. Please proceed with your question.

You guys mentioned the status of the NeoDisc trial. Is there any update with the other disc platforms in terms of the approval timelines in the US?

They have not changed so I haven't made any specific comments but it is the same as what they were on our last call so we feel that with lateral TDR we will be in position to file an IDE in late '07 early part of '08, no differently then before. And then with Cerpass position to file an IDE second half of 2007. And I think NeoDisc we have already discussed in detail.

Okay great. Thanks.

Sure.

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

Okay, well thanks everybody. We will talk to you in another quarter.