NuVasive Inc (NUVA) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the NuVasive Inc. third-quarter 2007 earnings conference. 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. Joining us on the call today is Alex Lukianov, Chairman and CEO; Keith Valentine, President and COO; and Kevin O'Boyle, Executive Vice President and Chief Financial Officer.

NuVasive cautions you that statements included in this conference call may include those that are not a description of historical facts and are forward-looking statements that involve risks and uncertainties and 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. Potential risks and uncertainties that could cause actual growth in 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 difficultly in generating sales or achieving anticipated profitability; the risk 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 risk that additional clinical data may call into question the benefits of new NuVasive's products for patients, hospitals and surgeons; and other risks and uncertainties more fully described in NuVasive's press releases and periodic filings with the SEC.

NuVasive's public filings with the Securities and Exchange Commission are available at that www.sec.gov. NuVasive assumes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which it was made. I would now like to turn the call over to Alex Lukianov.

Thank you, Nick. And thank you, everyone for joining us on our third-quarter conference call. With our corporate headquarters located in San Diego, many of our employees or shareowners as we call them have been addressing issues this week related to the massive wildfires in our region.

Our corporate offices are located a safe distance from the fires and all personnel and corporate assets are safe but many of our shareowners have been focused this week on making sure their families and communities are safe while dealing with evacuations. Because of these events some of our personnel who would typically participate in our full-scale presence at NASS have instead remained in San Diego.

Our tradeshow booth is fully staffed and workshops and operating room demonstrations are going on as planned. Our salesforces is fully represented along with many of our San Diego personnel who were already in Austin prior to the wildfires or arrived late.

As a result, our core NASS presence remains intact even though we have canceled our investor conference that was scheduled to take place later this evening. Our call is being conducted from San Diego headquarters where we can better provide support to our affected shareowners, friends and family. Keith and Kevin are joining telephonically from Austin as their families and homes are now safe. Now for a review of our quarterly results.

NuVasive's third quarter of 2007 delivered solid operating and financial performance. Our exclusive salesforce continues to expand our presence in the US market while increasing product penetration with existing customers. XLP Lateral Plate, Formagraft, and SpheRx II generated a strong feedback in their first quarter of full-scale launch.

Before I provide more detail on our operational progress let me first highlight our financial performance. Revenue for the third quarter increased 52.9% year-over-year to $38.5 million. On a sequential basis this represents an 8.2% increase. From a profitability perspective non-GAAP earnings per share was $0.04.

Our exclusive salesforce has grown in its ability to increase product penetration in existing accounts while simultaneously expanding to new customers. Our seasoned representatives have become especially successful in cultivating key relationships and educating spine surgeons on how they can incorporate our complete suite of innovative products into their practice.

Following the initial seeding of the US markets, where NuVasive has not previously had a presence, we have seen early footholds in these markets that give us confidence in their future expansion. At the end of the quarter, the total salesforce grew to 230 up from 220 at the end of the second quarter. We believe that our strategy of increasing product penetration coupled with greater regional expansion will continue to drive robust revenue growth in 2007 and beyond.

Our continued ability to innovate and stay one step ahead of the competition provides the fuel for our salesforce performance. Our R&D team is focused on next generation solutions and enhancing our current product offerings driven in large part by surgeon feedback. During the third quarter SpheRx II, XLP Lateral Plate and Formagraft were fully launched after a complete build of product inventory. All three of these products experienced strong surgeon adoption during the quarter and allowed NuVasive to capture incremental revenue.

The SpheRx II pedicle screw system provides surgeons the ability to address multiple level cases including adult degenerative scoliosis. Our XLP lateral Plate allows for additional fixation during (inaudible) procedures from the same lateral access point as the fusion procedure meaning two forms of this fixation are delivered through the same lateral incision.

Our innovative XLP Lateral Plate offers a minimally disruptive alternative to those XLIF surgeons who would otherwise use no fixation or a posterior pedicle screw while our recently launched Formagraft product provides NuVasive the ability to offer a fusion enhancing BioLogic for incremental business.

Because of the success of our surgeon training program, our unique XLIF lateral approach to lumbar spinal fusion continues to become a key part of a growing number of US surgeon practices. Surgeons are expanding the clinical applications of this technology and we see a growing number of experienced XLIF surgeons applying our MAS technology on one or two level procedures, decompressive applications and multiple levels for both adult degenerative scoliosis and thoracic spine procedures.

Expanding these XLIF applications which even include TDR revisions increases the addressable market and is an important element of our long-term growth strategy. At the North American Spine Society this week in Austin, we're launching each of the core components of the XLIF thoracic approach.

This includes our MaXcess thoracic system which is specifically designed to allow minimally disruptive lateral surgical access to the thoracic spine in the same manner as an XLIF procedure. Moving up the spline into the thoracic region represents an incremental market opportunity and an additional point of differentiation for our salesforce.

In support of XLIF thoracic we're introducing our CoRoent XLT and CoRoent revision peak implants designed specifically for thoracic applications along with a range of specialized instruments to make the procedure easy and reproducible.

This week we also announced additional steps to expand our surgical product offering which is an important focus of our differentiation strategy. We introduced two new cervical plates this week, the Helix anterior cervical plate and the Helix MiniPlate. These two cervical plates complement our current gradients plus CoRoent and Triad allografted cervical product lines by providing greater versatility, allowing us to accommodate the various surgeon preferences.

I also want to comment on our efforts to expand our operational infrastructure in support of our long-term goal of becoming a dominant force in the spine market. As we continue to successfully execute on our growth strategy, it's increasingly important that we have the corporate infrastructure in place to meet the demands of our high-growth expectations over the next several years.

Accordingly, we will be moving to our headquarters in 2008 to a larger leased facility, converting to an SAP software platform to unify our operations allowing for efficient growth and significantly expanding our sales training programs. Let me expand as follows.

First, relocation of our corporate headquarters is crucial to our continued growth. Accommodating all corporate functions in a single location will be an expensive investment but we believe this is a necessary component for the continued innovation and scalability that has been an important ingredient in NuVasive's growth to date. Moreover, it allows us to leverage our unique culture of absolute responsiveness as we expand and ensure that the outstanding qualities and standards we demand of our shareowners permeate through the entire organization.

The new facility will include the same elements that differentiate NuVasive from the competition at our current location including a surgeon training operating theater, on-site machine shop for rapid design and manufacturing of custom instruments and prototypes as well as expanded biomechanics testing lab capabilities for research purposes.

Second, the SAP software conversion will support our anticipated sales growth and allow all operations including our intricate [loaner set] processing, finance and IP teams a uniform platform to manage the increasingly complex information system and maintain strong financial control. Third, significant expansion of our sales training programs will ensure that we have fully trained salesforce with the skills and knowledge necessary to educate spine surgeons about our unique products and technologies.

This particular expansion will cover training at all levels including sales management, sales representatives and product specialists who provide expert product knowledge in XLIF and NeuroVision. We are dedicated to providing our salesforce with top-notch resources and continued skills development. These investments will help to ensure our continued growth and enhance our ability to bring our pioneering MAS technology to a greater portion of the US and international markets.

We have also made consistent progress on our motion preservation strategy led by the NeoDisc cervical disc replacement study. As we reported at our recent investor reception in New York City, the NeoDisc pivotal trial is over 50% enrolled and we remain on track for completion of enrollment in the first half of 2008.

In Europe, we are on track to receive a CE Mark for NeoDisc by the end of 2007. This coincides with our plans for international expansion where we remain on target for our initial seeding of select markets at the end of 2007 and beginning of 2008. This international launch will include both lumbar and cervical product offerings on a limited release basis. Our lumbar products will be XLIF and our lateral total disc replacement device XL TDR. The cervical offering will include both NeoDisc and Cerpass total disc replacement products.

While we do not expect a robust revenue contribution from our initial international launch in Q4 2007 or 2008, the OUS markets are part of our overall long-term market penetration strategy. I would now like to turn the call over to Kevin O'Boyle for a review of our third-quarter financial results.

Thank you, Alex. Our revenue for the third-quarter 2007 was $38.5 million a 52.9% increase over Q3 2006 and an 8.2% increase over Q2 2007. Our strong sequential revenue growth was driven by continued adoption of our MAS platform and new product launches.

Gross margin for the third quarter was 82% compared to gross margin in Q3 2006 of 80.5% and gross margin in Q2 2007 of 81.2%. Our Q3 2007 net loss was $2.3 million or a loss per share of $0.07 on a GAAP basis. On a non-GAAP basis the Company reported net income of $1.5 million or $0.04 per share.

The non GAAP income per share is due to the realization of salesforce efficiencies and the continued strength of our revenue from innovative products. Our non GAAP net income calculation in the third quarter of 2007 excludes stock based compensation of $3.4 million and amortization of intangible assets of $398,000.

Operating expenses for Q3 2007 totaled $35.2 million and $34 million in the second quarter of 2007. R&D costs were $5.7 million in the third quarter excluding stock based compensation vs. $5.4 million in the second quarter. The increase in R&D spend from Q2 was related to the enrollment of subjects in the NeoDisc clinical trial and development efforts related to our product pipeline. Excluding stock based compensation, R&D as a percent of revenues for Q3 2007 came in at 14.7% versus Q2 2007 at 15%.

Sales, marketing and administrative expenses totaled $26.1 million excluding stock based compensation versus $25.1 million in the second quarter. The increase in spend from Q2 was related to incremental sales expense because of higher revenues. Excluding stock based compensation, sales, marketing and administration as a percent of revenues for Q3 2007 came in at 67.9% versus Q2 2007 at 70.6%.

The interest in other income for the quarter was $1.3 million. The stock based compensation charge for the quarter of $3.4 million was recorded in operating expenses and allocated as $563,000 in research and development with a balance of $2.8 million in sales, marketing and administrative costs.

As of September 30, 2007 we had $96.7 million in cash, cash equivalents and short and long-term investments. Our operating cash burn was $1 million for Q3 2007 which broadly reflects the development of our MIS product pipeline including motion preservation, the national launch of new products 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. Day sales outstanding or DSOs were 56 days in Q3 2007 compared to 60 days in Q2 2007.

As it relates to 2007 guidance we are increasing our full year 2000 revenue to 147 to $148 million up from 143 to $146 million. GAAP loss per share range is being lowered to a loss of $0.35 to $0.31 from $0.38 to $0.31. Non-GAAP earnings per share is increased on the low end of the range to $0.06 to $0.09 up from $0.05 to $0.09.

Looking to 2008, we expect mid-30s percent year-over-year revenue growth rates. From an operating expense perspective, we will see continued synergies in our sales expenses, however our total operating expenses will increase because of the costs of the infrastructure needed to provide the foundation to drive revenues to $500 million. These additional costs can be attributable to new leased campus style headquarters, SAP, software implementation and an increased commitment to training our salesforce.

As Alex has outlined, we view these as important infrastructure investments that will provide us with a solid base from which we can continue to execute on our growth strategy. We therefore anticipate marginal GAAP profitability and significant non-GAAP profitability in 2008. We will be giving a detailed guidance for 2008 during our fourth- quarter conference call which will be given in February.

Our long-term non-GAAP operating profit remains intact at 20% levels. I would now like to turn the call back over to Alex for closing commentary.

Thanks, Kevin. Our culture of absolute responsiveness and track record for achieving results continues to be the driving force behind NuVasive's ability to stay ahead of the innovation curve. We believe it is a major reason why spine surgeons choose to work with NuVasive over our competitors. It continues to be our most important ingredient in everything we do and we have taken a number of steps to ensure that remains one of our most important strategic assets.

All of our shareowners including our entire salesforce are drive by a genuine desire to make NuVasive a major force in spine and soon to be the fifth largest company in the market. Clearly there are several important element to our long-term growth strategy. We're making investments in the salesforce and physical and IT infrastructure necessary to achieve our companywide goal of growing revenues at an annual rate in the mid 30% range to $500 million over the next several years.

Although we're making the necessary strategic investments that will allow us to maintain our growth momentum, we are doing so with an eye toward leveraging our operations and profitability. In summary, we are pleased with our financial and operational results this quarter. We have seen salesforce growth and added new customers while increasing product penetration.

Three innovative products experienced robust surgeon adoption during the first quarter of a full-scale launch and we anticipate that with our NASS product releases we will see continued momentum into the fourth quarter, end 2008. We would now the pleased to answer any of your questions.

(OPERATOR INSTRUCTIONS) Steve Lichtman, Banc America Securities.

Evening guys. (multiple speakers) just a couple of questions. First of all Alex, I think you mentioned for the international launch XLIF is one of the products. I thought we were just going to be launching the discs next year. So are you also going to be seeding XLIF as well next year? Just want to clarify that.

Yes we are and the reason for doing so is we don't feel that surgeons can comfortably move from doing a normal -- if you would call it that or standard I guess -- fusion procedure to doing a lateral PDR without first being fully trained on an XLIF fusion procedure. So we will be doing that selectively as I said on a limited release meaning we want to make sure that surgeons get the outstanding results that we have seen in the US with XLIF and be able to mimic those results with our PDR approach.

Great, and where will that training be done for the surgeons overseas?

Well, it's going to be done in a number of different locations. Primarily it will be done in Germany. There will be proctorship set up as well in the UK, potentially Greece, But most of our activities will take place in the German speaking markets as well as the United Kingdom.

Okay, and in terms of the number of reps, you mentioned 230. Any sort of initial thoughts on how much you want to grow that force as you go into 2008?

I think we're going to keep it at about the same pace which is in the neighborhood around 15% growth.

Okay, great. And then I guess just lastly, just in terms of the new products all three went into high production -- the three new main products went into high production midyear and with a full launch throughout the quarter or growing throughout the quarter. Maybe characterize that?

It was a full launch for the entire third quarter.

Okay great, okay good. I hope everyone is well.

Thank you very much; we are doing all right.

Bob Hopkins, Lehman Brothers.

Hi guys this is Lennox actually in for Bob. Can you hear me okay?

Yes.

Just two quick questions. Just on the new product launches -- this is the first full quarter. Is it possible to break out what those contributed to revenues in the quarter?

We don't do that. We simply have talked before about the fact that MAS constitutes the vast majority of our sales and that has not changed. So it's still in that range of well over 80% MAS in terms of our revenue.

Okay great. And then on topline growth, Alex, you're quoted in the press release as saying you expect the mid 30% range for the next few years. I just wanted to clarify. Do you expect to see so close to 35% each year rather than that being a compound annual growth rate?

I see that as approximately mid-30s every year. That's what I am suggesting.

Michael Matson, Wachovia Securities.

Thanks for taking my question. I guess I just want to try to get a little bit better understanding of that 35% growth target that you guys are putting out there. It seems a little ambitious to me. I know you guys have executed here and definitely have been growing at pretty high rates. I think your growth has probably been driven by new products that's you've added, geographic expansion and new sales reps.

But it seems like you have got a pretty broad product line now. Are there are still opportunities to continue to add new reps in areas of the country where you feel like you don't have a lot of penetrations?

You mean versus are we like finished and that's it? No, of course if you take a look at XLIF, XLIF is still in its infancy when it comes to adoption. So if you take a look at the size of the market, the size of NuVasive we have a long ways to go in terms of growth and we expect that to be the standard over the next 10 years.

So it's very easy for me to feel comfortable about telling you that we're going to grow at a robust pace over the next several years. The same is true for our salesforce. We continue to see very robust penetration in the markets where we have been present for at least two years exclusively. And in those markets what we're seeing is we are seeing that our more seasoned representative that have been in place for approximately 18 months are having terrific success.

So we have many markets that are not in that condition yet. They're still growing and they're still being developed on a missionary basis. So I anticipate that we have terrific upside.

In your product line are there areas that you still need to fill or do you have a pretty complete product line at this point in your view?

Well I think if you take a look at what we have, as I mentioned we're adding on the cervical side. In 2008 we'll be adding another cervical product to the posterior application. All of these are anterior. So that's the only really other key component to cervical.

But even that being the posterior side represents approximately 10% of the cervical fusion cases. So now don't forget that we are also anticipating for NeoDisc to be on track and that is part of our cervical armamentarium. That all comes together first outside the United States and then ultimately in the United States over the next few years.

So we expect our cervical business to grow at an especially robust pace. But if you take a look at where we are with XLIF we're just starting to move into the thoracic spine. We're just starting to get much more penetration in terms of additional levels which of course brings more revenue on a per case basis.

But we're seeing again surgeons that have been doing the procedure for some time getting more and more comfortable with increased applications and I believe that's what's going to drive our revenue. And I believe that our products which we will always continue to refine and make sure that they are first in class on an ongoing basis will be leading the way.

All right; that's helpful. And then can you remind us what percentage of your revenue is coming from cervical products right now? I think you have given that number in the past if I recall.

It's approximately 10%.

Have you seen -- I know Medtronic has been training surgeons very aggressively on the Prestige disc. I was wondering if you have seen any kind of impact from that or what your thoughts are there.

None whatsoever. I think that if you take a look at our cervical market position, we have so much opportunity shifting that several points I think is not a difficult. As I like to say here, it's a small matter of execution.

But clearly I don't think it is that difficult because there is much more growth happening right now on the cervical side than there is on the lumbar side anyway. So for us it's just a matter of taking market share. And I think we have the products and the team in place to do so.

Okay, and then just one final question. Did you give a vertical integration number? I might have missed it. I apologize if I did.

No we didn't, Mike. The last quarter we said that we were not going to provide that any longer simply because the denominator was growing so much that it didn't make sense meaning we were increasing the number of accounts at such a fast pace that the vertical integration began to lose purpose.

Okay, that's all I have got; thanks a lot.

Matt Miksic, Morgan Stanley.

So, a lot of the questions I think I've got, that I have, have been picked over. But I wanted to drill into a little more the salesforce and where -- how that's going to work in Europe. You talk about 230 going to -- is that a year end number of 230 or that's the current number of 230?

It's currently 230 so it will increase a little bit more.

A little bit more --

230 through the third quarter.

Third-quarter; right? And then something up in the range of 15%, something you mentioned earlier. And that's for the US only?

Yes, so we will talk about OUS much more on our next call. But as one of the questions you brought up, we're planning to -- we already started to go direct in Germany. We have established ourselves direct in the UK and all other markets. At this point in time we're looking at distributor relationships when it comes to Europe.

We have not tackled the Far East markets yet in terms of seeding them. We're in the process of getting our appropriate orientation established in those markets and we expect to move into them over the course of the next two years.

Good stuff. The other comment -- and I'm not sure that I caught -- did you talk about revenue growth target for next year?

We did not. I simply talked about our goal of reaching $500 million over the next several years and that I anticipate our growth being approximately 35% per year, in that range -- mid 30s.

Okay, so mid 30s over that time period starting from where you are now kind of ramping down presumably over that time period. And then I wanted to -- this campus facility that you are talking about setting up -- if you could talk a little bit more about when maybe in 2008 and then I'm sorry I had to join the call a little bit late but the capital investments, the size of those investments again and when we would expect those in 2008.

Let me talk briefly about that and then have Kevin jump in as well. I guess first and foremost we expect to be in a new facility by the middle of 2008. And what that will do is that will double the size of our current facility which is about 60,000 square feet where we are now. But we are doubled and tripled up in many situations so we are absolutely bursting at the seams.

And with this campus approach what it will allow us to do is add an additional building as well as takeover an additional building. So over the next several years we anticipate that we can meet our needs from the roughly doubling even a little bit more of doubling our current space to several hundred thousand square feet.

So we believe that it will act as a permanent long-term headquarters and allow us to keep everybody in the same place and in the same compound. So it will have an expanded operating room in terms of what we can do there from what labs and so forth. We will be doing much more in the way of training. And again it just allows us to accommodate our scalability as well because of introducing a new or I should say installing a new SAP system next year. But I'll ask Kevin if he'd like to make any comments with regard to the financial impact.

As it relates to 2008 moving to a new corporate headquarters it would be a leased facility. So we are not investing in real estate. So what would come would be leasehold improvements and we are working through the designs of the interior of those buildings as we speak. And we will have obviously a lot of visibility to that on our next call which we'd be happy to go through that with you at that time.

Okay, and then you talked in the past about SpheRx giving you more multilevel capability in the procedures that you are doing. And I just wanted to see if you have to read so far as to what percentage of your cases now are say in -- is it two plus that this puts you into the -- gives you the capability of doing more than two levels? Is that -- if I understand it correctly?

Yes; that's correct. I think it allows us to move up the spine in terms of course lumbar as well as traverse into the thoracic region. But SpheRx II really is re-design that offers much more capability.

Do have a sense so far as to what percentage of your case and how much of that mix is now north of two?

No, we have not measured that on a national basis. But I think in terms of local pockets we have seen an increase of levels.

Just to refresh our memory, when you talk about the revenue per procedure --I guess it used to be revenue per procedure that you talk about. But is it revenue per procedure or revenue per level opportunity that you have?

Well we haven't changed with regard to how we discussed that particular metric which puts us in the 11,000 to $12,000 range for an XLIF case, an MAS XLIF case. But I think clearly it puts us into a position of being able to extract more revenue from those cases where we were let's say, largely doing more of a four-five or doing a three-four level. So now we're really able to really own the entire lumbar spine from five, one on up as well as to move into the thoracic region.

And that's very significant with regard to surgeon retention. That's very significant of course in terms of revenue and I think it just allows us to dig in much more and increase our penetration of accounts than with cervical and with other pullthrough products beyond just cervical.

So I mean if I understand that, if it's 11 to 12,000 per procedure, three-four to four-five and you are doing two or three levels is that -- I'm sure it's not a direct multiplier two times, three times. But is this increasing the mix of procedures where it's certainly something well north of $12,000?

Yes; that's correct. It starts to move things more towards the $20,000 plus level which otherwise we were not anywhere near that in most of the applications.

Last question and then I will jump back in queue here is --

Matt, I just want to simply clarify though that again this is not what we are seeing nationally. I think this is what we are growing towards. This is what we are seeing from XLIF surgeons that have been involved for quite some time, are very experienced in XLIF. And what we see from them is an increase in their indications which is what I spoke about in my prepared remarks.

That's curious. Because I -- Kevin's in San Diego. I mean, Kevin is in Austin isn't he?

Yes.

So when you make that kind of comment I always imagined Kevin like waving his hands at you and saying no; 20,000, don't let him run with what that and now you are sort of clarifying that. Him being in Austin I am impressed. I don't know how exactly you guys are pulling that of.

I'm in total control over this call; that's how we are doing it.

No actually --

I think I understand. That is the opportunity you can start tracking towards. It's not necessarily what you are seeing today sort of switched on nationally.

That's exactly right.

Last question just on sales productivity. Just how far away from -- you've talk about this, whatever the number is, if it's $1 million a rep on average, that you're tracking towards. In terms of sort of fully leveraging this salesforce that you've had in place now for a little over a year, are we a quarter away from that? Are we two quarters away or more? Can you give us a sense?

I think what I've tried to explain before is that it takes about 18 months. It could take even as long as two years depending upon the market to have full penetration if you will of a territory by a rep. So as we continue to add for example as we have added the sales force to the sales force numbers this year we are expecting again -- it restarts the 18 month clock.

So, I think that there's never a point where you have that penetration by every single individual. But I think if you consider the sales force number that we had -- and I believe that was approximately 175 towards the end of 2006, 175 in that range -- that I think that what we will expect to see is over an 18 to 24 months range, we will expect to see those levels of penetration from that subgroup.

Ben Andrew, William Blair.

Good afternoon, just wanted to follow up on a few things. First, can you comment of surgeon training? Is it steady, accelerating with where you have been in the past? I know you're seeing a further mix with retraining.

It's about the same as it has been if not a little bit more robust. So as we talked about before, training approximately 100 surgeons per quarter. So that's been very consistent and demand has been very high. So we continue to be booked out several weeks in most cases, so that's going well. We're doing more proctorships as well.

So surgeons that have come through here, been trained on XLIF and have done some cases are now very interested in spending more time at our let's call them more elite centers that have already applied multiple indications with XLIF to their practices. So we are seeing more surgeons wanting to go into the field and learn from those individuals.

How much more training capacity do you believe the new facility will initially give you kind of in mid-2008? Are you bumping into training limits? You say you are booked out a couple of weeks. I guess that's not too bad, but --

Well I think as we talked about before it's really something we can dial in based upon our needs. I think with regard to the sales force, we didn't want to overtrain and not be able to properly service accounts. So I think that the capability is the same. It's six operating rooms, same as here.

So we can go well beyond 400 trainings per year. As you know, last year we did over 500. So I think that clearly there is plenty of room for growth. But what we're trying to do is to make sure we can do other things as well and that's why we will have a wet lab meaning you can have cadaver biomechanical testing taking place, not just straightforward biomechanical testing. So there's a lot more that we expect to do at this facility.

Okay, and you've talked in the past about maybe seeing a little bit of an uptick in procedure volumes broadly for the industry kind of as the second phase of the SPORT trial came out and lifted some of the concerns. Are you still seeing that generally?

Yes, we are.

Is it a marked acceleration? Can you -- want to give us on a scale of one to ten or how would you characterize that?

Well I see it as a continuum that has not changed. I don't think anybody was really affected by the SPORT study. If anything it was probably more Wall Street and perhaps some of the investors that weren't clear on it. I think most people understood and I think most analysts clearly understood that it did not have any kind of direct ramification to the market.

And if anything now, I would say the SPORT study actually demonstrated the need for potentially more fusion. But we did not see any sort of acceleration nor did we see deceleration prior to the release of the SPORT study.

Okay; understood. I guess the other question is really on the thoracic side. As you think about how substantial that can be for you on a mix basis if you look out two or three years, is that 5% potential of the revenues as you move into the multilevel fusions or is it as much as something like 20?

Hard to say exactly since we've just really started down that path. But I would certainly say that we can hard circle 5% and I believe that we anticipate that it can grow to 10% from what we are seeing right now. Again, it can be just like XLIF where we did not expect to be doing degenerative scoliosis cases when we went down this path several years ago. And now we're seeing surgeons do that more and more so and operating on octogenarians and being able to do things that nobody really thought we would be able to do. But that's all because of the MAS approach.

Okay. And then in terms of the existing facility, remind us what you are going to do with that as you transition to the new campus. Thanks.

We will plan to basically get ourselves out of our lease situation here. We think that that will be very straightforward to do. And as I mentioned before we anticipate moving the entire Company by the middle of next year and certain areas will move before hand probably somewhere at the end of the first quarter.

Steve Ogilvie, ThinkEquity Partners.

Hey guys, just a couple of quick things. Looking out to the $500 million objective, could you maybe break that down at least qualitatively in terms of domestic and international? And how many domestic reps do you think you need to reach that goal?

Well I think again it will be approximately be the 15% growth that I talked about in terms of where that takes us. But what I anticipate will start to happen is we will see more reps performing to the level of $2 million in revenue per individual.

So I think as you do the math on that you'll see that it's really going to get us to not only where we want to be with $500 million but far beyond that. Sorry, what was the second part of your question?

That's fine. The other thing I wanted to ask was maybe you could give us to feel from the field with AxiaLIF getting a lot of focus or will be getting a lot of focus as they hire a bunch of reps do you feel like doctors are getting maybe a little saturated with all the new approaches and at the end of the day they are concerned about maybe some other more basic things in terms of patient care? Or do you think that there's still a huge appetite for all these new techniques and tools?

I don't think there is a huge appetite for things that could potentially be a flash in the pan. So I'm not sure that I can comment on every single technique that is out there because I think some of them will have limited penetration. There's no doubt about that.

I think as we're focused on XLIF and furthering XLIF, that is by no means a flash in the pan. If anything we see more and more surgeons wanting it to be a clear part of their armamentarium.

Concurrently, there are many smaller companies that are able to take some market share but they're not really taking it so much from the bigger companies. They're taking it more in terms of -- they are of course -- but they're really mostly taking it from a very small group of surgeons. And that's pretty much the strategy that if you can convince five or ten surgeons to do something then you can pretty much be able to move down that pathway with them. So I think if you look at the fact that there are literally now hundreds of spine companies there's a pretty small number that are really performing at the top level.

Do you feel like the big guys whether it be Metronic with some PMA type products that only they have, do they have a certain amount of market share just locked in because doctors need to be associated with them to get some of the cutting-edge stuff or is there a disillusionment with the market share leaders?

Well I think there certainly there have been some performance issues related to DePuy that have been well-established by the analysts. So really if you take a look at what's happening, Medtronic does have a very strong momentum in the spine area. I do not expect that to significantly shift downward.

Again just because of the presence that they have in terms of their representatives. So the Company's always been game changing Company when it gets behind certain areas and I think that's going to happen in motion preservation. I'm thrilled about that prospect because I think it actually makes it easier for companies like us no differently than when Medtronic went down the MIS path and had surgeons considering different techniques it made it much easier for us to go down a path with MAS as an alternative.

John Putnam, Dawson James Securities.

Thank you. Your gross margin continues to creep up nicely. I guess what I'm wondering is, is it a matter of mix or is a matter of some things that you're doing internally? And I guess more importantly where do you think you can get your gross margin to, Alex?

I think I'm going to have Kevin jump in here. But I think we definitely feel that our gross margin will stay in the low 80% range for the next several years and it's coming from all the things you mentioned -- from mix, from leveraging our manufacturing sources; so it's coming from a number of different directions. Kevin is there anything you would like to add?

No, I would just second what you said, Alex. I think your range that you mentioned is right on target.

And then I was wondering are any of your MIS systems on SAP now?

No; we are on a Microsoft system right now that we will be changing over completely.

All right, and I guess my question is how long does it take and do you see any potential risks in doing that?

I don't see any major risks. It takes a solid 18 months to get through the process. We have been working on it of course as a result most of this year and we expect to have it online in the first half of next year. So we'll do a thorough testing. It will be done in a very organized and I believe speaking for our people a very intelligent way as we have done most everything else from bringing up distribution to a new facility and not missing a shipment and things of that nature. So I have a lot of confidence in our team's ability to deliver.

Thanks and good luck on the fires.

Thank you very much; appreciate that.

(OPERATOR INSTRUCTIONS) Steve Lichtman, Banc America Securities.

I have two follow-ups guys. One, you guys had talked a while back about a dynamic rod. I just want to see if that is still in the plans. And then secondly, just at NASS this week -- can you highlight XLIF data that we should be looking for either on posters or in your presentations? Thanks.

Sure, I'm going to ask Keith to make some comments with regard to that. But I think with regard to a dynamic rod for fusion there is no doubt that we have made some very nice progress and we are showing that to some select surgeons. So we believe that we have a good product. But again it's a fusion system.

With regard to the literature, we were going to cover some things at our analyst and investor reception this evening and Dr. Rogers in particular was going to cover some information. But I will ask Keith to fill in on the literature not just so much in terms of what's happening at NASS which is important but I think just in general where we stand and have him make any other comments he feels are appropriate. Keith?

Yes, there is a number of really neat items that are going on at NASS as far as presentations regarding XLIF and they focus both on the lumbar and the thoracic areas. There's also a number of chapters that will be coming forward in the next few months and a number of literature items that are coming out as well.

So I think that there is going to be really nice coverage as you look forward over the next six to nine months including meetings that are coming up early next year as well as scientific publications.

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

Thank you very much. We're going to get back to our hoses and get back to the things we need to do here in San Diego. And of course our NASS team is in place. So if there's anybody that would like to see the products they are on clearly on display and both Kevin, Keith, Pat Miles, another series of executives will be on-site to help you better understand some of the new offerings. So I thank everybody and we will talk to you again after the fourth quarter. Bye-bye.

This concludes today's conference. Thank you for your participation.