NuVasive Inc (NUVA) 2008 Q1 法說會逐字稿

Greetings and welcome to the NuVasive, Incorporated First Quarter 2008 Earnings Conference Call. (OPERATOR INSTRUCTIONS) It is now my pleasure to introduce your Mr. Nick Laudico of The Ruth Group. Thank you, Mr. Laudico, you may begin.

Thanks, operator. Welcome to the NuVasive First Quarter Earnings Conference Call. NuVasive 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 statements included in this conference call that 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 or those expressed or implied by such forward-looking statements.

Uncertainties that could cause actual growth and results to differ materially include, but are not limited to profitability projections that may prove incorrect because of unexpected difficulty converting sales or achieving anticipated profitability, the uncertain process of seeking regulatory approval or clearance of NuVasive's products or devices, risks that such process could be significantly delayed; the possibility that the FDA may require significant changes to NuVasive's products or clinical studies; products that 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 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 SEC 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'd like to turn the call over to Alex Lukianov.

Thanks, Nick and thank you, everyone, for joining us this afternoon for our first quarter 2008 call. We are pleased with our operating and financial performance during the first quarter, which was driven in part by our continued focus on deepening product penetration, particularly in geographies where we have a long-standing presence.

We continue to invest in our infrastructure to provide the foundation for long-term growth, sustainable GAAP profitability, and further leveraging of our expense base. We also improved our cash position in the quarter with a successful convertible debt offering, netting $209 million. These additional funds strengthen our ability to execute on strategic opportunities, which will be a key focus in the near-term.

Before outlining our operational progress during the quarter, let me take a moment to briefly review our strong financial performance.

Revenue in the quarter increased 54% year-over-year to $51 million. On a sequential basis, this represents a 9.0% quarterly increase over our strong fourth quarter 2007 results. Accordingly, we are increasing our revenue guidance for the full year 2008 by $6.0 million and decreasing EPS by $0.02 to reflect current market yield on our investments, which Kevin will discuss in detail shortly.

We ended the first quarter with a headcount of 255 in our sales organization and we remain on track for our guidance of growing the group by 10% to 15% this year. In order to maximize the efficiency of our expanding sales force, we recently increased the number of sales regions in our U.S. market from 5 to eleven. This allows our sales representatives to sharpen their focus on filling our full product mix with existing accounts and further educating customers on the benefits of NuVasive's complete line of spinal products.

The long-term benefit is deeper penetration and more comprehensive involvement in a surgeon's practice. It also allows our most seasoned representatives, managers and directors to focus on the development of new business and ensure these new customers receive the same absolute responsiveness in customer service, which remains one of our major competitive differentiators.

Our XLIF procedure continues to expand across the U.S. and our representatives continue to gain momentum in educating the market on the unique benefits of our innovative lateral approach to the spine. While we have taken a measured approach to our geographic expansion with a concentric model of focusing on key surgeons and building outward over time, we experienced greater-than-anticipated success in regions where we have a longstanding presence, such as the Southeast and the West.

The process of ramping operations in our new sales regions will be ongoing, as our sales directors focus on building key accounts and market awareness prior to expanding their coverage outward. This process typically takes 12 to 18 months to successfully establish our presence.

Our strategy for attracting new business will continue to center on leading with our innovative XLIF procedure and establishing a reputation for unmatched customer service with absolute responsiveness at cheetah speed. Once our sales team has introduced the benefits of XLIF with our MAS platform and formed a working relationship, it is an essential component of our strategy that we achieve maximum pull-through of our full line of spinal products.

Improving the mix of products sold to our customer base will make significant contributions towards our milestone of $500 million in sales. Accordingly, our sales force incentives are weighted towards the goal of driving sales of the full mix of our products, including biologics and cervical. We believe this will lead to more efficient production from our sales representatives to maximize revenue per representative.

Additionally, as surgeons become more comfortable with the lumbar applications of XLIF, they continue to move up the spine with even more applications such as thoracic XLIF in adult degenerative scoliosis, thus creating additional growth opportunities for our sales team.

In support of our effort to broaden the reach of our sales force, we are rapidly expanding our sales training programs to develop increasing expertise in all areas of spine to output an entirely elite sales organization. We have complimented our strategy of improving sales mix with a number of new product introductions, including the first quarter launches in our cervical fixation product line.

We recently introduced the Helix Anterior Cervical Plate and the VuePoint Posterior Fixation System. Combined with our Gradient Cervical Plate, our full line of cervical products deliver flexible and elegant solutions for the various preferences among surgeons for cervical fusion. Initial surgeon feedback on these products has been positive and we remain confident that our cervical platform revenues will contribute meaningfully to future revenue.

We also saw further penetration of the new products we introduced in 2007, including the XLP Lateral Plate, SpheRx II Pedicle Screw System, Formagraft Biologic, Thoracic XLIF and NeuroVision. These products are complimenting our strategy of expanding the indications of our lateral approach, which is being used more frequently for multilevel procedures including the thoracic spine.

Moving beyond our product options for spinal fixation, we also continue to execute on our motion preservation strategy for the cervical and lumbar spine. Enrollment in the pivotal trial for our cervical motion preservation device, NeoDisc, stands at over 85% complete. We anticipate completing enrollment in the next few months. We also anticipate IDE approval for two of our other motion preservation devices later in 2008, these being Cerpass, our mechanical ceramic cervical disc replacement device, and XL TDR, our lumbar total disc replacement device designed for insertion through our unique lateral approach.

In addition to these disc replacement devices, we are currently developing a less rigid rod fusion system that will compete with dynamic stabilization constructs as well as evaluating alternative spinous process-type devices. We believe these motion preservation initiatives will form a larger part of our product offering in the future.

During the first quarter, we began the controlled international rollout of several of our products along with our MAS platform, mostly in Germany, the UK, and Greece. Our international strategy is focused on infrastructure development and clinical education in select European regions. This targeted approach will allow us to properly educate surgeons on our unique product offerings for laterally approaching the spine, as well as motion preservation. Overall we were pleased with the progress of our initial launch.

Achieving GAAP profitability is an important near-term corporate goal. We anticipate achieving this by closely managing our expenses and leveraging our corporate and IT infrastructure. Sustainable profitability will be made possible by the infrastructure investments we are making with respect to our new expanded office space, operating systems, personnel, and training. These investments will increase the scalability of our business and allow us to operate more efficiently.

We completed the initial phase of our relocation to our new campus, now corporate headquarters, in the first quarter and we'll complete the balance of the move in the third quarter. We will benefit greatly from accommodating all of our departments in a single location, leveraging our culture of absolute responsiveness across the entire organization. The new headquarters also provides us with several options to accommodate growth over the next several years as we expand our infrastructure, in step with our growing market share in spine.

The implementation of our SAP enterprise software platform is progressing and will provide incremental efficiency as we expand our operations in the U.S. and in select international markets. This infrastructure is increasingly important to meet the demands of our high growth expectations over the next several years. However, we believe that when complete, these improvements will significantly enhance our operational efficiency and ability to sustain and grow GAAP profitability as we leverage our established infrastructure and expanding sales organization against a robust revenue growth expectation.

In March we completed a convertible debt offering, increasing the Company's cash position to $275 million as of March 31. During the quarter, we bought out royalty obligations on our SpheRx pedicle screw platform and also acquired exclusive rights to a posted screw intellectual property, which ensures the continued expansion of our innovative pedicle screw platform through 2015. This provides us with a broad product platform for the further development of innovative pedicle-based fusion systems, as well as incorporating our ball rod technology in other systems.

We intend to identify and execute on strategic acquisitions in the near-term and our significant cash position will give us the flexibility to do so. We are focused on near-term opportunities to acquire products or technologies that represent synergistic additions to our core MAS platform and fit our goal of becoming the most innovative provider of spine surgery products.

I would now like to turn the call over to Kevin for a detailed review of our financial results.

Thank you, Alex. Our revenue for the first quarter 2008 was $51.2 million, a 54.1% increase over Q1 2007 and a 9.1% increase over Q4 2007. International revenue was on target to the 2.0 to 3.0% revenue contribution that we guided to for 2008.

Gross margin for the first quarter was 82.2%, compared to gross margin in the first quarter of '07 of 82.8% and gross margin in the fourth quarter of '07 of 82.9%. We continue to expect full year 2008 gross margins to be in the range of 81 to 82%.

Our Q1 2008 net loss was $7.7 million or a loss per share of $0.22 on a GAAP basis, or $0.10, with which excludes onetime charges. On a non-GAAP basis, the Company reported net income of $2.1 million or $0.06 per share. Our non-GAAP net income calculation in the first quarter of 2008 excludes stock-based compensation of $5.2 million, amortization of intangible assets of $392,000 and in-process research and development (R&D) costs of $4.2 million or approximately $0.12 per share related to acquisition of new pedicle screw intellectual property.

Operating expenses for Q1 2008 totaled $50.5 million. The increase in operating expenses in the first quarter from the fourth primarily reflects the in process R&D costs, increased selling costs, higher administrative expenses associated with infrastructure advancements and international startup costs.

R&D costs were $6.3 million in the first quarter, excluding stock-based compensation. The increase in R&D spend from Q4 was related to the normal enrollment of subjects in the NeoDisc clinical trial and development efforts related to our product pipeline. Excluding stock-based compensation, R&D as a percentage of revenues for Q1 2008 came in at 12.4% versus Q4 2007 at 13%.

Sales, marketing and administrative expenses, excluding stock-based comp for the quarter was $34.8 million versus $31.5 million in the fourth quarter. Excluding stock-based comp, sales, marketing and administration as a percent of revenues for Q1 2008 came in at 68% versus Q4 2007 at 67.1%. The increase in spend from Q4 was related to increased costs associated with the territory realignments and facility costs associated with the first phase of relocating our corporate headquarters.

The interest and other income contribution for the quarter was $700,000. Interest and other income includes the affect of the convertible debt offering and is reflective of reduced yields due to current market conditions. The stock-based compensation charge for the quarter of $5.2 million was recorded in our operating expenses and allocated as $646,000 in R&D, with a balance of $4.5 million in sales, marketing and administrative expenses.

As of March 31, 2008, we had $275 million in cash, cash equivalents and short- and long-term investments. As previously announced in March, we raised net proceeds off approximately $209 million from an offering of convertible senior notes due 2013.

Our operating cash burn was $15.6 million for Q1 2008, which broadly reflects the development of our MAS product pipeline, including motion preservation, the national launch of new products and the build-out of inventory and instruments to support future growth. Included in our cash burn were costs related to leasehold improvements for our new corporate facility, the first phase of moving into our new corporate headquarters, and implementation costs for our ERP system, totaling $9.0 million. Our operating cash burn is defined as cash used for operating activities plus additions to fixed assets.

Our inventory position was $45.7 million at the end of Q1 or 22% of analyzed revenue. Inventory has increased each quarter in 2007 and into the first quarter of 2008, principally because of our rapid revenue growth and the new products we have introduced. We expect our inventory-to-sales ratio to average about 20 to 25%, which may spike in a quarter depending on how many and what type of products get launched. Additionally, a corresponding increase has occurred in our property and equipment costs for the same reasons.

Day sales outstanding, or DSO's, were 53 days in Q1 2008 compared to 53 days in Q4 2007.

As it relates to 2008 guidance, we are increasing our full year 2008 revenue by $6.0 million to $210 to $214 million, up from $204 to $208 million. GAAP EPS, excluding onetime charges, is being lowered slightly to $0.00 to $0.03 from $0.02 to $0.05. We are decreasing our non-GAAP EPS guidance to $0.54 to $0.57, down from $0.56 to $0.59.

The majority of the revenue increase in our guidance is attributable to the second half of the year, which should offset reductions in our EPS guidance in Q3 and Q4 related to anticipated lower interest income contribution. It is important to note that operationally our outlook has improved and we remain focused in 2008 on cost control and operating expense management inline with achieving profitability.

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

Thanks, Kevin. Maximizing the ability of our growing sales organization to efficiently sell our entire line of innovative spinal products while generating new business is a major driving force behind reaching our goal of $500 million in sales over the next few years. Reaching sustained and growing GAAP profitability is equally imperative and our investments in corporate and IT infrastructure have helped strengthen our ability to achieve this goal.

Our sales directors began the initial transition from five to eleven sales regions in the quarter. As they complete this process over the course of 2008 and strengthen their focus entirely on improving sales mix and expanding to new accounts, we expect to experience even greater leverage and efficiency. Our further enhancements to sales training will ensure that all of our representatives are experts in selling our complete line of products.

Our improved cash position will drive our near-term acquisition strategy to further enhance our product platform with complimentary technology. Our shareowners continue to focus on making NuVasive the easiest spine company to do business with, leveraging our culture of absolute responsiveness to provide all of our customers with unmatched customer service and doing so at cheetah speed. We are extremely proud of the strong foundation we have built with our exclusive sales force, dedicated shareowners, and innovative product offering headlined by our MAS platform.

XLIF is still just scratching the surface and we see tremendous opportunity for our continued growth and innovation. We believe we are well positioned to leverage this foundation to reach our sales and profitability goals for 2008 and well beyond.

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

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from Bob Hopkins with Lehman Brothers. Please proceed with your question.

Hi. Thank you and good afternoon.

Hi Bob.

A couple of questions here. First, given your commentary about the potential for near-term M&A, I was wondering if you could kind of go over again, to the degree that you're willing to do so, the areas that you're interested in? And how -- what's the range of possibilities in terms of the size of a particular transaction, just sort of the criteria that you're looking at, and if you can, again, the areas that you're most interested in right now?

Sure. I think we talked about this a little bit on our last call, but our primary focus is to look at things that we'd like to expand our product offering with. Those would be biologics, those would be trauma, those would be focused on other applications of MAS and the other things that we're looking at are ways to further position ourselves outside the United States.

So we're looking at ways to be able to affect distribution, potentially with acquisitions in those areas. We have opportunities, we believe, to further our position in scoliosis as well. And I think, as far as the size, we're looking at the type of acquisitions that are likely to be less than $100 million and then potentially looking at additional smaller technology or licensing, IP-type of arrangements as well.

So it looks like we should expect a number of transactions. Is that a fair statement or just one or two major things that you're looking at?

Well, we're hopeful to be able to pull together, I think, a significant transaction and then from there look at a number of different options of varying size. But we certainly wouldn't expect it to use up a significant amount of our cash position over the course of this year, but we'd obviously be applying a pretty good portion of it.

And since a lot of these things are fairly early stage, should we expect that there's the potential for a significant push back in the profitability profile of the Company as a result of one of these deals? Or is that not something you're willing to sacrifice?

Well, we're certainly working hard on making sure that anything that we do is going to be accretive and that's our primary focus, so that's what we're working towards.

Okay, thank you for that and then secondly, I was wondering if you could go back and explain why you gave the original guidance that you did for this quarter to be sort of flat sequentially, and then what happened during the quarter that allowed you to perform ahead of expectations? It sounds like maybe it was due primarily to key accounts that already exist within NuVasive. I'm curious if there was any meaningful contribution from Europe. Just some color there would be helpful.

Sure. Well, I think, as we've felt before, our strength in terms of our sales progress has really been from West to the East and that includes the Southeast part of the country and so that's how the Company's grown over the last several years. That's where we saw a lot more traction than we really anticipated.

As you know, with changing around a number of the regions, we anticipated some softness and we anticipated our directors taking the time to be acclimated to their new geographies, learning the new accounts. And so we still anticipate that happening in the next quarter and it's going to take a solid, I think, year, maybe even as long as 18 months before the directors are in a solid position to continue expanding.

So it really came from those regions where we've been penetrated for quite some time and internationally, we got off to a very nice start, consistent with what talked about, in the range of 3.0% of revenues on the year. So we're pleased with that and that certainly contributed to a strong first quarter.

Okay and then two final quick ones. Could you talk a little bit more about the expansion of your sales force training and exactly what's going on there? And then, also, could you tell us how you're doing and how your surgery went and whether that made you more or less of a fan of NuVasive?

What a setup! Well, as far as sales training is concerned, what we're really focused on is to ensure that -- obviously our product breadth has dramatically increased over the last 18 months in particular. We want to make sure that your sales force is not just expert in XLIF, but expert in cervical, in biologics, so we want to be certain that our sales force can sell across all market segments. And that requires field training as well as in-house training, so we've put a lot of emphasis in those areas, increased the personnel in those areas and so that's really what we're doing and so the scope has expanded.

For me, personally, I don't know if you saw the fight, but Nate Quarry fought and he has an XLIF in his back, so he only has one level. He did pretty well. I have two levels, so I think I can probably do even better than Nate Quarry, I guess. I have the power of 2x. But I'm doing very well.

I'm six weeks post op. I had a two-level XLIF because of leg pain and back pain. I also had a SpheRx DBR put it and used our Formagraft product, so I'm really pleased with getting rid of my primary symptoms and back to work full-time. So I have to say that I was a fan before having it done and I'm an even bigger fan now of XLIF.

Thanks, Alex.

Thank you.

Ben Andrew, William Blair & Co.

Good afternoon.

Hi Ben.

I just wanted to follow-up with a couple things to Bob's questions. What sort of a competitive response are you seeing as you kind of increased your efforts in some of those newer regions? Is it any different than what you've seen historically?

No. I think it's the same. We're up against the same competitors and I think we mostly do battle with the bigger companies.

And within the territories where you've gotten to the 10 or 15% market shares that you commented in the past that you've gotten to, are you seeing a different response in those particular areas?

That's probably where, well, I would certainly say we've had the greatest success against the larger companies in those areas, because we've been there the longest. So those are probably the best examples of how we've been able to take some pretty good market share from the larger players.

But they haven't been able to come up with successful responses, I guess is my question.

That's correct.

Okay and then talk a little bit more about the process of going from five to eleven regions and you said it would take upwards of 18 months to really get that implemented and just maybe, if you can, elaborate on that? Maybe Keith can jump in with some comments as well.

Sure. So what we did is we took -- we had -- obviously with having five regions before and expanding out, we promoted several of our area business managers that we felt were the very best folks and narrowed their focus. In some cases, which meant, really, for those that had five territories, it'd mean that they had smaller geographies; for those that were area business managers, they had larger geographies. But in all cases, it meant for a lot of these folks going into areas that they were not accustomed to calling on, going into areas where we do not have representatives.

So what we've been focused on is ensuring that we maintain the business that we have, the business that we've built and then asking the new directors to then go ahead and hire new representatives. And as you saw, we had a pretty robust hiring in the first quarter in the way of new reps, to go ahead and place new representatives into these areas and then get them properly trained and move into penetrating those accounts.

But we want to make sure that the directors are leading the way and using their skills. They're the most proficient at selling our technology. They were very successful as area business managers and we believe will be just as successful as directors in setting the pace and setting the course for our expansion into territories where right now we have either a very small presence or no presence whatsoever.

Okay and as you look at sort of the procedure volumes, and I know you won't comment territory-by-territory, but have you seen any kind of slippage in particular regions that was made up elsewhere through kind of additional staff additions? Such that when you've made these moves to bring people out of territories where they're well established that you've gone backwards a little bit for a time?

No we haven't.

Okay. So that was partially the concern and it wasn't realized.

Correct.

Okay. Maybe just a couple of quick kind of numbers questions for Kevin, if I can? The R&D spending was well below what we thought, Kevin. Was that a function of the enrollment of the trial and are we going to see that then pushed back to the balance of the year? Or it looks like you're going to continue to be down sequentially from here.

You know R&D enrollment should be pretty consistent in Q2 and then, as we look to finish the enrollment of the trial, where most of the costs are, in the next several months or few months, R&D should start to fall off as a percentage as we get into the second half of the year.

Okay and then stock-based comp. Is that going to -- I mean, I know it's a function of stock price, but is there a reason to believe that that will actually keep going up from here or can it come down next quarter?

No. I think it'll be pretty consistent with the first quarter. I think we guided to $19 to $20 million and it that range is consistent with our expectations for the balance of the year, Ben.

Okay and then Alex, you had commented that you were on-track with OUS revenues at 3.0% for the full year. Is that a fair number to use for Q1 or are you ramping towards that and you're maybe exiting slightly higher than that on the full year basis?

That's fair to use for Q1 and that's what we're looking at right now annually. We'll see where we end up, but we're very pleased with the earlier traction than we expected -- better traction than we expected starting out.

Is there much inventory build in that number?

There is certainly inventory build in that number, yes.

Okay, so we should then be careful of that. Great, I'll jump back in queue. Thanks.

Okay. Thank you.

Steven Lichtman, Bank of America Securities.

Thank you, evening, guys. On the dynamic rod, Alex, that you spoke about, can you give us a little bit more details on that system and also on potential timing?

Sure. Well, our approach, as I think we've talked about before, is not so much to put forward a dynamic rod. We have a different alternative to that and it's really going to be a less rigid system, but it is going to be still a fusion system. So we'll be talking about that as we have our product ready to roll out and we plan to be able to do so in the third quarter, so that's on track and we hope to be able to show that at that time period.

Okay, great and then, in terms of the international business, as this ramps up over the next year or two and beyond, how should be think about gross margins relative to the U.S., Kevin?

Yes. I think, as we get out, where international winds up being maybe 10% of the $500 million number, that the gross margins, as we know, are lower effectively OUS, primarily because we'll be selling through pure distributorships where they will take title of the product, obviously, and then resell to the ultimate customer.

Having said that, they step into our shoes in terms of a number of the operating expenses that we'd have here they would certainly incur it there. So the net should still be very strong, but the margins should be less and I think, until we get even more visibility on an international that we're comfortable longer-term with the margin out, at that time, in the 80% range.

Okay. Can you break out for us what percentage of the business today is cervical, approximately?

We talked about that before. It's approximately 10% and what we want to make sure is that we're maintaining that 10%, because obviously our volume is increasing significantly as we grow from 2007 to 2008 and we believe that we can grow it past 10% over the next several years.

Okay and then on artificial discs, obviously the issues with lumbar are well known. It seems as though some of those have crept into cervical as well. Is it fair to say we're not seeing a lot of shifting towards cervical artificial discs at this point in the market place?

I think that's really just a reimbursement issue and I think that once that's resolved and I believe that we're seeing some, a fair amount of light that's popping around right now in the way of some insurance companies that are starting to step up and move in that direction. I think it's going to be resolved and I think it's going to happen over the relative near-term, so I don't believe that's going to be a problem longer-term and I wouldn't compare it to the lumbar spine.

Okay and then as we think medium-term, where do you think the mix can go on artificial discs, both on cervical and on lumbar, over the next few years?

Well, we haven't changed our position on that. I think we still believe that cervical can ramp up to be 40% of the fusion market, but we also believe that it can expand that market by no less than 10%. So we think that especially with a product like NeoDisc that has the potential to be used earlier in the disease process, earlier intervention, that also has the opportunity to expand the market and TDRs do as well.

On the lumbar side, I think it's going to take a lateral approach like ours, which gets you moving quickly and I can attest to that. That I was walking around the hospital the next day, exactly like Sven or whoever that was in our photograph from our road show that we talked about, but I was walking around the same way. And I think that once we're able to come in with a lateral approach it really does change everything and so I don't know that it moves it to be a huge number. I think it still keeps it in the probably 20% range, so I don't think it's a huge game changer, but I think that it has that potential.

Okay, great. Thanks, guys.

You're welcome.

Matt Miksic, Morgan Stanley.

Hi guys. Thanks for taking the question.

Hi. Sure.

Just was -- you talked about this on the bottom line guides for the year, there's about $0.02, I guess, of lower interest yield. I just wanted to quantify that to make sure I'm looking at this the right way. Is that sort of just in the neighborhood of $1.0 million relative to the last guidance that you gave for interest expense?

There are two factors as it relates to the EPS guidance. One is it certainly would have been the increase in the EPS guidance based on the increase on the revenues and offsetting that is certainly the yield difference in our invested cash. So, when you combine both of those, you wind up $0.02 less than our original guidance, so the interest expense yield issue is more like $0.08 and not $0.02.

Got you. Okay, so that's like, boy, that's a big difference. Okay. That's more like $3.0 million or maybe $3.0 to $4.0 million?

No. It's like, it's a little less than $3.0 million.

Okay. All right. Good, that's helpful. And then just I wanted to just check the number that you're working towards on NeoDisc. Greater than 85% is sort of, where is that, sort of like 425 range out of 500 patients?

Yes, approximately.

Okay and then someone had asked this question earlier, but is that -- have you ever quantified or are you willing to give us sort of like a round number as to what that's costing you per quarter?

No we haven't.

We haven't talked about it per quarter. I think we've talked about some annual estimates early on.

We talked about it. I think it was in '07 and we talked about NeoDisc being about $3.0 to $4.0 million a year, so $1.0 to $1.25 million, something like that a quarter, somewhere in there.

Okay and the also kind of on the expense side, did you say $9.0 million of SAP expense in the quarter?

No. What it was -- no, as it related to the cash burn for the quarter, there are other things other than what we would call traditional operating the business type expenditures. And that was effectively leasehold improvements and ERP, principally and when you add that up, you get to an additional $9.0 million of burn.

I see. Got it.

All right?

Okay. So that's the new office --?

That's right.

Go ahead, I'm sorry.

So it was originally $15.6 million burn for the quarter, of which $9.0 million can be attributable to our new leasehold improvements and the ERP system.

Okay and SAP, is that going to be a steady cost throughout the your as well or is that going to trail off in the latter part?

No. We expect to go live this summer, so those costs will discontinue at that point, because the investment into the ERP system will have been completed and therefore, we turn the system live and here we go. So then it's an amortization effect of the capitalized costs.

Got it. I also just wanted to ask a couple of product-related questions, in terms of what the uptake is of your mix of some of these procedures, some of these products in your procedures. You've made an investment and so you're actually talking about a new pedicle screw system for next year based on this Ball and Rod technology and these other technologies that you've licensed. What -- can you give us just a sense of how many, at this point, what percentage of the cases that you do in lumbar are you using SpheRx? Or are you using your own pedicle screw systems at this point?

Well, I think as far as using our own pedicle screw system it's pretty much in every case. I think that changed with SpheRx II when that was launched last year and also with DBR II. I don't know what the exact percentage is. I know that, we know that, MAS is about 85% of our revenue, the balance being made up by cervical and biologics. So I couldn't tell you the exact breakdown, but it's a pretty fair contribution to that total piece of MAS.

Okay. So you're capturing a big piece of that now. What -- also, just a similar question along the lateral plate. You obviously got one, or did you, Alex, or no?

Did not get a lateral plate.

Did not get a lateral plate, you got SpheRx but no lateral plate.

I had posterior screws as well.

Okay. What's the utilization of that do you find? I know it was sort of a question early on how many docs are going to adopt that. What rate, what are you seeing there?

It's pretty much what we talked about before. It's been about 25%, 30%.

Okay and those folks would typically not get posterior stabilization, right?

A combination. Some either were stand-alone or some moved away from posterior and a lot of it really depends on the patient. For example, for me being a big guy, I think the surgeons -- we could have done things, we could have done my procedure with a lateral plate. But the surgeons don't like -- just because of my general size, the size of my bones, better off doing posterior fixation, not because of XLP didn't work or wouldn't work. So you really have to look at it on a case-by-case basis of what makes the most sense, but I think we've got it covered in either situation.

Okay and on -- I asked this question before, but I was hoping you could maybe give us a snapshot today versus a year ago, in terms of in the lumbar area, what's your sort of average levels per case, if you can give us some sense? I know you're doing more with SpheRx II, I think you're doing more. Any color there?

We don't measure that.

Okay. So you don't have any visibility there?

We don't measure that. But it's a next to impossible number for us to get per case, because as you know, we just don't have access to that data from the hospital.

That's fair. That's fair. Last question on the acquisition that you made of SpheRx, your buying out of the licensing and this additional technology. Maybe, Kevin, can you give us -- is there anything you could tell us about the effect that's going to have on gross margins going forward? Will we see any effect on gross margins?

No. That should be consistent with our corporate average. It won't have any negative effect on our gross margins.

Okay. Well, that's all I've got. I'll jump back in queue.

Okay. Thank you.

Ed Shenkan, Needham & Co.

As far as modeling goes for SG&A, should we expect it to increase as a total dollar spend each quarter throughout the rest of this year?

As the revenues rise so that just even looking at the sales costs of what it takes to sell $1.0 million worth of product, so that's naturally in dollars, will certainly increase every quarter. It better. So that's certainly it and then we'll also have additional infrastructure costs for our second phase of our move in the third quarter and then the ERP system will be turned on, effectively, for accounting purposes in the third quarter.

However, having said that, we are getting synergies out of a number of our expense line items that'll allow us to deliver GAAP profitability, excluding the onetime charges. So we still feel very comfortable about that, but those are some of the dynamics going on within S&M administrative.

And do you still expect a complete enrollment for NeoDisc in the first half of '08 and if so, should we expect a sharp drop-off in the third and fourth quarter as far as R&D spend?

Well, we certainly expect to be completed this summer, as we've talked about before and as I mentioned over the course of my prepared remarks, we're hopeful to be able to have additional IDEs ready to go. And as those are, depending on when they clear, then we will be looking to start new studies, so we do not have visibility as to exactly when that'll be. As soon as we have that we'll report it.

And the in-patient CMS rates came out recently. Were there any surprises there and what was of interest to you that you noticed?

No, essentially pretty much what we expected.

And the spine market, as far as growth, any changes that you're seeing macro and as far as revenue per case, if you could just tell us, in the $13,000 to $15,000 per case and does it continue to rise?

Well, we see a very robust spine market, so I think it's always hard to say how much of that is coming from other players, because we are able to take share. But we still believe its somewhere in the 12 to 15% range and we know that we're getting our fair share of the larger procedures and as I've just mentioned to, I think it was Matt that asked the prior question, we don't measure things out on a per-level basis. But we do know that we're getting a lot more one- and two-level cases overall.

Okay, thanks.

Michael Matson, Wachovia Capital Markets.

Hi, thanks for taking my question. I guess, can you tell us what percentage of your sales came from international sales?

Actually, we talked about that 3.0%.

Okay, I'm sorry, I must have missed that. And then with regards to your comments on acquisitions, can you give us your thought on the vertebral compression fracture market? Is that something that maybe you'd possibly interested in?

Yes.

Okay and then on when you initiate your other clinical trials for the XL TDR and the Cerpass, are you going to have both those trials running sort of simultaneously and what's the impact of that going to be on your R&D? Is that going to drive some meaningful expansion in the R&D expense?

Yes, those are things that we're going to have to evaluate once we get to that point. Honestly, just can't give you a straight answer on that right now. We'll have to -- it really just depends on the scope of the study and how we're able to negotiate that with the FDA. So we'll know that as soon as the IDEs are cleared.

Okay and then with regards to the convertible debt, at what point would that start to hit your share count on a GAAP basis?

That probably won't be in till well into 2009, because it's on an if-converted accounting method and it's kind of a protracted calculation. But in looking at it from our perspective, that's probably a mid-'09 and second half of '09 when that would be added.

Okay and is that based on -- is that triggered at a certain stock price based on the conversion price or something like that, or?

Well, with the stock price effectively $49.13, which is kind of the premium to the convert, at that point the holders would have the opportunity to effectively convert to an equity position.

From an accounting standpoint, you can convert those shares based on taking your GAAP net income, adding back the interest that's effectively attributable to those debt instruments. And if it gets you into a profitable situation, you would then add the outstanding shares to the number. So there are two events that could trigger that. We don't really anticipate that really hitting until '09.

Okay. That's all I've got. Thanks a lot.

Okay.

John Putnam, Dawson James Securities.

Thanks very much. I wondered, Alex, if you might comment on how you're going about training of surgeons in the international market and what kind of challenge that presents to you?

Well, we're doing it with the same standards that we train surgeons in the U.S., doing it slowly and progressively. So we're using key centers in Europe. We have just a small number that we utilize and of course we've brought over some of the key surgeons to the U.S.

So, as we talked about, we're looking for a relatively slow rollout. We want to make sure that we gain some study adoption with key users and then, from there, we'll ramp it up more in '09 and '10.

Are you actually doing it, though, in hospitals over there as opposed to your own training facility here in the U.S.?

Yes -- in terms of training?

Right.

Well, we're actually doing -- I mean we're doing XLIF procedures doing there, in Germany and in Greece and starting in the UK as well. Also, we're using cadaver lab facilities over there, just similar to the ones that you can lease on a daily basis, if you'd like, in the U.S.

Okay. Secondly, I know you wanted to grow your sales force 10 to 15%. At the end of the year, roughly how many people would that comprise?

I think it pushes us somewhere in the neighborhood of around 270, right, 260?

260, 270?

I think that's right. 270, I think its 270.

All right and then, finally, I know that last quarter you talked about --.

270, 265 as just round numbers is about what we're looking for. I'm not sure what the exact percentage is, but it's 15% approximately.

Okay, but roughly 20 more than where you are right now?

Yes. That's right. It's about 40 on the year, so I don't know, I wasn't doing the math per se, but yes.

Okay, great, thanks. And then, finally, you talked last quarter, I think, about introducing 10 new products this year. Are you pretty much on schedule to being able to do that or?

We are.

Okay, great.

Yes and there's the cervical we talked about and we've got several things coming in terms of CoRoent and next generation NeuroVision, XLIF revisions, to there are still quite a few products still to launch.

Okay, great. Thanks very much.

You're welcome, John.

Joanne Wuensch, BMO Capital Markets.

Thank you for taking my question. Just to clarify, you did not hire any new salespeople this quarter?

No we did. We went from 230 at the end of last year, Joanne, to 255 at the end of Q1.

255 salespeople at the end of Q1?

Yes.

And how do we think about then ramping in revenue in terms of average sales per rep? I mean, I can take your total revenue, divide it by 255, but I don't think it's that easy.

It takes 12 to 18 months, as we've I think discussed in prior conferences, for a sales rep to be fully efficient and that means that it gets them up to our target of over $1.0 million in revenue. So that's where we want to get our reps. Those that are extremely proficient, like we talked about in the West and in the Southeast, that knocked it out of the park in the first quarter are doing well over $1.0 million.

That's very helpful. Thank you. One additional question. You talk about targeting to select international markets. How do you think about which markets you're going to aim for and what are the steps to entering those markets?

Well, it's based upon the population and based upon the overall predisposition of the surgeon base to new technology. So we have found that the German-speaking and the English-speaking countries have largely been the most receptive in Europe.

Certainly not to say that the others are not and based on population, obviously Germany is certainly the biggest market in Europe and so we've been most focused on that area. Greece has been a surprisingly terrific contributor for us in terms of OUS and it entails CE Marking. And so we've gone through that process, of course and so that has been completed now for some time.

And what about Japan?

We have to go through a registration process and so we've been working through various registration processes for the Far East countries and working towards distribution in Australia as well as New Zealand.

And when might you be in this market?

It's going to take -- it won't be this year for Japan. Australia and New Zealand we have an opportunity for later in 2008 to begin our start in those markets.

Should we think of Japan as in '09 or 2010?

It's probably a couple of years off.

Okay, very helpful. Thank you very much.

You're welcome.

[Mike Barone], Silverback.

Hi. I just had a quick question. In your guidance, do you still target being cash flow positive in the second half of the year?

Yes.

Okay and that is -- I'm assuming that includes both quarters. Okay, thank you.

You're welcome.

Matt Miksic, Morgan Stanley.

Hey, thanks for taking the follow-up. There was one more on your progress with Formagraft. You talk about it being 5.0%. I just wanted to -- we were looking for $2.0 million in the quarter. Is it sort of in that neighborhood, $2.0 to $2.5 million? Is that the run rate and I guess going forward, is that run rate you expect to see for the rest of the year?

We're looking for -- Formagraft is about $10 million, is what we've talked about, and that's about the contribution level that we expect for this year. It may be a little bit higher, but that's about right.

Okay. That's all I have. Thanks again.

Sure.

Michael Matson, Wachovia Capital Markets.

Kevin, I have a follow-up question on the convertible. Sorry, I meant to ask this before and I forgot. Just with regards to the possible accounting changes, can you give us thought on that? I guess there's possibly going to be a change that would require companies to sort of proactively adjust their financial statements for convertible debt. Do you think that's going to happen and what would the potential impact of that be?

I don't know if I can necessarily speak to that. I can tell you as part of our due diligence in this process and utilizing Ernst & Young as our outside accountants and certainly using the banks that were involved in this to come up collectively with how we're handling that is certainly appropriate and current. So future potential accounting rule changes and so on I can't really speak to that.

All right. That's helpful. Thank you.

You're welcome.

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

Okay, well than that's it. We'll talk to you in another quarter. Thank you so much.

Thank you.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.