NuVasive Inc (NUVA) 2008 Q2 法說會逐字稿

Greetings, and welcome to NuVasive Incorporated Second Quarter 2008 Earnings Conference Call. (OPERATOR INSTRUCTIONS)

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

Thanks, operator. Welcome to the NuVasive Second Quarter Earnings Conference Call. NuVasive's senior management joining us on the call today will be Alex Lukianov, the Chairman and Chief Executive Officer; Keith Valentine, President and Chief Operating Officer; and Kevin O'Boyle, Executive Vice President and Chief Financial Officer.

During our management comments and in our responses to your questions, certain items may be discussed, which are not based entirely on historical facts. Any such items should be considered forward-looking statements that involved risks, uncertainties, assumptions and other factors, which, if they do not materialize or prove correct could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements.

These and other risks and uncertainties are more completely described in today's press release and NuVasive's most recent 10-Q and 10-K forms filed with the Securities and Exchange Commission. 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 second quarter 2008 call.

Our strong second quarter performance was driven by the continued adoption of our XLIF procedure and deeper penetration into existing accounts as our sales force executes on the strategy of selling the full mix of our products. We made substantial progress on a number of our strategic growth initiatives including the expansion of our biologics offering through the acquisition of the Osteocel Biologics business, which was closed and completed today, the upcoming completion of enrollment in our NeoDisc clinical trial and the continued building of operations infrastructure through the recent go-live implementation of our SAP enterprise software platform. Our new product introductions and sales force initiatives, coupled with building our corporate infrastructure, are keys to achieving $500 million and beyond in revenues with sustainable GAAP profitability.

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 61% year-over-year to $57.4 million. On a sequential basis, this represents a 12% quarterly increase over the first quarter of 2008. Accordingly, we are increasing our revenue guidance for the full year 2008 to $238 million to $240 million, which includes $15 million for the Osteocel Biologics business.

Although global economic conditions have resulted in increases expenses relating to such items as shipping, distribution and travel, coupled with lower yields on cash investments, we remain committed to GAAP profitability and are increasing our GAAP earnings per share guidance for 2008 to $0.05 to $0.07. Kevin will provide full details on our updated guidance, deal costs and our financial expectations for Osteocel during his prepared remarks.

The end of the second quarter marked the second full year of sales force exclusivity at NuVasive. Our original commitment to transition our sales force was based on our strategy that exclusivity would be the key driver of our ability to sell a full mix of spine products and leverage our unique lateral approach. Our most experienced representatives, those who have been with the company for at least 18 to 24 months, are becoming expert in educating surgeons on the benefits of our products and driving deeper product penetration. These tenured representatives are focused on expanding relationships with existing accounts, increasing market awareness of our unique products, selling our complete product mix and introducing advanced XLIF techniques that allow surgeons to further differentiate their practices by moving up the spine with our MAS platform.

Our recent transition from five to 11 sales regions has further sharpened our collective ability to play an integrative and comprehensive role in surgeons' practices while also focusing on the development of new business. At the end of the second quarter our headcount stood at 269 sales professionals. On average, our commissioned representatives are currently producing more than $1 million in annual sales. Our most experienced representatives, those located in regions such as the West and Southeast where we have had a longstanding presence, are producing well above this average. As a component of our exclusive sales for strategy and focus on deeper product penetration, we expect this metric to continue to improve as our sales force solidifies and expands relationships with both current and new spine surgeon customers.

Our product development efforts center on our philosophy of continued innovation and obsoleting our own products to stay well ahead of the competitive curve. Our 2007 product introductions, including the XLP Lateral Plate, SpheRx II and Thoracic XLIF have increased the utility of our unique lateral approach, and we continue to experience strong penetration of these products in 2008.

In the first half of this year, we also expanded our cervical product offering through the full national launch of our HELIX Anterior Cervical Plate, HELIX Mini-Plate and our ViewPoint Posterior Fixation System to compliment our existing line of cervical products. This has given our sales force a comprehensive selection of cervical fixation products with which to gain more of the surgeons' business. We are pleased with the initial cervical business pull-through that we have achieved, and remain on track to double our cervical revenue goal for the year to more than 10% of our overall revenue.

We also launched our Halo Anterior Plate to compliment the CoRoent XLR Interbody Device to address the L5/S1 region. These products allow surgeons to performance either an ALIF for a TLIF for pathology below L4/5. While surgeons have been able to access the L5/S1 level using NuVasive products in the past, Halo provides a fixation option designed specifically for this level. In the second half of the year, we will introduce further CoRoent products and line extensions, along with XLIF revision instrumentation for failed TDRs or traditional fusions.

During the annual meeting of the North American Spine Society, or NASS, being held in Toronto in October of this year, we will introduce our next-generation NeuroVision product line known as NeuroVision M5. This enhanced version will build upon our existing monitoring platform and will comprise a total of five monitoring modalities to cover the entire spine. Tying into our NeuroVision platform, NeuroVision M5 will continue to offer, one, stimulated EMG; two, free-run EMG; and three, MEP modalities. Two additional enhancements include SSEP mode, broadening NeuroVision's coverage for surgical procedures and navigated guidance, and creative user-friendly approach to pedicle screw placement using precision trajectory feedback to the surgeon.

NeuroVision M5 offers complete monitoring coverage for the entire spinal cord along with the simplicity of M5 guidance. The next-generation NeuroVision leverages NuVasive's five years of system experience in more than 70,000 cases of surgeon-directed neuromonitoring and will create even greater distance between us and our competitors.

We have also recently achieved two major milestones towards our goal of adding synergistic and unique products to our already comprehensive suite of spine surgery products. First, we just announced the completion of our acquisition of the Osteocel Biologics business of Osiris Therapeutics. We closed the Osteocel acquisition today, despite a last-minute attempt by Orthofix to interfere.

Some of you may have seen that Orthofix was seeking an injunction against Osiris to prevent the closing. Since Orthofix has publicly stated that its rights to Osteocel terminate at the end of 2008, and has also stated that it is very prepared to replace the product, we have no insight to offer on their motivation for trying to interfere. Nonetheless, a hearing was already held on this issue, and the attempt to stop the closing was denied.

The transaction has now fully closed, and we are very excited about incorporating Osteocel into our product offering, pursuing future development projects and educating our sales force and customers. As we have previously stated, we intend to honor the existing distribution arrangements in place through the end of 2008.

As a reminder, Osteocel provides what we believe to be one of the more powerful biologic platforms for use in spine applications on the market today. Osteocel is the only viable bone matrix product on the market that provides the three beneficial properties similar to Autograft; one, osteoconduction, which provides and scaffold for bone growth; two, osteoinduction for bone formation stimulation; and three, osteogenesis for bone production.

Osteocel allows us to participate in all segments of the $1.5 billion US biologics market, as we see it, filling the product gap between DBM and INFUSE, while complimenting our Formagraft business. We will begin investments in infrastructure and studies this year in preparation of developing clinical data to further support the efficacy of Osteocel. We believe there are substantial opportunities to create an aggressive marketing program to achieve this product's full potential.

To that end, we have created a biologics business unit headed up by our new Senior Vice President, Tyler Lipschultz. Tyler brings a solid record in driving new products to market in the orthopedics area with such companies as DePuy, Smith & Nephew, Striker and most recently Spine Wave. We welcome Tyler to our team and are enthused about his anticipated contributions to our results.

We are reiterating our incremental revenue guidance of $15 million in 2008, and $25 million in 2009, as we transition the product to our sales force. We believe Osteocel, combined with our Formagraft product, will provide the foundation for a $100 million biologics business over the next several years.

Secondly, we expect to complete enrollment of nearly 500 patients in our pivotal clinical trial for NeoDisc in August. NeoDisc is a next-generation cervical device, replacement device, that is designed to maintain a patient's natural spine motion. It's space the vertebral end plates and offers a more forgiving placement while mimicking the natural motion of a human cervical disc. The procedure is very straightforward, and the implant is fully imageable and easily revisable. We look forward to collecting clinical data on this device during the follow-up period as we move forward a potential approval.

We will provide further clinical updates at NASS in October on our motion preservation platform progress. This will focus predominantly on NeoDisc, as well as an introduction to the XLTDR, our lumbar TDR placed laterally versus through the abdomen, which we anticipate to start enrolling in an ID clinical study late 2008 or early 2009.

In Europe, we continued selling primarily into Germany, the UK and Greece. In the Far East, we are focused on Australia with eventual penetration into Japan and China. We have also started limited distribution in parts of South America.

Overall, we are in line with our expectations to have international contribute upwards of 3% to our overall revenue and are pleased with the initial reception of our products as we continue infrastructure development and clinical education. We believe this measured approach will ensure that we properly educate surgeons on the benefits and application of our unique XLIF procedure and innovation motion preservation products ahead of a ramping of our international sales activities in 2009 through 2011.

We are very pleased with our results through the first half of 2008. We remain focused on achieving GAAP profitability this year, while establishing strong corporate and IT infrastructure to support our drive towards $500 million in sales, and beyond. In early July, we converted over to our SAP enterprise software platform, which will allow us to efficiently grow our business both in the US and abroad. This new unified platform is essential to meeting the demand of our high-growth expectations.

We also remain on schedule to complete the second and final phase of our relocation to our new campus-style corporate headquarters in August. When the relocation is complete, all of our San Diego operations will be located in a single scalable complex, allowing us to amplify our culture of absolute responsiveness across all areas of our business.

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

Thank you, Alex.

Our revenue for the second quarter 2008 was $57.4, a 61.2% increase over Q2 2007, and a 12.2% increase over Q1 2008. International revenue was $1.6 million, on target with our 2% to 3% revenue contribution that we guided to for 2008. Gross margin for the second quarter was 83.3% compared to gross margin in Q2 2007 of 81.2%, and gross margin in Q1 2008 of 82.2%.

Our Q2 2008 net loss was $495,000, or a loss per share of $0.01 on a GAAP basis. On a non-GAAP basis, the company reported net income of $5.1 million or $0.14 per share. Our non-GAAP net income calculation in the second quarter of 2008 excludes stock-based compensation of $5.1 million and amortization of intangible assets of $467,000.

Operating expenses for Q2 2008 totaled $48.5 million. The decrease in operating expenses in the second quarter from the first quarter is a result of in-process research and development costs of $4.2 million incurred in the first quarter related to the acquisition of new pedicle screw intellectual property. Excluding the in-process research and development costs, first quarter operating expenses were $46.3 million. The increase in operating expenses primarily reflects increased selling costs, higher administrative expenses associated with infrastructure advancements and international startup costs.

Research and development expenses, excluding stock-based compensation for the quarter, totaled $5.8 million versus $6.3 million in the first quarter. The decrease in R&D spend from Q1 was related to the timing of the expenses for new product development. Excluding stock-based compensation, R&D, as a percentage of revenues for Q2 2008, came in at 10.1% versus Q1 2008 at 12.4%.

Sales, marketing and administrative expenses, excluding stock-based compensation for the quarter, totaled $37.6 million versus $34.8 million in the first quarter. Excluding stock-based compensation, sales, marketing and administrative, as a percent of revenues for Q2 2008, came in at 65.4% versus Q1 2008 at 68%. The increase in spend from Q1 was related to typical selling expenses related to a higher revenue base, as well as a facility cost associated with the relocation of our corporate headquarters.

The interest and other income contribution for the quarter was $184,000. Interest and other income reflect reduced yields on our cash investments due to current market conditions. The stock-based compensation charge for the quarter was $5.1 million. It was recorded in our operating expenses and allocated as $610,000 in R&D with a balance of $4.5 million in sales, marketing and administrative expenses.

As of June 30, we had $265 million in cash, cash equivalents, short and long-term investments. As previously announced in March, we raised net proceeds of approximately $208 million from an offering of convertible senior notes due 2013.

Our operating cash burn was $16.2 million for Q2 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, costs associated with moving into our new corporate headquarters and implementation costs for our ERP system. The total for these items was $4.5 million in the quarter. Our operating cash burn is defined as cash used for operating activities plus additions to fixed assets.

Our inventory position was $52.2 million at the end of Q2 or 22.7% of annualized revenue. Inventory has increased each quarter in 2007 and through the first two quarters of 2008 principally because of our rapid revenue growth in 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 are launched. Additionally, a corresponding increase has occurred in our property and equipment costs for the same reasons. Days sales outstanding, or DSOs, were 50 days in Q2 2008 compared to 53 days in Q1 2008.

I would now like to turn to a review of our 2008 financial guidance, including our acquisition of the Osteocel Biologics business. For the full year 2008, we are increasing our revenue guidance to a range of $238 million to $240 million, up from $210 million to $214 million, which includes the contribution from Osteocel of $15 million. It's important to note that for the balance of the year, we anticipate flat sequential revenue in Q3 and robust Q4 growth. For Osteocel, the revenue should be $15 million in Q3 and $10 million in Q4 -- I'm sorry, it should be $5 million in Q3 and $10 million in Q4 for Osteocel.

Our gross margins for the balance of 2008 should be in a range of 80% to 81%. The principal reason for the reduction from our current levels is the effect of selling Osteocel through existing distribution agreements at a mid-30% gross margin, which should increase significantly in 2009.

For the full year 2008, we have increased our GAAP earnings per share guidance, excluding one-time charges, to $0.05 to $0.07 from breakeven to $0.03 despite increased pressure from economic conditions resulting in higher expenses relating to items such as shipping, distribution and travel, coupled with our expectation of continued lower yields on our cash investments.

The Osteocel acquisition is anticipated to be neutral to earnings in 2008 and 2009. We are, however, anticipating a one-time, in-process R&D charge from the Osteocel acquisition in the range of $15 million to $20 million to be recorded in Q3.

For the full year 2009, we will transition Osteo sales to a direct-channel model through our exclusive sales force and expect revenue of $25 million with gross margins above 60%. We expect the Osteocel revenue contribution in the first two quarters will reflect the transition to our sales force of next to no sales, followed by a strong second half. Once again, excluding the one-time, in-process R&D charge, which should be in the $15 million to $20 million in Q3, we anticipate an earnings-neutral result in both 2008 and 2009.

The deal structure for Osteocel is as follows; a closing payment of $35 million in cash, Osiris will continue to supply Osteocel to NuVasive for a period of 18 months following the closing and will be eligible to receive up to a total of $22.5 million in cash or stock in milestones related to product supply. NuVasive will also make a payment of $15 million in cash or stock upon achieving Osteo sales of $35 million. Lastly, the dedicated processing facility for Osteocel will be transferred to NuVasive at the end of the 18-month supply period, and NuVasive will make a payment of up to $12.5 million in cash or stock at that time. The total maximum consideration is $85 million.

Our interest income in Q2 of $184,000 continues to reflect low yields on our invested cash due to current market conditions. We expect to earn similar interest income levels on a quarterly basis for the remainder of 2008 and only a marginal increase to these levels in 2009.

As Alex mentioned, we successfully converted to our enterprise software platform, SAP, in early July, and we are on track to complete the transition to our new corporate headquarters in August.

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

Thank you, Kevin.

Our second quarter results were driven by the continued improvement of our organization's proficiency in selling the full mix of our innovative spine products and ability to attract new customers. Our comprehensive portfolio of products continues to gain momentum. While XLIF has experienced success, we have still only scratched the surface of its market penetration opportunity. These successes, combined with our infrastructure investments, move us even closer to our goal of becoming a major competitive force in spine.

All of our accomplishments during the quarter are a direct result of our dedicated shareowners and their commitment to our cultures output of absolute responsiveness and cheetah speed. We are extremely proud of the strong foundation we have built based on this culture, which has fostered a unique environment for A-players to achieve outstanding results, be it our exclusive sales force, innovative product offering or our daily focus on making NuVasive the easiest spine company to do business with.

Overall, we believe we are very well positioned to leverage this foundation to reach our interim sales goal of $500 million in concert with growing profitability.

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

Thank you. (OPERATOR INSTRUCTIONS)

Our first question is from the line of Bob Hopkins with Bank of America. Please go ahead.

Thanks, and good afternoon. Can you hear me?

Yes, Bob.

Yes, we can.

We can hear you from Bank of America.

That's right, that's right. Congrats on your results today - a couple questions.

First, just to ask a question on the Orthofix lawsuit, can you explain what's the next step with that and also explain the positive ruling that you commented on in your prepared remarks?

Well, it's not a lawsuit. They filed for an injunction this morning, and that was with Osiris.

Right.

So the judge dismissed that. So there is no pending legal action.

Okay, so that's done?

Correct, and we closed the deal, as I announced.

Right. Okay, so they're not -- okay, that's clear.

And then, on the Osteocel guidance, I assume it's pretty similar commentary to what you made before in terms of your really projecting no growth for the product out the next 18 months primarily because of the changes that you'll be making and the handover from manufacturing, and that's why you're offering up the conservative guidance as you've done?

The reason for the forecast or the guidance of $25 million for next year is because our sales force will effectively be starting from zero in January. We do not expect a transition of sales of any substance coming from Orthofix over to us. So we'll be building it form the ground level. That's the reason we're projecting for $25 million. I don't think it's as conservative as I think it's just a realistic project, and I believe that as we give guidance into 2010 we'll be able to accelerate the growth rate.

Okay. And then, the one question I had for Kevin -- Kevin, can you just give me a sense, as you look at your business longer term, what kind of revenue base do you guys need to have in order to be able to drive something close to a 20% GAAP operating margin?

Something north of -- in and around $500 million.

Okay, so that's kind of the magic number for roughly 20%. Okay, that's --.

But, that's before stock-based compensation. That's a non-GAAP operating income of 20% on $500 million is really that sweet spot, and we've been consistent with that.

Yes, yes. Okay, thanks, that's all I had for today.

You're welcome.

Okay.

Thank you, Bob.

Thank you. Our next question comes from the line of Ben Andrew with William Blair, please go ahead.

Good afternoon, guys.

Hi, Ben.

I guess following on Bob's questions about Osteocel, maybe talk a little bit about the mechanics of the transfer of Osteocel and how you see -- and I want to get into capacity and kind of the milestone of the $35 million -- but, the transfers. So the idea basically is that Orthofix has these relationships, and you don't think you have the material overlap with the same surgeons and you're going to have to start selling it again or, mechanically, what's going to be going on, on the ground?

Well we don't have knowledge, and we don't anticipate having any knowledge of where they are selling, and so we'll be starting from the ground level, introducing the product as our very own next year. So that's why we believe that there is no pass over, if you will, from one company to another in this transition process.

So there may well be sales in Q1/Q2, but you think it -- since you're starting from scratch, you want the assumptions to be very conservative and, i.e., zero.

Well I want them to be -- yeah, exactly. I want them to be reasonable because we don't exactly where we're going to be and how long it's going to take for our sales force to learn about the biologics arena and to be effective. So that's going to take some time.

Okay. And the balance of -- since the -- from the closing here today till the end of the year, what do you think the behavior pattern at Orthofix is going to be? I mean, they sued to block it. They obviously want the product. Well they sell it, do you think? Do you think that they'll try to load up inventory and prevent you from selling it separately? And finally, do you have any direct sales of the product by your sales force between now and the first of January?

We are not planning for any sale of our products between now and January 1. We anticipate that Orthofix will conduct business in a reasonable and prudent fashion over the course of the next six months, in particular, or through the end of the year. So we anticipate transferring the product to them in exchange for the purchase orders that should be coming our way, and we expect it to be a smooth process.

Do you have rights under the contracts -- let's say they never give you another order for Osteocel, do you have the right to terminate that distribution deal at a certain point?

That would be considered a breach, and we would be able to take appropriate action.

Okay. And then, the 35 million, Kevin, total, is that including Orthofix's end-user sales, and then kind of running through your $35 million after you take it over, or is it only starting when you get the product?

No, the -- if I understand the question, the guidance was $15 million this year, $25 next year. But, the milestone --.

No, I mean the milestone payment, the $35.

The milestone, the total $35 is the aggregate number of sales from day one to the point we get to the $35, and that's the sales that we would record over -- and we think it should probably take somewhere in the 18-month timeframe, maybe a little longer.

Okay. So when they -- when Orthofix is selling Osteocel from here to the end of the year, you will book that as 100% revenues or the transfer price?

No, it'll be 100% revenues because effectively we're stepping in Osiris's shoes and selling the product to Orthofix.

Okay, but you're -- but is it at the end-user price or the transfer price after you gross margin?

Transfer price.

Okay. And then, finally, looking at the capacity and the ability to ramp manufacturing, and that's been of the challenges with Osteocel along the way, where is your confidence now with a few more months under your belt looking at that business in terms of the ability to deliver on that and drive to that $25 million next year?

Our confidence, and the reason that we pulled the trigger on doing this deal, ultimately, is that we can obtain $100 million worth of product over the next several years, and that's why we've been forecasting our biologics business to arrive at that sort of a milestone we anticipate over the next few years. So we feel very positive about the supply.

Great. Thank you.

You're welcome.

Thank you. Our next question comes from the line of Raj Denhoy with Thomas Weisel Partners. Please go ahead.

Good afternoon, guys.

Hey, Raj.

Hey, Raj.

I have an Osteocel question, as well, but I wanted to first ask just about the results in the quarter, I mean, obviously very strong after what was a very strong first quarter, and I'm curious if you could maybe portion out where that's coming from. There was the expansion in geographic territories, which is rolling out this year. Is the growth coming from new areas, existing areas? Maybe you could just give us a little bit more color on that.

It's coming from both. It's coming throughout the United States. We're seeing a little bit more coming out of the more established areas that I talked about, the West and the Southeast, which as you know is how the company has progressed with its distribution.

So that's what we're seeing, and that's where we have the most tenured representatives. And as a result, we're getting bigger contributions from them on a per representative contribution basis. So, they're -- as I talked about our sales force doing about $1 million per representative overall, we see results more like in the neighborhood of $2 million and even plus $2 million in those other areas.

Well then, I guess the other question, sort of the new territories, which you've established, I guess the six new territories, what's the pace of business-building there? I mean, are they training surgeons, or is it really just - is it still early days there, or maybe you could just give us some insight?

It's still early days there, and I think we're making very good headway, but it's still in the process of hiring representatives. And as you know, we just talked about increasing to 269 sales professionals. Those people need to be trained, they need to build relationships. So we're still in the process of making hay in those areas, but we're very pleased with how that's going.

So it's fair to say that most of the growth, then, is coming from existing areas, then. I mean, so the growth story that comes from the expansion is yet to really kick in.

That's right.

Okay. As far as Osteocel, you mentioned that you will start collecting data there, and that's always been one of the pushbacks. What sort of timeline do you envision that you could actually start to product data where you could go to surgeons with white papers or just some data that the material is actually doing something?

Well we certainly anticipate having some data in 2009. I think as far as anything hugely significant, it's going to be closer to the end of the next year and really into '10. So that's really when we expect to see more longer-term data with regard to Osteocel.

But I guess I imagine that since the product -- since it's a tissue product, the data you'll collect, it can come in a lot of different forms. It doesn't have to be formal clinical trials. It can really be white papers, anecdotal reports, case reports, those sorts of things.

Yes, that's correct.

Okay. Okay, great. Thank you.

Thank you.

Thank you. Our next question comes from David Roman with Morgan Stanley. Please go ahead.

Good evening, everyone. Thank you for taking the question. Just a couple quick ones. Just on the gross margin, the 83% gross margin this quarter was considerably higher than what we've seen the past couple of quarters. Can you maybe just sort of walk us through some of the components there of both the sequential and year-over-year increase?

Yeah, the margin increase is more of an answer that's based on product mix. XLIF continues to lead the charge. Our biologics and Formagraft continues to do very well, which carry some very nice margins compared to some of the other products in the portfolio, and the ongoing penetration of those products in the market is what's really pushed that margin to the 83% range.

Okay. And then, on the earnings guidance for the full year, can you give us some sense as to the progressive for the next two quarters? I assume the vast majority of that is going to come in Q4.

That's right.

Okay. And then, lastly, on the number of sales reps, it looks like growth this quarter, year-over-year, is about 22%. Is that the type of growth rate we should consider for the next two quarters, or should expect it to be more in the 15% range that you've talked about previously?

It should be about the 15% range, perhaps as high as 20%. It's just a question of how quickly we can find qualified representatives. So, it's not going to greatly exceed the 20% rate, as far as we have visibility.

Okay. And then, lastly, at NASS, you referenced that you would have some data on the NeoDisc, but anything on XLIF? Are we going to see maybe two-year follow-up data on the conventional procedure, as well?

Well there's a book that's just been published that's dedicated to XLIF, and that is being released. So certainly that will be featured, and there are a lot of very positive articles, chapters rather, in that book. So additionally, we'll be talking at NASS or in October at our analyst meeting. We'll be talking about XLTDR and talking about our plans for that study and for beginning enrollment.

Okay. Great. Thank you very much.

You bet.

Thank you. Our next question comes from Matt Miksic with Piper Jaffray. Please go ahead.

Hey, everybody.

Hey, Matt. Piper Jaffray, is that right?

Yes, yes. There's a lot of things moving around here. It's tough to keep track of. We're going to have to get you a little --.

It is, it is.

We're going to have to get you a little cheat sheet maybe.

We've got a whiteboard that we keep here in the hall. That's fine.

So a couple of questions. I think a lot of them have been asked here. But, I have a couple maybe just on Osteocel. I think Raj talked about the kinds of data that you could pull together. I mean, is the strategy to do kind of post-marketing studies or really to get something published in a peer-reviewed journal?

It's a combination of all those things. We're going to invest significant dollars into doing a variety of things that are pre-clinical, mechanical, clinical. So we're going to be investing in a number of different areas. We're finalizing our plans to do so. And as I mentioned, Tyler Lipschultz has come on board and is driving that effort for us.

And when you talked about filling the gap between INFUSE and DBM, I assume you're thinking primarily of use in the lumbar spine, or is this something that's also safe you think to be using in the cervical spine?

Well it's both, but I'm going to let Keith jump in here and give some additional color.

Yes, this is a great opportunity also for the cervical spine. I think we're all aware of some cautions that have been put out there by the FDA in the cervical spine. And certainly, as Alex described in the commentary earlier, this is the only product that offers the three basics for bone growth, and that plays very well into what the demand is out there in the cervical space.

Okay. And then, just one on -- again, just to make sure I understand how you're coming at this market opportunity, is just this -- I'm trying to understand the kind of folks who would be interested in using this because clearly there's people who are very comfortable with INFUSE, they use it all the time. I suppose there's some folks who are price sensitive. There's iliac crest bone graft users out there still. Who do you think is the right target audience, initially, to start using the product?

I think both. The unique part about this product is that you're really functioning around a more natural alternative to bone growth. And we have seen both excitement, not only on BMP users who may have cost-conscious constraints imposed by the hospital who are interested in this alternative, but there's also a great deal of people who want a more supercharged product from the existing DBMs that are out there, or even the synthetic products. So it does bridge a gap between both, and it participated in a very large white space that really nothing participates in right now.

Great. Well thank you for taking my questions.

Okay. Thank you.

Thank you.

Thank you. Our next question is from the line of Joanne Wuensch with BMO Capital Markets. Please go ahead.

Thank you very much for taking my question. Did you give the percentage of revenue that's being generated outside the United States?

Yes, we said it was approximately 3%, and that's our guidance for the year.

Okay. And when you talk about the cost differential, say between INFUSE and Osteocel, could you walk us through what Osteocel charges -- costs?

Well we see it as having a lower price point. And as far as setting the exact price, we can give you a range, and I'll ask Keith to comment further about that versus the INFUSE price point.

Yes, the ASP that's been I the marketplace by a number -- well two distributors right now in the marketplace is lower on a per-CC basis, or a quantity basis, than BMP, somewhere between 15% and 20% lower for similar volumes for similar applications.

So it does participate nicely, as I mentioned, in that particular white space. I mean, on average, you're looking at around $5,000 a level for most INFUSE that's being used, and sometimes that's extended over multiple levels, but that's the advantage of this product as well. It can be extended and has been extended in surgical hands, as we understand, for quite a while now.

When I think about growth, not necessarily this year or next year, as you go through this transition, what do you think this growth can be, and what was it growing at, the product Osteocel, under its previous owner?

Well it was -- our projections, and I guess that's probably what's most important are the things that we've talked about. We've talked about achieving $100 million over the next several years. So I think that that's really what's key.

The run rate has approximately been $15 million $30 million. We don't know the specifics of exactly where the product has gone and nor do we expect to learn that information. So we don't know what's inventory, we don't know what's where. We simply know what's been purchased from Osiris by Orthofix.

Do we need to worry about excess inventory being out there in the field, that it's going to take you a while to eat through once you launch the product on your own?

Well we don't think it's going to affect the results in terms of what we're forecasting for next year regarding the revenue line. We think there is lots of opportunity for uptake with this product. So even if there is a dwindling supply that remains in the field next year with Orthofix, we don't see that having an impact on what we're going to do.

Many thanks. Have a good evening.

You bet you.

Thank you. Our next question comes from the line of Steve Ogilvie with ThinkPanmure. Please go ahead.

Hey, guys. Sorry to beat Osteocel to death here. Just wondering, did Osiris ship it to Orthofix, or did they ship direct to the customers?

Does Osiris ship to Orthofix? They ship directly to Orthofix, not to the customers.

So you guys won't even have access to the customer information.

Yes, that's correct.

Okay. And then, on the supply side, how involved are you going to be starting tomorrow in terms of cadaver acquisition, building out the manufacturing, and how's that going to change over time?

We're going to be extremely involved. It's now our business, and we're going to take good care of it in terms of insuring that we have the supply that we're counting on, as well as making arrangements for continuing that supply beyond the $100 million that we're expecting over the next few years.

Okay. And then, if I understand Orthofix's contract, they have a certain percentage, which they can sell up to, so are you in a way kind of disincentivised to make a lot this year? Are you really going to be focusing on next year, or do you not think of it that way?

We don't think of it that way. We're looking at meeting our obligation to Orthofix and planning for scaling up for 2009.

Okay. And then, last question, not Osteocel related, the NeoDisc enrollment hasn't gone exactly as you'd previously said. I'm wondering if there's anything that you can shed light on.

Well I had said that we would be completed with the study in the summer. It's still summer, and it'll be completed in August. And so we thought it'd be done by the end of the first half of the year, but we're effectively within four to six weeks of being done versus right smack in the middle of the year.

Any discussion with the FDA yet on that, on what it'll look like, or is it still kind of the same timeframe, a year follow-up and then a year of bureaucracy before approval.

A total of two years of follow-up on each patient, so we're still looking at 2011, and nothing has changed from that standpoint. And our closing out the study in August keeps us right on track with that original timeline that we offered.

Okay. Great. Thanks, guys.

Thank you.

Thank you. Our next question comes from the line of Michael Matson with Wachovia Capital Markets. Please go ahead.

Hi. Thanks for taking my question.

I guess just with regards to the new NeuroVision system that you're going to be watching, I was just curious how that would potentially affect your P&L, if at all. I mean, how exactly do you count for those systems because I guess I understand you're not typically selling them to the hospitals? Do you capitalize that, or something?

Yes, what we do -- that's an asset that sits on NuVasive's books, and we traditionally depreciate that asset over three years through the cost of sales category, very similar, and matter of fact, identical to what we do with NeuroVision today.

Okay. And so there really wouldn't -- would you be upgrading the existing customers or just gradually rolling it out over time?

We'd be rolling this out over time. The current NeuroVisions have usages overseas, as well as other applications within the US. So we'll gradually move into the M5 line and build it out throughout 2009.

Okay. And then, I was wondering if you could -- I've got to have another Osteocel question. I was wondering if you could compared the Osteo XC product to the Osteocel product. I realize you've just bought the Osteocel product, not the XC product yet, but you may think you have a right of first refusal there, if I'm correct. Just your thoughts on how those compare, and so forth.

Yes, the XC describes the cultured product, and the cultured product has a number of benefits, most significantly it is a greater control of supply, and theoretically a limitless amount of supply because of the way XC is cultured. So that gives a great deal of advantage.

The XC product, too, has a lot of similarities, functionally, to a some of the projects that Osiris is probably working on, just in a -- this is in a different area, of course. The XC that we would be interested in is for bone growth. So there is a strong history and success of what Osiris is working on right now that could help parlay to that XC.

So from that perspective, it would be a more consistent production product and would also give the ability, potentially, and clinical studies would have to prove that out, of how much more efficacious it would be to have that sort of controlled environment for a product line instead of it coming from donors.

Okay. And then, finally, I know there's been concern among investors about the economic impact on procedure volumes. And I realize that, for NuVasive, you're such a small portion of the market that you're probably not as sensitive to the overall market trends, but I was just wondering if you were getting any feedback from any of your customers about any delays in surgery or anything like that. What I've seen so far from some of the other spine companies, it does look like the market may have slowed a little bit. I don't know if that's due to procedures or not, but --.

We've certainly not seen that, and I think that's reflected in our results. So that's not how we're seeing the market, and I don't think our ability to gain share has been adversely effected whatsoever.

Okay. All right, that's all I've got. Thanks.

Thank you.

Thank you. Our next question comes from the line of Ed Shenkan with Needham & Company. Please go ahead.

I have two financial questions for the tax rate guidance and the share count guidance. Where would you direct us?

Tax rate, I don't think we have to worry about tax rate at the moment. We have an NOL that exceeds 150 million, so we don't have an issue with the tax rate any time soon.

And in terms of in our share guidance, as we start turning GAAP profitable -- the actual share number is in our tables through our press release, which a little over 37 million shares, which should certainly be used in certainly the fourth quarter.

And when you're reporting at least profitability in your income statement, even though you have the NOLs, what would be -- will it be a 40% tax rate in the income statement?

Yes, probably 34% to 40%, somewhere in that range. But, it's going to be a while before we start recording any provisions for income tax.

And for the SAP update, what amount is capitalized? What should we think about for amortization expense going forward associated with that?

We've capitalized the IBM growth, who are our software implementers, plus the purchase of the system, and so on, and that number is $10 million.

And you'll write it off over, what, five to seven or --?

Seven years.

Seven years. Okay, thank you.

Our final question is a follow-up from Bob Hopkins with Bank of America. Please go ahead.

Hi, thanks. Just one more on our favorite subject of the day. I just wanted to be clear about a comment you made earlier. Did you really say that you don't know what percentage of your doctors are using Osteocel currently today?

I said that we do not know where Osteocel is being used. Very few of our doctors have used the product.

Very few of your doctors, okay. So that -- and then, in terms of your due diligence process, I assume you've reached out to your network and talked to a fair number of physicians. As a result of that process, did you -- from a -- what kind of a -- what I'm trying to get at is what sort of cross-selling opportunity might there be in terms of introducing NuVasive products to Osteocel users who don't use NuVasive core products today?

Well I think that it's not so much just driven out of the acquisition of Osteocel. I think Osteocel becomes a strong adjunct for us with regard to our portfolio. So we see ourselves being able to primarily sell the product into our existing customer base.

And then, just along with our efforts of expansion with XLIF, MAS, Cervical, that gives us the opportunity to obviously bring our new biologic products into the fold there. And I think the fact that we are focused on adding more products to the cervical arena is really a plus and an opportunity for us, as Keith outlined, to take advantage of the situation with regard to INFUSE being largely now focused on the lumbar spine.

And in terms of the percentage of your doctors currently using Osteocel, where would you put that, 5%, 10%?

5% or less.

Okay. Thanks very much.

You're welcome.

We actually have a second follow-up from Matt Miksic with Piper Jaffray. Please go ahead.

Hey, just one quick follow-up on -- sorry to say it's also kind of on Osteocel and orthobiologics. But I'm thinking about what has made INFUSE so successful, and part of it, obviously, is the powerful effectiveness of the product, but the data and I think the ability of the company to kind of detail it, right, in sort of a specialty sales force way.

And I'm wondering, if you're focused on data, which is a part of that, and I think that's important, going out a year or two, can we expect to see the same kind of focus on a specialized orthobiologics sales force that starts to detail the product a little bit more like the way you'd detail a pharmaceutical product to these surgeons?

No.

Nothing like that?

No, we're going to continue to ensure that our sales force can sell mix and be able to speak about all of our products.

You just put the tools in the hands of the regular reps, put the data in their hands, and let them sell the product.

Yes, and they've been very effective with selling Formagraft. They've been very effective in moving Allograft, especially into the cervical spine. So I think that, this being an Allograft product, that our sales force is going to embrace it and understand it quickly.

Great. That's all I got. Thanks.

Thank you.

Sure.

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

Thank you, everybody, and we'll speak to you next quarter. Bye-bye.

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