NuVasive Inc (NUVA) 2008 Q3 法說會逐字稿

Greetings, and welcome to the NuVasive Incorporated Third Quarter 2008 Earnings Conference Call. (Operator Instructions.) As a reminder, this conference is being recorded.

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

Thanks, Operator. Welcome to the NuVasive Third Quarter 2008 Earnings Conference Call.

NuVasive's senior management joining us on the call today will be Alex Lukianov, Chairman and Chief Executive Officer; Keith Valentine, President and Chief Operating Officer; and Kevin O'Boyle, Executive Vice President and Chief Financial Officer.

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 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 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 10Q and 10K forms filed with the Securities and Exchange Commission.

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

Thank you, Nick, and thank you, everyone, for joining us this afternoon on our third quarter 2008 call.

Our results in the third quarter provide continued evidence of strong market adoption of XLIF and the proficiency of our exclusive sales force in penetrating existing accounts with our full mix of innovative products.

And following our continued philosophy to stay ahead of the competitive curve, we are preparing to launch our newly acquired biological product, Osteocel, as the core of a $100 million biologics platform.

The combination of these strategic initiatives provides what we believe to be a clear path to the robust revenue growth and sustained profitability we expect over the next several years.

Before outlining some of the details that drove our operational success this quarter, let me take a moment to briefly review our strong financial performance.

Revenue in the quarter increased 73.7% year-over-year to $67 million. On a sequential basis, this represents a 16.5% quarterly increase over the second quarter of 2008. Accordingly, we are increasing our revenue guidance for the full-year 2008 to $245 million to $247 million.

Our exclusive sales force, which now stands at 300 strong, continued to gain momentum in the third quarter. Our most seasoned representatives, who have been with the company for at least 18 to 24 months, have been successful in achieving penetration of our full product offering into existing accounts while also developing new business.

On average, our commissioned representatives are currently producing $1.2 million in annual sales. In regions such as the West and the Southeast, our most experienced representatives are producing annual sales well above the current corporate average and in excess of $2 million.

This demonstrates the potential we envision for our entire organization as our exclusive sales force becomes more expert in selling our full mix of products and expands their relationships with both current and new spine surgeon customers.

Our growing product offering has strengthened our ability to address the majority of procedures in the lumbar, thoracic and cervical spine, allowing our sales force to compete for the majority of the spine surgeon's business and expanding our established competitive advantage in XLIF.

Our most important new product introduction at NAS was NeuroVision M5, our next generation nerve avoidance system. M5 builds on the innovation behind our original NeuroVision product and represents a significant step forward in nerve monitoring technology, strengthening XLIF and the MAS platform as the only safe and reproducible lateral approach to spine surgery.

M5 brings the total number of NeuroVision monitoring modalities from three to five, expanding monitoring coverage to the entire spine. The addition of SSEP mode, or somatosensory evoked potentials, broadens NeuroVision coverage for thoracic surgical procedures and offers a faster setup with intuitive plug-and-play connections. Navigated guidance mode offers surgeons a user-friendly approach to pedicle screw placement, using precision trajectory feedback to help align the proper approach angle while dramatically reducing fluoroscopy exposure.

These two new modes are in addition to our three existing modalities of stimulated EMG, or electromyography, free-run EMG, and MEP, or motor evoked potentials. The next generation NeuroVision leverages NuVasive's five years of experience in nearly 100,000 cases of surgeon-directed neuromonitoring and will create even greater distance between us and our competitors.

In addition to these enhancements to the NeuroVision platform, we have introduced four (technical difficulty) interbody device line extensions to address the specific demand for unique sizes and shapes in the lumbar spine from the surgeon community.

We also believe there is considerable opportunity for XLIF to address failed TDRs or failed traditional fusions. At NAS, we introduced instrumentation specifically designed to facilitate removal and revision of these failed implants.

We have complemented the growing applications of our innovative lateral approach by devoting appropriate focus on the development of our traditional product lines.

In addition to expanding options with XLIF, a surgeon can now use NuVasive products to perform anterior fusion procedures and address L5-S1 through our Halo system. We also continue to expand our instrument and implant offerings for PLIF and TLIF procedures.

In the cervical spine, we now have a comprehensive selection of products that address the various preferences among surgeons for fixation. Our recently introduced cervical products, the Helix anterior cervical plate, Helix mini plate and VuePoint posterior fixation system are allowing our sales force to steadily gain incremental cervical pull-through business across our customer base.

We are pleased with the initial success of our cervical business and remain on track to double our cervical revenue in 2008.

These innovative product launches, combined with the continued success of thoracic XLIF to address multilevel degenerative scoliosis procedures, supports our strategy of providing surgeons with a comprehensive product suite that addresses major applications in all regions of the spine.

In early August, we completed enrollment of our NeoDisc clinical trial. The trial protocol requires a successful two-year follow-up period on all patients before submitting to the FDA for potential approval. In terms of our complete motion preservation platform, we remain focused on XL TDR, our innovative disc replacement device, with our unique lateral approach and plan to embark on a clinical study in 2009.

Osteocel, the most recent addition to our comprehensive product portfolio, is part of our biologics unit that we expect to be a $100 million business over the next several years. As a reminder, we believe that Osteocel uniquely fills the product gap between DBM and BMP in the $1.5 billion US biologics market and is complementary to our Formagraft product.

It is the only viable bone matrix product on the market that provides the three beneficial properties similar to autograft of osteoconduction, osteoinduction and osteogenesis.

As we have previously disclosed, we recently agreed on a plan with Orthofix, the current primary distributor of Osteocel, to effect an easier and more rapid transition of distribution to our sales force. As a result, we now expect to begin limited direct commercial activity in late fourth quarter which should lead to a more robust 2009.

We are supporting our 2009 expectations with an aggressive ramp in premarketing activity in our biologics division, designed to fully educate our sales representatives, identify key accounts for initial product penetration, and commence clinical studies supporting the efficacy of the product. We are strategically aiming to complete and present the results of these studies in support of even stronger sales expectations in 2010.

Upon completion of our diligence and integration of the Osteocel business, we have confirmed there are no supply issues with Osteocel and expect to have ample inventory to support our expectations in 2009.

In order to support our robust revenue growth and profitability expectations, we recently completed two major improvements to our corporate infrastructure. During the quarter, we completed the transition to our new corporate headquarters and strengthened our technology infrastructure with the implementation of our new ERP system.

These are essential components of our growth strategy and our commitment to sustain and grow profitably. The ERP system and our new corporate headquarters provide a strong base that will enhance operational efficiency and help support our expectation for rapid revenue growth in 2009.

I would now like to briefly address the complaint brought by Medtronic Sofamor Danek alleging patent infringement involving certain NuVasive products.

As we indicated in our press release, we are accessing defense strategies as well as potential counter-claims based on our own significant patent portfolio and intellectual property rights. I would like to reiterate that we are prepared to vigorously defend ourselves in the courtroom, and remain focused on building our business so that patients can continue to experience the innovations that NuVasive has brought to the field of spine care.

Our existing operations have not been disrupted whatsoever by this legal matter, and we do not expect any significant disruption going forward. Although I do not plan to provide detailed updates of the procedural steps of this litigation, I will surely keep you apprised of all significant developments or changes. Kevin will provide an overview of our expected legal costs for the next 15 months during his remarks.

I would also like to provide a few comments on the current financial environment and the potential impact on spine procedures. From a macro perspective, we have not seen a significant impact on elective spine procedures in the markets where NuVasive does business, and we do not expect the growth of our core business to slow in the current environment.

However, hospitals may slow down upfront purchase arrangements such as capital purchases and stocking orders. As a result, we may see less of these large scale transactions in the fourth quarter. Nonetheless, on the strength of our core business, we anticipate robust growth in Q4 leading to our revised annual revenue guidance of $245 million to $247 million.

Despite the current financial markets, we still believe our business can grow at rates consistent with past guidance. Looking to 2009, with the addition of the Osteocel product line, we believe our overall revenue growth can approach 40% over our newly revised 2008 revenue guidance range, with steady improvements to profitability.

I would now like to turn it over to Kevin O'Boyle for a detailed review of our financial results and updated guidance.

Thank you, Alex.

Our revenue for the third quarter of 2008 was $66.9 million, a 73.7% increase over Q3 2007 and a 16.5% increase over Q2 2008. Osteocel revenue was $4.4 million versus our expectation of approximately $5 million for the third quarter. Excluding Osteocel revenue, the third quarter was a 62.3% increase over Q3 2007 and an 8.9% increase over Q2 2008.

International revenue remains on target with the 2% to 3% revenue contribution that we guided to for 2008.

As Alex mentioned, the lower Osteocel revenue was a result of the transition arrangement we worked out with the current primary distributor of the product. As a result of this arrangement, Orthofix will take less inventory so that they are able to transition away from the product. In exchange, we will begin limited sales in the late fourth quarter.

Gross margin for the third quarter was 81.8% compared to gross margin in Q3 2007 of 82% and gross margin in Q2 2008 of 83.3%. The lower gross margin in the third quarter primarily reflects the revenue contribution from sales of Osteocel through preexisting distribution agreements with a gross margin of 36.4%.

Our Q3 2008 net loss was $23.1 million, or a loss per share of $0.64 on a GAAP basis. On a non-GAAP basis, the company reported net income of $8 million, or $0.21 per share.

Our non-GAAP net income calculation in the third quarter of 2008 excludes stock-based comp of $5.4 million, a charge for in-process R&D of $16.7 million related to the acquisition of the Osteocel biologics business, a one-time leasehold charge of $4.8 million related to the company vacating our previous headquarters, a charge of $2.6 million related to short-term transitional support costs for the company's ERP system, amortization of intangible assets of $900,000 and IP litigation expenses of $600,000.

Operating expenses for Q3 2008 totaled $77.7 million compared to $35.2 million in Q3 2007 and $48.5 million in Q2 2008. The increase in operating expenses in the third quarter from the second quarter primarily reflects the in-process research and development costs, the traditional support cost for the company's ERP system, the one-time leasehold charge relating to vacating the company's previous headquarters, and IP litigation. Excluding these expenses, operating expenses for Q3 2008 totaled $53 million.

Our legal expense related to the Medtronic lawsuit in the third quarter was approximately $600,000, and we anticipate spending $1 million in the fourth quarter. For 2009, we are currently estimating the projected cost of our defense to be in the range of $4 million to $5 million.

R&D expenses, excluding stock-based comp for the quarter, totaled $5.5 million versus $5.8 million in the second quarter. The decrease in R&D spend from Q2 was related to the completion of enrollment in the NeoDisc trial.

Excluding stock-based compensation, R&D as a percent of revenue for Q3 2008 came in at 8.2% versus Q2 2008 at 10.1%.

Sales, marketing and administrative expenses, excluding stock-based comp, for the quarter totaled $50.1 million versus $37.6 million in the second quarter. Excluding stock-based comp and other adjustments, the percent to revenue was 62.9% versus Q2 2008 at 65.4%.

The increase in spend in absolute dollars from Q2 was related to typical selling expenses related to the higher revenue base as well as facility costs associated with the relocation of our corporate headquarters.

The interest and other expense cost for the quarter was $146,000. This reflects reduced yields on our cash investments due to current market conditions. With $222 million in cash, our primary focus in Q3 and going forward is safety of principal, which is why the majority of our cash invested is in securities backed by the US government.

The stock-based comp charge for the quarter was $5.4 million, was recorded in our operating expenses and allocated as $920,000 in R&D with a balance of $4.5 million in sales, marketing and administrative expenses.

Our cash burn was $12.1 million for Q3 2008, including our cash burn in the development of our MAS product pipeline, the national launch of new products, the build-out of inventory and instruments to support future growth, 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.

Our operating cash burn is defined as cash used for our operating activities plus additions to fixed assets.

Our inventory position was $58.4 million at the end of Q3, or 21.8% of annualized third quarter revenue. We expect our inventory to sales ratio to average between 20% to 25%, which may spike in a quarter depending on how many and what type of products are launched.

Day sales outstanding, or DSOs, were 60 days in Q3 2008 compared to 50 days in Q2 2008. The fourth quarter should see a meaningful decrease to the mid-50 day range. And as we realize the benefits of our new ERP system, we should return back to the low 50s.

I would now like to turn to a review of our 2008 financial guidance. For the full-year 2008, we are increasing our revenue guidance to a range of $245 million to $247 million, up from $238 million to $240 million. This includes a contribution from Osteocel of $9 million in the second half of 2008, or approximately $4.6 million in the fourth quarter of 2008, which is down from our previous guidance of $15 million.

We have also increased our Osteocel guidance for 2009 from $25 million to $28 million based on introducing the product to our sales force on a limited basis in late fourth quarter.

As Alex mentioned, the reduced sales to Orthofix will provide our sales force with the advantage of having more inventory to sell and reduced competition in 2009.

We continue to expect Osteocel revenue contribution to be limited in the first two quarters of 2009 as we effect the transition to our sales force, followed by a strong second half.

We expect that gross margins for the balance of 2008 should be in the range of 81% to 82% based on the effect of selling Osteocel through existing distribution agreements and a mid-30% gross margin. We should realize a significant increase in Osteocel gross margin in 2009 to about 60% when we discontinue selling through distributors.

For the full-year 2008, we have maintained our GAAP earnings per share guidance, excluding in-process R&D and other adjustments, as detailed in the table of our earnings release at $0.05 to $0.07. We believe that excluding each of these costs provides information that reflects the company's ongoing operating activities for 2008.

Our interest expense in Q3 of $146,000 continues to reflect a further reduction in yields on our invested cash due to current market conditions. We expect to incur greater interest expense levels in the fourth quarter and in 2009.

As Alex mentioned, we converted our entire company to the SAP Enterprise software platform in July. Although transitioning to a new ERP system is never without challenges, our ability to report results in the third week following quarter-end is a testimonial to our shareowners' ability to adapt to a new system.

During the quarter, we realized additional consulting time was important for a successful transition and, therefore, incurred $2.6 million in Q3 which was incremental to our ongoing support costs. We also anticipate an additional charge of approximately $1.5 million in the fourth quarter.

These third and fourth quarter investments minimize the potential for transitional risk of moving to a new SAP-based system and will assist in driving expected efficiencies in 2009. We expect to move to a more traditional and leverageable ongoing support model in 2009 without significant incremental costs.

For 2009, we believe our overall revenue growth can approach 40% over our newly revised 2008 revenue guidance range of $245 million to $247 million, in conjunction with a non-GAAP operating income percent of 11% to 13%, which excludes stock-based comp, amortization of intangibles, and litigation fees associated with the Medtronic lawsuit.

We will provide comprehensive guidance for 2009 on our fourth quarter earnings call.

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

Thank you, Kevin.

Overall, we are pleased with our third quarter results. We remain well-positioned to continue to strategically expand our geographic footprint, both in the US and abroad, leveraging our innovative lateral approach, enhanced corporate infrastructure and unique culture of absolute responsiveness to continue to take market share.

Concurrently, we are introducing new products that both protect our leadership and innovation and unlock new segments of the spine market. Together, we believe that these initiatives strongly support our drive towards our interim sales goal of $500 million, combined with growing profitability.

We will now be willing to answer your questions.

Thank you. (Operator Instructions.) One moment, please, while we poll for questions. Matt Miksic, Piper Jaffray. Please go ahead.

Hey, good evening. Thanks for taking the question. Can you hear me okay?

Absolutely.

Yes, no worries.

So, one quick sort of clarification on Osteocel in the second half of the year. You're talking about marketing it late in the fourth quarter. You talked about data being important to marketing the product.

Can you talk about, I guess, how the strategy for going to market with that product now and in the fourth quarter is going to change or step up maybe throughout next year? Just how we should think about that product and what you'll be doing with it?

Well, the strategy doesn't change from what we've talked about before. It just starts a little bit sooner as a result of the change in our arrangement with Orthofix. So, we'll be rolling the product out on a limited basis beginning late this year, and then expanding that in 2009.

What we plan to do, as we discussed before, and many of these have already been initiated, is to conduct a series of preclinical as well as clinical studies that we think will further the efficacy of the product and give us a very strong case in order to reach the kind of sales levels that we're thinking about for 2010.

So, it's really no different than what we talked about before. The only difference is that we're starting it a little bit earlier.

Okay.

Changing gears, a question on the sales force. The number stepped up pretty significantly from last quarter and sort of puts you at --it looks like it put you ahead of your --what was your formal goal for growth in the year.

Anything change there? I mean, what caused you to sort of add what looks like so many more people?

Well, it's a combination of things. One is availability of excellent candidates, and so we've certainly moved forward on that.

Additionally, it's been our exclusive distributors have been hiring at a faster pace than before, and I think that has a lot to do with their confidence in being able to really drive the products forward into 2009 and beyond, and building the infrastructure for that growth now in 2008.

Any of this falling out of any of the recent acquisitions or changes in distributorships here in the US?

No.

Okay. So, not yet, I guess, maybe.

Not at this point in time, no.

So, looking to the fourth quarter, should we continue to think about you adding more, or are you sort of at where you need to be for the year?

We'll probably increase, certainly, a few more heads. We have several in process. I can't give you an exact number right now, but it's probably in the neighborhood of 10, approximately.

Okay.

And then, maybe just a general question, coming out of last week at NAS, if you saw anything or came out of the meeting with any sort of realization of where docs are going or where the market's going or where reimbursement's going, sort of anything that you thought was particularly significant for your business?

Well, I think there's been a very strong reception from minimally-invasive spine surgery. We continue to see that with a very strong demand for lateral procedures, XLIF obviously. So, we feel that that demand has been very robust.

We've not seen any kind of a fall-off with regard to demand for elective spine procedures. And as I mentioned in my remarks, we feel that that's going to continue to be moving forward at a good pace just like the market has been growing right now as we see into 2009.

So, I think the environment is still very strong with regard to spine. We anticipate a bit more pricing pressure because of our size as we move into next year. We anticipate being able to go into more larger accounts and have to bid aggressively to get that business.

So, that means that some of our pricing will come down, but I don't think it's going to adversely affect our gross margins that we are used to seeing. And we'll certainly talk about those some more on the fourth quarter call, but they'll be pretty consistent with prior levels.

Okay, terrific. Well, thanks for taking the questions. I'll jump back in queue.

Okay, appreciate it.

Thank you. Taylor Harris, JPMorgan. Please go ahead.

Thanks a lot.

Hey.

Hey, guys.

Hey.

Hello.

Hey, Taylor.

So, Kevin, I wanted to make sure I heard your guidance for 2009 correctly. Did you say on the operating margin range 11% to 13% on a non-GAAP basis?

I did.

Okay.

And should we expect most of the leverage coming on the SG&A line?

Yes.

Okay, great.

And for the full-year 2008, you're obviously taking up your sales range, and you are taking up non-GAAP EPS. GAAP EPS is staying the same. What are the moving parts there that's not allowing you to take up the GAAP EPS range?

The GAAP EPS range that we have there, we have stock-based comp that's in that table, is listed, I think, at $0.56 for the year, I believe. That's one reason.

And as it relates to just managing the overall business, given SAP transitional costs and other costs that we have in getting Osteocel out of the gates appropriately is the reason why.

Okay.

And I also assume interest rates on your cash have moved against you, as well. Is that--?

--No, that's fair because obviously with investing most of our cash in US treasuries, our effective yields sit close to 2%.

Okay, great.

And then, the last question --and I apologize. I had to miss the beginning part of this call. But, I guess, Alex, within the product portfolio, is there anything in particular --is the cervical business still growing faster than the rest, that's really supercharging revenue growth?

I'm sure this is still primarily an XLIF story, but just wondering if there was anything outside of that that you would point to?

It's really the XLIF story. With regard to cervical, I talked about how we're doubling our business from last year, but it is very much an XLIF story. Sorry, I have a cold. It's a little hard for me to enunciate.

It's very much an XLIF story, as well as the launch of M5 for NeuroVision which came out at NAS, and we think that's just a huge step forward. We are already well ahead of our competitors by at least a couple of years, excluding our IP position, and I think this puts us another three years ahead of everybody else at the very least.

So, that's going to give us a lot of momentum going into the fourth quarter and into 2009.

Great. Thank you, guys.

Thank you.

Thanks, Taylor.

Raj Denhoy, Thomas Weisel Partners. Please go ahead.

Hello, good afternoon, guys.

Hi, Raj.

Hi, Raj.

You mentioned the momentum in the business, and it's pretty clear you guys are seeing the revenue growth, the underlying revenue growth, accelerate for the last three quarters.

But, if you look at your guidance for the full-year, the upper end of your full-year guidance, and you back out what you think you're going to do in Osteocel in the fourth quarter, it kind of implies a low 40% kind of growth rate for the underlying business.

And I'm curious why you think you'd see that much of a slowdown in the fourth quarter just given the momentum we've seen so far?

Well, I don't see that as a big slowdown. I think what we talked about during my remarks really has to do with sort of some limited upside in the fourth quarter that we're used to normally seeing.

Capital purchases typically make up anywhere between 1% and 2% of the fourth quarter number for us. We think because of our size right now, as I mentioned before, we're now bidding for larger businesses at hospitals, so the capital component could be more along the lines of 5%.

So, if you take a look at a 5% upside that may not be there in the fourth quarter, that's really what's changing. And that doesn't change our base business. It simply changes the fact that hospitals are less willing to purchase out in front and purchase big sets. And so, we hope that some will still do that, but we're hesitant to rely on those sets until and if they come through.

So, you're really just being prudent at this point. It's not that you're seeing that 5% which is usually --or that 1% to 4% which could be 5% now not coming in. Are you just being prudent in front of maybe it's not coming in, I guess?

Exactly. That would be the topside. So, that would be not the topside of our guidance. That would be the upside above our guidance that, right now, I'm just not sure that it's going to be there.

Okay, fair enough.

Let me just ask one on the gross margin. Again, if you kind of back out what you implied the Osteocel gross margins were in the quarter, I think the underlying business approached something like 85%. Is that correct? And if that is, that's a pretty big jump-up from what we've seen in the last couple of quarters.

It is correct, and it really comes to product mix, what got sold. Formagraft was a great product for us in the quarter. XLIF continues to drive a lot of additional implants for us, which gave us another 150 basis points in the quarter over what we had experienced in the past.

Okay, fair enough. A nice quarter.

Thank you very much.

Thank you. Ben Andrew, William Blair. Please go ahead.

I just wanted to catch up on a couple of details on Osteocel. What's your capacity for manufacturing next year? I know you can support the levels that you're guiding to but, I mean, I think Orthofix was selling upwards of $15 million in the second quarter to end users, so that would imply some upside if you could generate that level of demand.

The capacity is probably closer to about $50 million in revenue next year but, obviously, we have to see the market. We have to establish consignment levels. So, we feel that $28 million is good guidance at this point in time. But, from a supply perspective, we don't believe we're constrained.

Okay.

Then, as you work with the different vial sizes and kind of the long lead time for that product, could we see inventory jump up as we go through '09 kind of as you position for that and make sure you don't run short on any particular vial sizes?

Yes.

Okay.

And then, breaking out the legal in the non-GAAP numbers, you're going to do that consistently over the course of 2008?

Yes.

We are with regard to this particular litigation, yes.

Okay.

And then, I guess the last question I had, as you think about the customer base and kind of some of the stresses that they're seeing, are there any other potential areas beyond some of these large bidding contracts where you're seeing stresses in the system or increased hesitancy on the part of customers to position in front of this environment?

Not in the least. Obviously, I had a lot of face time with customers at NAS, and I asked that question of pretty much everyone I saw. And I would say that the enthusiasm is very high. Surgeons, in fact, talk about how XLIF gives them an opportunity to grow their business beyond just maintaining growth in a pretty robust market.

So, I think pulling into the thoracic spine, doing multiple levels, all of those things are a huge positive for the surgeons. And so, we continue to see a lot of excitement and a lot of uptake.

I guess one last question. One of the things that impressed me at NAS was the navigated guidance mode on the new M5. How do you see that being used? And is that a significant share-taking opportunity, or is it just sort of more incremental to the sales guys?

We think it's a way for us to really shore up the diversity of NeuroVision and give us another reason to be in there in front of doctors and in front of accounts.

So, we, at this point, really, really don't have an exact impact number to give for 2009. We'll talk about that some more in the fourth quarter, in terms of what we think it'll contribute. But, what we think it largely does is just allows us to continue to build the NeuroVision base in a very solid fashion.

Okay. Thanks, Alex.

Okay, you're welcome.

Thank you. Bob Hopkins, Banc of America. Please go ahead.

Thank you. And I'm sorry if you already addressed this. I've been bopping around on a few calls tonight.

But, Alex, I was wondering if you could give us an update on the M&A outlook. You guys articulated a while ago when you did the fundraising that you'd have several things that you'd potentially be doing over the course of the next 12 months.

And one of those, I think, included potentially purchasing distributors outside the US, and I was wondering if you could just give us an update on where you are with that and when we might see some activity?

Well, we don't have anything really to report at this point, other than what I've talked about before, Bob, which is that we're looking at those sort of opportunities outside the United States. They're pretty hard to find.

We are also looking at ways to expand our biologics business, and I've talked about that before, that we think there are some other things we can do more on the synthetic side, I guess, if you want to call it, of the business, now that we've moved into stem cells and we're very excited about what that'll do for us.

And then, we're going to continue to evaluate opportunities with regard to strengthening our position in trauma as well as scoliosis. We are developing a scoliosis system organically, and we'll talk about that some more next year. But, we're also looking at some other things that we might do that'll move us forward with regard to trauma scoliosis, as well as the VCF space.

We're very interested in the VCF space and trying to figure out an innovative way to get into that. And so, we continue to evaluate companies and technology that'll bring us closer to that goal.

Thanks for that.

And I'm sorry if --you might have talked about this as well. But, in the preliminary 2009 revenue thoughts that you've provided, what kind of contribution do you have from outside the United States?

Well, we really haven't talked about that, Bob. I haven't really given guidance on that, so I'm not really prepared to make the comment there. Right now, we're really at 2% to 3% of revenue, and I'll give guidance specifically with regard to OUS on the fourth quarter call.

Okay, thank you.

All right. You're welcome.

Thank you. David Roman, Morgan Stanley. Please go ahead.

Thank you. Good evening, everyone.

Just two quick questions. On the sales reps you hired this quarter, was there any particular region in which they were concentrated? I think we've talked a lot in the past about the Northeast being sort of an underpenetrated region for you guys. Is there anything to note on the sales force front?

Yes, we have made some advances in those territories, also some additional hires in the Southeast and really a peppering across the nation. But, I think if there's a concentration to talk about, it's kind of in the right upper quadrant of the United States as well as the Southeast.

And does that sort of square with your comment as well on addressing sort of large order accounts, potentially academic centers which are also largely concentrated in the Northeast?

No, that actually is more of a national issue.

Okay.

There is plenty of large accounts, obviously, around the country. So, we're into quite a few different scenarios with regard to moving into a bidding process.

And then, well, one thing that came up at NAS was the number of your competitors who are also introducing lateral systems. I mean, obviously, in the numbers that you reported, we're not seeing any impact from that.

But, maybe could you just talk a little bit about are you getting any feedback from your sales force on some of the other players out there and what your expectations are in 2009?

Well, our expectations are to continue to grow our excellent business at a very robust pace. I can go through the reasons for why we feel that there's no competition relative to what we're doing, but I think, clearly, you have to look at NeuroVision, M5 in particular, as another reason why we're going to advance beyond everybody else.

And I'm sure, as you know from speaking with the surgeons, they'll tell you that it's not just NeuroVision or just MaXcess or the implants. It's everything. It's the entire thoughtfulness behind the suite of products. It's the surgeon expertise. It's the support. It's the technique. It's all of the things that really go into spending five years on developing this area and continuing to stay at the forefront of innovation.

So, I don't really see anything out there that we feel is a direct threat to what we're doing. We, by no means, minimize the efforts of our competitors, but we really feel confident in our ability to drive XLIF and to drive XLIF up the spine in 2009 and beyond.

Okay.

And then, just one quick housekeeping question for Kevin. On the $0.05 to $0.07 guidance for the full-year, that would sort of compare to the $1.6 million in net income and $0.04 per share for this quarter?

Repeat that one more time, please.

The $0.05 to $0.07 for the full-year, if you were to comp that to what that equates to this quarter, it's the $1.612 million earnings per share, excluding IPR and other adjustments, or the $0.04?

Yes.

Okay. Thank you.

Okay, thanks.

Thank you. Joanne Wuensch, BMO Capital Markets. Please go ahead.

Thank you very much for taking my question.

All right.

I apologize if I missed this. I've been bopping around on calls.

Everybody's bopping today. Don't worry about it.

It's a bopping day.

It is a bopping day.

How many associates did you hire in the quarter?

Well, we went from 269 to 300, 31.

Okay.

And my second question is you made a comment about aggressively ramping Osteocel throughout the year. If I had to think about spreading $28 million throughout next year, how do you define aggressive?

I don't know. I don't remember if I said aggressively ramping, but I think what we talked about is --I think we were talking about the second half of the year with regard to aggressive ramping. We said the first half would essentially be the seeding process which starts late in the fourth quarter, and then it would be an aggressive ramp in the second half of the year.

Okay.

Over time, do you target what level of SG&A as a percentage of revenue you're trying to get to? And if so, can you share that with us?

Over time, Joanne, what we're looking at, and we've been consistent on this, is on a non-GAAP basis at $500 million, we're looking for 20% operating margins on a non-GAAP basis.

So, that's where we're headed. We're laser-focused on that. We've done our strategic planning around that and, given 2009 guidance, puts us on the right path to get there.

Okay.

And then, a final question, what did inventory days look like during the quarter?

Well, what we do is we don't do inventory days. What we do is we give the percent of inventory to our third quarter annualized revenue number, and it was just over 21%.

In my prepared comments, I mentioned that we will traditionally be between 20% and 25%, depending on how many different products we may launch in a particular quarter. So, we're right in that range and feel comfortable there given where we think the business is going and what we need to bring in to make sure we don't interrupt the ramp.

Terrific. Thank you very much.

You're welcome.

You're welcome.

Thank you. Vincent Ricci, Wachovia. Please go ahead.

Hey, guys. Just a piggyback up on that inventory question. You guys have been building inventory for a while. You do launch a lot of products throughout the year. And most of those end up as a mix benefit, but is there any chance that you obsolete yourself and eventually have some inventory you have to write-down?

We take a look at that all the time as we come out with new products and line extensions and things like that, and we are good stewards of looking at that information and making sure the products that we're buying are for next generation products, as well as feeding, if you will, the popular sizes that get used more often than others.

And we are comfortable with our inventory balance in that we're appropriately managing any obsolescence that may come about as part of building our inventory.

Okay, great.

And then, on the gross margins, particularly the core gross margins, if you kind of back out Osteocel, they continue to go up which is great for us, but you also tend to think of international diluting your gross margins.

Is it possible you guys are actually getting some good pricing power international, or is it just that it's not that significant part of your revenues right now that we're not seeing the drag?

It's just not significant at this point in time.

Okay, great.

And then, the last question would be, you guys described this at the analyst day, but could you talk to us a little bit about the somatosensory signal and how that benefits the surgeon?

I'll actually get Keith to jump in here and answer that technical question.

There's two items to SSEP. Obviously, we have expanded XLIF into the thoracic spine. And so, as you do that, there's two modalities that are typically used in the thoracic spine, MEP and SSEP, with SSEP being largely the preferred for a deformity correction, especially in a thoracic spine.

And so, what we've introduced with M5 is the ability to have a unit that not only does EMG and MEP, but also SSEP. And as we move forward, there's going to be a proprietary way that the SSEP is automated. And it's that automatization and the ability for a surgeon to direct it that gives them full flexibility in the OR to use any one of those modalities for their XLIF cases or their deformity cases.

Okay, great. Thanks for taking my questions.

Thank you. Vivian Cervantes, Rodman & Renshaw. Please go ahead.

Great. Thank you for taking the question.

Sure, Vivian.

You've talked to some lengths about the macro environment and what you guys are finding out there. But, if I may, are there any changes in sales cycles? Are you seeing that it takes longer to sell? And then, maybe sort of contrast that between what you expect this will be if you enter big accounts versus some of the more --the current accounts that you're currently marketing to at this point.

The selling cycle has not changed, and I think what we've talked about before is it has everything to do with sales force tenure. So, as we build our relationships, we see the most effective sales representatives being those that have been with us for 18 to 24 months.

It obviously takes longer to go through a bidding process and to secure the larger accounts. Those are ongoing efforts. And I think if you take a look at how they tend to stack up, it provides us with a constant flow of new business on a quarterly basis.

So, if we were just starting that today, you could probably anticipate a lag time of three to six months, but because we're already midstream on it, I think it's going to be a pretty consistent flow.

Okay, that's helpful.

So, that said, are we --when we look into '09, should we look at big ramps in sales rep hires similar to what we've seen this quarter, or will we stay consistent to what we've seen in the last couple of years?

I think it's going to be pretty consistent. We just try to give a general idea as to how the sales force is going to grow. A lot of it has to do with just the overall momentum in various territories and our ability to add as a result of that. So, that's just a general guideline.

But, our goal is to get the sales force to the range of 450 representatives, even as much as 500 representatives, over the next few years. And if we can do that faster, we will, but we're going to keep an eye on profitability as we continue to ramp.

That's helpful. Thank you.

You bet.

Thank you. Ed Shenkan, Needham & Company. Please go ahead.

Yes, a couple of questions on the international side of the business. Could you just recap for us what countries you're direct in, where you've got distributors and what future expansion plans are?

We're direct in Germany and the UK. As far as distributors at the moment, in Europe we have Greece, we have Spain, and we have Italy. Greece we've been in now for over a year. The other two countries we're just really starting in. We have established some distributor relationships in Latin and South America.

And so, the future really bodes for a greater focus on European opportunities, as well as the Far East. So, next for us will be Japan over the next couple of years, as well as Australia, New Zealand next year.

What kind of gross margins do you get in Germany and the UK, and what is it in those distributor countries? And put that in perspective how that'll affect the overall gross margin going forward.

Well, generally speaking, those will range in the --anywhere between 65% and 75%, just depending upon the particular market and product mix.

So, when you're direct in Germany and the UK, 65% to 75% also?

That's correct.

And in the Greece, Spain and Italy, probably less than 65%, I guess?

That would be the typical model for a distributor. Yes, that would be less.

And is it local currency, or do you sell in US dollars to those distributors?

It's all in US dollars at this point in time.

Except Germany, obviously, and UK, correct?

That's right.

Great. And that's all. Thank you.

Okay.

Thank you. John Putnam, Dawson James Securities. Please go ahead.

Thanks. My question just got asked and answered.

All right, then. Next question. No, go ahead, John. That's it, then?

We have another question. Bill Plovanic, Canaccord Adams.

All right.

Please go ahead.

Hello.

I was just kidding, John. You could have asked another question.

Great, thank you. Good evening.

Hi.

Hey, Bill.

Hi. Hopefully, it's the last question here.

So, Alex, it's very interesting. You've been in this business a long time. We all just got back from NAS last week. We saw just a bunch of little companies kind of grow up over the last couple of years, and now it seems like not a lot of new players at this year's spine show.

Just give us your view on kind of what's going to happen to all these little guys, especially with the funding that's dried up, and how does NuVasive capitalize on that?

Well, from my perspective, there were a lot of companies at NAS this year. And I think what I saw was that there were a lot of companies that did not have anything unique to talk about or anything unique to show. It was another pedicle screw or a plate or some kind of a peak product.

So, I really believe that there are going to be some issues for companies like that as they try to ramp because, as you already pointed out, there is no well to turn to with regard to building these companies, and I don't think that there's much of an interest with regard to the larger players in acquiring them.

So, I know that in talking to --actually even talking to surgeons, they expect to see a fair amount of carnage with regard to the smaller companies. I think we're going to continue to look at opportunities, whether it's to buy some interesting IP, parts of a particular technology that are of interest to us. We'll certainly keep our eyes open for that.

But, we don't see much in the way of many small companies that were of great interest to us. And I don't mean to dismiss anybody that has a great product idea, and there were certainly some companies out there that did that. But, there were more "me, too" copy type companies than any other sort.

Do you think we've started to see, or have you seen or picked up customers that maybe had been at some of those small "me, too" companies, or is that a shift that is probably coming in the next, call it six to 18 months?

I don't think I fully understand your question about those that have invented the --say that again. I'm sorry.

No, no, the "me, too" companies.

Yes.

So, as the surgeons that were dealing with the "me, too" companies kind of look at this and understand that the liquidity's not there for them, that they don't have capital to fund it, that they can't grow, how long do you think it takes for you to take those customers or those surgeons and bring them back to --or bring them into NuVasive for the first time and make them a customer of yours because you have something differentiated and--?

--Yes, sorry. Yes, I understand your question.

I think that happens right away for us. And in fact, I was just on a call today talking about this with regard to our cervical business, that it is very diversified now compared to where we were before, and how much easier it is for us to sell our full line of cervical products versus competing with a company that only has a cervical plate.

And so, in talking to some of the folks on the sales force today, they've had very good success in doing just that, and that's just on the cervical side of the front.

So, I think, overall, NuVasive is in a very strong position right now. We've got approximately 45 different product lines, so we're in a terrific position to come in and diversify and show what we've got that's different in terms of our offering.

All right. That's all I had. Thank you.

You're welcome.

We have no further questions in the queue at this time.

All right, then. Well, thank you everybody for bopping with us today, and we will speak with you in another quarter.

Thank you.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.