NuVasive Inc (NUVA) 2008 Q4 法說會逐字稿

Greetings, and welcome to the NuVasive Inc. fourth quarter 2008 conference call. At this time, all participants are in a listen-only mode. (Operator instructions). As a reminder, this conference is being recorded. We will be holding a question-and-answer session after the management's prepared remarks. (Operator instructions). We ask that all participants limit themselves to one question and a brief follow up. I would now like to turn the call over to Patrick Williams, Vice President of Finance. Thank you Mr. Williams, you may begin.

Thanks operator. Welcome to the NuVasive fourth quarter and full year 2008 conference call. NuVasive senior management joining us on the call today will be Alexis 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 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 would like to turn the call over to Alex.

Thank you, Patrick, and thank you, everyone for joining us this afternoon on our fourth quarter and full year 2008 conference call. Our results in 2008 provide continued evidence that NuVasive's strategy of accelerated market growth is working. We believe there is a unique opportunity for NuVasive to continue growing faster than our competitors and become the number four spine company over the next several years, surpassing interim goal of $500 million in revenue and moving towards $1 billion. In today's call, I would like to review our market by segments as well as some of the major themes in the marketplace and how we intend to reach $1 billion in revenue.

First, let me review our financial performance in the fourth quarter and 2008 and talk about guidance for 2009. Revenue in the fourth quarter increased 59% year-over-year, to $74.6 million, revenue for the full year 2008 was $250 million, of 62% increase over 2007. Excluding one time charges, full year earnings per share were $0.10 which exceeded our guidance of $0.07 to $0.09. Our fourth quarter GAAP earnings per share were $0.10 which reflects reduced spending related to the timing of product launches and R&D expenses including clinical trials. We plan to aggressively invest in the growth of our business in 2009 including the initiation of our XLTDR clinical study, increased scientific and marketing investments in the biologics platform, continued international expansion and the launch of 15 new products and line extensions. Despite uncertain economic conditions, we see 2009 as an opportunity for NuVasive to continue taking market share with the speed and creativity that we have become known for. We look forward to capitalizing on current market conditions to accelerate our move into the top tier of global spine companies.

For 2009, we are guiding to $345 million to $350 million in revenue, about 40% of growth over 2008 results. Excluding the impact of the recent investment in Progentix, we expect 2009 non-GAAP operating margins for the 11% to 13%. We are on track to achieve our stated goal of 20%, non-GAAP operating margins at a $500 million revenue run rate in the next several years. However, we see the opportunity for NuVasive to drive well past $500 million with even greater operating margins. This will, of course, require additional investment as evidence in the recent transactions and will impact near term earnings. We are confident that taking advantage of these investments now the the correct market conditions will provide beneficial over the course of the next several years. Kevin will give a more detailed review of our 2008 results and 2009 guidance later in the call, incorporating the impact of our recent strategic investments.

Now I would like to review the various segments of the spine market and our strategy in each area to take market share. First I will start with the biologics market. In the past two years, we have made three strategic investments into biologics. First, with Formagraft, next, Osteocel Plus and most recently with Progentix. Together, these three products provide NuVasive with on offering to suit any surgeon preference. We believe our products will generate compelling clinical data that will allow us to take share from both BMP and lower priced commodity bone graphs, thereby creating a new middle segment of the biologics market. Our Osteocel Plus launch is going well, and we are seeing early acceptance of a unique stem cell based allograph in the market. We anticipate sales will be $28 million for the year, but moderate in the first half as we launch the product through our exclusive sales force with the bulk of the revenue coming in the second half of the year. Going forward, we believe that Osteocel Plus will contribute to a 100 million biologics business in the next few years. Last month, we announced an investment in Progentix, a Dutch biologics company. The preclinical data generated by Progentix novel synthetic bone graph material attracted us to the company. We anticipate additional data to the come forward in 2009, to further prove out the qualities of the technology. We believe that Progentix current product platform following FDA clearances will generate $10 million in revenue in 2010, growing to $30 million over the next several years. What is truly exciting about this technology is our belief that through an expanded product offering and successful preclinical and clinical studies, Progentix technology has the potential to successfully compete with any other biologic in the market, and be a stand alone $100 million product line.

Next I would like to discuss the thorolumbar market segment which includes our revolutionary X-lift procedure that continues to transform the fusion market. X-lift continues improve patient care by providing less traumatic surgery, shorter surgery times, quicker recoveries and shorter hospital stays. 2008 was a landmark year for me personally, because I received a two level X-lift fusion with outstanding results. Our continued efforts to train surgeons and improve our own product line has made us the unquestioned leader in lateral surgery and has prevented competitive knock offs from taking our market share. We will continue to focus on expansion of this procedure, thereby cementing our position as the only provider of reproducible and clinically proven lateral surgery.

In 2009, we look forward to leveraging our domination in X-lift into other areas of this market segment. We remain committed to developing innovative products and will have several new product launches and line extensions in 2009. The new product launches include expandable retrievable body replacement devices and a next generation of our XLP lateral plate. We also have line extensions for MaXcess thoracic product to better equip surgeons as they move X-lift further up in to the thoracic spine and new implant sets targeting deformity which is a new market segment for us. Through this aggressive launch plan, we will seek to address the most important subsegments of the market as well as expand our own established product lines, thereby staying ahead of our competitors. We are going to provide additional insight in to our new product launches at our analysts day on May 12 this year in New York City where we will feature these products including a demo of our next generation NeuroVision M5 system. There will also be a surgeon panel to answer questions. The motion preservation market in the lumbar spine has been less promising than anticipated, especially with respect to the total disk replacement or TDR market. We believe this is due in part to the limitations associated with implanting devices from an anterior approach. As the market meters in lateral surgery, we plan to be the first company to embark on a FDA clinical study for a laterally implanted lumbar TDR. We are confident that we will begin enrolling in 2009. We believe the lateral TDR will prove to be the superior device for the lumbar market.

Next, I will discuss the cervical marketplace. Over the past years, we have developed and launched a complete sweep of cervical fusion products covering all surgical techniques, both anterior and posterior which encompasses the vast majority of today's market. In 2008, we also finished enrollment of our clinical trial for NeoDisc, a unique technology for disk replacement and motion preservation in the cervical spine. We believe that the cervical TDR market will grow more rapidly than the lumbar market and look forward to cementing our offering with both mechanical and compliant devices. 2009 will also see further product launches and line extensions in our cervical platform, which notably will include a new helix cervical plate providing translational fixation. Also of note is our belief that cervical sales will be bolstered in 2009 by our biologics product portfolio as doctors look for safer alternatives to BMP in the cervical spine. Historically, NuVasive best known for innovation in the lumbar spine, but we feel that with our current and planned offering of cervical products, we are poised to achieve greater penetration in to the cervical market.

Finally, we turn to Neurovision. 2008 was an important year as the total number of Neurovision cases surpassed 100,000, a remarkable achievement. We also announced the arrival of our new Neurovision platform M5 which provides additional monitoring and guidance capabilities, but more importantly, further solidifies our place as the leading lateral access company by enabling safe and reproducible approaches. In 2009, we also plan to launch new additions to the M5 platform to further distance ourselves from the competition. The M5 software system will have the capacity to receive new updates via the internet, allowing for realtime updates throughout the installed base without the need to return the system for upgrades. Also this year, we plan to launch a Neurovision tool set for the cervical market as well as expanded guidance applications. 2009 will be a very busy year for NuVasive with over 15 product launches and line extensions. This leads me to NuVasive's premier exclusive selling organization. We finished the year with over 300 representatives. This number includes sales leadership and support and going forward, we will disclose number of quota carrying salespeople which was 225 at the end of the year. We have divided the US in to 11 regions, as you know, in 2008, and recently promoted four new area vice presidents to manage those regions as we further penetrate and geographically segment the market in 2009. This year we anticipate the number of quota carrying reps to increase from 20% to 25%.

Internationally, we grew revenue 100%. And while small, we are adding new people and new countries, on a most recent hire coming in Australia. We believe there is strong potential in the international markets and particularly excited for the continued growth in our core markets of Germany and the UK. Internally, we continue to build NuVasive to support our growth potential. In 2008, we moved into a new corporate campus with a state of the art training facility with ample room for growth and expansion. We also implemented an ERP system that will facilitate management of a much larger company. While the transition of operating systems is always challenging, we are now beginning to reap the benefits of the advanced system. We have also greatly expanded our distribution facility in Memphis with total headcount rapidly approaching 100 shareholders.

I will now briefly discuss a couple of other current issues before I turn the call over to Kevin for a financial review. First, the Medtronic litigation. We are still expecting up to $5 million in litigation expense for 2009 related to the Medtronic action. We remain confident in our patent position. We will keep you posted, but we have no updates to provide at this time. On a macroeconomic perspective, we have not seen a slow down in our core business as those that undergo implant related spine surgery will attest that it truly is not an elective procedure. We are prepared and continue to ready or ourselves for changes in the health care landscape with a greater emphasis towards patient outcomes and the economic impact of surgical technologies. We believe we are uniquely positioned to take advantage of this cost sensitive focus as our X-lift procedure provides unmatched patient outcomes while simultaneously lowering cost to hospitals, insurers and the entire system. To further demonstrate this to the health care community, we are undertaking further studies to document the economic efficacy of the X-lift procedure to improve our ability to communicate these benefits.

On the compliance front, we expect the government and medical societies to adopt stricter policy related to disclosure of surgeon relationships. We will continue to acquire innovative ideas and intellectual property from physicians we will continue to work closely with surgeons to procter and teach our innovative technologies, all within the balance that have been determined by the government and industry groups. We believe doctors are crucial for driving innovation in the spine market and helping companies like NuVasive to develop products that deliver outstanding patient outcomes. The added clarity likely to come from increased government regulation will help ensure consistent compliance for our industry. Now, I would like to turn the call over to Kevin for a detailed review of our financial results and updated guidance.

Thank you Alex. Our revenue for the fourth quarter 2008 was $74.6 million, 58.9% increase over fourth quarter 2007 and an 11.5% increase over Q3 2008. Osteocel saw revenue for the fourth quarter was $5.6 million, and $10 million for the year, ahead of our $9 million estimate. Excluding Osteocel revenue, the fourth quarter was a 46.7% increase over Q4 2007 and a 10% increase over Q3 2008. International revenue remained on target with the 2% to 3% revenue contribution that we guided to for 2008. Gross margin for the fourth quarter was 82% compared to gross margin in Q4 2007 of 82.9%, and gross margin in Q3 2008 of 81.8%. The lower gross margin in the third and fourth quarters primarily reflects the lower margin sales of Osteocel through preexisting distribution agreements. Our Q4 2008 GAAP net income was $3.7 million or on an earnings per share basis, $0.10. For the full year, our GAAP net loss was $27.5 million, or a loss per share of $0,77.

For the year, excluding charges for in process R&D expenses related to vacating our previous corporate headquarters, transitional support costs for the company's ERP system and IP litigation, our 2008 earnings per share was $0.10, exceeding our previous guidance of $0.07 to $0.09. Please reference the table in the press release for more detail. The GAAP -- the fourth quarter GAAP net income of $3.7 million demonstrates the ability of the company to leverage our top line growth to generate earnings and cash flow. However, we believe that in order to compete for the number four globally ranked spine company on a market share basis, we need to make strategic investments such as clinical trials and taking advantage of opportunistic acquisitions. We will continue to maintain a strategic approach to the industry as we drive to achieve $500 million and then on to $1 billion in revenues. It's important to note that we remain confident in achieving a 20% non-GAAP operating margin commensurate with $500 million in revenues.

Operating expenses for Q4 2008 totaled $57 million compared to $41.2 million in Q4 2007 and $77.7 million in Q3 2008. The decrease in operating expenses in the fourth quarter from the third is the due to having no in process research and development cost, no one time leasehold charge related to vacating the company's previous corporate head quarters and lower transitional support cost for the company's ERP system. Our legal expense related to the Medtronic lawsuit in the fourth quarter was $1 million, for the year $1.5 million, which was in line with our guidance.

For 2009, we are estimating the cost of our defense to be $5 million. R&D expenses, excluding stock based compensation for the fourth quarter, totaled $5.2 million versus $5.5 million in the third quarter. The decrease in R&D spends from the third quarter was principally due to completion of enrollment in the Neodisc trial in Q3. Excluding stock based comp, R&D as a percentage of revenues for Q4 2008 came in at 7%, versus Q3 2008 at 8.2%. Sales, marketing and administrative expenses, excluding stock based comp and other adjustments for the fourth quarter, totaled $43.9 million versus $42.1 million in the third quarter. Excluding stock based comp and other adjustments, the percent of revenue was 59% for Q3 2008 at 62.9%. The decrease in the percent of revenue from 62.9% to 59% was related to timing of sales and marketing initiatives. The interest and other expense costs for the quarter were $432,000. This reflects a continued downward trend in yields on our cash investments due to market conditions.

With $223 million in cash and investments, our primary focus has been and will be going forward safety of principal as a result of the majority of our invested cash is in securities backed by the US government. The stock based compensation charge for the quarter of $5.2 million was recorded in our operating expenses and allocated as $1 million in research and development with a balance of $4.2 million in sales, marketing and administrative expenses. We have positive cash flow in the quarter of $1.7 million. Our inventory position was $68.8 million at the end of Q4 or 23.1% of annualized fourth quarter revenue. As we have commented in the past, we expect our inventory to sales ratio to average between 20% to 25%, which may spike in the quarter depending on how many and what types of products are launched. Day sales outstanding, or DSOs were 63 days in Q4 2008 compared to 60 days in Q3 2008. The increase in DSOs can be largely attributed to hospitals extending their payments.

I would now like to turn to review of our 2009 financial guidance. For the full year 2009, we are maintaining our revenue guidance range of $345 million to $350 million, which is approximately 40% growth. As previously guided, we expect Q1 2009 to be sequentially flat at approximately $75 million as we transition the Osteocel product to our exclusive sales force. Importantly, we expect our core MAS business to continue to ramp in the first quarter with sequential growth from fourth quarter 2008. Our 2009 revenue guidance includes a contribution from Osteocel of $28 million for the full year with minimal contribution in Q1 and ramping in the second half of the year. International sales should be in the range of $13 million to $15 million for the year.

Now I would like to give more detail on our Q1 and full year 2009 guidance. Gross margins should be in the 81% to 82% for both the first quarter and the full year. Excluding stock based compensation, research and development expenses, as a percent of revenue should be 11% for both a first quarter and the full year. Excluding stock based compensation and amortization of intangible assets, sales, marketing and administrative expenses should be 67% for the first quarter and 58% to 59% for the full year. Stock based compensation should be $7.4 million for the first quarter and approximately $27 million for the full year, with 20% allocated to R&D and 80% allocated to sales, marketing and administrative. Amortization of intangible assets should be approximately $1.3 million for the first quarter and $5 million for the full year. Interest and other expense should be approximately $1.3 million for the first quarter and $5 million for the full year.

Now I would like to give insight in to the trend of our operating expenses in 2009. Our operating expense trends for 2009 take into account full year revenue of $345 million to $350 million, and we are spending to reach those goals. Similar to prior years, we expect revenue to grow significantly through the year while fixed expenses should be more consistent from quarter to quarter. As a result, we expect our first quarter to have a significantly lower non-GAAP operating margin than the full year. This is true across all business lines and is particularly pronounced in biologics with expenses from marketing and clinical studies coming in advantage of their revenue ramp. Also coming in 2009 is the lateral lumbar total disk replacement IDE trial and the continued commitment to developing our MAS platform. As our revenue increases throughout the year, we should experience strong leveraging of our sales, marketing and administrative expenses, thus driving more earnings to the bottom line in the second half of the year, which is similar to our 2008 trends.

First quarter 2009 loss per share of guidance loss of a loss of $0.21 to $0.19 and a full year earnings per share guidance of $0.02 to $0.04. This range excludes IP litigation expenses and acquisition costs related to the Progentix transaction. Our non-GAAP earnings, which excludes IP litigation, acquisition related costs, stock based comp and amortization of intangible assets should be in the range of $0.01 to $0.03 earnings per share for the first quarter and $0.83 to $0.85 for the full year. As Alex described, we plan to take advantage of current market conditions and invest aggressively in our business in 2009 to expand our market position and advance our technological leadership. Our most significant investments are the XLTDR study which could cost more than $15 million, our international expansion plan is a break even strategy for the next several years. Our cost of build scientific evidence documenting the efficacy of our biologics platform and continued investment in our product pipeline. These are important investments and will help cement our position as a dominant spine company. Now I would like to turn the call back over to Alex for closing commentary.

Thanks Kevin. Overall, we are very pleased with our 2008 results. We believe that our planned extensive product launches, along with our expanding pipeline in biologics and motion preservation will keep our product offering ahead of the competition for years to come. We remain well positioned to continue strategically expanding our geographic footprint both in the United States and abroad leveraging our innovative lateral approach enhanced corporate infrastructure and unique culture of absolute responsiveness to continue to take market share. Together, we believe that these initiatives strongly support our drive towards our interim sales goal of $500 million, combined with growing profitability and will accelerate us towards the goal of $1 billion in revenue and becoming the number four spine company. All of this will be accomplished by adhering to our core values of absolute responsiveness, outstanding customer service, pioneering technological advances and (inaudible) speed. These are the things that differentiate us from the competition. We will now be willing to answer your questions.

Thank you. (Operator instructions). Our first question comes from the line of Taylor Harris with JPMorgan Chase and Company. Please proceed with your question.

Thanks a lot. Alex, I wanted to start with some of your comments on the macroenvironment and first of all, maybe talk to us about if what you are seeing -- if the comments you made relate just to your business or what you are hearing more broadly in the spine industry. And then, you also made a number of comments through the call about how you think now is a particularly good time to be investing, to be spending ahead of growth. Are you seeing anything from the competitors in terms of reduced investment that you think makes now a particularly good time from a competitive perspective?

Well, I think there is a couple of things. I was talking really about spine specifically. I think spine has been the least effected, if anything. As you all know, maybe it's down 1%, but it's growing at at least a 10% rate. So I think all those things are positive. For u,s obviously it's is ability to take market share right now very effectively, and so the reason that we look at it right now is that this a great time to be putting on the gas pedal because we are so effective with our technology so effective in terms of our ability to penetrate markets that we are going to do everything we can to push forward on resources and take advantage of perhaps some of the other companies that are either more cash constrained, perhaps have other limitations with regard to larger owners from a corporate standpoint than we do.

Our next question comes from the line of Mark Hopkins with Banc of America Securities, please proceed with your question.

Hi, thanks, can you hear me okay?

Yes.

So I might have missed this, I apologize, but in your non-GAAP earnings guidance for 2009, are you assuming that you pay any taxes?

No.

Okay. And are you -- what exactly, Kevin, are you assuming in terms of interest or other expense or revenue for 2009?

The -- what used to be interest income for us in prior years has now moved to interest expense position in 2009. We are anticipating a $5 million interest charge because our effective yield on our cash is now below the coupon rate of the convertible debt, which is really or creates that interest expense position.

Okay. So that I think is the difference between what I was modeling '09, what you are -- then one little question on the pricing front. Sort of dovetailing from what Taylor was asking about, understand you are not seeing anything on the unit side and given these very strong numbers, it looks like the market may be even growing a little bit in excess of 10% in the fourth quarter, so very healthy market right now. But are you seeing any signs of any incremental pushback on pricing of product in recent weeks or months in light of all the general pressures that everyone is well aware of?

Nothing any different than we have seen over the last year or even 18 months, it's really been very consistent. There's nothing new that's happened as of the last several months that I would say is tied to the market or to the economic conditions.

Okay. Great, thanks guys, appreciate it.

Thank you, Bob.

Our next question comes from the line of Matt Miksic with Piper Jaffray, please proceed with your question.

Hi, thanks for taking the question. Can you hear me okay?

Yes.

Just a couple of questions on the EPS impact and then just -- I also wanted to -- you talked a little bit about your sales strategy, maybe ask a follow up there. But on the P&L, I think I understand the $5 million net interest expense which is higher than we were modeling, I think higher than most people were modeling, what are the other items? You talk about $0.03 solution in Progentix in Q1 related to -- or acquisition related charges. You also mentioned the investments in R&D increasing due to clinical trials. If you could give us an idea of maybe what some of other items are, maybe put some dollar round numbers around what those incremental investments are that that you are making in 2009 and how we think about that dropping through the P&L, that would be very helpful.

Matt, what we are talking about XLTDR, we talked about that. Biologics investing around Osteocel and certainly Progentix as well as the ongoing R&D pipeline where we plan on introducing 15 new products or product extensions. That is certainly there. We talked about Progentix, the Progentix number of really $0.03 in the first quarter has to do with the new accounting rules where you have to expense the deal cost to get the deal done, whether it be legal, accounting and other due diligence costs and now expensed where before they were part of the opening balance sheet, if you will. So that's a new item for everyone and certainly one for us in the first quarter with the acquisition or the investment in Progentix. The other piece was stock based compensation is certainly higher in 2009 over 2008 levels, so with that, in the percent guidance we gave for the different departments, I think you should be able to model the company along with line with our effective guidance.

And on the sales territories and the expansion you are planning for 2009, I remember you talking about sort of a stratified approach for your sales force, where maybe less hunters and more sort of case coverage or farmer type reps rather than having everybody out there just hitting it as they were the last two couple of years. Is that something that comes in to play in 2009, does it come into play in 2010? And maybe as part of that, is there any opportunity as we go out to 2010 and beyond to start reigning in some of the stock based comp as a percent of sales going forward?

I'm from New York I don't know much about farming, so I'm a pretty aggressive guy. I don't think it would have been me that said that. I think -- I'm not sure exactly what you are thinking Matt, but my guess is we talked -- I don't think it was last year, I think it was the year before, we talked about the need for having coverage reps, and what we were doing was adding coverage reps which were less expensive in order to round out the ability for a representative to be more affective. A coverage rep, though, does not carry a quota. Every organization has coverage reps. I'm not sure if I'm getting at what you are saying, but anyway, what we are planning to do -- when we talk about adding reps and we talk about adding quota carrying reps, they are hunters. When we are talking about management and we are talking about sales support, that would include, in some cases, what you are calling farmers.

That does get to my question. And then on the stock based comp side, any thoughts? It's been 8%-ish of revenues for '08 and it looks like it will be again in '09. Is that a number that we assume goes on in perpetuity, or is it possible to bring that in a little on the out years.

That's certainly possible in the out years.

Okay. Thank you for taking the questions.

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

Good afternoon. I guess I will ask the same question, can you hear me, because we are all sitting here on the floor,.

We're good, Ben.

Alright, thanks. Two questions, first, if you look at the different studies that you're doing on X-lift, what kind of time frame are you thinking about in trial design? Are these going to be more registry like, or can these be randomized in some form to really get class one level evidence to use in the field?

Ben, are you referring to the comments in the script on how we are trying to map out new data on economics?

Yes, basically. Clearly the whole world is suddenly now more focused on comparative clinical effectiveness, it's good that you guys are going down that path. So really kind of a time frame, Keith, of when we might see some data coming out and what of trial design you are looking at.

Sure. Well what we are working on is this is being done through the SOLAS organization, and the idea is that we are going to be looking at retrospectively data across the board for a number of clinicians and try to really get a very good comparison of what the economic landscape looks like across from -- sampling across the country. Obviously, you can't be doing this from an individual site and really trying to capture what those up ticks are from shorter stay, quicker surgery, quicker recovery, all the things that we've talked about for a number of years. And we do think that there is a very powerful set of data that is out there that can capture this.

Okay, so it's primarily an economic focus as opposed to necessarily doing more comparative clinical work.

That's right.

Okay, and then --

It can be a combination of both though, Ben. There is also other items that are going on throughout the course of the year, even into -- could be done next year that will further substantiate and validate X-lift not only in the lumbar spine, but also as it climbs up into the thoracic spine. It's more than a one -- it's a multi-pronged approach.

It's something that we're going to keep going with, so as we start this approach, we want to keep this going in to a whole series of different studies, so our intent is to the get this first study that Keith talked about done in '09 so we have that ready for '10 and that we have further studies ready for '10 and beyond as we feel that we may be appropriately armed to need them.

Okay. And then you talked about the need to invest in additional acquisitions to really position yourselves for longer term growth on top of the things you have already done plus the internal development. Talk about maybe some of the areas of focus. Obviously trauma is one opportunities, but are there other more niche applications within cervical or lumbar, say in L5 S1 where you are focused on trying to do something there as well.

Our business focus now is cash preservation for obvious reasons. We gotten a number of things done, we spent a lot of money on integration, so we feel we have what we need to grow our business this year. At the same time, we got our eyes open. We are looking at BBR, we are looking at all the things you mentioned, but I wouldn't narrow it down to just one thing.

Okay. Great. Then maybe last question for Kevin, gross margins assumptions on Osteocel a little bit better this quarter. What are you baking in for 2009?

The gross margins assumptions for Osteocel should be in the low 60s on average, Ben. Now that we are not through -- selling through another distributor, so we're comfortable in the low 60s, Ben.

Great, thank you.

Welcome.

Our next question comes from the line of Raj Denhoy with Thomas Weisel Partners, please proceed with your question.

Hi, good evening guys. Wondering if I could ask a little about the early experience you had with Osteocel. I think you mentioned that you are pretty pleased with what you're seeing so far, and I'm curious, where are you seeing the up tick? Are you seeing it with with existing users that are now come over to you now that you are selling it? Are you seeing it with your current base of surgeons or just really, where is the receptivity right now?

We're getting good diversity with it. Actually, you have to keep in mind we are in a lot of surgeries, especially with X-lift. (inaudible) point for use with the complimentary lumbar technology that we have. There's a great deal of effort that's being done by the sales force for a lot of new expansion.

So when you say new expansion, is that into --

-- into our existing customer base.

Okay, so that's primarily where you are seeing the up tick at this point? My second question was just on the macroenvironment, I'm curious about the visibility you might see into that. How far out can you see when you talk to your clinicians here about their ability to predict whether they are seeing slowing in their business or not?

That's really hard to say. I think that's anywhere from 6 months to a year. I've answered the question this way several times as I said at the outset, I know that our ability to take market share, our technology has got so many attributes to it it will allow us to hit our numbers into very well next year. We've got -- who the heck know what is is happening? But I think it's hard for the clinicians to see much further than that. But we keep hearing consistently, and ask them every day they are here. They are here Friday again, they keep saying the exact same thing, that they are completely backed up, that they have never been busier, so it's very consistent. Nothing seems to be changing, so.

Maybe just (inaudible) to that, when you look at the guidance you given for the core product going into the low 30% range, when you gave that guidance, did you include any conservatism for what might develop in the economy?

No.

You didn't, okay, thank you.

We are going to take just one more question. So I don't think if we have questions left, but we've just got time for one more question.

Our last question comes from the line of David Roman with Morgan Stanley. Please proceed with your question.

Can you hear me okay?

Yes.

Thank you. Just Kevin, could you clarify the $1.7 million of positive cash flow, is that for the quarter or the year?

Quarter.

And can you give us some sense as to what we can expect next -- 2009 in terms of cash flow?

I think cash flow before any payments for obligations we have with Osteocel in 2009 would be about a $20 million positive cash flow effect.

But it's sort of operating cash flow less CapEx?

That's right, and from there we have the opportunity to do cash or stock with milestones and when we get to those, we will make the determination of what makes more sense.

Okay, and then lastly in terms of development timelines on NeoDisc or the XLTDR, it sounds like XLTDR, the trial would begin starting rolling this year. When is the next milestone on NeoDisc that we should be looking for?

You're still -- the next milestone for us is we are still in follow up phase, so we are going to be getting through -- we have to get through our two year data point and from the two year data point the compiling the data and then for submission. So you are still looking at well past somewhere in the order of 18 months, something in that time frame.

Then lastly, there are a number, I believe two of your competitors who plan to come to market with a lateral approach this year, could you give us some sense as to a measure you are taking to either proactively address that potential competition or what you sort of factored in to your thinking for 2000?

Sure. The thinking hasn't changed. It's about safety, reproducibility and it's about the complimentary technology that goes along with just the excellent implant. And when you talk about X-lift, I know the thought is about the implantation, but it's a much more comprehensive portfolio. Most important to that portfolio, of course, is safe neural access and the ability to get down to the SOLAS and certainly the publications that are out there, the, podium presentations, the success rates that are out there indicate very clearly that the only way to safely do this sort of surgery is to be doing it with NeuroVision or new NeuroVision, which we call now M5.

I will put it to you this way. Ask a surgeon whether or not he would have an X-lift done or he would have somebody else's procedure done. And I'm not trying to be a (expletive) because of obviously my own situation, but that will be your answer, and it's no different than what is happening , Right now there is quite a few stars and professional athletes that are having the procedures, and we are not at liberty to say who they are, but there is nobody right now that's willing to sign up for any other approach for all the reasons that Keith just

Okay. Great. Thank you very much.

Okay, you're welcome, thanks. We will talk to you guys in April.

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