NuVasive Inc (NUVA) 2009 Q2 法說會逐字稿

Greetings, and welcome to the NuVasive, Inc. second quarter 2009 earnings conference call.

(Operator instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Patrick Williams, Vice President of Finance and Investor Relations for NuVasive, Inc.

Thank you, Mr. Williams. You may begin.

Thanks, operator.

Welcome to NuVasive's second quarter 2009 earnings conference call. NuVasive senior management 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.

Today's second quarter results confirmed our XLIF approach to spine fusion has improved the safety and reproducibility of spine surgery, as evidenced by the growing number of surgeons performing the procedure. In the hands of our elite sales force, the superiority of XLIF and our complementary product lines gives us an unparalleled advantage and enables us to take market share. We continue to broaden our offering with innovative solutions in cervical, thoracic and lumbar spine, as well as biologics and motion preservation, to position our spine company as best in class. As we advance adoption and utilization of both the XLIF procedure and our entire product offering, we anticipate generating increasing levels of profitability and becoming the number four global spine company in the world.

And once again our quarterly profitability and revenue results validate continued progress towards our goal of $500 million in revenue in conjunction with a 20% non-GAAP operating margin. Revenue in the second quarter increased over 50% year over year, to $88.5 million. We achieved earnings per share on a GAAP basis of $0.07, and, excluding intellectual property litigation and acquisition-related costs, earnings per share of $0.11.

To reflect our results in the quarter with our 2009 outlook, we are raising revenue guidance by $5 million, which means $360 million to $365 million for the year. With Osteocel Plus on track, revenue from our total biologics portfolio in the first half of 2009 was approximately $20 million, and we expect the full-year contribution from our total biologics portfolio to approximate $45 million to $50 million.

We continue to observe a healthy environment for our innovative approach to spine fusion. Positive feedback from both new and existing spine surgeon customers via our weekly MVP training program gives us confidence that overall spine market growth will continue to be roughly 10%. As we execute on our share-taking strategy, we envision growing revenue in the 30% to 35% range next year despite difficult macroeconomic conditions and outlook.

We remain focused on a company-wide effort to support our plan to become the number four global spine company. We have made numerous infrastructure investments, including an enterprise-wide resource planning software system and a significant expansion of our physical facilities in San Diego, Memphis, London, Germany and Australia. Offices in New York, Singapore and Japan are planned to open over the next 12 months. We continue to invest in the areas of our business that will drive NuVasive to $500 million and on to $1 billion.

Perhaps our most significant investment over the years, and our most vital source of growth going forward, will be the continual development of our worldwide exclusive sales force. We ended the quarter with 250 quota-carrying sales representatives, and we are on pace to end the year with 275 to 300 representatives globally. We are deepening our presence in under-penetrated geographies and adding new territories in the US. Internationally, we have just begun to build a direct sales presence, which we expect will have a meaningful impact in 2011. And, more importantly, as our sales force matures, productivity is continuously improving.

We are also solidifying our position as the most innovative company in spine by investing in studies that will further substantiate the clinical and cost-effectiveness of our expanding technologies to drive deeper adoption. Studies for our Osteocel Plus biologic in both the lumbar and cervical spine are underway, with data expected in late 2010. We are complementing our cervical offering with the newly acquired Cervitech PCM total disc replacement, and we should be on track to file for PMA approval in the first quarter of 2010. As for our lateral XL TDR clinical study, it will be fully underway in the second half of this year. We are committed to continuously evolving our product portfolio with both new solutions and improvements to existing offerings.

A key outcome of our intense R&D effort is our goal to launch over 10 new products and line extensions every year. We will expand our reach in the scoliosis market with the introduction of a fixation system designed exclusively for idiopathic scoliosis. Adult degenerative scoliosis is also an underdeveloped area, and we believe XLIF is a superior option for patient care. Additionally, we are launching a new fixation system and our first vertebral body replacement device designed specifically for the tumor/trauma market. Furthermore, we have added options to the MaXcess retractor in order to more elegantly accommodate surgeries in the thoracic spine.

These new products, along with a low-profile pedicle screw, a lateral thoracic plate, application-specific XLIF implants for revision surgery, as well as the new NeuroVision M5 capabilities are evidence of our broadening product suite which enables our sales force to compete for large accounts and to take market share. Many of our new products will debut at NASS in San Francisco this November. Overall, these investments into product development, clinical effectiveness studies and infrastructure are vital to the future growth of our business.

Even with the increased investments necessary to sustain our growth, we expect further improvements in our profitability as revenue grows. Gross margins will approximate 80% as improvements related to scale will likely be offset by international and biologics becoming larger parts of our revenue mix. The majority of profitability expansion will come from SM&A as we leverage our infrastructure and increase the productivity of NuVasive's exclusive sales representatives.

Turning to the landscape in Washington, although we cannot be certain what healthcare reform will mean for our sector, we believe the free market will continue to reward both innovation and solutions that reduce healthcare costs while improving patient outcomes. Accordingly, NuVasive is well positioned for any changes. Whether comparative effectiveness refers to clinical effectiveness or cost effectiveness, our XLIF approach to spine fusion is a standout. That in mind, we are conducting economically oriented comparative effectiveness studies for XLIF to further quantify our excellent outcomes across the United States.

To put spine fusion surgery into further context, in the US alone 5 million people suffer from chronic back pain, but only 300,000 obtain pain relief via lumbar fusion surgery annually. Surgery for this patient population is not elective, because of problems such as neurological deficit, mechanical instability and disabling back and leg pain. We are focused on treating this patient population with our unique XLIF technology to relieve symptoms and restore normal activity. As a two-level XLIF patient myself, I can vouch for both the preoperative severity of the pain and the urgency of surgical treatment. I can also confirm that my symptoms remain fully resolved at 16 months postoperative and that I have virtually no restrictions of my activities.

With respect to recent deal activity, integration is going well. In the first half of 2009 we finalized the Cervitech acquisition, solidified manufacturing for our Osteocel Plus biologic and made a strategic biologic investment into Progentix. At this point, we are pleased with our suite of products and do not envision further large-scale M&A, though we remain open to complementary technology-related opportunities that would leverage our sales network.

We continue to work on establishing a footprint internationally. The implant market outside the US is very attractive, estimated to be a $1.5 billion opportunity growing 8% to 12% annually. Our approach is both disciplined and measured in that we enter a new market with strategic, experienced local hires and build infrastructure platforms in each country. We continue to view our growth plan for the international business as a break-even one, with sales outside the US to be about 2% to 3% of total revenues this year, growing toward 10% to 15% as we approach $1 billion in revenues.

Let me quickly give an update on the Medtronic litigation before I turn it over to Kevin for a detailed review of the financial results and guidance. The litigation is still in the early phases, and Medtronic has already withdrawn three of the patents under dispute, leaving the total number at nine versus 12 patents. During the quarter we filed countersuits against Medtronic related to their neuromonitoring product along with its use in conjunction with the lateral approach and their retractor system. We will not seek a settlement in this litigation and will aggressively use all defensive and offensive measures available to us. In the first half of '09, we spent $2.6 million, and we continue to expect $5 million in litigation expenses for the full year.

Now I would like to turn it over to Kevin O'Boyle.

Thank you, Alex, and good afternoon, everyone. Our revenue for the second quarter 2009 was $88.5 million. This represents a 54.1% increase over Q2 2008 and a 10.6% increase over Q1 2009. Our strong revenue results this quarter demonstrate the Company's continued ability to take market share. Gross margin in the second quarter was 81.1%, compared to 83.3% in Q2 2008 and 81.5% in Q1 2009. The change year over year and sequentially is primarily driven by revenue mix from both biologics and international.

Our Q2 2009 GAAP net earnings were $2.8 million, or earnings per share of $0.07. Excluding intellectual property litigation expenses of $1 million and acquisition-related expenses of $560,000, our second quarter earnings were approximately $4.3 million, or earnings per share of $0.11. Please reference the table in today's press release for more detail. The strong earnings result in the second quarter is related to higher revenue, the leveraging of our sales, marketing and administrative expense base, and timing of research and development spending.

Operating expenses for Q2 2009 totaled $67.3 million, compared to $48.5 million in Q2 2008 and $68.7 million in Q1 2009. The decrease in operating expenses in Q2 from Q1 2009 is primarily due to lower intellectual property litigation and lower acquisition-related costs. As a reminder, new accounting rules require acquisition costs to be expensed in the period they are incurred.

Our legal expense related to Medtronic lawsuit in the second quarter was $1 million, and we remain on track with our previous guidance of $5 million for the full year.

Research and development expenses, excluding stock-based comp and intellectual property litigation, totaled $7.1 million for both Q1 and Q2 2009, representing 8.1% of revenues, versus Q1 2009 at 8.9%.

We continued to invest in clinical data studies designed to further establish our technology and support new product development. In the second quarter, we had anticipated higher spending related to clinical studies and development activities, resulting in approximately $2.5 million of expense shifting into the balance of the year.

Sales, marketing and administrative expenses for the second quarter, excluding stock-based comp, amortization of intangibles and acquisition-related costs, totaled $51 million, versus $50 million in Q1 2009. The increase in the sales, marketing and administrative expenses was commensurate with commissions on higher revenues as well as increased spending behind our international expansion. Excluding stock-based compensation and the adjustments mentioned earlier, the percent of revenue was 57.6%, versus Q1 2009 at 62.5%, reflecting our ability to lever sales, marketing and administrative expenses.

Stock-based compensation expense for the quarter of $6.3 million was recorded in our operating expenses and allocated as $5.2 million in sales, marketing and administrative, with the balance of $1.1 million in research and development.

The interest and other expense for the quarter was $2.1 million. This reflects a continued trend of low yields on our cash investments.

Operating cash flow in the second quarter was $2.9 million, and in the first half of 2009 operating cash flow was $7.6 million. With $181 million in cash and investments, our primary focus has been and will continue to be safety of principal. As a result, the majority of our invested cash is in securities backed by the US government. We now expect to close the year with a solid cash position between $170 million and $180 million, taking into account expected milestone payments to Osiris and the investment in Progentix.

As a reminder, included in the other expense total is an item titled "Net loss attributed to non-controlling interest." As a result of our investment in Progentix, we are now consolidating the entire expense in research and development. However, the net loss representing the 60% we do not own is backed out in the line titled "Net loss attributable to non-controlling interest."

At the end of the second quarter 2009, our inventory position was $87.1 million, or 24.6% of annualized second quarter revenue, down from 25.7% last quarter. We continue to expect to end the year with our targeted range of 20% to 25%. Days sales outstanding, or DSOs, were 53 days in the quarter, down from 59 days in Q1 2009.

Turning to guidance, for the full year 2009 we are increasing our revenue guidance range to $360 million to $365 million, from $350 million to $360 million. We are also increasing our full-year GAAP earnings per share guidance to $0.06 to $0.08, from our previous guidance for a loss per share of $0.07 to $0.05. Excluding intellectual property litigation and acquisition-related costs, we are increasing our earnings per share guidance to $0.25 to $0.27, from $0.11 to $0.13.

Gross margin guidance for the year will approximate 81%, given the revenue contributions for both biologics and our international markets. We now expect research and development expenses, excluding stock-based comp and intellectual property expense, to approximate 11% of revenues for the full year. This reflects the timing of clinical trial costs shifting into the second half of the year.

For the full year we expect sales, marketing and administrative expenses, excluding stock-based comp, amortization of intangibles and acquisition-related costs, to approximate 57% to 58%. We expect continual improvement going forward as we leverage our infrastructure and increase the productivity of NuVasive's exclusive sales representatives. We expect stock-based compensation for the full year to be $25 million, versus our previous guidance of $27 million. The allocation remains at 20% to research and development and 80% to sales, marketing and administrative. Our expectation for the amortization of intangible assets and interest and other expense remains unchanged at $5 million each.

We will continue to drive towards the attainment of $500 million in revenues in conjunction with a 20% non-GAAP operating margin. Our results in 2009 have demonstrated that we are on track to achieve this goal.

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

We are very pleased with our financial performance in the second quarter of 2009 in terms of both revenue and earnings. With today's results, we have consistently met or exceeded expectations in all of our 21 quarters as a public company. Our XLIF approach to spine fusion is an extraordinary competitive advantage that offers better reproducible outcomes for both patients and surgeons. The product launches we have planned and the clinical studies underway will enable us to continue to generate an overwhelming majority of total revenue organically.

Our differentiated product positions us as a premier spine company, with novel solutions for fusion, biologics and motion preservation. As we execute upon our financial growth goals, we are intensely focused on fostering a dynamic culture that differentiates NuVasive and grants us the speed and innovation to stay years ahead of the competition. We are committed to hiring only A players with outstanding performance standards that will facilitate the achievement of our objectives. We intend to become the number four global spine company by adhering to our core values of absolute responsiveness, outstanding customer service and cheetah speed. As we like to say at NUVA, onward and upward.

We will now take your questions.

Thank you.

(Operator instructions)

Our first question comes from the line of Taylor Harris, with JPMorgan Chase & Co. Your line is open. You may proceed with your question.

Thanks a lot. Alex, I appreciated your comments on growth targets for 2010, and I wanted to ask you, I think you mentioned 30% to 35% overall growth, I assume biologics and international are going to be growing perhaps faster than that, so what's your US hardware growth target that you would need to be able to hit in order to be in that 30% to 35% overall range?

Well, at this point in time we're not prepared to start to segment things for next year. What I'm trying to do is to give a sense of how we see our ability to take market share going into next year. So that's a total number, obviously total company performance. And what we're talking about is just simply given the overall market conditions, we see ourselves still being in a very strong position as we move into 2010. So I'm not prepared to go into any sort of differentiation or segmentation. We'll talk about that in about nine months.

Okay, very good. Maybe just a clarification on this year's guidance -- I think you said international at 2% to 3% of sales, which would imply call it $7 million to $11 million of international sales. That's lower than what you had talked about previously. So maybe just comment on what's going on in international. And then you're making up for that, obviously, in the US business. Is it more on the biologics side, the core XLIF side? Just talk to us about that.

Sure. As far as OUS is concerned, what we're doing is making sure that we have the right infrastructure. It's taken us a little bit longer to get some of the key players that we'd like to have involved with our company. We're pretty much just wrapping all of those up, and they should be in very good shape by the end of the summer. So, as a result of that, what we're doing is investing more time as well as money into infrastructure so that we have what we believe will be a stronger 2010 relative to OUS and then stay on track for where we want it to be in 2011.

Okay. Last question, on biologics, you mentioned $45 million to $50 million for the entire platform. Does that assume Osteocel above the $30 million level, or is the upside coming from FormaGraft?

Potentially it does. We see FormaGraft being cannibalized a little bit, which is what we anticipated might happen. So Osteocel right now in terms of our modeling is still about $30 million. But we anticipate that there might be some movement relative to cannibalizing FormaGraft.

Okay. Thanks a lot, you guys.

You're welcome.

Thank you. Our next question comes from the line of Bob Hopkins, with Bank of America. You may proceed with your question.

Hi. Thanks very much. First question is, did you disclose the Osteocel revenue for the quarter?

No.

And are you going to do that?

I can answer your question, if that's a -- sounds like a form of a question.

Yes, sorry, guys.

It's final jeopardy. That's okay if that's your question. Just teasing. It would be approximately $8 million in Osteocel this quarter, $5 million in the first quarter. What I'd like to do, though, is I'd like to, as we're moving forward, focus us on our bigger biologics number, so it's a $45 million to $50 million on the year, and so we'll talk more about that. I think what we wanted to communicate is that we're on track relative to deal expectations, which was towards $30 million, which, as you know, was ratcheted up from the original deal terms, or at least deal expectations. So that's how we're going to do it moving forward.

Okay. So, then, excluding Osteocel growth in the core underlying business, would that still equate to roughly 40%?

Yes.

Okay. And then just a question on the guidance, I think you clarified some of this in the call, but I just wanted to make sure I have it specifically. Obviously, relative to the $0.31 on a non-GAAP basis that you put up this quarter, you're suggesting that in the third and fourth quarter it will go down from that $0.31. Part of that is the switch in timing on the R&D spend, that $2.5 million that you mentioned. Is there anything else from a spending perspective that will hit in the back half that would cause earnings to decelerate from that $0.31 in Q3 and Q4?

No, it is the timing of R&D from Q2 of the $2.5 million into the second half of the year. And then the other part is we talked about gross margins for the year equaling 81%. So it's a combination of both.

So then in that new -- that guidance of $1.03 to $1.05, what's the non-GAAP operating margin that drives that $1.03 to $1.05?

I think it's -- I believe it's like 12.5% to 12.7%, right in that range.

Okay, and then last quick one from me is just on tax. Now that you're on a GAAP basis, profitable, Kevin, how should we think about when you will have to start paying taxes and what that tax rate might look like? Thanks.

Yes, the tax for us, we have a, as you know, a very large NOL. We have about a $190 million NOL, for which we'll be applying through the, obviously, the next couple of years. The material tax number really starts in 2012, and maybe in the back half of '11 we may start looking at a tax rate all in at probably close to 40%, which is the statutory rate between California, effectively, and federal.

Great. Thanks very much.

Thank you. Our next question comes from the line of Matt Miksic, with Piper Jaffray. Your line is open. You may proceed.

Hey, good evening. Thanks for taking our questions.

Sure.

So, question on the biologics. You talk about your biologics portfolio, Alex, so that is just Osteocel and FormaGraft, or is there anything else in there?

There's a little bit of allograft in the grand total for the year, but it's a very small number.

Okay. So, but those three things together, we should be able to get to $20 million for the quarter? Is that right, or no?

No, $20 million is through the first half of the year, grand total. And then on the year, $45 million to $50 million grand total. And, as I said, I think that the Osteocel component will be no less than $30 million, potentially a little bit of cannibalization of FormaGraft.

Okay. Yes, that was a first half comment I didn't hear. That wasn't making sense. So as we look at the end of the year, and I know you don't want to get too specific on Osteocel going forward, but if we think about where that's tracking as we leave the year, I mean, is it safe to think about sort of a '10, '11-ish kind of $1 million quarter run rate as we turn into next year? Is that sort of a fair way to model the business going forward, at least from where it is right now?

I think you just have to simply look at the $45 million to $50 million number, and then we're going to grow that commensurate with our overall growth rate as we move into 2010. So our objective is no different than it was before, which is to get that to $100 million over the next couple of years or so, and so that's what we're tracking towards.

Okay, so 30% to 35% growth for 2010 in Osteocel, is that fair?

Across the Company, yes, and we'll differentiate further as we get to giving guidance for 2010.

Terrific. That's very helpful. I'm not trying to back you into giving guidance now, but it's helpful to get an idea. So, another question on, you mentioned these offices that you're opening, and you've talked about them before, in New York and elsewhere. Can you maybe talk a little bit about what that's going to add in terms of driver? How does that help you sort of springboard your business, if that's what it does, or what do those new offices add?

Well, so, as we talk about New York, which will probably be northern New Jersey, we're just finalizing all of that right now, but what that does is it opens a mini NuVasive out on the East Coast, meaning it would have full capability as we continue to grow that. So what it gives us out of the chute is it gives us the ability to do MVP training from there in a cadaver operating theater. So that allows us to better serve the East Coast of the United States. It also serves as a bridge for Europe to fly over and to do MVPs versus all the way to California, which is certainly worth the ride, but nonetheless we want to make that a little bit more attractive and more easily accessible.

And then of course as far as the offices that we're setting up outside the United States, those are largely distribution, sales and marketing entities for us that over time we will establish regional offices, which we haven't discussed yet, but over time we'll establish regional offices in both Europe and Asia-Pacific, and those will be larger distribution centers for those parts of the world.

Okay, so helping more accessible training, not having people make the trip all the way back to San Diego, essentially, for new folks for training.

That's right, and that's not so much an issue with regard to, let's say, the first trip that a surgeon makes to San Diego. It's especially helpful in terms of additional training. And, as you know, we're moving further up the spine with thoracic indications and so forth, as well as having a very unique cervical portfolio coming together for us, so we have many more reasons and opportunities for training surgeons. So we're going to start doing advanced courses, cervical courses, so on and so forth, over the ensuing years.

Question on Japan, you had talked about, I didn't catch your remark this evening, but where are you in terms of pursuing some distribution strategy in Japan?

So, our plan is to go direct, and we anticipate opening an office there next year, and we'll have some revenue in 2010, but we don't really get into that market in earnest until 2011 because of the regulatory process there.

Okay, and then last thing, just you mentioned the thoracic area, and with SRS kind of coming up here in a month or so, are you -- I guess, how far are you going to go into deformity? There's a lot of stuff, right, that comes along with a meaningful push into that part of the market. What in addition to use of your retractors and some of the interbody spacers that you have talked about, what else do you think you'll be providing to that part of the market?

Well, we're going full out when it comes to deformity, and so what that means is providing a great multitude of sizes and instruments and combination of mostly different size screws and different attachments. It's a whole different process. The screws themselves are lower profile, so it's effectively a new system. So it's a big investment for us relative to inventory. It stays still within the total limits of what we're looking to keep in the way of our inventory relative to revenue. But it's a big investment in inventory.

And that comes, those kinds of things, when would we expect to see them?

It'll be towards the end of the year, but I don't think it's meaningful enough, you wouldn't see it reflected in the inventory number.

No, I wouldn't so much in terms of that, but in terms of sort of launching those kinds of (inaudible).

Towards the end of the year.

Got it.

Yes.

All right. Thank you again for taking the questions.

You bet.

Thank you. Our next question comes from the line of Ben Andrew, with William Blair. Your line is open. You may proceed.

Good afternoon, guys. Can you hear me okay?

Yes.

Okay, great. Just a few questions briefly, if I can. Alex, can you characterize sort of what percentage of cases you're seeing biologic utilization in at this point?

Pretty small. I don't know what the percentage is, Ben, but it's pretty small. We're just still in the process of rolling things out. We're very pleased with the kind of traction that we're getting, but even over the entire sales force, $8 million relative to Osteocel is still pretty small penetration. So it's probably approaching 10%. So we have a lot of room there.

Okay. And then maybe a question for Keith -- as you think about the sales organization and where you've come over the last year or so, are you seeing any shift in the levers of kind of procedure growth and penetration of accounts, whether that comes in the form of new surgeons coming on more quickly, the experienced surgeons moving up the curve more quickly? Obviously the growth rates in the implant business are very strong -- if you could maybe talk a bit about that.

Yes, I think you see that growth specifically, too, in the XLIF product line, where you're seeing when it was largely just a degenerative opportunity, it's now advanced and advanced rapidly into a deformity opportunity, into the thoracic spine, into more multilevel cases. So that transformation and that change is really about further penetration into greater procedures, and procedures that provide a much higher implant sales revenue.

Right. So in conjunction with that, I mean, you're just literally rolling out the beginnings of your thoracic program. It sounds like you're going to have a series of additional launches over the course of this year. Could we actually see that trend accelerate, or do you have offsetting things that are pulling down that underlying implant growth rate that that's compensating for?

No, you will see acceleration with XLIF, and you'll see that same acceleration with what was talked about in the new product launches. To do a proper deformity correction it's not just about the interbody opportunity with XLIF, it's also about a posterior rod system or hook system. It's also about addressing the thoracic spine and some of the indications that go for tumor and trauma. And think about we're getting to the spine in a less invasive way thoracically, we also have to be able to provide that implant, and an implant that's elegant with the retraction system and with the NeuroVision system. So it absolutely is going to expand and continue to expand in that thoracic beyond just deformity. There's also a tumor/trauma segment, as well.

Okay, and then, Kevin, the change in the R&D disbursement throughout the course of the year, what's the consequence of that? Is that later clinical study publication? Is that launches? What happens as a result of that?

No, in terms of the $2.5 million, it's a step up in the third quarter, and then more heavily in the fourth quarter as we continue to see increased enrollment in the XL TDR clinical study.

Okay, so it's primarily XL TDR as opposed to some of the other comparative effectiveness studies.

Yes.

Okay. And then receivables and inventories, in particular I guess inventories, when would -- I mean, you gave some guidance towards the end of the year, but, I mean, do you plan to bring that down below 25% definitely over time, or do you just view this as a weapon and you don't want to get behind with the counts and so just keep those levels as high as necessary?

You know, we talk about 20% to 25%, and we'll be in that range, and that's where we need to be. We're now under that for the year. You can anticipate us falling in that range.

Okay. And then, finally, as you talk about $500 million on a run rate --

Is this your like eighth question, Ben, or where are we here?

All right. I'll jump out. Thanks.

It must be the mundane train ride or something. We want to make sure we have time for some other questions.

It's glorious O'Hare. Thanks.

Okay. Let's go with the next --

Thank you. Our next question comes from the line of Raj Denhoy, with Thomas Weisel Partners. Your line is open. You may proceed.

Oh, hi. Good afternoon, guys.

Hi, Raj. You get half a question because of Ben.

Half a question, well --

Yes, he took all your time.

Yes, I'm not sure there's a lot left, anyway. Just a point of clarification, when you guys talk about your 20% non-GAAP operating margins on $500 million, should we think about that as a $500 million run rate when you get to $125 million in revenue per quarter or so, or should we think of that as a full year, just some -- a little clarity around that?

It's more on a full year, Raj, because the quarter that we would hit that run rate it's probably got a quarter delay in your ability to hit the 20%, but it's -- so when we hit $500 million for the year we'll be at the 20%.

So sometime in the middle of -- so maybe the quarter after that run rate you might get to that point is what you're saying.

Yes.

Okay. And then just a product question, with the PCM disc, I guess, is that approved in Europe at this point? I mean, can you launch that in Europe at this point?

Yes, and we're in the process of doing so.

Is it fair to think, though, that with that product as a nice addition, why would you expect Europe or US to ramp 2011? Why wouldn't you want to do something sooner, given that you've got (inaudible).

Well, we are doing things sooner. There is a transition of moving from the PCM distributorships that have had the product over to our own direct sales force as well as potentially some exclusive distributorships. So those are the things that we're working towards. As far as next year is concerned, we are going to be ramping it up, and it offers some upside opportunity for us. At this point in time what we're doing is just giving you a general sense of how things are coming together. We don't see 2010 being a huge year for international because of additional infrastructure build. But 2011 is when it all comes together, all the regulatory clearances are done as far as some of the Asia-Pac countries, and puts us into a very strong position to move from there. So that's pretty much where we are.

One additional comment, Raj, is you have to look at, too, the fact that we'll be the third company in the US marketplace with a disc, but when you look to Europe it's a much different landscape, with 15 to 20 different designs that are there, even more in some markets. So it's a much different landscape in how long they've been using it, the options they have, and what indications for each of these different devices that are in Europe.

Yes, so I think Keith's point is that even though it has a novel design to it, it's really going to have its greatest success because of an established sales force outside the United States.

Very good. I'll keep it to two questions. Thanks.

Okay, thanks, Raj.

Thank you.

All right, we have one last round of questions here.

Our next question comes from the line of Rick Wise, with Leerink Swann. Your line is now open. You may proceed with your question.

Thanks for getting me in. A couple of general questions, Alex. The sales upside was certainly nice relative to our model and consensus. I was curious, was it a surprise to you? I mean, always in the context, I know you're driving for more, was it a surprise to you, and, if it was, was it more from more new accounts starting up or more of the new products being sold at existing accounts? How do we think about it?

It was not a surprise to us, per se. I think that we've just been able to take a little bit more market share than we thought we would in terms of aggressiveness. We weren't really clear as to what kind of an impact the economy could have relative to our growth, so we've been sticking to seeing the market grow at about 10%. Because the market is still so lousy, the general markets, we're not going to come off of the kind of guidance that we have and push towards higher levels, but it's pretty consistent with what we thought was potentially going to happen.

Okay, and just, in general, I'm thinking about -- I keep trying to find a way to convey it to people, this notion of leveraging existing accounts with new products. How can we think about it? If you take any 100 existing accounts, 5% use every product you can sell them, and as that percentage increases -- do you see what I'm getting at? Is there any way you think about it that you could share with us?

The way that we look at it is that our general target is to get 25% of a surgeon's business. If we can have more, then obviously we'd like to have more. But as we model our overall targets that's what we look for. So in terms of surgeons that are using all of our products, I mean, we now have over 50 products, so it's unreasonable to believe that a surgeon will use everything. What we've done, though, is we've coupled a series of products like NeuroVision as well as thoracolumbar as well as XLIF together so that there's a lot more for a surgeon to utilize.

So our biggest opportunity is to pull through on cervical, and I think cervical is coming through, still, consistently, with about -- it's about 10% of revenue, so that's consistent from last year in terms of being about 10% of revenue, and with a 50% overall revenue growth rate, that's pretty substantial growth. So we're pleased with that.

But we don't model it quite the way that you're saying, Rick. It's really more looking at the overall potential of what we can obtain from a surgeon, and that's 25% of their business. Obviously, 25% of their business is a huge market share when it's applied across the United States, so I think for us our primary focus is to get into the 10% to 15% range over the next few years.

Yes, and just last I've got a big picture question. Obviously, you're reiterating your thoughts about spine market growth, and clearly we've seen a number of the companies report pretty solid numbers. Is there anything three month on versus the last call that you see that concerns you about the economy or the environment that you're more -- you feel better about, you feel worse about, just as we look toward the second half of the year? Thanks.

Well, it's certainly reassuring to see our competitors being able to put up more reasonable numbers relative to market growth, so I think that that certainly spells positive news. For us overall, I feel that we're in a terrifically strong position because of our ability to take market share and because of our differentiated offering. I think we've got -- looks like we have just one more question we're going to take.

Thank you. Our last question of the conference comes from the line of Joanne Wuensch, with BMO Capital Markets. Your line is open. You may proceed with your question.

Thank you very much for squeezing me in. What kind of margins do biologics products carry?

Yes, they're in the mid 60% range, Joanne.

And I would assume that over time the longer you own these products the more you leverage them. We can see that move up (inaudible) closer to the corporate average, or is that too optimistic?

That's too optimistic. They'll remain in the mid 60% range. They have an allograft component, too, the Osteocel piece, and you won't see margins over 70% for a product like that.

And did you share what percentage of your revenues came from outside the United States this quarter?

No, I don't think we did, but it's still consistent with the 2% to 3% range that we've been talking about.

And I'm going to assume unlike other companies that are facing some pricing pressure you guys aren't seeing that. (Inaudible)?

It has not changed from the last quarter, so pricing for us is neutral.

Very helpful. Thank you very much.

You're welcome.

Thank you very much.

All right. Thanks, everybody.

I'd like to turn the floor back to management for any closing comments.

Okay. I already had it. But anyway, thanks, everybody, and we will talk to you in a quarter. Bye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation. Have a wonderful evening.