NuVasive Inc (NUVA) 2009 Q4 法說會逐字稿

Greetings and welcome to the NuVasive fourth quarter 2009 conference call.

At this time, all participants under a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Patrick Williams, Vice President of Finance, and Investor Relations. Thank you, Mr. Williams, you may begin.

Thanks, operator. Welcome to NuVasive's fourth quarter, 2009 earnings conference call.

NuVasive senior management on the call will be Alex Lukianov, Chairman and Chief Executive Officer; Keith Valentine, President and Chief Operating Officer; and Michael Lambert, 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. Finally, we will be limiting to each person to two questions during the Q&A section so that we can accommodate the large number of requests and as a courtesy to all, in order to keep the conference call to a manageable time.

With, that I would like to turn the call over to Alex.

Our fourth quarter and full year results confirm that NuVasive is gaining market share with its comprehensive product portfolio. The surgeon community continues to adopt XLIF, which is improving the safety and reproducibility of spine surgery. The superior outcomes produced by the XLIF approach, coupled with our complete product offering gives us a unique advantage that will continue to drive our strategy to be not only the number four US spine company, but the number four global spine company.

Revenue in the fourth quarter increased 43% year-over-year to $107 million, exceeding our guidance on unexpectedly strong hospital purchases. Revenue for the full year 2009 grew 48% to $370 million. In the fourth quarter, we achieved adjusted earnings per share of $0.11 and $0.32 for the full year 2009, exceeding our prior guidance. For 2010, we continued to anticipate 30% to 35% revenue growth, or $480 million to $500 million in revenue. We also continued to expect a full year non-GAAP operating margin in 2009 of approximately 17%, and plan to exit the year at approximately 20%.

To support our views of the spine market, we closely monitor the feedback received via surveys issued at our weekly surgeon training program to gauge the health of the market for NuVasive and for spine fusions overall. The survey results continue to suggest that spine surgeon queues are healthy and that surgeons are experiencing volumes better than or equivalent to volumes 12 months ago. The positive feedback gives us confidence that the spine market will continue to experience strong procedural growth rates. Fourth quarter 2009 results for the spine industry suggest that market growth has slowed from the 10% to 12% range in 2009 to 8% to 10% largely due to the low single digit pricing pressure. A dynamic that we expect will persist.

However, thanks to the positive mix afforded by our continuous new product launches and line extensions, as well as the benefits of having a highly differentiated portfolio of solutions, we expect nominal impact from pricing on NUVA's growth specifically. 2009 results also emphasize the market share shift towards small and medium sized companies that's underway. With a comprehensive product portfolio that addresses the entire spine, we can now effectively compete for high volume national accounts and continue to take market share. In consideration of these market dynamics and our confidence in NuVasive's continued ability to take market share and create new markets, we anticipate that our growth will continue to outpace the spine market.

We expect revenue growth of 25% to 30% in 2011, in conjunction with a non-GAAP operating margin that approaches 22%. Additionally, there are several catalysts that may accelerate growth in 2011, beyond the 25% to 30% range toward the mid-30s or higher. For example, earlier commercialization of our PCM cervical motion preservation device, or of our synthetic biologic would provide upside to our revenue growth expectations.

The magnitude of the impact on revenue growth would be dependent on commercialization timing. We are also constantly assessing strategic means of accelerating our international expansion, which would provide another avenue of upside to 2011 growth. On today's call, I will discuss how we intend to achieve solid growth and profitability in 2010 and 2011, starting with a quick overview of the growth drivers in each of our addressable markets, and followed by a review of our strategy to facilitate market share gains within each of those markets.

The growth profile for each of the markets that we actively participate in is excellent. Thanks to new product development and strategic acquisitions, our $8.5 billion addressable market in 2010 encompasses the global market of $4.8 billion for thoracolumbar implants, $2 billion for cervical implants, and $1.7 billion for biologics. In the thoracolumbar market, the shift toward less disruptive solutions is driving our growth as improved patient outcomes enable surgeons to treat patient populations previously considered inoperable and expanding the frequency of both earlier patient interventions and multi level procedures.

In the cervical market we are optimistic about the prospects for motion preservation devices, which we believe will eventually capture 40% of the overall market for cervical fusion, up from only 10% market share today. Additionally, biologics market growth will continue to expand as the body of evidence demonstrating favorable clinical outcomes for the use of biologics in spine fusion, continues to grow. As we evolve into a much larger business, our maximum access surgery, MAS platform, for spine fusion will continue to differentiate NuVasive and pave the way for growth likely encompassing 70% of revenues at $1 billion. Additionally, our revenue mix will shift increasingly toward our cervical and biologic solutions as the newer additions to the NuVasive product portfolio continue to gain penetration across a rapidly expanding customer base.

In 2009, we generated roughly 10% of revenues from each of the cervical and biologics markets. Upon achievement of our goal of $1 billion in revenue, we anticipate 15% of our revenue mix will come from cervical and 15% from biologics. With a solid product foundation, and an innovative pipeline across all of our addressable markets, we expect our differentiation to drive further market share gains in every market that we compete in. Our market share gains and rapid growth rates are a function of superior patient outcomes, as well as several strategic initiatives that I will detail today.

These include increasing the breadth of our product portfolio to address the entire spine, introducing at least 10 new products in line extensions annually, driving deeper penetration in US markets, developing a meaningful international presence, expanding surgeon training with a new training facility; and finally, continually growing our exclusive sales force. To begin, as the momentum shifts away from traditional open solutions for spine fusion and toward less disruptive solutions like XLIF, NuVasive market share gains will come from our industry leading innovative surgical solutions with over 55 products on the market today. The breadth of our product offering is capable of addressing the entire spine from cervical to L5S1 and can achieve any of the objectives of open surgery, typically with better outcomes.

Today, NuVasive offers innovative solutions for access to the thoracic and lumbar spine, a broad array of implants that address every spine level, an entire suite of fixation options to provide lateral, anterior, or posterior stability and a biologics offering capable of satisfying a wide variety of surgeon preferences. The reach of our comprehensive product portfolio enables NuVasive sales representatives to successfully compete for high volume, large accounts, a key component of our progression to a much bigger business.

We are also fostering growth through continuous product portfolio advancement, developing and launching at least 10 new products and line extensions annually, and driving roughly 20% of revenue growth each year from new products. We just launched a host of new solutions at NAS in the fourth quarter, many of which marked NuVasive's entry into markets that we did not address in 2009. In the thoracolumbar market, we previewed XLIF for the thoracic spine at NAS, a solution that will revolutionize thoracic treatments, allowing optimal direct visualization while utilizing a small incision, as opposed to the traditional method of using an opening so large, it is often called a shark bite incision.

We showcased an instrument set for XLIF to treat tumors and trauma, as well as a new scoliosis system to facilitate less disruptive treatment, addressing new patient populations previously considered inoperable due to the morbidity associated with traditional treatment. Another NAS highlight was our proprietary MAS TLIF solution, which improves the way TLIF procedures are done to make the process more reproducible and gives XLIF surgeons the ability to perform L5S1 spine fusions with greater simplicity and efficiency.. Each of these products will gain momentum over the course of 2010 and 2011.

And in 2010, the intense pace of portfolio innovation will continue as we introduce several exciting new products in the thoracolumbar space. We will debut the new generation of our MaXcess retractor, which will leverage our years of experience, innovating lateral spine fusion to improve the integrated nerve avoidance functionality, further increase the ease of use, and enable even broader applications.

In the cervical space, we previewed our Helix T cervical plate at NAS for anterior fixation with friction based translation to allow for natural anatomical settlement. At our Nuvasive sales meeting last month, our cervical team previewed the NuVasive solution to laminoplasti, which redefines the procedure and improves both safety and reproducibility. Later this year, we will debut a stand alone inner body implant for cervical to increase ease of use in the operating room.

In biologics, we are actively preparing for the anticipated commercialization of progentics in 2011, which we believe will prove to be the best synthetic product on the market and compete effectively with BMP, all at a price point that will be a competitive advantage yet still afford generous gross margins that exceed our core business. Additionally, over the course of the year, we plan to preview biologic containment slides for our cervical and lumbar implants, which simplify the handling of biologics during the insertion of our implants. We anticipate another exciting year of organic development, further solidifying the leadership position and innovation that differentiates NuVasive.

Along with increasing the depth of our product portfolio, another major driver of NuVasive's growth is improving productivity of our representatives as they build relationships and extend their tenure in the field. We have roughly 7% share in the $6.8 billion addressable US market, but a region-by-region analysis of that share points to the exceptional runway ahead for NuVasive. Some of our first representatives began to develop business in the southeast over five years ago, and in certain markets NuVasive is approaching 20% share. In a newer market, like areas in the northeast where NuVasive representatives entered within only the last two years, our market share is still only 2% or 3%. As our representatives foster surgeon confidence, and more surgeons are trained on XLIF, our market share will continue to ramp from 7% to well into double digits.

Our efforts to penetrate the U.S. will be mirrored overseas where we have only just begun to form a presence in a $1.7 billion market. In 2009, we developed a foundation of our international growth strategy, with key new hires to spearhead our penetration overseas and with the addition of NuVasive offices in Germany, UK, Australia, Singapore, and soon Tokyo. We will continue to build our international organization in 2010, in anticipation of a more significant contribution to our results beginning in 2011. Revenues derived internationally comprised approximately 3% of total revenues in 2009, and we expect the mix to approach 10% as we draw near $1 billion in revenue.

We eagerly anticipate the grand opening of a New York-based office this summer. The facility will improve distribution capabilities and enhance our efforts to increase advanced surgeon training from the offerings to accelerate the utilization and adoption of XLIF for more complicated procedures, such as multilevel thoracic, tumor, trauma, and the treatment of adult degenerative scoliosis. Eastcoast based training capabilities will also facilitate the training of surgeons from both the eastern seaboard and Europe.

Our global sales representatives finished the year producing approximately $1.6 million in average annualized revenues per representative, up from $1.2 million last year, an improvements of over 30%. Today, over half of our sales force has been with NuVasive for less than two years. We expect that sales force maturation will continue to drive additional productivity improvements and fuel the expansion of our operating margin.

Looking forward, hiring decisions will continue to be made on a market-by-market basis as we deepen our presence in under penetrated geographies and add new territories in the US and internationally. For competitive reasons, we plan to discontinue the disclosure of the number of global NuVasive sales representatives, but as we grow revenue toward $1 billion, we will continue to build toward our plan for a sales force of 500 representatives producing $2 million in average annualized revenues.

In summary, we have numerous strategic initiatives underway. All of which will continue to set NuVasive apart from the marketplace in terms of patient and surgeon outcomes, innovation, service, and growth. As we expand into new addressable markets and new geographies, the spirit that propelled NuVasive from an idea for a differentiated approach to spine fusion into a $370 million global business, is not only alive and well, but poised for continued expansion.

With that, I would like to offer an update on reimbursement. As most of you know, the XLIF procedure received a good deal of publicity over the last few months in connection with several private insurance providers stating noncoverage decisions. There was a very encouraging development on the reimbursement front last month when NAS, in response to surgeon demands, reiterated their 2006 guidance that XLIF procedures should be coded as all other anterolateral procedures in a letter sent to the top insurance providers.

The letter affirmed that one, XLIF would be inappropriately characterized as experimental or investigatal. Two, data is not needed to endorse continued use and coverage. And three, the technical execution and surgical principles of lateral inner body fusion are sufficiently analogous to, if not a variation of anterior lumbar inner body fusion. While we agree with NAS that further data is not essential to reversing the noncoverage decisions, I'm pleased to report that additional clinical evidence is forthcoming.

Several studies with long term fusion based data offering further clinical support of the XLIF procedure were submitted for publication in December and January. The studies were both prospective and retrospective non-randomized studies designed to look at XLIF fusion outcomes at one to two years across approximately 250 patients. The data will demonstrate favorable outcomes for the XLIF procedure, such as a 97% fusion rate in a 67 XLIF patient study achieved without the use of BMP.

Recently the second of three studies was accepted for publication, and we expect the third study to be accepted shortly. As a result, we anticipate the publication of all three studies in peer-reviewed medical journals by mid-year. XLIF continues to be well supported by the surgeon community. As just another example, a course will be offered for CME credit at the upcoming American Academy of Neurological Surgeons meeting in May, which will cover coding for XLIF reimbursement, consistent with the guidance set forth by NAS.

Additionally, feedback from our ongoing meetings with providers continues to be positive. We are on target in the execution of our strategy to reverse the XLIF noncoverage decisions, and we plan to keep everyone up to date as we make progress throughout the year. Though as I previously stated, actual time lines are dictated by the providers. As indicated by our strong results in the quarter and by our robust outlook for 2010, we believe utilization and adoption of the XLIF procedure will remain strong in spite the publicity. In fact, our checks continue to confirm that surgeons are experiencing no constraints on their ability to perform or to obtain reimbursement for XLIF procedures; though a few have seen a slight increase in the frequency of their communication with payers during the preauthorization process. To be crystal clear, the confusion among certain insurance providers is not causing us to miss XLIF cases.

I would now like to provide an update on our efforts to build a comprehensive motion preservation offering. First with PCM, the data has been collected, and we are on track for PMA submission this quarter. We look forward to feedback from the FDA around mid-year to better understand the timelines as we work toward potential approval. While we continue to anticipate commercialization in 2011, we are aware that the approval process at the FDA has slowed so we cannot offer a more discreet time frame at this point.

With respect to the neodisc cervical motion preservation device, we expect a two-year trial follow-up to be complete by the end of 2010 with commercialization no sooner than 2013. And in the lumbar space, we expect to complete enrollment for our XLTDR clinical trial near the end of 2010, with commercialization anticipated in 2014 to 2015. We'll provide more details on our motion preservation portfolio, as we obtain meaningful feedback on our FDA submissions.

Earlier, I mentioned progentics where we made significant progress in 2009. Our development efforts have led us to an ideal material to be combined with the progentics granules to create a bone graft substitute with optimal handling characteristics and biocompatibility, as well as best in class bone growth qualities due to the novel microceptor of the calcium phosphate. As is often the case with groundbreaking R&D, it took more time than we originally anticipated, but we now have the best materials as we see the results of the preclinical work by the end of the year. We will know more about the commercial potential for 2011.

Next, I would like to offer a brief update on the Medtronic litigation. In 2009, we spent approximately $4.6 million and we continue to expect $5 million in litigation expense in 2010. As I repeatedly stated, we will not seek a settlement in the litigation and plan to aggressively use all defensive and offensive measures available to us.

Now, I would like to turn it over to Michael Lambert, our new Chief Financial Officer. Michael is already earning his cheetah spots, and we are excited about the high level of analytical sophistication that he has demonstrated since day one. His background has afforded him a wealth of experience driving profitability through expense leverage and improving cash generation through asset efficiencies. Michael's addition has further enhanced the depth and strategic composition of our senior leadership team and I look forward to working with him as we grow NuVasive to a $1 billion business and beyond.

Thank you, Alex and good afternoon everyone.

Having monitored NuVasive from afar for several years, I can say that as I approach my fourth month on the job, I'm even more excited about the growth opportunity that lies ahead. I'm delighted to join the NuVasive team at such an important time in the Company's evolution, and I look forward to working with my fellow share owners, as well as the broader Wall Street community in the coming years.

On today's call, I will begin by providing an overview of revenue and profitability in the fourth quarter and full year 2009, cover the expense items that will be classified differently moving forward, present the highlights of our fourth quarter and full year 2009 financial statements, then close with some details on our guidance for 2010.

So to begin, our revenue for the fourth quarter 2009 was $106.9 million. This represents a 43.4% increase over Q4, '08, and a 12.7% increase over Q3, '09. Our strong revenue results this quarter demonstrate the Company's continued ability to dramatically outgrow competitors and take market share. Our Q4, '09 GAAP net income was $2.3 million, or earnings per share of $0.06. Excluding an aggregate adjustment of approximately $1.9 million for intellectual property litigation expenses and acquisition-related items, our fourth quarter adjusted earnings were approximately $4.2 million or $0.11 per share. Please reference the reconciliation table in today's press release for more detail.

Turning to a few accounting topics that are detailed in today's press release, and our soon to be filed 2009, 10-K. Within the last year, our team began a review to ensure that our classification of expenses on the income statement was optimal. From that work, we reached a conclusion that certain expenses should be reclassified. There is no impact to operating margin or earnings per share, but certain expenses have shifted between categories on the income statement.

First, royalty expense, which has historically been included in sales, marketing, and administrative expense will be classified as cost of goods sold. Second, the depreciation related to our loaned instrument sets, which has historically been considered cost of goods sold will now be reflected in the sales, marketing and administrative line. This classification better reflects the true nature of the expense, and our internal ownership and accountability from a functional standpoint. In addition, it enhances comparability with other participants in our industry sector.

Third, expenses related to the intellectual property litigation historically included in research and development expense, will also be incorporated into SM&A. The most important take away here is that the net effect of these expense reclassifications will have no impact on the non-GAAP operating margin goals we have previously outlined. There will be a shift in our gross margin and operating expense line item assumptions, both in aggregate dollars and as a percent of revenue, which I will detail in a moment. We feel that classifying expenses in this manner will provide greater transparency into the true fundamentals of our business as it grows toward a $1 billion revenue stream.

As I review the highlights of our fourth quarter and full year 2009 financial statements, note that these reclassifications are already reflected in both today's results and in comparisons to historical results. Gross margin in the fourth quarter was 83.2%, compared to 85.5% in Q4, '08, and 83.3% in Q3, '09. Gross margin was impacted year-over-year by increased revenue contribution from lower margin biologics and international businesses.

Operating expenses in aggregate for Q4, '09 totaled $84.7 million, compared to $59.6 million in Q4, '08 and $73 million in Q3, '09. Research and development expenses excluding stock based comp, totalled $10.1 million for Q4, '09. R&D expenses excluding stock-based comp was 9.5% as a percent of revenue for Q4, '09, versus 7% in Q4, '08, and 9.5% in Q3, '09. Relative to Q4, '08, investments continued to ramp for the clinical trials and studies designed to demonstrate the value of our technology as well as for the buildout for our biologics team.

Sales, marketing, and administrative expenses for the fourth quarter comparisons excluding stock-based comp, intellectual property litigation expenses, acquisition-related items and the benefit of the reversal of the leasehold termination charge, totaled $65.7 million. Excluding the adjustments mentioned,SM&A expense as a percent of revenue was 61.5%, versus 61.2% in Q4, '08 and 61.2% last quarter. The year-over-year increase in the more variable components of SM&A expenses, like commissions, freight, and loaned instruments set depreciation was fairly consistent with the corresponding increase in revenue. In addition to the variable components on a year-over-year basis, we invested significantly in continued international expansion, in bringing our Town Center facility back online to accommodate growth, and in adding share owners and infrastructure to support growing volume, especially in sales.

Stock-based comp expense for the fourth quarter was $5.6 million--was recorded in our operating expenses, which compared to $5.2 million, recognized in both Q4, '08 and in Q3, '09. Stock-based comp was allocated as $4.8 million in sales, marketing, and administrative expenses with the balance in research and development expenses. Other expense for the fourth quarter was about $1.4 million, versus $0.4 million last year, and $1.2 million last quarter. The increase in expense from Q4, '08 to Q4, '09 reflects a continued trend of low yields; and therefore, lower interest income on our cash investments.

A good proxy for cash flow generation off of the income statement measured as earnings before interest, tax, depreciation, amortization, and stock-based comp or EBITDA SBC totaled approximately $63 million for the full year 2009, compared to approximately $41 million in 2008, an improvement of nearly 50%. Cash provided by operating activities continued to show progress in the fourth quarter, coming in at nearly $14 million. Of considerable note, operating cash flow for the full year totaled $46 million, compared to a net use of cash of $5 million in 2008.

Strong year-over-year progress is attributable to our focus and execution resulting in improved operating margins, greater inventory efficiency, significant progress on receivables and DSOs, and an improved DPO profile. Looking forward, we will continue to drive for efficiencies in our cash generation cycle.

Our cash and investments balance at the end of the fourth quarter was $204.7 million, down a bit from 2008's ending balance of approximately $223 million. The primary drivers behind the change, in addition to the improvement in operating cash flow mentioned were that we spent $46 million in cash on the M&A and business development front, and about $33 million on CapEx.

Our primary investment focus for cash balances will continue to be safety of principle. As a result, the majority of our invested cash is in securities of US government-sponsored entities. At the end of Q4, '09, our inventory position was 21.1%, of annualized fourth quarter revenue, down from 23.1% at year end 2008, and down from 22.6% last quarter, reflecting our continued progress on this important metric. As we have communicated in the past, we are focused on the long term trend line here instead of focusing on any given quarter's fluctuation. We do expect to see this ratio fluctuate some, and even rise on occasion, especially in conjunction with new product launches.

Day sales outstanding or DSOs were 52 days in the quarter, an improvement from 63 days at year-end 2008, and roughly in line with 51 days at Q3, '09. Our AR team made great progress with cash collections in 2009, and I know that further progress will continue to be a priority for them as we move into 2010. As we head into our guidance discussion for 2010, I would first like to provide an update on our transition towards becoming a tax paying entity.

In 2010, we will continue to utilize our deferred tax benefits and as a result, we do not expect to pay significant cash taxes this coming year; however, we do expect to recognize tax expense throughout the year, which will then be offset in the fourth quarter by a one-time reversal of the remaining valuation allowance of approximately $47 million provided against our net operating loss carry forwards and other tax attributes. This one-time benefit is primarily triggered by our reaching a sustainable level of profitability.

Please refer to the table in our press release labeled 2010 tax adjustments and WASO guidance for working assumptions to use for our quarterly and annual effective tax rate or ETR throughout 2010, which reflects our best estimate of the total taxes to be booked by quarter. That table also includes information on the expected reversal of the remaining valuation allowance. The rate we have provided reflects our own view of pretax income. Those with different pretax income assumptions would find somewhat different ETR results, although generally in the range of our own estimates.

Moving into 2011, we expect to move toward a more normalized effective tax rate, which we currently estimate to be in the 40% to 45% range. Both the reversal of the remaining valuation allowance in the fourth quarter, and increasing levels of expected profitability over the course of 2010 will likely trigger the need to assume the conversion of our convertible debt and our calculation of EPS in the fourth quarter and for the full year. As a result, we anticipate that our diluted weighted average share count will be approximately 41 million shares for Q1 to Q3, increasing to approximately 46 million shares in Q4 and for the full year. And that the convertible debt interest expense and corresponding remaining amortization of debt issuance costs, both net of tax, will be added back to earnings attributable to common stockholders in the Q4 and full year periods solely for the calculation of fully diluted EPS under the if converted method.

Now, I will turn to guidance for the full year 2010. We continue to expect revenue growth of 30% to 35%, resulting in revenue of $480 million to $500 million. As Alex mentioned, our fourth quarter 2009 was exceptionally strong as we exceeded our prior guidance by $3 million due to unexpectedly strong year end hospital spending. Because of the stronger than anticipated fourth quarter, we expect revenue to be roughly flat sequentially for the first quarter of 2010. Regardless of where we fall within that $480 million to $500 million revenue guidance range for 2010, we expect to manage the business to a full year non-GAAP operating margin of approximately 17%, expanding to approximately 20% as we exit the year.

Non-GAAP operating margin guidance will continue to exclude stock-based comp, amortization of intangible assets, intellectual property litigation expenses and acquisition-related items. For 2010 and beyond, we plan to move to two forms of EPS guidance. First, we will continue to issue GAAP EPS guidance as required for external reporting, which as you would expect will consider all expenses, including all tax-related and if converted impacts.

Second, we will issue non-GAAP EPS guidance which will correlate to our non-GAAP operating margin guidance, thus excluding stock-based comp, amortization of intangible assets, intellectual property litigation expenses, acquisition-related items; and in 2010, the currently estimated $47 million one-time reversal of the remaining valuation allowance. We feel this non-GAAP EPS measure will most accurately portray the operating earnings power of NuVasive and should be the basis of how we measure our progress.

By providing only two measures, this should simplify both historical and forward-looking comparisons. For 2010, we anticipate GAAP EPS of $1.58 to $1.70, and non-GAAP EPS of $1.13 to $1.25. Please refer to the tables in today's press release for a reconciliation of non-GAAP to GAAP EPS guidance for Q4, '09, and the full year as well as the full year 2010 EPS bridge, which reconciles the pretax, prevaluation allowance reversal and preconvert EPS to the final net of tax and if converted EPS guidance. Because we understand that there are a lot of moving parts here, we tried to provide everyone with clear line of sight to the changes via those reconciliation tables.

As I previously stated, our overall goal of achieving a full year non-GAAP operating margin of approximately 17%, expanding to approximately 20% as we exit the year has not changed, but the components have adjusted due to the above mentioned expense reclassifications. We now expect full year gross margin to be approximately 83% in consideration of a net positive impact from the royalty expense and loaned instrument set depreciation expense reclasses. Research and development expense, excluding stock-based comp will approximate 9% of revenue for the full year as we remain committed to reinventing our product portfolio and further arming our sales force.

Sales, marketing and administrative expense excluding stock-based comp, intellectual property litigation expenses and acquisition-related items will approximate 56% to 58% of revenue for the full year, an improvement from 62% of revenue on an apples-to-apples basis in 2009. This new expense to revenue ratio expectations similarly adjusts for the royalty expense and loaned instrument set depreciation expense reclassifications. For the full year, we expect the amortization of intangible assets to approximate $6 million, and intellectual property litigation expenses to approximate $5 million, both spread roughly evenly throughout the year. Other expense will approximate $5 million and will also be roughly equally spread throughout the year.

We anticipate stock-based compensation of approximately $30 million, which will be allocated as roughly 80% towards sales, marketing and administrative expense and 20% towards research and development. For EPS calculation purposes, please refer to the table in the earnings release labeled 2010 tax adjustments and WASO guidance for the quarterly and full year diluted share count estimates for 2010, which consider the impact of the assumed conversion of our convertible debt in Q4.

Again, I'm thrilled to join NuVasive in its drive to become the number four global spine company with $1 billion in revenue. I look forward to helping the Company continue to demonstrate its market-making and share-taking abilities as well as its ability to drive leverage across its operating expense structure and asset base. These execution-related objectives will continue to fuel improvement and our cash generation capabilities.

Now, I will turn the call back over to Alex for closing comments. Thank you, Michael, for that very thorough overview.

We are extremely pleased with our financial performance in 2009, in terms of revenue, earnings, and cash generation. With today's results, we have consistently met or exceeded expectations in all of our 23 quarters as a public company. The results this past year clearly demonstrate the power of the business engine we have created, and we are focused on further driving growth and profitability. Looking to 2010 and beyond, the outlook for our ability to create new markets and take market share is as strong as ever. The XLIF approach to spine fusion continues to offer surgeons and patients better outcomes.

Over the years we have created an entire spine franchise by complimenting an innovative solution for lumbar spine fusion with a full product suite that's now capable of addressing the entire spine and capturing the entire per procedure revenue opportunity. As evidenced by the recent new product introductions at NAS, we constantly reinvent the NuVasive portfolio to be increasingly relevant to spine surgeons. This relentless focus on leading with innovation and being absolutely responsive to our customers will continue to propel our growth well in advance of the market toward $1 billion in revenues.

As we execute upon our financial growth goals, we are focused on cultivating the dynamic culture that differentiates NuVasive and grants us the speed and ability to deliver unique solutions. We are committed to fostering an environment that drives outstanding results in hiring the A players who deliver outstanding results in order to achieve our objectives. We have our sites set on becoming 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 is from the line of Mike Weinstein with JPMorgan and Chase. Please proceed with your question.

Thank you.

Alex, talk if you would about a couple of items. First, if we go back to the November 30th conference call you had to address the street's reimbursement concern. You talked at that time about the Company's efforts at the local level to create greater awareness of XLIF, and to alleviate any concerns out there on reimbursement for the procedure. Can you talk about what you have done, the Company has done in the intervening period, what your surgeon champions have done on your behalf or on the procedure's behalf over that time as well in terms of their interaction with payers?

And then the second question is, I'm hoping you could talk about the spine market. It's obviously very hard to see in your results but if we look at everybody else's, the spine market did slow in the fourth quarter, as did a number of device markets, but certainly the spine market slowed. And would appreciate your insights into maybe what's going on there in the broader market with what you see in your own numbers. Thanks .

Sure. Well, first of all, with regard to reimbursement, we did a lot of things. What we did is we made sure that all efforts were undertaken to accelerate the various studies and papers that were already in the works and to moving them towards publication as quickly as possible. So that was step number one.

Additionally, we set up hotlines. We made sure that all of the local insurance companies, the sales force surgeons, we used various forms of communication that everybody understood exactly what the process was relative to reimbursement. We reiterated what NAS had told us and sent out that communication. So I think what we effectively did was we launched a massive communication process to the field so that everybody would understand the best way to proceed. And then, of course, since that time, NAS has further accentuated their position with the letters to the insurance companies. So I think that's been very positive.

Going back to just a few weeks ago, the second paper has been accepted now for publication in a peer-reviewed journal. So the data that NAS said is not needed and we felt all along is not needed, that data nonetheless is forthcoming and will be made available to the insurance companies to the payers. So that's where we are on your first question.

With regard to the spine market, we feel that it has slowed a little bit, as I said in my comments. Instead of a 10% to 12% growth rate, it's probably an 8% to 10% growth rate. It's hard for us to gauge, because the larger companies are the ones that have really stalled. What we are seeing is a lot of market shifting taking place to the smaller companies, to the mid-sized companies. We have been unaffected because of our ability to create new markets and to effectively take market share and we don't see ourselves being affected over the near term, or even over the next several years because of our plans and our ability to take market share.

As far as price is concerned, as I mentioned, I think price certainly has been a bit of a factor overall and probably has more to do with some of the downward pressure and the change from 10% to 12%, to 8% to 10%. I don't get the sense, though, that it's procedural volume that's dropping. I think procedural volume is about the same growth rate that we have seen over prior years.

So I think that's about the most color I can give you. Again from our standpoint, because we are changing the way spine surgery is being done, we expect to be able to grow at very robust rates for quite sometime.

Just one follow-up.

In your commentary, I was interested in with what Medtronic did in relative to the market, it wasn't procedure volume as much as maybe mix and to some degree incrementally priced. So if we step back and think about NuVasive and we think about the spine market to a degree this disconnect; and, again, your growth to this point in the Company's development is yet to track at all what we have seen in the broader spine market. To what degree, when you are forecasting 2010, and you are suggesting today a 25% to 30% growth maybe better in 2011. To what degree is the growth profile, the underlying market dictating your own forecast?

It's not. I think that as we take a look at our ability to grow, it's, again, just taking market share and it's the fact that we--what's really different about NuVasive versus the larger companies is that we launch ten products a year. We have the benefit of mix every single year in our portfolio, and in our growth rate. I don't think they have that same level of opportunity because of how they release products.

Thanks, Alex.

You bet.

Thank you.

Our next question comes from the line of Bill Plovanic with Canaccord Adams. Please proceed with your question.

Great. Thank you. Just two questions here.

One was this is nitpicky but the sales and marketing seems to increase. Did you accelerate new sales adds in the fourth quarter? And then just secondly, on the Osteocel product at this point, do you think you penetrated a majority of your existing accounts and now it's being used more to go into kind of build new accounts? That's all I have, thanks.

I will answer the Osteocel and let Michael take the nitpicky question. With regard to Osteocel, no, I think we are far from that. I think that the penetration is actually quite low. So we're very excited about our ability to--to continue to move that into the portfolio of products. So the short answer to the question, no, very limited penetration still with biologics. A very strong year for biologics but tremendous upside.

On the SM&A side, I think you saw and mentioned the trend. I think at the end of the day, the thing to pay attention to there is we've continued to invest in new share owners, new infrastructure, and I think as we mentioned, and I tried to address specifically, especially on the sales side. So we do believe by putting in some more money, we can continue to chase the rapid growth that we've got. So, yes, investments in sales.

All right. Great. That's all I had. Thanks.

You bet.

Our next question comes from the line of Bob Hopkins with Bank of America Merrill Lynch. Please proceed with your question.

Hi, thanks. Can you hear me okay?

Yes.

Hey, Alex.

The first question, just to be super clear, Alex. So there's nothing that you've seen in February that would suggest that doctors are having a more difficult time getting paid or reimbursed versus what you saw in January or versus what you saw in December? Is that the message?

That is the message.

And I think just to clarify, Bob, so what we are seeing is a slight increase in the frequency of surgeon communication with payers. It's negligible but it's not having any impact on getting XLIF cases done, it's not changing any of the outcomes there.

Okay.

Just to follow up on your comments about having new data publications being accepted and coming around mid-year. Do you think that's the key gating item to start the process of getting some of the reimbursement decisions reversed? So in other words, once those data are published, should we expect the potential for some reversals of those decisions perhaps during this calendar year 2010?

We don't believe that the payers have a firm leg to stand on with regard to their position. I think that's been made very clear by NAS. I think we have made that very clear with data and with the facts surrounding that. I think with the additional studies that will be published in peer-reviewed journals, it makes it absolutely impossible for them to continue that position and takes away any potential--any potential negatives that they might be trying to present. So I think once that's published, it's--again, it's hard to say how quickly they will react, but I don't think that they have a leg to stand on.

But--but just to be clear, have you had specific conversations with those insurers whereby they say, okay, show us some data and we'll start a process of considering reversal or is it more vague than that?

It's more vague than that. I think the conversations lead us to believe that the data will push it over, and kind of knock the wall over, but also what continues to happen in the meantime is that the XLIF cases are going through and the surgeries are being done, and it's largely business as usual between the surgeons and the payers.

Okay. Great. That's all I needed. Thank you so much.

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

Hi, this is [Rashni] in for Matt. Thanks for taking the question.

One question, since the larger players are having trouble with pricing and mix, can you talk about the outlook for consolidation in the spine space? And for NUVA in particular, do you see strategic investment as an important driver over the next 12 to 24 months.

Despite their trends, we don't plan to buy any of those larger companies if that's what you are asking me. No, I guess there would be an opportunity there.

For us clearly, our organic opportunity is tremendous, and as is our ability for OUS growth. And so as I mentioned in my comments, what we are looking for is other ways to fuel OUS revenue. We believe that that's going to be probably about 10% as we approach $1 billion in terms of the contribution, but that's really what we are focused on. If you take a look at the larger players, they tend to have OUS contributions of 20% plus to their total revenue. We are projecting about 10%. And that's an area that I would really like for us to improve upon and that we are diligently pursuing.

That's probably our biggest opportunity, the biggest area of focus. The other areas are more commensurate with timing and product launches relative to FDA approval processes and so forth, but we feel very bullish relative to our organic opportunities to grow.

Okay.

And then as a follow-up on the approval. What implications or what assumptions do you have in your timelines for potential changes to the 510k process or increased regulatory scrutiny for PMA?

Well, it's hard to say where it's going to end up. What we are--I think we're all saying the same thing, which is it's obviously slowed down. Does that mean that the 510K process will have more of a data component to it? We're not sure. Our assumption is that that may be a direction that comes out of FDA, but there's been no clarity. I think that we also believe that there will be a grandfather provision to anything that's done. We don't think that will affect our existing products. And as far as future products, I don't think it will have an impact until perhaps 2011, 2012. Those are things that we can adjust to in terms of our time frames and our ability to launch multiple products annually. So right now we don't know exactly what it is, but we also don't see a diliterious effect coming out of it for the 510K process that directly affects NuVasive.

Okay. Thank you.

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

Good afternoon.

Maybe a quick question on the first quarter outlook, Alex. You gave us some thoughts on your end of purchases by hospitals. Maybe give a bit more detail there.

Sure. Well, as we talked about, we had some unexpected revenue come out of the fourth quarter just having to do with just additional hospital purchases. We don't expect to see that again in the first quarter. We have been saying that it's roughly flat moving into the first quarter. So that's the--that's the main reason for that comment.

Can you characterize that in terms off--was it a couple million dollars? I wasn't aware that a lot of hospitals were carrying significant inventory, was this new hospitals stocking in? Did you have a price increase that you were going to take in '10?

No. We didn't do any price increases and this is just from larger accounts and just--it's just a combination of things like set sales and things that you normally see at the end of a year that are usually there for us. We just didn't expect them to come, because of the soft economy in 2009. So that's why it exceeded our own expectations.

Okay.

And then my follow-up is on the international side, you talked about some strategic options there. Is that something that's really a nearer term event where we might expect an announcement this year with implementation in '11 or '12, or do you want to go there yet.?

I would love to be able to say all of those things. Frankly, we are just not far enough along to be able to announce anything relative to that. So we just don't have anything concrete at this point. As I talked about on prior calls, we are looking at rollup opportunities. We are looking at different ways to accelerate our distribution process in different areas. So the short answer is we have a lot of opportunities that are open to us. We have not selected one or two to really drive to, but I would hope to have a clear direction established by the end of this year.

Thank you.

You bet.

Our next question comes from the line of Glenn Novarro with RBC capital markets. Please proceed with your question.

Thanks.

I want to follow-up on pricing. I'm just trying to get a better understanding of what's changed in the last three months. Back in October, when everyone reported 3Q results, we didn't hear anything about pricing pressure; and now we're hearing pricing pressures. So Alex, can you give us the reasons why we are hearing it? Is it hospitals pushing back? Is it small companies starting to use price to gain share? Any color would be helpful, and then just can you quickly quantify what the hospital purchasing in the fourth quarter did for you? Did they add $1 million or $2 million in revenues, thanks?

So the hospital purchasing, what we alluded to is it's about $3 million in terms of our beat. So it correlates with the beat to our guidance. As far as price is concerned, Glenn, I think it's all of those things. The impact on us has been neutral. We have not put forward a price increase, and we don't plan to do a price increase per se.

NuVasive has a different position because of the fact that we release products--new products on an ongoing basis. So our mix opportunities are always there. I think for the larger players it's simply not there. There's been a fair amount of erosion on the BMP side, we think. Again, I can't speak and pretend to speak for Medtronic. But what we see, at least, the way it strikes us is that there's price erosion in that area and I think opportunities for a lot of companies to move forward with their biologic portfolios.

We also see very strong growth rates from a lot of the smaller companies that are out there, both private as well as public. So clearly there's a lot of market shifting taking place and that's largely what we are seeing. I can't really comment further than that as to what's happening in the bigger houses.

Can I just ask one quick question? Should we assume going forward now like the normalized run rate for spine pricing is down 1% to 2% per quarter?

To give you a total growth rate of what? What are you saying, what's the total growth rate then?

I'm sorry. Yes, you're right. Like year-over-year, if we look a year from now, will pricing be down in the 1% to 2% range?

I think that--yes, probably but I think that still puts you in the 8% to 10% range of market growth. So I think that's taken into account of an 8% to 10% number. Does that move to 7% in '11? I don't know. But probably 8% to 10% is about right.

Okay. So 8% to 10% is a good market number for 2010, including price?

Correct.

Okay. Thank you.

You bet.

Our next question comes from the line of Raj Denhoy with Jefferies & Company. Please proceed with your question.

Hi Alex.

Hi Raj.

You mentioned the meetings you have been having with providers as having been positive. I'm curious if you could describe the level at which those meetings are taking place and the frequency and whether it's with all the various providers that have issued coverage policy or whether it's with particular ones at this point?

I think it's fair to say that there's been at least one meeting with every single provider that is listed. It's happened at different levels. It's happened on local levels on regional levels. It's happened with us and without us, with consultants and with surgeons and so forth. So it's been--a lot of activity has taken place in that area. I also believe that that's why we're not seeing any change in terms of the position that we talked about before, and why XLIF has done so well in the fourth quarter, and why we're so bullish on our guidance for--for this year.

Have any of those meetings been initiated by the providers to gather more information?

I don't believe so.

So you are reaching out to them?

Correct.

Okay.

Well, when you say it's you, I mean it's a combination of surgeons or us or a society. I mean, it's--there's a whole host of parties involved in this, that want to make sure that the payers understand that they are making a mistake relative to their position.

Yes. I was just trying to get at whether they are starting to begin the process to come around in a sense, but it sounds like it's still mostly industry, yourselves, all the various parties pushing on them at this point.

Yes, kind of like the government coming around to doing things differently, I guess.

That's a whole other conversation.

It is.

When you look at your share gains in 2009, I think you mentioned you guys gained maybe--almost two points of market share in the US, which was even an acceleration from what you gained last year in '08. If you look out into 2010, obviously your penetration of the lumbar area is going to have increased significantly, and what I'm trying to get at is the opportunities for you in the other parts of the spine because as XLIF becomes much more penetrated in the lumbar area, is it more difficult then for you to capture these levels of share given that you are coming at it with products, which are perhaps not as differentiated as XLIF is?

I think that our position is terrific in getting the additional revenue, and if you take a close look at what we launched in cervical at the end of last year, other things that we're launching this year, we have a very full bag of products for the surgeons to utilize. We've had very nice success with Osteocel plus. We're very pleased with that. I think on both cervical and biologicals we expect those to be very good contributors; and that's why I'm forecasting that it's going to move from about 10% respectively of contributing to revenue to about 15% each, as we get to $1 billion.

So those are pretty big increases when you look at our MAS business is about 80% today. It should be about 70% at $1 billion. Those are pretty hefty, and I think they all have upside. And I think that's what's great about this, is that we don't have a motion preservation product on the market. Hopefully that's forthcoming at some point next year. There's a number of things that I think will allow us to increase our position in those areas, but we're starting to see more and more success. Last year, especially with biologics and I think this year with biologics and cervical outside of MAS.

Great. And just two quick modeling questions.

I think you mentioned in 2011, you expect a 22% operating margin, is that the whole year, or do you expect to finish 2011 at 22%?

I will have to tell you at the end of this year, but generally, it's just 22%. It's a year end.

Year end.

I don't know how we'll spread it at that point. We are just trying to give year end points.

Okay.

And I think you also mentioned a 40% to 45% tax rate in 2011, was that correct?

That's right. That's the current working assumption.

And think about that as sort of federal rate plus the state rates and then we've got some foreign entity impacts. One of the things to be aware of is similar to the valuation allowance reversal or the valuation allowance we have provided on our domestic view, that will--that will release in 2010, we face a similar situation internationally. You can't use the losses that are generated internationally, those tax shields until you can prove out that they are consistently profitable. So that actually is part of a driver on the rate up above--up above 40%, as you look to 2011.

Now, that will eventually come back in as we achieve break even and then profitability on the international operations. But those are the drivers behind the number.

Okay. Thank you.

You bet.

Our next question comes from the line of John Putnam with Capstone Investments. Please proceed with your question.

Yes, thanks very much.

Alex, we used to talk about revenue per procedure potential. I'm wondering if you could give us some color on that, and perhaps give us some guidance on how much year-over-year it may have increased.

Well, revenue per procedure is effectively at a maximum. So in other words, in terms of our ability to gain that, as I mentioned during my comments, that's probably on a single level fusion. That's definitely in the $13,000 to $15,000 range. We haven't been talking about that as a fully blended number because fully blended through all of our product lines probably just doesn't have a good point of relevance. That's why we talked a lot about penetration per representative and talked about how that has increased. And so we are very pleased with how that finished at $1.6 million just this past year. And the kind of growth prospects we expect for that to move towards $2 million.

Great.

And then a follow-up, at NAS you were quite enthusiastic about the adult scoliosis market. I wondered if you could give us more of an update on that and perhaps tell us a little bit about training physicians for that procedure.

Well, that--that's going to be a relatively slow process, as we talked about at NAS. I think it's an opportunity for the Company to get in front of a lot of luminary surgeons that do scoliosis, and an opportunity for us to participate in some very high-ticket type of cases. So it's gone well. It's been, again, a slower launch because of simply the ability to get in front of those types of surgeons.

We are on track for this year, and I expect that to accelerate into the latter part of '10, and really put us into a very nice position in '11. We are very pleased to see what's happening with the thoracic space, also overall with XLIF, so that's continuing to gain momentum, and I think as we open our New York office in the middle of the year, we will start to see a series of advanced courses taking place there. Especially in the fourth quarter, and see more and more things dedicated to the proliferation of advanced technologies like scoliosis and thoracic applications.

Thank you very much.

Your welcome.

Our next question is coming from the line of Rick Wise with Leerink Swann. Please proceed with your question.

Good afternoon, Alex.

Alex, in your opening comments, you talked about some possible upside for 2010 if you got earlier than expected approval launch rollout of the cervical biologics, and if I understood you correctly, a faster ramp, OUS. Can you talk a little bit more--?

Rick, that was for 2011.

I'm sorry, I thought you said 2010. I'm sorry. Well, maybe it--

No. 2010 is so fast, it couldn't be faster!

Okay.

Maybe even--even so, maybe you could talk a little bit about your thoughts--I mean, especially on the OUS side, maybe--if you give us a little more color on what steps you are taking or need to take to get that going more quickly.

Sure. So a number of things relative to OUS. So we're very pleased with where we are in terms of our subsidiaries and I've talked about where those are, and how that's going. We are very pleased with the management positions that we have added in Europe as well as in Asia Pacific.

Things have gone a little bit slower than we have liked the last year and a half to get to where we are now because of the regulatory constraints and the registration process. So we are not in Japan yet. We are still waiting to get into Japan. We won't be in Japan until next year because of the registration process.

So there's some things that we simply can't do very much about, and so 2011 becomes a much more meaningful year, for us, OUS in general. We are looking at acquisition targets in various parts of the Far East. We are looking at distribution rollup opportunities. We are looking at just, as I mentioned earlier, I think Bob asked me a similar question, we are looking at every possible avenue, and angle that we can think of.

We are trying to then select the most prudent ones and get those rolling by the end of this year that would have an impact--at least start to have an impact in '11. Anything that we do, we want to do within the bounds of it being accretive or neutral, so that's important too. And that just further challenges our strategy to get it done. But I think we will be successful, and I think it's just a matter of finding the very best options for us.

Okay.

With apologies in advance for my limited samples, and any doc sampling that I would do would have to be limited relative to your perspective. Alex, a lot of the docs I have talked to in the last few weeks are suggesting that reimbursement times have lengthened significantly. And at the same time, they are expressing real enthusiasm and maybe you saw our piece that said they are not really changing anything yet. So I found that encouraging. But they all basically were saying that they are concerned about the push back and the push back times. Could this suggest maybe greater near term risk to growth until you get all the stuff resolved and then maybe--maybe you think or how do I--how do we process that kind of feedback?

I don't think that it changes what we are talking about. So when we did our call back in November, what we talked about was that there was 10 or less rejections that took place over the prior two years. So let me just address that for a second. We don't have the full scoop on all of those, let's just round them up to 10--on those 10. We are familiar with that fact that several of those cases went on to be done as TLIFs, as XLIFs. We believe a couple were canceled but we don't know the exact determination of what happened to that list.

So since that time. Since I gave you that number, so back in November, we've had a total of about 12 similar type of cases where there's significant push back, and of those 12 cases, we've had--we believe that every single one of them is going to move on to--to an XLIF. That's our understanding. Now, of the ones that I have already mentioned, several of them already have moved on to XLIF. So there's been a grand total of 12 since the last--what's that, four months--over four months? That's 12.

I cannot correlate what you are saying, in terms of the questions that you are asking, but I can tell you that we have a hotline, we have surgeons that call in when there's an issue. We have tried to address this from every possible direction. I will tell you a conversation that we had in one particular state, which we said, are there any things that we can do relative to a rejection by an insurance company? Well, very simply put, there actually wasn't any rejection in the state that we could hang our hat on to even make an issue out of.

They are saying when there's an actual rejection, I guess you could then potentially take it to the state commission, or you could do some sort of alternative strategy on it. But the problem is that there's not even a rejection because the cases continue to get done. So are the doctors, perhaps some of them getting a little be more hassle factor in speaking with the insurance companies? I think so. It sounds like your survey supports that.

But I'm telling with regard to our outlook on this year and the fourth quarter, that we do not see it having any kind of material impact, nor do we see anything that is--that is brewing or do we see a trend that's going in any other direction than what we've tried to describe with total accuracy and with--being as forth right as we can be on it.

I appreciate that. Thank you.

And just a last quick one for Michael. You talked about improvements or possible improvements in the cash generation cycle, just maybe a little more clarity on your goals and how, when, where, where are you going?

Yes. So a couple of thoughts on that. I mean, we ended at 52 on the DSO side and we expect to continue to drive down below that, and certainly are targeting that on the inventory side. The Company has talked historically about that 20% to 25% range, as--as a percentage of revenue. For the time being, we are going to try and drive to stay around the low end of that range, although as I mentioned, new product cycles tend to drive that up a blip. And then come back down.

And so those are the two primary drivers. We also have gotten quite a bit of progress on the cash side out of managing AP on DPO, and we will be reaching the outer bounds of that shortly.

Our next question is from the line of Steve Lichtman with JMP Securities. Please proceed with your question.

Thank you.

Michael, the guidance for 2010 on gross margin suggests relatively holding up here despite international biologics becoming a little bit more of the mix and I guess at lower margin. What is the offset that you guys are able to do to keep it at that relatively flat level?

Sorry, ask the question again, please.

Sure. The gross margin that you guys are guiding to is relatively flat despite the fact that you will receive more mix of international and biologics, which I guess are lower margins, what kind of offset are you able to produce to keep that gross margin seemingly relatively flat?

Sure. We work all the normal things you would expect. We look at the vendor profile, try and drive cost reduction out of it, things like that. And then you have some of the other mix things that do float around to our benefit. Alex mentioned earlier at some point the newer biologics, although that's not really a 2010 issue for us. We look to the cost side and drive that as hard as we can.

Okay.

And Alex, on the three papers that you spoke about, can you provide a little more detail about what the types of papers are, what were the study design end points, the number of patients, etc?

It's about 250. It's one and two-year data, all XLIF. It's prospective and retrospective, so there's two different types of data in there. And the outcomes look--look superb relative to what we are seeing historically for TLIF and for other types of fusion, as well as for ALIF.

And what type of end points were there, and are they multi-center, single center type of studies?

These are single center and there's multiple end points but it's really fusion. It's two-year fusion data.

Okay. All right. Great. Thanks, guys.

Sure.

We've just got time for a couple more questions. So we want to keep it moving and try to get as many people in as we can, but realize it's a long call with all the information we covered today. So we'll--let's go on with our next questioner.

Our next question is from Joanne Wuensch with BMO Capital Markets. Please proceed with your questions.

Thank you very much for taking any question and good afternoon.

Two questions, first of all, can you please comment on the training schedules and what you are seeing there; and if your center opens in the New York area in the mid-year, do you anticipate attracting largely OUS positions to that base? And then my second question is more for Michael. Can we talk about how we should think about your guidance for EPS throughout the year on a more quarterly basis, given that there are a couple of moving parts that are happening here? Thank you.

Sure. Joanne, for training purposes--rather for the training perspective that you asked for, the training rate is about the same as it was last year, so we are on pace for 400 to 500 surgeons again. That would be for all centers. So that does not necessarily change anything with the East Coast. So that's the same number for the East Coast.

What the East Coast is going to allow us to do and we expect that to open up in July or so, it's going to allow to us do more advanced training, either in San Diego or in the East Coast. And to do more basic training at both facilities. So it will target largely the eastern coastline.

We expect to see a lot of activity, a lot of surgeons coming from those areas, but also give us an opportunity with UK, and European-based surgeons to come over for a relatively short flight compared to coming out to San Diego.

And I think the other question was for Michael.

Yes, so Joanne, on the--on the EPS question, think about the seasonality model for us and if you look at it over the last couple of years, it's a stair step up, Q1 to Q4, so we would expect the EPS profile to map along that. Very similar to thinking about the average 17% non-GAAP operating margin with an exit at 20%. And so if you model to the revenue seasonality, and--and that up margin profile, the EPS numbers will fall out for you.

Okay. Thank you.

Our next question is from Brighton Hyde with Cowen Please proceed with your question.

Hi, good afternoon. It's actually Doug Schenkel from Cowen.

The first question, again, on hospital revenue. It sounds like we should think about this as revenue that you expected in Q1 that got pulled into Q4. I just want to be clear, is there any conservatism factored into your Q1 revenue guidance, related to reimbursement rates, pricing pressures, or slowing marketwide volume trends?

And then my second question goes back to your discussions with the payers on the negative reimbursement decisions. Just to be very clear here, it's a little bit hard for me to understand why you wouldn't be having more specific discussions with them regarding exactly what hurdles you need to overcome, or what data you need to provide to definitively reverse reimbursement decisions. Why are those--those types of discussions not occurring? Are they just unwilling to get to that level of detail with you?

So first of all, it has nothing to do--the fourth quarter increased revenue has nothing to do with the first quarter. What we explained, I thought in detail was that that came from additional purchases that we did not anticipate. In terms of usual seasonality, the fourth quarter is typically very strong for us, it's typically strong for the spine industry and that comes because of set sales, that comes because of volume sales. There's different things that the hospitals will tend to do at year end, to kind of run through their capital budgets when they are available. Because the economy was soft last year, we did not anticipate the usual type of contribution that we would see at year end.

We were surprised to see that come through and that's why we beat our own guidance by about $3 million. And that correlates with that beat. That money is--was spent. That money has nothing to do with the first quarter and that money may or may not be available again until the fourth quarter when there's normal seasonality and we don't know if there will be seasonality in this year's fourth quarter. So we are very consistent with regard to how we see the overall year coming together.

As far as payers are concerned and the comments that I made, I think that we have done just about everything you can possibly do relative to addressing the issues with payers. We believe that the data that is forthcoming will--will obviously have an impact. As you have seen, letters from NAS, letters--clear positions relative to where CMS is on all of this. A lot of--a lot of surgeons and a lot of other entities have made their positions very clear to the insurance companies and it's not had an impact. They have not told us bluntly and directly that--that they need necessarily data. So we believe that it would be helpful to them to have some additional data that is overwhelmingly supportive of XLIF. And so we have done everything we can to help accelerate that process.

I think that the next turning point for us is when these peer-reviewed articles are actually published in the journals. I think it becomes impossible for the insurance companies to push back in the face of overwhelming data. Also, Dr. Rogers did a call not long ago with one of the analysts and talked about the fact that there are literally thousands of cases that are going to be written up over the course of this year and subsequent years with equally strong data pertaining to XLIF.

I think there's an overwhelming tide of information that is coming in the direction of the insurance companies. We are doing everything we can to move them forward and as I say, we have done it at every--literally at every level that we can do. So we have--we have pretty much done everything we can think of, and now we are just waiting to play out this part of it, which has to do with, we think, the clinical data.

Our next question is from the line of Sameer Harish with Needham & Company. Please proceed with your question.

Hi, thanks for taking the question. I will just ask one.

A follow-up to the growth internationally. What are the key decision points for you in ramping to that 10%? And when you talk about potentially ramping faster internationally, are you talking about getting to 10% potentially earlier than--than the $1 billion in revenue time, or potentially being at a larger percentage when you reach at a billion.

Yes, so right now, we are on track for 10% revenue contribution at a billion. What I'm talking about is our ability to grow faster than that. To have a bigger contribution at $1 billion.

And just a follow-up, what are some of the key decision points for you in order to accelerate that process? Does it have more to do with what you are seeing at an international level or more with the leverage that you are seeing in the US and being able to place some of that dollars into investing in international?

I think it's more of just the fact that there's a very strong OUS opportunity. That OUS opportunity exists for the larger players because they built the infrastructure some 20 years ago, 15, 20 years ago, and they are now getting the return on that investment. Well, we have just gone into OUS over the last couple of years, so we can't expect to reap that level of return. We're trying to come up with ways to accelerate our positions so that we can start to see 20% of--of revenue coming from OUS.

Thank you.

You bet.

I want to make just a quick comment because I've talked about this before, and it goes back to one of the prior questions with regard to reimbursement. I wanted to make clear that we do not have a relationship with insurance, that that is a contract between surgeons and payers. So we are not directly involved in this. If we were dealing with a brand new technology that we were trying to push forward through normal circles, through CMS, and introducing a brand new technology, then we would be in front of insurance companies and CMS, and we would be working very hard to obtain a code. And we'd be trying to get a code in order to push that technology through.

This is not the same issue. There is a very clear code. The societies have been very clear about supporting the code for XLIF and dictating which code to use. So the entire fight, if you want to call it that, is between the surgeons and between the payers. And so we are doing everything we can to insert ourselves. We are doing everything that we can to accelerate the resolution of this fight and to provide reasonable exit opportunities for the payers with additional data, with any other opportunity that we can muster so that we can--we can move past this.

In the meantime, it's not affecting our business. As I said all along, I think that it does not affect our outcomes relative to guidance for this year, and I think you just saw that again with a very strong fourth quarter.

Next question. Sorry, I just wanted to clarify that point.

Our next question comes from the line of David Roman with Goldman Sachs. Please proceed with your question.

Good evening, and thank you for squeezing in the question.

Two--one quick follow-up. Alex, in your prepared remarks, I think you said that progentic would have a higher gross margin in overall corporate average, did I hear that correctly?

You did.

Okay.

And then on the end of quarter sales in Q4, were there any procedures associated with those sales and historically have there been procedures associated with that , and could you give us any specifics on what products go through quarter end sales? Because I thought there was very little inventory fill associated in spine

So the--it's not a procedure-based number. So it's hospitals, for example, purchasing some additional implants at a discount. It's an across-the-board. It's what they--they call it capital purchases. It's not necessarily capital purchase, but it's a combination. It came across in--in biologics. It came across in implants. There was not one particular area that stood out above everything else.

Okay. That's extremely helpful.

And then maybe just one last thing. Can you give us--I think Michael, you said the international at these levels is not yet profitability. When you get to the 10% or above level, is that the breaking point on profitability, or is there a lower number that where international starts to contribute positively to the bottom line?

We would expect it to be well before that.

Okay.

And lastly, would you be willing to part with the core fusion number for the quarter?

To part with the what?

The base fusion business number, the ex-biologics, ex-international.

We spent 40 minutes giving our prepared remarks. So you've got everything.

Okay.

All right we've got time for one more question here, I think.

Our next question comes from the line of Michael Matson with Well Fargo Securities. Please proceed with your question.

Thanks.

I was wondering if you could give us an update on Osteocel clinical data. Where are you at with those trials and when do you expect to have something? And then if you didn't give us the--already the sales number for your biologics business, that would be helpful.

As far as Osteocel is concerned, we should see some data coming out towards the latter part of this year, and so there's several studies that are underway. There's--there's three in particular. There's two in lumbar, one in cervical. They are prospective. So end points are all fusion. There's no controls per se. So overall, I think that that's--that's what we expect. It's no different than what we had originally forecast that we were looking to get in the way of data when we did the original acquisition.

Okay. And biologics sales?

10% of revenues.

Okay.

And in the cervical area, it seems like there's a decent move going on with these stand alone cervical implants without plates. Are you seeing that and how important are those products, I guess, the ones you are planning to launch in that area?

I'm sorry, can you repeat that question, please. The stand alone what now?

The stand alone cervical spacers with--that are used without a plate. Is that something that's becoming increasingly popular in the cervical fusion area and how important is that product going to be for your business?

Not that we're aware of. We don't see that as an emerging trend. I think that there's probably a bit more proliferation in the lumbar area of spacers still. I think people are still trying to figure out what makes the most sense there, but we are not seeing a direct impact of cervical spacers on fusions or in our market.

All right. Thanks.

Okay. All right.

Patrick--whoever is on the line gets the last call. So last question. Patrick convinced us.

Our last question is from the line of Douglas Tsao of Barclays Capital. Please proceed with your question.

Thanks for squeezing me in.

Just quickly. In terms of the hotlines that you've set up for reimbursement, what are they exactly instructing physicians to do?

They are not necessarily instructing physicians to do anything. It's an opportunity for physicians to have a gauge for which they can get information. So I think over this entire period, there have been very few phone calls that have actually come in from either physicians or our sales force. It's open to really anybody associated in that regard.

And you commented and then sort of sticking to the reimbursement issue, you commented that you were seeing sort of higher levels of communications during the preauthorization process. Do you think that some of this might not simply be related to XLIF, and could just be a broader attempt by managed care companies to perhaps limit their spending on spine procedures overall, which have obviously grown much faster than the volumes that they would see in traditional sort of knees and hips and other segments of orthopedics.

No, I don't believe that's the case. That's not--we are not seeing any sign of that per se. I think that as we--we've talked about this now at length on--as you are well aware, in a number of venues, but I think that there was a little bit of a perfect storm in terms of AXLIF and being confused as XLIF. I think there was a short report that went out. I think that there was a lot of things that happened that obviously created a storm of activity, and as we have demonstrated going back to now four months, it's not had an impact on our business.

And I think NAS has been extremely clear relative to where coding should be and relative to where coding is for XLIF. As I mentioned during the call, AANS is conducting CME training and making very clear that XLIF falls within the same codes that NAS is talking about and that everybody--so the surgeons couldn't be more clear about the utility and how to go about applying it relative to the codes and relative to the positions that the payers have tried to put toward.

Great. Thank you very much.

You're welcome. Okay.

Thank you.

Thanks, everybody. We'll talk to you in just a couple of months. Thanks for your time.