NuVasive Inc (NUVA) 2010 Q1 法說會逐字稿

Greetings, and welcome to the NuVasive, Inc. first quarter, 2010, earnings conference call. At this time all participants are in 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 with NuVasive. Thank you, you may begin.

Welcome to NuVasive's first quarter 2010 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 Michael Lambert, Executive Vice President and Chief Financial Officer.

During our management comments and our responses to your questions, certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements that involve risks, uncertainties, assumptions, and other factors which, if they do not materialize or prove correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements. These and other risks and uncertainties are more completely described in today's press release and NuVasive's most recent 10-Q and 10-K forms filed with the Securities and Exchange Commission.

Finally, we'll be limiting each person to two questions during the Q&A session 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'd like to turn the call over to Alex.

We're pleased with our Q1 2010 results, which confirm that NuVasive's differentiated solutions for spine surgery continue to drive market share gains. Our focus on improving clinical outcomes for spine surgeons and their patients, at a level of service unmatched in the industry, affords a unique advantage that is the foundation of our strategy to become the number four global spine Company over the next few years.

Revenue in the first quarter increased 36% year-over-year to $109.1 million, exceeding our expectations for flat sequential sales. We exited with a very strong run rate and are optimistic about our prospects as we head into the second quarter. We were pleased to deliver $2 million more in revenue than we guided driven by continued strong biologics performance, stronger traction across our new product launches, and some benefit from the positive reimbursement policy changes announced in late February. Our first quarter performance puts us well on our way to achieve our full-year revenue guidance of $480 million to $500 million. Moreover, we achieved double-digit annual non-GAAP EPS growth despite being affected by tax rate for the first time.

Our market share expansion is fueling growth at approximately 4 times market growth. We expect overall spine to grow in the high single-digit range this year. Procedure volumes are robust, a view supported by the feedback received via surveys issued at our weekly surgeon training programs. Surgeon optimism for spine fusion volumes over the next twelve months has not fluctuated since we began tracking responses nearly two years ago. Additionally, just yesterday CMS proposed favorable hospital reimbursement payment increases averaging to roughly 4% for 2011. Although spine market growth continues to be offset by low single-digit pricing pressure, we expect that this dynamic will have a relatively neutral impact on NuVasive. We attribute this to the positive mix effect generated by a continuous flow of new products and our differentiated procedures.

First quarter gross margins were slightly down due to increased contribution from our biologics portfolio and timing of normal inventory reserves related to new product launches. Over the long term, our gross margins will continue to track above 80% even with the increased impact of product mix related to our biologics and international contribution, deeper penetration into high volume accounts, and competitive pricing pressure. We expect to track toward our 83% gross margin target for this year.

In consideration of these market dynamics and our confidence in NuVasive strategy to take market share and create new markets, we continue to expect 30% to 35% revenue growth in 2010, and we anticipate revenue growth of 25% to 30% in 2011, in conjunction with a non-GAAP operating margin that approaches 22%. Several catalysts in motion preservation and biologics could accelerate revenue growth in 2011, beyond that 25% to 30% range. We also continue to assess various strategic means of accelerating our international expansion which could provide another avenue of upside to 2011 revenue growth. The growth profile for each of the markets that we actively participate in remains excellent and both new product development and clinical research to advance the adoption of existing procedures continues at a rigorous pace.

In the thoracolumbar market, the adoption of XLIF in lumbar cases, and expansion of XLIF into the thoracic spine continues to drive market share gains. The recent launch of the XLIF Corpectomy set to treat tumors and trauma is building traction as surgeon awareness increases regarding the ability to produce excellent surgical outcomes with patient populations previously considered inoperable. Early adoption for both our new scoliosis system, the Armada, and our solution to the TLIF procedure, the MAS TLIF, is also strong. Additionally, we look forward to the debut of the next generation of our MaXcess retractor later this year. We are on track to have three XLIF studies published in peer review journals by summer of this year, and we anticipate additional data will be published throughout the rest of the year.

In the cervical space, we are rolling out our Helix-T cervical plate which debuted at NAS, as well as our differentiated solution to laminoplasty. At the end of the first quarter, we filed the PMA application for our PCM cervical motion preservation device and we look forward to feedback from the FDA to better understand the time lines as we work toward potential approval and commercialization in a market with a very exciting growth profile.

In biologics, the uptick of Osteocel Plus continues to be favorable and we anticipate data from surgeon-driven surveys in late 2010 or early 2011 will advance adoption over the long run. We remain well positioned to meet increased market demand with expanded supply. The significant investment that we made to acquire the Osteocel intellectual property has proven rewarding, and we plan to aggressively defend that investment as the biologics market continues to develop. Today, we initiated a legal dispute against Orthofix's stem cell offering, Trinity Evolution, which we feel infringes on the patent rights that we acquired in the transaction. We are also actively preparing for the anticipated commercialization of the Progentix technology in 2011 which has the potential to be a highly efficacious synthetic biologic to compete effectively with anything on the market, including BMT.

Aside from research and development that drives the expansion and innovation of our product portfolio, surgeon training and adoption are key elements of NuVasive's growth. We have over 1,000 surgeons actively using our technology, still well below the estimated 5,000 to 6,000 spine and neurosurgeons that practice in the US alone. We recently had our annual meeting for our most advanced users known as SOLAS, or the Society Of Lateral Access Surgeons, which presently is over 350 members strong. The meeting was very positive with continued excitement over expanding indications and increased adoption of our XLIF technology. Opening our New York office this summer will facilitate the training of surgeons from the Eastern Seaboard and Europe, and will enhance our capability to increase the number of more advanced surgeon training programs.

Another important aspect of NuVasive's growth is continued improvement in the 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 where over half of our representatives have been with NuVasive for less than two years. Our market share will continue to ramp as our representatives mature and are able to encourage new surgeon training, demonstrate NuVasive's superior clinical outcomes and gradually capture greater share of new surgeons practices. The efforts to penetrate the US are being mirrored overseas where we are building on last year's efforts to drive deeper penetration and expansion of our international organization as we head into 2011. We continue to expect that revenues derived internationally will comprise approximately 10% of total revenues as we draw near $1 billion in revenue. We have a multi-pronged strategy to drive toward our goal of achieving $1 billion in revenue, while evolving our culture in conjunction with improved profitability.

Strategic growth will be a focal point of the corporate update I will provide in a couple of weeks at our NuVasive Analysts Morning on May 7, in New York City. In true NuVasive style, we have planned a comprehensive event complete with hands-on procedure-specific product demonstrations led by management and surgeons, a strategy update, and a large interactive panel comprised of some of the leading spinal surgeons in the US. Members of the surgeon panel will offer previews of the clinical study results we expect to see published soon, provide color on our initiatives in the motion preservation market, and offer clinical updates on expanded applications for the XLIF procedure. We also have few high profile XLIF patients in attendance to showcase the Better Way Back program for patient education. It is an opportunity not to be missed and we hope to see you in the Big Apple.

Before I turn the call over to Michael, I'd like to offer a brief update on IP litigation. We continue to expect roughly $5 million in litigation expenses related to the Medtronic dispute in 2010, having spent approximately $1.3 million in Q1. We will not seek a settlement with Medtronic, and plan to aggressively use all defensive and offensive measures available to us. Also, as I mentioned earlier, today we initiated a dispute against Orthofix in defense of patents acquired in the Osteocel transaction. As we have always stated with respect to litigation matters, we will not conduct internal meetings during normal business hours concerning these matters which would otherwise distract us from executing our plans and meeting with customers. All meetings surrounding litigation take place no earlier than five pm.

With that, I will turn the call over to Michael, who earned his Cheetah spots this quarter along with the latest group of new share owners that sat for the first quarter NuVasive spine exam. Michael not only passed, he aced it, scoring 100% on the exam. As you may recall, a passing grade corresponds to 90% and he now joins an elite group of share owners with perfect spine exam scores. I encourage all of you to test Michael's spine knowledge in your future interactions with him. And before I turn it over to him, I do have a quick question for Michael. Just to check his spine exam knowledge. So here we go, Michael. It is impromptu, he doesn't know this is coming. What is the network of nerves that is comprised of the ventral rami of the lumbar spinal nerves which travel within the psoas muscle to innervate the lower extremities? And the answer is?

I cannot believe you're asking me this question, Alex. Lumbar plexus.

Correct. You may now proceed with the financials.

Thanks, Alex. Good afternoon, everybody. I'll repeat it, I can't believe he did that to me.

Our revenue for the first quarter 2010 was $109.1 million. That represents a 36.3% increase over Q1 '09 and a 2% increase over Q4 '09. The strong year-over-year revenue growth demonstrates the Company's continued ability to take market share. Our Q1 2010 GAAP net income was $1.1 million, or earnings per share of $0.03. Excluding intellectual property litigation costs, acquisition related items, stock-based compensation and amortization of intangible assets, our first quarter non-GAAP earnings were approximately $8.3 million, or $0.21 per share. Please reference the reconciliation table in today's press release for more detail.

Gross margin in the first quarter was 82.2%, compared to 83.8% in Q1 '09 and 83.2% in Q4 '09. Year-over-year gross margin was impacted by increased revenue contribution from our lower margin biologics and international businesses. Gross margin was also impacted both year-over-year and sequentially by inventory obsolescence reserves related to our new product launch schedule in Q1 2010. For the balance of the year, inventory reserves should normalize as a percent of sales as we continue to track toward our full-year gross margin target of approximately 83%. Operating expenses in aggregate for Q1 2010 totalled $86.7 million, compared to $70.4 million in Q1 '09, and $84.7 million in Q4 '09.

Research and development expenses, excluding stock-based compensation, and acquisition-related items, totalled $9.6 million for Q1 2010. This expense was 8.8% as a percent of revenue for Q1 2010, versus 8.9% in Q1 '09, and 9.5% in Q4 '09. Relative to last year's Q1, as a percent of revenue, we were consistent with our strategy of continued spending to support organic R&D. On an absolute dollar basis we invested in infrastructure, supporting research and clinical head count. Also, we continued to ramp investment in the various clinical trials and studies, designed to demonstrate the value of our technology. This included increases in our XL TDR trial, and as Alex mentioned, we submitted the PMA for our PCM cervical motion preservation investigational device, as expected, during the first quarter.

Sales, marketing and administrative expense for the first quarter, excluding stock-based compensation, intellectual property litigation expenses, and acquisition-related items, totalled $67.7 million. Excluding the adjustments mentioned, SM&A expense as a percent of revenue was 62.1% versus 64.7% in Q1 '09, and 61.5% last quarter. The year-over-year decrease in SM&A as a percent of sales, shows some of the leverage that we have guided to as we continue to grow the top line. The more variable components of SM&A expense, like commissions, freight and loaned instruments, set depreciation grew reasonably consistently relative to the corresponding growth in revenue. In addition to the variable components on a year-over-year basis, we invested significantly in continued international expansion and in adding share owners and infrastructure to support growing volume, with the heaviest weighting of this growth coming on the sales side. Sequentially the drivers of the increase in SM&A expense were shared between the more variable components of spending, the impact from a full quarter of expense associated with the sales head count we added in Q4, and increased expense associated with the full national launches of our new products including MAS TLIF, XLIF Corpectomy, and our Armada scoliosis system.

Finally in Q1, SM&A results reflect a nearly $0.02 impact from non -- non-Medtronic legal expenses and from the costs associated with our efforts to resolve the reimbursement issue with payors.

Stock-based compensation expense for the quarter totaling $6.4 million was recorded in our operating expenses and compares to $6.7 million recognized in Q1 '09 and $5.6 million in Q4 '09. Sales, marketing and administrative expense includes $5.7 million of stock-based compensation, with the balance in research and development expense. Other expense for the first quarter was about $1.4 million, versus $1 million last year, and $1.3 million last quarter.

Cash provided by operating activities came in at $9.1 million, providing a positive cash flow start to 2010. Our cash and investments balance at the end of the first quarter was just over $208 million, up from from the comparable 2009 year end balance of $204.7 million. Our primary investment focus for cash balances will continue to be safety of principal. As a result, the majority of our invested cash is in Securities of US government-sponsored entities. At the end of Q1 2010, our inventory position was 20.8% of annualized first quarter revenue, down from 21.1% last quarter reflecting 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 on any given quarter's fluctuation, and it is possible that the ratio will rise on occasion, particularly in conjunction with new product launches.

Days sales outstanding, or DSOs, when run off of our net AR balance, was 51 days in the quarter which is up slightly from 49 days at the end of Q4 '09. Our AR team, again, had a stellar quarter and set a new cash collection record by exceeding the $100 million mark in Q1, a significant accomplishment.

Now, I will turn to guidance for the full-year 2010 which has remained unchanged since our last earnings call. We continue to expect revenue growth of 30% to 35% resulting in revenue of $480 million to $500 million. As I mentioned in the last earnings call, regardless of where we fall within the $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 excludes intellectual property, litigation expenses, acquisition-related items, stock-based compensation, and amortization of intangible assets. For 2010 we continue to anticipate GAAP EPS of $1.58 to $1.70, and non-GAAP EPS of $1.13 to $1.25. Non-GAAP EPS guidance correlates to our non-GAAP operating margin guidance and excludes intellectual property litigation expenses, acquisition-related items, stock-based compensation, amortization of intangible assets, and the estimated $47 million, one-time reversal of the remaining valuation allowance that will impact Q4 2010 and the full-year. We feel this non-GAAP EPS measure most accurately portrays the operating earnings power of NuVasive and should be the basis of measuring our progress. Please refer to the tables in today's press release for a reconciliation of non-GAAP to GAAP EPS guidance. Relative to our non-GAAP expectations regarding the P&L, we continue to expect full-year gross margin to be approximately 83%.

Research and development expense excluding stock-based compensation and acquisition-related items, 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 compensation, intellectual property, litigation expenses, and acquisition-related items, will approximate 56% to 58% of revenue for the full year. Improving over the course of the year as higher revenue levels facilitate increased cost leverage.

As Alex mentioned, we initiated a lawsuit against Orthofix today in order to protect our valuable and proprietary Osteocel biologics intellectual property. The cost associated with this offensive litigation effort will be included in SM&A expense and, at present, we do not plan to exclude these costs from the calculation of non-GAAP operating margin or earnings per share. Although these expenses are included in our results for the first quarter, we continue to anticipate a full-year non-GAAP operating margin of approximately 17%. We will provide further updates as the suit progresses.

For the full year we continue to expect the intellectual property litigation expenses related to the Medtronic dispute, to approximate $5 million and the amortization of intangible assets to approximate $6 million, both spread roughly evenly throughout the year. Other expense will approximate $5 million and will also be consistently spread throughout the year.

We expect stock-based compensation of approximately $30 million in 2010, which we now anticipate will be spread approximately 85% towards sales, marketing and administrative expense, with the remainder landing in R&D.

Finally, at present we are maintaining our full-year 35% effective tax rate guidance. We'll update this, if required, as the rest of the year's performance materializes, and as we continue to work through our tax strategy during the remainder of the year. As we close the books on my second quarter at NuVasive, I look forward to participating in NuVasive's march toward becoming the number four global spine Company with $1 billion in revenue.

Now I'll turn the call back over to Alex for closing comments.

Thank you, Michael. And nice job knowing the definition of lumbar plexus.

We are very pleased with our results in the first quarter, which indicates that we are on track for another year of outstanding growth, profitability expansion and cash generation. With today's results, we have consistently met or exceeded expectations in all of our 24 quarters, or six years, as a public Company. Looking forward, we are focussed on being the most creative spine technology Company in the world and achieving outstanding results through speed of innovation, absolute responsiveness, and superior clinical outcomes which will continue to differentiate NuVasive and drive market share expansion. We have our sights set on becoming the number four global spine Company by adhering to the same set of core values that propelled us from an idea to improve just lateral spine fusion, into a global spine franchise that boasts over 55 innovative products. 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 Mike Weinstein with JPMorgan. Please go ahead with your question.

Thank you, gentlemen, good afternoon. Let me start with a couple items. You continue to show strong year-over-year growth and potential growth and obviously there is a lot of focus in the investment community about this, the health of the underlying spine market. Maybe it would be helpful if you could talk a little bit about your experiences as you're now getting more into some of the national contracting opportunities, you're getting more GPO opportunities, than you would have had a year, or even a year or two ago. Can you tell us about how those contracts look from year-end? Obviously, this is the first time for to you go into that business, but your perspective there would be helpful in terms of how those negotiations play out.

And then, specific to NuVasive, you had talked, whenever this focus on reimbursement started a year, about a couple of catalysts that would help clear the picture. Obviously, you got some of those (inaudible) immediately after the fourth quarter call. But there's some additional ones that we're all kind of looking towards and including the publication of those peer review journals. Do you expect those occur by the middle of the year? And is there anything else we should be watching for in the reimbursement landscape to give us added comfort? Thanks.

Well, first of all, with regard to the market and what's taking place as we talked about -- as I talked about in my remarks, we expect to see essentially high single-digit growth for the market this year. The way that we see that is that the effect on NuvAsive overall is neutral. As we've talked about. We are moving into larger accounts, and so for us that is incremental business. I would not say that our national account strategy is in full force right now relative to that. So we're just in the beginning stages of that, and moving into those areas. But we are seeing price pressure, as I think everybody has been indicating in the spine industry overall. But as far as our gross margins are concerned, one of the things that we've alluded to is that we believe we can maintain a very strong gross margin for the foreseeable future, and that correlates with something north of 80% or higher. So we are -- we are seeing some price pressure, but again it's having a neutral impact on our business, and we feel very good about moving towards an 83% gross margin for 2010.

On the reimbursement front, the peer-reviewed articles that we've talked about, will be published, we believe, over the next couple, three months. Next month at the analysts meeting in New York City, some of the doctors will be presenting their works. You'll get to hear it firsthand. But those are the major, I think, next steps, as far as catalysts are concerned. We continue, though, to, to do everything we can to ensure that surgeons understand the proper coding as set forward by NAS. Patients understand that the procedure is covered by insurance companies, that it is not, in fact, investigational. So, we continue to do the grass roots work, also.

Alex, you said amongst the, the (inaudible) that helped your quarter, thirdly you mentioned is that you might have seen some benefit from the positive reimbursement changes that were announced in February 2010. Was that actually -- is that actually visible? That you actually saw some improvement in your business as a result -- subsequent to the reimbursement policy changes between the two carriers?

You know , it is hard to attribute it directly to -- to that change in policy. We exited the quarter in a very strong fashion. You know, I think if you take a look at all of the noise that was taking place on, on, from Wall Street and just around the Company, over the last several months, I think it is hard to say, you know, that it wouldn't have any impact whatsoever on, perhaps, our sales force morale. And I think we saw some early signs of that in January and February 2010. Needless to say, you know, the entire Company and sales force has been very buoyed by the change.

Last question, I'll let some others jump in. Alex, if we think about the expansion of the portfolio of the Company beyond Lumbar XLIF and the broadening out of NuVasive, can you help us a little bit with the growth outlook for 2010, the percentage of that, the percentage of your 2010 growth that comes from Lumbar XLIF and then the percent that comes from literally everything else, which is XLIF, thoracic, biologics, et cetera?

Well the numbers are very consistent with what we saw last year. So it's about 80% is coming from MAS vertical lumbar. Biologics and cervical comprise the balance of the 20%.

Thank you.

You're welcome. Way to go there with four questions there, Mike. Who's next. We have to stick with two questions.

The next question is from Matt Miksic with Piper Jaffray. Please go ahead with your question.

Hi, thanks for taking my two questions. First, I just wanted to follow up on this pricing question. As you know there has been a lot of commentary today on that, a lot of questions on pricing in spine. And I just -- I would love to understand, you know, I understand you're not seeing -- you're not seeing it as much, maybe, as some other folks are seeing it. Maybe, if you could give us your perspective on, is that, is that -- what is, how is that tied to your portfolio products? How is it tied to, I don't know, is it the flow of new products? Is it the places in spine that you play, like MIS, for example, versus some of the other segments of the fusion market? And any color you could provide on what helps you to sort of neutralize the impact of spine in your business, and then I have one follow-up.

Okay. I think first and foremost what tough keep in mind is that some of the larger companies have been out there for a very long period of time in the market. They have been discounting over that period of time to some extent on probably an annual or bi-annual basis, and so that has been taking place over that entire period. We have not been subject to that in the new accounts. So we're coming into new accounts fresh. We've not had to -- to do the multiple discounting that the other companies have been through. So I think that, at this point in time, when they're having to face discounting, it's a pretty big hit for them, because they already have a well established book of business, and they have a gross margin linked to that.

So for us, though, when we come in, we're able to still effectively lead with XLIF, lead with our premium products, and as I said during my remarks, we launch a lot of new products every year. There is a certain level of premium built into that, obviously to pay for the R&D, if that helps us with our mix on an ongoing basis. I don't think you see that as much from the other companies. I don't believe they're quite as prolific as we are with regard to launching products. I think that is probably one of the biggest differences. When we go in and are trying to get new business that is incremental to us, we will obviously do whatever we have to do to compete and to honor the pricing established by the larger companies. But for us, it is still new incremental business that is coming more from perhaps some of our classic products. Maybe pedicle screws, maybe cervical plates, things that have been historically heavily discounted for several years.

That's helpful. And the follow-up, just on -- not to get ahead of ourselves too much, but looking out to where you begin to sort of turn the page here on this $500 million mark, that you have been talking about for several years, what -- what is different about, you know, the challenges, or the factors that are going to be driving your growth over the next -- next, you know, year, say, or two? And, you know, if the challenge three years ago was conversion to an exclusive sales force, which you -- which you got through, and the leverage, what is the challenge for you, say, in the next 12 months to 18 months that will tell us that you are really -- you're really setting the framework for growth over the next, you know, two years to three years?

I think for us it's just executing what we've talked about. So it's maintaining the robust rate of growth that we've been talking about into next year. So I think, you know, that is the next 18 months. We're forecasting 25% to 30% growth. There is potential upside to that forecast as we move into next year. But I think we have -- we're still scratching the surface in so many areas. As you know, we have a 7% market share, OUS is still in the virginal stages for us. There's a lot of other opportunities for us. XLIF is not bloodily penetrated even though it's very well accepted and it's being utilized more frequently by a lot of different types of surgeons, it's still relatively under-penetrated as correlates with our market share. So, we see it as really executing and continuing to drive XLIF, and continuing to drive through to a much higher percentage of the market.

So, you know, our issues, so to speak, or the things we find as challenges, are just scale and making sure that we have the right infrastructure, the right talent on an ongoing basis. But those are the things that we plan for, and those are the things that we routinely work on. I think having the East Coast office opening this summer is going to be a very big boost for us, as we move into 2011 and 2012 and really help us with the East Coast as well as the -- as well as parts of Europe. So I think everything is in order. It is just a simple matter of execution.

So, as much as you talk about and as much as these new products in Europe are important, if I'm hearing you correctly, it sounds like you still have a lot of legs here just here in the core US market.

Absolutely.

Thank you.

You're welcome.

(Operator Instructions) And in the interest of time, please limit your questions to two. Thank you. Our next question is from Rick Wise with Leerink Swann. Please go ahead with your questions.

Hi guys, this is actually Rich (inaudible) in for Rick. I just have two quick questions. One was, one of the things you cited as potential for catalysts for growth above your 25% to 30% top line guidance for 2011, and I was just wondering -- one of the things you've cited is, is certain -- approvals in your pipeline materialize faster than expected primarily Progentix and, you know, an approval of the PCM device. Just was wondering, is this mostly contingent on execution on your end? Is this purely just based on how quickly the FDA can go? Just maybe a little color there. And then what the timelines are to whatever extent you can say?

It is a combination of regulatory approvals and wrapping up some pre-clinical items with regard to Progentix. So, on the PCM side is, we have submitted our PMA application, and we expect to hear over the next, you know, couple months. So we'll see what FDA says. But we have an opportunity for it to be cleared in '11. I think that's being optimistic in the current state in Washington. But, nonetheless, it exists. 2012 is probably most likely. But we're pushing for 2011. Progentix, we're hoping, we'll have on the market in 2011. So, we're still working, working through that, but that looks favorable and we'll have an update on that as we get closer.

So really, the PCM approval, or potential approval in 2011 would be gravy to that 25% that 30%. It's not baked into that 25% to 30%?

That's right. And I think the other catalyst that you hadn't mentioned is on the international side. So, we think that if we can do some things that can accelerate our growth rate there, then, you know, that would be on top of the growth rate that we think is looking pretty good on top of the 25% to 30% for next year.

Great. And I was just curious, was there any --

That was two.

Okay. Okay.

All right. Got to be tough. Mike ruined it for everybody .

Thank you. The next question is from Bob Hopkins with Banc of America, please go ahead.

Hey, thanks, guys. Can you hear me okay?

Absolutely.

So two questions, obviously. First one, Alex, for you, I just curious in your opinion how much of a challenge would be to hit your 2010 growth targets? And the operating margin targets, non-GAAP operating targets? If we're in an environment where pricing is disrupted the market to a degree where it is more like a mid-single-digit growth market than the 10 to, 10-plus that it has been, how much of your success is dependent on the market maintaining those kinds of growth rates?

Well, I think that we're very comfortable with our guidance and, in fact, you know, we believe that the market is growing in the upper single-digits. So, whether, you know, for us, whether that growth is, you know, 7% or 8%, or even if that growth is 6%, it doesn't change our outlook whatsoever, or our ability to execute. I mean, we're growing at, we just grew at 36%. So, we're outpacing the market by such a big margin that it really doesn't matter to us, even -- and we talked about this during the entire economic slowdown last year, that even if the market came to a complete halt at zero, we still felt comfortable about hitting our numbers last year.

Okay. Great. And then for -- for Michael, between now and the year-end, you've got about 800 to 900 basis points of operating margin improvement that you need to deliver in order to hit the guidance that you're talking about. Which is a, you know, obviously a huge task for any companies. I'm wondering if you can just put in buckets for us, where and how you plan on driving that amount of operating leverage in that short period of time? Just love to get as much detail as we can in terms of the different buckets and what is really the true low-hanging fruit here, that gives you that confidence that you'll get there.

Okay, Bob. Let me just give you sort of rough, top-level, conceptual detail on that to give you a sense of where the leverage comes from, particularly SM&A. Won't go down to the bucket level, obviously, for you, though. But, I think the way to understand what we're doing is that we are continually scouring our expense profile as you would expect at a very detailed level to sort of map out which things are highly variables with revs and which are not. And then, those ones that are highly variable we do seek some leverage over, but those tend to be more medium to long-term in nature in terms of what you can drive out of them, and the things that are not variable relative to the growth rate in sales, you know, usually we can see some near-end, or medium-term opportunity on those. And so, you know, again, without having to cover all of the detail on it, we drive it that way. And then we're constantly monitoring for, you know, all the numerous projects we've got under way, what is starting, what is ending, what the status of those are. And that's how we develop our view of leverage potential, but it is down at a very deep cost element level.

Lots of followups, but I guess we'll do it off-line. Thanks.

Thank you.

The next questions is from [Raj Denhue] with Jeffries. Please go ahead with your question.

Hi guys.

Hello Raj.

First question, just on a little bit of follow up to last one, but you know you mentioned that the majority of your sales force has been in place for, I think you said a little less than two years at this point. How important, over the balance of this year, is the stability of that sales force? And have you seen much churn there? Or are folks pretty much sticking around at this point?

No, there's been very little churn. We've been expanding at a pretty fast pace. So I think everything is in order.

So, do you envision, though, slowing down that pace of additions over the course of the year in order to hit these margin targets you put forward?

It's, it's built into our forecast, obviously, our internal forecasts reflect that as does our guidance. So I think we're in fine shape.

But again, do -- are you envisioning, though, slowing that pace of putting people -- new people on the ground? Or do you think you'll still continue to put them at the same pace you've done over the last couple of years?

Well, we're going to be doing it at a pretty fast pace but it is not going to take away from our ability to hit the bottom line.

Okay. And I guess my second question is, I have an anatomy question for Michael as well.

Good.

No, just kidding on that, actually. But the --

Nothing would surprise me at this stage.

You made him go pale, I will tell you that.

The -- I don't think you've -- did you actually give us the number costs of the IP litigation around Orthofix? How much you think it is going to be this year?

No, no we didn't.

But that is reflected in the guidance, and you're not breaking that out like you are the Medtronic litigation?

We don't expect, at this stage, to include it in the litigation cost like we do with Medtronic. We do expect to absorb it, as we said, as the suit itself starts to make progress, we'll update you, if there is any update needed.

Okay. I guess that's two. Thanks.

Thank you.

The next question is from Ben Andrew with William Blair. Please go ahead with your question.

Good afternoon guys. I guess I wanted to follow-up on the pricing question and just ask, have you seen the change in the behavior of the other competitors out there? Or has it been relatively steady over the last few quarters?

Let Keith jump in here and answer that.

You know, there is a number of competitors that are -- I think that's what is giving us our opportunity, is that as these contracts get renewed, there may be new RFPs that are associated with those contracts and that's what is really giving us our opportunity to finally participate at some accounts We're either there very lightly, or we're trying to break into the account. And so, the larger competitors are pushing back, and pushing back hard. And it is some of that push-back that gives us the first opportunity in the door. So, it's actually worked out in our favor.

So, in order to try to defend, even though they don't have XLIF, they're having to use price and you're still getting some business despite not offering prices. Is that a way a say it?

That is one way. Because the traditional products, you're going to have to compete on price. There's RFPs that are in place, and you're forced to compete on price. But, the great opportunity is that once you're in that door we're also able to offer the unique less invasive tools and implants in such a way that it does offer some price incentive for us.

Okay. And then, my follow-up would be, if you go back into the end of February 2010, and you said you were not seeing a lot of reaction, or lost cases before that, and maybe a pickup in trajectory, were March volumes better? Did you hear a different tone from surgeons? And then, in a related question, once you published the studies do you think that there is going to be a different trajectory to uptake after the summer when the three studies come out? Thanks.

March was strong for us, but I think it was just really -- we couldn't quantify it in terms of seeing any kind of rejections in the things that we talked about on our last call in February 2010. So, I think it was more, as I tried to explain it before, it was more of an morale issue than it was anything else. There weren't a ton of surgeons necessarily standing on the sidelines. It wasn't anything like that, that you could get your arms around. But, I think the winds were shifting a little bit. And as -- as that cleared its way out with the two carriers, changing their position, you know, it obviously made for a very strong close to the quarter. So that is what we're very pleased about that, and very bullish on our prospects for the year.

I don't know, it is hard to say exactly what's going to happen when those other studies come out? You know, our impression is that the other insurance carriers all do now understand the issues, they're working through the process. Some just take longer than others to, to reverse themselves, to fully appreciate it and to, to make those adjustments. And it goes back to prior comments where we can't say if that's going to take one particular catalyst of studies being out there, or it is going to take their next review cycle. But it does -- it's not interfering with our business and it is not interfering with our ability to put up the kind of numbers we expect to put up this year.

Thank you.

The next question is from Vivian Cervantes with Maxim Group. Please go ahead.

Hi, thanks for taking the questions. This is Vivian Cervantes, Maxim Group. Just as a follow-up, on your comments on, you know, an improvement in morale issue with the reimbursement overhang lifted. You had mentioned that there was some benefit to revenue this quarter. And that you're bullish going forward. Do you expect, you know, a snap-back in demand in coming quarters? Or is it more like, you know, the freeway has been paved open so there is nothing stopping us?

I think that the freeway is pretty much open. I don't think it was really closed much. I think that -- I think people were just scratching their heads over all of the noise. Fundamentally nothing has changed with regard to, to our business. But, you know, a sales forces are kind of like, you know, thoroughbred race horses. They -- they're a little jumpy. And they're high performers. And they're looking around all the time wondering what's happening in their environment. And I think that the issue was just simply wearing on them So, it was just a big relief point and they came out of the gates a little bit harder.

Okay, great. And for my second question, I will do a bit of a housekeeping one. The inventory adjustment in the quarter, do you have a sense for how much that impacted gross margins on a basis-point level?

You know, it was less than half -- you know, less than 50 basis points.

Helpful. Thank you.

The next question is from Sameer Harish with Needham & Company. Please go ahead with your question.

Hi, guys, I thought I would start with the opportunity to increase utilization. Alex, I appreciate your comments on the, you know, thousand or so surgeons that are users today. Can you talk about kind of your expectations for how much you expect to grow that business, when you look outside of new users and new products that they might be using? Just -- the opportunity to grow their, their utilization of products? Either go from niche-y kind of use, to more of, you know, mainstay kind of use, that kind of thing?

Sure. Well, we expect that number to increase from 1,000, you know, to start to approximate 1200, something like that, 1300, as we close out the year. So I think if you take a look at 400 surgeons, or so, trained. We would probably add another let's say 300, or so, 75% roughly on top of that number. I think one of the more important numbers for us, and something that we have been very pleased with, has been the number of members in SOLAS. That number is 350. We see people joining that organization every single quarter at a very robust pace. And I think that from our standpoint we want to see that number continue to rise. We expect that the SOLAS society is probably going to be 500 members over the next few quarters. So I think that that's a very good indicator of how well XLIF is doing and how broadly it is being applied by the spine surgeon community.

Okay. And to follow up on some of the other questions in terms of expansion on margin, can you talk about, you know, the expectations for the sales force? Are they, are they able to spend less time in surgery? Is that a focus that you have in order to expand their leverage? Or kind of just talk about how the dynamics of the sales force level is going to be.

To -- Well, we don't necessarily want them to spend less time in surgery. We want them to spend less time in -- we want them to spend more time on fewer accounts. That is probably the best way to describe it. So we're consistently compressing the territories over time within our area of business manager areas and distributor principal areas. So we're very pleased with the productivity of our sales force, and what we want is for them to continue to go deeper in a smaller number of accounts, and that is how we're building our sales force, and that is how we arrived at, I think, the, I think it was $1.6 million or so per rep as we finished out 2009. And that number is on track and is growing to $2 million, you know, and we've got quite a few reps now, that are, have crossed beyond $2 million. So that's what we're focussed on is making sure that we have as many touches as possible with as many surgeons as we can, within a discrete number of hospitals and we're trying to compress those territories for the reps.

The next question is from Douglas Tsao with Barclays Capital. Please go ahead with your question.

Hi this is Matt in for Doug. Can you hear me?

Yes.

Yes.

I have -- first question is on competition. I just wondered if, with number of other competitors coming in with their lateral approaches, you had seen that impact your business at all? If they're getting any traction, or if you're still in sort of clear runway with your product?

Well, I think there certainly, as you know, a lot of talk about lateral, and it is coming from a lot of different companies. And their approach to doing lateral. Which is -- which is very different from ours. Which is the best one, and the one protected with our technology with NeuroVision, and the one that has the diversity of application. So, you know, it's not a -- it's not a fair question. Not from you, but, I mean, it is one of those questions, where they're coming forward with a very straightforward one-level type of approach. What we're doing is very sophisticated and it is completely different from everyone else. So, you know, what's good is that there is a lot of talk, there is a lot of focus on lateral, and that is moving more and more surgeons to take a very hard look at our technology. We are extremely differentiated from everyone else. So we appreciate the comparison and we love the competition.

So, I guess you're saying that that's not impacting your price at all?

That's -- that would be the short answer.

Okay. And then the second question is, initially you talked a little bit about international market expansion. And I think you mentioned there was going to be some factors that factored into your decision as to whether to go more into international markets, or stick with the US focus. And I just was wondering what those variables are, what you're thinking about in terms of strategic.

We were talking about upside in -- to 2011 growth rates. And what we're looking at are different things we might be able to accomplish over the course of this year, or early next year that would accelerate that. So it is not a change of focus. It is not a, it's not a change of anything. We still anticipate for international to be 10% of revenue at $1 billion dollars. It is about 3% last year. And our goal is to increase that percentage beyond 10%. So those are the things that I'm talking about that have upside for us. That is what we're working towards.

Okay, so I just wanted to understand there wasn't a change in focus from your previous --

No.

Okay. Okay.

No. It is the same.

Thank you very much .

You're welcome.

The next question is from Vincent Ricci with Wells Fargo securities. Please go ahead with your question.

Good morning -- afternoon, gentlemen. First, a question for you on seasonality. You know, traditionally in the past for procedural-driven markets, we see Q1 being down from Q4. You guys have been more of a momentum story, such that you're up sequentially high single-digits. You've got it at the flat revenues. And can we just talk about the mechanics behind that? How you reach the critical mass? Has there been a slight change in the way in which you're approaching things? Or is it also just a focus on profitability, such as not having an AOS boot this year?

You know that -- let me offer a couple of comments on that there. How many questions were in there?

About six. There were six questions.

Alex will jump in on anything I miss. Alex will jump in on anything I miss. I think it is actually a very straight forward answer. If you go back and look at the history here, you will see, from a seasonality standpoint, that Q1 actually landed as a sort of anticipated percentage of full-year revenues. Right where the physical history has been over the last three, four, five years. Low 20s, give or take, as you think about it as percentage of the full year. I do think, ,my own view, is that we are reaching some of that critical mass, or at least critical momentum, continuing to push that. And we're seeing that day-to-day, as Alex said, the -- certainly February and March, with the recovery out of the reimbursement question, and the improvement in morale on the sales force, that helped, too. Anything else on your side, Alex?

No, I think that was a good answer.

Okay, great. And in the past, you've mentioned the VCF market as strategic interest. Clearly you've died down on that recently. Just your updated thoughts on that?

And also, Alex, what was your Cheetah score?

That is a great question. That was the third question , so let me answer the second question on VCF. So with regard to the VCF, we look at that area quite a bit and we're looking at IP. We haven't really found exactly what we're looking for. I think, for us, the concerns that we have in approaching that, and we're still open-minded about it, is that we don't want to change our sales-call patterns and move into the interventional radiology realm, kind of really where I think Kyphon is driving a lot of its business now. So, that's something that we don't want to do is to, is to de-focus. So, I think we've answered you're two questions. Whose

And, Vincent, I'll say that I actually will be searching the archives this evening to try and find that mythical test exam that's somewhere in the NuVasive building with Alex's score.

Great. Thanks for taking my questions.

Sure.

The next question is from Steve Lichtman with JMP Securities. Please state your question.

Thank you. Hi, guys. Alex, just on your comment about a potentially accelerating the expansion overseas. Would your focus be more on bringing on more distribution? Or on new product,? Or both?

It's, it's some combination thereof. The primary focus is on distribution and we're looking at those avenues. There may be an acquisition that we can find that is, that is accretive, or certainly it would have to be neutral as a minimum. But preferably accretive, and something that could work, and that could entail some product.

Okay, great. Thanks. And then, the second question just -- are we still expecting the NeoDisc and Progentix data later this year? And if so, what, what form should we anticipate that? Thanks.

Probably towards the fourth quarter, or so, we should be in a position to discuss that and so we'll certainly come forward with the updates as soon as they are available. But towards the end of the year we should have some pretty good updates.

Okay. Thank you.

You're welcome.

The next question is from [Briggen Hyde] with Cowen and Company. Please go ahead with your question.

Hi guys. It's actually Doug Schenkel. Couple questions. We've heard a lot more about situations where hospitals are increasingly trying to limit vendor selection. Our checks suggest that, while this may have been a problem for you guys two to three years ago, your bag is clearly and broadly seen as broad enough to compete strongly in these situations. Is there any way to quantify how much of an opportunity this may represent for you guys, or maybe say how important this dynamic is to your 2010 outlook?

I'll comment, this is Keith. I'll comment on that. You know , it is kind of interesting, the largest institutions that were largely driving just a few vendors, have changed their stance. And so I would, I would challenge that going forward we're going to see greater and greater opportunity. And the reason for this is because of some of the unique offerings, such as the less invasive surgical options that are out there. And also because they're getting such push-back from the larger providers. And so it really is creating an opportunity for the smaller players to get into accounts they've never been allowed to get in. So I think we're seeing more and more of it. It benefits us in two ways. We're seeing more of that opening, and if they are still reserved to two or three players, we are now large enough and have a broad enough offering that we can also participate in those

Okay. And just in an FDA question. It is pretty well understood that there is, I guess, what we could describe as broad stagnation at the FDA when it comes to new approvals. You guys have done a good job talking about this, and positioning it in the context of guidance. But is, is there any concern regarding the need to potentially spend more on R&D over time than you're currently planning for? If there was an instance where the FDA actually did take formal steps to heighten some of the hurdles necessary to get approval?

I think it is too early to tell exactly what their final recommendations are going to be on the 510-K process. But certainly, if the 510-K process shifts to meeting supplemental data, you will have to figure out ways to provide that data. I think the very good news going on is with our CE marking and ability to expand internationally, you can grab that data at an earlier time point. So, I think it really means just shifting the mindset of how you launch a product in alpha and beta, and make sure that your European data can be used for submissions if it's needed.

Okay. Thanks for taking the questions.

The next question is from Bill Plovanic with Canaccord Adams. Please go ahead with your question.

Great. Thank you. Good Evening.

Hi Bill.

I just actually have two questions. One, very basic, was the -- what was the revenue per sales rep in the quarter?

We didn't go into the specifics of that. It is pretty consistent with how it was in the fourth quarter, up slightly.

Consistent with Q4 and up slightly. And then, two, there wasn't any commentary on Q2 guidance. Are you comfortable with consensus revenue estimates of $118 million at this point?

Well, you know, in the overall scheme of things that's reasonably consistent with -- if you go back and look at it, the seasonality views that start to pop out. So it's in the game.

Okay. That's all I had. Thank you very much.

Thanks.

The next question is from David Roman with Goldman Sachs. Please go ahead with your question.

Hi, guys, this is actually Kevin Hahn. Thanks for taking the question. So, earlier this month there was a Medicare study that was published noting some of the more complex spinal fusion surgeries as kind of being viewed as done unnecessarily. And then you talked about the CMS reimbursement in the 4% range. Our estimate showed that this decelerated 400 bips. I guess my questions is, how do you see these two dynamics affecting your conversations at the hospital?

Repeat the second part of that question, I'm sorry.

The DRG reimbursement in the 4% range that you noted at the beginning of the call? Our estimates show year-over-year that decelerated 400 bips.

You're over-year-shows decelerated what?

By 400 basis points.

Okay. Okay.

Let me address the first part. I think you're referring to the JEM article that came out, that really broke up spinal procedures into decompression and what they call single and complex fusion surgery. I think the first thing that needs to be understood about that article is it only goes back to data from 2007 and previous. So it doesn't account for data points in 2008 and 2009 which, I think we all agree has seen shifts in the market to less invasive surgery, and also seen shifts in selection criteria for patients. But, probably the most important thing that the author has even noted during this -- or in the study, was that the study cost info is based on hospital charges rather than actual reimbursements. And so that -- the relationship between costs and charges is variable, and worse, it's even more variable as the complexity of the surgery increases. So that is a huge issue right there when you're evaluating the cost issues surrounding these two procedures.

And then further, the ICD9 codes that they were trying to best fit for these three categories, are not easily definable, meaning they don't necessarily differentiate very well between single and complex. And complex can mean a variety of things, as can single. And these codes are just codes. They don't have the depth to recognize, you know, basically, was it moderately complex? Was it very complex? It just lumps it into one bucket. So with all that said, there is not enough data points now to determine the second part of your question, which is, how do you see that trending out with the Medicare side of the equation.

Okay. And then the second question, if you can give us update on the remaining two investigational labels? What are you guys doing on that front, and what do you think it will take to get those results? Thanks.

Well, as I talked about before, there is a big grass roots effort that has been under way now since November 2009. And so we are doing our best to resolve those things on a local level. I believe that as these additional studies that we've talked about are published over the next month or two, you know, that that's going to serve as, as a good catalyst to some change. I don't know if that means a month or two months or six months. I have no way to tell you. Other than that, you know, our business remains robust.

Okay. Thanks.

The next question is from Joanne Wuensch with BMO Capital Markets. Please go ahead with your question.

Thank you for taking my question. I'm sorry, I have been bopping around calls this evening. Did you give the percentage of revenue that was generated outside of the United States in the quarter and some type of a guide to what it might look like at the ends of this year?

We did not talk about that as a percentage. I don't know if we've guided to -- did we guide on international in the year?

No.

I don't think we have given that. We haven't broken that out for this year.

Can you give it? At least for (inaudible).

Sure, sure, it's probably in the -- it's approximately 4%, 4% to 5% is the range for international for this year.

And for the quarter?

For the quarter would be -- would be consistent with that. It should be very close to 4%.

So I have that you did about 3% OUS in the fourth quarter of '09. So it was a nice step-up sequentially based on what you're saying?

Right.

Okay. Is that in any particular geography, or is that -- should we just think of that more Europe and -- help me out here.

More Europe than anywhere else. But again, the numbers are small. So, you know, as you look at it as a percentage of our revenue for this year, we're pleased with the progress that we're making, but as talked about, 2011 is really when we expect OUS really come on and to nearly double what we're doing, you know, this year as we move in that general direction. So, I think overall we're pleased with the traction that we're getting. But at this point in time we're not, we're not really going into a lot of details. But it is just generally across the board, it is all building up.

Okay. Very helpful. Thank you very much.

You bet.

There are no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Okay. Well, we're all set and we'll come up with some new questions for Michael for the next call. Thanks, everybody.

Thank you. This concludes the teleconference. You may disconnect your lines. Thank you for your participation.