NuVasive Inc (NUVA) 2010 Q4 法說會逐字稿

Greetings, and welcome to NuVasive fourth-quarter 2010 earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Patrick Williams, Vice President of Finance and Investor Relations for NuVasive. Thank you, Mr. Williams, you may begin.

Welcome to NuVasive's fourth 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, as a courtesy to all, we will be limiting each person to two questions during the Q&A section, so that we can accommodate the large number of requests, and keep the conference call to a manageable time. With that, I'd like to turn the call over to Alex.

We are pleased with our fourth-quarter results which attest to excellent execution in a challenging environment. We are especially pleased with the progress made in expanding the clinical evidence for our technology, and in working with the insurance providers to insure appropriate coverage for XLIF patients.

Revenue in the fourth quarter increased 21% year-over-year to $129 million, and we achieved non-GAAP earnings per share of $0.46. Revenue for the full-year increased nearly 30%, to over $478 million. We also demonstrated excellent progress on our profitability goals, reporting a non-GAAP operating margin of approximately 17.5% in the quarter, and 15.5% for the full-year.

This afternoon, I'd like to open with our view of conditions in the spine market, and our outlook for 2011. Conversations with the surgeon community and our sales force continue to indicate that lumbar spine fusion procedure volumes are being depressed by push back from various private insurers. Overall, payers have increased the level of scrutiny, and the enforcement of criteria necessary for spine fusion surgery. We estimate that approximately 10% to 20% of spine fusion procedures industry-wide, are performed on patients that present with discogenic back pain, but with no evidence of radicular pain. A small subset of this population might benefit more conservative alternatives to spine fusion, and perhaps not require surgery. This decision, however, should be made by the patient, in consultation with his or her surgeon, and should be based on lifestyle, vocation, and the ability to withstand chronic pain.

However, many private insurers are attempting to deny coverage for back pain cases by adopting or enforcing a more rigid set of criteria that fusion patients must meet to qualify for reimbursement. The source of the set of criteria most commonly cited to deny coverage is the Milliman care guidelines. These guidelines are the products of an actuarial consulting firm of the same name, with strong commercial ties to insurance companies. The guidelines are being used to manage risk, by providing more conservative guidelines than the standards of care developed by medical societies themselves. It is our opinion, and likely most of the surgical spine community would agree, that the Milliman guidelines are uniform standards of care that are overly restrictive, and will deny access to patients who could benefit from surgery otherwise.

The guidelines also do not reflect the technological advances in spine surgery that have taken place over five to ten years, especially in MIS. Spine surgery outcomes are very strong with XLIF, in particular, which was developed just over the past decade. Unfortunately, the severity and inflexibility of the guidelines are making it difficult for all fusion patients, even those in dire need of timely procedures, to obtain surgery pre-approval. As I mentioned last quarter, NuVasive has assumed a leadership role in the charge to improve coverage of spine fusion, and we are pleased to report on the progress that has been made.

Recall that last fall, several of the major insurers including United, Aetna, Humana and CIGNA had non-coverage policies for XLIF, as well as they deemed the procedure to be experimental or investigational. In response, we helped to mobilize the surgeon community with clinical support for XLIF, and worked with NASS to educate the insurance providers to the nature of an XLIF procedure, and the well-documented outcomes achievable for patients. We are proud to report that, at this time, all of the major commercial insurance providers that once had non-coverage policies for XLIF have reversed their position.

Through that educational process, we learned how best to work with the insurance providers, and what it takes to enact policy change. The lessons learned will be invaluable to us, as we support the surgical societies in the improvement of coverage for spine fusion. Generally speaking, this will likely be a more complex process that requires the collaboration and coordination of numerous interest groups. We are mindful of what needs to be done, and we will continue to spearhead the drive for progress.

To recap some of the events during the fourth quarter, in November, Blue Cross Blue Shield of North Carolina issued a coverage policy change which, effective January 1 of 2011, would utilize the Milliman guidelines in pre-authorizing spine fusion surgery, and would outright deny fusion for cases of degenerative disc disease without radicular pain. While this insurer represents only a minute portion of covered persons in the US, the surgeon community rallied and swiftly responded via a letter, composed by nine of the major orthopedic and neurosurgical societies, including AANS, AAOS, CNS, the AANS/CNS Joint Section on Disorders of the Spine and Peripheral Nerves, ISASS, NASS, NCNS, POSNA, and SRS, virtually all of the major orthopedic and neurosurgical societies. The letter was sent to Blue Cross Blue Shield of Carolina mid-December and offered clear recommendations backed by clinical evidence to assist the North Carolina payer in achieving its end goal of providing appropriate coverage for patients who will benefit from lumbar spine fusion.

In January, Blue Cross Blue Shield of North Carolina responded to the letter, bringing their policy more in line with criteria suggested by the surgical societies, and relying less on the Milliman guidelines. That, and their increased willingness to approve payment for fusion for certain forms of instability, or degenerative disc disease through an appellate process, are both encouraging changes. While we expect that the policy change will have an immaterial impact on market volumes, it is an important symbolic first step towards resolution of the disconnect between spine fusion patient needs and insurance coverage. We applaud the efforts of the surgical societies, in working with Blue Cross Blue Shield in North Carolina, in such a timely manner.

We believe that surgeons, not consultants or unrealistic guidelines, should determine proper patient care. It is no secret that the vast majority of fusion patients experienced dramatic improvements in their quality of life. Bill Walton, of NBA Hall of Fame, and an ambassador of our patient education program, was in such pain, prior to fusion for treatment of degenerative disc disease, that he considered taking his own life. Now, he is able to walk, and is pain-free, allowing him to once again lead a highly productive life. As shown in the sport trial, and in scores of peer-reviewed articles, fusion is a clinically-proven treatment for patients suffering from appropriately indicated back pain. We will do everything we can to support the societies, as they work to establish new guidelines for spine fusion, and ensure treatment availability to patients in need.

Now, I'd like to turn to our outlook for 2011. Given the challenges created by payer push back on spine fusion reimbursement in general, we continue to anticipate 2011 revenue of $525 million to $535 million, which entails revenue growth of approximately 10% to 12%. With just over half of the first quarter behind us, we also have visibility to first quarter revenue growth of approximately 12% to 15%. Our guidance continues to contemplate a market where the payers will enforce more stringent guidelines for fusion surgery. This has resulted in a bottleneck, and has slowed the US market growth to effectively zero. We continue to expect that the more predictable portions of our business, which are not being impacted by insurance provider push back, will drive growth.

Specifically, we expect our Biologics and cervical offerings to grow at a greater rate than the core business in 2011, as both are relatively newer additions to the NuVasive product portfolio. These product lines benefit from deeper account and procedural penetration. Additionally, we expect our international business to double in 2011, as new markets in Europe, the Middle East, Australia and New Zealand, the Far East, and Latin America continue to scale.

In 2011, we will also be preparing for the opening of our Tokyo office in early 2012. Japan is the number two spine market after the US, and we are eagerly looking forward to deriving revenue from Japan. The push back from insurers on US lumbar spine fusion, continues to limit visibility and predictability. As a result, our revenue guidance for 2011 contemplates flat growth within our US lumbar business, as the 10% to 20% of back pain oriented cases are largely eliminated from the system.

In the meantime, the MIS space continues to cannibalize the traditional market at a 15% to 20% pace. Revenue guidance for our US lumbar business incorporates zero to even negative market share expansion, despite our persistent focus on taking market share, which has historically fostered market share gains. More than ever, the time to bring a surgeon into the fold is taking longer. What used to take three months can now take six to even nine months. As well, revenue guidance for 2011 contemplates continued low single-digit pressure on pricing, a dynamic that has negatively impacted the spine market for some time. We are seeing instances of aggressive pricing by hospitals and competitors in some regions of the United States. In response, we will continue to lever our comprehensive portfolio of over 65 innovative products to ensure that we maintain accounts, as well as build new business.

Moving forward, NuVasive will continue to focus on sustainable growth with increasing profitability. Just a few weeks ago, at our global NuVasive sales meeting, we celebrated the achievements of 2010, and unveiled NuVasive's next milestone, which is to become a $1 billion start-up. We analyzed what it means to be a start-up Company, which we defined as a new business venture, fully focused on translating an idea into results, and compared that understanding to what it means to be a well-established Company, which we defined as a business that achieves both scalability and reproducibility for long-term sustainability. We have decided that one or the other is not good enough for NuVasive, so NuVasive plans to be the best of both.

NuVasive will forge ahead towards the accomplishment of $1 billion in revenues, by offering both the focus and passion of a start-up, accompanied by the experience and resources of reproducible success. Those principles are the foundation of our top three objectives for 2011 and beyond, which are, number one, revenue growth above market with increase in profitability; two, an industry-leading new product stream; and three, the evolution of the NuVasive culture on achieving results through A players.

Let me briefly expand on each of these top three objectives. To begin, as we look toward the $1 billion milestone, we anticipate continued market-leading revenue growth, and increasing profitability, as our market share taking strategy unfolds against a backdrop of a steadily, albeit slowly improving spine market. We expect the powerful shift within spine towards less invasive treatments to persist, and the 80% of spine procedures that currently employ more traditional techniques, to continue to be cannibalized by less disruptive procedures with superior patient outcomes.

As well, we expect demographics, motion preservation, and expansion overseas to return global spine market growth to a more normalized mid- to high single-digit rate, once the US spine community and payers can agree upon the proper criteria for spine fusion procedures. As spine market growth improves, we anticipate that sustained investments into the levers of our market share taking strategy will continue to propel growth for NuVasive at multiples of the industry.

For example, today, our sales force numbers in the 300s. As we look forward to the $1 billion revenue milestone, we envision a sales force of at least 500 representative strong, facilitating NuVasive's presence in new territories and depth in existing ones. Moreover, surgeon adoption of the lateral approach to fusion, and XLIF specifically, is truly at the tipping point. With the addition of the NUVA East training facility, or Big Apple NUVA, we are now able to offer over 500 surgeon training sessions annually on both coasts. Demand for training at the new facility is strong, and, to date, we have hosted nearly 100 surgeons in training sessions.

The rapid expansion of our product portfolio over the last several years enables surgeons to partner with NuVasive to treat the entire spine, and address previously untreatable pathologies using increasingly sophisticated techniques. Consequentially, our surgeon training is shifting towards more advanced training, adding depth to the relationships we have forged with our surgeon customers. As surgeons become true adopters of NUVA's less-invasive solutions for spine surgery, SOLAS, the NuVasive-sponsored Society of Lateral Access Surgery, will continue to expand from the nearly 500,000 strong surgeon members that it boasts today.

Another major lever of growth is our expansion overseas, which has just begun and has an astounding runway for growth. We have entered some overseas markets with minimally disruptive solutions, like our XLIF flagship, while in other smaller markets, we are creating relationships with our more classic solutions. As surgeons overseas come to appreciate the absolute responsiveness of our innovative culture at NuVasive, they are increasingly relying upon NuVasive's full portfolio of solutions to meet their surgical needs.

The UK, for example, is one of the first markets that NuVasive entered internationally, is one of our strongest performers, but the XLIF procedure remains largely unpenetrated among the surgeon relationships that we have developed there. Alternatively, in Germany, our team has done an excellent job of introducing XLIF, XL TDR, and Armada, our solution for scoliosis, but our more traditional solutions are relatively under-utilized. The cross-selling opportunities, internationally, are exceptionally robust. As we look to mirror overseas what we've accomplished in the US, we anticipate many years of continued outstanding growth.

Profitability will continue to improve at a sustainable and measured pace, as our business grows and becomes increasingly capable of levering overhead. Manufacturing cost improvements are an untapped opportunity for NuVasive, and are a target of the vendor management team just assembled in 2010. We anticipate consistent reductions for cost of goods sold. As well, the majority of our sales force has been with the Company for less than two years, and will become increasingly productive, as they become established in their markets, and are able to develop surgeon relationships.

Finally, we anticipate that investments made to expand overseas will contribute to profitability in 2012, which, thus far, has been a break-even growth strategy. With speed as NuVasive's competitive edge, our second objective is to maintain the pace of innovation and the industry-leading product stream that we are known for. With over 65 products in the NuVasive portfolio, we aim to be the most innovative Company in spine, and to continuously enhance surgeon and patient outcomes by introducing at least ten new products or line extensions annually.

Over the next three to five years, our growth will continue to be driven not just by the improved penetration and acceptance of these new solutions, but also by the additional pathologies and patient populations that these solutions enable surgeons to address. The ability to treat the thoracic spine, for example, was dramatically improved by our new solution for scoliosis and corpectomy, which enables surgeons to access the thoracic spine in a minimally disruptive fashion, instead of requiring the huge incisions that both increase the risk and limit the outcomes of traditional thoracic procedures. In the cervical spine, we look forward to introducing a novel, less invasive retractor system, following launch of our PCM cervical total disc replacement. And in the lumbar spine, we continue to differentiate the XLIF procedure, by enhancing the implant capabilities and options, and by improving and expanding the monitoring capabilities of the NeuroVision platform.

That said, our development process is about much more than simply updating our portfolio. We push and incentivize our development teams to come up with true game-changers, innovative solutions that completely re-think traditional treatments, and like the XLIF solution, set NuVasive years ahead of anything the competition can offer. Our MAS TLIF solution, which we launched over the course of 2010, is one example of a game-changing innovation that completely re-thought the approach to the traditional TLIF procedure. The retractor for our MAS TLIF latches on the pedicles, to define the exposure and to provide stabilization of the access system, as it anchors to the spine. When exposure is achieved with the MAS TLIF, surgeons are able to easily identify the pedicles, as a basis for anatomical orientation, making the procedure safer and more reproducible. Another great example of our game-changer in spine is leverage for laminoplasty, which just launched last year. Leverage moved the last step in the traditional procedure to the first step, eliminating the need to drill and screw over an exposed spinal cord, greatly enhancing the safety and reproducibility of the procedure.

Late this year or early next, depending on FDA time lines, we look forward to the commercialization of two solutions in our pipeline that have the capacity to be game-changers. The PCM device for the cervical spine could make NuVasive the third company with a motion preservation device on the US market, marking our foray into an exciting field that we continue to believe could ultimately become the standard of care for certain cervical pathologies. As well, our synthetic biologic, Progentix, is a novel orthobiologic with a synthetic bone substitute technology that we expect to be capable of competing head-to-head with the leading biologic solutions on the market. The surgeon community has come to expect big ideas from NuVasive, and, as we drive toward $1 billion in revenues, we will not disappoint them.

Nothing supports big thinking and innovation better than clinical evidence, and we continue to make great strides in the validation of our technology. In December 2010, the entire issue of Spine, a peer-reviewed biweekly periodical recognized internationally, was dedicated to minimally invasive solutions, and contained several landmark articles for NuVasive. A significant article for XLIF specifically analyzed the two-year follow-up results of 84 XLIF patients, and highlighted several advantages of the lateral approach to fusion, compared to traditional approaches to the lumbar spine. The article concluded that XLIF is a viable procedure option for the treatment of degenerative conditions, with minimal operative time, blood loss and recovery, as well as demonstrated clinical, radiographic, and cost effectiveness. The December Spine issue also published landmark articles for XLIF for tumor, XLIF for trauma, XLIF for scoliosis , XLIF for octogenarians, and the NuVasive solution to MIS TLIF. We are exceptionally proud of the achievements of our clinical research team, and we look forward to the continued growth of the body of evidence for XLIF specifically, which is, by far, the most clinically validated lateral approach.

Last, but certainly not least, is our objective to continually evolve the NuVasive culture. The first sign of a business losing its start-up mentality is when the Company starts to become a bureaucracy. As NuVasive evolves into a $1 billion Company, we are more focused than ever on cultivating the stream-lined, highly accountable, absolutely responsive, and performance-oriented culture that propelled us to where we are today. A great example of that is the sales force recertification process, which commenced in the third quarter 2010, and was completed during the fourth quarter. The process was a rigorous training program which required each of our sales representatives to demonstrate an ability to perform an XLIF procedure, with the same dexterity and confidence as our surgeon customers. The program is a true testament to absolute responsiveness, in that it equipped our representatives with the expertise to be valuable assets in the operating room, and to prevail in a more competitive selling environment.

Before I turn the call over to Michael, I'd like to offer a brief update on our intellectual property matters. We take immense pride in our unique technology, and the intellectual property rights that protect it. You can continue to expect that we will aggressively use all offensive and defensive measures available, to preserve the investments we have made, to be the most innovative spine technology Company in the world. During the fourth quarter, we settled a dispute with Orthofix, involving patents acquired in the Osteocel transaction. As a result of the settlement, we entered into a license agreement covering Trinity Evolution. Also, we recently entered into a licensing agreement with AlloSource, our tissue partner, which further validates the strength of our allograft stem cell IP.

Last quarter, we initiated a patent infringement lawsuit against Globus Medical, which contends that Globus Medical's LLIF lateral fusion offering infringes NuVasive's XLIF intellectual property. The suit is still in the early stages of litigation, so I have little else to report.

Regarding the Medtronic dispute, we recorded approximately $5 million in IP litigation expenses last year, and expect to recognize approximately $6 million in 2011, as we prepare for trial this year. We continue to assert that we will not seek a settlement with Medtronic, and we will provide updates on litigation progress as necessary. But, you can continue to expect that we will not conduct internal meetings during normal business hours concerning these matters, which would otherwise distract us from executing our plans. With that, I'll turn the call over to

Thank you, Alex, and good afternoon, everyone. Our revenue for the fourth quarter 2010 was $129.3 million. This represents a 21% increase over Q4 2009, and a 7.5% increase over Q3 2010. Our strong revenue results this quarter demonstrate the continued execution of our market share taking strategy. One item of note was that fourth quarter revenue benefited by about $2 million, from a payment for back royalties related to the settlement of our intellectual property dispute with Orthofix.

Our Q4 2010 GAAP net income was $61.9 million, or earnings per share of $1.39. Excluding an aggregate adjustment of approximately $43 million for stock-based compensation, certain intellectual property litigation expenses, amortization of intangible assets, acquisition-related items, and the reversal of our income tax valuation allowance, fourth quarter non-GAAP earnings were approximately $19.3 million or $0.46 per share. Please reference the reconciliation table in today's press release for more details.

Gross margin in the fourth quarter was 82.1%, compared to 83.2% in Q4 2009, and 82.1% in Q3 2010. Gross margin was impacted year-over-year by a shift in US product mix toward lower margin products, as well as from increased revenue contribution from our lower margin international business. Operating expenses in aggregate, for Q4 2010, totaled $94.9 million, compared to $84.7 million in Q4 2009, and $89.1 million in Q3 2010.

Research and development expenses adjusted to exclude stock-based compensation and acquisition-related items, totaled $9.7 million for Q4 2010, compared to $10 million for Q4 2009, and $9 million for Q3 2010. R&D expense, as adjusted, was 7.5% of revenue for Q4 2010, versus 9.3% in Q4 2009, and 7.5% in Q3 2010. The small reduction in absolute dollar expense year-over-year was driven by lower R&D material consumption, given the timing of product development life -- product development cycles, and by the PCM PMA filing in the first half of 2010. The combination of which more than offset the incremental investment we made in headcount across most groups to support growth.

Sales, marketing and administrative expenses for the fourth quarter excluding stock-based compensation, intellectual property litigation expenses, and acquisition-related items totaled $73.9 million, compared to $65.9 million in Q4 2009, and $69.7 million in Q3 2010. Excluding the adjustments mentioned, SM&A expense as a percent of revenue was 57.2%, versus 61.6% in Q4 2009, and 57.9% last quarter. The year-over-year decrease in SM&A, as a percent of revenue, shows some of the leverage and productivity progress that we have guided to, as we continue to grow our top line and manage operating expenses prudently.

On an absolute basis, the year-over-year increase in the more variable components of SM&A expenses including commissions, freight, set depreciation, and sales force headcount, was reasonably consistent with the corresponding increase in revenue. In addition to the variable components relative to last year, we invested significantly in continued international expansion, and in adding share owners and infrastructure to support growth. Additionally, compared to last year's fourth quarter, we incurred significantly higher legal expenses, including those associated with the settlement of our intellectual property dispute with Orthofix. Finally, we added the NUVA East surgeon training facility to the expense profile.

Fourth quarter non-GAAP operating margin was 17.5%, compared to 12.2% in Q4 2009, and 16.6% last quarter. Non-GAAP operating margin excludes non-GAAP stock-based compensation, certain intellectual property litigation expenses, amortization of intangible assets, and acquisition-related items. Stock-based compensation expense for the fourth quarter totaled $6.9 million, and was recorded in our operating expenses which compares to $5.6 million recognized in Q4 2009, and $7.3 million recognized in Q3 2010. Stock-based compensation was allocated at $6.1 million to sales, marketing and administrative expenses, with the balance in research and development.

Acquisition-related items for the fourth quarter totaled $1.4 million, which compares to $700,000 recognized in Q4 2009, and $600,000 in Q3 2010. The acquisition-related items were allocated as $1 million to research and development, with the balance in sales, marketing, and administrative. Other expense for the fourth quarter was about $1.8 million, versus $1.4 million last year, and $1.5 million last quarter.

In the fourth quarter 2010, we booked a one-time reversal of the remaining valuation allowance on our domestic tax attributes of approximately $53 million. This one-time credit is primarily triggered by our reaching a three-year cumulative level of profitability, and the reversal of the valuation allowance confirms a forward expectation of ongoing, profitable operations. As we previously forecasted, the reversal of the remaining valuation allowance in the fourth quarter, and the increased level of profitability over the course of 2010 triggered the need to assume the conversion of our convertible debt in our calculation of diluted EPS, in both the fourth quarter 2010 and the full-year, in accordance with the if-converted method.

As a result, our diluted weighted average share count increased to 45.5 million shares for Q4 and for the full-year, up from 40.4 million shares in Q3 2010. Partially offsetting that dilution for both the fourth quarter 2010 and the full-year is the add back of convertible debt interest expense, and the amortization of debt issuance costs net of tax, to our net income. This latter item totaled just under $1.5 million for the fourth quarter 2010, and approximately $6 million for full-year 2010. These adjustments to share count and interest expense are solely for the calculation of fully diluted GAAP and non-GAAP EPS, under the if-converted method.

Cash provided by operating activities continued to show progress in the fourth quarter, coming in at approximately $22 million. Operating cash flow for the full-year came in over $65 million, compared to last year's roughly $46 million, an improvement of over 40%. Year-over-year progress is attributable to our focus and strong execution on improving operating margins, and to an improved DPO profile.

Looking forward, we will continue to focus on identifying efficiencies in our cash generation cycle. Our cash and investments balance at the end of the fourth quarter was approximately $230 million, up from 2009's ending balance of approximately $205 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.

One other item to mention, we continue to believe strongly, that the NeuroVision trademark dispute will be resolved in our favor, even in spite of the jury verdict. That said, we will likely be required to restrict up to $65 million in cash for the 18 to 24 month duration of the appeals process. We do not currently foresee that this restricted cash requirement will impact our 2011 cash needs, given our improved operating cash flow, and the portion of our cash balance that will remain unrestricted.

At the end of Q4 2010, our inventory position was 20.8% of annualized fourth quarter revenue, roughly in line with the 21.1% at year-end 2009, and up slightly from 20.5% last quarter. 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. So, it is possible that this ratio will rise on occasion, as it did this quarter.

In the meantime, we continue to work on improving our operational systems through significant investments in logistics, distribution, and related reporting functionality. In 2011, for example, we expect to complete enhancements to our asset management software capabilities to enable greater efficiencies of our loan to instrument sets in the future. Days sales outstanding or DSOs, when run off of our net AR balance was 53 days in the quarter, compared to 49 days for last year's Q4, and 54 days at the end of Q3 2010. In this tight economic environment, we are seeing customer attempts to stretch payments, thereby contributing to longer collection cycles, even as we continue improving the timeliness of our collections efforts. In addition, just over two days of the year-over-year variance, is related to the out-sized growth in the O-US business, where payment terms are much longer than on the US side.

Now, I'll turn to guidance for full-year 2011. We continue to expect revenue growth of 10% to 12%, resulting in revenue of $525 million to $535 million. Regardless of where we fall within that $525 million to $535 million revenue guidance range for full-year 2011, we expect to manage the business to a full-year non-GAAP operating margin of approximately 16.5% Non-GAAP operating margin will ramp up throughout the year, much like it did in 2010. As Alex mentioned, we expect Q1 year-over-year revenue growth of approximately 12% to 15%, which should correlate to a non-GAAP operating margin of roughly 11%.

Our guidance for all non-GAAP measurements will continue to exclude stock-based compensation, certain intellectual property litigation expenses, amortization of intangible assets, and acquisition-related items. Relative to our non-GAAP expectations regarding the P&L, we continue to expect full-year gross margin to approximate 81%, down slightly from the 82.2% reported for 2010. The slight reduction is due primarily to mix shifts toward our lower margin Biologics products, and international businesses, as well as potential excess and obsolete inventory impacts, as we continue to innovate within our existing product lines.

Research and development expense, excluding stock-based compensation, and as-incurred acquisition-related items, will approximate 8% 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, certain intellectual property litigation expenses, and acquisition-related items will approximate 56.5% of revenue for the full-year, an improvement from 58.8% of revenue in 2010, as we become increasingly capable of levering overhead expenses.

For the full-year 2011, we expect the amortization of intangible assets to approximate $7.5 million, and acquisition-related items to be roughly $1.5 million. This latter item includes expenses associated with prior M&A activity. Intellectual property litigation expenses related to the Medtronic dispute are expected to approximate $6 million, spread roughly evenly throughout the year. Other expense is anticipated to be just over $6 million, and will also be spread roughly equally throughout the year.

We anticipate stock-based compensation of approximately $33 million, which will be allocated as roughly 85% towards SM&A expense, and 15% towards R&D. As we continue to refine our tax modeling, we now anticipate our GAAP 2011 full-year tax rate to be roughly 49%, and our non-GAAP adjustments to be tax-effected at approximately 40%. The higher 2011 GAAP tax rate is due to our lower top line growth expectations, and the impact those reductions have on aggregate pre-tax net income. Several components of our tax calculation do not vary in proportion to pre-tax income, so the lower pre-tax income we are now forecasting driven by lower revenue growth will now result in a higher effective tax rate.

Finally, we anticipate full-year GAAP EPS of $0.39 to $0.42, and non-GAAP EPS to approximate $1.07 to $1.10. Optically, tax rate has a significant impact on the delta between earnings per share in 2010 and 2011, masking what will be a strong year of operational growth. In fact, our guidance implies that non-GAAP pre-tax income in 2011, is expected to increase roughly 18% to 21% over 2010. Please reference the table in today's press release for further details.

One other item of note is that our 2011 EPS guidance does not the trigger the need to calculate EPS under the if-converted method. Thus, our 2011 fully diluted weighted average shares outstanding is currently expected to be approximately 42 million shares. Non-GAAP EPS guidance correlates to our non-GAAP operating margin guidance, and excludes stock-based compensation, certain intellectual property litigation expenses, amortization of intangible assets, and acquisition-related items. We feel this non-GAAP EPS measure most accurately portrays the operating earnings power of NuVasive, and should be the basis for measuring our progress. Please refer to the tables in today's press release for a reconciliation of non-GAAP to GAAP EPS guidance.

My first full-year with NuVasive has been extra-ordinary, extremely fast-paced, and a lot of fun, complete with fantastic accomplishments, as well as challenging hurdles. I feel lucky to be a participant in NuVasive's evolution into a $1 billion start-up, and I look forward to continued, steady progress, in driving leverage across the operating expense structure and asset base. Now, I'll turn the call back over to Alex for closing comments.

Thank you, Michael. As the curtains close on 2010, we are able to reflect on a year that was both challenging and encouraging for NuVasive. We generated revenue growth of nearly 30%, and close to 300 basis points of operating margin improvement, despite facing the second most difficult and unpredictable environment in spine I have ever experienced. However, today's market pressures still pale in comparison to the pedicle screw litigation issues of the early 1990s. We overcame those obstacles, and we'll do the same with the ones we face today, to emerge even stronger and more bullish on our future.

The foundation of our ability to overcome obstacles is the undeniable fact that spine surgery is good medicine, with excellent clinical results that only improve with technological advancement. And, we have made great strides in building the body of clinical evidence, in support of our pioneering technology in educating the insurance providers to the nature and benefits of the XLIF procedure, and in cultivating our future growth. In the end, our focus is to improve the lives of patients, and we are doing just that every day, and for decades to come.

We now move toward the next milestone, which is the evolution of NuVasive into a $1 billion Company. We are equally laser-focused on maintaining the start-up mentality that is the very source of NuVasive success. With speed as our competitive edge, we will rely on creativity and resourcefulness, and our culture of accountability to bring game-changing innovations to our surgeon customers, and deliver exceptional results to our shareholders. The success of our market share taking strategy will reflect in a continued industry-leading revenue growth, increasing profitability, and cash generation, as we drive today's minimally disruptive market from 20% to 80% of the spine market over the next decade. As we now say at NUVA, onward and upward to the first $1 billion start-up. We will now take your questions.

(Operator Instructions).

Our first question is from the line of Bob Hopkins with Bank of America.

So two questions, one for Michael, and one for Alex. First on the financial side, it looks like the progression of operating margins over the course of the year is going to look fairly similar to last year, but can you remind us, you've been trending at a non-GAAP operating margin in the 17%s for the last couple quarters, and then it falls to 11%. Can you just remind us, why you have that type of progression?

Yes, Bob. It does tend to follow that historical pattern as you noticed. And really what 's happening there, is that it scales over the course of the year, as the revs growth scales accordingly. So, similar really -- what we are expecting is, to Q1 of last year. We absolutely executed to a ramp last year. We started last year around 11%, and we grew over the course of the year to 17.5%, and we expect to do the same thing this year. We are comfortable then, because of that with a full-year guidance on Op margin, at about 16.5%.

Okay. Great. And then for Alex, obviously, given your success with the insurance companies over the course of the last nine months, you have good relationships there. In light of that, I was wondering if you could just update us on this issue of insurance company push back. How would you characterize where we are right now, relative to where we were, three or four months ago? And is it roughly, the same type of environment? Would you say that it's stable, maybe getting a little bit worse, getting a little bit better? Just broadly, how should we be thinking about that in your view?

I think it's best to describe it as stable at this point. It's something that kind of rolls and fluctuates, but I would say, it's pretty stable. What we continue to see though, is this very strong push back on degenerative disc disease, as I mentioned in my prepared remarks. And it's very clear that, that I believe that this effort is going to be resolved, perhaps over the course of this year. We are certainly doing everything we can to help. But I think in resolving it, it is going to take establishing some new guidelines by the surgical spine societies, and I think finding a reasonable, middle ground. Based on what happened in North Carolina with Blue Cross Blue Shield, I believe that is underway. I know SAS, NASS, AANS, in particular, are working hard to bring together new guidelines, that all the spine societies can agree upon. And I think once that happens, we should be in pretty good shape, and start to see things improve.

How long do you think that will happen, and is there the potential for a reversal in North Carolina this year?

Well, as far as North Carolina is concerned, they've already, pretty much loosened up their position, and we are waiting to see further, on how they are going to play that. But clearly, they're also waiting for some additional guidelines. So I think the guidelines -- we should see guidelines put together, somewhere in the second quarter, I would expect. Now, whether or not they are formal enough to be presented to the insurance companies, I don't know. I do think we will start to see drafts of those guidelines, in as soon as about four to six weeks. I think with the appearance of those, and most importantly, the agreement between the societies that those are indeed the ones that they will support. Then I think it's a matter of educating the payers, and getting them to relinquish utilization of things like the Milliman guidelines.

Great. Thanks very much.

You're welcome.

Thank you. Our next question is from the line of Matt Miksic with Piper Jaffray. Please go ahead.

Thanks very much, Can you hear me okay?

Yes.

So, one follow-up on the market, Alex, you mentioned pricing, in kind of the low, low single digits. There's been some conflicting comments across some of the other larger competitors, in terms of pricing, in MIS and in traditional approaches. Could you maybe give us some color, as to where you are seeing pressure, maybe what the difference is you're seeing between MIS and more traditional approaches, or in cervical? And then I have one follow-up.

Well, in terms of, in terms of the conflicting information, is this the usual stuff, where we got it right, and somebody else doesn't? Because if that's what we are talking about, it's sort of pointless to debate that. I can tell you, if you look at all the US results, I mean they are down significantly. I know that the largest competitor was touting its growth of its lateral solution just yesterday. And I think that that's an entirely different base than our Company growth. So the size of that base, is obviously much smaller. And, I think that you have to recognize that, that is not necessarily new business. That is likely cannibalization of its own business. What we have seen on an on-going basis, is that the large companies are not having success in gaining market share. They are basically taking it from themselves, or shifting it amongst themselves.

So, I still believe that the entire MIS space is growing at the 15% to 20% rate. We think that's consistent with everything that we understand out there. And again, though, you have to remember that there's a combination in our case of getting new business, as well as cannibalization of someone else's classic fusion business.

And just to be clear on pricing, when you say low single digits, you're talking about -- is that the same, say, in MIS and cervical? Or are you seeing -- is that a mix across the businesses, and maybe just some color as to where there's more pressure, where there is less pressure.

Sure. I think there is a number of things going on. And we are seeing more aggressive pricing requests coming from hospitals, in the Northeast for example, other parts of the East Coast, and sort of spotty areas around the United States. What we've seen, and we've seen that across our entire platform of products. As you're well aware, we are the only ones that offer nerve monitoring that seeks out the nerve, and provides information along the way to the surgeon. And so, as that is the key components to our lateral offering, we see our competitors coming in, and trying to work without any kind of monitoring, or certainly with inferior monitoring.

One of the things that we're doing aggressively, is we are positioning NeuroVision. We are getting some pushback along the way, with regard to the pricing of NeuroVision disposables. But we are being very aggressive to ensure that we have the entire procedure. And as we do so, in some cases we have to more deeply discount NeuroVision disposables. It's not something that we haven't really dealt with in the past, but I think that it's very clear, in terms of the large players that don't have any sort of innovative offerings, they certainly are trying to win on price versus on innovation.

Fair enough. And then one follow-up on, you mentioned that the Big Apple training site has been up for about six months now I guess, or coming up on six months. Can you give us some color, maybe as to what's the balance of your East West business? And is it a matter of driving more penetration on a pretty even coverage area on the East Coast, or is this an opportunity to balance your business deeper into the East Coast? Anything you can -- maybe where that goes over the next 12 to 24 months would be helpful?

Yes, the focus is really on the eastern half of the United States. And it's an opportunity for us to bring surgeons there for the first time, as well as for advanced training. I think as we continue to grow, we are going to start to see more and more of that mix that moves towards advanced training. It's probably about 50/50 right now, between new and returning customers. And I believe that as we continue to grow, it's likely to become more weighted towards returning customers. Simply because if you take a look at a number of our offerings that we released in 2010, from moving into the thoracic spine to scoliosis, these are very specialized. And it takes quite some time for a surgeon to be comfortable in moving from a one or two level XLIF, or even a degenerative scoliosis case, into these applications. So we expect that to be on the rise for several years to come. As surgeons start to experience more and more of our platform, and want more and more education, and obviously we will continue to launch more products along the way.

And then -- (Multiple speakers). And please, I just wanted to clarify if I could --.

Get out of here, get out of here. Next. Sorry, Matt, you are already at 3.5. (Laughter).

All right, who's next, please?

And our next question is from Doug Schenkel with Cowen & Company.

Hello, good afternoon.

Don't try Miksic move, okay? Let's keep it to two. (Laughter).

All right. Two questions. First, enforcement of the Milliman guidelines started to intensify over the summer. I think some of these patients should be completing close to their sixth month of conservative care. Are there any signs that some of these folks are coming back, or will soon come back into the system?

You know something, it's a great question, and I wish we had the visibility to that, but we don't. It's a back-office phenomenon that happens with the surgeons, and it's really difficult for us to understand what that looks like nationally. We, anecdotally speak to surgeons, and we certainly see some of that, where some of the patients are able to come back. Others go elsewhere for their treatments. Others end up being pushed to where, I think the insurance companies are driving them, which is for more of a soft tissue procedure, to remove the disc, or to remove the lamina. And so what that does, is that lines them up, and I speak from a voice of experience with my own back, as I went through that exact process. What that does, is it lines you up, for greater instability, and you'll be back. You'll be back for an XLIF for -- in a few years. And it's not the best thing to do for the patient.

What's built into your guidance doesn't assume that these guys come back this year, though right? You're assuming they're gone?

That's exactly right.

Okay. Second question, you're guidance incorporates the assumption that US lumbar growth is minimal, while you are projecting that world-wide Biologics-- and presumably in the US, that Biologics grows above the market?

Right.

Presumably the Biologics growth assumption is driven principally, by confidence in your ability to accelerate penetration of existing practices, in spite of their volume challenges? If I am right, can you just talk about how these efforts have been tracking over the last few quarters, maybe provide some detail on how you have been tracking, to actually getting Biologics penetration to pick up in these practices?

Sure. And that's been picking up dramatically over the last couple of years. Especially you go from 2009 to 2010. In 2009, we were roughly 10%, little bit north of 10% penetration. If you look at 2010, we finished up with about 18% penetration with Biologics. And when I mean penetration, and I'm not talking about market share, I'm talking about as a percentage of our revenue. As we look at this year, with very strong Biologics growth, we expect it to be somewhere in the 20% range, with regard to a percentage of revenue.

I think the best we look at, is that one third of our procedures are using a NUVA biologic. And so, we've got a two-thirds opportunity to go, not only up into the spine, but to go much more deeply also with the one-third. So the one-third isn't necessarily 100%, so they are applying it to various procedures. We think we have a lot of upside with our synthetic, once we are able to launch that. Then we will also have additional upside to our Biologics outside of the United States.

Okay. Thanks, Alex.

You're welcome.

Thank you. Our next question is from the line of Ben Andrew with William Blair. Please go ahead.

Hi, good afternoon. Can you hear me?

Yes.

Great. Alex, you talked about the fact that you are baking in 0 to even negative lumbar share for the guidance and when you do bring new surgeons on, what used to be a 3 month process, is really more now 6 to 9? Maybe walk us through a typical case, or what is driving that dramatic change in surgeon adoption, in terms of timing? And then, what sort of efficiency and revenue delivery do you get from that surgeon after that window?

Well, I think certainly what we're seeing is that there is just a lot more competitors out there. And, I think as a result, there are more misinformed customers.

Here's what I mean by that, is that some of the competitive offerings are simply about an inner body solution. And they are saying, this is all you need for lateral. Here, try our inner body solution. And so what that does, it delays our process of bringing a surgeon in here, because now that surgeon is able to stick with who ever the competitor is, pick one of several, and say gosh, I guess I'm doing lateral surgery now. And then they come to realize, through the scientific literature, through their peers and so forth, that they're really doing something well short of lateral surgery with that kind of an approach.

It just takes longer for us now, to penetrate the relationship that exists between that competitor sales rep and the surgeon, and our ability to then, to bring that surgeon in here for training. Once we get them in here for training, we also find that in this sort of payor environment that we're in, it's taking a little bit longer. It's taking a lot longer if they're not doing any lateral work whatsoever at a hospital. So to get through committees and what have you, in the past was reliably done inside of 3 months, can now easily take 6 months if a hospital is not doing XLIF. And so there's a delay there.

So in part what happens, is the surgeon has to fight a little bit harder to do his first XLIF, if it's a brand-new hospital. And then additionally, it takes us longer to bring them in here. So, we are seeing that clock of about 3 months, start to rise more to on average closer to 6 now and, in some cases, even 9.

And so then --

With that, Ben, comes a great opportunity for advance training, because we are the only group that offers so many different advanced training opportunities. And the advanced training opportunities really cater to very specific procedural instruments and procedural implants. And so with that kind of fight that goes on, at the one and two level degenerative opportunity, there's a much greater focus in penetration that we are getting on the advanced opportunity. And the advanced opportunity is really where everything comes together to shine, meaning the neurophysiology components, along with the retraction systems, and the customized implants.

And that's a great point. And I think that those particular courses where we're doing that, those courses are filled up. The surgeons coming out here, in short order and they are applying that technology in short order. We consistently see some surgeons come out here, do an advanced course, they have already have a case lined up for the next week, or the following week. And of course, there are no issues with regard to the hospital, everything is set up. So, those things are going very well. And I think that our strategy is working, which is to do more advance training, as Keith said.

And keep in mind, these procedures have no insurance issues. So, these are important procedures, when it comes to the simplicity of being able to get them approved, and get them into surgery.

And then Keith, maybe briefly for you, my second question, what is the level and magnitude of change in the sales force, voluntary and involuntary, now versus, say, a year ago?

You're saying as far as --?

More turnover in the sales force, either on your side, or are people choosing to go somewhere else?

Yes, I don't know if there's really a big difference, to be honest with you, Ben. I think it's a tough environment out there. I think, if anything, what we're seeing is there is a lot of discourse with some of the larger players, who have very frustrated sales teams. So, I wouldn't necessarily say, we are seeing huge difference. I think there's always management changes that go on. And those have a lot of reasons behind them, from management of territory, how they are growing the business, how they are focusing on advance procedures. I think if anything, we are in one of our greatest opportunities of a number of sales teams out there, from our competitive perspective, that are not happy with the direction of their innovation and they want to come to something different.

Thank you.

Our next question is from the line of David Roman with Goldman Sachs.

Good evening. I just have two questions, four follow ups, and a clarification, so I will try to be brief. Maybe you could just go back to something you said earlier, Alex, when you walked through kind of the cannibalization on the market of MIS versus open, and kind of square that with what you said about flat growth in the lumbar fusion segment of your business? I mean, it still sounds like MIS is a relatively small percentage of the total, so why shouldn't that offset some of the weakness in the open procedures?

As far as MIS is concerned, I think that what's happening right now is that you've got a lot of companies that are out there pushing it, and they are pushing it with simply inner body. And so, as I mentioned earlier, that equates to a fair amount of turn. That isn't necessarily going to be reported as MIS by a number of the other players. It 's that cannibalizing process that we keep talking about. It may very well be having a deeper impact. We just don't know, because nobody is talking about it, we don't have any way to get at it. You may be correct.

So it is essentially what you're saying, is that there's been a short term impact from competitive trialing, as other companies go in there trying to sell alternative solutions, that may have a reason for hospitals to try, whether it's price or other incentives they are offering. But over time, the technology advantage you have will prove to result in customers returning to NuVasive, or in ultimate acceleration in your market share gains?

Yes. And I think, it gives us an opportunity actually to more readily differentiate our offering, compared to what the others are doing. But, as I just was talking about, it takes a little bit longer, to get in front of some of those newer surgeons than it did before.

Okay. And how long do you think it will take for some of those surgeons who were trialing others? I know you made some comments for -- to sort of try something, and potentially either give up, or come back to NuVasive? What is your sense in talking to surgeons, to the runway they are willing to give competitors?

Well, you know what, first of all, we've lost very, very little business. There are a few surgeons that have switched over to work with other companies. But, that's really, I mean you can count those on pretty much a couple of hands. That's less than ten, so that's not a big number. I think as you look at that, as far as surgeons coming back, we are losing very few surgeons from that standpoint. So, it's more just still an issue of, how much longer does it take to get a new one? But at this point in time, I think it's still fairly early in the process of all the new competitors being out there, But, we're not really seeing any kind of a base change in our business, than we've seen in the past.

That's helpful. Thank you.

You bet.

Thank you. Our next question is from the line of Chris Pasquale with JPMorgan. Please go ahead.

Thanks. Alex, I think I heard you mentioned that you expect gross margin to improve longer term, even though you're guiding to a decline in 2011. Given the pricing pressure we're seeing in the market broadly, and the fact that mix internally is working against you, can you help us understand what gives you confidence there and how soon we can see the downward trend in 2011 reverse?

Yes. And I was mostly focused on COGS with my comments, but I think Michael can jump in, and give you his perspective on that.

Yes. So let me jump in. And this is not a 2011 statement by any means, but the things to be thinking about, over the medium to long term, that are the opportunities for gross margin, and we are unique in this sense. We don't manufacture today, we can manufacture in the future. We are reaching the scale where that will start to become a lot more economic. Alex talked earlier on the call about the Progentix synthetic biologic, and we think that will have a more attractive gross margins than our Biologics business overall. And in fact, more attractive gross margins potentially, than our corporate average, driven by the fact that it is a synthetic.

Then of course, the Japan market entry, which as Alex mentioned, is the second-largest spine market growth. We don't even play there today. And so, the economics and characteristics, from a margin perspective of Japan, we believe are at or above our average today. And so, it's really that full complement of three or four things, that will be contributors to the improvement potential that we see over time.

Okay. And then, you talked about your goal of doubling international sales in 2011. Is that an organic number, or does it assume that you're going to be buying in some revenue, by acquiring distributors and broadening your infrastructure?

That's an organic number. So, that does not assume any kind of an acquisition. But, it does assume, obviously, some expansion of our infrastructure, and some build-out of offices. We are opening a new office in Puerto Rico, which is a very robust market. Preparation for the Japan office will be underway throughout 2011, and we certainly have some OpEx involved in that. We will be expanding our offices in Australia and New Zealand, but probably not until the start of next year. So, I think for the most part, our infrastructure load is fairly low, on the OUS side. But, it's all going to be organic growth.

Chris, it's Michael again. One other quick comment, or at least clarification to your earlier comment. Those things that I just talked about on the margin side, those are things that can, and will contribute to offsetting. We obviously have not put out a forward view that we are going to improve gross margin out in 2012 and beyond that.

Okay. And just clarifying real quick--

Now you are going into the Miksic clause.

(laughter) Very briefly, so just, you've talked the past about looking at opportunities to acquire distributors internationally. We should assume that if any of that activity takes place this year, it will represent upside to your goal of doubling sales.

That's correct.

Okay. Thank you.

Okay.

Our next question is from the line of Douglas Tsao with Barclays Capital.

Mike, I was just hoping you could sort of run through some of the assumptions, in terms of the share count, in terms of the guidance for next year?

Yes. I think the big thing, Douglas, really at $42 million, it's slightly higher than sort of where we landed to exit this year, pre-if-convert. And so really the big driver there is 45.5 used in full-year for 2010. The real driver there is, next year we don't expect to be on the if-convert methodology, which has been really 5 million roughly shares, coming out of the share account.

They come back out. And then what would trigger use of the if-converted method, on a go forward basis?

Well, it really just depends on the profitability profile, because you really run it, both on a fully converted basis, taking out the -- or adding back the interest expense, versus not, and then you just take the most dilutive of the two.

Okay. And then Alex, I'm just hoping you could comment, in terms of the growth next year for the Biologics business, what percentage of that do you expect to come from the settlement with Orthofix? Versus sort of just the broader sort of organic growth of the business?

Well, next to none really. It's barely material.

Okay. Great. Thank you very much.

You're welcome.

Our next question is from the line with Glenn Novarro with RBC Capital Markets. Please go ahead.

Thank you. Alex, just a question on your first quarter revenue guidance. You're guiding to revenues up 12% to 15%, so that's above what you are expecting for the full-year. So I'm wondering here in the first quarter, what are you seeing? Is the core business doing better, or is this growth coming from stronger OUS and Biologics? Thanks.

Sure. Our overall business, I think, the increase from the fourth quarter is essentially not there, because what we've seen from last quarter, which we talked about, was we had a couple million dollars that came from a settlement. We had a couple million dollars that came from capital equipment sales. Those are the typical year-end seasonal sales that you might get, which we were not expecting necessarily to see as much of. So effectively, it's making us, roughly it's pretty flat overall, compared to last quarter at 125 total. So, we are not really seeing -- this is not representing a large increase sequentially, obviously, in fact it's pretty much flat.

Okay. So the overall market trend that you saw in 4Q, playing out pretty much the same here, at least through the first two months of 1Q then?

Yes.

Okay. Thank you.

You're welcome.

Our next question is from the line of Vivian Cervantes with Maxim Group. Please go ahead.

Good afternoon. Thank you for taking the question.

Sure.

I wanted to sort of follow-up on some of the comments that you made on hospitals pushing more pricing concessions? And then maybe, layer into that any of your thoughts on vendor consolidation, and how this may impact you, given some of the bigger players sort of moving to a navigated lateral system in the coming months. And of course, a more crowded lateral space?

Well, I think, first of all, one of the big things that our competitors focus on is the price differential with neuro monitoring included with NeuroVision, and their system without it. And that's what I try to address in the Q&A, is that we are more than happy to negotiate and work out a reasonable point with the hospital, whenever that is requested of us. We are certainly doing that. We are also going on the offensive when it comes to our neuro monitoring business, and making sure that is never an obstacle. So those are the things that we're doing on that front.

We are seeing pressure as we've seen now for quite some time, that we've described as basically a minus 2% pressure. Can that pressure be a little higher over the course of this year? Yes, and we contemplated that in our guidance. So, let's just say, that as long as it stays in the low single digits, it's somewhere in the minus 2% to minus 4% range, and we don't see it deteriorating from that. But we are seeing price pressure in various markets.

I think the one thing you have to remember, when you talk of the bigger players, the bigger players are not incentived to lower the price on their inner body solutions, if they are going to play in lateral. Because what they are doing in effect, is cannibalizing their own businesses. So, they tend to use it as an opportunity to either run a slight premium with regard to the pricing of that, or certainly keep it at the same levels, as what they would otherwise be doing. They are not going to come in and discount it, because they are just killing their revenue, if they take that kind of attack. So I don't think there is as much room for them to move.

I think with the smaller players that are in this space, they are not looking to do the same thing either. They are trying to come in, and be closer to what the market is paying. For example, if we just talk about the inner body aspects of it, compared to pedicle screws, if it's a 360. The areas that have been under pressure for years, and I think have come close to a bottom are things like cervical plates and screws. Pedicle screws have been under pressure for many, many years, and are at a relative bottom. Some of that percutaneous systems now are under more pressure, but again that's not new to this year. That's the same as it was last year, and the year before.

That's very helpful. Thank you. And then as another follow-up, you had mentioned that North Carolina Blue Shield has sort of given up a little bit of room, making things just a tad bit easier, and that the guidelines from the societies are coming.

Right.

That said, do you think that may be some of the other private payers, knowing what's going on with Blue Cross Blue Shield and interactions with the societies, do you think that some of the other payers are now going to come in, and put out something that's probably as restricted, or maybe even more restricted than what North Carolina Blue Cross Blue Shield has put out?

I don't think so, because I think that what you saw, in terms of the reaction from the surgeons, I don't think that's ever happened before. We have to double check, but to my knowledge to get nine societies all agreed to do anything is next to impossible. And, I think that's true of any industry. So for them to have reacted so swiftly -- and because I think the biggest issue for them, is not this insurance issue.

The biggest issue for them is the fact that an insurance company is coming between a surgeon and a patient. And ultimately is denying access, or telling the patient what they should do. And where is the art of practicing medicine? And I think that's what the surgeons realized was happening, was that if everything is being driven off of a guideline, then where is the subjective interpretation of the surgeon, that is supposed to perform the treatment? And where is the opportunity for the patient to make an informed decision, versus just a guideline that is way too restrictive? And then you have patient still sitting there, saying ,well, I don't get it. I really do need spine surgery and something has to be done.

So, in those cases of course, they are going back, and they are petitioning the insurance company to get approval, and they are getting approvals. Obviously, it's not that surgeries aren't being done, it's just that they are constricting the entire process. I do not think it is get more restrictive, but I think it's going to take some time for it to get better, for the reasons that I've outlined.

Very helpful. Thank you.

You're welcome.

Our next question is from Charles Chon with Stifel Nicolaus.

Yes. Thank you. First question is just on the guidance for doubling international growth in 2011. Could you delve a little more into the some of the mechanics on how we get there? For instance, you mentioned there is some blocking and tackling that still left to be done in regions like the UK. What are the hurdles there that are limiting penetration? Are they structural issues or execution-related? And, as NuVasive moves into new markets outside the US, should we think of international revenues being susceptible, more to stocking patterns, maybe a little more lumpiness as we go forward here?

Yes. I can answer both questions. It's Keith. The first one is, a lot of how the growth is structured, has a lot to do with how we are training surgeons, and how we're getting them to the facilities for training, how they are getting supported when they go back to in-country, just as we have done over the years here in United States. And what is critical is that they have the appropriate first and second and third case experiences, those experiences transition into multi-level.

I just got back from a trip in Australia, where a surgeon just recently was trained at the New York facility, had gone back and did a one level procedure for XLIF, then did a second procedure at two-level. And I had the pleasure of seeing him do a four level procedure. And so, when you have those kind of training opportunities -- and it was a double training, with a training and a lab, also was able to see it live surgery in the US, and then go back and be able to replicate that. Those are the real opportunities for growth. We want to do those in a progressive way, not just turn around and train 20 people and hope that a couple stick with the procedure. We want to make sure that we make the clean investment, so when they go back in-country that they get the proper support to have successful cases. And in this particular patient had a four level case and 50 ccs of blood loss, and was very happy with the result. And that's not heard of in that person's practice before this. So, those are the kind of opportunities we want to take advantage of.

When it comes to lumpy sales, the balance for us, which is good, as we have subsidiaries, and we also have distributors. By having both, you avoid that kind of lumpiness that you're talking about. If we were all a distributor, there becomes a risk that you have those kind of scenarios as quarters end. When you have subsidiary we have actual sales into the end market, along with the distributors that are ordering, which gives us a better balance of revenues internationally.

I just want to add thing about my comment. Keith did a nice job of summarizing what was going on there. So when I was talking about the UK, and saying that the UK has been slow to adopt XLIF, for example. So what's happened is that in a few markets -- most of the markets we've gone in just exactly as Keith describes, we keep moving down the path of XLIF, and we get more and more stickiness. And then we are a little bit behind, on trying to get the rest of our more classic fusion products in there, which again, is an opportunity. But it's not an obstacle.

In some markets, we went in knowing that it is going to take longer, because of the conservative nature of the surgeons to get our XLIF offering in. And so we started with more of our classic fusion products. They will now convert, and move into XLIF. It's not an obstacle, it's just , just really two different routes that we take, in different scenarios. The route of, starting with classic fusion products, we've taken more with distributorships. The UK is the only exception that. And the UK is also now starting to do more scoliosis cases with Armada, and doing the same thing on the XLIF side. So, none of those things are obstacles. What I wanted to explain was that they were huge cross-selling opportunities for us to go much deeper in all of our markets, without having any infrastructure burden associated

That's helpful. Thank you. And just for the second question; as the mix of training shift more towards these advanced procedures and concentrates more around the Company's existing base of business, especially the installed surgeon base if you will. Could you help us understand the revenue growth trajectory longer-term for these opportunities? How could it be different from NuVasive's historical growth profile, which may have been predicated more on pursuing and training new surgeons?

I think what we were referring to there -- I think I am capturing your question with this. What ends up happening with longer level procedures. They are usually associated to deformity, sometimes with trauma, sometimes with tumor, often they involve getting into the thoracic spine, which creates a different set of challenges that need to be accompanied with certain instruments and implants. But the point that was being made, was those are the procedures that don't have this insurance push back. So there is a big revenue opportunity right there. You don't have all of the frenetic activity, if you will, of what the surgeons office has to do to get the procedure approved, and just approved through insurance.

Secondly, those very cases involve more implantation, more implants themselves, and are typically at a much higher dollar per procedure than you would for a typical one or two level degenerative procedure. So, that advanced training, by definition, are higher revenue procedures just per single procedure.

Great. Thank you.

Our next question is from the line of John Putnam with Capstone Investment.

Thank you very much. Most of my questions have been answered, but I wondered if you have seen any uptake in the New Jersey facility by international surgeons or what that has been like, Alex?

Yes, we have. It's not called the New Jersey facility, it's now called the Big Apple facility. So, we decided to settle this whole thing of the New York office being in New Jersey, by calling it Big Apple which makes it easy. We have certainly seen, actually we've seen quite a few surgeons come over from Germany. Keith just talked about a surgeon that trained from Australia. So it's doing what we wanted to do, and we are happy with that.

Thanks very much.

You bet.

Our next question is from the line of Rick Wise with Leerink Swan.

This is Rich in for Rick. Just a quick question on pricing. Alex, you mentioned that NeuroVision is not necessarily anything that you haven't done before, but sometimes you may have to use the discounting tactics to preserve market share. You also have been describing in previous quarters, your ability to either gain new accounts, or to leverage lower pricing on some more traditional type products versus your competitors. Can you explain how that dynamic is playing out? And if you can offset that, and that strategy still works to offset whatever discounting you might be doing on the NeuroVision side?

Yes. That offset comes in incremental revenue, when we are able to come in and bundle, so we are doing more of that. We are getting more opportunities to bundle. I think, as we are working through the various, normal trend of bids that you work through the hospital. There is one hospital every single day, at least, that we are dealing with, if not a few. You are able to work through those, pick up the extra revenue that is associated with it. But, what's really great is, that I think now as I've talked about, we are on that preferred provider listing. So, that gives us an opportunity to come in, and to bid on that particular account. So, we are getting into that situation much more frequently now, because of the breadth of our offering.

Thanks a lot.

You're welcome.

> Our next question is from the line of Joanne Wuensch from BMO Capital Markets.

Thank you, and good evening. I have two questions, I'll keep it simple. Could you please provide an update on the PCM cervical disc. If I heard correctly or remember correctly, the PMA has already been submitted. Do you need a panel for this, do you have the right sales force for this and all that kind of good stuff? And then my second question, has to do with operating margin progression throughout 2011. If I heard correctly, you are starting the year at about 11%, and then full-year 16.5%. That means as very low EPS number at the beginning of the year, and I'm curious what you think the exit Op margin might be for the fourth quarter? Thank you.

Keith is going to answer the PCM question.

Joanne, things are actually progressing nicely. We have had indication that's not going to be necessary for panel, but we have to work through all the same processes that you would expect, and validating manufacturing, and working through labeling, everything else. So we are in process of doing all that. Things seem to be progressing on a track that we feel is good, meaning that, it's not expeditious, but we certainly don't have any delays. And, the communication back and forth has been very strong.

And, Joanne, I will take the second question. This is Michael. You did hear it right; progression over the course of the year, stepping up. Non-GAAP operating margin, quarter by quarter, similar to what we did in 2010. I think you can think about that exit year for us as approaching, yet again, that elusive 20%-- elusive to date, but a 20% non-GAAP operating margin. We expect to get there during 2011.

Joanne, just to finish where you were going on PCM, we do not need a specialized sales force to sell that. So, we are not contemplating that at all. We will be using our facilities in order to do surgeon training, so we're not be doing this, as was done once upon a time with cap spines and saw bones. We are going to do it properly, and make sure surgeons are trained with the categoric model, and that they really learn how to apply it in the best possible way. I think we are hopeful that we will be able to see approval sometime very early next year. And again, it's all sort of driven and dictated by FDA right now. As Keith said, a lot of things are going very well, very much on track. So, right now in terms of our prognosticating, it's somewhere around first quarter of next year.

Terrific. Thank you very much.

You're welcome.

> Our next question is from the line as Jeff Johnson with Robert W. Baird.

Thanks. Good evening, guys. Just a couple of follow-up questions here. Following up on Vivian's question. She was asking about increasing push back from payers, or making it more difficult. Do you see more payers maybe pushing back on the approvals at this point beyond North Carolina, California, some of those that have, not necessarily instituting stricter guidelines, but more payers actually moving to that model?

There have been more payers pushing back since last year. So, I mean, that's been happening across the country. Not to the level of -- North Carolina took it to sort of to an extreme, or threatened to take it to an extreme, in January and that's what they did. I think that's what got the ire of the societies. The others are applying it, but they are not applying it with that kind of aggressiveness like they did in North Carolina. Of course, since, they've back down.

Alex, my question was over the last 3 to 6 months, you are still seeing that progression happening of more payers, not less payers pushing back, and that really hasn't changed? Is that fair?

I wouldn't say, that it's more, I would say that just simply hasn't changed. I think it's consistent.

That's helpful. And just last question, I am just trying to reconcile, with your 1Q guidance of revenue at the 12% to 15% range, would imply a slowing of revenue growth anyway throughout the year, yet operating margin expanding so significantly in the latter half of the year off of the lower revenue growth base, but the significant margin expansion. What is the reconciling factor there?

When you -- ask the question again, please?

I'm just -- your revenue growth, presumably from your guidance, is going to slow throughout the year, but operating margin is going to ramp pretty aggressively. So, it's not like spreading of overhead is going to get materially easier, off a rapidly growing revenue line and that. So, I'm just trying to figure out how those operating margins ramp so aggressively, especially in the back half of the year?

That's really the modulation of spending and investment on the OpEx side over time, and really how the fixed variable structure of the Company tends to work. We do tend to make or front-end load some of our investment profile, as we exit Q4 and enter Q1. Right? So that loads in OpEx that works to deliver the next round of growth over the course of the year. That's really how it works.

Thanks, Michael.

And our final question comes from the line of Michael Matson with Wells Fargo Securities.

I guess I just had a question on your operating margins. Looking out, over the longer term, on a GAAP basis, how high do you really think your operating margins can go? Do you think you could get considerably to the 15% or 20% level at some point on a GAAP basis?

We are going to say for the time being talking about non-GAAP, we think, is the most relevant. At some point, way out in the future, do GAAP and non-GAAP merge for us, probably, but not over the immediate horizon.

All right. And then, just the tax rate, I understand you have some kind of unique issues this year, but looking beyond 2011, is that owing to kind of fall back into the low 40% range, or is it going to be higher or lower than that?

Yes. If you think about beyond 2011, we would expect to migrate back towards the mid-40s, and then beyond that migrate toward the low 40s. Now, that said all this is before any of the long-term tax planning strategy work that we've got to get underway this year and that will be a multi-year set of activities. So, that will be a multi-year set of activities that we will get working on. The idea there is that those are the things that could potentially bring us sub 40% of the point. But, I just want to remind you, as we head toward closing the call, of the operational performance, nice progress embedded in the pre-tax operating margin and pre-tax earnings numbers that we talked about on the call. So, that we are continuing to deliver strong operational performance, even in light of or in spite of the delta tax rates year-over-year.

And Mike, just to clarify, I think as we are continuing to grow, like Michael said here, on our end, we are going to be focused on a non-GAAP operating margin. But as we move towards $1 billion -- and we talked about this in our remarks, we expect to see year-over-year improvement on the operating margin. We believe that, and we don't have an exact number in mind, but we believe that as our business gets to the point of getting well into the 20% range of the about 20% maybe even approximating mid, as we continue to grow, but let's just call in the 20% range for non-GAAP operating margin.

Okay. Thank you.

You're welcome. Okay, everyone, I guess that's it for this quarter, and we will talk to you in a couple months. Thanks very much, everyone. Bye-bye.

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