NuVasive Inc (NUVA) 2011 Q2 法說會逐字稿

Greetings and welcome to the NuVasive second quarter 2011 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, Mr. Patrick Williams, Vice President of Industry and Investor Relations for NuVasive. Thank you, Mr. Williams, you may begin.

Thank you, Operator.

Welcome to NuVasive's second quarter 2011 earnings conference call. NuVasive's 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 filings filed with the Securities and Exchange Commission.

Finally, as a courtesy to all, we will be limiting each person to 2 questions during the Q&A session so 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 second quarter results, which attest to excellent execution of our strategy to take market share in what continues to be a challenging environment. Revenue increased over 11% year over year, to approximately $133 million. And we demonstrated further progress toward our goal of steadily increasing profitability with a non-GAAP operating margin of 17.3%.

I will open today with an update on the state of the spine market in terms of industry, volume, pricing and the competitive landscape. As you know, various private payers have overly increased their scrutiny and enforcement of criteria necessary to pre-authorize lumbar surgery. This dynamic continues to depress US spine procedural volumes. That said, our results in the fourth quarter of 2010 and in the first half of 2011 imply that our expectations of payer impact on NuVasive's growth are appropriate. And on a positive note, our experience in the field continues to indicate that the landscape is in the process of stabilizing, as on a case-by-case basis surgeons are better learning to navigate this environment.

As we approach the first anniversary of payer pushback on industry volumes, year-over-year growth is likely to improve optically. Longer-term, we anticipate a return to mid single-digit volume growth in the industry. But organic growth is unlikely to materialize until the surgical community is able to effect change with private payers. In our relationship with the surgical community, we are actively working to support the surgeons in advocacy for their patients. And we have developed a good grasp on what that process will entail and who the key stakeholders are. We also underscore that, 1, NuVasive does not directly control the time line. And, 2, the process will take some time. However, we are hopeful to see the tide start to turn by the end of this year.

We continue to observe a behavior among the payers. They appear to be delaying inappropriate lumbar fusions by instead advocating potentially destabilizing decompressions, which are soft tissue procedures without implants. This is not good medicine, in our view. As well, there has been some recent news regarding proposed coverage policy changes which would further restrict patient access to all lumbar fusions in such states as Minnesota and Florida. The proposed changes are not unlike prior policy proposals which were successfully overturned. Similarly, we recently saw NASS and AAS respond to the proposed Florida and Minnesota policy changes. NuVasive is well versed in the process of collaborating with the surgical societies to educate the insurance providers on the clinical merits of XLIF and other lumbar fusion procedures. We have a very successful track record of effecting change. You can expect that we will continue to fully support surgeons and the surgical societies, while taking a leadership role of working with the providers to ensure access to care for their patients.

Additionally, we are working closely with the surgical societies and the clinical research community to ensure that thoughtful, clinically-supported, consistent guidelines for spine fusion remain on track to be finalized in the fourth quarter. As well, ISASS recently published a policy statement on lumbar spinal fusion surgery which they will advocate to payers. The final guidelines will be coupled with a wealth of peer-reviewed clinical evidence, and submitted to the payers with the longer term aim of broad adoption by the payers and a more uniform set of standards for lumbar fusion surgery. Ultimately, it is our hope that surgeons, not actuarial consultants, will determine the appropriate care for patients; and that good medicine and good outcomes will prevail.

Turning to pricing, we continue to experience and expect low single digit pricing pressure, which is somewhat mitigated by positive mix. A primary benefit of being the most innovative player in the industry is that we continually have new solutions to talk to our surgeon customers about, and innovative products that positively impact patient outcomes. We continue to see peer-reviewed data demonstrating a compelling cost-effectiveness argument to our hospital customers. A great reference, for example is the XLIF study published last year, which showed a nearly 10% perioperative hospital cost reduction, with minimally disruptive versus open surgery.

Now I will turn to the competitive landscape. As you know, the lateral market has been privy to a host of new products over the course of the last year. That said, our experience in the field, coupled with our analysis of reported results in the US, implies the current dynamic has limited impact on our ability to take market share. In fact, despite the flurry of new market entrants at NASS late last year, we have grown US revenues roughly 10% year to date within the context of a US market that we believe did not grow, and may even have contracted. This gives us confidence in our market share-taking strategy, and in our conviction that longer term, the new market entrants will serve to further validate NuVasive's lateral approach to fusion.

Surgeons who are led to believe XLIF was a niche product are increasingly reconsidering how it can dramatically affect their practice. As surgeon familiarity with the lateral approach grows, our sales team is well prepared and eager to drive conversions to XLIF, based on the technical and functional superiority of our solution. NuVasive offers unmatched integrated neuromonitoring, that provides surgeons self-directed real-time feedback with both nerve proximity and directionality. And very importantly, this yields a safer, more reproducible approach with fewer complications. XLIF surgeons have access to an unmatched number of implants to treat multiple indications laterally. They also now enjoy MaXcess 4, the latest generation of our best-in-class retractor. It is the only retractor with a customizable exposure designed specifically for the lateral approach.

So with all of those market dynamics in mind, we reiterate full-year 2011 revenue guidance of $530 million to $540 million, or 11% to 13% growth year over year, with a 17.5% non-GAAP operating margin. While we are always focused on the overall growth of our business, and prefer to view the pieces of our business collectively, I will offer some detail on the components of that growth, which have changed slightly now that we are midway through the year. Due to better than expected growth of 10% year-to-date in our US lumbar business through market share gains, we now anticipate roughly 3% to 6% growth for the full year, up from the 1% to 4% growth that we expected previously. Our assumption is that 15% of US lumbar fusion procedures that are DDD -- degenerative disk disease -- cases will continue to experience payer denials. It is difficult to pinpoint exactly where we are in that process; but as a reminder, the denials began to negatively impact our business very late in the third quarter last year.

While easier growth comparisons may begin to play a part in overall industry growth in the fourth quarter, we feel that the dynamic nature of the environment warrants continued caution. M IS procedures continued to expand; now to over 20% of share of the spine industry. So we expect MIS volumes in the US -- net of the negative impact of payer pushback -- to exhibit low to mid single-digit positive growth. With that backdrop, we expect our US lumbar business to continue to benefit from market share expansion, thus fractionally outpacing US MIS volume growth.

We continue to look to under-penetrated pieces of our business to drive revenue growth this year. That said, we now anticipate Biologics growth of 15% for the full year, down from the 20% we expected previously. Delays at the FDA are calling into question our expectation to be able to commercialize our synthetic biologic, Progentix, within the time frame we originally hoped for. On a positive note, Progentix was used successfully in the second quarter in several surgeries across our international markets, and is currently being marketed under the name AttraX. We believe AttraX will have its first full year of commercialization in the US next year. AttraX could accelerated Biologics growth back up toward 20% if FDA will grant earlier approval. With respect to our Cervical business, we continue to expect approximately 20% growth for the full year as account penetration improves, and as new products continue to gain traction in the marketplace. Our recently launched Helix R anterior translational cervical plate has seen very good early adoption.

We also continue to expect our international revenue to double this year, and provide greater growth opportunities for all of our products. Q2 non-GAAP operating margin and earnings were strong this quarter, and we continued to show good progress toward our full-year profitability goals. Our full-year EPS guidance would have remained unchanged if not for the new convertible notes offering completed in the quarter. I'll let Michael give further details on those revisions in just a moment. Now let me extend the focus beyond 2011, and offer a progress report on our long-term growth drivers -- the building blocks for NuVasive's evolution into the first $1 billion spine startup.

NuVasive's speed of innovation and the culture that fosters it, is the very foundation of our reputation with the surgical community, the driver of our growth and the mainstay of our ability to continue to take market share. We continue to leverage unrivaled years of experience in lateral to afford NuVasive the best-in-class, most comprehensive lateral solution for spine fusion; a testament that was this quarter's launch of the 4th generation of our retractor, the MaXcess 4, which has exceeded even our own high expectations. We incorporated years of surgeon feedback to redesign our retractor for strength, precision, [floor] visibility, and seamlessly integrated neuromonitoring to make the XLIF procedure even more reproducible and easier to learn. The outcome is truly superb.

We received overwhelming response feedback on the new retractor, and the results are tangible. We have converted numerous surgeons to XLIF that were either using competing lateral solutions or opting for procedures they thought would be less complex due to some of the instability concerns or handling difficulties associated with our previous retractor. The resounding surgeon accolades underline another extremely successful product launch for NuVasive. NASS will be in November this year, and we will have plenty to talk to surgeons about, as we preview upgrades to our MIS TLIF solution, a new MaXcess 4 kit, and a new MIS deformity solution.

And late this year, early next, depending on FDA time lines, we look forward to the commercialization of 2 solutions in our pipeline that have exceptional potential. The PCM device for the cervical spine could be the third motion preservation device to the US market, marking NuVasive's foray into a very exciting field that we continue to believe could eventually displace most cervical fusions. And AttraX, our novel orthobiologic with a synthetic bone substitute technology that we expect to compete head to head with Infuse. The surgeon community has come to expect big ideas from NuVasive. And as we drive toward $1 billion in revenues, we will continue to deliver.

Another pillar of NuVasive's long-term growth is our developing presence internationally. Surgeons overseas increasingly recognize the quality of NuVasive's educational programs, and are eager to accept invitations to train with us, which in most cases expose them to the benefits of MIS techniques for the very first time. In several of our more mature international markets, like Australia, Germany and Puerto Rico, our MIS solutions for spine surgery are being adopted at a rapid pace, and the momentum is building. And as our international development team continues to gain experience, they are becoming increasingly skilled with the complex regulatory process for new international markets.

This year that team has encountered great success, and we are exceptionally proud to have made our first sales in several new countries. We are completing the lengthy regulatory approvals process to officially enter Japan in 2012. Japan is the second largest market for spine. We recently opened our fifth international office, in Puerto Rico. Our sixth office, in Tokyo, opens late this year. We are very excited about our international progress, and expect it to represent 8% of revenue in 2011, and make a positive contribution to profitability in 2012.

Our global sales force is another growth leader for NuVasive. It already numbers well over 300-strong today. We continue to attract the spine industry's top talent. And as we look forward to the $1 billion revenue milestone, we envision a sales force at least 500 representatives strong to take market share in new and existing territories. And as our sales force continues to mature, efficiency is improving at a measured pace, driving operating margins up.

Surgeon training is also a driving force of our long-term growth. It continues to advance the adoption of lateral approach to fusion, not only for basic single-level lumbar cases, but also for multilevel procedures, tumor and trauma procedures, thoracic procedures, and the treatment of deformity.

As we close out NUVA East's inaugural year, demand for training at the facility continues to exceed our expectations. By the end of June, we have hosted over 100 surgeons-in-training at the new facility. This boosts our confidence in at least 600 surgeon training sessions to improve our penetration on the East Coast and overseas. SOLAS, the NuVasive-supported Society of Lateral Access Surgeons, will also continue to grow, as surgeons increase the use of NuVasive's products and drive the market toward more minimally-disruptive approaches to spine surgery.

Before I turn the call over to Michael, here's an update on IP litigation, and most notably the upcoming trial with Medtronic. The trial is set for August 30 before a jury in San Diego. As a reminder, Medtronic initially brought forth 12 patents in the original complaint, of which 3 related to pedicle screws. These 3 pedicle screw patents were dropped early in the case, bringing the total number of patents in dispute to 9. 3 of the 9 patents will be part of this first phase of the trial. The remaining 6 patents have been set aside by the court for later phases of the trial. More to the immediate focus, the 3 Medtronic patents that are part of this first phase of the trial relate to one of our cervical plates, our MaXcess retractor, and our lateral inter-body implant. We counter-sued with 3 patents, all related to Medtronics NIMS neuromonitoring system, of which 1 will be going to trial in this initial phase. So 4 patents altogether.

These types of cases are not uncommon to our industry. It is the cost of doing business in spine against highly litigious companies. No matter what the outcome, we can expect some type of appeals process from either side. As you know, NuVasive developed XLIF, which made the lateral approach safe and reproducible, and built the market from the ground up. 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. We will provide updates as necessary, including at the conclusion of the first phase of the trial expected in late September.

Finally, our ongoing appeal of the NeuroVision trademark verdict continues with no material updates expected for at least another year. We still feel strongly that we will prevail, and the existing judgment will be overturned. The spending behind all of these cases has been fully contemplated in our EPS guidance.

With that, I turn the call over to Michael, who had a very busy quarter. He and his team executed extremely well on the convertible notes offering, to bolster our balance sheet and enhance our flexibility as we look toward our next major milestone of $1 billion in revenue.

Michael?

Thank you, Alex, and good afternoon, everyone.

Our revenue for the second quarter 2011 was $133 million. This represents an 11.2% increase over Q2 2010, and about a 7% sequential increase to last quarter. Revenue results this quarter demonstrate excellent execution within a difficult spine environment. Biologics revenue was $24.2 million, and international revenue was about 7.5% of total revenue in the quarter.

Before I walk through our results from the second quarter, I would like to go over some details and financial impacts on our new convertible notes, which priced at the end of the quarter. We are exceptionally pleased with the outcome of the offering, and with the enhanced financial flexibility that it will afford for both our near- and longer-term growth objectives. The total offering ended up at $402.5 million, which differs from the $350 million in the June 22 press release, due to an additional $52.5 million exercised with the over-allotment option, or greenshoe. We estimate net proceeds of approximately $360 million, which we intend to use for general corporate purposes for the potential repurchase of our $230 million convertible notes due March 2013, as well as for possible strategic growth opportunities. Regarding the $230 million of convertible notes due in March 2013, any early repurchase we attempt would be decided by a disciplined approach driven by the economics of the transaction. Our new offering confirmed our NuVasive credit strength, which is contributing to the old convertible notes trading strength relative to par value.

Given the economics implied in the current trading levels of the notes, we are not financially motivated to repurchase them at this time. We will continue to monitor the economics as we approach the March 2013 maturity, and we have earmarked the cash necessary to cover this obligation. In the meantime, we will carry a long-term debt level of just over $630 million, associated with the 2 convertible notes; and we will pay interest expense on both instruments. Accounting rules related to the new convertible notes require that we record noncash interest expense over their 6-year life, which will be excluded from our non-GAAP earnings results. This noncash interest expense, along with the coupon interest expense and amortization of the issuance fees associated with the new notes, will be recorded in the Other Income and Expense line on the P&L.

Also, the new convertible notes will require mark-to-market accounting for the conversion feature and bond hedge derivatives for the third and possibly the fourth quarter. The income and expense impacts resulting from this accounting are expected to roughly offset one another; but to the extent they do not, we expect to exclude any impact, either positive or negative, from our non-GAAP earnings per share calculations. I'll cover the expected P&L impact in greater detail when I address guidance.

In our first quarter press release, we detailed an accounting estimate change which went into effect this year. As a reminder, for certain loaned instrument sets placed into service before January 1, 2011, we changed the depreciable life estimate from 3 years to 4 years. This change in historical accounting estimate reduced depreciation expense, which is a sales, marketing and administrative expense, in the second quarter, by $2.1 million, and year to date by $3.8 million. When comparing to prior year only, this increased both GAAP and non-GAAP earnings per share in the quarter by $0.03, and year to date by $0.05. First quarter results and full year 2011 guidance already take into consideration this impact. So all numbers I'll reference below will be on an as-reported basis.

Now let me turn to our results in the second quarter. Our Q2 2011 GAAP net income was $5.4 million, or earnings per share of $0.13. Excluding an aggregate adjustment of approximately $7 million net of tax for stock-based compensation, certain intellectual property litigation expenses, amortization of intangible assets, acquisition-related items, and noncash interest expense associated with the new convertible notes; second quarter non-GAAP earnings were approximately $12.4 million or $0.30 per share. Gross margin in the second quarter was 80.8%, compared to 82.4% in Q2 2010; and 81.1% in Q1 2011. Year-over-year gross margin was impacted by higher excess in obsolete inventory reserves associated with cervical product transitions.

Operating expenses for Q2 2011 totaled $96 million, compared to $90.3 million in Q2 2010; and $96.3 million in Q1 2011. Research and development expenses, adjusted to exclude stock-based compensation and acquisition-related items, totaled $9.2 million in Q2 2011, compared to $10 million in Q2 2011; and $10.2 million in Q1 2011. R&D expense as adjusted was 6.9% of revenue for Q2 2011, versus 8.3% in Q2 2010; and 8.2% in Q1 2011. The lower year-over-year spend is primarily attributable to the timing of our various clinical trials and studies. As reported, sales, marketing, and administrative expenses, adjusted to exclude stock-based compensation, certain intellectual property litigation expenses, and acquisition-related items totaled $75.3 million in Q2 2011, compared to $69.8 million in Q2 2010; and $74.2 million in Q1 2011.

SM&A expense as a percent of revenue was 56.6% in Q2 2011, versus 58.3% in Q2 2010; and 59.6% in Q1 2011. The year-over-year decrease in SM&A is primarily attributable to the previously-discussed change in accounting estimate. On an absolute basis, the year-over-year increase in the more variable components of SM&A expense, including commissions, freight, set depreciation, international investment, and sales force personnel, was similar to the corresponding increase in revenue. In addition to the variable components relative to last year, we invested significantly in adding share owners and infrastructure, along with their related costs to support growth.

Second quarter non-GAAP operating margin, as reported, was 17.3 [million] (sic - see Press Release), compared to 15.8% in Q2 2010, and 13.3% in Q1 2011. Non-GAAP operating margin excludes stock-based compensation, certain intellectual property litigation expenses, amortization of intangible assets, and acquisition-related items. Stock-based compensation totaled $7.7 million in the quarter, compared to $7.5 million in Q2 2010; and $7.9 million in Q1 2011. Stock-based compensation was allocated as $7.1 million to SM&A expenses, with the balance in R&D. Medtronic-related intellectual property litigation expenses were $1.1 million in the quarter, compared to $1.1 million in Q2 2010; and $2.1 million in Q1 2011. Amortization of intangible assets totaled $1.4 million in the quarter, compared to $1.4 million in Q2 2010; and $1.3 million in Q1 2011. Acquisition-related items totaled $1.3 million in the quarter, compared to $558,000 in Q2 2010; and $571,000 in Q1 2011. This quarter acquisition-related items were allocated as $825,000 to SM&A, with the balance in R&D.

Interest and other expense totaled $1.7 million in the quarter, compared to $1.5 million in Q2 2010; and $1.1 million in Q1 2011. These numbers included about $96,000 of noncash interest expense associated with the new convertible notes. On a year-to-date basis, cash provided by operating activities continues to demonstrate progress, with Q2 coming in at approximately $13.2 million in the first 6 months, at $27.7 million. Looking forward, we continue to focus on identifying efficiencies in our cash generation cycle. Our cash and investments balance at the end of the second quarter was significantly higher, given our recent convert placement; but the Q2 total was also reduced by the escrow restriction of approximately $63 million associated with the NeuroVision trademark jury verdict, pending our ongoing appeal. Cash and investments came in at approximately $524 million, compared to 2010's ending balance of approximately $230 million. Our primary investment focus for cash balance will continue to be safety of principal.

At the end of Q2 2011, our inventory position was just over 22% of annualized second quarter revenue, compared to 23% at the end of the first quarter; and about 20% for second quarter 2010. As mentioned, last quarter we continued to align inventory to ensure we capture all possible revenue opportunities in this dynamic environment. And we want additional flexibility, as we plan for some new product announcements, and as we manage through a reconfiguration of our sets in an attempt to improve future efficiency. 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.

Day sales outstanding, or DSOs, when run off of our net AR balance, was 55 days in the quarter, compared to 51 days for last year's Q2; and 55 days at the end of Q1 2011. 1 day of the year-over-year variance is related to the outsized growth in the international business, where payment terms are much longer than on the US side. 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.

Now I will turn to guidance for the full year 2011. Please reference the tables in today's press release, which further detail our guidance changes. Please recognize that our revised guidance contemplates no convertible note repurchases in 2011. If we do engage in a repurchase, guidance will be adjusted accordingly.

As Alex mentioned, we are reiterating revenue guidance for the full year to growth of 11% to 13%, or $530 million to $540 million. We also expect revenue in the third quarter will increase slightly from the second quarter, to approximately $134 million. Moving through the rest of the P&L, we continue to anticipate a full-year gross margin of approximately 81%. We continue to expect full-year 2011 non-GAAP operating margin to be approximately 17.5%. As we anticipate third quarter revenue to be only slightly up, we expect third quarter non-GAAP operating margin to approximate our Q2 2011 margin result. As leverage improves against a higher revenue profile in the fourth quarter, we anticipate exiting the year with a non-GAAP operating margin above 20%.

Now that we are halfway through the year, we have fine-tuned our R&D and SM&A expense forecasts for 2011. We now expect R&D expense, excluding stock-based compensation and acquisition-related items, to approximate 7% of revenue for the full year, down from the approximately 8% of revenue that we previously expected. And we now expect SM&A expense to approximate 56.5% of full-year revenue, up from the approximately 55.5% that we previously expected. We see opportunity to aggressively take market share, and as such are prioritizing resources accordingly. We remain committed to reinventing our product portfolio and further arming our sales force. With the FDA approval process becoming less predictable and less timely, we are refocusing our efforts on driving market share gains. We believe R&D could ramp back up to historical levels as these dynamics stabilize.

We continue to anticipate stock-based compensation of approximately $33 million, which will be allocated as roughly 90% toward SM&A expense, with the remainder toward R&D expense. We also continue to expect intellectual property litigation expenses related to the Medtronic dispute to approximate $6 million. We have spent approximately $3.2 million year to date, and we expect a significant piece of the year's remainder to be rolled into the third quarter, assuming an August trial date. For the full year 2011, we continue to expect the amortization of intangible assets to be approximately $8 million. Due to the new convertible notes, interest and other expense is now anticipated to be about $18.5 million for the full year 2011, up from the approximately $6 million we previously expected. We anticipate interest and other expense for the third quarter to be about $8 million, and the fourth quarter to be about $8 million. For purposes of computing our non-GAAP earnings, we will exclude the noncash interest expense associated with our new convertible notes, of approximately $3 million in the third quarter and $3 million in the fourth quarter. The noncash interest expense is not a straight line accretion; thus we expect it to be approximately $13 million for the full year 2012.

As a result of the convert placement, we now anticipate a full year 2011 GAAP tax rate of about 50%, up from the 45% that we previously expected. As we have discussed, we have some fixed dollar items in our effective tax rate calculation that do not vary in proportion to pretax income, which, as the increased interest expense associated with the new convertible notes rolls into the P&L, puts upward pressure on our tax rate. On an absolute dollar basis, our total tax expense is expected to decrease. We continue to expect our non-GAAP adjustments to be tax-affected at approximately 40%.

Finally, I would like to be clear that we were it not for the impact of the recently-placed convertible notes, EPS guidance would have remained unchanged. Incorporating the impact of the new notes, however, we now anticipate full-year GAAP EPS of $0.33 to $0.36, compared to $0.52 to $0.55 previously. We now expect non-GAAP EPS of $1.09 to $1.12, compared to $1.20 to $1.23 previously. Thus, non-GAAP EPS will be impacted by approximately $0.05 for the third quarter, and approximately $0.06 for the fourth quarter, from impacts associated with the new convertible notes. Non-GAAP EPS guidance excludes noncash, stock-based compensation, certain intellectual property litigation expenses, amortization of intangible assets, acquisition-related items, and noncash interest expense on convertible notes. 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.

We continue to expect 2011 fully diluted weighted average shares outstanding to be approximately 42 million shares. The second quarter of 2011 marks solid performance in what we expect will be another year of industry-leading growth for NuVasive. We made great strides in enhancing our financial flexibility, and we executed well operationally in a difficult market. NuVasive' evolution into a $1 billion startup continues to unfold, and I look forward to contributing to steady predictable progress in levering the operating expense structure and asset base.

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

Thank you, Michael.

I am exceptionally pleased with our second quarter results. Early industry reports reflect some stabilization in the market, but still flattish growth rates. NuVasive, however, is once again taking market share and driving industry-leading revenue growth, with consistent progress in profitability. And importantly, we continue to thoughtfully expand the foundation that will sustain growth and market share gains for years to come. As we move toward the next milestone, which is the evolution of NuVasive into a $1 billion company, we are laser-focused on maintaining the startup mentality that is the very source of NuVasive's success. Our market share taking ability, together with our speed of innovation, will lead the industry to continue improving patient outcomes with game-changing products. So onward and upward.

We will now take your questions.

(Operator instructions). Bob Hopkins with Bank of America Merrill Lynch.

Hi, thanks. First, just wanted to ask about the upcoming Medtronic lawsuit, or trial, I should say. So Alex, is it safe to assume it's still the party line from you is no settlement? And then what percentage of revenues is roughly represented by those 3 patents? And then could you just talk about your confidence in the outcome and potential ramifications? Thanks.

Sure. Bob, we don't intend to settle and we are already past that point really. The trial is coming up here in about a month. As far as revenue is concerned, this has to do with cervical, and certainly I think you're aware of what our total cervical is. But it wouldn't be anywhere near that because we are talking really about a much smaller piece. With regard to implants with XLIF and NeuroVision, from our side obviously, that's a larger chunk of our business. But I don't think that's the right way to look at it. I don't believe our exposure has to do with the total dollar volume for us. And I also indicated that this is something that's going to go on for a very long period of time one way or another.

Our confidence is unchanged. We believe that, first of all, we are the ones that developed XLIF. We are certainly sure of that and so is the marketplace and so are surgeons. So we believe that there is no reason for us not to prevail and we are moving forward in a very confident manner.

And then I also wanted to ask really quickly about use of proceeds for the convertible offering. How should we be thinking about that? Maybe I'll just throw a number out there. Potential transactions that you might be thinking about, are we talking more in the sub $100 million range or potentially over $100 million range? And just general thoughts on dilution and what you might consider and what you wouldn't consider. Thanks.

Just briefly on that, Bob, I think what we are planning to do is to largely earmark the funds that are required to be able to deal with the first convert. Beyond that, we are certainly going to do our best to utilize cash, keeping in mind that that will lessen any kind of a dilutive impact that we might do on any transaction here in the future.

But to the degree that you're considering transactions would you say mostly smaller as the kind of tractions you've been doing in the past? Or would you consider larger deals?

I think we are mostly looking at things that are in the sub $100 million range.

Joanne Wuensch with BMO Capital Markets.

Thank you very much for taking the question. You said something which was interesting to me, which was that you're shifting more of your expense towards SG&A as you are hitting some hurdles in R&D at the FDA. I'm paraphrasing here but could you explain a little bit more, please?

Yes, Joanne, Michael. Really what it amounts to is we are fine-tuning our estimate midway through the year. So I think the right way to think about that is same R&D projects, same spend, extending out over a bit longer time line. Not cutting any projects. And in some respects that's really a response to what we see and feel at the FDA in terms of the approval process. It's clearly become less predictable. So for us that has meant refocusing our efforts on trying to drive market share gains.

And can you comment on where you are with the formerly known Progentix program, what kind of FDA feedback you're receiving?

Where we are is just, obviously, additional delays than we had anticipated. So our belief is that we should have approval by the end of this year such that we can have a full year of commercialization next year. If we are fortunate, we could potentially see some revenue in the fourth quarter. And I think that would boost our entire biologics portfolio significantly, especially in light of what's going on with Infuse right now.

Ben Andrew with William Blair.

Good afternoon. Alex, can you talk a little bit about customer acquisition time and the efforts required now. I know with training and follow-up it's been a little bit more lengthy than you saw before. Has that changed over the last 1 or 2 quarters?

It's about the same, Ben. There's not been a change really. It's about the same. I think what we are seeing, though, is there's a couple of things that are moving things in our direction. First and foremost is that we are able to attract a number of top reps. And I think that as those reps move in our direction, that certainly helps us overall. So that's something that hasn't changed the outcome of how long it takes to convert a surgeon. But I'm hopeful that as we move towards 2012, that will probably give us an opportunity to decrease that time.

And in terms of follow-up with those customers, have you seen people that have maybe gone away to a competitor come back at a differentiate than maybe you saw 6, 9 months ago?

I talked about before that we really saw very few surgeons move away from us entirely, so that's a very low number. I think, if anything, what we are seeing is the impact of what we talked about now for quite some time. That, as surgeons have an opportunity to have various systems demo-ed to them and to have various companies talk about these products, it's an opportunity for them to then understand the difference that we provide and the superiority of our platform. So I think they are just basically getting exposed to more lateral emphasis and that's good for us. And obviously we are one of the few companies that's really growing any kind of market share right now.

And maybe if Keith is there, a follow-up if I can finish with this on the biologics side. You had a good quarter, it looked to us. But the guidance for the year maybe was a little bit less than we were looking for. Has there been any change in utilization over the course of procedures or customer feedback relative to your current portfolio that would lead to that? If you can give us a little bit more detail on your outlook there. Thanks.

I think the feedback and direction has still been quite strong throughout the quarter compared to past quarters as well, Ben. Osteocel Plus has been doing very well. I think certainly there's a lot of confusion in the marketplace with developments with some of the BMP pushback. But that said, we are focusing on getting AttraX launched. We think it's a great complement to the biologics product line. But in the meantime, the existing biologic products are having nice momentum.

Matt Miksic with Piper Jaffray.

I wanted to follow-up on one of the comments you made, Alex, about procedures in the quarter, trends you're saying. It sounds like procedures essentially getting downgraded to procedures that could create instability leading to potential revision surgeries for those patients down the road. If that's, in fact, what you said, could you expand a little bit on how widespread you think that is and any steps being taken to head that off? And, it's not a great story for patients, but how and when do these patients ultimately get retreated in these situations?

Yes, so let me elaborate a little bit. What I was referring to is that what we are seeing is, I think, a trend. And I don't think it's a huge trend. But we hear about it more often than not lately. And that is, that instead of allowing a fusion to take place in certain situations where there has been a denial. So this is post denial. So once there's a denial, then to try to push the surgeon, as well as the patient, into having a soft tissue procedure. And by soft tissue, I mean laminectomy or a diskectomy. In other words, force the patient to make do with the inappropriate procedure that the surgeon is actually requesting. And so I think what happens when they do acquiesce to that kind of a situation is then the patient is likely to then end up having a fusion anyway, but that fusion will now be delayed by, depending on the patient, obviously, there's no perfect number, but anywhere from 6 months to 12 months to 18 months to even as much as 24 months. Somewhere in that range in terms of that instability and causing pain that could be brought on by that particular surgery. So in other words, not necessarily treating all the pathology that's present.

So it's a concern. There's things that we continue to advocate. I know that there's a number of efforts underway that are helping patients. There's various hot lines, there's various websites that patients can turn to and help them to appeal a denial. And our understanding is that they are having very good success. The ISASS, or SAS as most of us call it, SAS actually has information about that on their website and it has a portal into some of those particular websites.

Great. And then a follow-up for Michael. In part of your guidance it sounds like biologic is coming down a little bit and then core metal implants coming up maybe a little bit. Can you talk about any mix implications of that trend that we should think about heading into the back half of the year?

No significant gross margin impact or change relative to the mix shifting. If you remember, we had suggested gross margin guidelines about 81% for the year unchanged based on just that change, Matt.

And so Progentix, or whatever it was that you were thinking you would be selling, is roughly the same?

It's the new Progentix.

Got it. But that it's roughly equivalent, is that what you're saying?

Sorry, say the last part again, Matt?

Those are roughly equivalent, AttraX and, say, pedicle screws are roughly equivalent?

We do expected the AttraX to be higher margin eventually when it gets here. My only comment is that the rough shifting we are talking about is not dramatically altering the margin structure to force us to change guidance.

Sameer Harish with ThinkEquity.

Hi, guys, good afternoon. I wanted to ask you about NeuroVision. In the past you guys have talked about potentially bringing down the incremental cost to the facility for NeuroVision. Can you give us any can color as to the impact that's having on pricing relative to pricing for implants and other parts of the procedure?

We've talked about that as something that, on an ongoing basis, we evaluate with each account. And, if necessary, we certainly will bundle up our products. And so I think that's something that is underway together with all the pricing pressure that we see out there. So NeuroVision is not a loss leader in and of itself. It's still maintaining a pretty good price. So overall I think that that strategy is still being underplayed. We are not having to do that in a very huge way. But overall, as I mentioned, obviously we do make price concessions on an ongoing basis across our portfolio.

Okay. And just as a follow-up, we have heard from many hospitals that they are looking at more procedure-based pricing relative to, I don't know if you want to call it per part pricing for components of the surgery. Where are you in that conversion? Can you just give us on a basis of percentage of revenue that's per procedure price or bundled, if you will, versus the other way?

Yes. Percentage of revenue, it's still very small. But that is an emerging trend and we are hearing that more and more frequently. Clearly that's what the hospitals seem to be moving toward. And so as contracts come up for review, as we enter accounts, we are now being asked to, in effect, bundle things up. So that does appear to be the new approach that the hospitals are embarking on.

Is that the primary driver for the decrease in ASVs? And I'll leave it at that.

No that's been ongoing for quite some time. It's just that they are trying to just basically reduce it down to a procedure price.

Rick Wise with Leerink Swann.

Good afternoon, Alex, hi, everybody. Alex, your general market commentary, market's a challenging environment but landscape stabilizing, is very much in line with what we heard from Stryker and J&J. It seems like pricing, the declines have stabilized, volumes have stabilized. And I'm just curious if you could give us a little more color on what's changed, do you think, in the last few months? We haven't gotten to the easy comps yet. Is it just docs getting better at dealing with the pushback and working through the paperwork? Or patients having waited long enough? And it sounds like you think this trend is going to continue.

I think the other companies have gotten used to losing market share, so that's part of what you're hearing. I think on our front, really what we are seeing is that the surgeons have, I think, been really focused on navigating what they need to get done in dealing with the payers. And that's what we see on an ongoing basis. So we actually think that, just as we said, the landscape is pretty much flat. But it's hard to sit here and say, we think we are now coming out of it and it's going to grow. We believe that our business is going to improve as we continue moving forward. Obviously we need the help of the full market in order for that to become a very large number. But we are encouraged by the fact that things are pretty flat and that there hasn't been much deterioration. But it's really been coming through market share gains for us. Especially in an environment where pricing is an issue, obviously those market share gains are more substantial than they would be otherwise for us.

Okay. Two other quick ones. First for Michael. Any FX impact in the quarter, Michael? And maybe a last one for Alex. I know that PODs had had an impact on this industry. And another company highlighted loss of a key account to a physician-owned distributorship. And the Senate has asked for a report, I think it's coming in mid-August. Just big picture, Alex, do you think something is going to change? Is it getting worse? And just wonder how you're thinking about this as you think about what's happening for NuVasive.

I think as far as what the senators are doing, I think that's very significant, and I think it's gotten to that level. I don't know what the outcome of that investigation is going to be, obviously, any more than anyone else does. There are concerns on the part of, I think, many third-party observers to the overall ethics of the process and how these things really operate and how they should operate. I think that there have been quite a few PODs showing up of late. I shouldn't even say there's quite a few PODs showing up. There seems to be a pretty significant intent to form PODs and a lot of folks out there feeling whether or not that's something that they should do, meaning the surgeons. It's hard to quantify it. That's been very difficult for us. It's probably something in the order of a few hundred million dollars compared to a $5 billion US market. But we have no way to say for sure what that number is. It's just a guess. Definitely more of a prevalence in the West and in the Midwestern states, and really moving into Mid-America. But other than that, we just have to wait and see to what degree this thing moves forward.

But not more of a concern for you in your mind?

Not any more than it is right now, no. I would say, if anything, I hope that the Senate investigation is a positive for the overall industry.

And Rick, on the FX side -- which I will note was your third question, by the way. So on the FX side, while there was, and is always an impact given the size of our O-US business, it's not huge certainly on top line. So we don't tend to report or talk to it. The other thing to understand is the cost profile for us internationally was adjusted, so any benefit we got was virtually all offset by FX on the cost side. So not significant yet.

Raj Denhoy with Jeffries & Company.

Hi. Good afternoon. I wonder if I could ask about your guidance for the lumbar segment of the business. I think it's still about two-thirds of your sales. And I think you said it grew greater than 10% so far this year. And yet your guidance was 4% to 6% for the balance of the year. And I'm curious why the conservatism in the back half of the year in that line in particular.

Yes, so the guidance now 3% to 6%, up from the 1.4% prior. The way to understand what's underneath that, still assuming about 15% of the DDD case is gone, but that, of course, is offset by MIS growth in the 20% range. And mostly what's underneath it here for us is where, as we said, still a very difficult environment out there. And so we are trying to be a little bit cautious given some of those market dynamics that we have been suffering through the last 6 months.

Okay. Maybe for my second question I'll ask about biologics. One of your competitors on the stem cell side got a letter from the FDA related to how that product was regulated, whether a he tissue product or otherwise. Do you see any bearing with that on your stem cell product? Is there any potential risk to you guys getting a similar letter from the FDA?

This is Keith. We feel very comfortable, even from the time of all the diligence we did before acquisition to now. It's been in a number of different conversations and reviews with the FDA. We as an organization have gone through our own audit process with the FDA. And it has been part of the process and has gone through in a very productive way. So we don't anticipate the challenges that some of these new products and new competitors are seeing as we have over the past few years been driving this product line.

But if you look at where the FDA focused on, the systemic effects of the stem cell product, do you think yours has got a different action than that so you wouldn't have a similar issue?

We do. And you've got to keep in mind, when you look at this scientifically, this product is derived from bone cells. So we are putting it back into an environment that it came from. And that's very different than some of the other opportunities that are being talked about or promoted in the marketplace, even if it's just in small trials.

Jeff Johnson with Robert W. Baird.

Thank you. Good evening, guys. Michael, let me just start, go back to Raj's first question. I understand how you get there from a building up and taking away some things from some of the cancelled surgeries, or delayed or deferred surgeries. But to Raj's point, 10% growth or in excess of 10% growth in the first half and now guiding to 3% to 6% for the year, why would we expect the second half, as you lap them and get into easier comps, why expect the second half to maybe slow down?

Yes. Again, all I would suggest on that is, we have lived through a very uncertain period the last 9 months or more. And so in the overall scheme of things, I think we are just trying to adopt a cautious stance or a cautious point of view in what has been a very dynamic market.

Sure. Okay, that's helpful, thanks. And Alex, a glass half empty, glass half full kind of question for you, 2 things. On the Cummock paper that just came out in the Journal of Neurosurgery, 63% of patients having some thigh complications immediately post-op but 90% of those complications resolved at 1 year. Do you think that study is going to be a positive or a negative as we get into NASS and that paper is more and more discussed?

The comments that were raised in the paper aren't different than what's talked about from a SOLAS perspective. And that is, you're talking about an approach and you're talking about -- it's kind of interesting. A question was asked at the most recent meeting that, would you consider it a complication or would you consider it a reason for review for a TLIF or PLIF case if the patient wakes up and complains of muscle and back soreness. And you don't, because it's obvious. We have torn open the back to get to your spine. And so, because this is a new technique, because this is a technique that continues to get expanded from now going into deformity and going into trauma, you're going to get some differences in how the patient wakes up and resolves some of their surgical complications. And we view this as a very standard healing process. And we are seeing more and more with surgeons a better understanding on how to limit or eliminate it during surgery by proper use of retraction. And that's the very reason why MaXcess 4 is out, is to continue to keep pushing for less traumatic ways to get through this so we can access the spine.

Let me just add one further point to that, is that there's a huge difference between, for example, how a DLIF is done and how an XLIF is done. And in any studies where those are being pooled together, that's not the right way to look at it because the incidence of transient issues with thigh pain for XLIF is well known. But also any kind of ongoing thigh pain or long-term thigh pain is extremely limited and actually quite rare. As you know, I had an XLIF and I had transient thigh pain for about a week. I wouldn't even consider it pain. It was really just some weakness in my leg. And that lasted about a week and that was it. But if you're looking at DLIF -- and I'm not trying to pick on DLIF per se, but that's probably what some of the other authors may have experience with-- that's where NeuroVision comes into play. And also, I think, the technique of XLIF surgeons where they are very careful around the nerve versus some of the more aggressive exposures that don't entail nerve surveillance technology. So you can certainly do a lateral without it, but that's the problem. It's aggressive and it can damage the nerve. And that's why we developed NeuroVision in the first place, is to make it highly reproducible and safe. And so we know that if XLIF is done correctly following up on the kind of training that we provide, that it's transient and it's next to a nothing complication.

Alex maybe I need to just review that study. I thought it was exclusive XLIF. Was there some DLIF in there that maybe I missed?

I don't know which one you're talking about. What was the name of the author?

The Cummock study, C-U-M-M-O-C-K. And Michael Yang. He's the final author there. The Journal of Neurosurgery Spine that just came out a week ago, 2 weeks ago.

I didn't see that. Cummock?

Cummock and Wang, yes.

I don't know. We'll check it out.

Chris Pasquale with JPMorgan.

Thanks, guys. Alex, start off with, the midpoint of your guidance implied about 11% top line growth in the back half of the year, basically in line with this past quarter. But you mentioned your comps do get easier as you move through the year in the 3Q and then into 4Q. So, what's your confidence level around that guidance? And why shouldn't we be expecting growth to improve, particularly with US lumbar tracking ahead of your original expectations thus far?

I think we want to be appropriately conservative in how we are viewing the year. And we also want to see more than just NuVasive leading the way with market share gains. And that's really what we are seeing largely in the spine market today. So I think we'd like to see a little bit more of a recovery that points to some positive growth in this market before we are the only ones getting out ahead of everyone else. We believe that, as I've said, our outlook is slowly improving but not to the point where we think it's appropriate to change our guidance after 2 quarters. As you know, we did change our guidance after the first, we did up that, and we are sticking with it.

Okay. And then I just want to clarify some of the comments about the biologics business. You talked about good momentum there, or maybe it was Keith, in response to a previous question. But you lowered the full-year outlook. So what factors drove that decision specifically? And do you see the recent Infuse controversy as an opportunity to pick up some business over the next quarters? Or is there a risk that it creates some pushback against the use of biologics in general?

We'll let Keith comment in a second. But, just to be clear, we are looking at 15% versus 20%. The 20% really was because we anticipated having an earlier approval from AttraX. And so since that has not happened and AttraX has been delayed to the end of the year, right now we don't see that. If AttraX were to come in in the fourth quarter, then there could be some upside to the 15% that we are talking about. We just don't know. Right now at this point in time we are really banking on AttraX for next year. Keith can talk to you a little bit more about Infuse and the kind of impact that's having on the market.

Yes, and the comment was that we are seeing good momentum in light of the fact that that product has a delay. That delay creates some challenges with how we did our forecasting. But keep in mind that the sales force is very focused on continuing to take share, and take share with the products that are in their bag between Formagraft and Osteocel Plus. And they are doing a good job with it. And in addition to that, I think we do have a market dynamic out there right now that's just confusing for some surgeons and hospitals, and how this is playing out with some of the BMP scare, if you will. And although we don't necessarily agree with some of the directions it's taking, the reality is it's created a confusing marketplace.

Is that a net positive for you guys competitively or does it actually --

It is. There is some very positive aspects to it when it comes to biologic. But there are still some patients out there, and surgeons feel very strongly that they are best served through BMP because they have challenged fusion conditions and pathology. So yes, it is an opportunity.

Michael Matson with Mizuho Securities.

Hi. Thanks for taking my question. With regard to J&J's acquisition of Synthes, we are now more than a quarter into that announcement. I know the deal isn't closed, but just wondering if you're seeing any disruption out there, if you're seeing more opportunities to maybe pick off reps selectively from either of those firms, just given uncertainty created from that deal?

There's a fair amount of dialogue about it. I would say that a number of people are still on the sideline. But clearly there are several now that are looking at the future and wondering where they ought to be. So the short answer to your question is we are starting to see reps that are starting to come into play. I do believe that's going to increase over the next year or so. But we are also seeing that from some of the other competitive companies too.

Okay. And just there's been some talk about the Infuse issues. And the thing with Infuse is obviously there's a lot of data out there versus your Osteocel product, which I don't think there's a whole lot of data on. I think NuVasive had been running some clinical trials on Osteocel. And I was just wondering where things stand with that. Are we going to see that data any time soon?

Yes, some of the data has been out there and talked at meetings and some of it is still coming. A number of the studies involve a good distance of follow-up and so it's just a matter of they are closed and then follow-up and we are waiting on the production of final results.

Matt Hewitt with Craig-Hallum.

Good afternoon and thank you for taking my questions. First off, and I'm going to focus on the international, given the issues with Infuse, could you lay out how significant the opportunity is for you to gain share internationally? And then I do have a quick follow-up.

Can you expand a little bit. Infuse and internationally?

As far as with your biologics. Are you able to pick off some share internationally given some of the issues that they are having with Infuse?

I don't think the Infuse issues give us greater leverage internationally. But the other part of that is we are getting leverage internationally with some of the new biologics products because we don't have challenges from an FDA perspective. So we are promoting those products from a global perspective. AttraX product.

Okay, excellent. And then just a quick follow-up. You're guiding to roughly 8% of your revenues this year from international markets. And it sounds like Japan could become an opportunity for you in 2012. Have you discussed what amount, given their size in spine, that country's size in spine, what kind of opportunity that would represent for you and where you maybe see 2012 from an international perspective?

No, we haven't captured all of that yet. And the reason why is the most lengthy and difficult regulatory process now in the world is out of Japan. And so we need to first ensure and determine exactly what products are going to be available, the timing of those product launches and then we can get our arms better around what that market opportunity is and the distance to start taking market share there. So you should think about that as exit this year, heading into next year we will probably start to take a look at trying to size that. Also last thing I'll say about it, remember, that Japanese market is the second largest from a country standpoint worldwide.

Jason Wittes with Caris & Company

Hi. Thank you.

Jason, before you ask your question, let me just qualify something. We just did a little bit of quick research on that study we were talking about before with regard to transient leg pain. That was presented a couple of years ago. The authors were Cummock and Wang. And as I suspected, that is about both DLIF and XLIF. So the comments I made, I think, were appropriate.

Yes, and I think something else to make sure you're aware of is that it was a study that was presented on a couple years ago. And I think it had been brought together. But one important fact along with that is that they were key also to explain the transient nature of the items, which is no different than the discussion I was telling you about at a recent meeting. That was, you don't talk about necessarily the transient pain of your back for a TLIF or a PLIF. And so it is the opinion that it's a very similar condition considering how quickly it resolves, just as back pain does for TLIF and PLIF, the muscle pain associated with TLIF and PLIF.

Thanks for the clarification. Just 2 questions. The first and hopefully I say it right, AttraX, formerly Progentix, specifically what label are you looking to get from the FDA? And do you expect there to be, A, either additional clinical data required or, B, an FDA panel involved with the approval?

Yes, we do not expect any sort of additional clinical data to be required or a panel. So this will be under a 510(k). There was some additional testing that was requested, and we have done that and provided it to the FDA. So we don't believe that anything of that sort is going to happen and so it should be available. Effectively it will be similar, I believe, and Keith can correct me if I'm wrong, but it will be similar to a graft extender. And that will be made available, as I said, whenever the FDA finally clears it.

The label will be similar to a graft extender?

Yes, that's correct.

Okay, thank you. And then second question relates to covered lives. You mentioned Minnesota and Florida, and I think they were both the Blues that had tried to reclassify XLIF and a few other procedures. I'm just curious, if you look at who has finally agreed to reimbursing XLIF, roughly how many covered lives do we have in the US at this point? And generally what's your outlook on the process with Minnesota and Florida at this point from a timing perspective?

I don't have the exact answer as far as covered lives are concerned. But I do know that as far as XLIF is concerned, nothing is easy, I suppose, when it comes to payers and one should never make that sort of comment, but we do believe it's pretty straightforward to clarify XLIF. Because if you look at some of the things that they have written they simply just are confused with regard to minimally invasive. And it's the same issue as before about ALIF and XLIF, and I think that's been properly demonstrated to the private payers. So we are confident it's not going to be an XLIF issue. I think really what we are talking about is more of a fusion issue. And they are different. Minnesota is really the one that's really more focused on XLIF. Florida is more connected to Medicare and has to do really with fusions overall. And I don't think either one of these have actually gone into full effect anyway, so they are still in the process of obtaining feedback. And I understand that there's been very substantial feedback in Florida including, I think, the US senators involved in trying to get to the bottom of it. So there's been very strong pushback and I think Florida is really just trying to stop fusions. No different than what went down, I think, in North Carolina at the start of this year. So my comments are, as I made in the prepared remarks, I think that we can effectively deal with these. And the Society has already jumped on it and all of that's coming together.

John Putnam with Capstone Investments.

Yes, thanks very much and good afternoon. Alex, I was just wondering in general if you're seeing the FDA being more restrictive, less restrictive, any change there? And can you contrast that to what you see going on overseas in Europe?

Yes, I would say that the restrictive aspect of the FDA has not changed. And it's something that we have all, the entire industry, been talking about and prompting the FDA to make some changes. So we have not seen any changes come out that have increased the rate of approvals. And as you well know, they are all very slowed down. So there's a number of companies that are starting to seek approval outside the United States and bypass the US market. But it's a problem with the FDA because obviously the US still is the largest market, and we still need to get approval here, especially for companies that are our size.

Doug Schenkel with Cowen and Company.

Hi, good afternoon. My first question is, it looks as though you had a nice sequential increase in international revenue. Maybe if my math is right, about $3 million in dollar terms. Was there anything abnormal in terms of pacing or stocking? And maybe more broadly could you just talk about the environment in Europe and whether any of the recent macro developments are affecting your business?

No, there's nothing really unusual. Obviously we are being affected by the things that have taken place in Greece and so forth. But no, it was a pretty steady quarter for us all in all. And, as you know, there's seasonality when it comes to summer vacations and shutdowns in Europe, so there's always the beginning of that at the end of the second quarter. And obviously that carries into the third. But we believe that international is definitely on track for about 100% growth.

Okay. And then Alex, one more in the context of discussing volume trends. A lot earlier, you indicated that you do think there will be an eventual normalization of volume growth at the mid single-digit levels.

Yes.

Is this what you expect? Is this a year away? Is it 2 years away if I can ask you to take out your crystal ball? And whenever it happens, is there any reason to think that you won't targeting at least mid double-digit growth like you did in the past? Thanks again.

What it's related to is really the payer pushback. And so my comments really are around the fact that once the payer pushback goes away, and what I mean by that is once the new guidelines are definitively accepted by the payers, which are being formulated, and SAS has put together some very nice overall policy recommendations, that I think once that works through the system, which really will hopefully begin this year, that we could see some relief next year. I can't say if, once it starts, which would be later this year hopefully, I can't say if that's going to take a year or 2 years to work its way through. Look at what's happened with the thing we were just talking about with Minnesota. That's an old issue. It's just really confusion on the part of a carrier as large as the Blues. And this is something that's effectively almost 2 years old, and they still get it wrong. So those are pretty easy to fix. But I think what we have seen is that the left hand does not know what the right hand is doing in the insurance industry overall when it comes to understanding the appropriate indications and types of procedures that need to get done.

Bill Plovanic with Canaccord Adams.

Thanks. Simple question. One, the acquisition charges, what were they for? And then just 2 on the doubling O-US. Does that mean we are seeing an acceleration in the back half of the year? Or I think you mentioned typical seasonality for Q3 flattish and then the up Q4. That's a little more guidance than you normally give but any color is helpful, thanks.

So on the M&A one-timers $1.3 million in the quarter versus $600,000 last quarter. About $500,000 of that was the Cervitech accretion. That has been flowing through every quarter really for the last several years as we approach FDA approval. The other pieces were split between some M&A deal-related expenses and a small technology acquisition that reached a milestone.

And as far as the back half, yes, we do see it accelerating into the back half of the year so you're reading into that correctly.

Spencer Nam with Madison Williams.

Thanks for taking my questions. 2 quick questions. First one out, could you tell us what the rough number of quota-carrying rep count is at this point?

I believe I provided that. I think that our sales forces is over 300.

Okay. And then in terms of the growth of the reps this year, what kind of plan do you have at this point for the rest of the year?

We are not speculating on the growth. We don't provide the exact numbers of our sales force because that's exactly what our competitors would like to know.

Charles Chon with Stifel Nicolaus.

Yes, hello, thank you. Just a couple of questions. First on the expense front. Michael, I want to go back to your guidance on SM&A. I'm looking at SM&A spending on an absolute basis. And when using the midpoint of your 2011 guidance, revenue guidance, this suggests only $2 million more than what you spent here in the first half of 2011. But with spending seasonality, all the various spending items going into year end, including year-end compensation I'm just wondering how we can get there. Maybe if you could provide some more detail on what sorts of cost controls could help you drive the incremental leverage, that would be great.

Sure, Charlie. So second half lower percent. And the drivers there are continuing to leverage the big items in SM&A. Absolutely rep productivity and productivity gains. We've got to run a very disciplined resource allocation process. Very actively manage the cost structure. Probably make some hard choices along the way. The way to think about it, Q3 2011 expense to revenue percentage probably similar to Q2, given the similar revs that implies, flattish absolute dollars. And then greater expense to revenue leverage in Q4 as we hit the higher revs profile that the Q4 seasonality. What that does is it provides probably a small increase in absolute dollars. So we have got to manage assertively given that amount of wiggle room.

Okay, great, thank you. And then the second question is -- and I don't know if I missed this explanation -- but in terms of the grid for the 2011 guidance reconciliation in the press release, there's a note here that indicates that there's an acquisition-related item that includes 50 basis points of revenue for expenses. So, say, with prior M&A activity. Would you mind going into a little more detail on what exactly that is and how we should think about this impact on the top line?

Yes. So, we do have in that M&A item the serve tech accretion rolls in there, Charlie, plus any deal expenses that we have over the course of the year. That's why we put that line as 0.5% plus as incurred. And so the Cervitech accretion is the biggest thing in there year to date.

Eugene Peysakh with Stifel, Nicolaus.

Sorry, actually my question has been answered. We were just having phone difficulties, thank you.

You're welcome. And I don't believe we have any more questions. So Patrick Williams asked me to spell AttraX for some of you, so it's A-t-t-r-a-capital X. AttraX. So we will talk to you in a quarter. Thanks, everybody, bye-bye.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.