NuVasive Inc (NUVA) 2011 Q4 法說會逐字稿

Greetings and welcome to the NuVasive Inc. fourth quarter 2011 earnings release conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Patrick Williams, Vice President, Strategy, Investor Relations for NuVasive. Thank you, Mr. Williams, you may begin.

Thank you, Operator, welcome to NuVasive's fourth 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's 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 risk, 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 to NuVasive's most recent 10-Q and 10-K Forms filed with the Securities and Exchange Commission. Finally, to keep the conference call to a manageable time, we will be limiting the Q&A to approximately 30 minutes. With that, I'd like to the call over to Alex.

NuVasive again showed industry leading growth in a challenging year for the spine market. We exceeded our revenue guidance, delivering over $150 million in the fourth quarter and finishing the full year at $540.5 million, or 13% growth year over year. Excluding the Impulse acquisition, we achieved organic revenue growth of over 11%, within the range of initial annual guidance and within a US spine market that did not grow. After a drop in Q3 '11 profitability tied largely to poor performance in Europe, we also met our revised profitability guidance and closed the full year with a 15.5% non-GAAP operating margin. All in all, I am very pleased with the execution of our market share taking strategy and our Top 5 Global Spine Company position. Today, I will address 2012 guidance, provide an update on our view of the spine market and detail the drivers of our differentiation and sustainable growth to $1 billion in revenue. We are especially focused on our ability to become the number three player in spine with increasing profitability every step of the way.

For the full year 2012, we anticipate revenue of approximately $615 million which implies growth of about 14%. We also anticipate a non-GAAP operating margin of around 14% and non-GAAP EPS of approximately $0.93. We intend to focus keenly on executing to these annual expectations in 2012. Our 2012 guidance reflects the full-year impact of convertible note activity, the Impulse Monitoring business and then accrual for patent litigation royalty. Optically these items create an unfavorable comparison between 2011 and 2012 non-GAAP operating margin and EPS. However, when those items are normalized, we are very pleased with the operating leverage improvement and approximately 13% growth in pre-tax earnings that we expect to generate this year. Michael Lambert will walk through the detail explaining the positive improvements in a moment.

Now let me turn to our view of the spine market beginning with a brief update on the status of insurance pushback on spine fusion procedures in the US. We have seen some progress in coverage decision changes by the insurers across commercial payers, Blue Cross Blue Shield entities and CMS contractors. A highlight of 2011 was the development of a Health Technology Assessment, or HTA, which is a collection of peer-reviewed literature in support of lumbar fusion. The HTA was submitted for publication in Q4 of 2011 and we expect to see it published this year. The HTA will help surgical societies and industry to work with the insurers to best incorporate clinically supported guidelines for spine fusion. We will continue to support the surgical societies as they work to improve patient access and we hope to see more progress in 2012. At this point in time, it is still very difficult to ascertain what degree of positive impact these efforts will have on spine fusion volumes. With that said, the US market was flat in 2011 and should remain flat in 2012. We believe that this relative stability is positive for the industry.

Turning to the global spine market, we estimate a global market of 6 -- sorry, $7.6 billion growing at a 3% to 5% pace over the next three to five years and approaching $9 billion in 2015. The outcomes and the economics afforded by minimally invasive procedures are driving a shift away from traditional open procedures, and as a result, the growth of the MIS market should exceed the growth of the global spine market. We estimate the MIS market to be $1.6 billion growing to 10% to 15% over the next three to five years and approaching $3 billion in 2015. MIS procedures today represent about 22% of the spine market and we expect that share will expand to north of 30% by 2015.

Our view of the global MIS market also incorporates an outlook for the cervical motion preservation market. Today's press release details the impact of a non-cash, in-process R&D impairment charge related to a lower valuation for assets acquired in the Cervitech transaction, which most notably added the PCM motion preservation device to the NuVasive product pipeline. We are extremely excited about the potential for PCM and we continue to look forward to commercialization pending FDA approval. The new valuation was driven by an updated view of the reimbursement, competitive and regulatory landscape in the cervical market, which has dramatically changed since we acquired Cervitech in May 2009.

Where we originally expected motion preserving devices would capture a 40% share of the cervical fusion market, the dynamics impacting today's landscape have led us to anticipate that share will be closer to 25% with pricing more in line with comparable fusion constructs. As a matter of perspective, in light of this adjusted view, PCM was acquired for $82 million in total and we, with a timely approval, believe it can generate close to $200 million over its product life. Our revised view of the cervical market along with the current regulatory climate has also finalized our decision to discontinue pursuit of the NeoDisc motion preserving device for the cervical spine. The time and expense required for approval and commercialization of NeoDisc will not warrant an acceptable return on investment.

NUVA differentiation, let me talk about that. As the pioneer of lateral spine surgery, NuVasive is exceptionally well positioned to capitalize on the shift toward MIS, but we are not relying on that shift alone to [promote] growth. We are laser focused on cultivating our market share taking strategy which differentiates NuVasive and will continue to not just drive growth, but actually sustain our growth well into the future. Central to that strategy is our mission to be the most creative spine technology Company and to achieve outstanding results through speed of innovation, superior clinical outcomes and absolute responsiveness.

Let me provide an update on those major facets of our share taking strategy with an outlook for each. I'll begin with our dedication to innovation achieved with speed and why it's important. As you know, we maintain our leadership in innovation by continually differentiating and adding depth to the NuVasive portfolio with technologies and procedural solutions that improve spine surgery and patient outcomes. I will now point out specific products in our portfolio to showcase not only the size and depth of our offerings, but also to give a full appreciation of our ability to effectively compete against any sized company.

In 2011 we successfully launched numerous new solutions that further differentiate XLIF from the other lateral products that have recently become available in the market. These included the next generation of our MaXcess retractor integrated with neuromonitoring, a software upgrade for our NeuroVision M5 neuromonitoring system and a series of new indication-specific implants including our X-CORE expandable cage for corpectomies. Our XLP, XLP II, Traverse, and SpheRx anterior provide lateral plating options during an XLIF. Outside of XLIF, NuVasive has become increasingly relevant to spine surgeons and our hospital customers. Our portfolio allows surgeons to treat the entire spine and to address new pathologies with either minimally invasive or more traditional solutions. For traditional posterior procedures, we have CoRoent LI, LT and LN, along with our SpheRx pedicle screw system and our DBR II percutaneous pedicle screw system.

For longer constructs to address such indications as scoliosis, we have Armada and recently launched our Precept fixation system which simplifies posterior fixation procedures by offering more practical MIS or open instrumentation for even the most advanced constructs. For less disruptive posterior procedures, we have our MAS TLIF system with CoRoent LO, LC and LW implant options of fixed plating, Magnitude and ExtenSure line of implants. For ALIF procedures, our Brigade, Halo plates and CoRoent XLR inner body remain options for surgeons seeking a more traditional ALIF approach.

On the cervical side, our anterior cervical portfolio continues to be led by our Helix family of plates and the addition of our Helix revolution translational plate. We have introduced more CoRoent inner body solutions like our small contour and small interlock implant which offers an interfixated low-profile standalone solution for ACBFs. For posterior cervical, our VuePoint Leverage and Affix II Mini address single to multi-level constructs including laminoplasties.

These are just a few of our many products, and as you can see, NuVasive has developed a world-class portfolio of solutions which addresses both MIS and traditional open procedures. Additionally, our acquisition of Impulse Monitoring affords us a unique opportunity to procedurally integrate a comprehensive intraoperative monitoring solution. The clinical importance of intraoperative monitoring during surgical procedures continues to grow. We believe this market can grow upwards of 15% annually. The breadth of technology in the NuVasive portfolio combined with this new sustainable differentiator, will strengthen our reputation for game changing thinking in spine. As well, the integration of Impulse will accelerate our ability to drive the penetration of our differentiated product solutions by providing best in class neuromonitoring service which also opens up an incremental per procedure revenue opportunity.

While that aspect alone is encouraging, the strategic rationale behind the combination will play out over the long term as our team of neurophysiologists, who are exceptionally valued members of their operating room teams, are able to help surgeons understand the technical superiority of our monitoring solution for our suite of surgical products. Our objective is to win over new surgeons by helping them fundamentally appreciate the power of integrated neuromonitoring and our highly differentiated and broad product portfolio. Combined with our focus on superior clinical outcomes, we believe this strategy will drive surgeon conversion and allow us take more market share.

We have made strong progress in the integration of Impulse and are pleased to report 100% customer retention to date. Today, 85% of the team of neurophysiologists has completed introductory training on NuVasive's products and NeuroVision M5. The procedurally integrated approach to spine that NuVasive plus Impulse affords has already had an impact on our ability to win mutual contracts. In the fourth quarter we signed a new hospital customer that we both were unable to otherwise acquire as separate entities. As we look to improve upon our abilities with the hospital demand for intraoperative monitoring, we plan to organically and gradually expand from 160 neurophysiologists today to over 200 by year end. Ultimately, we will scale our IOM coverage towards a nationwide footprint that we envision will approximate the size of our [implant] sales force.

In addition to offering hospitals a comprehensive intraoperative monitoring solution, our pipeline has never been more exciting. In 2012 we plan to launch additional indication specific implants for XLIF, new lateral fixation options, expansions for MAS TLIF, a MAS PLIF solution, enhancements to our ALIF portfolio and new access and fixation options for the cervical spine. And as you know, we have opportunities to accelerate the growth of both our Biologics and our cervical portfolios with FDA approval of AttraX and our PCM device.

In sum, the NuVasive portfolio now boasts over 70 innovative surgical solutions capable of meeting the needs of any spine surgeon customer and addressing almost any spine pathology be it via minimally invasive or via traditional open approaches. Our prolific pipeline and strategic thinking about the direction of spine surgery has established the portfolio to depth central to effectively participating in new vendor negotiations as a Top 5 Global Spine Company. Our ability to compete against the top four players, soon-to-be three, post the DePuy and Synthes merger, for new business with differentiated open-end MIS solutions is unprecedented. This comes at an opportune time when hospitals are reducing vendor relationships down to between three to five vendors for all of their spine product needs.

Next, let me turn to our focus on superior clinical outcomes. We remain focused on building the body of clinical evidence that supports the superior clinical outcomes of our XLIF procedure. No other company has the amount of data documenting the benefits of a lateral surgery as a procedural solution which encompasses integrated neuromonitoring, indication-specific implants and specialized instruments. In 2011, we made great strides with 67 new peer-reviewed articles published on XLIF, 28 new manuscripts submitted to journals and 184 new abstracts presented at industry conferences. As well, our Better Way Back Patient Education initiative, which utilizes a network of XLIF recipients who reach out to prospective patients and surgeons to provide support and education is now over 400 patient ambassadors strong.

Another pillar of our market share taking strategy and a key differentiator of NuVasive in the marketplace is our commitment to absolute responsiveness. Best-in-class surgeon training is a crucial element of that commitment, and in 2011 we exceeded our surgeon training expectations considerably. Going forward, we plan to maintain the existing level of surgeon training and to focus on creating a greater impact with our training sessions. We continue to make progress in shifting the mix of surgeon training towards 75% advanced training, which we believe is an optimal balance between education of surgeons who are new to XLIF, and surgeon adoption of the full breadth of the NuVasive portfolio and all of its treatment capabilities.

Our sales force is also a tremendous asset as the very face of NuVasive's absolute responsiveness in the field. Our team of global quota carrying representatives grew at a high single-digit pace in 2011, and importantly, the productivity of the team continues to improve. We expect to grow the sales force toward a target of 500 representatives at $1 billion in revenue over the next several years with increasing productivity as tenure lengthens and as the benefits of the integration of Impulses' skilled neurophysiologists are further realized. We are thoughtfully expanding our ability to be absolutely responsive to the surgical community outside the United States as we strengthen our global presence. 2011 marks the first year that our international operations broke even from a profitability perspective, marking an exciting inflection point for NuVasive following several years of investment and strengthening our plans for profitable expansion. We are especially excited to enter the second largest spine market outside of the US by beginning operations in Japan later this year.

Before I turn the call over to Michael in just a few moments, I will provide a quick update on litigation. About a month ago, the judge presiding over our case against Medtronic denied Medtronic's request for a permanent injunction on the products involved in phase 1 of our legal dispute, denied Medtronic's motion for supplemental damages and also denied both NuVasive's and Medtronic's motions for a new trial. Last week the court quickly denied Medtronic's request to reconsider its denial of a permanent injunction.

Looking ahead, the remaining issues in this phase of our case include the determination of ongoing royalty rates that will apply to the period of time following the jury verdict, whether interest should be awarded on top of the damage award, whether any lost profits are due to Medtronic for sales during the post verdict period and how the $101.5 million damage award is to be secured through the appellate process. We expect these issues to be resolved over the next several weeks and we then look forward to initiating the appellate process in earnest. I will now turn the call over to Michael.

Thank you, Alex, and good afternoon, everyone. Our revenue for the fourth quarter 2011 was $150.2 million. This represents a 16.2 % increase over Q4 2010. Revenue results this quarter and for the full year demonstrate continued strong execution within a challenging global spine environment. Impulses' first quarter under the NuVasive umbrella delivered $8.5 million in revenue. US Biologics revenue was just over $25 million and OUS revenue, including its Biologics component, was just under $10 million, or about 6.5% of total revenue in the quarter.

In our first quarter 2011 press release, we detailed an accounting estimate change which went into effect during the year. As a reminder, for certain loaned instrument sets placed into service before January 1, 2011 we changed the depreciable life estimate from three years to four years. This change in historical accounting estimate reduced depreciation expense, which is a sales, marketing and administrative expense by $876,000 in the fourth quarter and for the full year 2011 by just under $5.9 million. When comparing to prior year only, this increased both GAAP and non-GAAP earnings per share in the fourth quarter by $0.01 and year to date by approximately $0.09. Each quarter of actuals in 2011 includes this impact, so the numbers that I reference today will all be on an as reported basis. In addition, since our 2011 guidance contemplates this change and we lapped the accounting change in Q1 2012, this will be the last time we'll discuss this item.

Let me turn to our results in the fourth quarter. Our Q4 2011 GAAP net loss was $10 million, or a loss per share of $0.24. For the full year 2011, we reported a GAAP net loss of $69.8 million, or a loss per share of $1.73. Excluding an aggregate adjustment of approximately $21.5 million net of tax for the adjustments detailed in our press release, fourth-quarter non-GAAP earnings were approximately $11.4 million, or $0.27 per share. For the full year 2011, excluding an aggregate adjustment of approximately $113.8 million net of tax for the items detailed in our press release, non-GAAP earnings were $43.9 million, or $1.07 per share. Gross margin in the fourth quarter was 75.3% compared to 82.1% in Q4 2010 and 80.4% in Q3 2011. Year over year gross margin was primarily impacted by patient litigation royalty expense, which drove roughly 200 basis points of impact, and by the acquisition of Impulse Monitoring, which drove roughly 250 basis points of impact. The remaining 200 basis points were driven by a number of items excluding access and obsolete charges, product mix and geographic mix.

Research and development, or R&D expenses, adjusted to exclude stock-based compensation, acquisition-related items and the asset impairment charge totaled $8.9 million in Q4 2011 compared to $9.7 million in Q4 2010 and $9.2 million in Q3 2011. R&D expense as adjusted was 5.9% of revenue for Q4 2011 versus 7.5% in Q4 2010 and 6.9% in Q3 2011. Relative to last year, the decrease in R&D as a percent of sales was caused by the higher revenue base afforded by our acquisition of Impulse as well as to lower spending since we are between investment cycles on clinical trials, FDA approvals and several studies.

Sales, marketing and administrative, or SM&A expenses, adjusted to exclude stock-based compensation, certain intellectual property litigation expenses and acquisition-related items totaled $82.4 million for Q4 2011 compared to $73.9 million in Q4 2010 and $75.3 million in Q3 2011. SM&A expense as a percent of revenue was 54.9% in Q4 2011 versus 57.2% in Q4 2010 and 56.6% in Q3 2011. The year-over-year decrease in SM&A as a percent of sales is attributable to both the addition of Impulse in the quarter, which has a less intensive SM&A structure than the rest of NuVasive, as well as to the previously discussed change in accounting estimate. On an absolute basis, the year-over-year growth in SM&A expense is primarily attributable to investments to support increased revenue including continuing the build out of our international operations.

As a result of the above mentioned gross margin, R&D, and SM&A results, our fourth-quarter non-GAAP operating margin was 14.5% compared to 17.5% in Q4 2010 and 16.8% in Q3 2011. Interest and other expense net totaled $7 million in the quarter compared to $1.8 million in Q4 2010 and $5.3 million in Q3 2011. Included in this total is nearly $7 million in interest expense with nearly $4 million being cash interest expense associated with both the old and new convertible notes, and the remaining $3 million representing the non-cash portion of the new notes.

For the full year, cash provided by operating activities came in at roughly $63 million. While on inspection this is below last year's $65.8 million, we had a significant overpayment process to a taxing authority that was not refunded before quarter end. The monies have since been refunded to us. Adjusting for this, as well as for the year-over-year difference in interest expense for the converts, would have yielded operating cash flow approaching $79 million which is more in line with our expectations and a significant improvement over prior year. Our cash and investments balance at the end of the fourth quarter was approximately $342 million and is understated by the overpayment previously mentioned. This balance reflects the repurchase of about $37 million of our March 2013 convertible notes in the quarter.

Our ending cash compares to $419 million at the end of Q3 2011 and 2010's ending balance of approximately $230 million. We are assuming roughly $74 million to repurchase the balance of the convertible notes maturing in March 2013, potentially approaching up to $50 million for future anticipated milestone payments related to prior M&A and approximately $101 million for the patent litigation outcome. Net of these assumptions, we'd still have more than $100 million in cash, which we currently believe provides sufficient resources to run and execute our strategic plans.

At the end of Q4 2011, our inventory position was roughly 20% of annualized fourth-quarter revenue compared to just under 21% at the end of Q4 2010 and just over 23% at the end of the third quarter. The sequential reduction here reflects active management of our inventory as well as some benefit from the Impulse acquisition which is a less inventoried -- which is less inventory intensive than our traditional business. Days sales outstanding, or DSO, when run off of our net AR balance was 53 days in the quarter, in line with the prior year and the prior quarter.

Now let me turn to guidance for the full year 2012. I'd like to begin by pointing out that we intend to focus our attention on executing to annual expectations for 2012 which means we will reduce the emphasis on quarterly versus annual expectations in our public commentary. You can assume that normal seasonality will apply to both revenue and operating items. In other words, similar to years past, we expect both the magnitude of revenue and the degree of operating leverage to improve from the first quarter of the year to the fourth quarter of the year. For our annual guidance, please reference the tables in today's press release which provide additional detail. As well, we have posted supplementary financial information on our website in the investor relations section. The file should be a substantial aid to those of you building models as it has a bridge from GAAP to non-GAAP EPS for quarterly review -- quarterly results in 2011 as well as a view for full year 2012.

As Alex already mentioned we are providing revenue guidance for full year 2012 of approximately $615 million, which implies about 14% growth overall and about 7.5% organic growth. Let me walk through the drivers of that growth beginning with expectations for our US lumbar business which grew about 7% in 2011, despite the impact of insurer pushback on lumbar spine fusion procedures generally. Alex walked through some of the progress that is being made on that front, but let me point out that it is very difficult to ascertain what impact the efforts of the surgical community will have on spine fusion volumes as well as when those efforts will actually be reflected in volume growth. As a result, we feel most comfortable forecasting 2012 US lumbar growth of about 6%.

US Biologics grew approximately 8% for the full year 2011. Although US lumbar procedure volumes have slowed, Osteocel Plus continues to be a real success. With a NuVasive biologic used in about 50% of NUVA cases today, the penetration level is about where we would expect it to be barring significant class I clinical data. As a result, we anticipate that going forward the growth of Osteocel Plus will approximate the growth of our US lumbar business. Additionally, surgeons are responding well to the launch of our PEEK implant solutions for the cervical spine. The result has been some cannibalization of sales of our allograft solutions, a product line encompassed in our US Biologics number. And finally, our other consideration here, a synthetic biologic solution called AttraX awaits FDA clearance and we look forward to its potential US commercialization and associated revenue contribution. Because of the uncertainty around the timing of FDA clearance, AttraX is not included in our 2012 revenue guidance. In consideration of all these factors, we anticipate overall US Biologics growth to be flat in 2012.

Our cervical revenue grew about 20% for the full year 2011. Our innovative cervical spine solutions are increasingly being adopted and at just under 10% of NuVasive's total revenue, we have a long runway of growth ahead of us before our cervical business approaches the roughly 20% that this segment represents of overall spine industry revenue. Our cervical motion preservation device, PCM, is also pending FDA approval, the timing of which we cannot predict with certainty. Thus our 2012 revenue guidance does not include a contribution from PCM and we expect US cervical growth in 2012 to be about 15%.

Now let me turn to our international business which grew over 60% in 2011 in spite of the turmoil in Europe which began to negatively impact our results in the second half. Surgeon training and adoption of our overall ability to take market share in Europe is healthy, but the turbulence is impacting both surgery volumes and the financial ability of European distributors to make investments to drive for growth. We believe the second half 2011 trend will likely continue to impact results throughout 2012. And while we look forward to entering the Japanese market in late 2012, we do not expect the revenue contribution to be significant this year. We do however anticipate continued penetration in Australia, other Asian countries and broadly across Latin America, resulting in total international growth that will approximate 35% in 2012 and will show more significant growth in the second half of the year due to easier year-over-year comparisons.

Finally, I can speak to intraoperative monitoring which will be an exciting new avenue of growth for us in the market for outsourced monitoring which grows about 15% annually. Going forward, we will include both Impulse and our prior Sandia intraoperative monitoring business in our IOM results. For the fourth quarter and full year 2012, Impulse generated about $8.5 million in revenue. For 2012 on a pro forma basis, which combines actual IOM service results for Sandia with IOM service results for Impulse, assuming Impulse was a part of NuVasive for the full year, total pro forma US monitoring revenue approximated $40 million. As we look to 2012, we expect to generate approximately $45 million in intraoperative monitoring revenue, which implies about a 13% year-over-year growth rate.

Turning to the rest of the P&L, let me start with an important point about how the ongoing operating leverage we plan to achieve in 2012 will not be clearly apparent on the face of the income statement due to several second half 2011 events. In 2012, we will realize full-year impacts related to the patent litigation royalty expense, to the Impulse acquisition and to changes in the convertible notes that underlie our capital structure. Each of these items only impacted results in 2011 for a quarter or two. Because of the full year nature of these impacts in 2012 optically, our gross margin, non-GAAP operating margin and earnings per share guidance will be lower than 2011 but this does not fully reflect the operating leverage progress we anticipate for 2012.

With that introductory comment covered, let me walk through our P&L guidance for 2012. We anticipate full-year 2012 gross margin to be just over 76% and full-year 2012 non-GAAP operating margin to be approximately 14%. This non-GAAP operating margin guidance includes stock-based compensation, certain intellectual property litigation expenses, amortization of intangible assets and acquisition-related items. As I mentioned, the major drivers of the delta between our expected gross and non-GAAP operating margins for 2012 and the margins that we reported for 2011 are the full-year impacts of the patent litigation royalty expense and the acquisition of Impulse Monitoring.

Normalizing a year-over-year view for these impacts, full year 2012 non-GAAP operating margin guidance would improve by approximately 50 basis points in our underlying business. We anticipate full year 2012 non-GAAP operating expenses as a percent of revenue to approximate 62%. We are not planning to detail non-GAAP SM&A or R&D results for 2012, however, you can expect R&D expense as a percent of revenue for the full year to be relatively close to what we experienced in Q4 2011. Over a longer term horizon, we expect operating leverage to continue to stem primarily from improvements in SM&A expense. R&D expense will lever somewhat off of a higher revenue base, but we remain committed to spending the requisite R&D dollars necessary to fuel -- to continue to fuel the innovation engine we've built.

As we mentioned last quarter, we are working to structure profitability improvements while maintaining important investments behind key initiatives in line with an updated view of revenue growth. That process has identified areas where spending can be moderated some over the course of the next few years such as growth in non-sales headcount through increasing automation and focus on productivity as well as spending on more discretionary items within SM&A. That Company-wide effort in concert with the re-prioritization of clinical efforts that Alex mentioned and the leverage that will be driven naturally by the continued growth of our core business and by the scale afforded by a nationwide footprint for Impulse Monitoring, should generate measured improvements in non-GAAP operating margin over time. We anticipate full year 2012 other income and expense will approximate $27 million, which will include approximately $12.5 million in non-cash interest expense.

We anticipate a 2012 full-year GAAP effective tax rate of approximately 60% which compares to a 29% tax benefit rate reported in 2011. This change from a tax benefit rate in 2011 to a tax expense rate in 2012 means that earnings per share cannot be compared or normalized between the years in a straightforward manner. While we expect tax rate to improve some each year as we move forward, significant progress will be dependent on international revenues becoming a meaningful percentage of our total revenue mix. We expect non-GAAP adjustments to be tax affected at approximately 40% for the full year 2012.

We expect diluted shares outstanding for the full year 2012 to approximate 45 million. And finally, we anticipate full year 2012 GAAP EPS of approximately $0.09 and non-GAAP EPS of approximately $0.93. Non-GAAP EPS guidance for 2012 excludes full-year impacts of non-cash stock-based compensation of $34.5 million, certain intellectual property litigation expenses of $2.5 million, amortization of intangible assets of approximately $12 million, acquisition related items of $1.3 million and non-cash interest expense associated with the convertible notes of approximately $12.5 million. We feel this non-GAAP EPS measure, generally speaking, most accurately portrays the operating earnings power of NuVasive and should be the basis for measuring our progress.

That said, the full-year impacts of both GAAP and non-GAAP earnings on the estimated patent -- of the estimated patent litigation royalty expense, the adjustments in our convertible debt levels and the acquisition of Impulse Monitoring and the tax rate anomaly introduced by 2011's tax benefit rate will mask much of the progress we intend to make in 2012. Given these factors, full-year 2012 pretax earnings adjusted for the incremental year-over-year impacts of those items will offer a better view of the earnings progress of our underlying business. To that point we expect an approximate 13% increase in full-year 2012 adjusted pretax earnings over 2011, nearly two times the rate of organic revenue growth. Given the fixed versus variable nature of our cost structure, we feel this leverage is appropriate and delivers on our plan to drive progress on the profitability front.

Similar to the year-over-year comparable just mentioned, our profitability longer term will continue to improve in several areas. Our operational engine will become more efficient and contribute to improvements in adjusted non-GAAP operating margin. When we layer on the tax rate improvement opportunities associated with growing out our international business to proper scale, NuVasive has significant opportunities longer term to flow more dollars through to the bottom line contributing to earnings growth that will outpace revenue growth in the out years.

The fourth quarter of 2011 closes the books on an inspiring year for those of us at NuVasive. In spite of the difficult market environment, our results attest to continued solid out performance compared to the spine sector as a whole. I look forward to another year of industry-leading growth combined with steady progress toward improved profitability. Now I'll turn the call back over to Alex for closing comments.

Thank you, Michael. 2011 was a challenging year for the spine industry and NuVasive. Nevertheless, our focus on taking market share once again delivered industry-leading growth. We remain focused on our long-term strategy of sustainable revenue growth in conjunction with increasing profitability and we plan to deliver in 2012. I am very proud of the entire NuVasive family which now includes Impulse. All of our accomplishments have established us as one of the top spine companies in the world with products and services that address the entire spine with innovative and integrated procedural solutions.

We are in a very unique position to fully capitalize as the spine market continues its shift toward minimally invasive solutions. Through the breadth of our procedural offerings, proliferation of new products, global expansion, continued focus on superior clinical outcomes, we are well positioned to grow to $1 billion in revenue. Together with a greatly improved profitability profile, we plan to become the number three spine Company in the world. As we like to say around here, onward and upward. We will now take your questions.

Thank you. We will now be conducting a question-and-answer session. As a reminder, Management will be keeping the question-and-answer session to approximately 30 minutes. (Operator Instructions) Matt Miksic with Piper Jaffray.

So I wanted to ask you a little bit about what your-- you mentioned leverage, Michael, in the SM&A line and wondering Alex, if you could give us an update on sort of trends and goals in sales productivity and the strategy behind your sales force? And I don't know if you're still providing size, but maybe are you expecting to grow it, are you just going to manage, any color would be helpful? And then I have one follow up.

I'll start off just by telling you that sales productivity continues to increase in terms of revenue per [rep]. We are not providing that information to our competitors which is directly where it goes. But rather are focused on growing the size of our sales force to 500. I think I've talked over the course of 2011 that our quota carrying sales force is well over 300, it grew by single digits last year so we're pleased with that net/net. And we continue to drive the expansion of both the neurophysiologists from 160 to well over 200 by the end of this year in concert with additional growth in our sales force. So the growth prospects are really for 500 over the next few years here and probably very close to that, 400 to 500 on the neurophysiologists side, but looking to do most of that on an organic basis. Michael, you want to talk about leverage?

Yes, Matt, let me take you through non-GAAP op margin just a couple of data points just to help bridge it. Full-year 2012 non-GAAP op margin guidance about 14%. We obviously hope to do a little bit better than that. That compares to full-year '11, 15.5%. So on the face of it looks down about 100 basis points but the key as I mentioned is the timing related impacts that help you bridge the comparison from 2011 to 2012. So Medtronic royalty, the litigation royalty, 70 bips in 2011 basis points and Impulse 10 basis points in 2011, as adjusted, those get you to about 16.3%. If you take the 14% guidance to help bridge back to the 50 basis points I mentioned, and you look at the 2012 impacts from full year of those two items, 200 basis points for Medtronic royalty impact and 70 basis points for Impulse, those will bridge you back to about 16.8% or so. And it's that difference on the adjusted or normalized basis, 16.3% to 16.8% that show the 50 basis points on the base business.

Okay thanks, that's helpful. One follow up, if I could, on just you're about a quarter in now, Alex, to the integration on execution of strategy and there's cross-selling and synergies between the core implant business and Impulse, any perspective, you talked a little bit about it in your comments, but wondering if you could tell us now that the sort of rubber's on the road, what kind of results are you seeing and maybe an update as to when we might start to see the fruits of these cross-selling efforts in your reported numbers? Thanks.

Sure. I think as we looked at this acquisition last year and I talked about it, we anticipated starting to see some results in the way of cross-selling, somewhere in the six to nine month range. I think that that's probably accurate. I think what you have to remember though is that the footprint of Impulse is still only about 15% of the nation approximately. And so I think we have a lot of excitement on the part of our sales force in terms of the collaboration and the pull through opportunities. We have some, as I detailed in my prepared remarks, of some new accounts. We have a number of things that are happening, but clearly it's a big integration process for us. And I would expect to see some of that pull through activity coming towards the latter part of this year. And I think it's going well. But these things always take a little bit longer than you'd like, so I'd say instead of six to nine months, it's more six to 12 months. So we should start to see an impact by the fourth quarter of this year that really is starting to come over into the numbers.

And is that in your guidance just to be clear?

What's that?

Is that kind of pull through of implant revenue in your guidance or are you sort of just looking at one plus one equals two as far as your guidance goes?

It's generally in the guidance at this point in time. We don't-- we'll make adjustments to it as we actually see it rise much above what we're guiding towards at this point.

Thanks so much.

You can even do another question if you want, Matt, we're like in really good spirits here, so--

Gee wiz well--

We're going to allow for 2.5 this time instead--

Well one of the-- you talked about your expectations for market growth, I'd love to understand, a, where you're-- how you get to those assumptions, you said this year, we sort of think it will be like last year. And then also, maybe what kind of pricing trends you're assuming in that flat estimate, is it sort of the same? Is it-- are you allowing for things getting a little worse? Thanks.

Sure, the feedback is really coming from our perspective more from what we hear from our sales force and from the surgeons. And so that's where we're really forecasting it to be flat and consistent with last year. We're not seeing a big dip, per se. So I think as far as price is concerned, it's still negative low-single digits, we continue to see that, as you know we remain in a good position with regard to premium products and our ability to offset that. But clearly, it's a flat market and I see that as being positive overall for the industry because it allows us to plan more effectively with regard to our growth and hopefully with the things that I detailed along the lines of the HTA getting published and other payer pushback various actions that are being contemplated and worked through the societies, which by the way are very active. ISAS is very active, NASS's very active in pushing back with the number of things that I'm aware of. So I believe that those things should help us as we start to move to the latter part of this year and into next. But we have no reason to look beyond that and so we're looking at it as being flat, but again optimistic about that.

Matt, I know I also blasted through a bunch of numbers there for you a minute or two ago, so let me just give you a quick summary too. As you think about guidance and leverage, right, our view is that people should be understanding, we've tried to set achievable guidance, not only top line but also bottom line. We're going to continue to make some of the investments that we need to make, sales force as Alex talked about, OUS, the final build out in Japan on the regulatory side and ramping up a sales and marketing capability toward the end of the year in IOM. And I will share with you and the rest of the folks externally, Alex is as focused on and is as attentive to the op margin improvements and leverage we're trying to drive as I am, which is a novel thing for me to have a CEO who's that perfectly aligned with me on those things.

That's great to hear, well thanks again.

Bob Hopkins with Bank of America.

Thanks, can you hear me okay?

Yes, Bob, I'm sorry, but we're pretty much out of time now, so if you could e-mail me, that'd be great. Go ahead.

(Laughter) I will keep it to two, first I just want to understand the revenue guidance a little bit better. On the Impulse side on a pro forma basis, you said up 13% is what you're guiding for 2012. So on the non-Impulse side or on the core spine and Biologics business, could you just sum up all those numbers you gave, what's the growth that you're assuming for your-- basically your core business ex-Impulse?

Yes, Michael, go ahead.

So Bob, just to cover those numbers again, US lumbar about 6% growth, that represents-- should represent about 60% of the overall revenue profile, US Biologics flat, that should represent 16% odd of the revenue profile, cervical growth 15% and that'll land probably at about 8% of the revenue profile and then OUS about 35% growth.

And then what does just-- I mean I can do the math, but what does that all add up to?

Overall, let's see roughly 14% growth rate and you can find those numbers, they're posted on that supplemental thing that we mentioned we put on the website.

Yes our guidance is $615 million and that includes the $45 million from IOM, so that's how we get this $615 million as well with everything Michael just went through.

All right, so that's 13% growth for Impulse on a pro forma basis, and then these numbers would all add up to about 14% growth for core spine?

14% total Company,

Total Company.

To $615 million with organic growth of about 8%.

And then just on the cervical side, I guess I don't really understand why that should be a zero-- or I'm sorry, on the Biologics side, why that would be a 0% grower in the quarter. You went through some explanation there and some of that was due to cervical cannibalization, but then again your cervical guidance is down from the growth that it was. So just if you could just walk through a little bit on that Biologics number and why it would be flat? And then just one other thing I wanted to ask about is on the SG&A side since that's where the bulk of the leverage that you expect will come net of the incremental expenses that you'll have, could you just talk a little bit more about what you're doing to drive that leverage, are you changing commission rates at all or making any major-- or any changes to the business model, if you will? So those two things would be great.

I'll start off with the Biologics. So Osteocel is going to grow as we said very similar to the lumbar business, so let's call that roughly 6% or so, so it's in the 5% to 6% range. So that's going to continue to pace along with that area. As we explained, we've seen some cannibalization of our allograft products, and so as a result, that's why that number comes down. 15% we feel is very solid growth obviously in a market that is flat to negative. So we're very bullish on the 15% cervical and that does not include PCM which hopefully we'll have approved in 2012. So I think those numbers are actually very good numbers overall and especially tied to our total growth. Michael, do you want to talk about the leverage on the SM&A?

Yes, let me talk about SM&A. I'll just also reinforce the earlier point I made that we're trying to build a profile here for 2012 the leaves us with a comfortably achievable plan as to what we tried to guide today. So relative to the SM&A guidance, implied although not exactly formal guidance from us, if you back out the R&D number, you'd land somewhere around 56% or so. If you normalize that view excluding Impulse, so excluding the benefit we get have Impulse, it's sort of flattish '12 verses '11. Now the reason for that is there's no change for EUL in '12, the useful life in '12 verses '11.

Bob, to get to your question about the moving parts and the spending around that, the incremental investments we've talked a little bit about, OUS, Japan regulatory and the second half build of a sales and marketing capability as we prepare to ramp that up, we're also investing in both direct sales force heads and some tools to make the sales force more efficient, we've talked about making some investments in IT. In order to fund those investments, the important thing for you all to understand, is that there's a lot of churn in the spending profile to allow us to afford those investments. We have reduced spend in other parts of the business significantly.

A couple of examples of that, we have revamped the way we do and run all Company meetings to make them more cost efficient and cost effective, we're spending less on promotional materials and branding related spend, non-sales headcount growth will be moderated some and that will also contribute to some moderation of growth in non-sales travel and related, trade shows, conferences, certainly spending less on that and those of who are at NASS saw the reduction in size and the footprint of our booth as an example, the clinical studies that Alex mentioned, prioritizing our NeoDisc will save money. And then we've actually looked at starting to in-source some things like the NeuroVision repair activity which we just got started on this past year where we saw opportunities to save money rather than contract it out the way we had historically. The thing to make sure you understand, is that we're driving a lot of changes and reductions, significant reductions in order to support those incremental investments we're making in growth, large laundry list.

How about, did you mention commission rates for the direct sales force?

We did not mention commission rates on that list.

And were those--

Yes, that's actually something that we've talked about before, that we have plans for annual reductions and so we're actually going through that entire process and we have started to lower some of the commission rates already going into 2012, we anticipate doing the same thing again in '13 and '14 in concert with our growth.

And by how much, roughly?

Anywhere between half a point to a point.

Great, thanks very much, guys.

You're welcome, Bob.

Matt Taylor with Barclays Capital.

I just wanted to ask about the Biologics and whether you're seeing any impact from some of the noise around INFUSE and the dramatic declines that we saw from the quarter the other day?

Well what's interesting about our understanding of those numbers, is that Medtronic reported Biologics down 23% and obviously taking big hits in INFUSE, but also an increases in some of their other Biologics. And that's consistent with really our view of 2011 where they were really cannibalizing the INFUSE sales but supplanting it with lower-cost Biologics. And so that's why I think we haven't had a big opportunity to take, for example, a lot of Biologics share beyond our own growth profiles. So we're about 50% penetrated with our accounts, which we're very happy about, we have room there obviously for the future.

But one of the things that we talked about with Osteocel back to the days when we acquired it, is that we saw it having a runaway to about $100 million, and really much past $100 million would require a Class I type of data. And that's why we're reliant upon Attracts in the future to move us beyond the roughly 5%, 6% growth that we expect to see from Osteocel this year more into double-digit levels whenever Attracts comes on and has a full-year impact.

And then OUS, it looks like you're talking about building in the first half, a little bit of a pick up in the second half, and I was just curious you're really not putting much in there for Japan, is that by choice, is it a controlled rollout or do you think it's just going to take a little bit longer to get the penetration there?

Yes, the idea is to plan the ramp to Japan from an expense standpoint in the latter half of the year as the regulatory stuff finishes up. So I think your comment is right, it is a small or very moderate revenue number in the-- in Japan as we exit the year. And I think your earlier comment was correct, the lower comps in the back half of the year do make it a little bit easier as we start to lap those given the Europe slowdown in 2011.

And I understand--

Matt, our objective for Japan really is to have it ready to go, like Michael said, we'll obtain some revenue from it this year, we don't know exactly how much because of the precise timing, which we'll know as we get closer. But really have it ready to roll for us in '13, I mean that's really the way we're setting it up, so whatever we do obtain this year is really just setting the stage for next.

And I understand if you don't want to comment given the sensitivity, but care to share any expectations about the upcoming outcome of the final resolution of this stage of the trial?

Well I think we'll have an answer in a few weeks. I think basically you can see that things have largely gone as anticipated on our end, so it's-- we can't really speculate as to how all of that's going to shake out, that's what we're negotiating and working through. But we're optimistic and excited to get to the point of starting the appellate process.

Okay, thanks a lot, guys.

You bet.

Raj Denhoy with Jefferies & Company.

Wonder if I could ask a little bit more about international, not Japan, but the rest of the world. I think the growth at the beginning of the year, beginning of '11, I think you talked about that business essentially doubling in '11, 100% growth. I know that you've kind of described some of the issues with the availability of capital. But perhaps you could talk about just how sort of NuVasive brand, the XLIF approach is kind of resonating in these international markets and why we're not seeing kind of a better receptivity to it in those markets right now?

Well I think the issue is really Europe, I mean if you take a look at how we're doing in the other markets, we're doing exceptionally well with regard to penetration in Australia, in New Zealand, in-- we're just really starting in Latin America, but Puerto Rico is an exceptionally strong market for us, Brazil is starting to come on, Venezuela, so on and so forth. And if you look at the-- at Europe, so last year Europe was supposed to account for about half of our revenue as we started looking at it at the beginning of the year. Because of economic conditions, because of the number of issues going on in Europe, we just haven't seen that level of penetration. So we've backed off of our expectations for Europe moving into this year and that's why you're seeing us to move from I think it was, what was it 60% growth last year to 35% this year. So we think we've got good upside there down the road potentially, things start to improve for us in Europe and really we're putting most of our chips in places like Japan as well as other parts of the Far East and Latin America. So we're looking forward to having a very strong 2013 in particular with international continuing to build and improve.

Okay and then just one question, I guess both internationally and domestically just on competition, you can't turn around at NASS or any of these meetings and not see another lateral approach. I'm curious what you think your share now is of the lateral market and whether you're seeing any of these systems out there starting to get any traction?

Well our share is north of 50%, DLIF would be second in share and then you've a whole peppering of various other companies that are trying to get to a certain point. But I want to tell you something that's really important that I covered in my remarks, which is that hospitals are switching now to a smaller number of vendors. The reason that we were successful in building XLIF when we were over the last several years was because it was outside of vendor arrangements because nobody else had a system anything similar to what we were providing. As we start to move forward into the next several years and hospitals continue to consolidate down to three to five vendors, which is definitely the trend that we're seeing, it's going to knock out a lot of these smaller companies because they don't have a way to come in and say well we have something different from what is being offered by the top five players.

So clearly there's a lot of competition out there, but I don't think it's anywhere near as sticky as people might be expecting with regard to their lateral solutions just because they have them, I think it's an opportunity to open the door. But I think clearly for us with regard to differentiation, being in the top five, continuing to evolve XLIF, we clearly have the upper hand. And so they'll continue to be noise and they'll continue to be a lot of activity in those areas, but that's why we're growing at 14% and it's because of I think our leap-frogging with regard to ongoing new products and where we already sit with regard to market share.

Okay. And if I could just sneak one last one in, just as a follow up to the last question, just on the INFUSE, Medtronic is sort of almost giving away share here in the high-end Biologics market. I'm curious, I know you've sort of talked about the lack of kind of clinical data but it seems at that upper end where people are looking for more robust biological materials, it's a bit surprising to see INFUSE, I'm sorry, to see Osteocel Plus not resonate a bit more with that investment community and perhaps you could just maybe offer some thoughts around when we could see some of that data you need to start driving that, anything would be helpful?

Sure, that data is at least a year away. But I think what you're seeing is I think you're seeing on the Medtronic side, you're seeing a certain level of customer loyalty and that's why it's very difficult to get in there. So as we take market share from Medtronic, then we're able to of course bring in our Biologics and utilize that. And that's really what I mentioned, that's what we see. So when we see 50% penetration with our customers, we obviously have some room to improve there. But I think what we're seeing across the industry, is everybody is pretty much sticking with their own Biologics. If you look at some of the other players that are having success or at least talking about having success with Biologics, I think a lot of it has to do with applications not just in spine but in extremities and other areas. We don't really go into that area much, we stick to spine. So our success in Biologics is very much predicated upon penetration with our existing customer base rather than something that opens doors with customers. That really isn't how the sales call process works and how the penetration process works for us, it's the other way around. It's really getting the implants-- and getting the implants in and then being able to follow up with the Biologic as a secondary sale opportunity.

Great, thank you very much.

You're welcome.

Chris Pasquale with JPMorgan.

Thanks. Alex, on the IOM business, wondering how quickly do you expect that to grow on call it a same-store basis in 2012, just trying to get a sense of what portion of the growth there is being driven by headcount additions and tucking in smaller one-off practices versus actual volume increases?

I would say something in the neighborhood of 15% or better.

Okay, so there's a significant component there of sort of organic growth?

Correct.

Okay, and then sorry if you walked through this earlier, I jumped on late, but can you just elaborate a little bit on the reasons for discontinuing the NeoDisc program? And then another pipeline product that I don't think I've heard you talk about in a while, what's the status of the XL TDR device?

Sure. With regard to NeoDisc, NeoDisc is something that we've worked through the PMA process on and believe that will just take too long to get through the FDA. The reason for that that I've talked about, haven't really talked about it much I guess recently, but I've talked about in the past is because it's a total disc replacement but it's more like a nucleus replacement. And we just think that's going to be very difficult. There's a number of devices prior to NeoDisc that did not get through the FDA process and were abandoned, and unfortunately we find ourselves in the same situation. We anticipated that this could happen a few years ago, literally three years ago, when we purchased PCM and that's why we started to move into that direction. So we've got PCM as our primary play now for cervical motion, and essentially we are hopeful that that'll be approved sometime this year and we can get that rolling. So that'll be our foray into cervical motion preservation.

Overall with regard to XL TDR, we're still enrolling patients. That is a time-intensive study, but we're still in the enrollment phase. So we're somewhere north of probably 75% at this point, so we still have a little ways to go.

And it's Michael, just to make sure we make this point clear, like to clarify the IOM growth. We expect to add roughly 40 odd techs this year, so we would see probably roughly a third of it, a third of the growth being same store and the new heads would then drive the reminder. Of course, they are focusing on our existing hardware accounts to put IOM in.

Thanks, Michael,

Sure.

Bill Plovanic with Canaccord.

Great, thanks, good evening. I just have two questions. One as you talk about commercializing in Japan, what approvals do you really need or is there anything major that's kind of gating the introduction in Japan of the product lines?

Well yes, it's a very long process and there's no blanket approval. So it's running through things one product at a time and it's something we've been working on for gosh it's got to be three years now. And Keith I don't know if you have any other comments you want to make?

Yes, they have a unique regulatory process, unique to any other country in the world, whereby you have to test the product on the very manufacturer you're going to be using after you launch the product, so it's literally from point A all the way through approval you have to go back to that point A to have them the product for launch, and that's unlike anywhere else in the world where you just have to make the specifications. There you actually have to keep the same manufacturer. So because of that, there's a lengthy process just to get all the testing done. In addition to that, the Japan market is not fully immersed with the PEEK style of inner body grafts. So you have to both contemplate how you're going to have a metal offering, meaning a titanium offering, and a PEEK offering which also complicates the level of testing. So that is really where interestingly enough the NeuroVision product line and a lot of the electronic product lines we have that flow through haven't had the issue of lengthy delays, but the traditional implants, it's just a time constraint to get everything tested and then submitted and then through submission and back to manufacturing til launch in the market.

But are you awaiting for approval of all products before you commercialize or will you start once you have some of the major ones ready to go? I'm trying to find out if there's like one gating factor, if there's anything--

No.

No.

No, most of the applied systems we put in as a bolus, but we have hand-selected which ones of what priority.

Yes, our strategy, Bill, is to make sure that as we hire our sale force that we effectively hire them as quickly as we can and have a lot for them to sell, versus hiring one or two people and slowly building up that way. We think we can have faster and better success by doing things in a bolus fashion.

And then with the PCM product, if I could switch gears, it's-- I think that's been at the FDA, I know all the cervical discs has kind of been held up with the FDA. We've heard some commentary that some of them maybe moving through and getting ready for approval. I mean how would you characterize the discussions you've been having with the FDA on that product recently? And I think you mentioned you're even thinking that 2011 might be the year for approval.

Well it's been very encouraging. And we do hope that 2012 is the year for approval. So I think it's been a protracted process. Keith may want to add some additional comments here. But it's one that's been protracted with regard to requests for addtional data, corroboration of various data points. Everything that they've asked of us, we've done so we're kind of-- we'd be miffed if we were asked to do anything else. We think we've covered all the bases. Keith, what do you add--

Yes, your summary is correct, Bill, that there's what three of us that really probably in the same stages and have gone through the same processes and I think we all feel that 2012 will bring greater clarity and some approvals.

And then if I may ask one more, I think people have been kind of dancing around the subject, but as you get a little leverage this year, can we surmise that maybe 2013 might be the year that we see a little more operating leverage? I know you're getting some when you do the adjustments this year, but given that Japan is built out, or will 2013 we'll see continued investment in Japan to really grow that market. I mean just trying to think a little longer term here.

Yes, Bill, you should be thinking about leverage as sort of steady and predictable. In some years we'll be able to give more improvement, some years less, 2012 is certainly one of those years where it's 50 basis points, we'll look at it and say we want to do better, we'll try and do better, certainly try and expect to do better. 2013, I think your point is a valid one, as we exit 2012 we'll have to continue to invest probably early in 2013 and straight through most of it to build that capability in Japan. That will certainly put pressure on our ability, but just recognize the expectations for us should be progress every year, some years more so-- a bit more than others.

Great, thank you.

David Roman with Goldman Sachs.

Good evening. I wanted to just follow up on the MIS overall market growth commentary, I think in the past you disclosed that Biologic is 25% to 30% of the total pie. And you've talked about that total pie growing in the 15% range. But it looks as though the Biologics component is right now flattish, could you maybe help square how we maintain that 15% growth rate on a go forward basis in the context of Biologics being relatively weak?

So most of that growth is going to come from global thoracolumbar as well as cervical. We are not seeing much growth, or do not expect much growth from Biologics. So I think your assessment is generally correct. But what's driving it is more applications, more attention to this space and we also believe, although it probably won't be hugely material this year just because of the timing, but motion preservation can start to come on with cervical. There's I guess about near half a dozen or so insurers that are providing coverage for cervical discs and so we feel that that's very encouraging, and we hope to see that number increase. So I think motion preservation can have a profound impact on that especially if we're right about our assumption that we'll cannibalize 25% roughly of the cervical fusion market.

Got it, that's helpful. And the other-- Alex, in your prepared remarks, obviously you talked a little about the pressure that we all know about thoracolumbar procedures, can you just talk about what's happening in your cervical business and what the outlook is there? I think that's been considerably stronger over the past several quarters, and is that fair that that would be the trend on a go forward basis as well?

Yes and we talked about that as being 15% growth moving into this year, so it's very strong. It's slightly higher than what the total Company is going to do of 14% that we're projecting out, I think certainly higher than the organic growth overall of a percent. So cervical, we expect to perform very well and hopefully even better if we can get PCM out there.

Okay and then lastly, a follow up on the question regarding 2013 and earnings leverage. I know it's still 12 months away but as you start to think about the [Medted] tax, a number of your peers on the larger side have talked about restructuring programs and other alternatives they might implement to offset that what appears to be required expense, maybe just get your latest thoughts on that and how we should just think about that for a modeling perspective?

There's not been anything really concrete, as you know, I mean there's been speculation about what are some strategies that might work to offset that. And I think we're well aware of the various thinking around it. But nothing really concrete at this point. So we're going to explore the same avenues, we really have not come up with a here's what we're going to do plan at this point in time. We will figure out what we can with regard to offsets. But we don't expect to be able to dramatically offset the tax. I mean there's just not, there's just not enough levers for us to pull. I mean I think that's part of the problem for the industry, which is why we're pushing back on the tax policy makers, is that there's really not much you can do. You can't pass along price increases right now. That goes without saying, so it's easy to say well the customer is going to get it in the end, but well we'd be pleased if we could do that, but I don't see that as an opportunity. So we'll have to see what we can do, I think for us, it's most of our businesses is US. So it's going to be a question. I think the only thing that we have to really think through, and especially since we now have a pretty strong service component, is how does that play into the tax and we simply don't know the answer to that just yet.

Got it. Okay, thank you very much.

You're welcome.

Rich Newitter with Leerink Swann.

Yes, thanks for taking the question. I just was wondering if I could go back to your core US lumbar growth assumption, and you mentioned that for the market you expect continued mid- single digit pricing pressures. What are you assuming specifically for NuVasive?

For which?

The pricing.

The pricing? It's the same, basically low-single digit, price pressure negative.

Okay, so you basically don't assume any change to the pricing environment in your business as well as the market?

Correct, our growth is predicated upon taking share.

Okay. And just two other quick ones, first--

And Rich, that low-single digit that we've talked about for more than two or three, going on two or three years now, right? The expectation in 2012 still continues to be consistent with the two to three-year pricing profile we have seen even while the industry has deteriorate a lot around us. And that of course, is-- we think is a testimony to the ability to innovate faster than everybody else and bring new products to market and capture some level of price premium. That's how we're able to do it.

Okay, and I was just curious, your NUVA East facility, I know that you've been using that as kind of a hopping ground for European surgeons. Can you maybe just characterize the percentage of training that's been taking place, at what percentage are coming from abroad?

I would say that I'd have to give you a guess here, but probably in the neighborhood of 20% of all of our training is taking place out there. As again, it's just a rough estimate. And as far as how much of that is coming out of Europe, it's probably about 10% to 15% of that number. So it's not a very large number at this point although we've had certainly some pretty good sized European groups come over. But that 's about right and that's about consistent with where we are right now in Europe which is largely focused on Germany and the UK. And so that's where the emphasis is being placed and that's where the surgeons are mostly coming from, so--

And you mentioned an the Impulse Monitoring side of the business, that there was a particular account you would have otherwise not been able to get into. Can you just talk about how the business combination there helps you get into that account?

Sure. So it's essentially an account that we were unable to penetrate because we were unable to provide general neuromonitoring. They were not able to get into that account and I don't know the exact reason for why they were unable to get in there, but they could not get any kind of traction. And so I think by coming in and offering essentially the full scope services of one Company, I think it had to do with more with reducing the number of vendors and really the number of services, the increase in services that made it more attractive to that account. So that's generally-- and that's what we expect to happen as we continue moving down the pike, is the consolidation of services is what's very attractive to the hospital. They don't have to deal with different individuals and different entities, they can effectively deal with one company.

Thank you.

Welcome.

Matthew O'Brien with William Blair.

Good afternoon, thanks for taking the questions. Just--

Matt, and just before you go, just want to let everybody else know that we said we were going to try to stick to about 30 minutes, we're already 45 minutes on Q&A, so we're going to try to go through for another few more minutes and we're just not going to be able to get to everybody. We're doing our best, but-- so please go ahead and if you can limit it to one, if there's something else that we haven't addressed yet, obviously, go ahead and ask those. But try to limit it to one or two at the most.

Sure, I'll stick to one real quick then.

Okay, thanks.

Keith, you talked about the clinical data that you have out there and the wealth of that data, are you able to capture any of that data or anecdotally fusion rates among the different types of Biologics that are used during XLIF specific cases, beit INFUSE, Osteocel, autograft, allograft, whatever it may be, or is that something that you are working on at this time?

We do not have that stratified that way. So that's not available to us.

Okay just a real quick follow up, to that then, I mean is there anything that gives you any kind of concern with the decline in the use of INFUSE right now in terms of the efficacy or the fusion rates you may see going forward in your XLIF cases?

I'll give a quick answer to that, I think what you're seeing too with the INFUSE market is confusing. You obviously have the negative press that's going on around it. But let's not discredit the fact that there's been a completely different comp structure put together by Medtronic that drives their sales force to really use other Biologics. They went from a commission structure to then a user fee or a service fee and now it's down to zero. And anytime you do that to a sales force, you force them to look at other things in their bag to promote. So at the end of the day, INFUSE is still being used for those difficult patients, just like a greater option with Osteocel Plus, not greater than INFUSE, but a greater option to other Biologics like Osteocel Plus when they need more challenged cases. But I think hospitals and a very large part of the sales forces is pressing for other Biologics as a low-cost alternative with similar results. And so that's kind of the trend you're seeing with Biologics that's pushing down from a procedure perspective, they're still using them, it's just a different price point.

Okay, thank you.

You're welcome.

Michael Matson with Mizuho Securities.

Yes I just had a question about the neuromonitoring or the Impulse business. You commented that your-- about the projections in terms of the number of neurophysiologist you plan to have, so I mean should I read into that that you're planning to kind of build it at least in the near term rather than go out and buy other businesses? And just maybe help me understand the impact on your operating costs of adding these individuals, is there sort of upfront costs and then as they ramp up, kind of like a sales rep, as they ramp up with their business, then they'll generate more revenue as they go forward and then leverage those costs?

Yes, so really what we're talking about with regard to building out the sales force, sorry, the neurophysiologist this year, is organically driven. And so that's already in our numbers and that's contemplated in our operating margin. Generally speaking, if you're able to obtain a couple of things, first of all, to train somebody is something that can be done and made effective within a relatively short period of time of three to six months. The key is whether or not you have a contract such that you're able to really have that person immediately able to become effective or not. That's why over the past, we've looked at ways of doing this inorganically because you're able to purchase a contract together with a number of neurophysiologists that are already there executing.

So I think that we're going to continue to be opportunistic and see if there are opportunities for us to grow things faster. But anything that we would do would absolutely have to be accretive. We would not be screwing around with our bottom line because we'd be totally satisfied if all we did at the end of this year was to move from 160 to 200 neurophysiologists. So I think that's generally-- I think I've answered your question.

Yes, you have, and then I just have one really quick follow-up question and you went to the litigation, patent litigation stuff kind of quickly, so you may have said this, but is the royalty rates that you have to pay on the different products still up in the air? I know I did see some news that Medtronic was asking I think for like a 36% rate on the spacer, so is that still to be determined or has it been set at the levels that you've baked into your guidance?

Yes, so that would be for the-- the royalty rate is still up in the air for post verdict period. And that's in the process of still being discussed and worked out and that's what we're hoping is going to come out of-- we don't think we're going to get any kind of clarity on it until the final decision, it's possible but it's unlikely. So we do believe though that, I think we've talked about that final decision coming somewhere in the first or second quarter of this year. It may very well happen in first quarter, it could push over into the second. But right now things are starting to-- I think things are far enough along that it could very well be resolved in the first quarter. Not that we're changing our projections, but we have signs to believe that it could move a little bit more quickly.

And just to clarify, when you say a post trial period, would that mean the royalty rate from here on out until the patent expires?

That would mean through the appellate process. And then, from the appellate process, we would basically know where we stand which a number of things can happen, they could effectively invalidate that patent or they can send us back for another trial.

Okay, all right. I got it, thank you.

You're welcome.

And remember, that patent expires I think beginning of 2015.

Jason Wittes with Caris & Company.

Hi, thank you. Just wanted to follow up on some of the Osteocel Plus questions. I had the impression that you would have some data for Osteocel Plus this year, it sounds like it's moved into next year. Could you just kind of give us a framework in terms of what clinical trials are ongoing and what to expect from them, especially if they're enough to sort of get you into that tier 1 category of evidence?

Yes, there's a number of trials that are completed or are being completed, they then get finished and then off to submission. So I think our comment was about timing of peer review for those particular studies and when exactly they'll be shown.

Okay. But they're all for basically next year and I guess the question is are they really going to be tier 1 evidence or just supportive, so sort of keeping you in that $100 million range that you discussed earlier?

Yes, I think a couple could provide some new momentum, but our point is that we're going to wait and see first how the final data comes together and then two, from its publication and comment perspective. So I think we're holding kind of a conservative stance until those publications get out there.

And just one last follow up to kind of wrap up what you've been saying about lumbar for this year in terms of guidance. It sounds like you're basically modeling for a year very similar to last year which means synergies from IOM even new products aren't necessarily going to be seen in these numbers. Is that the right way to think about how you've sort of given us this guidance for about 6% US lumbar growth this year, or is there-- are there other factors playing a role here?

I think that's not a bad way to look at things and I think what we've made very clear in our guidance, is that we have achievable top and bottom line. And that's really what we're trying to make it clear.

Okay well understood. Great, thank you.

Okay, well I think we're good, we've allocated plenty of time. So we look forward to speaking with everybody in just a couple of months. Thanks very much. Bye-bye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.