Orthofix Medical Inc (OFIX) 2019 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Orthofix First Quarter 2019 Earnings Results Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Mark Quick, Senior Director of Business Development and Investor Relations. Please go ahead.

Thank you, operator, and good afternoon, everyone. Welcome to the Orthofix First Quarter 2019 Earnings Call. Joining me on the call today are President and Chief Executive Officer, Brad Mason; and Chief Financial Officer, Doug Rice.

I'll start with our safe harbor statement and then pass over to Brad. During this call, we'll be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical fact are forward-looking statements, including any earnings guidance we provide and any statements about our plans, beliefs, strategies, expectations, goals or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements, as there is no assurance the matters contained in such statements will occur.

The forward-looking statements we make on today's call are based on our beliefs and expectations as of today, May 6, 2019. We do not undertake any obligation to revise or update such forward-looking statements. Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risks disclosed under the heading Risk Factors in our Form 10-K for the year ended December 31, 2018, as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at Orthofix in Lewisville, Texas.

In addition, on today's call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to financial measures determined in accordance with U.S. GAAP. Please refer to today's press release announcing our first quarter 2019 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results.

At this point, I will turn the call over to Brad.

Thanks, Mark, and good afternoon, everyone. Today, I'll start by giving you a summary of our first quarter 2019 performance and highlights, after which Doug will discuss the financial results in more depth. I will then follow up with our outlook for the remainder of 2019 before taking questions.

For the first quarter, we reported net sales of $109.1 million, representing a year-over-year increase of 0.4% or 0.19% (sic, see press release -- "1.9%") in constant currency. These results were slightly better than anticipated and set us up well to achieve the sequential quarterly sales acceleration that we guided to for this year.

Orthofix Spine, which includes our Bone Growth Therapies, Spinal Implants, Biologics and Spinal Kinetics product lines, generated $85.9 million in sales in the first quarter, which represents a 5.8% increase in reported sales over prior year or 6.1% in constant currency.

Beginning with the Bone Growth Therapies product line, net sales increased 2.4% in the first quarter versus prior year. This was in line with our expectations for the period. Order volumes increased 5.4%, partially offset by customer and products mix changes. We still expect this business to grow in the 3% to 4% range for the full year and have already seen a strong start to the second quarter.

In Spinal Implants, which includes both spine fixation and motion preservation products, we reported a net sales increase of 10.6% or 11.6% in constant currency compared to prior year. This increase was driven by a $3.1 million contribution from our Spinal Kinetics motion preservation products, offset by a decrease in sales of our spine fixation products in the U.S., resulting from our ongoing selected disruption of our legacy sales force in preparation for bringing on larger sales partners in key geographies. We now have several new sales partners under contract and ready to go. This sales disruption is likely to continue but taper off in the quarters ahead as we gain traction with our new distributors. Spinal Kinetics OUS product sales were in line with our expectations for the quarter.

The sales star for the quarter was our Biologics product line where we reported net sales increased by 9.7% in the period compared to prior year. When normalized for the contractual reduction in March of last year of the marketing service fee Orthofix receives from MTF Biologics, sales increased 16.6% in the quarter, primarily driven by the contribution from new distributors added in the last 3 quarters and the recovery in our previously underperforming region. Product sales volumes increased by 20%, partially offset by a low single-digit ASP decline.

Lastly, in our Orthofix Extremities business, reported and constant currency net sales decreased 15.7% and 10.4%, respectively, in the first quarter over prior year. As can happen in this business, a number of large stocking orders that were expected in Q1 did not come through before we closed the quarter. Given this quarter variability, we believe the best way to assess its performance is to look at the constant currency trailing 12 months year-over-year growth. On this basis, the Orthofix Extremities business grew 1.4%. We started the second quarter on a good pace and remain confident that this business will grow at least low single digits for the full year.

Now turning to operating highlights for the period. In our Spine business, we continue to focus on the commercial opportunities created by the consolidation of our Spine product lines under one organizational structure. We are beginning to realize these benefits in the top line performance of our Biologics products as reflected in our strong start to the year. While as I mentioned, the transition from legacy distributors to new sales partners in high-potential territories will continue to be a headwind to our top line in Spine Fixation implants in the near future. We expect this trend to reverse in the latter part of the year as our new partners gain traction.

Regarding the U.S. commercial launch of the M6-C artificial cervical disc, the U.S. Food and Drug Administration approval of the M6-C disc was certainly the most important highlight of the first quarter for the company. We also recently released the compelling results of the full 2-year data from the M6-C cervical disc IDE clinical study. These results included a statistically significant improvement in the neck disability index for patients who received the M6-C disc. These patients also reported a 92% satisfaction rate with the surgery, and 93% they would have -- say they would have the surgery again.

Surgery time and the mean length of hospital stay were significantly reduced compared to anterior cervical discectomy and fuse procedures, or ACDF. And very importantly in today's environment, in 24 months, the rate of M6-C disc patients who were still taking some type of pain medication dropped to 14% compared to 38.2% of ACDF patients. Of these, there was a 7x higher rate of opioid use for the ACDF patients than with patients who received the M6-C disc.

Additionally, we recently began the training and certification of U.S. surgeons, with 16 leading surgeons already through the process, and had our first commercial patient implants of the M6-C disc. We will be executing a measured national rollout of the disc over the next several quarters, with a significantly accelerating trajectory by year-end. And we continue to have a very high level of interest and enthusiasm from physicians and distributors about the opportunity this disc presents.

In our Biologics product line, I am very happy to announce the limited market launch of fiberFUSE demineralized bone matrix, or DBM. fiberFUSE DBM is the only natural 100% bone DBM that can be used for spine, orthopedic and maxillofacial procedures. Containing a mixture of cancellous bone and demineralized cortical bone with no carrier added, the fiberFUSE DBM creates a natural scaffold for revascularization, cellular in growth and new bone formation. And most importantly, it has the advantage of having handling characteristics similar to our market-leading Trinity stem cell allograft.

And lastly, regarding our Orthofix Extremities business, while typically choppy from quarter-to-quarter due to international stocking order cadence, this business remains solid, with our biggest opportunity still in the U.S. foot and ankle and pediatric markets. Orthofix Extremities remains an important part of our inorganic growth strategy and one of the fastest growing segments in orthopedics.

In summary, the first quarter was modestly better than we anticipated, which along with the FDA M6-C cervical disc approval and limited launch sets us up very well for the remainder of the year.

I'll now hand it over to Doug to give you the financial metrics in the quarter.

Thanks, Brad, and good afternoon, everyone. I'll start by providing some additional details into our net sales and earnings results and then discuss some of our other financial measures.

As Brad noted, total net sales in the quarter were $109.1 million, up 0.4% on a reported basis and 1.9% on a constant currency basis when compared to the first quarter of 2018. When adjusting for Spinal Kinetics sales and the MTF Biologics contractual fee change, our organic growth was approximately flat over prior year in constant currency, with strong performance in our Biologics business and low single-digit growth in Bone Growth Therapies, which was offset by year-over-year declines in both Extremities and Spinal Implants.

Gross margin in the first quarter 2019 was 78.3% compared to 77.8% in the prior-year period. The increase was due primarily to favorable product mix, offset slightly by the dilutive impact from Spinal Kinetics. For the full year 2019, we continue to expect gross margins to be between 78% and 79%. Sales and marketing expenses were 49.2% of net sales in the first quarter of 2019, an increase over 46.2% in the first quarter of 2018. The increase was primarily due to the investments in our extensive training and education programs to support the M6 U.S. commercial launch. We continue to expect sales and marketing in 2019 to tick up approximately 100 basis points over 2018.

G&A expenses were 18.8% of net sales in the first quarter of 2019, which were slightly up from 17.9% in the prior year period. This increase was due primarily to CEO succession charges, which were offset by decreases in strategic investments during the quarter.

R&D expenses for the first quarter were 8.5% of net sales, up from 6.4% in the prior year period, driven primarily by additional spending from the successful M6-C artificial cervical disc FDA approval process. For 2019, we continue to expect R&D spending to increase modestly to be between 7.5% and 8.5%.

Adjusted EBITDA decreased to $15.7 million or 14.4% of revenue, down from $19.7 million or 18.1% of revenue for the first quarter of 2018. This decrease was primarily driven by the M6-C launch costs and sales and marketing as well as the expected dilution from Spinal Kinetics. It's important to note that starting this quarter we have updated our segment reporting in the 10-Q and earnings release tables to reflect the recent realignment of our Spine and Extremities businesses. We will continue to provide top line results for each of our 4 traditional product categories. Also, the updated segment reporting now includes the adjusted EBITDA results for each segment, which provides further transparency into how we currently evaluate these businesses and make strategic decisions.

Now turning to tax. We had income tax benefit for the quarter of $6 million or 118% of loss before income taxes as compared to income tax expense of $5.4 million or 51% of income before taxes in the same period of 2018. This year-over-year decrease in our quarter tax provision was driven by favorable adjustments from the settlement of our 2015 IRS audit and final resolution of prior year tax issues.

For the first quarter 2019, we reported GAAP earnings of $0.05 per diluted share as compared to net income of $0.27 per share for the first quarter 2018. After adjusting for certain items and when normalizing for tax using a non-GAAP long-term effective tax rate, adjusted EPS for the first quarter 2019 was $0.27 compared to $0.39 in the first quarter of 2018. The impact of the lower tax rate in the quarter was partially offset by increased investments in the M6-C U.S. launch and the continued dilutive impact of Spinal Kinetics.

Moving on to the balance sheet highlights. Days sales outstanding, or DSOs, were 66 days at the end of the first quarter 2019, up from 64 days at the end of the first quarter 2018. As noted on the last call, this increase was due primarily to the timing of collections from stocking distributors in our OUS Extremities business. Our inventory turns at the end of the first quarter 2019 were 1.2x, flat from the first quarter 2018. Although we continue to see benefits from our inventory management initiatives, these were offset by our investment in newly launched products and a $7.2 million increase in inventory related to the acquisition of Spinal Kinetics.

Cash, cash equivalents and restricted cash at the end of the first quarter totaled $49.2 million compared to $72.2 million at the end of 2018. The decrease was primarily driven by the $15 million milestone payment made to Spinal Kinetics' former shareholders related to the FDA approval of the M6-C. Cash flow from operations for the quarter was negative $1 million, an improvement from negative $3.6 million in the first quarter 2018.

Capital expenditures were up in the quarter to $4.9 million from $3.4 million in the prior year due primarily to investments in our global IT infrastructure and manufacturing capacity expansion for the M6 artificial cervical disc. We continue to expect 2019 capital expenditures of $24 million to $26 million, which reflects equipment and instrument investments to support sales growth from the M6 artificial cervical disc.

Free cash flow, defined as cash flow from operations minus CapEx, was an outflow of $6 million during the quarter compared to an outflow of $7 million in the prior year. This modest improvement was primarily due to the increased operating cash flow that I just noted. Consistent with prior years, we expect our free cash flow to improve significantly as our sales ramp for the remainder of the year.

With that, I will now turn it back to Brad.

Thanks, Doug. Regarding guidance for the full year 2019, our outlook remains unchanged. The company continues to expect to report net sales in the range of $472 million to $477 million, including a $4 million currency headwind, representing a reported year-over-year increase of 4.2% to 5.3%.

We also continue to expect the reported sales cadence for the year to be heavily weighted toward the last third of the year, with low single-digit sales growth in Q2 ramping to mid-single digits for Q3 and high single digits in the fourth quarter. This sales cadence is being driven by a number of factors including currency headwinds weighted toward the first half of the year; the planned disruption of our U.S. spine implants legacy sales force in selective major markets in order to convert to high-potential sales partners that are now attracted to our motion preservation, fixation and biologics portfolio; and lastly, the ramp-up of sales in the last third of the year of the M6-C disc in the U.S.

This sales cadence will also disproportionately affect our flow-through to the bottom line as we saw in the first quarter. As with sales, we expect our adjusted EBITDA to be heavily weighted toward the end of the year but continue to expect for the full year 2019 adjusted EBITDA, including Spinal Kinetics, to be in the range of $86 million to $89 million and adjusted earnings per share to be $1.75 to $1.82, using a non-GAAP long-term tax rate of 27%.

Lastly, the search for our next CEO is going well, with a strong pool of outstanding candidates included in the process. The Board of Directors and I remain committed to finding an exceptional individual to lead the company into its next chapter.

With that, operator, we're now ready to open up the line for questions.

(Operator Instructions) The first question comes from the line of Craig Bijou from Cantor Fitzgerald.

Want to start with Biologics. Obviously, a lot of strength there. You called it out, and you did I think also mention that you saw some traction with distributors and that might have been some of the driver of the growth. So just wanted to understand what really drove that growth. Were there any stocking orders or onetime items in there? And I think on the last call you said low single digits for the year, and is that still what you guys expect?

Yes. Good question, Craig. No -- exactly as I said my prepared remarks, it was really driven by -- primarily by distribution that was added in the last 6 to 9 months as well as kind of getting our underperforming region back up to speed. There's no stocking orders in that business at all that impacted it. And as a matter of fact, based on what we've seen year-to-date, I think I'm a little more optimistic about the range that I gave you for the year. And everything is going very, very well in that business and continues to even in this quarter. So nothing that's onetime. It's just a solid business that we're bringing in.

Great. And then maybe on the sales disruptions or the disruption that you're seeing as you're realigning the sales force. Just want to get a sense for will -- would you be able to or would you be willing to, I guess is the question, to quantify that impact in Q1? And then maybe kind of lay out how the impact will affect the upcoming quarters.

Yes. So without getting into too much detail about Q1, these are geographies where we have enormous potential. They're large MSAs where we've been underperforming. So long-term outlook for these geographies is very, very solid. We expect probably second quarter to be similar to first quarter, while we expect that to reverse probably by Q3, get into growth again, and Q4 even more so. So I think midyear we should start to see a reversal of what you've seen as we bring on these new distributors. A number of them just started in April and May, and it take them a little bit of while to -- a little while to ramp up and cover the business that we lost in this process. So by year-end, we should be on a great trajectory with our fixation implants and, obviously, [are sold] with the M6-C, of course.

Your next question comes from the line of Raj Denhoy from Jefferies.

Wondered if maybe I -- maybe I could start a little bit with the Extremities business. You mentioned you -- there were a couple of stocking orders that you missed at the end of the quarter. Maybe you could just provide a little more detail around that and sort of confidence that those orders will appear here in the second quarter or really when you expect to get those back.

Sure. Yes, we had a couple of large orders that are choppy that -- and it's less about the orders. It's more about the geopolitical situation in a number of cases. But we do expect those back. In fact, we've started the quarter very strongly in that business, and we expect that we're going to do very well from here on. Now that said, I've given a guidance of low single-digits growth for the year, we still have more work to do in that business in the U.S. in particular. That's more opportunity, I should say. And I don't -- with the changes and things we're making there, I expect to see that next year but probably not as much this year. So we're -- we don't have high expectations for that business this year, but I do as we get -- go forward into 2020 and beyond, particularly because that is the fastest-growing segment of orthopedics. And it's also a very good, I would say, landscape for us to look for inorganic opportunities as well.

Okay. That's fair. Maybe I could just ask a couple on Spine as well. I know you gave broad Spine guidance at the beginning of the year. But as you look at how Biologics has been -- how it came in in the first quarter, which I think was quite a bit stronger than most were expecting, have you changed anything in terms of the complexion, in terms of what will contribute in Spine over the course of the year? I know you've kept guidance for everything roughly the same, but has there been any change in thinking about whether Biologics might do better and maybe the core Spine business takes a bit longer to come back together for you guys?

I personally have -- am more optimistic about the Biologics business. It's very strong. It's still a little early in the year for me to update any guidance on that. But if we see this for -- through Q2, we'll certainly be willing to take another look at that. But no change in our Bone Growth Therapies business as we look at that, the 3% to 4% for the year. And in our Spinal Implants, as I mentioned, we should see a nice turnaround in the business in the last -- particularly in the last third of the year, the fixation portion. And then so -- and then we're keeping our thoughts the same on the M6-C, between $3 million and $4 million, the vast majority of which will be in Q4.

So something -- maybe just the confidence overall is perhaps a bit higher, but you're not willing to raise numbers yet?

Exactly.

Great. This maybe -- one last one. You mentioned M6 -- I think you did mention you had some of the first implants in the United States in the quarter. Anything you can share in terms of demand or interest in getting trained with that product? Just anything in terms of the early days on M6 in the United States will be helpful.

Oh, absolutely. So several things. First of all, demand is not -- is the least of our problems right now. We -- in that product category, we want to make sure that every surgeon, every patient has a good outcome, so we're really focusing on training and education with the surgeons. And along that line, we had 13 top surgeons in the country in here over the weekend training and had a phenomenal experience. So we're very, very excited about that. And as are the surgeons. We've trained to date 16 surgeons -- trained and certified 16 surgeons. So everything is going very, very well from our perspective. Again, patience is a virtue here. We want to make sure we do it well and we do it right and -- for the long-term health of that business, and that's exactly what we're doing. And I couldn't be more pleased with how that project -- how that whole launch and rollout is going.

Great. And sorry, just one last housekeeping one. Looks like you took a write-off in Spine in the quarter as well. Is there any detail in terms of what that was related to?

I'm looking at Doug, and he has a puzzled look on his face.

What are you referring to, Raj?

Just as an -- just related fair value adjustment of $5.9 million in the quarter.

Yes. Got you. Yes, I wouldn't call that a write-off as much as just increasing our expected liability on some of the milestone payments that relates to our acquisition of Spinal Kinetics as we expected.

It's actually a good thing then?

It's a good thing, exactly.

Our next question comes from the line of Bruce Nudell from SunTrust Robinson.

Brad, when you just think about the ramp and the year, clearly the strategy of the company has been to kind of get more mindshare of existing distributors you want to keep as well as acquire new distributors that have better footprint in targeted geographies. And so when you think about the ramp, what is it about the kind of new distributors that kind of -- I suspect that's fitting into your belief that you'll be able to show significant acceleration as the year progresses. Do they just have a certain amount of captive share, for instance, that you know you're going to get?

So a good -- a really good question, Bruce. So let me make sure that I'm clear about my answer on a couple of fronts here. One is specifically around Spine Fixation implants. The growth this year -- if we think about this acceleration, a lot of it's going to come from just the launch of the M6-C disc. So we know that is going to pick up $3 million to $4 million.

In terms of kind of the reversal of the Spine Fixation products, implants, that has to do with the distributors that you're talking about. Now the distributors that we're bringing on, these distributors in the past have a history of doing multiple of times of the business that we have -- that we are doing or are capable of doing with our former distribution in these geographies. And in a lot of cases, these are large distributors in areas where we have no coverage. So as distributors come on, that will be a good portion of our ramp for the year. But also, if you think about it, our bone growth stimulation business is solid 3% to 4% for the year, so that's going to tick up from where it's been to get to that point.

And also, our Biologics business not contributing at such a high level is another driver of it as well. But it's a combination of those things, the new distribution, Biologics with the new distributors that they have. And also coming off of what I would say is a disappointing quarter in terms of the Extremities because of those stocking orders, we expect a nice recovery in that business as well, which will also give a -- quite a bit of a hockey stick at year-end.

And just thinking about Biologics, has the complexion of that business changed fundamentally? Or is distribution going to be playing an outside -- an outsized contributory effect for Biologics? Has anything really fundamentally changed from -- I think you described it as the low single-digit kind of market?

I think the things that are changing fundamentally for that business are, number one, just the distribution that is now attracted to Orthofix based on what they've seen over the last couple of years and what they anticipate the opportunity they will have with Orthofix when you consider all of the things in the -- in our Spine business. That's certainly contributed to this.

And also, I think to a large degree Trinity ELITE has become the standard of care. And that's being recognized I think more and more out there. It is just a great tissue. And now also with fiberFUSE coming on, that gives us even another leg on the stool in Biologics. So fundamentally, the tissue hasn't changed, but the market dynamics have changed a little bit, and we're taking advantage of that.

And I guess my last question is -- and my knowledge of the disc space is old. How -- do you have a feel for how the M6 stacks up against the other cervical discs? The opioid number that you cited or percentage versus ACDF sounded impressive, but is that kind of a class effect? Or is this new leap in that dimension?

Well, probably the best way to frame that, Bruce, is virtually every market that the M6 disc has gone into, it's taken the leading market share outside the U.S. There are significant advantages with the disc in terms of its natural design, much more similar to a human cervical disc, that is recognized by surgeons and appreciated by surgeons and patients alike. I think there are a number of reasons, including the data that I talked about, that in virtually every case is superior to the other discs that have gone through this path that are driving demand for this disc.

There's 300 patients a year in the U.S. that fly over to Europe to get the M6 disc put in. It is very well known by patients. There's a lot of demand already built up in the U.S. And it has -- now this is me speaking from what I understand, it has the best if -- or very close to the best reputation of any disc in the world. And so it is differentiated. There's no other disc like it in the U.S. They're all ball-and-sockets designs other than the M6-C, and the market recognizes that the demand is there. It's very much there.

Our next question comes from the line of Ryan Zimmerman from BTIG.

It's Sam on for Ryan. So getting into the -- digging a lot more into that Biologics. On the -- with fiberFUSE on the market now, can you give us a little insight on how that is going to impact your stem cell business going forward?

Yes. So when you think about the Biologics business, the Trinity ELITE product, the stem cell allograft products, are a premium-cost and premium-priced tissue form. In some cases, there are hospital systems that just will not pay that price. In the past, we have just forgone that business. So fiberFUSE is positioned so that we don't have to walk away from that business. It is not positioned as a replacement for Trinity ELITE. Trinity ELITE is a very unique tissue form that has a lot of advantages, including live stem cells. Both fiberFUSE and Trinity ELITE are both a partnership with MTF Biologics, which makes it another -- gives another advantage in terms of the relation -- excuse me, the reputation that MTF has. And so it's positioned as a lower-cost alternative, where Trinity ELITE will not be paid for. And that's the situation, and we have no intention of leading with fiberFUSE. It is a -- it is the backup to Trinity ELITE.

Great. And then turning to M6. In the lead-up to the more full-scale launch here in the back half of the year, are there any metrics that we can look at or that you may be divulging, whether it be the surgeon training or things along that line, to help us gauge performance of the rollout there, that you're looking at internally?

Yes. Good question, Sam. We will be giving a metric. We're contemplating whether that's surgeons trained or not -- by the end of -- when we do our Q2 call, we'll have a metric for you to use. We haven't decided on the best one, but we know that it's going to be valuable to you for us to share something other than just sales so you can get an indication of the future of the rollout of the disc.

Our next question comes from the line of Jeffrey Cohen from Ladenburg Thalmann.

Just a few follow-ups. Excuse my redundancy if there is any. So Q2, what might the surgeon training look like for the quarter? You expecting kind of double or triple the current number that you stated?

We probably won't get into those numbers at this point. We are -- what I will tell you is we're focusing on the key sites where the IDEs -- the study sites were done and the surgeons in those facilities, and that's where our focus is and will be for quite some time for a number of reasons. So but -- without getting into numbers specifically, we'll have a better handle on that and give you something at the end of Q2.

Okay. Got it. And sorry to drill down into Biologics again, but with the addition of fiberFUSE do you think that the 2 products now give you a pretty wide breadth as far as the landscape of Biologics? And can you give us a little more color on ground costs and ASPs out there as compared to competitors as well as training?

Yes. I think it gives us another arrow in the quiver. I don't -- I wouldn't say that we have a full and complete line of Biologics. But where we have products, we have very, very strong products -- or tissues, I should say. So if you think about kind of the ASPs in that business, you're really starting with inFUSE at the top, and you think about this as dollars per cc in terms of the ASP. It starts with Infuse. Then it goes to the stem cell allograft. Then it goes down to kind of the super DBMs like this is -- like fiberFUSE will be and then DBMs and synthetics and things like that, so a bit of a cascade. So we're playing toward the upper end at Trinity ELITE, and then more toward the middle of the pack with fiberFUSE.

Okay. And then lastly on the data front as far as some of the follow-up to M6 as far as opioid use and other therapies, should we expect more data?

No. If you go back and you look at the press release we put out probably a month ago or so, that'll give you a lot of data, Jeff, on what came out in the IDE. I just kind of highlighted a few of the things.

Yes. And you will expect some further data to be disclosed, it sounds?

No. Well, no. We did disclose the data that was in the IDE, if that's what you mean.

Yes. No, I was just talking about general market data for it, but I got it.

Our next question comes from the line of Jim Sidoti from Sidoti & Company.

Can you just give me a little more color on the distribution changes? Is it -- it's primarily a U.S. issue, I assume?

Yes, it is. Yes, that's exactly right, Jim. I should've been more specific about that, primarily U.S.

And why is it -- why does it impact the hardware more than the Biologics?

In many cases, it's different distributors, different agents. So we have -- as you recall, about 5 years ago we only use -- we only sold our Biologics through our metals agents out there. And then we separated that and kind of let Biologics find their own agents in addition to the agents that were selling our Spinal Implants. So roughly, let's say, a 50-50 split on the distributors that sell our metals also sell our Biologics. So they have their own other distribution as well, if that answers it.

Okay. And so -- and I guess the plan is to continue that strategy, to have some agents just sell Biologics and others that just sell the metal?

Well, it's really about -- it's less about -- the strategy, in a more broad sense, is to do what's best in a local geography, a local territory. There's no national strategy per se. We just go into a territory and say what's the best opportunity here to sell our metals, to sell our Biologics, to sell our bone growth stimulators and the disc. And in some cases, that will be 1 distributor that sells all of those. That's a little bit more rare, but that happens in some cases. In other cases, all they'll do is sell 1 portion of the portfolio, depending on how they're positioned in the territory and what other distributors we have in that territory. So it's all a case-by-case basis based on the market dynamics in an area.

Okay. All right. And then sorry, I missed some guidance you gave regarding gross margin. Where do you expect that to end up for the year?

Jim, this is Doug. We're guiding 78% to 79% for margins this year.

Okay. And then any update on the CEO search, Brad? And how much longer you want to work?

No. Other than to say that the process -- it's in process. It's going well. We've had some very, very good candidates. And that's really all that we want to speak about this point.

Our next question comes from the line of Dave Turkaly from JMP Securities.

Just a couple of quick follow-ups. You mentioned these new distributors in some of the bigger territories and signing them up I think primarily because of the M6. But I would love to get some color, are these distributors selling other competitive discs and you're stealing them away, or do they not have a disc in their bag today?

It could be -- it -- well, I would never use the term that we're stealing anybody away. Let's start with that. Secondly, they may have had a disc at one time, but they are -- we honor noncompetes in territories. So if they're coming on and starting with us, that means they are no longer obligated by -- under contact with anybody else. So they could have -- they might have sold disc in the past or perhaps not. It could be either one. It just -- it depends on which distributor we're talking about.

Got it. You mentioned market-leading share OUS. I'm just curious have you put a number around that, even if it's just sort of a ballpark. Does it have 30% or 40% share in some countries? And I guess the follow-up to that would be do you anticipate it might get to that level here in the U.S.?

It actually -- in many, many markets it's in, it has over 50% share. As I sit back and I look at this and I dream about the opportunity that the M6 creates, this is a roughly $250 million, $275 million market in the U.S. today, growing double digits, becoming more and more accepted, more and more pushed by patients, not just surgeons. And based on what's happened in other markets, based on the differentiation of the M6 disc not only in its design and its function but also its -- how -- the procedure to put it in, the training that we do, all of these things, it should have every opportunity to do what it's done in other markets from my perspective. And that is what gives us a lot of confidence about -- this year is a year that I think is going to be a good year. 2020 will be a great year from my perspective, and the M6 disc is a big part of that. And it leads to a lot of other things. It's kind of a link to other opportunities. But in terms of the U.S. market opportunity, growing market, and I expect that we will have an opportunity to get a significant portion of the market in the next 3 to 5 years.

Got it. Last one. You mentioned some of the features and some of the benefits that came out in that study. From an ASP standpoint, is the M6-C -- is it a premium-price device versus the other discs that are on the market?

It is. That's where -- that's how we have it positioned. It is a premium product, and we'll position it with a premium price.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Brad Mason.

Thank you, operator. And thanks, everyone, for joining the call today. We appreciate your time and attention. And we look forward to seeing you, hopefully, in the near future. Have a nice evening.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.