SI-BONE Inc (SIBN) 2021 Q4 法說會逐字稿

Good afternoon, and welcome to SI-BONE's Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Matt Bacso from the Gilmartin Group for a few introductory comments.

Thank you for participating in today's call. Joining me are Laura Francis, Chief Executive Officer; and Anshul Maheshwari, Chief Financial Officer. Earlier today, SI-BONE released financial results for the quarter ended December 31, 2021. A copy of the press release is available on the company's website.

Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of Federal Securities Laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. These forward-looking statements are based on the company's current expectations and inherently involve risks and uncertainties. These risks include the impact that COVID-19 pandemic will have on the ability and desire of patients and physicians to undergo procedures using the company's products, the duration of the COVID-19 pandemic and whether the COVID-19 pandemic will recur in the future.

Other forward-looking statements include our examination of operating trends and our future financial expectations, such as expectations for hiring, surgeon training and adoption, active surgeons, new products, clinical trial enrollment and reimbursement decisions and are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements.

For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. SI-BONE disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements or that because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 28, 2022.

And with that, I'll turn the call over to Laura.

Thanks, Matt. Good afternoon, and thank you for joining us. For today's call, I'll provide opening comments and a business update, followed by Anshul, who will provide additional detail regarding our financial results and initial 2022 guidance.

Let me start with our performance in the fourth quarter and full year 2021. I'm pleased with the team's execution in 2021 as we extended our market leadership position, grow our commercial infrastructure to 150 U.S. sales representatives, expanded exclusive payor coverage to over 160 million U.S. covered lives and ended the year with a record 690-plus U.S. active surgeons.

Our revenue, consistent with our pre-announcement on January 10, for the fourth quarter of 2021 was $25.2 million, representing growth of 14% compared to the fourth quarter of 2020. Despite various COVID surges throughout the year, we were able to generate sequential revenue growth for the third straight quarter. For the full year 2021, we generated revenue of $90.2 million, representing growth of 23% compared to full year 2020. We navigated through the pandemic very well due to consistent and focused commercial execution.

Now let me provide some insight into the impact of COVID-19 on our U.S. operations for the fourth quarter and early 2022. Despite the impact of Delta and Omicron, growing demand for our solutions allowed us to deliver sequential monthly revenue growth in the fourth quarter. Based on our booking records in the fourth quarter, approximately 100 cases, which has been scheduled were deferred due to COVID in the U.S. This impacted revenue in the fourth quarter by over $800,000.

These are the cases that were booked and then postponed, but of course, there are many more cases that were affected by COVID. We estimate that Omicron resulted in an approximately 40 U.S. cases being deferred in the back half of December, representing approximately $350,000 in revenue. We believe that the execution by our dedicated field organization has been a key differentiator as we manage through the pandemic better than many of our peers. We're also well positioned because approximately 80% of our procedures are performed in an outpatient setting or at surgery center.

Thus far, in the first quarter of 2022, we've experienced an increase in the deferral of procedures due to Omicron. Based on our booking records, over 100 cases were deferred in January. These deferred cases represented approximately $900,000 in revenue. Case deferrals in February declined to approximately 40 cases, which gives us optimism that the operating environment is improving. We remain confident based on our prior recovery experience and our ability to recapture the deferred cases over the next few months as the pandemic recedes.

Additionally, while anecdotal, based on our conversations with surgeons, we're aware of some surgeons who have built backlogs of 3 to 4 months due to the pandemic surges and hospital infrastructure limitations. The resiliency of our performance throughout the pandemic and the record operating milestones we achieved reaffirmed that our investments in growth initiatives over the last 18 months are delivering, and they positioned us to be a much stronger company in 2022.

Now let me provide you an update on our growth initiatives as we look to extend our leadership position and drive durable long-term growth. Starting with sales infrastructure expansion. Our sales team remains an important driver of growth as we penetrate our core market and expand our presence in trauma and adult deformity.

I'm really proud of our commercial leadership team's effort under the leadership of Tony Recupero, to attract high-caliber talent and end the year with a 150-person sales force, consisting of 85 territory managers and 65 clinical support specialists. These numbers translate to a 30% increase in territories in 2021. The dedicated sales team has been a clear differentiator, especially in this unique COVID-operating environment, as it allows us to remain focused on surgeons and deliver 25% growth in procedure volume in 2021.

In 2022, we'll continue to strategically add headcount by investing in high-quality sales reps to set up the platform to deliver strong and sustainable long-term growth. Additionally, we remain focused on driving sales force productivity by adding to our bench of clinical support specialists. We're targeting ending 2022 with an approximately 170-person sales force, of which 55% are anticipated to be sales territory managers.

Moving on to surgeon engagement. We ended the year with over 690 U.S. active surgeons who performed at least 1 case in the fourth quarter of 2021, representing a year-over-year increase of approximately 18% and a sequential increase of 10% from the third quarter of 2021. In 2021, we had over 1,000 surgeons perform at least 1 procedure in the year.

To put that in context, since our inception, around 1,800 surgeons have been trained and treated at least 1 patient. The growth in active surgeon base in the quarter, driven by both new and reengaged surgeons, reaffirms that our multipronged approach to drive surgeon engagement is delivering. Our investments in building a dedicated sales organization, combined with the introduction of TORQ, exclusive coverage of Anthem and UnitedHealthcare and the expansion of our proprietary SImulator to train surgeons has provided the ideal foundation for us to engage new surgeons and reactivate previously trained surgeons. Our goal is to grow our active surgeon base by approximately 15% by the end of 2022.

Our SImulator technology remains a cornerstone of our surgeon training program. Specifically, over half of our surgeons trained in the fourth quarter were trained using the SImulator. We've continued to experience a steady increase in adoption rate among surgeons, who have been trained on the SImulator. With 24 SImulators in use worldwide and approximately 6,000 surgeons to be trained and retrained, we believe we have the infrastructure to drive a surgeon engagement and further expand the active surgeon base.

As part of our long-term strategy to grow our active surgeon base, we continue to expand our academic programs to educate residents and fellows on primary SI joint diagnosis, and the degenerative and deformity surgical applications of our solutions. Since inception of the program, we've held approximately 170 academic programs in the U.S., resulting in the training of over 850 surgical residents and fellows.

Turning to our products and solutions. The strong performance of iFuse-TORQ in 2021 reaffirmed that our broadening product strategy is resonating with our customers. In 2021, our initial focus was on targeted competitive conversion to drive adoption and extend our market leadership as a sacropelvic solutions company. In 2022, we expect iFuse-TORQ to continue to be a tailwind as we accelerate our penetration into trauma, which we estimate to be a $350 million market opportunity.

In adult deformity, we're excited about the opportunity to build on the excessive bedrock with our second-generation product. We remain on track to launch this differentiated product in the first half of 2022. On the clinical research front, while the pandemic has impacted the pace of enrollment in SILVIA, a 2-year prospective international multicenter randomized controlled trial of 2 different methods for pelvic fixation in adult patients. We made significant progress on enrollment in the fourth quarter, nearing approximately 80% of target enrollment. We expect enrollment to continue through the first half of 2022 and anticipate the primary endpoint results in 2024.

Talking about our patient awareness initiative, we focused our investment in targeted digital marketing programs in our fourth quarter to educate and empower patients in their SI journey. To provide some preliminary insights, we have more than doubled the number of potential patients we are engaging through marketing, while significantly increasing the referral of patients to surgeons at the end of 2021 compared to the prior year, showing the effectiveness and efficiency of the targeted digital marketing spend. While the preliminary insights are encouraging, we continue to take a disciplined approach to continuously optimizing and focusing our investments across various digital platforms.

With that, I'll now turn the call over to Anshul to provide more detail on our financial results.

Thanks, Laura. Good afternoon, everyone. Our fourth quarter total revenue was $25.2 million, representing growth of 14% compared to the prior year period. U.S. revenue was $23.3 million, increasing 13% compared to the prior year period. International revenue was $1.9 million, increasing 28% compared to the prior year period.

Even with the multiple surges in the quarter, resulting in approximately 100 case deferrals in the U.S. and pressure on Europe case volumes in December, we delivered steady sequential monthly growth in worldwide procedure volumes with December being the highest case volume month in company history, reaffirming the underlying momentum in the business.

Gross margin for the fourth quarter of 2021 was 87% compared to 90% in the corresponding period in 2020. Gross margin in the fourth quarter was impacted by an increase in cost of operations to support the growth of the business. Operating expenses increased 29% to $35.8 million in the fourth quarter 2021 as compared to $27.7 million in the prior year period. The increase was driven by higher sales and marketing costs related to increased sales hiring, higher travel costs, research and development expenses and increased stock-based compensation.

Our net loss was $14.5 million or $0.43 per diluted share for the fourth quarter of 2021 as compared to a net loss of $9 million or $0.28 per diluted share in the prior year period. As of the end of the quarter, our cash and marketable securities were approximately $147 million and long-term borrowings were approximately $35 million. We believe we are well positioned from a liquidity standpoint to support our strategic priorities that will allow us to create long-term growth and shareholder value.

Moving to guidance. We are entering 2022 with several structural tailwinds, including increasing underlying demand, a productive sales force, growing surgeon engagement, near universal coverage in the U.S. and a growing portfolio of highly differentiated products. However, we remain cognizant of the unique external operating environment due to COVID-19 and its impact on elective procedures as well as health care infrastructure and staffing levels.

Our 2022 outlook is highly sensitive to assumptions on a steady global recovery, which anticipates case scheduling and elective procedure levels normalizing throughout the year. For 2022, we expect annual revenue to range between $106 million to $108 million, representing year-over-year annual growth between 18% and 20%. The guidance reflects the assumed impact from Omicron variant in the first quarter of 2022, which we expect will result in mid- to high single-digit revenue growth in the first quarter of 2022 when compared to the first quarter of 2021.

We expect the annual gross margin for 2022 to be in the mid to high 80% range. The annual gross margin range assumes a normal low single-digit ASP decline based on site-of-service mix and procedure mix and a higher depreciation of instrument trades based on our investments in 2021.

With that, I will turn the call over for questions. Operator?

(Operator Instructions) The first question is from Craig Bijou with Bank of America.

Congrats on a pretty strong quarter. Maybe just talking about the sales reps and productivity with the reps and kind of the thought process for -- I believe you're not adding too many reps if I have the numbers correct, or you're not expecting to add too many reps in '22. So maybe just a little bit more understanding of your thought process there, the philosophy, and how you see rep productivity improving in '22?

Yes. Thanks for the question. And you're right, we are pretty pleased with our performance in the quarter and for the fiscal year. And -- we like the sequential revenue growth that we saw in the quarter. We like the fact that Q4 was a record quarter with sequential monthly growth on top of it. And we think that we really did navigate quite well through a very difficult environment.

I'm also really pleased that the team was able to hit their targets for the year in terms of number of sales reps getting to that 150 people dedicated sales force or 30% growth in territories. So going forward for 2022, we certainly have the opportunity to grow our productivity in terms of our sales team. So -- they're an important driver of our growth as we're penetrating our core market and expanding our presence in trauma and adult deformity, especially with our second-generation product coming online during the first half of this year.

We think that having a dedicated sales team has been a clear differentiator, especially in this unique COVID operating environment and did contribute to 25% procedure growth during the year. But it does help us to enter 2022 with a strong bench that we should be able to leverage over time. And so we're currently targeting to end 2022 with 170 individuals in the sales force, and then more than half of them are going to be quota-bearing territory managers. So a mid-teens increase from that particular perspective. But it really all comes to gaining that leverage on the existing sales force. We know that a rep in a territory by himself or herself can do around $1.5 million of business. And then in a territory with the rep plus a clinical support specialist they can do on average approximately $2 million of business. So the goal is to continue to add reps, but then start to see that leverage on our sales force as well in 2022.

Great. That's helpful. And I do want to ask about expenses and kind of how to think about expenses going forward. Obviously, there was a bit of an uptick this year. But I know in the past, you've made comments about getting back to normal spending levels. And it sounds like you might be able to get some leverage as you're not bringing on as many salespeople next year. But -- and maybe some of the R&D spending that you've done over the last couple of years, you'll get some leverage out there, out of that also...

That's exactly...

I would love to...

Yes. No, I was saying that's exactly right, Craig. And the investments that we've made from a sales perspective and an R&D perspective, we believe that 2022 is a year where we can start to gain leverage on those particular investments. So our primary focus has been on revenue growth and capturing the opportunity that we have in the sacropelvic space. But we do also see 2022 as a year where we can gain leverage on that sales force and those R&D investments. And maybe Anshul can add a little bit more in terms of our thoughts there.

Yes. Thanks Laura. So when you think about OpEx growth rate, Craig, from the way we've modeled it, the OpEx growth rate is going to be a bit lower than the revenue growth rate. And like Laura said, it's going to be balancing between continued reinvestment in the business and the productivity gains. So that's what we're targeting.

And when you think about the spend from a dollar perspective, it will increase for a few reasons. One is you just annualized the new hires that we did last year. Laura said, we grew our sales force by 30% last year. Our TMs by 30% last year start annualizing some of the costs there.

We will continue to invest in R&D, even though we'll get leverage out of our existing portfolio, but TORQ is a great example of when we've come up with a differentiated product, we've actually had a big impact on the market. So we feel good about that. And then we're also making some investments to scale our operating infrastructure, Craig, to be able to support the top line growth that we're looking at over the next few years.

Your next question comes from Kyle Rose with Canaccord.

Congrats on the quarter. I wanted to see if we could just dig a little bit more into kind of Craig's previous question just around productivity. I think you provided that $1.5 million and that $2 million number for a few years now. When I just look at the backdrop, I mean, you've got much better reimbursement, you now have a product portfolio that's arguably 3 products if we include trauma deformity versus just primary. So I'm just trying to understand how we should really think about where those productivity gains from a $1 million territory to a $2 million territory really comes from? And then if you could just help us quantify the impact of TORQ in 2021 when we think about the competitive gains versus moving into trauma, more of a trauma focus in '22 would be helpful.

Thanks, Kyle. So as I said, from a productivity perspective, we definitely have the opportunity to grow the average sales per rep in the United States. And it's -- given how important the sales team is to our revenue growth, it also can be regional in terms of the decisions that we're making. It's how large is a particular territory in terms of the number of surgeons or the size of the particular territory, how much travel is required in a particular territory. But we're getting to that point where we're big enough and we have enough coverage at this point in order to really focus a little bit more on sales productivity.

So we increased the number of sales reps this last year, and I'm talking about the senior territory managers by 30% over the last 12 months. And so what we're trying to do now is to get some leverage from those reps that we've added, plus -- and it takes around 12 to 18 months in order to get those reps productive. So let's be clear on that as well.

But the goal in 2022 is to moderate the number of adds that we have and to start really pushing that productivity. And so the productivity comes from the senior sales rep, but it also comes from these junior clinical support specialists that we hired that are less expensive than the senior reps. So we're already thinking about ways in order to gain leverage on the channel. And so our plan is to start gaining leverage in 2022 and beyond. So that's the answer to your first question.

Your second question on TORQ, we are not giving -- breaking out the specific revenues for TORQ. But I will tell you, we are very pleased with the strong performance of the product, particularly with competitive conversions, which were our focus in 2021. The commercial team has really done an exceptional job in targeting competitive surgeons to drive that additional or initial adoption momentum. And we know who these surgeons actually are that are performing these procedures. In many cases, we originally train those surgeons. And so we've had the ability to go out to those that we think TORQ would be of interest and we've been quite successful in gaining that business.

So it really does provide us with the potential to expand the market and extend our market leadership position. But I'll also say that we're just scratching the surface right now on the core market opportunity for TORQ, and that's the trauma market. So we increased our investment in inventory and instrument trades in the second half of 2021, which you've seen in the Q3 report, you're going to see that in the 10-K as well. And a lot of that increase in inventory and instrument trade is actually related to TORQ as we methodically accelerated our penetration of the trauma opportunity. And so it provides a really nice tailwind for us into 2022.

Great. And then just 1 follow-up on my end. It's just I think you made a change or brought on a new marketing leader that really focusing around some of the direct-to-patient initiatives. I heard some of the commentary in the prepared remarks just about seeing a doubling of the patients targeted. Can you just talk about how that translates into demand and the pull-through you've seen in the field?

Sure. There's a couple of key areas that we invested in, in the second half of 2021 as it relates to direct to patient. The first was just an increase in search spend because we had such a tight amount of search spend that the addition of spending actually showed very similar ROI on those additional dollars as the core dollars that we were spending previously.

So our new VP of digital marketing really just started with the nuts and bolts of search, driving patients to our website, having them complete the pain quiz, going through our find-a-doctor function and then ultimately being referred to surgeons. So -- and we are able to track all of that information. And some of the metrics that we were mentioning are actually directly tied to those items that I just discussed.

In addition, in the fourth quarter, the team engaged in more direct-to-patient marketing, focusing on the lower part of the funnel using display advertising, using an educational type of campaign. And what I mean by the lower part of the funnel is those patients, who have been in pain management with a chronic SI joint issue for an extended period of time. And so ultimately, these sorts of investments normally take around 12 months for us to actually see the impact from them. But as I said, we've already been making pretty significant investments during the second half of 2021. And so we would expect to see the impact directly turn into case development in the second half of 2022.

Your next question comes from David Rescott with Truist Securities.

First on the expanded reimbursement that you talked about in the prepared remarks. I mean it's been a couple of months so far, where that's been in place and you have a couple of months so far this year already. But I guess could you discuss if at all, whether it's anecdotal or more broadly, just where the impact of these factors have started to come out of the business?

I mean is this opening up the door for new reps to reengage in new accounts? Is it reactivating inactive physicians, or just more utilization within some of the existing accounts? And then how should we think about that impact throughout the year? I mean is that something that scales and starts to better impact the business in the second half of the year? Any color there would be helpful.

Yes, yes. David, thanks for the question. And we are really pleased with what we've seen from a reimbursement perspective. We finished 2021 with near universal coverage of minimally invasive SI joint fusion and even more so with over 160 million patients who are exclusively covered for iFuse. So we're really pleased with what we've seen there.

In terms of the impact of some of those decisions, I think in particular, talking about Anthem and United, those exclusive. So Anthem, first of all, was really one of the last payers to cover this procedure. They had a non-coverage procedure prior to August of 2021. And so they finally moved to a positive coverage recommendation and that recommendation was exclusive to iFuse. So it was a huge win for us.

And then a little bit surprising was the decision by UnitedHealthcare to switch from a positive general coverage decision to an exclusive decision. And so in terms of what we're seeing, right now, we're seeing these payers enforce the exclusive policy. And while it's early days, we did see an uptick in Anthem case volumes in the fourth quarter that we do attribute to the Anthem decision. We do think that some of these early increases in Anthem cases are likely due to patients who are already in the system for some period of time.

Certainly some patients that had been denied coverage and then that coverage was overturned, it was appealed, and there was a positive decision that was made. So that's what we believe that we're seeing here in these early days. But I will say we are quite excited about the potential tailwind for 2022 from the coverage decisions and the exclusives, especially in the case of Anthem since they were a non-coverage decision. So in terms of what we would expect, it normally takes anywhere from 6 to 12 months for a new case to work itself through the system before seeing a meaningful impact on volume. But we have been really focused on the potential impact of these exclusives in our 2022 guidance. And so like I said, more of a 6- to 12-month time frame in terms of impact.

Okay. That's helpful. I guess just you run some commentaries on the canceled procedures and backlog of cases coming from Q4 and then into January and early February. I guess, what is the backlog look like at this point? You mentioned there's some positions that are scheduled out to 3 months or so or plus. But I guess what does the current backlog look like? How is the pipeline of patients looking? And then how should we think about this -- or these patients, I guess, progressing throughout the year? And how did you kind of contemplate that within your guidance?

Yes. It's been an unusual period of time, obviously. We had Delta in Q3 and then the start of Omicron in Q4. And then we did talk very openly about what we saw in January and February as well. And so what we've tried to do is to think about this contribution from these procedures over the next few months. And we're encouraged by the fact that we're seeing a decline in the deferral between January and February. We don't know what March will necessarily look like.

And in terms of backlog, the way that our system works is we typically will see the scheduling of cases at the point in time where it's put on the books at a surgeon's office. So it's normally only a few weeks. But we do know anecdotally that there are significant backlogs in the 3- to 4-month range, as I had mentioned in my prepared remarks, from talking with some of our surgeons. We also know that historically, the way that this has worked, we've gone through so many surges at this point that what typically happens is you'll have a surge, you'll see a lot of deferrals, then you'll see a decline, then a stabilization and then the rescheduling of cases.

And so the way that our guidance is looking at this right now is that January was a tough month. February a decline, a stabilization in March and then starting to see some of this rescheduling in the second quarter.

Our next question is from David Saxon with Needham.

I guess just 1 on 2022 guidance implies 20% at the high end, but in the past, you've talked about being able to grow well into the 20% range, I think Jeff once said 30% plus. So just want to hear your view on whether the lower implied growth reflects any change in confidence and the opportunity in front of you? Or if it's really just a tougher COVID-impacted market with perhaps some conservatism baked in?

Yes. Thanks for the question, David. And you're hinting in the right direction for us. We're really pleased with the execution in 2021. We actually have 25% growth in case volumes even with multiple surges and it does reaffirm the growing demand for our procedure. We're in the strongest position in the history of the company with our universal coverage, 160 million patients covered exclusively. All of the surgeon engagement and the increase in the number of active surgeons, a 30% increase in the number of territories in the United States with our sales team and then the growing portfolio of products. So we feel great about that, too.

But the operating environment was difficult in January. It's definitely improved in February with fewer deferrals and we believe that the health care environment is still progressing towards becoming fully normalized. And so when we think about procedure volumes continuing to grow month-over-month, we remain bullish on the underlying business momentum. But given the macro environment, we really think it's prudent to take a more conservative position around the pace of normalization and being deliberate on the impact of the tailwinds, including exclusive expansion into trauma or new product launch, all of those things on 2022 revenue growth.

But I will reaffirm we are extremely excited about the year 2022. We believe the underlying demand for our products remains robust and there is definitely upside assuming a sustained recovery from Omicron and COVID more broadly, and that certainly could further accelerate growth in the second half of 2022 through higher surgeon productivity from a backlog and growth in our trauma and adult deformity businesses.

The only thing I would add there, David, is you were spot on in the low end of our guidance, as Laura said, it assumes a very conservative scenario with some amount of impact from COVID throughout the year, including continued case deferrals and prolonged backlog recapture rates. So similar to some of the disruptions we've seen over the last 2 years, which, again, if those are on the sidelines, we do believe there's tremendous upside in the second half of the year.

Got it. That's super helpful. And then just 1 on the exclusive policies. I was just wondering if you've seen any benefit with regards to surgeon training, and how are you messaging the exclusive coverage to docs that maybe were reluctant to engage in the past?

Thanks, David. So as it regards the exclusive policies at the point in time where the decisions were made by Anthem and UnitedHealthcare, we had a very major marketing campaign that worked with our field sales team in order to reach out to all of the surgeons who are impacted around the country by those decisions. And so there was a first round of very significant sales and marketing activities around the Anthem decision in the third quarter. And then there were more activities that we engaged in, in the fourth quarter with UnitedHealthcare.

And you're correct that it did give us the opportunity to reengage with surgeons that we haven't engaged with for a while. It allowed us to train some of those surgeons using the SImulator. It makes it very easy to reactivate surgeons, who may have been trained previously or those that have expressed interest, but never gone through training. And then it also even gave us the opportunity to talk about what's new within the business. So we went in, and there were some cases where it was appropriate to talk to the surgeons about our new TORQ product. There were cases where it made sense to talk about bedrock and adult deformity.

And so what our team was able to do was use the opportunity to speak with those surgeons once again show them all of our clinical data, show them the 5-year data that's driving a lot of these exclusive decisions and then talk to them about ways to engage with us. So it was a major focus point for the sales team, along with our field marketing team and gave us a lot of opportunities for engagement in the second half of the year.

Your next question comes from Andrew Ranieri with Morgan Stanley.

Just as we're thinking about 2022, can you maybe talk about some of the trends that you're seeing in your procedures moving to the ASC setting? I mean are you seeing more of a -- are you expecting more of a shift in the current operating environment? But I'll stop there, and I have a follow-up.

Yes. The ASC environment has been a really important site of service for us over the last couple of years. So as I stated in my prepared remarks, approximately 80% of our procedures are either hospital outpatient procedures or ASC procedures. And before the pandemic, that number was in the single-digit range. We now have gotten in certain months and quarters into the 20% to 25% range for ASC sales.

We do see the ASC as a long-term growth opportunity for us just because a lot of procedures are shifting to that site of service. It is cost-effective location for service, and it's appealing for quite a few different reasons. It also has been absolutely critical to our business over the last 2 years with the pandemic during surges if hospitals were not able to perform procedures. So I'm not sure how much business we're going to see in the ASC setting that has yet to be stated. I originally thought that around 25% was going to be getting toward a maximum for us. And I simplistically did that by thinking 50% of our surgeons are employed by hospitals, the other 50% are private practice and simplistically said, those in private practice, half of them may do procedures in ASCs, but that's changed.

There are more of the private practice surgeons that want to do business in ASCs. And in fact, a lot of the hospitals are actually developing relationships with ASCs and are shifting business there as well. So I think it's a long-term growth opportunity for the business.

Got it. Understood. And then just to shift gears to gross margins, but you made some comments about the quarter, but I'd like to better understand kind of your guidance for 2022 and some of the pieces there, and whether or not kind of the inflationary cost environment is really being a factor in the gross margin guidance. And is 85%, is this kind of range, kind of the right go-forward SI-BONE gross margin rate?

Andrew, thanks a lot for that question. We obviously are really proud of our industry-leading gross margins, and we came in for 2021 at about 88%. So when you think about our guidance, both in 2022 and as we think longer term, the way we model it here is, we've got a few levers that we look at. One is the ASP decline that we tend to price in on a per procedure basis, not a per implant basis. A lot of that is driven by site-of-service mix, like Laura said, more procedures in ASC. They tend to be a little bit more price sensitive, especially if you see contribution from TORQ and adult deformity, which tend to use fewer implants than the primary SI joint fusion.

So you've got some of that ASP pressure that we tend to model in. And then we look into 2 other aspects. The second one being the depreciation expense, especially as we expand our product portfolio. We're expanding the amount of instrument trades that are in the field, that depreciation flows through our gross margin. So that will put some pressure on it. And then when you think about inflation as well, we do model in some amount of inflation, especially this year, given everything that's going on. Even though our supply chain team has done a phenomenal job in managing through the cost element and actually been very forward-looking in terms of the demand trends and what we need, we do model that in. Now where you see long-term gross margin sort of that mid- to potentially high 80s is where we look at. We're not going to be able to say is it 85%, but our aim is to keep it above that 85% number.

Our next question comes from Dave Turkaly with JMP Securities.

Well, I think I heard you say that the reengaged surgeons and maybe some of the new products were helping with that. But of the 690 active, do you comment at all at sort of how many of them were reengaged guys versus, let's say, brand new customers?

We don't comment on it, but it definitely has been a focal area for us to reengage surgeons. There was a pretty major push in the second half of 2022 (sic) [2021] to speak with surgeons who'd previously been trained and...

Second half of '21?

In the second half of 2021, yes. And we'll continue to do that going forward as well. As we said, there were 1,800 surgeons, who have trained and treated at least 1 patient, and 1,000 of them approximately did at least 1 procedure in fall of 2021. So what that means is there are approximately 800 surgeons who did not engage with us in that 12-month period. And so those continue to be targets for us.

And this ends our Q&A session. I will pass it back to Laura Francis for her final remarks.

Thanks so much, Carmen. I'm pleased with the team's execution in 2021. We hit several record milestones. And as we look beyond the near-term impact from the recent resurgence of COVID-19, including the pressure on hospital infrastructure, we see strong underlying momentum in our business. In 2022, we'll continue to leverage our investments to expand the market for sacropelvic surgical solutions and drive strong top line growth. I want to thank you for joining us today, and I look forward to meeting you at upcoming investor conferences and events. Goodbye.

And with that, ladies and gentlemen, we thank you for participating in today's program. You may now disconnect. Have a wonderful day.