SeaSpine Holdings Corp (SPNE) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to SeaSpine's 2015 Second Quarter Financial Results Conference Call.

At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a question and answer session. (Operator instructions). As a reminder, this conference call is being recorded today, August 13th, 2015.

I would now like to turn the call over to Lynn Pieper, Investor Relations. Please go ahead.

Thanks, Karen.

Thank you for participating in today's call. Joining me from SeaSpine is President and Chief Executive Officer, Keith Valentine, and Chief Financial Officer, John Bostjancic.

Earlier today, SeaSpine released financial results for the second quarter ended June 30, 2015. Before we begin, I want to remind you that the Company's comments today will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties and reflect the Company's judgment as of the date of this release.

Such forward-looking statements include among other matters 2015 Revenue Guidance, statements regarding SeaSpine's expected future new product launches and expectations for future operating cost and expenses. Actually results may differ materially from predicted or expected results.

Such risks and uncertainties include, but are not limited to, actions like governmental and regulatory authorities, delays, costs and difficulties related to the spinoff, and the operation as a separate publicly traded company following the spinoff, general economic and political conditions globally and in the markets in which SeaSpine does business; and other factors identified under the heading "Risk Factors" of SeaSpine's Form 10 Registration Statement, as amended, filed with the Securities and Exchange Commission. These forward-looking statements are made only as the date thereof, and, except as required by law, SeaSpine undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

With that, I'll now turn the call over to Keith Valentine. Keith?

Thank you, Lynn. Good afternoon and thank you for joining us on our first earnings call as an independent publicly traded company.

We are pleased to report second quarter results which were within Integra's diversified platform and reflect recent trends in both of our product portfolios. Our second quarter revenue was $33.5 million reflecting the decline of 6% year-over-year. Orthobiologics revenue was $17 million, up 1% and spinal Fusion Hardware sales were $16.5 million, down 13%.

Our spinoff from Integra became effective on July 1st and we emerged as a well capitalized, pure-play spine company. We have a leading orthobiologics platform and a robust R&D pipeline that includes over a dozen Spinal Fusion Hardware products that we expect to launch in the next 18 to 24 months. We were capitalized with $47 million in cash on our balance sheet and no debt which positions us well to continue making the operational improvements in investments began in the past several weeks.

Since this is our first call, I'd like to take a few minutes to review our business. How we are positioning for innovation and growth and why we are so excited about what we are -- where we are heading.

Then, I will turn the call over to our CFO, John Bostjancic who will provide detail on our financial results and provide our financial outlook for 2015. We will then look forward to your questions.

As many of you know, SeaSpine is a global medical technology company focused on surgical solutions for this treatment of patient suffering from spinal disorders. We generate approximately 90% of our revenues in the United States with the remainder mostly in Europe and South America.

Roughly half of our business is orthobiologics and the other half is Spinal Fusion Hardware. We have the ability to scale our business to enhance our leading market position in orthobiologics while taking market share in the Spinal Fusion Hardware segment.

We are unique and that our orthobiologics group has its own manufacturing and processing facility giving us a strategic advantage in how we approach the market.

For our most differentiated technology, we don't purchase finished goods on tissue banks. Rather, we rely on our internal development and manufacturing capabilities to drive innovation and expand our product offerings. This also provides us with the opportunity to increase gross margins on the orthobiologics portfolio as we scale within our own facility.

As an independent company that had been part of Integra for the past several years, we have infrastructure in place that we can leverage as well as the ability to refine and optimize programs to specifically meet the needs of a spine-focused company rather than a diversified business. As a result, we could be more efficient and effective in driving innovation and revenue growth.

Practically speaking, we already have in-house orthobiologics manufacturing capabilities, a machine shop for Spinal Fusion Hardware product development and customized instrumentation as well as a cadaver lab for surgeon and sales force training. We also inherited a number of compliance and regulatory programs from Integra and we have a fully functioning global ERP platform.

As a $140 million sales company, we have the infrastructure in place to scale meaningfully. Equally important, we are able to create a new culture built on accountability and empowerment. The team here is excited about what we can accomplish with renewed focus.

We intend to increase our R&D spending in order to drive revenue growth through new product sales. Our objective is to launch 8-10 innovative, new or next generation products per year. Also important to this strategy is how we deploy capital toward our development efforts both in accelerating innovation along with deploying implant and instrument sets into the marketplace.

Despite having a balanced orthobiologics and hardware portfolio, it was a constrained growth model within the Integra platform. Simply put, we were underfunded in three key areas. One, in the R&D side and support rapid and timely launch of new products. Two, in manufacturing redundancies to support the scale-up of our Orthobiologics platform. And three, in the capital needed to deploy enough implant and instrument sets to support a broad market release of new products and to establish a recognized commercial presence. We are beginning to ramp up investments in all three areas while simultaneously strengthening our leadership team and infrastructure.

Drilling down further on the Orthobiologic side of the business, we participate in the $1 billion market which is largely bone graft substitutes just as interesting, though, is the roughly $700 million for cell-based therapies. BMP stem cells and premium orthobiologics that surgeons often use but we're just seeing recent market erosion due to insurance pushback and resulting conversion to lower priced orthobiologic solutions.

This represents a great opportunity for continued market expansion and share gains for our products. We are ramping up manufacturing capacity and building more redundancies into our processes to deliver a reliable and increasing supply to our growing distribution network and sales team.

One of the products we want to highlight is our proprietary Accell Evo3 product, our most advanced bone graft substitute solution. This third generation deminerallized bone matrix product combines our proprietary Accell technology with a standard particulate DBM. The Accell bone matrix dispersed form of DBM provides faster accessibility to bone proteins and when combined with a denser standard particulate DBM material that breaks down over a longer period of time, this creates a favorable environment for the foundation of bone.

This product is processed in our Irvine facility with a unique biocompatible carrier designed to provide better handling and containment characteristics when compared to competitive DBM products. And meets the needs of challenging surgical applications where robust handling is essential.

From a new products perspective in the third quarter, we are launching line extension to our shaped strip and pocket strip human allograft DBM product that provides a natural biologics scaffold with verified osteoinductive potential. The shaped strip and pocket strip products were launched in late 2014 and based on the success of these products to date, we eagerly await the condition of complementary products to our Orthobiologics portfolio.

Shifting now to the $4 billion spinal Spinal Fusion Hardware market, we have more than a dozen new products we expect to launch over the next six-day quarters. We are particularly excited about the interbody space which is a $1.6 billion market. Of the products currently in our development pipeline or in limited commercial launch, we are focusing on three areas, MIS, complex spine deformity, and degenerative procedures.

New products include our advanced NanoMetalene titanium coating technology platform as well as extensions of our Orthobiologics products which have the potentials of further differentiate our portfolio from the competition. I'd like to take a minute to highlight our NanoMetalene technology platform to which we have exclusive rank in the spine.

We have launched an innovative line of PEEK interbody devices that are coated with a submicron layer of commercially pure titanium. This combines the favorable imaging characteristics and modules of elasticity of standard PEEK material with the bone friendly environment that you get from a commercially pure titanium device.

In animal histology, this premium NanoMetalene interbody devices showed bone fusion superior to regular PEEK interbody devices. Additionally, they are complementary to our advanced Orthobiologics offering.

We launched our first NanoMetalene interbody device, the Hollywood NanoMetalene in late 2013. And in June, we launched the Ventura NanoMetalene interbody device, also for use in the TLIF procedures.

We expect to launch or third device, the Cambria nanometalene for cervical application in the next few weeks. We have already received 510(k) clearance for a number of our other PEEK interbody devices, so we expect to continue to roll out additional NanoMetalene devices in future quarters. We are also excited about the launch of our new Cabo anterior cervical plate system later this quarter. This low profile cervical plate system or the quarter turn locking mechanism is a meaningful improvement to our cervical plating system that we expect will generate stronger distributor and surgeon engagement.

From a distribution and sales force standpoint, one of the most important goals of renewing our commitment to R&Ds, making sure we have complete launches with enough sets to meet demand.

In addition to bringing exciting new products to the market, it builds loyalty from the distribution team. This distribution -- distribution team launch new products but they get frustrated if they can't get them. We are expanding our commercial footprint to broader our U.S. network of independent sales agents and drive loyalty.

We also are enhancing our training efforts for both sales teams and surgeons. Lastly, we expect to expand internationally by focusing on certain existing sales territories and select untapped markets.

Overtime, we anticipate adding additional independent sales agents and stocking distributors to further leverage our innovation, marketing and education efforts.

We are steadily strengthening our team and deepening the bench. We recently announced the addition of two experienced leaders in the spine industry to our management team. Tyler Lipschultz has been named vice president Orthobiologics and Business Development and he will be responsible for the Orthobiologics marketing and development as well as business development for all of SeaSpine. Tyler has over 25 years of sales marketing and operational leadership experience in spine and general orthopedic devices.

We also brought in Laetitia Cousin as Vice President Regulatory Clinical and Quality Assuarance. Laeti has nearly two decades of medical technology experience as well, primarily in regulatory affairs and quality assurance. In addition to Tyler and Laeti, we have also field 10 corporate supply chain leadership positions. As of now, we have filled out most of the first two tiers of our management team through a mix of new hires and former Integra employees.

In summary, we're excited about a well capitalized independent pure-play spine company with a potential to accelerate our growth to targeted investment in R&D expansion and improvement in our supply stream as well as full support of our product launches with implant and instrument sets.

I'll now turn the call over to John Bostjancic to provide more detail on our financials and our financial outlook for 2015, then wrap up with some closing comments.

Thanks, Keith, and good afternoon everyone.

I will review the details of our second quarter of 2015 financial performance and will then provide guidance for the full year 2015. Please note that financial results for the second quarter of 2015 and 2014, while we were a wholly-owned subsdiary of Integra Life Sciences are reported using the same carved out basis of accounting that was used to report SeaSpine's financial results for the years 2012 through 2014 and for the first quarter of 2015 in the Form 10 registration statement as amended and filed with the SEC.

We will first report financial results as a standalone public company starting with the third quarter of 2015. Revenue from the three-month ended June 30th, 2015 decreased 6% to $33.5 million from $35.8 million during the same period of the prior year. Revenue from Orthobiologics product was $17 million reflecting growth of 1% and revenue from Spinal Fusion Hardware was $16.5 million, reflecting a decline of 13%.

This decline in Spinal Fusion Hardware products was primarily attributable to continued pricing pressure, decreased demand for our existing products and delays in new product launches. Changes in foreign currency exchange rates reduced reported revenues by approximately $300,000 in the second quarter of 2015 compared to the prior year period.

We expected to previously discuss new product launches scheduled for the remainder of 2015 and 2016 will stimulate increased demand and help us take the first step towards revenue growth. Gross margin for the second quarter of 2015 was 56.6%, a slight decline versus the 57.5% reported for the second quarter of 2014.

This decline was primarily due to a higher percentage of our revenues in the second quarter of 2015 being Orthobiologics products which generate lower gross margins that are Spinal Fusion Hardware products and from increased charges in a second quarter of 2015 for excess and obsolete inventory on our Spine Hardware products.

Operating expenses for the second quarter of 2015 increased $9.5 million to $35 million with that increase coming almost entirely from higher SG&A expenses. SG&A expenses increased $9.4 million to $31.7 million for the second quarter of 2015 compared to $22.2 million for the same period of the prior year.

This increase was primarily attributable to $9.8 million of spinoff related charges, slightly offset by lower depreciation on instrument sets and lower sales commission expense. R&D expenses were relatively flat at $2 million for the second quarter of 2015.

Total operating expenses in the second quarter of 2015 included $4.8 million of carved out basis overhead expense allocations from Integra compared to $5.8 million in the second quarter of 2014. The majority of those carved out expenses were reported in SG&A.

In the future, we expect to incur cost as an independent publicly traded company following a spinoff that are different from and lower than those expenses historically allocated to us by Integra. We estimate those costs to be $12 million to $14 million dollars on an annual pre-tax basis.

Effective income tax rates were negative 9.6% and negative 7.8% for the second quarter of 2015 and 2014 respectively. We reported income tax expense for both periods despite the reported losses before income taxes in those periods because our legal entity structure did not permit us to offset taxable losses generated by certain U.S. subsidiaries against the taxable income generated by another of our U.S. subsidiaries.

In the third quarter of 2015, we expect to make an election that will enable all of our subsidiaries to file a joint U.S. consolidated federal income tax return such that taxable income and losses from all of our subsidiaries will be included in a single return.

Net loss for the second quarter of 2015 was $17.7 million compared with a net loss of $5.4 million for the second quarter of 2014. Pro forma loss per share was calculated based on the 11 million shares of SeaSpine common stock that were distributed to Integra shareholders on July 1st, 2015. We reported a loss of $1.60 per share for the second quarter of 2015 compared to a loss of $0.49 per share for the second quarter of 2014.

Cash and cash equivalence totaled $13 million as of June 30th 2015.On July 1st, 2015, SeaSpine completed its tax-free spinoff from Integra and was capitalized with $47 million in cash and no debt.

I'd now like to offer our financial guidance for the full-year 2015. We continue to expect full year 2015 revenue will range from approximately $133 million to $139 million, representing flat to a 4% decline versus the same period in 2014. This is unchanged from guidance previously provided by Integra Life Sciences.

During the remainder of 2015, we expect to start incurring $3 million to $3.5 million of cost under the transition service agreements with Integra and expect to incur additional transaction and operational cost related to the spinoff and cost and expenses related to the commencement of operations is a separate publicly-traded company, some of which may be non-cash in nature.

Additionally, we have begun a review of our product portfolio and to evaluate our sales and marketing strategy for international markets. The outcome of which may trigger additional charges reported in cost of goods sold for discontinued and/or excess and obsolete inventory in the future.

Because the amounts in timing of any such expenses or charges, maybe significant and can vary from period to period, we are now providing financial guidance for the remainder of 2015 for anything other than revenue. We do not expect to incur significant amounts of spinoff and transition service cost in future years.

Long term, as we build scale to the business, we are targeting gross margins in the low to mid60% range investment in R&D to approximate 7% to 8% of revenues and SG&A excluding future noncash equity-based compensation charges to approximately 56% to 60% of revenues.

We expect to provide financial guidance for 2016 including revenues, gross margin and operating expenses when we report our yearend results in early 2016.

At this point, I'd like to turn the call back over to Keith for closing comments.

Thank you, John.

We are focused on moving forward and reinvigorating SeaSpine as an independent public company. We are creating a new culture to build on accountability and empowerment and we are building a world-class team that is excited about what we can accomplish over the next several years. Our goal is to effectively scale our business and advance our market position through targeted investment and strong execution.

To that end, we have a established near, mid, and long term objectives for accelerating our top line growth. Our first objective over the near-term which we defined as the next four quarters is to reduce and then stop the year-over-year revenue decline. Activities, we are undertaking to reach this goal include launching several new products, investing in instrument sets and implant trays, streamlining our processes, scaling manufacturing and strengthening the leadership team.

Many of these activities are well underway as we have discussed throughout this call.

Our second objective, over the midterm which we defined as the next five to eight quarters, is to drive revenue growth in the mid single digits and to start driving gross margin expansion. We expect to accomplish this by continuing our cadence of new product introductions while balancing new launches in support of recently added and existing products.

On the cost savings side, we expect to be in a position to drive greater manufacturing efficiencies with scale and bringing down our cost of goods. We also will be rounding out and solidifying our team to drive towards our goals especially insuring process improvement and simplicity or core focuses.

Our third objective, over the long term which we defined as the next nine to 12 quarters is to accelerate our revenues to double digit growth with a solid cadence of new product supported by implant and instrument sets in the field, we expect to be in a position to gain market share, leverage our investments and R&D, expand manufacturing, and advance all levels of our customer service and support.

We will shift our focus to optimizing our commercial footprint and execution, ensuring complete market coverage. We look forward to updating you on our progress on future calls. With that, we now open it up to questions. Operator?

Thank you. (Operator instructions). Our first question comes from the line of Matt O'Brien from Piper Jaffray.

Hi. Good afternoon. This is [JP], in for Matt. Congratulations on the first quarter as a standalone company.

Thank you.

Thank you.

If I could, just a couple quick ones for me. Did you guys see any disruptions from, you know, the spinoff, maybe from internally or distributors or your customers?

No. Actually, it's -- something that we've been -- we've been kind of reviewing over the past few weeks as well. There really was a strong effort made by the integration team and we felt -- we felt how well that was planned out after the true spin in early July, really has been a very smooth process. There has not been any major disruption of systems or of the way we're getting products to the customer.

Okay. And then what about some -- some first reactions from your distributors with -- you've got a kind of a strong pipeline coming in there and they haven't seen that in a while. Any feedback from them?

Yes, I don't have -- you know, there's a lot of enthusiasm but I think as this often goes and I think we tried to explain this in June during portions of our conversations before the spin, I think it's a bit of, for lack of a better description, a kind of a trust but verify, there's a lot of excitement. There's trust that the right things are being worked on and -- in development. And now, it's a matter of the team to execute and we have to verify to that distributor team that they can count on us, they can count on us having the right amount of instrument sets and implant trays for lunch. They can count on us delivering these new products on the schedule that we're committing to them. And so, this is, to me -- this is how we earned their trust and their royalty.

Got it. And then if I could ask one on guidance, so when you think of the range, 133 to 139, what's kind of the levers that are going to get us to the lower range and what's going to get us to the higher range? Is that, you know, hardware kind of stop the bleeding there or see some acceleration in biologics?

Yes, I think it's both, actually. I think that a number of the new products that we discussed just even on this call, the ability for NanoMetalene to continue to get leverage and a bigger footprint across the United States, and I think that also, one thing that we have to continue to focus on is our Orthobiologic are a high demand product. They have a nice market share and we have to make sure that we're accelerating the ability for our manufacturing teams to get the right equipment and to address the redundancy issues that we -- we've been discussing so that we can get the kind of supply that keeps that expansion up and going.

Okay. And then one for John. It looked like the gross margins were at least sequentially were down and I think there might have been an inventory adjustment in there. is there a more normalized gross margin that you guys have or something that you want --

Yes. The current quarter was impacted by two things, it was the mix, right, Orthobiologic was a greater percentage of revenues in the quarter and we did have a larger than, I'd say, historical trend adjustment for the excess and absolutely inventory in the second quarter on the hardware products.

Okay. And then on the -- just on the SG&A line, it looked like a little over around $10 million is coming from the spinoff cost, so, going forward, you know, if you add back in the public cost, it should, you know, normalize around mid-20s. Is that what you're expecting?

Yes, I mean, we're not providing specific guidance on it, like I said, because the rest of the year, there's a lot of different factors that are coming to play between the transition service agreements, the completion of some post spinoff activities related to the separation from Integra and some discretionary funding we might add to a charitable foundation that we're creating.

So, for the back half of this year, we're not giving any specific guidance on that line. But from a more normalized point of view, yes, I think that's -- that's a fair number that you were drawing out there.

Okay. Great. And then -- and then one last one for me, kind of a broad quarter for you, Keith, you know, since your time with the Company now, you know, is there anything that surprises you on the positive side or anything on the negative side that, you know, you didn't see, you know, before you joined the Company?

You know, you know what? I'll tell you -- on the -- on the positive side, I really have been pleased with the leadership of the senior team and stepping up to kind of what the task and challenges at hand. There's a lot of things that go on with the spin but there's also a lot of opportunity for quickly getting a sense of empowerment and accountability.

And so that's been a very strong surprise we have, strong leadership across marketing development, sales, and certainly with what John and his team have done have been fantastic. There's a lot of work that's going on in the background and we're still able to keep focused on the business, not just of what the dynamics were to the spin but the focus of the business itself. So, that was a positive surprise because I obviously came in to it with some concerns about how that spin itself could be distracting to the core business.

Your other, kind of, was any other surprises -- any other things that we did foresee, perhaps?

Yes.

I think what often comes with this is your opportunity to make sure how quickly you can get people to, at all levels of management to really engage that we are now our own independent company. And so, one thing that I want to make sure that I continue and I mentioned in the dialogue of our conference call so far in the script was really ensuring that people take ownership and empowerment to improve processes, right, I think it's natural when you're part of a diversified company that your sharing processes that are aligned for the whole company, so they're kind of a best fit but they're not really best for the individual business.

And so, we have to make sure that everything we do, whether it's processes and compliance processes and regulatory, whatever it is, that's it's very spine and Orthobiologics focused. And so, I would say it's not certainly a negative surprise, it's just one of those things that you really have to spend a lot of time on. It doesn't goes as fast as you wanted to.

And so, that's something that -- that, you know, we're becoming very aware of driving, you know, specifically.

Got it. That's all for me. Thanks for taking the questions.

Yes.

Thank you and that concludes our question and answer session for today. I would like to turn the conference back to Keith Valentine for any closing comments.

Great. Thank you, everyone, for joining us today. And have a great evening and we look forward to reporting on things next quarter.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.