SeaSpine Holdings Corp (SPNE) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the SeaSpine Holdings Corporation Q4 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Lynn Pieper. Ma'am, you may begin.

Thank you, Lauren. Thank you for participating in today's call. Joining me from SeaSpine is President and CEO, Keith Valentine, and CFO, John Bostjancic. Earlier today, SeaSpine released financial results, for the quarter year-ended December 31, 2015. During this conference call, we will make forward-looking statements within the meaning of federal securities laws in regard to our business strategy, expectations and plans, our objectives for future operations, and our future financial condition.

All statements other than statements of historical fact are forward-looking statements. Such statements may include words such as believe, could, would, will, plan, intend, and similar expressions. You are cautioned not to place undue reliance on forward-looking statements, which are only predictions, and reflect our beliefs based on current information and speak only as of today, March 15, 2016.

For a description of risk and uncertainties that could cause material differences between our actual results and those stated or implied by the forward-looking statements, please see our registration statement on Form 10, filed with Securities and Exchange Commission on June 9, 2015, which is available on our corporate website, www.seaspine.com and at www.sec.gov.

I will now turn the call over to Keith Valentine. Keith?

Thank you, Lynn. Good afternoon and thank you for joining us. I am pleased to provide an update on SeaSpine's fourth quarter and year-end, 2015 results.

First, I will provide a brief review of our fourth quarter performance, and recent accomplishments. Then, I will then turn the call over to our CFO, John Bostjancic, who will provide detail on our financial results and provide our financial outlook for 2016. We will then look forward to your questions.

Turning to the quarter, fourth-quarter results continue to be encouraging, as we are turning around the business. Overall revenue was $34.7 million, a 1% decline, compared to the prior year period. We executed the plan and took another big step towards reversing the multi-year revenue declines in the US Spine hardware products, and positioning ourselves for near-term growth.

We spent reasonably, and we put a $30 million credit in place, to provide for greater financial flexibility. We have many process and operational improvements underway, and we are already starting to see early payouts of these efforts with tangible progress. We are creating and reinforcing a culture and environment of empowerment, focused on innovation, process improvement, employee recognition, and accountability, which positions us well for sustained growth.

When we spun out from Integra in mid-2015, we indicated it would take four quarters to reestablish ourselves. We engaged with the surgeon community, and stopped the revenue decline. We are encouraged that we are tracking towards this milestone, and are optimistic about our prospects, looking forward. In the fourth quarter, Orthobiologic sales were $17.7 million, and Spinal Fusion hardware sales were $17 million, each reflecting a decline of 1%, compared to the fourth quarter of 2014. US revenue was up 1% to $31.2 million in the quarter. We have made substantial progress on a number of initiatives, since becoming an independent company, and there are several areas where we will continue to focus.

During the quarter, we continued steadily strengthening our team, and deepening the bench. We added to our leadership team within Orthobiologics product development, and we are continuing to add to our Spinal Fusion hardware product development crew, to drive sustained innovation, and to bolster our product platforms. We are now at a place where we have reliable manufacturing processes, and adequate supply on the shelf, for our leading Orthobiologics products. Also in December, we transitioned most of our mosaic product needs to our urbine manufacturing facility. Which not only provides for a more secure and stable supply stream that we control, but is also expected to drive gross margin improvements in the second half of 2016.

On the commercial side, we have expanded our regional breadth, increased and strengthened our sales management team, created more concentrated sales territories, added new distributors, as well as hired key individuals within product marketing. We also recently made a great addition to the senior leadership team. Troy Woolley, who joined us in September, 2015, has been promoted to the position of Vice President of Marketing, Spine hardware, reporting to me. In this role, Troy will have leadership responsibilities, with Spine hardware marketing, and the global marketing services team, supporting surgeon education, sales training, and branding. We are counting on Troy's leadership to shepherd the timely and successful launch, and commercialization of new Spine hardware products, that will help fuel our future growth, insuring that these new products meet the critical needs of our surgeons, right out of the gate. And, in developing a consistent and cohesive corporate branding across both, the Spine hardware, and Orthobiologics portfolios. Troy brings more than 20 years of product development and marketing experience, and expertise to this new role, and we are excited that he has agreed to accept this new challenge.

We are well-positioned, as of today, and expect to realize the favorable impact of these changes, in the next several quarters. Our Orthobiologics sales team is now able to expand our customer-base, and focus on territories that weren't previously covered well. We are beginning to see the benefits from the new Spinal Fusion hardware distributors, that we've added in the past six months, and the surgeons that we have been engaging. These activities take time to translate into additional revenues. And, we expect to see those additional revenues accelerate, as we head into the second half of 2016.

During the quarter, we transitioned many commercial and product development functions, or the Orthobiologics and hardware portfolios, to our new Carlsbad facility, which is about 10 miles away from our Vista location. We just recently began construction in Carlsbad on the machine shop for Spinal Fusion hardware product development and customized instrumentation, our Orthobiologic scientific lab, and a larger cadaver lab for surgeon and sales force training. We expect to have the capacity to take advantage of a more focused, and collaborative approach with sales, marketing and development, and integrated supply chain coordination all under one roof.

By integrating the marketing and product development teams for both Orthobiologics and hardware, it enables a thoughtful approach to the market for each portfolio. This first phase of the move is complete. Construction is underway, and we expect to move the remaining kitting, distribution, and customer service functions, out of the Vista facility by the year-end, 2016. We also kicked-off an initiative to improve our information and reporting systems, and our customer-facing business processes, to make our operations more efficient, and scalable. And, perhaps, and even more importantly, to make it easier for customers to do business with us.

Turning now to our product portfolio. As many of you know, roughly half of our revenue is Orthobiologics and the other half is Spinal Fusion Hardware. Across both portfolios, we are investing heavily in innovation, commercialization and supply, and manufacturing, with a focus on three areas; one, on the R&D side, to support rapid and timely launch of new products. Two, in manufacturing to increase capacity to support the efficient scale-up of our Orthobiologics platform and to lower the cost to manufacture our Orthobiologics products. And three, to ensure enough implant and instrument sets are available to support a broad market release of new, and existing products, and to establish a recognized commercial presence.

We remain focused on our goal of launching 8 to 10 new or next-generation products or product-line extensions every year. We recently launched the Pure Strip Demineralized Bone Matrix, designed specifically for use in lumbar fusion procedures. Within Spinal Fusion hardware, we recently rolled out the Cambria NanoMetalene Cervical interbody fusion device, the Cabo Anterior Cervical Plate system, and two alternate systems to vetical screw fixation, via spinous process plating, or the use of a vasette screw.

The Cambria NanoMetalene device is the latest NanoMetalene, coated inner-body device, in the Seaspine portfolio, which also includes the Ventura, and Hollywood NanoMetalene inner-body devices, for TLIF procedures. Cambria NanoMetalene is indicated for use as an adjunct to Cervical Fusion, in patients with Degenerative Disc Disease, and accompanies Seaspine's growing portfolio of devices, offering this proprietary technology.

Our data supports the bond strength of NanoMetalene, which was evaluated in destructive testing, as well as insertion, and push-out testing, during which, no delamination of our atomic deposition titanium surface was observed. We have received 510 K clearance for a number of additional, NanoMetalene-coated, peak inner body devices, and are committed to leveraging this compelling, new technology, and delivering additional NanoMetalene-coated devices, in future quarters.

The Cabo Interior Cervical Plate System is a low-profile, cervical plate system with a quarter-turn locking mechanism, that represents a meaningful improvement to our cervical plating system, and that we expect will generate stronger distributive, and surgeon engagement.

Overall, we expect the recent additions we have made to the leadership team, and in our marketing and product development teams, to accelerate the timelines by which we can more efficiently bring new products to market.

Of the products currently in our development pipeline, or in limited commercial launch, we remain focused on four areas, over the next two years. MIS, complex spine and deformity, degenerative procedures, and next-generation XL DBM technology. We are also looking to add a new synthetic Orthobiologics product to the bag, as well.

Internationally we remain committed to deploying and investing our limited sales and marketing resources in a targeted manner, in a select number of countries, to stabilize that revenue platform. To that end, we recently hired a sales manager, to focus on managing and growing the Latin America/Asia Pacific regions, and to allow our sales and marketing team, in France, to focus more on the European and Middle East markets. As we introduce more new products in the future, we expect to leverage those new product launches to lead our international expansion activities.

In summary, we are excited about our accomplishments in the second half of 2015. We are successfully building a culture focused on growth, innovation, and accountability, and are attracting robust talent across multiple functional areas. We have started many process and operational improvements which will position SeaSpine for future success, and are building a solid foundation for future growth and a strong, sustained cadence of product launches.

I will now turn the call over to John Bostjancic to provide more detail on our financials, and our financial outlook for 2016, then I will wrap up.

Thanks, Keith, and good afternoon, everyone. I will review the details of our fourth-quarter, and full-year 2015 financial performance, and will then provide our financial outlook for 2016.

Revenue for the fourth quarter of 2015 totaled $34.7 million, a 1% decline, compared to the same period of the prior year. Revenue in the United States totaled $31.2 million, an increase of 1%, while international revenue totaled $3.5 million, a roughly $700,000 decrease, compared to the prior year. Revenue from Orthobiologics products totaled $17.7 million, and revenue from Spinal Fusion Hardware was $17 million, each reflecting a 1% decline, compared to the fourth quarter of 2014.

Orthobiologics revenue was impacted by lower sales in international markets, which almost offset by 2% growth in the United States, led by solid sales growth in our third generation XL DBM technology. Spinal Fusion Hardware product revenue was flat in the United States and was down 8% internationally. In the US, the Spinal Fusion Hardware portfolio continues to face pricing pressures and lower demand for existing products, the effect of which was offset by $1 million of increased sales of products launched within the past two years.

Gross margin for the fourth quarter of 2015 was 52%, a 6.4% decrease compared to the same period in 2014. This decrease was driven primarily by $800,000 in higher provisions for excess and obsolete Spinal Fusion hardware inventory and by higher cost related to the sale during the quarter of our Mozaik product inventory. Evaluation of which was determined by pre-spinoff carve-out accounting, and which was approximately $1 million higher than would be expected had it been purchased subsequent to the spinoff under our supply agreement with Integra.

In the first half of 2016, we expect our gross margin to improve, as we record lower cost of good sold, associated with Mozaik products purchased from Integra, after the spinoff, under the supply agreement. Gross margin is expected to further improve in the second half of 2016, as we start to sell the Mozaik products that we began to manufacture in our Irvine facility in December, 2015.

Operating expenses for the fourth quarter of 2015 increased $3.8 million to $31.2 million. With increase coming from higher SG&A expenses. SG&A expenses increased, $3.8 million to $27.5 million for the fourth quarter of 2015, compared to $23.7 million for the same period of the prior year. This increase was primarily attributable to $1.7 million of increased stock-based compensation costs, $800,000 of transition service fees, $700,000 of increased rebranding and related marketing expenses, and $6.1 million of higher operating expenses, primarily related to greater compensation costs, due to increased headcount, and higher insurance, audit, legal, and other related fees, in information system and infrastructure costs, associated with being an independent, publicly traded company. These increases were partially offset by the absence of $2.2 million of spinoff-related transaction fees and expenses, and $3.6 million of allocations of expense from Integra, that were recorded in the fourth quarter of 2014.

R&D expenses increased $100,000 to $2.4 million, or 6.9% of revenues, for the fourth quarter of 2015, compared to $2.3 million for the same period of the prior year. This increase was primarily driven by higher compensation costs due to increased headcount and higher external costs related to product development programs, and clinical studies, and it was in line with the higher R&D expenses as a percentage of revenue that we were targeting.

We reported an income tax expense of $350,000 in the fourth quarter of 2015, compared to income tax expense of $1.2 million for the same period of the prior year. With a resolution in the third quarter of 2015, on the tax inefficient legal entity structure, that was inherited through the spinoff we expect to report minimal cash income tax expense, in 2016. Net loss for the fourth quarter of 2015 was $13.8 million, compared to the net loss of $8.2 million for the fourth quarter of 2014. Turning out to the full-year, revenues for the year 2015 decreased 4%, $5.5 million, to $133.2 million, and were within the guidance range we had established after the spinoff.

Spinal Fusion hardware revenues totaled $65.9 million, a 7% decline versus the prior year. While Orthobiologics revenues totaled $67.3 million, essentially flat versus the prior year. We are particularly pleased with the progress that we made in slowing the decline in Spinal Fusion hardware. As revenues in the first half of 2015 were down more than 11%, compared to the prior year, while revenues in the second half of 2015 were down less than 3%, compared to the prior year.

Cash and cash equivalents totaled $33.4 million as of December 31, 2015. In December, 2015, we entered into a 3-year credit facility with Wells Fargo Capital Finance, providing a revolving line of credit, of up to $30 million. We are now in a solid financial position to accelerate our organic growth objectives, namely, expanding our Orthobiotics manufacturing capacity, and supporting new product launches in our hardware business. And, we also have the capital to pursue acquisitions, and other business development opportunity.

Turning to our financial outlook for 2016, we are reiterating our expectations for 2016 revenue, in a range of $136 million to $140 million, reflecting top-line growth of 2% to 5%, versus 2015. Revenue growth in 2016 is expected to be heavily skewed toward the second half of the year. As we begin to more fully realize the cumulative benefits of new, and recent product launches, increased surgeon engagement, the expanded sales management team, and the new distributors that we added in the fourth quarter of 2015, and plan to add in the first half of 2016.

Moving down to P&L, we expect gross margin to be in the range of 57% to 60%, which includes the impact of approximately $2.7 million of non-cash, intangible asset amortization. R&D to approximate 7% to 9% of revenue, and SG&A, excluding non-cash, equity-based compensation charges, to approximate 68% to 72% of revenues.

In the next two to three years, as we build scale to the business, we are targeting gross margins in the mid-60% range, investment in R&D to approximate 7% to 8% of revenues, and SG&A, excluding non-cash and equity-based compensation charges, to approximate 56% to 60% of revenues.

We plan to end 2016, with roughly two years of liquidity, as measured by cash-on-hand, and availability under our credit facility, compared to annual cash spend rate. This reflects a significant planned investment in 2016, for building out our Carlsbad and Irvine facilities, and investments to improve our information systems, and related business processes.

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

Thank you, John. In 2016, our growth objectives which remain in place. We are focused on delivering low, single-digit, topline growth in delivering 8 to 10 new, or next generation products, or product line extensions, to build further momentum for growth in 2017. And, by the end of 2018, we plan to accelerate to double-digit revenue growth. At the same time, we expect to be in a position to drive greater manufacturing efficiencies with scale, bringing down our cost of goods, which will enable us to achieve our gross margin target, in the mid-60s.

We believe that we have the right products, differentiating technologies, pipeline, and people to penetrate the market opportunity in front of us. Our focus remains clear; effectively scale our business and advance our market position through targeted investment, strong execution, and a powerful culture.

We look forward to updating you on our progress on future calls. With that, we will now open it up to questions. Operator?

(Operator Instructions). Matthew O'Brien; Piper Jaffray.

I was hoping to start off with you, Keith, as far as some of the activities that you are going through at this point, with kind of reshaping the business, and some of the functionality and operations to the point where you think you can get some more of the sustainable growth. Can you just give us a sense - there's a lot going on here, with the Carlsbad build-out, etcetera; just how much more work there is to do as far as calling your distributors, or operations in getting the cadaver lab up and going, and when that may start to really contribute? It sounds like it's probably more like late this year, into next year, than really benefitting things during the second half of the year.

Yes, it is. And, you know what, we just got done with having our national sales meeting, and really having great engagement with the distributors, which is not only important from a messaging perspective, so they understand how that partnership needs to look in 2016, 2017, and 2018. Because it truly is a partnership, how we're going to get there from our internal investments, not only into the pipeline, but also what we're doing to ensure proper supply, on all fronts.

And so, that's an important part of that mix, and we're - Carlsbad, then, also comes in, in the second half just as you mentioned that there will be expanded capability, in the cadaver facility, as well as from a training perspective. And that expanded capability will further solidify our connection, and our partnership with that distribution team as we are able to fully educate on, not only the existing products, but also the new products, as we move forward.

Okay, that makes sense. And then, I know it's a smaller piece of the business at this point, but the international softness that we saw in Q4, can you just tell us a little bit about what's going on overseas, and how long it's going to take to right-size that right to ship there, with that business?

Yes, I think a lot of it is about focus. I mean, the international team for the spin was stripped down pretty heavily, and a lot of the way the sales programs worked, under Integra, many of those individuals stayed with the Integra platform. And so, we have been in a mode of making sure we're bringing aboard the right talent for focus. And then additionally, evaluating what new products, and how we need to expand in those areas. But, we want to do it thoughtfully and we want to make sure that our existing base of business is the one that we focus on first, for expansion, before we reach outside of that to new distribution opportunities. So, I would view specifically, that 2015 was about gaining stability and 2016 will be about moving forward to actually doing the muscle building, and really building some things out, together.

And then, just heading over to the revenue side of things here in 2016 and thinking about the back-half being more heavily weighted for some of the growth that we should see. Can you talk about some of the levers that you guys have, as far as getting to 2% growth versus 5%, because as I look at Q4, and understanding that you're still going through some changes there, it's fairly modest performance. So, what just gives you that comfort that you can accelerate growth in the back-half so meaningfully to get up to that 2% to 5% rate, for the year?

I think just, in focusing on the lever question, it's how quickly can we get our products in the hospital? We spent a lot of time, as Keith alluded to, in building up relationships with the distributors, right, and those distributors come with a relationship with the surgeons, our own outreach and relationship with the surgeons.

That all takes time - a few months, and - to really connect. And, the next step is getting it through the hospital administration and getting your products on board. So, that's what gives us the confidence that the back half of the year, we'll be able to accelerate those revenues. And, I think that the lever is, if we can move through that process faster, then we can get some of that growth earlier in the year. But, again, we're making the comment that the growth is expected to come more in the back-half of the year as those efforts we've embarked on the past six months start to pay off.

I think, also, Matt, consider that as we continue to strengthen, not only filling in areas of the nation that, not only don't have the appropriate coverage, but also strengthening within areas that are just large target markets for us. It gives us a great opportunity for the new product introductions that are coming down the pipe to really take advantage of better alpha and beta opportunities with new surgeons, and really establish that better partnership with these new distribution teams that we're bringing aboard. So, we think all of that really comes together nicely, in the second half of the year, which is a nice lever to pull, as you then map up how we grow for 2017.

Okay, so it sounds like a majority of that growth is going to come from the hardware side of the business? Would love to just learn a little bit more about where you think you can be successful. Is it going to be just trying to go deeper within existing relationships where you have that Orthobiologics presence, or is it going to be, potentially, some new accounts where you are trying to pick on, maybe, some of the incumbents, or some of the even smaller providers?

Yes, I think it's a split in two, really. When you look at the Orthobiologics platform, it's a unique one, because it is a hybrid sales force, and it's not just being provided, the Orthobiologics, are not just being provided by Seaspine hardware reps. It's also there are competitive reps, which gives us a broader footprint to the market. So, the key item there is making sure that they're comfortable in the expansion, because we now have enough product supply. And so, that's really the changing item that's happening this quarter, next quarter and as we get into the second half of the year.

Now when you turn the table to the hardware side; a little bit different, it's exactly like you mentioned. We have great opportunity with new distributors that have come aboard, those new relationships to really get into those accounts with existing products. And then solidify into those accounts as we keep launching new products.

Okay, and then, last one for me. Just on the Orthobiologics market; there's a lot of moving parts there, right now. I just would love to hear about the stability of the market from a volume and pricing perspective.

Yes, I think there is a lot of focus, I think, very interestingly, it's the first time we've seen the kind of growth we've seen with B&P, recently, which is, I think, good. I think that justifies that the premium side of the market is still healthy. It's probably a heavier competitive force to some of the more premium Orthobiologics, like stem cells. And, what we're seeing is, there's still a very large demand for synthetics, and DBM. But, I also think it's up to us to also be focused on how we approach next generation technologies, in both of those, as well. So, yes, there is pricing pressure generally in this market, across the board. But, we still see that by having a differentiated product, it leads to a better ASP point that we continue to stay focused on.

Okay, so just to add a little bit more to that, though. With Metronic now compensating their reps to sell BMP and there's been some acquisition in the space, recently, you're saying the BMP side, it's more cannibalizing - maybe stem cells and anything really, and anything that you're doing. And, you haven't seen much else from any other competitors, where you're playing?

Yes, right now, what we have seen is that, if a hospital environment is receptive to the premium priced products, then typically it's not for us to compete from a DBM perspective. Typically, DBM and synthetics have a very specific role in the hospital, and in some hospitals, even through the negotiated pricing that you've achieved with those larger accounts, and so, we don't see that sort of pushback. I think most of the pushback you're seeing for the premium products is either, hospital-related, or it's insurance-related. And, I think that the two new indications that B&P have received, you're seeing some incremental upside for them.

And, I'm showing no further questions, at this time. I would like to turn the call back over to Mr. Keith Valentine for closing remarks.

Thank you for joining us for our call, and we will be back with you after first quarter earnings release. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may all disconnect. Everyone have a great day.