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Edited Transcript of GMED earnings conference call or presentation 2-May-19 8:30pm GMT

Q1 2019 Globus Medical Inc Earnings Call

Audubon Sep 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Globus Medical Inc earnings conference call or presentation Thursday, May 2, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. Kearns

Globus Medical, Inc. - SVP of Business Development & IR

* Daniel T. Scavilla

Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer

* David M. Demski

Globus Medical, Inc. - CEO, President & Director

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Conference Call Participants

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* Craig William Bijou

Cantor Fitzgerald & Co., Research Division - Research Analyst

* Jonathan Lee Demchick

Morgan Stanley, Research Division - Equity Analyst

* Lawrence H. Biegelsen

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Mason E. Austen

Morgan Stanley, Research Division - Research Associate

* Matthew Oliver O'Brien

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Michael Stephen Matson

Needham & Company, LLC, Research Division - Senior Analyst

* Richard S. Newitter

SVB Leerink LLC, Research Division - MD, Medical Supplies & Devices and Senior Analyst

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

* Steven Michael Lichtman

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Xuyang Li

UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices

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Presentation

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Operator [1]

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Good afternoon. My name is Jason, and I'll be your conference operator today. At this time I would like to welcome everyone to Globus Medical's First Quarter 2019 Earnings Call. (Operator Instructions)

I would now like to turn the call over to our host Mr. Brian Kearns, Senior Vice President of Business Development and Investor Relations. Sir, you may begin your call.

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Brian J. Kearns, Globus Medical, Inc. - SVP of Business Development & IR [2]

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Thank you, Jason. And thank you, everyone, for being with us today.

Joining today's call from Globus Medical will be Dave Demski, President and CEO; Dan Scavilla, Executive Vice President, Chief Commercial Officer and CFO; and David Paul, Executive Chairman.

This review is being made available via webcast, accessible through the Investor Relations section of the Globus Medical website at globusmedical.com.

Before we begin, let me remind you that some of the statements made during this review are or may be considered forward-looking statements. Our Form 10-K for the 2018 fiscal year and our subsequent filings with the Securities and Exchange Commission identify certain factors that could cause our actual results to differ materially from those projected in any forward-looking statements made today. Our SEC filings, including the 10-K are available on our website.

We do not undertake to update any forward-looking statements as a result of new information or future events or developments.

Our discussion today will also include certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We believe these non-GAAP financial measures provide additional information pertinent to our business performance. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are available on the schedules accompanying the press release and on the Investor Relations section of the Globus Medical website.

With that, I'll now turn the call over to Dave Demski, our President and CEO.

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [3]

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Thank you, Brian. And good afternoon, everyone.

First quarter sales were $183 million, an increase of 4.9% as reported and 5.7% in constant currency, compared to the first quarter of 2018.

Non-GAAP EPS was $0.36 per share versus $0.41 a year ago. Our overall growth and profitability profile remains the best in our industry. For the quarter, the U.S. spine business grew by over 8%, adjusted for the impact of [biologics] disruption, the international spine business grew by almost 25%, [and enabling technologies delivered $7 million in revenue in this seasonally challenging first quarter.

We also launched 5 new products during the quarter and shipped a record number of sets in both trauma and spine, as our supply chain issues have been largely resolved.

This year, we began reporting our sales in the categories of musculoskeletal solutions and enabling technologies to better reflect our business strategy.

ExcelsiusGPS is currently the only product in the enabling technologies category.

In the first quarter, musculoskeletal solutions were up 8.7%, and enabling technologies were up by 44%.

The first quarter of the year is typically seasonally challenging for capital equipment, and our comparable number from the first quarter of last year included a significant [pent up] demand for ExcelsiusGPS due to the delayed launch in late 2017. We are also experiencing an elongation of the decision cycle by hospital executives in purchasing robotic systems due to the increased marketing initiatives by our competition.

Deals are taking longer to get finalized as accounts evaluate potential alternatives. In fact, we have already closed several deals in Q2 that we had expected to close in Q1.

We remain extremely bullish on the future of computer-assisted surgery in spine, and more importantly, Globus' ability to lead the industry in this transition.

There are several reasons for our optimism. First and foremost, we are seeing consistent adoption of the technology [reacted] by accounts who have purchased ExcelsiusGPS. And as a result, surgeons are able to perform less invasive techniques. Even the most challenging surgical approaches, like single-position lateral surgery, are being performed routinely by surgeons with all levels of experience, something that was simply inconceivable before our technology.

Second, surgeon interest in robotics continues to grow as evidenced by attendance at our MERC events, visits to our booth at society meetings, corporate tours and robotic roadshow presentations and labs.

Third, we have won an overwhelming majority of head-to-head technology evaluations. While there may be a lot of noise in the market right now about various alternatives, we firmly believe that the best technology will lead the way.

Fourth, our pipeline of innovation in the space is quickly coming to fruition.

We recently filed a 510(k) submission to the FDA for our ExcelsiusGPS interbody module, which we expect to launch in the third quarter. This fully integrated solution will enable surgeons to seamlessly navigate a variety of interbody spacers and utilize the Excelsius and effector to [originally] hold retractors or ports. Both of these features are unmatched in the market.

We also anticipate filing with the FDA on our cranial solution and our spine deformity planning solution that incorporates Surgimap technology during the third quarter with launches expected by year-end.

Finally, later this year, we will unveil 3 additional modular platform technologies that will complement and enhance the effectiveness of ExcelsiusGPS and [combine] an integrated suite of enabling technologies that we are calling The Smarter OR, focused on improving outcomes in spine surgery by enabling surgeons to effectively and efficiently deliver better care.

While I would love to provide greater detail on these exciting developments, for competitive reasons, we cannot at this time. We expect to provide more detailed information on these systems this fall.

As you know, we have been heavily investing in our imaging navigation and robotics business over the past several years with much of that investment going towards these new platforms. We are excited to be on the cusp of launching a series of innovations, that we believe will accelerate the transformation of spine surgery into the digital age.

Moving to musculoskeletal solutions. Our U.S. spine business grew by 6% over the first quarter of last year, significantly above the overall market. This result includes a negative impact we experienced in our biologics business due to the FDA warning letter we received late last year in our tissue processing facility in Texas. The run rate impact to Q1 revenues was about $3 million.

Stripping out biologics would have resulted in a growth rate of 8.4% in the U.S. spine business, consistent with the high single-digit results we produced in the second half of 2018 and indicative of the continued strong momentum in the biggest segment of our business.

Implant pull-through from ExcelsiusGPS placements and contributions from competitive recruiting were the primary growth drivers. On the recruiting front, we are off to a tremendous start well in excess of the pace we saw in early 2018.

Looking forward, we expect to have all tissue-related issues resolved by the second half of this year as well as launch a number of new spinal implant systems beginning in Q2, that we expect to further bolster the U.S. spine business.

Our international business grew by 19.7% in Q1 and 24.7% on a constant currency basis. The supply chain issues that constrained us in 2018 have been largely resolved, and we were able to increase the number of sets shipped to international markets in late 2018 and into Q1.

The Japan business produced record growth in the quarter driven by strong uptake of Globus technology there. Spain and Italy continued to be strong performers, and the U.K. has begun its turnaround.

The growth rate we saw in Q1 was probably not sustainable for the full year as it included an investment cycle by distributors, who now had full access to our technologies.

Dan will speak in more detail about it, but it is worth noting that the operational execution was offset by currency headwinds in the quarter.

We made significant progress in our trauma business during the quarter as we shipped more sets in Q1 than we had shipped for the entire year of 2018. The pull-through to sales will be somewhat delayed as we work through contracting in trial cycles. During the quarter, we launched our Tibial Nail System (sic) [Tibial Nailing System], and the reports from the first several cases have been outstanding.

Our focus remains on completing our initial ramp of set deployments and building sales momentum. We don't expect a meaningful revenue contribution with trauma until 2020.

We are fully committed to this opportunity, even though the EBITDA drag has been significant and the process has taken us longer than we had planned.

In summary, we remain confident in our ability to achieve our growth and profitability targets for the year. The momentum in our U.S. spine business, the uptick in our international spine business, the growing demand for robotic solutions, the improvements in our supply chain and a robust lineup of product launches untapped with spine, robotics and trauma, all point to a strong year.

I would like to take this opportunity to announce changes in our Board of Directors.

Rob Liptak stepped down from the Board, effective May 1, after serving our company for nearly 12 years. Rob joined the board as part of our Series E financing in 2007. He has been a valuable contributor to our success since then, and we will miss him. Unfortunately, Rob has assumed a role that precludes him from serving on public company boards.

We are also excited to announce the appointment of Steve Zarrilli to our board, effective May 1. Steve's currently the President and CEO of University Science Center in Philadelphia, the oldest and largest urban research hub in the U.S. Prior to that, Steve was the President and CEO of Safeguard Scientifics, a public company that provides growth equity capital to technology and health care enterprises. Steve has served as a member of the Board of Directors on 6 other public companies over the course of his career and is a graduate of La Salle University. We welcome Steve and look forward to working together with him to continue the success of our company.

I will now turn the call over to Dan.

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Daniel T. Scavilla, Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer [4]

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Thanks, Dave, and good afternoon, everyone.

In Q1, Globus achieved above-market gains in the U.S. spine business, accelerated growth in the international markets and increased trauma sales. Profitability remained strong reflecting continued investment in new business and included headwinds caused by nonoperational and timing items. We also redirected some of our cash flow this quarter to build spine and trauma sets as well as expand supply chain capabilities.

Q1 revenue was $182.9 million, growing 4.9% as reported or 5.7% in constant currency, with the same selling days in the quarter versus prior year.

GAAP net income was $33.2 million, and non-GAAP net income was $36.4 million, delivering $0.36 fully diluted non-GAAP earnings per share and adjusted EBITDA of 31.1% and $11 million of free cash flow. Focusing on sales, U.S. revenue for the quarter was $147.5 million, 1.3% higher than Q1 '18.

The U.S. spinal implant business, excluding the negative impact for biologics, continued to outpace the market with 8.4% growth driven by competitive rep onboarding and increased implant pull-through from accounts with ExcelsiusGPS.

Robotic sales were lower than anticipated, even when measured against a difficult prior year comp that include pent-up demand. We believe elongated selling cycles and seasonality are the drivers.

International revenues for the quarter was $35.4 million, growing 23% as reported or 27.9% in constant currency. Gains are achieved through continued market penetration in Japan, Spain, Italy and the U.K. combined with ExcelsiusGPS sales.

As Dave mentioned, we feel future quarter growth rates will be strong, but not as high as Q1 due to the distributor set purchases that occurred in the quarter, now that more product has become available globally.

Turning to the rest of the P&L. Q1 gross profit was 77.1% compared to 78.2% in Q1 '18.

The change is primarily due to the planned increase [in] depreciation for cases and instruments as we expand our sales force in spine, trauma and robotics globally.

Research and development expenses for the first quarter were $14.3 million or 7.8% of sales compared to $12.7 million or 7.3% in Q1 '18, resulting from increased investments in the INR platforms mentioned by Dave.

SG&A expenses for the first quarter were $85.8 million or 46.9% compared to $75.7 million or 43.4% in Q1 '18, reflecting expansion of the U.S. spine sales force, building out the robotic and trauma commercial teams, and increasing surgeon education.

Q1 also included $2.4 million of legal fees and timing related expenses that are not anticipated to continue in future quarters.

The GAAP income tax rate for Q1 was 20.3% compared to 17.8% in Q1 '18. The rate increase is driven from prior year higher stock option exercises and manufacturing tax credits not repeated in Q1 '19.

Adjusted EBITDA margin for the quarter was 31.1%. The lower than usual margin was driven by several factors: First, Q1 includes a nonoperational impact for unfavorable currency exchange rates, coupled with higher legal fees and timing-related expenses and lower biologic sales that combined negatively impacted EBITDA by 210 basis points for the quarter; second, the elongated robotic selling cycle created a drag in the quarter; and third, we continue our investment in new business opportunities and strategic growth platforms even in softer sales quarters.

Q1 appears to be the trough in margin, the full year EBITDA margin is projected to be in the mid-30s. GAAP first quarter net income was $33.2 million and non-GAAP net income is $36.4 million.

GAAP diluted earnings per share were $0.33, and non-GAAP diluted earnings per share were $0.36. The aforementioned nonoperational timing impacts resulted in a negative $0.04 drag to EPS. Also, the higher Q1 tax rate impacted the EPS an additional $0.01, for a total of $0.05 of headwinds for the quarter. Investments in enabling technologies and trauma also impacted Q1 EPS by negative $0.07. We ended the quarter with $621.5 million of cash, cash equivalents and marketable securities.

Net cash provided by operating activities was $39.2 million and free cash flow was $11 million. Cash flow this quarter reflects increased investment in inventory and sets for both spine and trauma as we sent a record amount of sets to our sales force. Also, investments in manufacturing equipment to expand production capacities and a building purchase to facilitate future supply chain expansion were included in the quarter. The company remains debt-free.

The company reaffirms guidance for full year 2019 sales of $770 million and non-GAAP diluted earnings per share of $1.72.

We will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Larry Biegelsen of Wells Fargo.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [2]

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So let me focus my question on ExcelsiusGPS, and I have a few. I'll try to break it up. But the replacements were down about 50% sequentially, and in Q1, it seems like it was a little bit greater seasonality than we historically see with other analogues, and you did mention the selling cycle getting longer. So a couple of questions. First, are you placing systems in return for implant volume? So the placements aren't showing up in system sales. Second, can you talk a little bit about the order book that you've talked about before. And just 2 more on that, I'll throw them in now. Do you expect Emerging Technologies to be up year-over-year in 2019 or not? And just lastly, [the help of the staff], can you put into context the importance of launching the interbody module in the third quarter?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [3]

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Larry, this is Dave. I will try to keep up with the questions. I think when you -- with regards to the placement cycle being down relative to others, I think the biggest impact there is our Q1 last year was artificially high because of the pent-up demand.

We go to our pipeline, your pipeline question, it remains strong and robust. We are -- I don't want to get into our rev rec issue about how we -- the deals that we're doing with folks, but that's a clean number that you're seeing there. There's nothing sort of masked in it.

And then finally, to the interbody solution, I think that is just 1 of many things that we're going to do to change and improve the offering that's going to help computer-assisted surgery in general just be -- become a standard of care. I'm not sure if that answered all your questions, but...

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [4]

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Yes, Dave. The -- just the one on Emerging Technology line, do you expect that to grow year-over-year in 2019? And then I'll drop.

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [5]

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Yes, we do expect that to grow.

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Operator [6]

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And your next question comes from the line of Jonathan Demchick of Morgan Stanley.

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Mason E. Austen, Morgan Stanley, Research Division - Research Associate [7]

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This is Mason on for John. I just wanted to touch on the cadence of rep hires. You mentioned previously and reiterated today the recruiting success that you've been having. Can you elaborate a little bit on where particularly you're seeing these reps come from? And I imagine most of them are going to the trauma business, but any sort of color you can provide on [so that] the cadence we can see and expect for the rest of the year will be very helpful.

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [8]

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Sure, Mason. When I refer to competitive rep, I was -- it has nothing to do with trauma. I was referring specifically to spine companies. And our recruiting -- I don't want to get into specific companies. But I would say, we're having a better success at companies who are or maybe experiencing some turmoil and some disruption in their ranks. And then other than that, it sort of reflects market share and the presence that's out there in the market.

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Jonathan Lee Demchick, Morgan Stanley, Research Division - Equity Analyst [9]

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Great. And just 1 quick -- yes, that's very helpful. And then just 1 quick follow-up on the pipeline, you mentioned several product launches planned for later this year. Can you just go into a little bit more detail on kind of the ones you're most excited about and the timing and any guardrails of how we should expect any sort of financial contribution?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [10]

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Typically, we don't talk about the implants, these systems that are on tab. We are looking at it across-the-board though in terms of our portfolio. And as we've demonstrated in the past, we are -- we're looking for ways to enhance spine surgery. And there's a number of opportunities we have, they're coming down the pipe.

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Operator [11]

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Your next question comes from Richard Newitter of Leerink.

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Richard S. Newitter, SVB Leerink LLC, Research Division - MD, Medical Supplies & Devices and Senior Analyst [12]

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I have a couple of questions here. Maybe just starting with the elongated selling cycle commentary around robotics. And within the context of you keeping your guidance unchanged. I guess my first question around that is, is the elongated selling cycle on the capital side [nearly] something that you think has pushed out within a 12-month time frame of being able to recognize the deals, such that your expectations coming into the year when you issued your guidance, they're still the same between the components for robots, trauma and core spine? Or is the elongated selling cycles that you're calling out potentially leading you to kind of switch the components of how you get to your guidance?

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Daniel T. Scavilla, Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer [13]

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Rich, it's Dan. So a couple of things, as Dave mentioned, we're seeing the elongated sales cycles. It doesn't mean we're losing anything there, it's just that what we thought would close basically in Q1 several had bled over into Q2, as there was longer conversations or deeper looks at different technologies. But we still come out with these type of approaches. That said, one of the reasons with the $770 million that we've kept to top side, as we've always said there are different levers, some up, some down, we'll use those mixes as they occur. And so we stay with the $770 million because we know that there's strength in some areas as well. And so as we evaluate this after Q1 and look at it, we still see several pathways to achieve the guidance we set out.

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Richard S. Newitter, SVB Leerink LLC, Research Division - MD, Medical Supplies & Devices and Senior Analyst [14]

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Okay. But I guess just thinking about it, are you at a point where you think you might need those different levers, like the way you're going to get there is different? Or you feel still good about your initial targets and achieving the pipeline recognition or conversion of -- on the capital side within a 12-month time frame? Is this a month of delay? Or is this kind of -- that the whole thing might get -- you might get some capital pushed into 2020?

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Daniel T. Scavilla, Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer [15]

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Don't know if I can answer that accurately since we're not there. What I do think is that we feel bullish about the robotics. We're not backing off our robotic thinking for the year. And while we're seeing in Q1 some elongation, there's nothing we see that would make us rethink our categories or take a pause with this.

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Richard S. Newitter, SVB Leerink LLC, Research Division - MD, Medical Supplies & Devices and Senior Analyst [16]

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Got it. And Dan, in the past you've kind of guided or suggested that kind of TheStreet's modeling of trauma revenue in '19 in that, call it, $5 million to $7 million range, that's a consensus estimate range. You felt comfortable with that. Do you still feel that's a good holding place for that business line?

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Daniel T. Scavilla, Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer [17]

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Yes, I think that's a good holding place. We're encouraged by the amount of sets coming out. We're seeing acceleration like we thought we would. As Dave mentioned, Tibial [Nailing] launch is a significant move for us. So I think, at this point, they're still valid guidance numbers to use.

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Richard S. Newitter, SVB Leerink LLC, Research Division - MD, Medical Supplies & Devices and Senior Analyst [18]

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Okay. And if I could, just one last one, the -- can you just run through, Dan, the things that were transient on the expense side or the things that kept the lid on margins below your mid-30% average that should alleviate as you move through the year and what gives you confidence into those? And can we see them alleviate as soon as the 2Q?

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Daniel T. Scavilla, Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer [19]

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Thanks, Rich. So I called that out in the script, but I'll go through that again quickly. There's really a few drivers here. One of them is some unfavorable exchange rate that occurred, that had a [way] down. I'm not going to break out the subcomponents of that. We did have some higher legal expenses. They're not settlements. We usually pull those out for non-GAAP. But truly, just some of the legal expenses up for recent settlements that had occurred just were coming through and [tying] up. We had some carryover of travel in different company meetings as well that were out there, those kind of timing things that I've talked about. None of those I really expect to carry forward. I do think the nonoperational currency impacts, we'll watch. We didn't put anything in for that for the full year. If that were to continue or not offset, then we would have a different conversation. But we need to get through the quarters before we make that assessment.

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Operator [20]

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And your next question comes from Mike Matson of Needham.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [21]

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Just curious what you're seeing out there with regards to competition in the robotics space. Obviously, Medtronic is out there with the Mazor system but Zimmer's recently gotten their product approved and then they basically just got one coming. So I'm sure Medtronic is pretty actively marketing their product, but what I was wondering is, is part of that the issue here that Zimmer and potentially even NuVasive are getting out there and sort of preselling their products and just creating more noise and uncertainty and -- for some of the customers?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [22]

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Sure, Mike. Thanks for the question. I think it's more of the latter. And it's combined with the fact that these are potential alternatives, the executives are asking the surgeon champions who want to adopt the technology to do a careful evaluation of everything that's out there. So a year ago there was only really one other choice. Now there are potentially 3 or 4 more that they have to work their way through to come to a conclusion. So that's what we're seeing at this point.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [23]

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Okay. And -- but just to be clear, you feel like you're still on a pretty good competitive position with the features and benefits, [the stuff that gets offered as well compared] to these other systems?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [24]

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Oh, absolutely. I think we're the #1 opportunity on the market right now. And when we add interbody to that, it's going to extend the lead even further.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [25]

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Okay. And then just these other -- The Smarter OR modules that you mentioned, are those something that is going to be internally developed by Globus, kind of like Excelsius was? Or are these something where you can maybe working with a partner or like an imaging system or something?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [26]

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They're all internally developed, and they're almost to that point where we're going to be ready to show you something, I think, by the fall, in all cases. But we're not going into any partnerships with other companies.

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Michael Stephen Matson, Needham & Company, LLC, Research Division - Senior Analyst [27]

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Okay. And then finally, can you just tell us how many trauma products or systems you currently got launched? And maybe, just briefly walk through what they are.

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Daniel T. Scavilla, Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer [28]

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Well, certainly. I mean we started out and we launched out with 12 that we have going active. We looked to really cover all of the long bone extremities, really from your collarbone down to your feet. And so whether that is a small fragmentation [or ankle] , some distal or proximal humerus-type things. We're launching out several [nails] . I won't bother you with every single name for that. But at the end of the day, the concept was for us to have the ability to go through and cover over 80-some-percent of the procedures, and then expand out from that afterwards.

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Operator [29]

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Your next question comes from Craig Bijou of Cantor Fitzgerald.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [30]

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I wanted to start with the international growth that you saw, obviously, very strong in the quarter. I know you called out some early orders of instruments sets. But I just wanted to see if there was -- if you can provide a little bit more color on -- or maybe regions that you're seeing particular strength in. And then, I guess, how you see that business going forward in terms of growth and contribution to that $770 million.

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Daniel T. Scavilla, Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer [31]

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Craig, thanks. It's Dan. So a couple of things. We're pleased with this. And if you remember, this has been a long journey. We've looked at different markets to focus on or divest from. We've changed management structures. As we mentioned last year, we increased surgeon education and awareness and continue to do that. And now, as we continue to put more sets out, we're seeing not only a penetration in the market in conversion of business. But also even places like Japan, who are looking and switching out the Alphatec products that we have [purchased and] , are coming out significantly stronger in Globus products and penetration that are offsetting. So there's a lot of pleasing areas like that. Italy has been really a very attractive market for us and continues that strong, solid double-digit growth all with Globus products. So those 2 are pleasing. I could really rattle off a lot of countries right now that are going through this. Spain is a strong country for us and the main focus in Europe. And we continue to see, as Dave said, the U.K. recover and get stronger. And even if you move into Australia as well, a lot of activities it is very promising with that.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [32]

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Great. That's helpful. I know you guys have mentioned the cranial application a number of times on these calls. And I'm not sure that there's been much time spent on kind of the opportunity or what you see of the strategy there. And so just wanted to see if maybe you guys can provide a little bit of color there, how much it could contribute. I'm assuming it's not going to be a contributor to 2019 revenue. But how it could contribute to 2020? Or how, I guess -- just, overall, how you monetize that application.

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [33]

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Sure, Craig. I think it's a true advancement in the way cranial surgeons can care for their patients today. I think standard of care is navigation, but I think the robotic opportunity really provides them a lead forward. In terms of the -- predicting what the impact will be, that's -- it's really difficult for us to say at this point. It's -- until we get into the market and really begin selling it, I think we won't have a great idea of that. The other thing it allows us to do is -- that's the same platform as spine, so it's a better argument, if you will, to the executives that they can leverage that investment over a couple different specialties. And I -- it's possible that we will see some impact in 2019. I -- it won't be much because we'll be launching it towards the end of the year, but there could be some impact even before end of the year.

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Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [34]

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And if could, just a follow-up on that. Is there any investment in sales force or any other kind of investment from that perspective that you guys need to make to actually bring that to market or once it hits the market?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [35]

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No. We'll be marketing that through our same capital sales force that is the Excelsius sales force we will be just adding that to their bag.

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Operator [36]

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Your next question comes from Matthew O'Brien of Piper Jaffray.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [37]

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So as we look at, I'm sure, investors are really going to focus on the enabling technology revenue in the quarter. It looks like you're about 4 systems shy of what most people were expecting. And then, Dave, you mentioned that you've already closed a bunch of those deals here in Q2. So is it fair to say that before that, that you came up a little shy on versus what we were expecting have already closed? And then if that's true, if that number's about right, did you have to do anything on the pricing side? You were going head-to-head with the other big competitor in the market to get those deals closed outside of what you've been doing because I think what the -- people are trying to figure out is obviously the system opportunities here is huge, but are you going to recognize that revenue up front? Or is this going to be something where you're going to really see more of the benefit over a multiyear period?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [38]

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Thanks, Matt. Well, we've never managed the business on a quarterly basis. So the question about whether we had to do anything special to close them I think is a little bit [reverse] . I think had we been willing to really do something extraordinary, we could have got them into the quarter. We don't think that's the right thing to do for our business. So we just kind of held our line and we closed them a little bit late, if that helps your question.

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Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [39]

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It does. That's very helpful. And then the other question was just on the interbody feature. As well as other features, you don't have a ton of systems in the field yet, but hopefully by the time the interbody feature launches, you'll be getting close to triple digits as far as systems in the field. So how do we think about that upgrade cycle from a revenue perspective? And then, are the interbody products that you sell specifically designed for that feature? And is it going to be all approaches, T-lift, P-lift, A-lift, lateral, et cetera?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [40]

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Yes. It's -- so it's all approaches. If you look at it, the upgrade cycle, I think it will be modest in terms of the impact for that module alone. I think what it does is it enhances the value of the overall systems. So I think it enables -- it's going to enable us to sell more systems in the future.

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Operator [41]

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Your next question comes from Matt Taylor of UBS.

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Xuyang Li, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [42]

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Guys, this is Young Li in for Matt. Thanks for taking the question. Maybe just one. So understanding [that capital's the pretty lumpy] business on a quarterly basis. And just looking forward -- and, I guess, looking also back at last year, Q3 was also the seasonally slow quarter and can be a seasonally slow quarter. I guess I'm just wondering, do you see the Q1 number for robot as the low watermark for the year? Or what's your view on that?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [43]

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Yes, Young, I think it's a great comparison to Q3. I feel like we're in the same position we were at the end of Q3 and going into Q4, where we had a great Q4. So -- and I do anticipate that this would be the low watermark for us for the year.

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Daniel T. Scavilla, Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer [44]

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I would add to that as well that we're here to drive the change in spinal surgeries, and we're looking at this over the long term. I recognize that we're focused on quarterly results, but we're not driven by the quarter. And as we've said and you've said, there's lumpiness, there will be ups and downs. But in a nascent market, we'll continue to [place] and drive, and we'll do that as best as we can. There will be times when some things bleed over because of elongated cycles, and that's okay because we're talking about 3 to 5 years, not just 1 quarter.

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Operator [45]

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Your next question comes from Steven Lichtman of Oppenheimer.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [46]

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Guys, can you talk about what steps you need to take to clear the biologics issue? I think you mentioned your competency in getting those complete in the second half. Just curious if you can provide more color on what it will take to get that behind you.

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [47]

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It's just going through the validation process of our process for those products that were affected by the warning letter. I'm not going to get into a lot of specifics but we have it well in hand. It requires us to make some changes and then validate those changes through testing. And that's really what the delay, if you will, is or what the cycle is to get it back on the market is as we made some changes now, we need to see if those changes were effective. And with tissue there's a waiting period as they culture samples and those kinds of things.

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Steven Michael Lichtman, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [48]

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Got it. And then secondly, maybe if you could give us -- on how you're feeling overall about the status of buying market. Any changes, one way or the other on price or volume that you'd call out?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [49]

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As we've commented in the past, it's hard for us to get a feel for the overall market given the share that we have. So from our perspective, I mean it looks great. We're growing in the high single digits, so our business is robust. And I don't know if that means the whole market is growing, but certainly, from our perspective, it looks really good.

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Operator [50]

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And your next question comes from Bob Hopkins from Bank of America.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [51]

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Sorry about that. Just curious -- just quick follow up on the robot and your expectations for -- kind of looking forward to percentage of sales that will be upfront versus some sort of flexible financing situation, like a lease or something like that. What's your latest thinking on where that's going to end up? Obviously, we've been watching Intuitive Surgical, their robot, now 1/3 of their replacements are operating leases. What's the outlook for your perspective on that topic?

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Daniel T. Scavilla, Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer [52]

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Bob, its Dan. I would tell you it depends. We already offer an array of options that work with the customer in order to get a robot placed, and we're not going to disclose each one of those. Currently, we've been [using] them but we see there's more of a willingness to actually purchase outright than anything else with that. So the options are out there. They've been blended in. I've not yet seen or we're not anticipating to bring in-house a large leasing ability, although we do have that capability in-house now. And we're using a third party to do the leases that we do, which actually allows us to grab revenue upon shipments and that works out for us right now.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [53]

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Okay. So did I hear in there that at least today, the majority of them are upfront at this point?

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Daniel T. Scavilla, Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer [54]

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Yes. Today, the majority has been that. And we do offer several options, but there's been, I would think, a willingness to just do an outright purchase versus any other options.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [55]

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Okay. Okay. And then just to be clear and sorry if I missed this, but the longer selling cycle you guys are referring to is primarily a function of just more choice in the marketplace and, therefore, centers being a little more careful about the evaluation process now that there's a couple of competitors to consider. Is that the right way to read it?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [56]

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That is the right way to read it, Bob. I think there's not only competitors, there's potential competitors. And the executives at the hospital are forcing their surgeons to go back and kind of make sure they're making the right decision. So they need to evaluate and go through the process of evaluation of what's there now and as well as what might be on the market.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [57]

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And then when you're in those situations where you're -- where it's a little more of a head-to-head situation or you're in a compare-and-contrast situation, what are the 1 or 2 things that you guys really highlight as a company as a reason to go with Globus? Like what do you highlight as the key differentiating part of -- either the package or the robot itself when you're in those situations?

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David M. Demski, Globus Medical, Inc. - CEO, President & Director [58]

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I think the primary advantage is just the workflow and the way I think it's able to be incorporated into the practice of the surgeons, and we see that consistently. And I think you see that borne out in our adoption statistics. So that would be the main thing. You would add to that effect that ours works with 3 different imaging modalities, a preop CT, interop CT as well as fluoro. It's also a fully integrated system. So it -- whereas the competition really has 2 systems in the room. There's 2 monitors, 2 boxes and its 2 different registration processes, if you want use it. So it's just -- it adds a lot of steps, it's harder to use.

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Daniel T. Scavilla, Globus Medical, Inc. - CFO, Executive VP & Chief Commercial Officer [59]

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I would also add to that, that the arm of our robot is superior to anything that's out there. It was designed, the strength of it, [the lack of] flexibility that allows you to really to do a lot of heavy things in there makes it superior to anything that's there. And also the fact that it's a mobile unit, it can move in and out as needed. It can move in different parts of the surgery so that it can be used around the surgeon versus [requiring] the workflow, like Dave said, or it could be pulled out when finished and redeployed in another surgery versus waiting for the entire completion.

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Operator [60]

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With no further questions, this ends the Globus Medical First Quarter Earnings Call. Thank you for participating. You may now disconnect.