U.S. Markets open in 30 mins

Edited Transcript of SPNE earnings conference call or presentation 29-Oct-19 8:30pm GMT

Q3 2019 SeaSpine Holdings Corp Earnings Call

Vista Nov 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Seaspine Holdings Corp earnings conference call or presentation Tuesday, October 29, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* John J. Bostjancic

SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer

* Keith C. Valentine

SeaSpine Holdings Corporation - President, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Craig William Bijou

Cantor Fitzgerald & Co., Research Division - Research Analyst

* Jeffrey Scott Cohen

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research

* Matthew Oliver O'Brien

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

* Sam Brodovsky

BTIG, LLC, Research Division - Equity Research Associate

* Leigh J. Salvo

Gilmartin Group LLC - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 SeaSpine Holdings Corporation Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to Leigh Salvo. Please go ahead, ma'am.

--------------------------------------------------------------------------------

Leigh J. Salvo, Gilmartin Group LLC - MD [2]

--------------------------------------------------------------------------------

Thank you. And thank you all for participating in today's call. Joining me from SeaSpine is CEO, Keith Valentine; and CFO, John Bostjancic. Earlier today, SeaSpine released full financial results for the third quarter ended September 30, 2019.

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 results and conditions. All statements other than statements of historical facts 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, October 29, 2019.

For a description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward-looking statements, please see our news releases and periodic filings with the SEC, which are available on our corporate website, www.seaspine.com, and at www.sec.gov.

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

--------------------------------------------------------------------------------

Keith C. Valentine, SeaSpine Holdings Corporation - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Leigh. Good afternoon, and thank you all for joining us. We are extremely pleased with our performance this year and in particular our third quarter. This quarter marked the pivot we have been signaling to sustain an accelerating double-digit revenue growth, growth generated by a larger, increasingly committed and exclusive distribution network that is armed with a very comprehensive and differentiated portfolio of spinal implants and complementary orthobiologics products that allows us to access new market segments where we were previously unable to compete. I'm confident the results we achieved in the third quarter are just the beginning and we believe are a signal for even greater progress to come, progress in the form of even higher revenue growth in 2020 and beyond as we continue our aggressive investment in new product launches and start to gain a foothold in new geographic markets in the United States where we previously had little to no distribution representation.

For those of you following along with the slide deck, Slide 3 provides a summary of our financial and operational highlights in the third quarter. We delivered the highest quarterly revenue in the history of SeaSpine as a stand-alone company with a total revenue of $39.9 million, an increase of 11% versus the year ago period.

In the U.S., growth was once again led by higher sales of recently launched products and line extensions that were increasingly driven by our core distributors, which I'll highlight in more detail momentarily. I'm especially proud of the 16% growth we posted for U.S. Spinal Implants, which is by far the highest growth in that portfolio to date. New and recently launched products contributed more than 53% of U.S. Spinal Implant revenue in the third quarter and grew 45% over the prior year.

As we continue to launch new products, we are able to capture more of the procedure by addressing new market segments such as the midline cortical approach, MIS and more complex deformity surgeries. And as illustrated in the progression on Slides 4 and 5 with how those recent line extensions for our foundational Mariner platform can enable us to take additional market share in the $2.8 billion fixation market segment. For this reason, we anticipate that our U.S. Spinal Implants revenue will continue to grow faster relative to our U.S. Orthobiologics revenue.

Turning to Slide 6. From a distribution perspective, we continue to add more committed and increasingly exclusive distributors in the U.S. market. These distributors, which we refer to as core distributors, are a select group that, with some exceptions, sell both our spinal implants and orthobiologics products and are expected to be the most meaningful contributors to our future revenue growth by virtue of the degree of their exclusivity and commitment to SeaSpine's products.

For the third quarter, our core distributors collectively generated nearly 60% of our total U.S. revenue and grew 19% year-over-year. As you can see, with the scale they have achieved, our core distributors' revenue percentage breakdown by portfolio, with nearly 60% spinal implants and just over 40% orthobiologics, is starting to more closely resemble the average revenue breakdown per procedure for spinal implants and orthobiologics -- versus orthobiologics, sorry.

From a product development perspective, SeaSpine is in the midst of our most ambitious launch schedule in our history. We launched 4 new products during the third quarter, including alpha launch line extensions of our foundational modular Mariner Pedicle Screw platform for MIS and revision surgery and of our modular Shoreline stand-alone cervical interbody that incorporates the innovative new Reef Topography.

Reef Topography describes machined microstructures and undercut features designed to act as an integrated fusion scaffolding that enhances our proprietary NanoMetalene surface technology. We are investing in the scientific work to evidence the value of Reef Topography as we finalize the data from an animal study that we expect to present in a future scientific conference and that we believe will demonstrate the in vivo benefits of Reef.

As described in prior earnings calls, we currently have a very robust development pipeline with more than 20 projects underway, including a procedure-specific retractor system, a next-generation cervical plating system, a new posterior cervical fixation system and new interbody designs including parallel and lordotic expandable interbody devices and a suite of 3D-printed interbody devices for a wide range of surgical approaches in collaboration with restor3D.

I want to take a moment to highlight the restor3D development agreement. The partnership provides us with an entry into and an opportunity to differentiate within the 3D-printed interbody space, one of the fastest-growing segments in spine. We partnered with Ken Gall, Professor of Mechanical Engineering at Duke University, and his team that specializes in developing 3D-printed implants with enhanced anatomical fit and superior integrated properties. restor3D's proprietary 3-dimensional structure was developed through years of scientific research and development in 3D metal printing. And their well-researched architecture provides a foundation for novel 3D interbody designs that thoughtfully balance structural integrity with the biological requirements for bony integration and fusion. We expect to commercialize our first 3D-printed interbody devices to be developed under this agreement in the second half of 2020.

The launch of these 3D-printed interbody devices, coupled with the anticipated launch of our expandable interbody devices in the first half of 2020, will fundamentally change the way we address the interbody market segment.

Turning to Slide 7, we show the estimated market breakdown of the $1.6 billion interbody segment where we currently compete only in the PEEK and composite space via our proprietary NanoMetalene surface technology. Given the ongoing and anticipated acceleration of the decline of the PEEK segment as more biologically friendly implants are adopted by the market, we expect a significant shift to composite and 3D-printed implants in the near term, as depicted on Slide 8.

However, by 2020, we plan to be able to address the entire $1.6 billion interbody market through our greater representation across the U.S., as shown on Slide 9. This ability to penetrate deeper into the interbody space is expected to be a major driver of our ability to take market share and thus contribute to even greater revenue growth in 2020 and beyond.

Shifting to our orthobiologics portfolio. At the recent NASS meeting, we presented data from a study conducted in collaboration with Jeff Wang, MD and the current President of NASS, and his research team at USC, along with Scott Boden, MD at Emory University, demonstrating that there was no benefit to the viable cell component of cellular bone matrices in the well-accepted athymic rat posterolateral fusion model. The results of the study, which are summarized on Slide 10, indicate superior fusion with OsteoStrand Plus demineralized bone matrix product, which does not contain any cell component relative to 2 market-leading cellular bone matrices products or CBMs, with or without the cellular component.

Slide 11 shows representative CT images of the study, which indicates more robust and mature bone formation with the OsteoStrand Plus product. As the body of evidence grows confirming that cells do not confer any benefit, we are exceptionally well positioned to transition hospitals from high-priced cell-based therapies to our best-in-class and most cost-effective DBM products. Additionally, we believe that we are now the #2 player in the U.S. DBM market, having passed J&J DePuy as they continue to focus their sales and marketing efforts more on cellular bone grafts.

Finally, turning to Slide 12. I wanted to highlight some recent addition and changes to our U.S. sales management team and structure. We have added more experienced leadership with Dave Decker joining us to oversee sales management in the Northeast and Central United States. And we are adding additional sales managers to the Southeastern United States, which is led by Rhett Clark. These regions all represent significant future growth opportunities for us, and we are relatively underpenetrated in those markets. Mike Lytle will continue to lead the Western area where we have generated mid-teen sales growth the past 2 years. And perhaps just as significant, we have now fully integrated sales leadership for both spinal implants and orthobiologics under one leadership team. We expect this fundamental change in sales leadership strategy under John Winge and his team to drive more efficient and effective collaboration to lead more cross-selling growth opportunities for our spinal implants and orthobiologics portfolios.

With this in mind, we are raising our guidance for full year 2019 total revenue to a range of $157 million to $158 million, reflecting growth of 9% to 10% compared to the prior year.

With the momentum we have gained in 2019 coupled with the growing confidence we have as an organization in our ability to quickly develop and commercialize cost-effective clinical solutions to meet our surgeon customers' needs, we believe that we are poised to deliver more robust revenue growth in 2020 and beyond, with U.S. Spinal Implants growing -- growth accelerating into the mid- to high teens.

I'll now turn the call over to John to provide more detail on our financials and our financial outlook then I will wrap up. John?

--------------------------------------------------------------------------------

John J. Bostjancic, SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer [4]

--------------------------------------------------------------------------------

Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, total revenue for the third quarter of 2019 was $39.9 million, an increase of 11% compared to the prior year and represents a meaningful acceleration in growth compared to the 2 previous quarters. U.S. revenue increased 12% to $35.5 million, and international revenue grew 6% to $4.4 million largely on the strength of spinal implant replenishment orders.

U.S. Orthobiologics revenue in the third quarter increased 9% year-over-year to $18.2 million driven by growth in recently launched DBM products led by the OsteoStrand Plus product. As we continue to ramp up production capacity of the fibers-based DBM products and broaden our sales and marketing efforts, we are starting to see more of the expected and desired cannibalization of our legacy particulate DBM products. This controlled cannibalization will have a beneficial impact on cash flow management as we scale down production of our legacy products inventory over time.

Sales of our Mozaik collagen matrix product line increased in the third quarter. And with the addition of the OsteoCurrent product, we expect to generate continued growth in our synthetic bone graft substitute franchise going forward.

U.S. Spinal Implant revenue in the third quarter increased 16% year-over-year to $17.4 million and was once again driven by growth in recently launched products, led primarily by the Shoreline and Mariner systems and by our expanded NanoMetalene portfolio and higher revenue dollars per procedure due to mix. Spinal implant surgery case volumes increased more than 10% but were somewhat offset by continued low single-digit price declines.

Despite the third quarter typically being one of the weakest quarters of the year due to seasonality, it was very encouraging to see third quarter spinal implant revenue increase sequentially versus the second quarter, which reaps the benefit of summer scoli season.

Gross margin for the third quarter was 63.9% compared to 60.2% for the same period in 2018. The improvement in gross margin was due to a favorable shift in geographic and product mix, with higher-margin U.S. revenue growing faster than international revenue and higher gross-margin spinal implant product revenue growing faster than orthobiologics product revenue.

Additionally, manufacturing scrap rates, inventory losses and excess and obsolete inventory provisions were lower in the current period compared to the prior year. We continue to see the sustained benefits of our focused efforts to reduce the raw material and manufacturing costs of our orthobiologics products.

Operating expenses for the third quarter of 2019 totaled $34.8 million, a $3.8 million increase compared to $31 million for the same period in the prior year. This increase was driven by a $3.1 million increase in selling, general and administrative expenses and a $700,000 increase in research and development expenses. The increase in SG&A expenses was mainly driven by higher sales commission expense due to increased revenue and higher salaries and wages and increased legal fees, freight and other logistics expenses.

Net loss was $9.7 million compared to a net loss of $9.6 million for the third quarter of 2018. Cash, cash equivalents and investments at September 30, 2019, totaled $27.3 million, and we had no amounts outstanding under our credit facility. Our free cash flow burn, which excludes financing inflows and outflows and purchases, sales and maturities of marketable securities, was $8.8 million for the third quarter of 2019 and $25.5 million year-to-date. This compares to a year-to-date $15.2 million free cash flow burn for the prior year period. The increase in 2019 was driven primarily by higher purchases of inventory and instruments to support recent and upcoming product launches and to maintain full inventory levels for both the newer fibers-based DBM and legacy particulate DBM portfolios and for investments in the spinal implant sets we expect to sell to international stocking distributors later in the fourth quarter particularly as we begin to sell our spinal implant systems into Mexico through an expanded relationship with our long-standing orthobiologics distributor.

We remain focused on expanding our gross margin and continuing to reduce cash-based G&A expenses as a percentage of revenue. However, in the short term, we plan to continue to redeploy much of that operating leverage towards the sales, marketing and R&D initiatives as well as the increased investments in spinal implant set build and inventory that are critical to building a scale and driving a sustained and accelerating revenue growth that are needed to achieve sustained positive free cash flow.

We now expect our free cash flow burn for full year 2019 to be in the range of $30 million to $32 million. This increase in spend reflects the confidence we have to more aggressively invest in the spinal implants inventory, instruments and sets that are needed to achieve the higher 2020 revenue growth rates that Keith discussed earlier and also reflects lower cash collections in 2019 than previously expected because of the late fourth quarter timing of spinal implant set sales to our international distributors, which is a few months later than originally anticipated. We expect to see a corresponding benefit to cash collections in the first half of 2020 as a result of the timing shift for international set sales. And we expect to reduce our free cash flow burn for full year 2020.

For the full year 2019, we continue to expect to spend in excess of $10 million of capital expenditures to support new spinal implant system launches and to fund the deployment of additional sets of our flagship Mariner and Shoreline systems. That represents more than a 50% increase compared to 2018 and translates into meaningfully higher but much harder-to-quantify spend this year compared to last year on the implant inventory that will go into those additional sets and for replenishment of warehouse stock.

I want to offer more color on this anticipated spend because of its impact on anticipated 2019 free cash flow burn and because it is an important factor in our decision to once again increase our full year 2019 revenue guidance. Based on the strong correlation we've identified between spinal implant set additions and increased revenue growth as measured by revenue generated per set, we continue to believe there is meaningful unmet demand for our key systems, Mariner, Shoreline and the recently alpha launch line extensions of those systems in particular that is being generated by our core distributor partners.

Year-to-date in 2019, we did not sell any shares of common stock under our ATM program, and we recently announced our decision to terminate this $50 million facility. Despite our ambitious product development plans, we believe that our strong balance sheet and liquidity position enables us to execute these plans successfully in the near term.

Turning to our financial outlook for 2019. As Keith mentioned earlier, we raised the bottom and top end of our revenue expectations. We now expect full year 2000 (sic) [2019] revenue to be in the range of $157 million to $158 million, reflecting growth of 9% to 10% over full year 2018 revenue and 10% to 12% higher than fourth quarter of 2018. This compares to previous revenue guidance of $155 million to $157 million.

Moving down the P&L. We now expect gross margin for 2019 to increase to within a range of 63% to 64% as we continue to realize the benefits of the process and yield improvements we've implemented in Irvine and SG&A excluding noncash stock-based compensation charges and any noncash gains or losses related to changes in the fair value of NLT contingent consideration liabilities to approximate 68% to 69% of revenue. We continue to expect R&D to approximate 9% to 10% of revenue.

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

--------------------------------------------------------------------------------

Keith C. Valentine, SeaSpine Holdings Corporation - President, CEO & Director [5]

--------------------------------------------------------------------------------

Thank you, John. SeaSpine is now one of the fastest-growing pure-play spine companies. With our pivot to sustain an accelerating double-digit revenue growth, we are an even more confident organization that is poised to take even more market share in the future. We are led by the very experienced and focused leadership team that collectively has more than 230 years of experience in spine and orthopedics. And perhaps most importantly, the almost 400 employees of SeaSpine are more motivated and capable than ever to deliver clinically relevant, cost-effective procedural solutions that differentiate us with both surgeons and distributors in this competitive market. We are energized yet humbled by our recent successes, and we are committed to continuing to grow at a rate that is at least 5 to 6x faster than the overall spinal implants market. I am proud of the solid foundation for accelerating growth we have established. And we remain dedicated to providing high-quality, differentiated and complementary technologies that leverage our core competencies in orthobiologics, interbody devices and modular spinal instrumentation systems.

With that, we will now open it up to questions. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Matthew O'Brien of Piper Jaffray.

--------------------------------------------------------------------------------

Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

--------------------------------------------------------------------------------

I guess the first few questions are actually for John. Keith, no offense. But John, can -- first is just a housekeeping one. Can you give us the split between hardware and biologics on a global basis?

--------------------------------------------------------------------------------

John J. Bostjancic, SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer [3]

--------------------------------------------------------------------------------

Yes. The global breakdown for third quarter?

--------------------------------------------------------------------------------

Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [4]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

John J. Bostjancic, SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer [5]

--------------------------------------------------------------------------------

Yes. That's global spinal implants was $19.8 million, and global orthobiologics was $20.1 million.

--------------------------------------------------------------------------------

Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [6]

--------------------------------------------------------------------------------

Got it, okay. And then you mentioned your cash balance being around $27 million. Can you remind us what the level of the -- of your credit facility is?

--------------------------------------------------------------------------------

John J. Bostjancic, SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer [7]

--------------------------------------------------------------------------------

Yes. A $30 million facility, we currently have over $25 million of borrowing capacity today, and that continues to increase each quarter. And then we also have that $10 million accordion that we executed when we extended and amended it in July 2018. So we can increase it to a $40 million total facility as we continue to grow into that borrowing base.

--------------------------------------------------------------------------------

Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [8]

--------------------------------------------------------------------------------

Got it. So in total, you're more like close to $70 million in cash and credit available today, not necessarily the $27 million. Is that fair?

--------------------------------------------------------------------------------

John J. Bostjancic, SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer [9]

--------------------------------------------------------------------------------

That's correct, yes.

--------------------------------------------------------------------------------

Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [10]

--------------------------------------------------------------------------------

Okay. And so -- and the reason I'm asking this is the cash burn definitely gets the attention of investors. When you talk about all this growth that you're going to see next year, that's great to hear, but the cash burn is going to come down. So is it fair to think that just today, you probably have 2 or 3 years' worth of cash on hand or cash and credit available?

--------------------------------------------------------------------------------

John J. Bostjancic, SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer [11]

--------------------------------------------------------------------------------

Yes. I mean when you look at it from the cash on hand and investments on hand and that potential borrowing capacity maximum under the credit facility, which like I said, we expect to continue to grow into that and be able to expand into the $10 million accordion, that would, based on expectations for future cash flow burn, get us to 2 years of liquidity based on the cash and that potential borrowing capacity in the facility.

--------------------------------------------------------------------------------

Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [12]

--------------------------------------------------------------------------------

Got it, very helpful. Okay. And let me flip over to Keith. The commentary on mid- to high-teens growth domestically in implants was rather eye-popping. So can you just provide a little bit more color as far as where that growth comes from? I know you have 2 new heads on the eastern seaboard that are showing things up there. But is it that, instrument sets, products, existing accounts going deeper? Just more detail on where all that growth comes from.

--------------------------------------------------------------------------------

Keith C. Valentine, SeaSpine Holdings Corporation - President, CEO & Director [13]

--------------------------------------------------------------------------------

Yes. So we're really excited on how the alpha launches have gone for extension into MIS for our Mariner system as well as getting into the ability to do revision surgery in more complexity. And so we feel very good how the alphas have gone. We feel very comfortable how we're going to be pushing those into full launch. And we know from how the alphas have gone that we have been able to better penetrate procedures. We've been able to grab more of the entire procedure, including orthobiologics and interbody devices. And so not to mention that these constructs can sometimes be longer, especially the ones that are revision in nature.

So we feel very good that the Mariner has become such a great foundation and that this is really important building blocks onto that foundational system. Especially when you look at how the market's growing, the MIS section of the market is the faster-growing than the traditional degenerative overall. So we feel good that we'll be able to capitalize on that, and we also feel very good with how the alphas have gone that we'll be able to transition nicely into full launch.

--------------------------------------------------------------------------------

Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [14]

--------------------------------------------------------------------------------

Okay. That's helpful. And then just along those lines, Keith, at your former company, I remember early days grabbing a percentage of total case opportunity was a big focus. Can you just share with us, maybe just anecdotally or just generally speaking, where you're at in that process of existing accounts in terms of the amount of procedures that you're grabbing, which it could be including them and how many -- or what kind of revenue per case you're seeing and where that potentially could go over time?

--------------------------------------------------------------------------------

Keith C. Valentine, SeaSpine Holdings Corporation - President, CEO & Director [15]

--------------------------------------------------------------------------------

Yes. Bos may be able to share a few of the percentages. But generally speaking, we're seeing a nice increase in procedural growth, right, but price per procedure is growing faster. And so that gives us the comfort of how we're seeing the spinal implant line kind of take on a new growth curve, if you will, as we get into the end of this year and then into next year.

--------------------------------------------------------------------------------

Matthew Oliver O'Brien, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [16]

--------------------------------------------------------------------------------

Got it. Last one for me, and I'll hop off. Just I think you talked a little bit about the NLT timing with the expandable. I know you're making an adjustment there. Sounds like that's all bottomed out. Can you talk a little bit about what that adjustment was that you made there and kind of what the differentiating features are really going to be of that expandable? I know that's a really good, growthy market.

--------------------------------------------------------------------------------

Keith C. Valentine, SeaSpine Holdings Corporation - President, CEO & Director [17]

--------------------------------------------------------------------------------

Yes. First, regarding the alpha, I think we pretty quickly realized we needed to have more sizes, and those sizes also required downsizing, in a sense, the implant. And so when you did that, it became challenging for the existing designs. So the -- we're keeping, as I mentioned in the last call, the existing design for the lordotic, but the parallel distraction is an in-house design that we're going to. We feel like it has a better ability to complement the size needs of the surgeon as well as easier for instrumentation to attach and decouple and be used for it. So that was kind of all kind of learnings from our early alpha.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from Ryan Zimmerman of BTIG.

--------------------------------------------------------------------------------

Sam Brodovsky, BTIG, LLC, Research Division - Equity Research Associate [19]

--------------------------------------------------------------------------------

It's actually Sam on for Ryan. Just congrats on the great quarter, first of all. So looking with all the capital deployment expected into FY '20, can you just remind investors where your revenue-to-capital ratio is on set deployments? And how do you look at that going into FY '20?

--------------------------------------------------------------------------------

John J. Bostjancic, SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer [20]

--------------------------------------------------------------------------------

Yes. We look at the -- we focus more on are we generating more revenue percent as we deploy sets. And if you think about the ASP per procedure, it's highly variable, so it's really difficult to put out a meaningful revenue per set metric because it's all over the board from a simple cervical procedure to a more complex deformity procedure. So we don't necessarily want to talk about ASP because mix can heavily impact the revenue per case.

But what we do focus on is as we continue to deploy more sets every quarter, are we generating more revenue per set. And it kind of goes along the line with what Keith is talking about, is capturing more of the procedure. So we know that when we deploy more sets, we're getting a resulting increase in revenue per set. But we're also -- as we have deployed Mariner MIS and Mariner Revision, for example, we're able to capture more of the procedure. So you get the pull-through not just from the revenue per set but also additional sets that are being brought into the case because we couldn't address that market segment in the past. And that's a lot of what Keith's comments were, is the new market segments we can address with the recent product introductions.

--------------------------------------------------------------------------------

Sam Brodovsky, BTIG, LLC, Research Division - Equity Research Associate [21]

--------------------------------------------------------------------------------

Okay. Great. That's helpful. And then can you remind us of your share position in the DBM market and what you're seeing from players above you, namely Medtronic and Johnson & Johnson? Has there been any investment in this area? Have they been keeping up with you there? And then it seems just like Medtronic in particular is redoubling efforts to -- on infuse as opposed to going for a lower-priced biologic option.

--------------------------------------------------------------------------------

Keith C. Valentine, SeaSpine Holdings Corporation - President, CEO & Director [22]

--------------------------------------------------------------------------------

Yes. So if you take a look at it now and as we mentioned in the call, that we feel like we're now in the #2 position. And a lot of that has to do with the fact that I think it's just been a refocusing of priorities. J&J was #2 previously. It certainly appears that they have taken a leadership stance on the cell side of their product offering. And I think it's really just a matter of focus. They're focusing more on that than they are on their DBM alternatives. Medtronic has always had a very good DBM portfolio, and they continue to have, I think, a balanced sales force approach to their DBM selling. So that's who we're gunning for.

I mean we feel like we have been the lone investors in this space over the past few years, not only in how we invested in our manufacturing of our new stranded DBM product, how we've done the science behind them and now that we're continuing to show additional clinical work on that side as well. So we feel like we're the ones making the investment, and we feel strongly that it's the right time to double down in this space. It's the only product I know of in spine that has 0 reimbursement pushback from payers. They have all been very accepting of the use of DBM as an orthobiologic for much greater than a decade, almost 2 decades now. And I think this is an area that we can continue to show that we're at the right price point and continue to deliver as good, if not better, clinical efficacy than the competition.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our next question comes from Craig Bijou of Cantor Fitzgerald.

--------------------------------------------------------------------------------

Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [24]

--------------------------------------------------------------------------------

Keith, congrats on a very strong quarter. Wanted to start with the biologics and maybe a little bit of a follow-up on the previous question. But obviously, you guys talked about the data you presented at NASS. So wanted -- and I know it's only about a month, but I wanted to get maybe some surgeon feedback or reaction that you guys received following that data. And then I know you mentioned J&J and they're investing on the cellular side. So maybe just anything you guys are seeing with respect to the higher-ASP biologics. J&J is focusing on the cellular side. Why if they're seeing a little bit more pushback on the higher price?

--------------------------------------------------------------------------------

Keith C. Valentine, SeaSpine Holdings Corporation - President, CEO & Director [25]

--------------------------------------------------------------------------------

Yes. I think that a lot of the pushback that suppliers are seeing are really generated -- there is, of course, some hospital pushback on any expensive orthobiologic, of course. But the bigger pushback I think you're seeing on the cell side is there's still a number of large payers that exclude that from kind of their formula, and I think that has been problematic. It depends on the area of the country. It depends on the particular private insurer. But there certainly is pushback on the private insurance side for cell-based technologies.

And I think on top of that, there has been more and more conversation over the past year or so about the role that cells play and what is that role. It's not a question as to whether they're living or not. The question is what is their role to be played. And I think a lot of surgeons continue to debate that question, and they continue to want to understand it more. And so the study was largely just trying to show what the impact is with and without cells and finding a good way to neutralize those cells through localization, which is -- which doesn't harm the DBM component that's within that entire composition.

So it's been great conversations since NASS. And I think that debate will continue, but we just want to be -- ensure that the debate is continuing with science behind it as well.

--------------------------------------------------------------------------------

Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [26]

--------------------------------------------------------------------------------

Got it. That's helpful. And maybe just thinking about the entire business in 2020, and I know you guys probably won't provide guidance. But you grew 11-plus percent this quarter. You're forecasting 11% at the midpoint in Q4, both on tough -- pretty tough year-over-year comps. So from an overall business perspective, how should we think about the growth rate in 2020? Can you accelerate from the strong second half growth you've seen thus far in '19?

--------------------------------------------------------------------------------

John J. Bostjancic, SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer [27]

--------------------------------------------------------------------------------

Yes. I think for all the reasons, Craig, that Keith talked about with continuing to grow the distributor network, get more exclusivity from that group, and what attracts those distributors is continuing to roll out the cadence of products and being able to address new market segments -- large parts of market segments that we haven't been able to address in the past through the 3D-printed interbody, the MIS and revision surgery, moving into deformity surgery with Mariner. That gives us the confidence, as Keith said on the call, exiting the second half of the year at sort of 11% at the midpoint, we think we can do a little bit better than that in 2020. But as we also called out in the scripted comments, spinal implants is going to be what drives that growth. And our expectation there is to get to -- sustain the mid-teens growth that we delivered in the third quarter and just continue to grow from there.

--------------------------------------------------------------------------------

Craig William Bijou, Cantor Fitzgerald & Co., Research Division - Research Analyst [28]

--------------------------------------------------------------------------------

Helpful. And not to ask a bit of a -- not a negative question necessarily, but what do you see as potential risks to getting to those levels that you guys are -- you guys expect to see in '20?

--------------------------------------------------------------------------------

Keith C. Valentine, SeaSpine Holdings Corporation - President, CEO & Director [29]

--------------------------------------------------------------------------------

Yes. I think that obviously, we're very bullish on the new products that we're pushing out for spinal implants. And so we feel very good about how they can grab more of the procedure, right? But I think speaking candidly, we also have to be very aware of the fact that growing orthobiologics is a harder segment. It's a harder segment of growth. It's especially hard with the market share penetration that we continue to get. And in addition, it often falls under pricing pressure. And so there's a balance there of how we have to continue to make sure we're expanding in the right areas, finding the right partners and getting onto the right contracts, which we have been very successful in doing with our orthobiologics franchise.

So I'd say those are the risk factors. The risk factors are, are we able to continue leveraging those larger accounts and those contracts and maintain our pricing especially now that we have a nice range of products from our particulate DBM all the way into our high-performing stranded DBM? So we have to maintain that price differentiation, if you will.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

Our next question comes from Jeffrey Cohen of Ladenburg Thalmann.

--------------------------------------------------------------------------------

Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [31]

--------------------------------------------------------------------------------

So I guess this is more probably for John. Could you talk about some of the 3D interbodies that you're anticipating some rollout next year and the general effect on your margins and general effect on the cost for cases and number of products that you expect to have in the field? Do you expect there to be kind of more SKUs available with short lead times to be shipped? Or do you expect to fully embed them within cases that are out there?

--------------------------------------------------------------------------------

Keith C. Valentine, SeaSpine Holdings Corporation - President, CEO & Director [32]

--------------------------------------------------------------------------------

Yes. So first, let's back up a little bit. One of the nice things about how we have been able to work with the team at Duke is the intent and the focus is that it's up to the surgeon what material they want. If they want a composite material, obviously, NanoMetalene is a choice. If they want a 3D-printed material, then we're going to have options for them. But the great news is you can use the same set of instruments, which is important because it leverages us to have more efficient ability to get trays out. It creates one learning curve of your system, meaning that instrument tray ends up being learned for both the NanoMetalene product line and the 3D product line.

So we feel like we're going to stepwise launch products that are very similar to one another as far as instrumentation but are certainly very different from a material perspective and even a design perspective, right? There's a little bit difference in the designs, of course, to the open architecture of NanoMetalene and what the architecture will be of a 3D implant. But I think that's a very important distinguishing fact of how we can cater into one account and still provide 2 very different material choices.

And I'll let John talk about the second part of that question. John?

--------------------------------------------------------------------------------

John J. Bostjancic, SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer [33]

--------------------------------------------------------------------------------

Yes. And the gross margins, Jeff, we expect based on our analysis, will be positive contributors to gross margin. Much like the NanoMetalene interbody portfolio contributes to gross margins overall, it's favorable to the portfolio. And as Keith highlighted, the efficiency of being able to use the existing instrumentation sets is great from a capital perspective because we don't have to buy as many instrument sets as we would to support those implant sets if -- in case you're bringing both the NanoMetalene and the 3D into the procedure, you've got one set of instruments that can manage that case. So it's efficient from the cash flow perspective as well.

--------------------------------------------------------------------------------

Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [34]

--------------------------------------------------------------------------------

So I mean you'll be able to handle the implant trays differently than the actual implants as far as logistics go?

--------------------------------------------------------------------------------

John J. Bostjancic, SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer [35]

--------------------------------------------------------------------------------

Yes. Typically, the implants are -- like on the NanoMetalene side, and I anticipate similar for the 3D printed, it's sterile packed in a tote, so you can bring in different totes with different product ranges configured to whatever the surgeon needs. And then you've got your standard trays of instruments that go in with sterile implant totes.

--------------------------------------------------------------------------------

Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [36]

--------------------------------------------------------------------------------

Okay, okay. Got it. You talked a little bit earlier about the costs out there in the marketplace. You're getting pushed lower, yet your case volumes are up 10%. So is it safe to assume then that your revenues per case are driving a lot of the growth? It sounds like revenues per case must be up 5% to 10%.

--------------------------------------------------------------------------------

John J. Bostjancic, SeaSpine Holdings Corporation - Senior VP, CFO & Treasurer [37]

--------------------------------------------------------------------------------

Yes. That's exactly what it was. It was 5% in the third quarter. So you're getting the case volume increase, the ASP per procedure increasing 5% and then the continued low single-digit pricing declines. And a lot of that's the procedural mix we talked about in the scripted comments, is more access to deformity cases, multilevel fusions, more complex surgeries with the Mariner Revision. And as we move Mariner into the deformity set, it's -- I think it's positive from a revenue per procedure perspective, which certainly was a contributor to the growth in the third quarter as well.

--------------------------------------------------------------------------------

Jeffrey Scott Cohen, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research [38]

--------------------------------------------------------------------------------

Okay. And then lastly for me, can you talk a little bit about the sales force as more of the alphas continue to pull through specifically to centers and docs? Can you talk about number of doctors, number of doctors at centers, number of centers that have come on board and where you're seeing the growth? More specifically, is it increased usage per physician, more physicians per practice or more new centers or all of the above?

--------------------------------------------------------------------------------

Keith C. Valentine, SeaSpine Holdings Corporation - President, CEO & Director [39]

--------------------------------------------------------------------------------

Yes, it's actually a -- yes, it's a combination of both, Jeff. Obviously, each of the projects that we have alpha surgeons on, a number of them are new surgeons, are new designers. They're newly involved with the organization. And then we have also a number that are closer to our distribution channel and closer to us that are also trialing it in alpha and giving us feedback. So both are going on.

As we get to full launch, though, we'll be opening it up to the entire country. Alpha is a little bit different in that you are really focused on being part of the surgery and making sure you're getting all the feedback, not just for how the implantation went but even more importantly how the instrumentation performed, right? And so as we get to full launch, it will be a much more open process where distributors are getting ready, they know what our launch date is, and they're getting ready for those first few cases as we get to full launch. So a little bit different strategy between alpha and full.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

There are no further questions. I'd like to turn the call back over to Keith Valentine for any further remarks.

--------------------------------------------------------------------------------

Keith C. Valentine, SeaSpine Holdings Corporation - President, CEO & Director [41]

--------------------------------------------------------------------------------

Thanks, everyone, for joining us for this Q3 call, and we look forward to updating you at just past the end of the year. Thanks.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.