OrthoPediatrics Corp.

Good morning and welcome to the Orthopediatrics Corporation's second quarter 2021 conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Basco from the Gilmartin Group for a few introductory remarks.

Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer, and Fred Haidt, Chief Operating and Financial Officer. Before we begin today, let me remind you that the company's remarks include forward-looking statements within the meaning of federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous risks and uncertainties, and the company's action results may differ materially. For a discussion of risk factors, including, among others, the risks related to COVID-19, the impacts this pandemic may have on the demand of the company's products and the company's ability to respond to the related challenges, I encourage you to review the company's most recent quarterly report on Form 10-Q, which will be filed with the SEC soon. During the call today, management will also discuss certain non-GAAP financial measures, which are supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period over period. For each non-GAAP financial measures referenced on this call, the company has included a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release. Please note that the non-GAAP financial measures have limitations as analytical tools, and should not be considered in isolation or as a substitute for orthopediatrics financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 5th, 2021, except as required by law. The company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call. With that, I would like to turn the call over to David Bailey, President and Chief Executive Officer.

Thanks, Matt. Good morning, everyone, and thank you for joining us. We hope you are safe and well. Before providing a business update and reviewing the financials, I'd like to take a moment to say how honored I am to have the opportunity to lead Orthopediatrics Forward. I joined OP more than 14 years ago, just after its founding, and I did so because I felt it was a calling on my life to help children. As I take on this new responsibility, I am humbled by all we've accomplished to improve the lives of children. As you know, Orthopediatrics was founded on the cause of improving the lives of children with orthopedic conditions. Over the years, we have partnered with key opinion leaders in the field of pediatric orthopedic surgery from around the world who share in our dedication to this cause. While we are proud of our accomplishments thus far, there is so much more we can do to ensure that children have access to the best healthcare. We are still very early in our growth story, and Fred and I are excited to build on our past successes. I'd also like to take this time to thank and congratulate Mark Throttle, our new executive chairman, for his commitment to our cause and his service to orthopediatrics over the last 10 years. Mark has been instrumental in building who we are as a company and what we represent. On a personal note, Mark has been an incredible mentor and friend. Thank you, Mark, for your leadership, guidance, and for your continued service. It's also true that there is no one who can match Mark's polished delivery of our prepared remarks on a quarterly earnings call, but Fred and I will do our best. With that said, let me turn to our quarterly results. We are proud to report that we helped a record 10,500 children in the second quarter of 2021, bringing the total number to more than 215,000 since the inception of orthopediatrics. Our team is very proud of this number, which is unusually large for a company of our size. And so we intend to lead off every quarterly call with this statistic, which represents the ultimate measure of our success as a business built on that cause. We are also pleased to report that Orthopediatrics posted record quarterly revenue as our associates continued to execute in this extremely demanding operating environment. In the second quarter, we generated quarterly results of $26.7 million. representing growth of 96% compared to the second quarter of 2020. As a reminder, the prior year quarter was significantly impacted by COVID-19. This robust growth was driven by all three businesses, strength in the domestic market, and improved trends in international markets. Achieving this milestone is a testament to the fundamental strength of our business and the resiliency of our team. In the second quarter of 2021, U.S. revenue was $21.7 million, a 79% increase from the second quarter of 2020. We believe that pediatric orthopedic clinic visits and surgery volumes in the U.S. have largely normalized at pre-COVID levels, and surgeons appear to have worked through much of the backlog. We generated international revenues of $5 million, up 243% as compared to the second quarter of 2020. While we are pleased with our performance in the quarter, unlike the U.S. market, international continue to be negatively impacted by COVID, leading to increased variability quarter to quarter. Additionally, while we believe U.S. surgeons have worked through their backlog of cases, it is our belief that most international markets will take at least 12 months to work through their backlog. Lastly, a leading indicator for us has always been set deployment by international stocking distributors. In aggregate, their set purchases still remain below 2019 levels. I'll now provide an update on our strategic initiatives. Since becoming a public company nearly four years ago, we have methodically strengthened our ability to deliver durable, long-term, double-digit revenue growth, which is consistent with our track record over the past decade. Moving forward, our corporate strategy will not change. Our focus will remain on five pillars of growth, which include, number one, focusing on high-volume children's hospitals and academic centers around the world that treat the majority of pediatric patients. Number two, surrounding pediatric orthopedic surgeons with a broad product portfolio uniquely designed to treat children. Number three, deploying instrument sets and sales personnel to meet the strong market demand. Number four, expanding the addressable market and meeting unmet needs through aggressive investment in R&D and select M&A opportunities. And finally, number five, expanding our already robust clinical education program to train and support the next generation of pediatric orthopedic surgeons. Our strategy is simple and proven, and it will allow us to continue to execute in a disciplined manner. Going forward, we see no reason to deviate from the formula that has produced consistent annual growth in excess of 20% since our founding. With respect to our continued product portfolio expansion, in May we announced the launch of the Response Neuromuscular, or Response NM, scoliosis system. This represents the 36th surgical system orthopediatrics has launched since its inception and is the latest addition to the response scoliosis platform. This new system is dedicated to the treatment of neuromuscular scoliosis and was developed in conjunction with pediatric orthopedic surgeons to address the unique challenges treating this challenging patient population. Building on the base of the response spine system, response neuromuscular features a complete set of implants and instruments that help simplify these extremely complex spinal procedures. Response Neuromuscular provides specific options to address extreme hyperlordosis and sacral pelvic fixation. The product was also designed with specific instrumentation to improve the speed of these procedures, provide greater deformity correction and stability, and thus optimize outcomes. While still early in its commercial launch, the reception from our key customers has been very positive. Additionally, in mid-June, we announced the full commercial release of our SCIFI cannulated screw system. This system was designed in collaboration with pediatric orthopedic surgeons as a solution for treating traumatic slipped capitol femoral epiphysis. Specifically, this system offers flexibility to treat SCIFI injuries with fully threaded and partially threaded screws. Unlike other systems on the market, Our fully threaded Skiffy screws are available in 2mm increments, providing the surgeon with more options to properly treat a wide range of pediatric patients instead of simply making do with what's available. The screws also incorporate unique features that help surgeons remove the implant more effectively. We now offer cannulated screws ranging from sizes 2.5mm to 7.3mm with various thread lengths to service virtually all the needs of a pediatric orthopedic surgeon. Within our trauma and deformity business, we continue to roll out our Orthex external fixation systems in the EMEA region, leading to our first cases in the major markets of Germany and the UK. We continue to expect that the Orthex EMEA launch to have a positive impact on 2021, similar to what we'd seen in Canada, Australia, and Brazil. Additionally, Orthex was recognized in its first clinical publication from British Columbia Children's Hospital in Vancouver, Canada. This paper highlighted the ability of Orthex to significantly reduce infection rates, leading to improved patient outcomes at a lower cost. Lastly, we finalized the settlement agreement with K2M Stryker, which has been an issue outstanding for the past four years. This settlement saves us from incurring considerable legal expenses and being exposed to risk in the future. Transitioning to our game-changing Apathix technology, In the second quarter, we continued to initiate clinical sites participating in the post-approval study, or PAS registry, and subsequently added new Apifix users. We now have 17 U.S. clinical locations with both required IRB approvals, enabling those locations to enroll patients in the registry. We expect the remaining three registry sites to receive their final approvals in the next few months, putting us at full strength. To date, 75 of the target 200 registry cases have been completed with an additional 20 cases approved or scheduled for surgery. While it is still early days, the clinical sites are delighted by the outcomes we've seen so far. With our first U.S. patient past her one-year follow-up this past June, and more than 25 patients at least six months past their surgery dates, we have had zero reported device-related complications and no reoperations or revisions. It's important to note that we have continued to experience COVID-related delays to IRB approvals at our 20 sites, which have impacted the pace of scheduling. Furthermore, as one might expect with a game-changing technology, many of the registry sites have also taken a very conservative approach to patient selection and scheduling. Given these two dynamics, we expect to meet our 200 registration target early next year. Due to Apifix's early clinical success, as well as patient, family, and surgeon demand, a parallel commercial release of the APOFIX system is being initiated prior to the actual completion of the first 200 planned cases for the PAS registry. We intend to start onboarding the next 10 to 20 commercial sites in the second half of 2021, of which six already have the single IRB approval required by the humanitarian device exemption and are in the process of training, patient selection, and scheduling of cases. These new commercial sites will not have to contend with the second IRB approval and the burden of the PAS registry requirements. Now turning to set deployment and Salesforce development. In the second quarter, we continued to execute our strategy of set deployment. Specifically, $4 million of sets were consigned in Q2 of 2021 compared to $5.8 million in the second quarter of 2020. Year-to-date 2021, we have deployed 9.4 million compared to 9.1 million in the first half of 2020. We anticipate 13 million to 15 million of set deployments in 2021, a somewhat lower number from recent years because of the significant lower cost and greater return on investment of Apophix and Orthex instrumentation sets. In the second quarter, we grew our domestic sales organization headcount to 182 sales reps, compared to 164 in the second quarter of 2020, with five new reps hired during the second quarter of 2021. Further recruitment efforts are now underway by many of our domestic sales partners, underscoring their confidence in the recovery of our business. As the U.S. market continues to normalize, we expect an increased number of sales associates will be added over the coming year. Outside of the United States, we are selling our products in 45 countries through 42 stocking distributors in 33 countries, and in 14 agencies in 13 countries. After the major conversion of Germany, Austria, and Switzerland announced earlier this year, we continue to work on several smaller agency conversions, which may be announced before the end of the year. On the M&A front, we also continue to work on several interesting projects, but we are very pleased to announce recently the important extension of our distribution agreement with Mighty Oak Medical, which secures our Firefly patient-specific 3D-printed pedicle screw guide franchise in the future, while also enabling us to evaluate navigation technologies from other sources. Lastly, turning to clinical education and sales initiatives. We remain focused on investing resources to train and support our surgeon partners. In May, we attended the Pediatric Orthopedic Society of North America, or POSNA meeting, annual meeting in Dallas. As a double diamond sponsor, we provided ongoing support of a subspecialty day symposia and awarded eight scholarships for residents and fellows to attend the meeting. We are proud of our ongoing partnership with POSNA and supporting pediatric orthopedic surgical societies. Another highlight in the quarter was our return to live clinical education events, hosting an external fixation education seminar this past June in Dallas. Our expert surgeon faculty hosted attendees from around the United States in lectures, discussions, and hands-on sessions highlighting external fixation and the orthics system. Feedback from the surgeon attendees was overwhelmingly positive, and 100% of survey respondents stated, that they were likely or very likely to recommend this course to their colleagues. Additionally, in the second quarter, our field sales force conducted more than 75 clinical and product education sessions with residents, fellows, attendings, and hospital staff members. These sessions are critical for the efficient and effective use of orthopediatrics products in the operating room. As a market leader, we believe it is integral to our mission to partner with pediatric orthopedic surgeons in advancing the entire field of pediatric orthopedics, not just selling more of our product. Our commitment to clinical education initiatives fosters collaboration and stronger partnerships with surgeons, thus furthering this mutual objective. As we look ahead, I am proud of how much our team has achieved since I joined Orthopediatrics. We have built a strong business that delivers growth from innovative, differentiated products that improve children's lives. We are pleased with our track record of sustained double-digit revenue growth, but we are still in the very early innings of penetrating this large underserved market. As we continue to execute our proven growth strategy, we remain confident in our ability to deliver and, in fact, accelerate growth and help the lives of more kids worldwide. With that, I'll turn the call over to Fred to provide more detail on our financial results. Fred?

Thanks, Dave. Our second quarter 2021 worldwide revenue of $26.7 million increased 96% when compared to the second quarter of 2020. On a sequential basis, we experienced growth of 24% in our worldwide revenue from the first quarter of 2021. The sequential increase is driven by strength across our business in the U.S., improving trends internationally, and growing sales from Appifix and Orthex. As a reminder, we acquired Appifix in April of 2020 and Orthex in June of 2019. In the second quarter of 2021, U.S. revenue was $21.7 million, a 79% increase from the second quarter of 2020. Due to the improvement in underlying procedure volumes, we realized double-digit revenue growth in each of our US businesses. On a sequential basis, domestic revenue increased 29% compared to the first quarter of 2021. International revenue was $5.0 million and increased 243% as compared to the second quarter of 2020. On a sequential basis, international revenues increased 7% compared to the first quarter of 2021. In the second quarter of 2021, trauma and deformity revenues of $17.9 million increased 95% compared to the prior year period and 23% compared to the first quarter of 2021. Growth in the quarter was driven by strong sales of P&P, cannulated screws, and Orth-X, although virtually all of our product lines grew dramatically. In the second quarter of 2021, scoliosis revenue of $7.7 million increased 100% compared to the prior year period and 29% compared to the first quarter of 2021. Quarterly performance reflected increased patient volume and growth in response and firefly procedures as well as an initial contribution from ApiFix. As we emerge from the pandemic, we believe clinical and orthopedic surgery volumes in the US have largely normalized to pre-COVID levels, and surgeons appear to have worked through much of their backlog. Thus, we believe second quarter performance was primarily driven by organic growth and market share gains, and less by recapturing backlog procedures. Finally, in the U.S., sports medicine other revenue in the second quarter of 2021 was $1.1 million, representing 106% growth over $0.5 million in the same period last year. Growth in the quarter was driven by Telos Partners consulting contracts and repeat advisory business. As a reminder, we acquired Telos in March of 2020. Touching briefly on a few key metrics for the second quarter of 2021, gross profit margin was 76.6% compared to 74.0% in the same quarter of 2020. This improvement was driven by higher percentage of domestic and international agency sales. Total operating expenses increased $6.2 million or 36% from $17.1 million in the second quarter of 2020 to $23.3 million in the second quarter of 2021. The change resulted mainly from increased commission expense and increased depreciation and amortization costs. We reported adjusted EBITDA of positive $1.2 million compared to an adjusted EBITDA loss of $2.3 million for the second quarter of 2020. While operating expenses increased year-over-year, the improvement to the bottom line results show revenue growth outpaced our investments. We ended the second quarter with $67.2 million of cash and restricted cash. And finally, turning to our outlook for 2021, we are increasing our full-year revenue guidance from $97 to $101 million up to from $94 to $98 million previously, and representing new growth of 36 to 42%. As Dave mentioned, we saw strong momentum in the U.S. during the second quarter. However, we continue to take a measured approach, forecasting a return to normal seasonality trends and potential headwinds resulting from the Delta COVID-19 variant. Turning to international, while we are encouraged by the improved growth rate, we do expect regional variability to persist as hospitals continue to work through backlogs and countries face challenges with the COVID surges. At this point, I'll now turn the call back to Dave for closing comments. Thank you, Fred.

I'd like to close by recognizing healthcare workers throughout the world for their selfless dedication helping us all through the COVID-19 pandemic. I'd also like to thank our surgeon customers, my colleagues at Orthopediatrics, and our sales associates around the world for their commitment to our cause. I am proud and grateful to be working alongside you improving the lives of kids. With that, I'd like to turn the call back over to the operator to open the line for any questions.

Thank you. If you would like to ask a question, press the star, then the one key on your touchtone telephone. To remove yourself from the queue, press the pound key. Our first question comes from Matt O'Brien with Piper Sandler. Your line is open.

Hi, guys. Good morning. This is actually drawn for Matt, and he writes on a nice quarter here. I just want to start off a little bit on guidance here. I know you guys are typically fairly conservative, but it looks like you're carrying through most of the beats, and numbers for the second half are staying mostly the same. You know, other med tech companies have discussed some atypical summer seasonality this year. So just wondering what you're seeing so far, you know, looking into Q3 here, and just any reason to expect anything different in what's typically one of your stronger quarters in Q3 here.

Yeah, I'll let Fred speak to the guidance. But I think we saw really strong momentum. And I think we said this in our last call that we saw momentum heading into Q2. We saw that momentum really build throughout Q2, and we closed the quarter very strong in June. There is no question that I think a lot of the med techs as well as orthopediatrics are seeing some slightly different trends, maybe related to vacation, maybe related to surgeon time off or family time off. But we think this is pretty short-lived. Those cases are going to happen most likely within this quarter, certainly within this year. And I think, you know, this is all really baked into our guidance and baked into our race. Fred, do you have another comment?

Yeah, that's a great summary. I mean, we effectively took the full year guidance up by the beat in the second quarter, which is $2.5 million, and then added an additional half a million dollars to the second half of the year versus our previous guidance. And clearly that reflects what we saw in July and what we anticipate seeing in the second half of the year. And I think you're correct that we still remain very confident in the guidance that we provide.

Very helpful. Thank you. And then on app effects, you know, appreciate the update on how far you're along with the registry. You know, maybe you could just expand a little bit more on what the primary gating factor is, you know, whether that be COVID or something else, and then Just wondering if this light push changes how you're thinking about the contribution from that product next year or the new proactive site onboarding that you spoke about likely to make up that difference. Thank you.

Yeah, good question. So I think we are extremely pleased with the kind of results we've seen with Apifix. I mean, this is a new technology to the US market. A year ago, no one had done this surgery. So to have 75 cases under our belt, and have no adverse events whatsoever, no reported complications. If you had told us that a year ago, I think we would have taken it and been extremely pleased. So this is very early, but with 25 patients out six months and seeing the results we're getting, we're very, very enthused. I think we probably underestimated COVID's impact in the IRB process. The first IRB is relatively easy to get. The second one related to the registry has taken us some additional time. and so we're a little behind in terms of having all 20 of our sites onboarded. Additionally, these are very prestigious locations, and we have asked that they be very conservative in terms of their patient selection. And so we're pretty pleased with where we are in terms of the 75 patients in the registry and nearly half of the way through that process, and very excited that the patient demand, surgeon demand, And FDA have allowed us to really kick off this first round of 10 to 20 clinical sites, which I think really helps us stay in line with our expectations for revenue from this product in 2022. Thank you.

Thank you. Our next question comes from Rick Wise with Stifel. Your line is open.

Hey, good morning. And it's great to see you. you know, such a superb quarter. Just again, reflecting on the second half, I appreciate the understandable, the right word is caution, but just sort of temperate approach given COVID. But, you know, maybe help us think through more specifically two aspects of that. International, I'm struck by the comment about backlog. On the one hand, I feel like, you know, that's wind at your back as we head into the second half and into next year. But maybe talk about international trends, what you're assuming in the second half. Do we imagine, you know, that dollars can continue to grow, you know, third over second, fourth over third? Help us think through the international part of things.

Yeah, Rick, it's a great question, and we've spent a lot of time on our side discussing that coming into this call. There are some variables that are at play. Australia, for example, really had been open for a year related to COVID, and we were seeing tremendous results. As you know, Sydney had shut down for a couple of weeks. Other cities in Australia are shutting down for a short amount of time. And that's very unusual. So there are these pockets of select shutdown, which do give us a little bit of pause for the second half of the year, not knowing what that is going to do. But we think we have that adequately reflected in the guidance that we provided. And obviously, Australia is just one example. It's happening in many, many countries, just like in the U.S., So we feel like we've evaluated those situations and we've properly included that risk in our guidance that we've provided, and we still are very confident with the numbers that we put out.

Sure. And maybe, Dave, turning to response system launch, this reminds us again the potential opportunity and impact situation potential impact on kids here. Just remind us, are you replacing something that exists in your product line, or is this an incremental opportunity and the growth could be incremental? Just, you know, Frank, if you would, the opportunity for you.

Yeah, great question, Rick. So this is, I think, an expansion of the product portfolio, not necessarily an expansion of the total available market. The patients who have neuromuscular scoliosis are generally fusion patients. They're just extremely complicated, complex fusion patients. And historically, no company has provided a really good system dedicated to that particular procedure. So, you know, we do some neuromuscular scoliosis now with the response system, but I think the opportunity to do substantially more neuromuscular scoliosis fusion procedures will be felt by adding the response neuromuscular system. You know, what we also see with this is that because no one else has some of the implants that are very specific to response neuromuscular, it's opened some of the doors up from a contracting side. So we have a few accounts already. Again, while this was just launched in May, we have a few accounts already that are allowing our full scoliosis portfolio in the door for the first time as a result of the fact that the technology for response neuromuscular is so unique. And that's already started to see, we've already started to see pull through with our fusion business simply as a result of this launch that, again, happened only 45 days ago. Yeah, no, I appreciate that.

And just last for me, maybe back to gross margins, Fred. Talk about, if you would, how we think about gross margin trends in the second half. Obviously, you've had a very strong first quarter and even better second quarter. Can we, you know, given... What I'll hope is conservative guidance, and I appreciate the reasons why. But given that my numbers may not change on Revlon, can gross margins continue to stay at or improve from these levels as we think about the second half? Thanks so much.

Yeah, absolutely, Rick. The main drivers, as you know, is the domestic mix, so higher domestic mix and higher agency sales outside of the U.S. drive that. as well as the overall revenue number. And so historically, the third quarter is our largest sales quarter. So with increased sales should come increased margins. And while the fourth quarter revenue typically comes down a bit, strong revenue in that quarter will enable us to have strong margins as well. The real question is how much set sales do we have internationally in the second half of the year, as we've had very little of that to date, really, in the last 18 months. And we see that may pick up a little bit, but we don't think it's going to have a tremendously lowering impact on the gross margin rate. I appreciate that. Thanks to you both. Thanks, Rick. Thanks, Rick.

Our next question comes from Ryan Zimmerman with BTIG. Your line is open.

Good morning, and thanks for taking the questions, Dave. Congrats on the role and congrats on the results. So if I could follow up just on the guidance for a second. You know, we've been watching the flu cases, particularly in pediatric patients, go up a bit. And certainly as the masks came down, you know, summer camp picked up, there's been this increased incidence of flu in kids. And so, you know, is that something that we need to be mindful of in the third quarter combined, you know, along with, you know, higher incidence of COVID in pediatrics at all? And, you know, how are you guys watching that or thinking about that right now? It sounds like it's not really, you know, a headwind as you contemplate guidance, but I'd love to get your thoughts on that.

Yeah, it's a great question, and we've spent a lot of time discussing that as well, preparing for this call. You know, we've spent a lot of time reaching out to the field and having conversations with them, and while we do read the same articles you do in some of these children's hospitals, which are unfortunate that they're getting busy with this, knock on wood, so far it has not impacted, we don't believe, the elective procedures in those locations. And what we're being told is that it's not anticipated to impact elective surgery. So we're watching it very closely. But, again, we think that within our guidance, we have some of that risk built in. And if it were to get worse from here, which it may, we still think we'll be okay within our current guidance published.

That's appreciated, Fred. Thank you. And then on the sales force, you know, continues to get better. The productivity metrics, you know, if you look at it on an annualized basis, year over year, continue to get better. So, you know, you're hitting, I think, 182 in these independent but dedicated sales agents and the associated field force. Where can that go over time in your mind, Dave? And, you know, how big can you take this force?

Yeah, I think it will continue to grow, no question. It's a question, Ryan, of if it grows at the pace of revenue growth. You know, when you add high ASP procedures like Orthex and Apifix, I would think that the sales force will continue to grow but probably not be able to keep up pace, frankly, with the growth that we'll likely see from some of those products. You know, you think about Apifix as, you know, high ASP from a coverage standpoint, this is – You know, it's a two-hour surgical procedure as opposed to a much longer fusion procedure. So, you know, we're just driving a lot of efficiencies from the sales force. I guess what Fred and I were most excited about is to see that our domestic sales organization really start adding again. And I think that's a signal of their bullishness of how we're coming out of this pandemic in the United States. I think we're going to see a fair amount more of that in Q3.

Go ahead. Thank you.

Our next question comes from Mike Madsen with Needham. Your line is open.

Yeah, thanks for taking my questions. So I know there was a prior question on AppFix and this delay in reaching the 200 number, but I wanted to understand a little bit more about this parallel launch that you mentioned. So is there a potential for that to offset some of the shortfall that you were expecting on the actual registry part of the volume? And then, you know, is this something where it's going to contribute this year or is that really more meaningful next year?

Yeah, I think the, you know, the setup here is really for 2022. The shortfalls in this first 200 patients in 2021, I think, would have very little impact overall, I think, primarily because of the pull-through we're seeing in our other products, frankly, with response. But I think the way to think about this is really an aggressive preparation to come out of the gates strong in 2022. with 10 to 20 sites that will already have the required IRB, which, to remind you, this is only one IRB required for any sites beyond the 20. And so I think this is really preparation to get ready to have a really strong 2022 as we roll the product out in a commercial way. Could have a small impact in fourth quarter of this year, but I think we're thinking about more and more as a 2022 story.

Okay, I understand, but just to be clear, are you allowed to sell Apifix for use outside of the registry before the registry is completed?

Yeah, that's a good clarifying question, and the answer is yes. Yes, so we already have six sites that are onboarded through the first IRB approval, and we are allowed to move to start selling the Apifix product outside of the 20 IRB sites. Does that make sense?

Yeah, it does. Thank you. And then I wanted to ask about some of the distributor conversions. So I guess first, starting with the large one that you did at the end of last year, it's been, I guess, six months plus now since you did that. I just want to get an update. And then you mentioned that you might do some more smaller ones. So I know with the large one that I just mentioned, there was sort of this revenue reversal that occurred because you had to kind of repurchase some of the inventory that they had. So You know, is there any risk that we could see something like that with any of these additional conversions that you'll do, that you're planning to do in the future?

Yeah, so the first part of that is we're very pleased with the success we've had in Germany, Austria, and Switzerland for the first six months. I would say it has met slash exceeded our expectations. and very excited about the future in those areas as we are now starting to deliver more sets into the area to enable additional locations and more sales in that location. Regarding the potential for a couple before year-end, they're very small, and I would say it would be a very, very small impact on revenue and is absolutely included in any guidance that we would have provided.

Okay, got it. Thank you.

Thank you, Michael.

Thank you. And we have a question from Sam Brodowski with Twist. Your line is open.

Hey, thanks for taking the questions. Just to start off, it sounds like the firm might be a little bit more aggressive and view M&A as a bit more of a normal part of business going forward. Is that the right way to think about it and If so, can you dig into areas in particular where you're thinking about M&A at this point?

Yeah, good question, Sam. I think we've always been fairly aggressive, at least in terms of our thinking, of acquisition of technologies. Generally speaking, the acquisitions we've done have been of technologies, not necessarily full operating companies. And so we continue to search the marketplace for opportunities where we think we can acquire some technology and some know-how that we could leverage the world's only global selling organization in pediatric orthopedics, leverage our strong brand, and all the other products we have. So we continue to look at technologies, certainly, that would fit within our trauma and limb deformity portfolio, the XFIX portfolio, We also have some interest, and I think we've shared that we had acquired a very unique non-surgical technology a few years ago. And we've been working internally from an R&D standpoint on that technology. And so we continue to look at others that might help bolster that when we're ready to launch it. And then we're always interested in kind of smart growing implants and growing technologies. And so those are areas where we continuously look. I don't know that we have anything here on the horizon that's big. But, yeah, I think the company is going to be aggressive in terms of technologies to fit within the portfolio and allow us to leverage what we've built over the last several years.

Yeah, I agree with that, Dave. And I would just add, you know, we're very excited about this extension with Mighty Oak Medical. The Firefly technology that we've been selling for many years now is a 3D patient-specific guide that really improves the outcome of these severe scoliosis surgeries. And that contract was going to expire here in the end of 2022. and we are very excited about extending that contract through August of 2027 to enable our sales force to have confidence that that product will be available to us and the exclusivity in the children's hospitals in the U.S. would continue on until that 2027 timeframe. So we, I think, are very aggressive, will continue to be very aggressive on the internal R&D front, on the acquisition front where the opportunities arise in technologies, and, you know, where necessary, striking distribution agreements that enable us to have access to technologies that are applicable in our channel.

Great. That's helpful. And then I'll give you one more on AppFX as it regards to patient selection and, in particular, you know, how that's going to apply to the parallel launch, and then how we should think about that potentially being a gating factor into 22, if at all. Thanks for the team questions.

Yeah, so we intend to hold the same rigorous standards with respect to adherence to the indications, the 35 to 60 degree curves that are flexible. and certainly our intent would be through the first wave of commercial launch to ensure that the patients that we're doing Apifix procedures on or customers are using Apifix on adhere to the indication. So I don't necessarily know that that's a gating factor. We want to get great outcomes here, and we know we can get great outcomes if our surgeons follow the indication. We're spending a lot of time both within the 17 facilities that are utilizing the product as well as training the next 10 to 20 about how to best select those patients, as well as how to have a discussion with the family. You know, this is a very new technology. Again, 75 cases done in the U.S. to date. And so you can imagine the discussions that it's requiring pediatric orthopedic surgeons to have with their patients to ensure the patients feel comfortable. And I think that's where we've invested our energy here on surgeon training, and then ensuring that we stay very rigorous with respect to the indication. But I don't think that going forward that will be a major gating factor. I just think it's doing the right thing to ensure that we get the outcomes we want.

Thank you. Our next question comes from David Turgley with JMP Securities. Your line is open. Thank you.

Yeah, hi, this is actually Danny on for Dave. Thanks for taking the question. Just have one quick one for you. So following up on the distributor conversions, you know, International had another quarter of solid growth. But, you know, what really has been driving the ramp in these new conversions in the first half here? Are there any product lines that have particularly stood out to you during the first two quarters? And, you know, you're still early days in the EMEA launch, but how much have orthostatic conversions been a contributor here? Thanks.

Yeah, I think that one of the biggest drivers here is being able to just get these agencies new sets. As Fred mentioned earlier, we've finally gotten a number of sets to the DACA region, Germany, Austria, and Switzerland. And, you know, that has had a substantial impact here in really the first two quarters where it's been an agency shift. So we're seeing growth across the entire portfolio in markets where we have converted to agencies. That said, we are launching the Orthex product in the MEA. It was great to see first cases in the UK and in Germany. We do expect that that will impact us positively in the second half and certainly be a really nice tailwind in 2022. We've also seen in this country, really strong growth with our PMP femur system. If you remember, that's a system that we launched in the United States, and really United States only, a few years ago, and it's vastly becoming the largest product within our trauma and deformity portfolio. And so we've started to do some procedures outside of the United States, both in Germany and the U.K., and we would expect that as we launch that product, really through the back half of this year as well as in 2022, that that will perform well. I think the thought here is that, you know, these markets are having, you know, there's regional fluctuations without question that COVID is impacting those markets. But, you know, once we get into this cadence of making up some backlog outside of the United States, whenever that occurs, and you combine that with some of the new product launches, particularly Orthex, I think we'll set up for some nice tailwinds, most likely in the early part of 2022.

Great. Thank you, guys.

Thanks, Danny.

Thank you. And there's no further questions in the queue. I'd like to turn the call back to David Bailey for any closing remarks.

Well, great. Thank you. I'd like to conclude our call, second quarter earnings call, by thanking everyone for their interest in orthopediatrics and for your support of our cause of helping children throughout the world. We very much look forward to updating you on our future progress and meeting many of you at upcoming investor conferences. Have a great day. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.