OrthoPediatrics Corp.

Good morning and welcome to the Orthopediatrics Corporation third quarter 2023 earnings 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 Tripp Taylor from the Gilmartin Group for a few introductory comments.

Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer, and Fred Height, 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 actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's most recent quarterly report on Form 10-Q, which will be filed with the SEC today. 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 measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure in its earnings release. Please note that the non-GAAP financial measures have limitations of analytical tools and should not be considered in isolation or as substitute for orthopediatrics financials 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 today, November 7th, 2023. 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'd like to turn the call over to David Bailey, President and Chief Executive Officer.

Thanks, Tripp. Good morning, everyone, and thank you for joining us on our third quarter 2023 conference call. As we start all earnings calls, I'd like to begin by highlighting that we helped nearly 22,000 children in the third quarter of 2023, a new record for orthopediatrics. And since inception, we have helped over 692,000 kids. Helping more children remains the best measure of our success. Before I continue, I'd like to acknowledge our 14 OP colleagues in Israel, who regardless of situation, continue to tirelessly support one another and this company through unimaginable time. In the third quarter of 2023, we generated record quarterly revenue of $40 million, representing growth of 14% compared to the third quarter of 2022, and produced a record adjusted EBITDA of $3.6 million. We are proud of the progress we're making, balancing strong revenue growth with improving profitability and continued progress towards achieving cash flow breakeven sooner. Our business continues to grow by taking market share in an environment where children's hospitals' inpatient surgery volumes remain suppressed. As expected, we continue to see incremental staffing and efficiency improvements, yet these factors remain a headwind. During the quarter, we benefited from the diverse nature of our business, as the trauma and deformity in international businesses were very strong, offset by lower growth in scoliosis due to an extremely tough comparable quarter. a decline in international scoliosis revenue due to abnormal ordering patterns from a few large South American distributors, and continued procedural headwinds in a few key U.S. accounts that are easing in Q4. With that said, our October scoliosis performance indicates an extremely positive growth trajectory in Q4 and continued strong performances in T&D and international. We are reiterating our revenue guidance for full year 2023 of $148 to $151 million, representing growth of 21 to 23%. We're raising our full year EBITDA guidance to $4 to $5 million from $3 to $4 million. And we now estimate set deployment of $23 million as we continue to focus on profitability and cash usage. From this rock-solid foundation and continued advancement of our strategy, we expect a similar annual company growth profile in 2024, while we further improve EBITDA and reduce the need for increased set deployment. With a plethora of growth drivers in place, continuing legacy product growth, several new organic product launches, PEGA sales expansion, normalization of international markets, positive long-term Apifix data publication, a newly formed and rapidly expanding specialty bracing business, OPSB, and an early start in digital healthcare, we believe this company is well-positioned for continued success. Importantly, we remain in an extremely strong financial position and are confident that the current balance sheet enables us to execute our long-term strategy without additional equity capital. I would also like to directly address the recent noise resulting from hypothesized market implications from GLP-1 that has impacted the sector's valuations in recent months. Orthopediatrics patients are children, and the conditions we treat are almost entirely acute injuries or congenital conditions. We have not experienced any impact on our current business, nor do we expect any impact to our future market opportunities. Our business is not exposed to downstream GOP impacts. Moving to our revenue segments. In the third quarter of 2023, we generated total trauma and deformity revenue of $28.8 million, representing growth of 21% compared to the prior year period. Revenue growth in the quarter was led by strong performances from Pega Products, Trauma, and OPSB. The quarter saw record Pega product performance with fantastic growth in the U.S. and international growth just beginning. Trauma growth was strong globally, again highlighted by P&P FEMER and cannulated screws, and continued share-taking across the entire portfolio. Sales at Pega remain better than we ever expected, and we anticipate this to persist for a few more months as we deeply penetrate our U.S. accounts with the full Pedeca product portfolio. and complete the transition to our international sales agencies and stocking distribution network, as well as continued relaunch of many of their products which had limited sets deployed. For the first time, international Pega revenue grew significantly in the third quarter, as we have nearly completed all of the distribution transition. We expect this growth to follow the U.S. trajectory and become a major revenue driver internationally in 2024. Beyond the revenue performance, we are excited to have received FDA approval and beta-launched the PMP tibia system, which is a first-of-its-kind pediatric rigid tibial nailing system modeled after our market-leading and largest trauma product, the PMP femur. Initial surgeries have gone extremely well, and several more are scheduled. We expect a full market launch of PMP tibia to start in Q2 of 2024 and continue for many quarters. Throughout 2023, we have seen an increasing number of customers using more of our products as a result of the continued execution of our key account conversion strategy. We have additional new high technology products on the way, and our robust pipeline was strengthened by the Pega acquisition. The T&D business is well positioned to continue to deliver sustainable growth. Further, we believe certain players are placing even less focus on pediatric trauma and limb deformity if not entirely exiting the space in the coming years. This places us in the driver's seat to claim the dominant share position across the next five years. Within the T&D business, our orthopediatrics non-surgical specialty bracing business, or OPSB, continues to perform extremely well. As we mentioned on our Q2 call, we are successfully executing a build aggressively strategy in OPSB. and anticipate it to grow very rapidly in the coming several years. We see many of the same characteristics in the OPSB opportunity that we witnessed when we started OP 17 years ago. There are countless unmet needs and opportunities to innovate, a concentrated customer base who we already service, an opportunity to further support clinical education, and no focused competition. Beyond all of that, it fits with our goal of surrounding our customers with all the products they need to treat children with orthopedic conditions, and it builds further brand loyalty across our entire surgical and non-surgical portfolio. Since the acquisition of MDO in April of 2022, we have been bombarded with new product ideas and partnership opportunities and opportunities for expansion, which we continue to prioritize as part of our strategy. For example, In early Q3, we completed the asset acquisition of Rhino Orthopedics and the Cruiser Brace, a product developed and popularized by legendary pediatric orthopedic surgeons, Drs. Dennis Wenger and Scott Mubarak at Rady Children's Hospital in San Diego. The Cruiser is the first of many new products designed to treat hip disorders in infants and children. Earlier this month, We executed an exclusive distribution agreement with Aura Medical and expect to launch their new product called the Levity in the next few weeks. The Levity device supports patients with cerebral palsy, allowing a one-of-a-kind, hands-free experience that reinforces muscles for optimal walking rehabilitation. Internally, organic product development, both within the MDO team in Iowa and with the orthopediatrics team in Warsaw, has been very productive. After releasing the MDO Move Bar earlier in the second quarter, we recently announced the launch of the Ponseti Plus clubfoot brace and anticipate the launch of Ponseti Lite in the coming weeks. Further, the much-anticipated DF2 femur fracture brace was recently launched through a limited release, and our supplier is currently scaling production capabilities for a full global release in early 2024. Beyond these product launches and partnerships, there will be several more. supporting our thesis that we can build a more capital-efficient $100 million business in this space in the coming years. As we have said previously, OPSB, along with other key products such as Apifix and Orthex, produce very strong returns on capital by requiring low or no confined inventory obligation while generating high revenue. As we grow OPSB, we will see a diminishing need for capital deployment while we bolster our growth prospects. Moving to the scoliosis business. In the third quarter of 2023, we generated revenue of $10.3 million, representing global growth of 3% compared to the prior year period, driven by a continuation of our strategy of promoting the combined strength of Apifix, Response, and 7D placement. Growth in the quarter was lower than normal due to difficult international and domestic comps of 33% and 38% respectively. irregular ordering patterns from a few large international stocking distributors in South America, and continued procedural volume headwinds in a few key U.S. accounts. U.S. scoliosis revenue grew 9%, driven by strong response and Apifix demand and the onboarding of several new first-time users of both products. Surgery schedules strengthened late in the third quarter and has continued into the fourth quarter. Despite difficult third-quarter domestic comps for Apifix, Usage grew both in new users and increased amongst several previous users, but was offset by an ongoing major slowdown from three of our largest sites as those surgeons transitioned to new practice locations and only started performing a few cases in Q3. Based on scheduling visibility, we expect this to largely reverse in the fourth quarter and throughout 2024. Further recent positive publications related to the longer-term performance of the Apifix device are driving more and more surgeons to seek access to Apifix, and we are seeing an increased rate of IRB approval requests from new potential users. Additionally, we expect to see published two-year data from the U.S. registry in the coming quarter. Moving on to international. In the third quarter of 2023, we generated international revenue of $10.6 million compared to $8.4 million the prior year period, delivering 26% growth, led by extremely strong performance with our legacy T&D product, offset by slow scoliosis sales to stocking distributors in South America. We are pleased to see a continuation of the rebound in our international business in the third quarter and expect it to continue into the fourth quarter in 2024. International agency market sales were particularly strong both in trauma and deformity and scoliosis, signaling a normalizing surgical environment. Progress in our German direct sales model continues to track favorably. Additionally, sales of PEGA products materially contributed to international revenue growth in the third quarter as we completed most of the final stocking distributor and agency transition. We believe third quarter growth is just the start for PEGA products internationally and expect to see similar results to that of the U.S. and believes this will be a major tailwind to international growth in the fourth quarter and in 2024. That brings us to surgeon training and education. In the third quarter, the company had strong attendance at several premier surgeon training events. Overall, throughout the quarter, we conducted 70 training sessions and educational programs reaching over 1,200 healthcare professionals. In August, we were a lead supporter of the Baltimore Limb Deformity Conference, which featured five days interactive hands-on labs on complex limb reconstruction using the Orthex external fixation system. Then in September, Orthopediatrics continued its gold-level sponsorship of the Scoliosis Research Society meeting, which took place in Seattle. There, we highlighted the Apifix technology. In October, we announced our strategic partnership with Children's National Hospital under the Alliance for Pediatric Device Innovation. to advance the development and commercialization of medical devices designed for children. OP will serve as the Alliance's strategic advisor and role model for device innovators whose primary focus is children. This coalition of thought leaders will advance all aspects of pediatric medicine for years to come and provide orthopediatrics with exposure to exciting opportunities and technologies beyond trauma, limb deformity, and scoliosis. With that, I'd like to turn the call over to Fred to provide more details on our financial results. Fred?

Thanks, Dave. Our third quarter 2023 worldwide revenue of $40.0 million is a new record for us and increased 14.4% compared to the third quarter of 2022. Growth in the quarter was driven primarily by record PEGA performance, strong global trauma growth, as well as continued share gains across our legacy portfolio and growth of our non-surgical specialty bracing business. U.S. revenue was $29.4 million, a 10.6% increase from the third quarter of 2022. Growth in the quarter was primarily driven by our trauma and deformity product lines, including our non-surgical specialty bracing business. We generated total international revenue of $10.6 million, representing growth of 26.2% compared to the third quarter of 2022. Growth in the quarter was driven by strong performance with our T&D products offset by slower scoliosis sales due to the timing of orders from stocking distributors in South America. In the third quarter of 2023, trauma and deformity global revenue of $28.8 million increased 20.6 percent compared to the prior year period growth in the quarter was driven primarily by the share gains across our entire portfolio with strong contributions from pega trauma and opsb in the third quarter of 2023 scoliosis revenue of 10.3 million dollars increased 3.3 percent compared to the prior year period Growth was primarily driven by the continuation of our strategy of the combined strength of Appifix, Response, and 70 placements in the U.S., offset by international weakness driven by timing of set sales to our South American stock distributors. Finally, sports medicine other revenue in the third quarter of 2023 was $0.9 million, which decreased 20% compared to the prior year period. Turning to set deployment, $3.9 million of sets were consigned in the third quarter of 2023 compared to $6.4 million in the third quarter of 2022. Year to date, we have deployed $16.1 million compared to $13.8 million in the same period last year. The increase was driven by significant new product development deployments, significant Pega deployment, as well as multiple consigned 70 units. Touching briefly on a few key metrics, for the third quarter of 2023, gross profit margin was 77.4% compared to 74.1% for the third quarter of 2022. The improvement was primarily driven by timing of favorable purchase price variances, as well as fewer scoliosis set sales to South America. Total operating expenses increased $2.6 million, or 8%, to $35.5 million in the third quarter of 2023. The increase was primarily driven by the addition of incremental personnel related to expenses required to support the ongoing growth of the company, as well as increased sales and marketing expenses driven by the increase in revenue. Sales and marketing expenses increased $1.7 million or 14.0% to $13.6 million in the third quarter of 2023. The increase was driven primarily by increased sales commission expenses. General and administrative expenses increased $3.4 million or 22% to $18.5 million in the third quarter of 2023. The increase was driven primarily by an increase in non-cash G&A expenses, including depreciation, amortization, and stock-based compensation, as well as additional personnel related to support the growth of the business. In the third quarter of 2023, we recorded a $1.0 million charge to operations related to intangible impairment as compared to $3.6 million charge in the third quarter of 2022. These charges were primarily driven by the decrease in forecasted revenue that was lower compared to the same period in the prior year. Research and development expenses increased $0.2 million, or 8%, to $2.4 million in the third quarter of 2023, driven by payments to third-party providers. total other income was 0.8 million dollars for the third quarter of 2023 compared to 1.7 million dollars of expense for the same period last year in the third quarter of 2022 we realized a 23.0 million dollar fair value adjustment benefit which was driven by the decrease in forecasted revenue that was lower in comparison to the same period last year We did not realize an adjustment for the fair value in the third quarter of 2023. We reported adjusted EBITDA income of $3.6 million in the third quarter of 2023, which is a new record for us and compares to $1.9 million for the third quarter of 2022. This increase was driven by incremental revenue combined with improved gross margin and cost controls across the organization. We ended the third quarter with $84 million in cash, short-term investments, and restricted cash. We continue to maintain a strong cash position, as well as the $50 million available to us on our line of credit. Overall, we are well capitalized to continue to execute on our strategy. Given the current economic environment, our strong balance sheet, positive adjusted EBITDA, And line of sight to cash flow break even places us in a position of tremendous strength. Turning to guidance, we are reiterating our expectations for full year 2023 revenue to be in the range of $148 to $151 million, representing year-over-year growth of 21 to 23%. Additionally, we now expect to generate between $4 and $5 million of adjusted EBITDA in 2023, up from our previous guidance of $3 to $4 million. Lastly, we now expect around $23 million of new set deployment in 2023, representing a year-over-year annual growth of 24%. and represents our continued focus on driving the business to cash flow break even sooner rather than later. I'll now turn the call back over to Dave for closing remarks.

Thanks, Fred. As we look back so far on 2023, we are proud of all that we've achieved and are excited about the growing opportunities in front of us next year. We expect positive trends in the business to continue. including robust top-line revenue growth and continued profitability growth as we move towards cash flow break-even even sooner than anticipated. Much of our predicted strength in the upcoming period lies with our recent product portfolio expansion, Apifix, Orthex, and the specialty bracing business that are all producing higher return on invested capital and require less set deployment to drive profitable revenue growth. All of our long-term plans including profitability growth, are supported by our robust balance sheet, strong cash position, and access to debt. The future is bright for orthopediatrics, and we have never been more excited about what lies ahead. In closing, I'd like to thank our surgeon partners, my OP associates, and all of the innovators in pediatric healthcare for standing together to help kids. Operator, let's open the call for Q&A.

Thank you. And as a reminder, to ask a question, simply press star 11. One moment while we compile the Q&A roster. Our first question is from Matthew O'Brien with Piper Sandler. Please proceed.

Good morning. Thanks for taking the questions.

Dave, maybe just, first of all, clarification. Just Sandler growth profile on the top line at 24, that's assuming 20%. And then the real question there is, is this commentary about people exiting the space Can you just give a little bit more color on that? Is it some of the bigger folks that you're hearing specifically that are potentially exiting the space, and how big of an opportunity could that be?

Yeah. Thanks, Matt. Yeah, my comments, I think our comments on growth are growth trajectory similar to what we saw in 2023 as we think about 2024. Obviously, we're not providing guidance at the moment, but yeah, you're right in that kind of range. You know, what we have seen historically, particularly since the advent of EU MDR, is more and more companies that are, you know, have either come to us to potentially acquire some of their smaller pediatric devices because they want to take those to the MDR. And so I guess from my perspective, when you hear companies talking about different asset classes or different product lines that they're not heavily focused on, you know, we obviously know that there's very few people, if any other than us, focused in pediatric trauma, limb deformity in particular. And so I guess our forward thinking is that there will be less competitors coming out with devices, particularly in our trauma space and maybe to a lesser degree in our limb deformity space. And I think that just hastens our position in terms of taking a dominant market share position going forward. Does that make sense? Makes total sense.

Appreciate that. And then question for Fred, the profitability number in the quarter was fantastic. I know it's a seasonally strong quarter for you guys, but the gross margin number specifically was really, really strong. Can you talk about that and then how we think about the the EBITDA progression going forward, you know, because you're up about $4 million this year versus last year. I don't think we're going to get that kind of level of improvement next year, but just maybe talk a little bit about that and that free cash flow break even sooner. There's a little bit more color you can provide there specifically. Thanks. Yeah, absolutely. Thanks, Matt. Very pleased, obviously, with the gross margin in the quarter. Typically, the higher volume does deliver higher gross margin for us, which we saw here in the third quarter. Highest revenue the company has ever delivered. which is our third quarter is always our strongest quarter within the year. And it was nice to see that show up in the gross margin line as well as the adjusted EBITDA line. So very pleased with the profitability. We still think for the year it's in the 76% range gross margin, and that's probably what we'll anticipate next year as well, 75% to 76% higher in the third quarter when the volume is the highest. The adjusted EBITDA very strong in the quarter and enabled us to increase the full year guidance on adjusted EBITDA up to that $4 to $5 million this year compared to positive 0.2 last year. And I would guess we would anticipate seeing some similar type of improvement next year. Again, number one goal is growing the top line. Secondary goal is to improve year over year adjusted EBITDA, not maximize it, but to show a nice improvement. And the third is to get to that cash flow break even sooner. So that adjusted EBITDA growing, less cash on sets gets us to that cash flow break even, as we said, sooner than we would have anticipated even 12 or 18 months ago.

Got it.

Thank you so much.

Thank you. One moment for our next question, please. And it comes from the line of Rick Weiss with Stifel. Please proceed.

Good morning to you both. Maybe just to start, you could talk a little bit more, Dave, about the pediatric hospital environment. Just, I mean, I heard several things about volume trends for specific products. If I heard you correctly, you start improve or improve as you're exiting the quarter, as you're heading into the fourth quarter. But did... Have you seen steady month-to-month improvement? Are you seeing staffing recovery? How far away from normal are you? When do we get back to, quote, normal, usual across the board? A lot in there, but I just wanted to see if you could expand on all that.

You bet. Thanks, Rick. Yeah, I mean, certainly this is still a headwind and we're feeling it. We're not, as you know, our patients are an inpatient. They're not going to outpatient surgery centers where I think the environment is better. So this remains a headwind for us. I think we are seeing, as we've said in the past, we're seeing hospitals higher. Obviously, staff's coming together, efficiency is improving. I think we probably haven't come off our position in thinking that maybe this is a mid-next year type of thing when we get back to normal. And I would just say that it's incremental, Rick. I mean, we're seeing kind of month to month, quarter to quarter, the lightening of this. We'd like to see some hospitals that, you know, we're running more rooms get back to running all their rooms. I'm not sure that we're seeing that. And so that depresses some of the volume that we see in our more complex procedures like scoliosis. But it is improving. It's hard to give you a specific percentage, but I think we're on a track. to certainly within the next 12 months or so getting back to a pretty normal environment. Gotcha.

And I was hoping you could, you touched on the scoliosis pressures and some of the factors, you know, that restrain performance there. But maybe you can help us, maybe you could sort of tie a bow on it, so to speak, and help us understand why you are so optimistic and so confident that, that along with the basically excellent performance elsewhere, that Scully is going to be better in the fourth quarter. And you feel equally, I hope, I assume constructive about next year. It's, is it the new products? Is it the, the, the, those three large sites getting back up? I mean, what are the biggest, factors and your current confidence in improvement there. Thank you.

Yeah, so one of the things I think gives me a lot of confidence on the Scully side in the United States, you know, 9% growth, you know, a little lower than we would have thought. But, you know, when we look at total new users, we actually added substantial volumes of new users on the Fusion side as well as the Apifix side. which is kind of odd, obviously, to see our new user base go in a way that it was really positive, but just in general to see volume slow or be a little bit lower than we thought. When we isolate where that volume comes from, again, this is still a relatively small business at $10-plus million and a quarter, and so we remain impacted by three to five accounts that we haven't lost any share, but volumes are off. And obviously you feel that pretty substantially in a quarter in the United States where we, you know, the comparable was a 38% growth number previous year. So, you know, we don't have a lot of those comparables out there that are at that rate. And so I feel pretty good about where we're going. I also think, well, we have a line of sight, obviously, into Q4. And while December is a big month for us, obviously it's the third largest month we have in kind of the second SCOLE season. we have gotten off to a really, really nice start. And so SCOLE has been choppy. We've said that for a while, but it's really nice to see here that, you know, we got a strong line of sight into Q4 and with the new users. And some of those surgeons that we said have moved accounts started to pick up, and that's why, you know, in the script we talk about scheduling improving in the back part of Q3, and we expect that to start to become a bit of a tailwind for us as those surgeons have now gotten into their new locations and have started scheduling cases.

Yeah, I would add that in addition to that, Rick, on the OUS side, OUS side, actually the spine was negative growth and that was driven because we had 35% growth internationally in the third quarter of last year, driven by set sales to South America that did not repeat here in the third quarter of this year. And again, we have line aside into what that looks like for the fourth quarter, which is much improved over the third quarter revenue. So feeling confident in both the fourth quarter and next year on that side of the business as well. Oh, that's good perspective.

And just I'm going to ask one more this morning. I mean, the cash flow question, obviously, it's great to see the positive progress there. You're You're in better shape than I expected. You've said, Fred, that you expect cash flow break-even. My memory may be wrong, but I feel like you've said cash flow break-even within the next five years is what I remember you saying last. You want to update that? It seems like you're making better progress more quickly. So is it within the next four years or three or two? I'll let you update it. Thank you.

Absolutely, Rick. Yes, you are right. Historically, we would have said in the next five years. We're thinking now it's probably closer to that three-year mark as opposed to five years based on how we see things, the improvement in the addressed EBITDA, and the reduction in cash usage of the business. So versus 12 or 18 months ago, it's probably a couple years sooner than what we were thinking then. Excellent. Thank you. Thanks, Rick.

Thank you. One moment for our next question, please. It comes from the line of Ryan Zimmerman with BTIG. Please proceed.

Hey, thanks for taking the questions, guys. I wanted to just ask about kind of the state of the scoliosis market in the U.S. With some of the disruption and consolidation we've seen, you know, broader in spine, I'm wondering if, Dave, you want to just you know, if you can speak to kind of what you're seeing from surgeons' interest in ApiFix, especially in the context of, you know, maybe some of the other options, you know, either being hindered or less focused put on, you know, some of the specialized orthopedic products and what that, you know, may do for you guys from a user's perspective as we think about 2024. Yeah. Thanks, Ron.

Good question. So, we really like what we're seeing with Apifix in this quarter at extremely tough comp. I mean, I think we had last year a surgeon that did six cases in a given day with Apifix, and that was one of the surgeons that's moved practice locations. So, it's good to see it grow despite a really tough comp. But, I mean, we are getting a number of surgeons in historically, maybe a few years ago, who would have been sitting on the sidelines on the Apifix front. moving towards IRB approval. And those IRB approvals are happening with more frequency, and we're getting through them faster, which is encouraging. So I think that the likelihood that the way Apifix develops over the course of the next several quarters is that all of our pediatric surgeons who take care of scoliosis are certainly well-trained to place screws in the back of the spine. and I think feel very comfortable there. And so this is an opportunity for literally every surgeon who uses scoliosis products, who takes care of AIS, to be trained on the Apifix device and have that within their kind of armamentarium when they need to take care of patients with non-fusion patients with scoliosis. And I think that's a little different than what we see with some of the other solutions, and I think we're going to continue to benefit by being able to have a lot more potential users globally, and maybe fewer sites that are doing 20, 30 a year, but most every surgeon who takes care of pediatric spine really having APOFIX available to them. And I also think as we start to see better data, and we had some nice data that came out of Germany here recently that I think is helping us gain momentum, helping surgeons understand where to use Apifix in their practice and what the likely result of Apifix procedures are going to be. I think that's driving interest in the product. And so while we've said that we don't expect this necessarily to be a hockey stick, I do expect this thing to continue to get more and more traction. And obviously, the combination of Apifix is pulling us into ORs that we weren't in otherwise. So when we say we added new Fusion users in this quarter, a lot of that is because of their association with Apifix or because of their association with 7D. So really pleased to see it. Again, probably not a hockey stick in the next few quarters. but certainly up and to the right with Apple Fix right now as the data gets better and we onboard more and more users. Got it.

Okay. And then Pega sounds like, you know, going really well, you know, was set constrained. You talked to me a little bit about kind of this opportunity over the coming months to, you know, get more sets out there for Pega. Just talk to us about kind of, you know, from a capacity standpoint or kind of, you know, where you're at, in this development and kind of how you think about the broader or maybe longer term opportunity for that Pega business now that it's fully integrated and part of OP?

Yeah, so we have been very successful in getting sets out to the field, particularly in the United States. We are now that the agency transitions have occurred outside of the United States. There's a great opportunity for us to start deploying inventory into some of our big agency markets. Germany in particular, UK, some of these large markets. And Ryan, our expectation is that what we would see internationally in the next few years is what we have seen here in the United States over the last few years, where over the last five quarters, where almost instantly you get an uptick in revenue because we have such strong representation in But then as you apply inventory and get products to the field that, frankly, a lot of these surgeons haven't been exposed to in the past, you see increased share taking there and increased revenue. So really, really like kind of the trajectory of this now that we've got the international business integrated and expect to see really strong growth. Here in the United States, I think this continues to grow for us for the next several years. I mean, what we are starting to see is some of the products that maybe were a little further down in the Pega portfolio. The Slim Nail, for example, is another, probably their number two product when we did the acquisition. That is becoming very rapidly adopted for a number of different procedures within the indication profile. And I think that is driving really substantial growth. And we expect to see that continue for the next few years. So, in short, we expect this growth profile, while maybe it's not going to double every year, we do expect this growth profile to be substantially higher than, you know, 20%, 25% year over year for the next few years. And, you know, that's one of the reasons why we have such confidence going into 2024.

Got it. Very helpful. Thank you.

Thank you. One moment for our next question, please. It's from the line of Samuel Brodowski with Truist Securities. Please proceed.

Hey, thanks for taking the question. The first one I'll ask is just sort of what the implications for 4Q, and it's a pretty wide range. Can you just give us some levers to what you think could drive it to the high end or the low end of the full year range in 4Q? Sure.

Yeah, absolutely, Sam. So as Dave mentioned earlier, December is our third largest month of the year, particularly on the scoliosis and the severe deformity correction, those big surgeries. And it's always a wild card, right? We never know exactly how it's going to come in. So that does explain some of the variance in the range. depending on how December comes in. The other is RSV. As you recall, RSV was very prevalent last year at this time. It has taken an uptick from where it was in the summer. And so that's always a wild card on what that is going to do here in the next 60 days. So those are two of the main reasons the range is so wide, is really the environment more so than anything internal.

Got it.

And then just as we think about RSV, there was a bit of an uptick sort of towards the end of 3Q. Did that impact the quarter at all, or was that more typical levels of virus?

Yeah, I would say it was typical levels. It was there, right? It wasn't nonexistent like it was in the summertime, but I wouldn't say that it had a major impact negatively on the business in the third quarter.

Okay. And shifting to MDO, you listed them all out, really, really nice new product cadence here. Is that, I mean, I would assume we're probably going to take a step back from that going forward, but how should we think about the new product cadence there and what's required to drive that towards the $100 million business into the future?

Yeah, good question. So, Like I said, we were really excited. When we acquired MD Orthopedics, part of the reason we did that was to essentially set a platform for what is now the OPSB business or the orthopediatric specialty bracing business. And in addition to the team at MDO really driving top line and profitability out of that business in Iowa, it has spawned just a number of inventors, surgeons, small companies that have come to us with ideas. And so we have a very robust pipeline of products that we expect to launch over the course of the next several years. We also have a really robust pipeline of potential partnerships and even some small companies that we could acquire over the course of the next few years. So it just is very reminiscent, Sam, of what we all saw when we were here 17 years ago starting this business, the surgical side, where Huge unmet need, a customer base that is really looking for a partner in the space, very limited competition in the space. And, you know, a number of niche products, right? A lot of these products aren't $100 million standalone products. But, you know, that's why I think there's fairly limited competition. And it's an opportunity for us to connect our brand from, you know, the majority of what our customer does and trying to avoid taking a kid to the operating room all the way through the operating room. And, you know, it helps us execute this strategy of surrounding the pediatric orthopedic surgeon with all the products they need to help kids. And so, so far, we're very pleased with what we see. Obviously, it's growing very rapidly. And there's just no shortage of opportunities there for us in the future. R&D cycle is slower or is faster. The cost associated with those R&D cycle is less. Profitability is really strong, and we like the capital usage, right? It doesn't take a lot of capital to deploy these things. We're not deploying, you know, consigned sets in the field. So there's just a lot to be excited about, and I think, you know, we stand behind this, that if we can execute a build aggressively strategy here over the course of the next few years, that this will be a really large lever for growth and profitability and ultimately cash generation.

Thank you.

Does that answer your question?

Yeah, thank you for taking the questions.

All right, one moment for our next question, please. All right, and it comes from the line of Mike Mattson with Needham & Company. Please proceed.

Hey, guys. This is Josephon from Mike. I guess the first one, I may have missed it on the call, but did you guys mention any plans, I guess, in 2024 for... converting, you know, international stocking distributors to agents?

No, we did not. We did not do, we did not talk about that for 23 or 24, to be honest with you. So the last time we've converted one of those is a couple years ago with Germany. But there are no plans for any major conversions on the international side. It's just continuing to grow the ones that we have right now.

Yeah, OK, perfect. And then maybe could we get just an update on 7D? Maybe how big is the installed base now?

Yeah, so a couple more units. I believe a couple more units were placed in the quarter installed base. Fred, can you help me here? Installed base. Well, we have about 15 units or so.

Is that right? Yeah, probably a little less than that right now. Between sold and placed, it's probably in that range. But consigned, it's probably 10-ish, 8 to 10 units.

Yeah.

And I think at this stage, what units aren't officially placed or consigned are currently in some form of evaluation. So we continue to see new users in the process of evaluating 7D. and feel really good. We have a deep pipeline right now of locations where we expect 7D to be placed. It's just as we said in the past, these things, even the consignment of these things take some time, but really pleased with what we're seeing and the technology is fantastic. It's ideal for pediatric scoliosis and it's certainly something that we think is going to impact us positively in 2024, especially as you think about the units that were placed in 2023 on earnouts.

Okay, great. Thanks very much. Yeah, we'll just do those two quick questions. We appreciate you guys' comments on the quarter.

You bet. Thank you.

Thank you. And with that, we thank you all who participated in the Q&A. I will turn it back to David Bailey for final remarks.

Thank you. Well, once again, thank you, everybody, for joining us on the call. Fred and I are always available, and so we look forward to seeing you at some upcoming conferences or on conference calls. Thank you.

Thank you all for joining. You may now disconnect.