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spk12: Greetings and welcome to the New Basis Incorporated Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Suzanne Hatcher, Vice President of Internal and External Affairs. Thank you. You may begin.
spk09: Thank you. Welcome to NuVasive's third quarter 2020 earnings call. The company's earnings release, which we issued earlier this afternoon, is posted on our website and has been filed on Form 8K with the Securities and Exchange Commission. We have also posted supplemental financial information on the IR website to accompany our discussion. We're going to begin with prepared remarks from our CEO, Chris Berry, and CFO, Matt Harbaugh. Then we'll open it up for Q&A. I would like to remind you the discussions during today's call will include forward-looking statements, which are based on current expectations and involve risks and uncertainties, assumptions, and other factors which, if they do not materialize or prove to be correct, could cause the basis results to differ materially from those expressed or implied by such forward-looking statements. In particular, there is significant uncertainty around the duration and the impact of COVID-19 pandemic on the company's business, operations, and financials. The COVID-19 pandemic continues to evolve, and it is important to note that our commentary reflects our best estimates as of today's date. Additional risks and uncertainties that may affect future results are described in Nuvasiv's news releases and periodic filings with the Securities and Exchange Commission. Nuvasiv assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. This call will also include a discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures. These measures include our cost of goods sold, gross margin, selling general and administrative expenses, research and development expenses, operating margin, non-GAAP earnings per share, pre-cash flow, and EBITDA. Reconciliation is the most directly comparable GAAP financial measures may be found in today's news release and the supplementary financial information, which are accessible from the investor relations section of NewBase's website. With that, I would like to turn the call over to Chris.
spk19: Thank you, Suzanne. Good afternoon, everyone, and thank you for joining us. I hope everyone is well and remaining healthy during these times. In the third quarter, we continue to make progress on our business, financial, and operational strategies while keeping safety of invasive employees and customers a top priority. Over the next few minutes, I will discuss our third quarter performance and market trends that led to the company's return to net sales growth year over year. Then Matt will provide details on Q3 financial results, the company's current cash position, and share initial thoughts on our fourth quarter outlook. NuVasive experienced a faster-than-expected recovery from the impact of COVID-19, with net sales of approximately $295 million, representing a growth of 1.5% on a reported basis and 1.2% on a constant currency basis from prior years. These results were primarily driven by a strong international performance, along with several spinal hardware product lines growing at high single digits or better. Offsetting this growth is the clinical service businesses and certain legacy products that declined year over year. Let me provide some additional commentary on quarterly trends. As we track the recovery throughout Q3, month-to-month case volumes and results were relatively consistent. indicating that market volatility has likely flattened. While these trends are encouraging, the market recovery still lacks uniformity, with certain U.S. regions and across the globe. Particular to the invasive U.S. footprint, the Northeast and Southeast regions reached a steadier state more quickly, with others lagging behind. Centrical case volumes in key international markets accelerated, like Japan and Germany and certain regions in the E.U., while others like the UK, Spain, and certain countries in Latin America continue to recover at a much slower rate due to ongoing local COVID-19 impacts. Also throughout the quarter, our clinical professional development team continued to pivot on how we deliver surgeon training to our current and new surgeon partners. Early in the pandemic, we developed a suite of online training resources, and over the last quarter, started to ramp up regional and localized in-person training labs closer to surgeons due to ongoing COVID-19 travel and safety concerns. In the third quarter, the CPD and commercial teams completed about 30% more remote labs than in Q2. In addition, in-person training in our Surgeon Experience Center has increased during the past quarter. And although we have not yet returned to pre-COVID levels, we are seeing steady training events on a weekly basis. In addition, we are moving forward with our commitment to further surgeon development and clinical education with the planned opening of our East Coast Experience Center next year. Surgeons are excited about this new opportunity as it will be located near major transportation hubs, facilitating convenient access for those traveling from domestic and international markets. The team is constantly working with surgeons to best meet their training needs, and they've done a great job given the circumstances over the past year. I'd like to share an update on the Pulse system and Pulse robotics development, as well as the company's innovation roadmap. The engineering and development teams have made significant progress on Pulse, and we still anticipate launching the platform next summer with revenue to be recognized in the back half of 2021. I'm pleased with the team's accomplishments over the last quarter, including the successful completion of the key technical milestones for the hardware and software components. Overall, the platform development is essentially complete. We have now transitioned to integrating testing of the technologies, including neuromonitoring, alignment assessment, patient-specific rod bending, navigation, and our proprietary radiation reduction application, LESRAE. We continue to believe that an integrated system that combines multiple technologies to both meet and advance clinical needs, but also advance and enhance workflow efficiencies will ultimately win in the market. And we are more confident than ever in our enabling technology strategy. Another accomplishment over the last quarter has been surgeons resuming weekly hands-on cadaveric labs of the Pulse platform to validate the integrated technologies and help enhance surgical workflows. Feedback on the technology's enhancements has been very positive, with surgeons citing that it's a one-of-a-kind platform, categorically advantaged over what's on the market today, with the navigation component exceeding their expectations. As previously communicated, we need to file a submission with the FDA, given some of the recent hardware-level updates. While we've been working on the new FDA submission, we also have been focused on dual-track work on our CE-Mark submission, which creates potential for a simultaneous launch of the Pulse platform. We'd originally planned for a phase launch, but our current timeline provides the opportunity for a broader launch. With Pulse development now largely completed and the platform in surge in testing, resources have shifted back to developing Pulse robotics in parallel with Pulse. We've hired several robotic engineers, built a key development leadership position, and further built internal capabilities to advance Nuvasiv's robotic program. Our timeline expectations for first in human use for Pulse Robotics in 2022 remains unchanged. It can't be overstated that focusing on a successful launch of the Pulse platform followed with an add-on of Pulse Robotics application is key to our long-term enabling technology strategy. We believe the value proposition of an integrated platform proceduralizing spine surgery with safer, more predictable outcomes with the robotic capability resonates more than ever with surgeons and hospitals. As we execute on our enabling technology roadmap and further proliferate the benefits of less invasive surgery, there are also several significant technologies we plan to launch by year end. First and foremost is the launch of our new cervical portfolio branded C360. The C stands for cervical and 360 refers to the comprehensive procedurally integrated solutions to treat cervical, degeneration, trauma, and deformity. The C360 portfolio includes several new products with highly differentiated features and integrates best-in-class access, implants, anterior and posterior fixation systems, enabling technologies, and biologic materials into a procedural solution for cervical spine. A key technology set to launch in December is an anterior cervical plate system, featuring the thinnest plate currently on the market and designed to help reduce common postoperative complications. In 2021, we plan to launch a posterior cervical system with new instrumentation and implant options that seamlessly integrate with our market-leading Reliant Thoracolumbar System. This includes Reliant Cervical which will round out the C360 portfolio and feature similar design principles of the current reliant system to provide a complete posterior spine fixation solution. With these additions to our portfolio, we believe our complex cervical spine surgery solutions will be the most comprehensive on the market. With a global cervical market opportunity at approximately $2.6 billion and the basis current share in the low single digits, there is a tremendous opportunity for growth ahead. This new full line of cervical products also demonstrates New Basics' ongoing commitment to being a surgeon partner of choice in cervical and execution against our five-year strategy. In addition to the new cervical systems, we are furthering our advanced material science portfolio with the launch of Coher X-Lift next month, the first FDA-cleared porous peak implant that will be brought to market for use in X-Lift. In conjunction, the company will introduce the Cohere EXLIF AMS plate, which is a low-profile anti-migration plate that allows for up to two points of fixation in EXLIF surgeries and rounds out the advanced material science portfolio. Recent clinical research studies have been completed on porous peak antibodies, which demonstrate the efficacy of this first-of-its-kind technology. Further preclinical studies have shown that porous peak technology improved cellular response with three times the integration strength of smooth or titanium coated PEEP technology, as well as durability, imaging capabilities, and stiffness. Cohere XLIP is yet another example of Nuvasiv combining its expertise in lateral implant design with the clinically validated porous surface technology. Lastly, As the leader in less invasive lateral spine surgery and focused on procedural techniques that help improve patient outcomes, Nuvasiv has been pioneering single-position procedures in both lateral and prone patient positioning for many years. Our global KOL team started performing excellent prone cases in early 2010, and we continue to partner with our KOLs to further enhance the safety profile and reproducibility of this procedure. NuVasive is uniquely positioned to be able to offer comprehensive single-position surgery for all levels, patient anatomy and pathology, in addition to developing a robust education framework to apply these techniques to maximize both surgeon and patient benefits. Regardless of which single-position approach and procedures surgeons deploy, XLIF, X360, XLIF-prone, or TL-posterior procedures, NuVasive is well-positioned to continue to lead in the lateral surgery market. As I wrap up my formal remarks, I'd like to emphasize that I'm encouraged by the faster recovery in the market and the more stable spine environment over the last several months. Although it remains unclear when pre-COVID case volumes fully return, especially as we face a recent global resurgence of coronavirus, leading to some governments reimposing lockdowns and healthcare facility restrictions, the management team is committed to executing our five-year strategic plan. We continue to maintain the same level of R&D investment we budgeted for at the beginning of the year and are excited to launch some game-changing technology in cervical and our AMS portfolio over the next months. With this ongoing commitment to innovation in 2021, we have approximately 20 new alpha and commercial launches planned to support our position as the innovator in spine. These new technologies directly align with our leveraging our leadership position in less invasive and lateral surgery to drive increased share investing in penetrating favorable open markets and procedurally integrating with enabling technologies in less invasive and open surgery. We are making solid headway on many commercial and operational initiatives while maintaining rigor and discipline on expense management throughout the organization. I'm confident in our long-term plan, and we continue to invest in key growth drivers of the company to create and drive shareholder value. Thank you, and I'd like to turn the call over to Matt to discuss the company's financials.
spk17: Thanks, Chris, and good afternoon, everyone. Before we get started, let me remind you that many of the financial measures covered in today's call are on a non-GAAP basis unless noted otherwise. Please refer to today's earnings release as well as the supplemental financial information on www.nuvasiv.com for further information regarding the non-GAAP reconciliation provided. For the third quarter 2020, net sales were $295.3 million, up 1.5% year-over-year as reported, and 1.2% on a constant currency basis. Overall, we saw a rapid recovery from COVID-19 impact in the quarter, with the majority of our product lines returning to growth, combined with the international business performing well. Now let me provide some details on our business line results. U.S. final hardware net sales increased 0.8% year-over-year to $161.2 million. As case volumes returned within the quarter, we saw a more normal mixture of procedures driving results. Thoracolumbar procedures grew in the low single digits, driven primarily by the expandable implant portfolio, the launch of modulus TLIF-A and TLIF-O, and fixation products. The pediatric deformity portfolio performed at pre-COVID-19 levels as surgeons worked through a backlog of cases. Our cervical portfolio offset this performance with a low single-digit decline due to the legacy product line within ACDF, despite growing momentum from cervical alpha launches. Innovation remains a key pillar for the company, with contributions from alpha product launches across our various product portfolios, including lateral, cervical, and posterior procedures. Pricing pressure this quarter was negative 1.5% in line with what we have seen historically. Net sales from U.S. surgical support came in at $69.5 million, a 3.4% decline over prior year. The decline was primarily related to the impact of new invasive clinical services, stronger billings and collections in the prior year as expected. This was partially offset by growth in interoperative monitoring disposable products due to an increase in thoracolumbar case volumes in the quarter. Turning to international, Net sales were $64.6 million for the third quarter, increasing 9.6% year-over-year as reported and 7.8% year-over-year on a constant currency basis. Results were driven by strong growth contributions from Asia Pacific, and in particular, Japan, where we have experienced less impact from COVID-19 overall. Japan also benefited from the recently launched cervical laminoplasty plate, specifically designed to strengthen our cervical offering in this local market. In Europe, we saw mixed results. While Northern Europe had solid quarterly performance, we did see declines in the UK and Spain driven by COVID-19 impact. In general, Latin America also experienced declines driven by COVID-19. Turning to the rest of the income statement, gross margin for the third quarter was 71.3%. a decrease of 220 basis points year over year. This decline was driven by increased expired and obsolete inventory reserves when compared to prior year as a result of declining demand for legacy product lines and continued launches of new products this year. Non-GAAP SG&A expense was $144.6 million, or 49% of net sales, a $5.6 million decrease compared to prior year. The decrease in SG&A expense over prior year was the direct result of our efforts to control discretionary spend this year in light of anticipated COVID-19 impact. Non-GAAP research and development, or R&D expenses, totaled approximately $19.5 million, or 6.6% of total net sales in the third quarter. Consistent with previous quarters, This increase over prior year is reflective of our ongoing commitment to innovation, new product introductions, and further investment into the Pulse platform and Pulse robotics. We continue to maintain our focus on transforming spinal surgeries and have increased our R&D spend sequentially by approximately $1 million each quarter this year to achieve the innovation timeline Chris shared previously. Third quarter non-GAAP operating margin came in at 15.8%, a 10 basis point improvement from prior year of 15.7%. Savings initiatives implemented in the year offset gross margin pressure and increased R&D investment and demonstrated the company's commitment to disciplined execution. Non-GAAP other income and expense for the quarter was $9.1 million, up from $5.5 million in the prior year. This increase is primarily related to higher interest expense from the principal amount of $900 million in convertible debt issued earlier this year. Non-GAAP tax expense in the quarter was $9.2 million, resulting in a non-GAAP effective tax rate of 24.4% versus a tax rate of 23% in the same quarter last year. In the third quarter, the company reported non-GAAP net income of $28.3 million or non-GAAP diluted earnings per share of 55 cents compared to non-GAAP net income of $30.9 million or non-GAAP diluted earnings per share of 59 cents for the same period last year. Turning to GAAP results, GAAP net income for the third quarter of 2020 was $5.9 million or GAAP diluted earnings per share of 11 cents compared to GAAP net income of $11 million. or GAAP diluted earnings per share of 21 cents in the same period last year. Notably, free cash flow for the third quarter was $54.3 million versus $38.1 million in the prior year. The increase in free cash flow is a result of solid accounts receivable collections, reductions in operating expenses noted earlier, and controls implemented around inventory and capital purchases in light of impacts anticipated earlier in the year from the COVID-19 pandemic. Throughout the quarter, we maintained strong cash and liquidity and ended the quarter with $982.1 million of cash, cash equivalents, and short-term investments on hand, along with an undrawn revolving credit facility of $550 million. Based on steps taken in the first half of the year to improve our capital structure, we are well positioned to repay the $650 million principal amount of convertible debt due in March 2021. The remaining capacity affords us the ability to invest in value drivers for the company and continue our disciplined capital deployment, which includes continued investment in R&D and operations, as well as opportunistic M&A. Now I'd like to share how we're thinking about the fourth quarter. The spine market continued to stabilize throughout the third quarter, and we saw several positive recovery trends continuing. These trends include positive patient sentiment to return to hospital and clinic settings, surgeons working through their patient backlog, and the new patient funnel starting to replenish. While we anticipate these trends will continue, we remain concerned for the potential virus resurgence as signaled by the current rise of COVID-19 cases and lockdowns occurring in many geographies around the world. Further, recall that the fourth quarter is usually the company's strongest performing quarter of the year, creating challenging year-over-year comparisons. Finally, I want to reiterate that the third quarter was marked with a faster than anticipated return to growth given the challenges and impacts from COVID-19 and positive momentum gained throughout key areas of the business. These results underscore the company's ability to execute, against its long-term strategy in a challenging environment and reflect our commitment to disciplined execution to drive value for patients, surgeons, and shareholders. Before turning the call over to the operator for Q&A, I'd like to take a moment to recognize our commercial and R&D teams in particular for their performance throughout the COVID-19 pandemic that enabled us to achieve these results. Thank you. I'd like to turn the call back over to the operator to start the Q&A session.
spk12: Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please also note that we ask that participants limit their remarks to one question during today's Q&A session. One moment while we poll for questions. Our first question comes from Kyle Rose with Canaccord Genuity. Please proceed.
spk13: Great. Thank you very much for taking the questions. I just wondered if, you know, Chris, you could give us a little more color around some of the training programs that have been put in place. I mean, obviously, X360 has been a major focus of the organization over the last several years and a big driver of growth, but, you know, the inability to get in front of physicians over the course of late Q1, Q2, and it sounds like still continuing a little bit. That has to have impacted some of your growth trajectory as far as training physicians, getting them trialing, and then having them adopt the procedure. So can you just maybe help us understand the specific levers you put in place from a training standpoint and maybe what the pipeline for physician demand with respect to those training programs looks like just so we can get a good sense of what – what that pipeline should translate to to commercial sales once you actually do get that back up and running.
spk19: Yeah, thanks, Kyle. I'll answer that the best I can, knowing what we know today. But, you know, I think the CPD team pivoted very early and obviously shifted our focus to online training education through remote labs. So over the course of the last nine months or so, we've seen a 30% increase in remote labs, really in Q3 versus Q2, a 30% increase. But we also have a lot of fellows graduating in the August, September timeframe, and that's a big focus for us as we speak. We have been able to now start bringing people into the San Diego Experience Center. And in addition, we've also moved people out or started going out to remote labs, taking the training to our customers and where they are. And for all those things, I think we've bridged the gap. We're still net down in the number of surgeons trained year over year from 2019 to 2020. And having said that, as we've talked a lot about, training education is a big part of our strategy in driving procedural adoption, not only in continuing to drive training to our existing lateral surgeons and X360, but attracting new surgeons. So hard to really say the impact at this point. You know, I'm encouraged, if you dig into our results, that the thoracolumbar procedure is where we actually spend a lot of our time, where X360 is really housed in our numbers. If you really dissect that out, you see that that's still growing in the mid-single digits. So for that, we feel pretty good. We have made decisions, and this pre-takes COVID, but COVID actually slowed it down to open up a new experience center on the East Coast. So we're building out our plans to open that up. That'll take our training capability from San Diego over to the East Coast, which I think will also attract a lot of the European surgeons as well. So hard to answer exactly what the impact has been thus far. There's so many variables, but clearly our commitment to education and training is still very much part of our key strategic focus. And good news is our labs are starting to fill up and the weekends are starting to fill up with surgeons coming into San Diego to resume training.
spk12: Our next question comes from Matt Nisik with Credit Suisse. Please receive the question. Matt, your line is live. Our next question comes from David Lewis with Morgan Stanley. Please proceed with your question.
spk04: Thank you. Good afternoon. Thanks for taking the question. This is Calvin on for David. I was wondering, I have two questions. Could you please comment on, you know, your view on market share? So certain peers have seen breakout performance recently indicating potential share movement. So just wanted to get your view, you know, how you see the pace, how you see share moving and also, you know, How do you see kind of pace of rep hiring and attrition relative to your sort of normal trend? And I have a quick follow-up.
spk19: All right, two different questions. Let me start with the first, which will probably be a bit of a lengthy answer, and the second will be probably pretty quick. You know, obviously, we've been keeping tabs of what other companies are saying, but just keep in mind that when you look at the spine space, six companies make up 60% to 70% of the market, and the other 30% to 40% are made up by literally hundreds if not thousands of other companies worldwide. That said, with the market contracting the way it did in Q2 and this now resurgence in the market, however, not necessarily getting back to pre-COVID volumes. I've heard everything from it's flat to it's slightly down to what we've seen through our NCS business that actually monitors volumes. We say it's probably flat-ish, not necessarily growth from prior year, but maybe flat to prior year. All those things considered, I have a hard time really looking at the variables of market share. I can just say from us, I'm actually pleased by our performance over the quarter. If you look at how the company grew, we reported 1.5% on a reported basis, but if you exclude the service businesses, we grew at approximately 3%, really driven by strong international growth of almost double digits, the 9.6% reported. And we've seen just a lack of uniformity across the markets. So where the market has returned, we've seen very strong growth, and where it hasn't, we've seen some lagging. As I said earlier, our thoracolumbar procedures, if you really dig into, even in the U.S. business, our thoracolumbar procedures, where we have major focus, grew more in the mid-single digits. It was offset by some legacy lines, specifically in cervical, but if you look at cervical, I'm still encouraged based on the fact that we've got some of our biggest launches coming in the cervical space. Also look at the East Coast versus the West Coast. The East Coast we saw low double-digit growth in the U.S. business, offset by lagging sales and lagging results on the West Coast. So it's really hard to discern share in this particular moment. I'm just very pleased and encouraged that the progress that we've made gets us back to growth, even in a time where volume hasn't necessarily returned, and we're poised to launch products that actually, I think, will further contribute to the growth we're seeing within really our sweet spot of lateral procedures in the Dorca Lombard space. On your second question, a little bit easier answer. As far as rep hiring, this is a trend and a tactic we continuously see in the market. I can say that I've seen nothing different this year. We've hired competitive reps and we've had some that have gone to competitors. No single competitor specifically. It's a competitive industry and we'll continue to lead with our innovation and try to attract talent. by ensuring that we have the broadest offering possible so the sales reps can go and better serve their surgeons and ultimately serve their patients.
spk12: Our next question comes from Ryan Zimmerman with BTIG. Please proceed with your question.
spk05: Hi, this is Maxon for Ryan. Thank you for taking our questions. I was just hoping to get a little bit more detail about month over month trends in terms of volume. I know previously you said that you ended June with volume down, low double digits, and then that kind of leveled off in July. Just trying to get a sense of how volume progressed month over month throughout the quarter and anything that you can provide in terms of how volume is trending here in October.
spk19: Yeah, I'll take a shot. We saw obviously volumes through Q2 continually increase. The good news is they were nearing pre-COVID levels. The challenging piece is they sort of flattened out in the quarter. So we saw pretty uniform volumes in July, September, or August, September, or July, August, and September. I can't get my months straight here. It's a little bit early. So encouragingly, as I said, the volumes were nearing pre-COVID levels. I would say that they're probably flat the prior year. I don't know that you've seen growth in volume yet. We clearly haven't seen a trend in growth in volume, but we have seen volumes return to pre-COVID levels, at least nearing pre-COVID levels. So that's encouraging. Challenging is normally we would see a slight uptick from August to September, and we didn't necessarily see that this year. So the seasonality is a question going into the fourth quarter. So really the position that we're taking is we're seeing pre-COVID volumes, but not necessarily growth. And as we look at Q4, which tends to be our strongest quarter, big question, as Matt said in his opening comments, we're unsure about what the seasonality will impact and how we'll see that translate into volume growth in the Q4. That's what we see today. We look at many different external sources, obviously paying close attention to what other companies are seeing. We also look at a proxy with our NCS businesses really, you know, basically agnostic on just pure, uh, looking at volumes and they're still reporting volume in Q3 down a couple of percentage points over prior year. So triangulating around it, I'm, I would still say we're probably flat as big question is how will that translate? Will there be seasonality that really drives tailwinds into the business in Q4? I think that remains to be seen.
spk17: Yeah. And the only thing I would add, this is Matt is, um, Our fourth quarter last year was a very impressive quarter. We grew 8%. So it's a tall order just going in without COVID going on.
spk05: Got it. That's helpful. Thank you. And just sticking with expectations for fourth quarter, recognizing that, you know, last year was a seasonally strong quarter. And I know it's difficult to kind of parse out the impact and backlog and procedure recovery, but Just kind of looking at where consensus is at for fourth quarter, I mean, we're kind of expecting a 2% to 3% sequential increase relative to this quarter. I mean, I know it's hard to say, but just anything you can provide there in terms of maybe a sequential increase relative to third quarter results.
spk17: Yeah, you know, Max, it's hard to peg it right now because we are seeing countries in Europe in particular that are being shut down. And, you know, 47 out of 50 states right now are having COVID go in negative territory right now. I don't know if you had a chance to look at Dr. Fauci's announcement late yesterday. So we don't know how that's going to impact the fourth quarter. But we do know is our European business, we are seeing impact right now to the negative. So it's just too early to predict.
spk18: Thank you. You bet.
spk12: Our next question comes from Robbie Marcus with JP Morgan. Please proceed with your question.
spk11: Hi, this is actually Lily on for Robbie. Thanks for taking the question. You know, appreciate the color you've given, but I was hoping you could provide a little bit more detail on the impact of the lockdowns in Europe. France and Germany, obviously both. recently announced restrictions and cases are on the rise across the US as well. So to what extent have you seen these volumes slow down? Is it anything close to, you know, March, April levels or are hospitals better prepared this time around?
spk17: Yeah, so we really don't have a material business in France. So we're not necessarily worried about any business impact there. Germany is an important market for us. And so we're watching that one very closely. I'd say probably one of the most impacted that we saw was the UK and Ireland. In the third quarter, they were down a material amount. And, you know, it's still tough there. You know, Puerto Rico has been tough throughout. So there are some real hot spots. Conversely, Japan was a really strong market for us throughout the third quarter. We were really pleased with our results there. It was, you know, uh, in the double digits, Southeast Asia did very well. Um, Northern Europe, uh, did pretty well. Um, so it's kind of a mixed bag, but, but we are a bit concerned with, with kind of the reports that we're getting out of Europe right now.
spk19: The one thing I would say just to add onto that though, is, is you look at Germany, Germany was one of our stronger markets that has been all year. So even during the first wave, it was more societal shutdown. Their health care system maintained their volumes pretty effectively. So we're hoping we see similar things. Clearly, we were hoping for a bounce back in areas like the UK and Spain. So we're concerned that that bounce back won't continue with some of the new waves. But the hope that I have here is that we've gone through this one time. We're better equipped to deal with the second wave country by country. And hopefully the shutdowns and some of the restrictions will be more societal, but the healthcare market will be maintained as much as possible. It's a little bit early to tell in certain markets, but I'm encouraged by the success we saw in areas like Japan and Germany over the course of the last nine months.
spk11: Great. Thank you. And just a quick follow-up. To what extent do you think that backlog was a driver of the recovery in this quarter and how much of it do you estimate has been worked through at this point?
spk19: Well, that's a really important question that I see recovery and I see normal volume and I see those things occurring at the same time. So it's really hard to discern. I think in the first month of the quarter, you probably saw continuing backlog into the second. The rate or you should say the slowdown in monthly increase, month over month, would indicate that the backlog is subsiding and you're seeing now normalization of volume, at least the way I interpret it, which would say that we saw a lot of that backlog, which again starts to then question how much of our current volume is backlog versus what's the true volume growth, what's true volume velocity in these markets. I wish I had the granular detail to help you out more there. We just don't at this point. We do continue to see positive signs of patients going into clinic. And I was out on the East Coast last week in several different cities, and their surgical or the clinical volumes are strong. A lot of the telehealth technologies have been implemented, and that's being fairly successful. but we'll see what it translates into volume over the course of the fourth quarter.
spk12: Once again, ladies and gentlemen, please remind you that we've taken one question during today's Q&A. Our next question comes from Richard Newitter with SV Lyric. Please proceed with your question.
spk06: Hi, thanks for taking the questions. I'm just curious. Chris, are you kind of suggesting that the cervical performance this quarter, in contrast to the U.S. lumbar performance where, you know, you are potentially outpacing a flat market with mid-single-digit growth but cervical is declining, are you kind of maybe suggesting that that's probably a decent explanation for kind of the delta between, you know, maybe your overall U.S. results versus some tiers? And then I would follow up on that.
spk19: Yeah. I mean, I feel very strongly that a couple things. I think, as we talked about earlier in the call, some of the challenges we had with training slowed some of our thoracolumbar growth, but we still saw roughly mid-single digit there. The launch schedule for the cervical products and things like ACDF and some of these other procedures, we saw a pretty sharp decline. The good news is we do have a host of technologies coming, specifically in cervical, that we're very excited about. So I do think if you look at our performance versus peers, you've got to kind of cut through some of those things. I do think the uniformity of where we had business on the East Coast versus some on the West Coast is something we're still trying to assess. But absolutely, I feel very good about our Thorpe Lombard business and the progress we're making. And clearly with our continuance now of reengaging our full-scale CPD group to continue to educate and train, I think we'll continue to see good growth there.
spk12: Thank you. Our next question comes from Kayla Crum with Truist Securities. Please proceed with your question.
spk10: Hi, guys. Thanks for taking our question. So just on Pulse to start, I mean, you mentioned you're expecting revenue now in the back half of 2021. Just would love to get your initial thoughts on the commercialization strategy there and potential contribution. I think Most of us aren't putting it or much in our models today, but just in your mind, do you think this will be a material contributor next year, and what does material mean to you?
spk19: Let me take the first part, and I'll turn it over to Matt to take on the material piece of it. Listen, we've made a ton of progress on Pulse. I'm excited about the milestones that we've covered over the past several months. As far as the commercialization strategy, I think I've said all along, and I'll continue to say the word I use is flexible. We want to get this technology integrated. We think it's a synergy to our proceduralization strategy that includes instrumentation, implants, biologics, posterior fixation, and now the whole host of technologies that we'll bring to bear with our pulse technology. So we want to get this installed in as many locations as we can. So to that end, we feel very good, and we are working through the commercialization strategies, obviously planning through the alpha launch into the beta, and then a full-scale launch towards the end of next year. As far as material revenue, I'll ask Matt to comment.
spk17: Yeah, we're thinking in a few million. It's not going to be significant, but it then will, in turn, for the following year, be much more material. And so I'm more focused on You know, getting the launch set up, investing in the launch, making sure that that's done as well as possible, and that probably is going to require a fair bit of investment that will eat up the margin, but this is a long-term play for us.
spk12: Thank you. Our next question comes from Matt Nisik with Credit Suisse. Please proceed with your question.
spk15: Thanks so much, and apologies for before. One question on patient flow and another just on sort of the advanced technology or enabling technology competitive landscape. So if I could, on patient willingness, you know, this is something that we get questions about all the time. I think folks are trying to understand the ebbs and flows of patients willing to come into hospitals and get cases done, given that the demographics of spine fusion tend to skew younger non-Medicare patients, et cetera, you know, wondering to what degree you saw any of this over the summer as flare-ups happened or to what degree, you know, surgeons are speaking to your reps or you have any sense of the ebbs and flows of demand, if that's changed at all or been affected by the headlines, and then a quick follow-up.
spk19: Thanks, Matt. Thanks for the question. Simple answer is no. Not until this point. Now, clearly, we're sort of on the horizon of this second wave, and the noise level has increased substantially. But as early as when I was on the East Coast last week in New York, New Jersey, Philly, Baltimore, and many different cities, asking the question, are you seeing really patient willings to come in? And to a person, the surgeons and clinical staff I talked to said that they weren't seeing any decline in patient sentiment. So... Up to this point, we've seen increasing level of patient sentiment. I think that's reflected in the volume increases we've seen. Now, whether or not this second wave or resurgence that we're hearing about today has an impact on that will be a question. You're also nearing the end of the year, and a lot of people's deductible plans potentially encourage them to go in and get procedures done that may also pull people into the healthcare market, even with a second wave. So a lot of variables that that we've lived with in the past, but under the veil of COVID, just not real clear on how the next three months will play out.
spk15: Sure, super helpful. And so the second question on enabling technology, I know we've all had this conversation about Pulse and the robotic application and the timelines for that. But I wonder if you could give us a sense. I mean, you've got enabling technology in every one of your hospital customers' ORs in the form of M5 and the tools that they use every day to do lateral surgery. And I'm just wondering, like, you know, from a practical standpoint, at what point or where and when is the, you know, inability to sort of, you know, to wheel Pulse in or the robot in, you know, impacting the way that you sell or the, you know, the patience of your customer. It's just trying to get a sense of what's the demand there or, you know, is it sort of just business as usual in sort of lateral access and MIS and, you know, with these other things kind of more of a, you know, our expectations for where you're going.
spk19: I mean, I guess the basis of your question, I think demand is still high for enabling technology. I think demand is still high for MIS and some of the lateral techniques that we focus on. As I said earlier, our labs, the demand is still high for people to come back in and resume training. So all of those things I think are high. If anything, maybe they were paused over the last nine months, but I don't think demand has subsided. I think it's still there. Great.
spk18: Thank you.
spk12: Our next question comes from Matthew O'Brien with Piper Jaffrey. Please receive the question.
spk03: Afternoon. Thanks for taking the question. Chris or Matt, I'd love to focus on the U.S. business. As I look at the stock in the aftermarket, it's down a little bit. I think it's because, to Rich's point earlier, the performance that we're seeing is versus the rest of the peer plays we've seen so far is lower than the recovery there. And I understand you've got a little bit of a hole in the cervical side right now. But, you know, the other companies that we're looking at out there, yeah, some are smaller, some are about the same size, and they're putting up really good growth rates. You've got some more competition, you know, on the single position side coming, Matt Link's leaving. Cervical's an area that, you know, Nuva's historically struggled to really access successfully. So... You know, lumbar is doing well. It's going to see some pressure probably competitively. Cervical is an area that's a big opportunity, but historically haven't done real well. So can you just square up, you know, what looks like some share loss with the ability to really stabilize some things and then kind of get back to market, you know, some of the best growth within all of the spine before you get pulse and pulse robotics on the market?
spk19: Yeah, I mean, on the cervical piece, I think it's – we've been working through the cervical, what we call the C360 portfolio lineup for some time, which integrates, you know, best-in-class access implants, anterior and posterior fixations, the whole nine yards, including enabling technologies as we get those out and biologics. To really bring a full suite in the cervical spine, I think that's the difference in maybe what we've done in the past. You know, the anterior cervical plate, system that we're launching the Reliant C, which fully now extends our full line, uh, thoracolumbar line system to have the comprehensive, uh, posterior fixation system from, from the entirety of the spine. So I feel very good about where we're going cervical. You know, I, I, I do believe that we, you know, we, we hit a decline here. We were, we were, we'd done some initial alpha testing last year and saw some initial growth. But over the course of this year, we had pretty much stopped installed on some of those alpha launches, picking those things back up now, I think will be a real synergy in relation to what we're doing with thoracolumbar procedures. And again, I also go back to the fact that our ability now to turn back on our training and education programs, which as you recall, our thoracolumbar procedures were driven by roughly about 30% of our existing lateral users being trained leading into the COVID crisis. We still have runway to train more lateral surgeons to the X360 procedure as well as attract new surgeons. You know, again, I go back to the fact that I'm very encouraged because of the fact that in the areas I see deficit, we've got immediate launches coming. And, again, the work that we've put in place around training education and on the horizon of enabling technologies over the next couple of quarters, I think line us up for innovation growth roadmap that we've put in place.
spk18: Thank you.
spk12: Our next question comes from Joanne Winich with Citi. Please receive the question.
spk02: Yes, hi. This is Matt Hendrickson in for Joanne. My question is to the Pulse robotic system. You guys reaffirmed First in Human in 2022, but kind of what are the next steps that bridge between that First in Human study and the actual launch? What other milestones, pivotal trials you may need? That would be helpful. Thank you.
spk19: Yeah, you know, once you go into First Human, you're on the other side of your regulatory pathway. So the fact is then we're really just going through the alpha testing that we do with any enabling technology, very similar to what we do with Pulse. So there's a whole range of different testing modules and use case scenarios. We're also getting our organization ready to support the technology in the clinical setting more broadly. So once we kind of go through the regulatory approval, get in first in human and start really driving through the alpha testing, it's really all about ramping up the organizational capability to fully launch and obviously learning any last-minute things in a clinical setting that we didn't necessarily see in a lab setting. And those things always happen specifically with these types of technologies. So it's not an arduous pathway, but one that's very important so that we learn and that when we launch this technology, it meets our customers' needs.
spk12: Our next question comes from Mike Mattson with Needham and Company. Please receive your question.
spk16: Hi, thanks for taking my question. So I guess just with regard to the robotic system, you know, what would have to happen to pull the timeline in, and is that even possible at all at this point?
spk19: Well, I'm not going to say anything's impossible. I mean, clearly we have, as I said before, we've We've shifted resources back to Pulse Robotics as we encourage some of the challenges we faced with Pulse early on. And I have to say the team did a really remarkable job in dealing with the component level change at the, you know, really at the ninth hour. And we're very close to the original, you know, at least what the previously communicated Pulse launch timeline looked like about this time last year. As far as robotics, as far as what happens to pull it in, that's a question we're asking our teams every day. We brought in some new talent, filled a very key position in the robotics development group to try to answer that question. What will it take to move it forward? Again, we don't want to shortcut this. We want to make sure that this is an effective technology that complements our Pulse system and integrates in our Pulse system. But there is a fairly... regimented process to go through in order to launch a technology like this. And we'll follow the right pathway. We want to make sure we have the safest, most effective product in the market. But we are consistently challenging ourselves. So obviously more to come on this subject, but we're pressing where we can.
spk17: Yeah, and we're not limiting ourselves for pulse either. We're continuing to hire. We're continuing to put the dollars in. I would just echo that our spend is up
spk18: year-to-date, year-over-year in a significant way.
spk12: Our next question comes from Rage Tenhoy with Jefferies. Please proceed with your question.
spk08: Hi, this is Zach on for Raj. Can you just talk about rep access and how that shifted through COVID? And it's more recently as COVID, you know, resurged a little bit. If you've seen any shifts on a geographic basis and where reps are allowed into hospitals and not?
spk19: Thanks. I mean, in general, I would say rep access is still fairly, reps can still access where they need to go into surgical procedures. Again, there's all kinds of protocols to enter hospitals today. Again, using my own experiences out in many hospitals last week, and you go through the same litany of things that you go to a lot of public places where you get your temperature, they badge you, and the badge is there for a period of time, and that's it. So it's probably a little more arduous to move around, but, again, you have to understand our sales team and our commercial organization is really an integrated part of the surgical system. staff. They're working through the sets. They're ensuring that the surgeon and the clinical staff has the appropriate instruments and appropriate implantables. So they're very necessary in many of these procedures. And to that end, they're working through protocols to make sure they have full access. No major change there. You know, the situation where you have a rep that tests positive, obviously that creates a scenario. But other than that, it's a It's kind of dealing with what we're dealing with with broader society. You're just having to go through the protocols.
spk12: Our next question comes from Matt Taylor with UBS. Please proceed with your question.
spk07: Thanks. This is for Matt. Thanks for taking up questions. I guess maybe one on robotics. Do you get the sense that sentiment for using spine robotics is changing in the U.S. from surgeons or from a hospital admin's perspective? And in accounts that have a competitive robotics system, can you maybe talk about how that impacts your basis of business?
spk19: I mean, the sentiment is, I think the sentiment of robotics and surgery is different. is changing. I think it, and I've said this all along, it will continue to evolve. And I think it will become a standard of care over time and not just in spine, but across many different surgical areas. I think it's a, it's a, it's a path that these things don't happen overnight. And, and so to that end, I believe we're still in the early days in spinal robotics. As far as a robotic system that enters into our, our purview in one of our hospitals where we have business and other companies have business that have robotic systems, it doesn't necessarily change things overnight. We still compete with our technology roadmap the way we talked about. We still try to drive our lateral portfolio and other key areas of our portfolio. I think at the end of the day, the companies that have these enabling technologies, inclusive of robotics, will continue to gain footing, and attract more of a customer share. We still fight for that today. We have a gap that we're quickly filling. When we have that, I'll feel better. But in the meantime, we continue to drive our proceduralization solutions that we talked about, support that with really world-class training education, rounding out the portfolio with cervical, adult, and pediatric deformity, specifically in some of the fixation technologies that we're bringing to bear. And so to that end, we'll continue to push that.
spk12: Our next question comes from Matthew Blackman with Stifel. Please receive your question.
spk01: Oh, thanks, and good afternoon, everyone. Thanks for the question. Just a real quick one back on cervical. Just curious, when do you think you'll be at fighting weight in cervical, where the new product uptake starts to outpace the drag of the legacy portfolio? Is it six months, nine months? And just remind us again of the biggest gating factors that we should be thinking about. Thanks so much.
spk19: No, I honestly, if you get into the December, January, February timeframe, if we're not seeing good growth in cervical next year, I'll be very disappointed. I am very excited about the anterior cervical plate. It is a unique differentiated technology. The Reliance C system that is coming out to complement. And then we have posterior cervical system or the Reliance C system complementing That will be coming out in early 2021. That complements what we're doing in this December. So I feel very strongly that the cervical group has done a good job. It's been validated by the customers I've talked to. We've got a great design team with many surgeons around the country and around the world that have echoed that as well. So we still have some gaps to fill in the portfolio over time. But the good news is they're pretty sequential in the timing. And I think the work that's done and where we go in December and January and February of this, you know, leading out of this year and into next should put us in a growth mode of cervical. All right. Thank you.
spk12: Our next question from Josh Jennings with Cowan. Please proceed with the question.
spk14: Thank you. This is Brian here for Josh. Thanks for taking the question. Just one on the CMARC strategy for pulse. Should we be thinking about this as a single launch into a single territory, or is there something planned for kind of a broader international plan based on the CMARC?
spk19: Yeah, I mean, early on, if you looked at our, you know, kind of what we talked about, we had originally started saying, you know, we're going to launch, we're going to get FDA approval, and then post-FDA approval would go and file for CMARC. What the team has done is they've found some unique ways and a pathway that allows us to go after both FDA and CMARC almost simultaneously. So to that end, that opens up our opportunity to a much broader market opportunity, both inclusive of U.S. or FDA countries or CMR countries. So, you know, the rate limiter here, good news is it won't be a regulatory pathway likely. It will likely just be the number of units we can get out, support, go through the output testing. But it will be good to have a true global launch out of the gate. Now, that's probably overstated with CMR and FDA approval. but a much more global launch than what we had originally thought we would have in the timing we thought we would have it.
spk12: Thank you. Mr. Barry, there are no further questions at this time. I would like to turn the call back over to you for closing comments.
spk19: Okay. Thank you all for participating in our Q3 earnings call. Stay safe, and we look forward to talking to you all next time.
spk12: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation, and have a great day.
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