Orthofix Medical Inc.

Good morning. My name is Gavin and I will be your conference operator today. At this time, I would like to welcome everyone to the All36 Medical Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. Alex Werthe may now begin your conference.

Thank you, operator and good morning everyone welcome to the ortho fix third quarter 2022 earnings call. Joining me on the call today are our President and Chief Executive Officer john for both big and she financial officer Doug right. i'll start with a safe harbor statement and then pass it over to john during this call, we will be making forward looking statements that involve risks and uncertainties. All statements other than those of historical facts are forward-looking statements, including any earnings guidance we provide and any statements about our plans, beliefs, strategies, expectations, goals, or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements, as there is no assurance that the matter contained in such statements will occur. The forward-looking statements we will make on today's call are based on our beliefs and expectations as of today, November 3, 2022. We do not take any obligation to revise or update such forward-looking statements. Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risk factors disclosed under the heading Risk Factors in our Form 10-K for the year ended December 31st, 2021, and Form 10-Q for the quarter ended September 30th, 2022, filed this morning, November 3rd, 2022, as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at OrthoFix in Louisville, Texas. In addition, on today's call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to the financial measures determined in accordance with U.S. GAAP. Please refer to today's press release announcing our third quarter 2022 results for reconciliations of these non-GAAP financial measures to our US GAAP financial results. At this point, I will turn the call over to John.

Thank you, Alexa. Welcome, everyone, and thank you for joining our third quarter 2022 results conference call. On today's call, I will provide an update of our third quarter performance, review progress against our strategic initiatives, and discuss the planned merger with C Spine before handing the call over to Doug, who will provide our financial update. I will close the call with our perspectives on the balance of 2022 and near-term growth drivers before I open the line for questions. Starting with our third quarter performance, as announced in October, total revenue for the quarter was $114 million, increasing 1% over 2021 on a reported basis and 5% on a constant currency basis. Our strategic investments in our commercial channel and innovation pipeline are paying off as global orthopedics, biologics, and bone growth therapies continue their strong performance despite lingering macro headwinds. Specific to innovation, we are encouraged by the several new products we introduced this year. DSL stem bone healing therapy, TruLock Evo, Galaxy Gemini, our next generation pin-to-bar system, and the Virtuos Lyograph have been very well received in the market. Turning to the performance of each of our product categories, starting with bone growth therapies or BGT, sales for the quarter were 46.5 million, up 3% on both a reported and constant currency basis compared to third quarter of 2021. Growth was driven by higher order volumes as well as revenue from a sales down, which initiated its launch in the second quarter of this year. Moving to spinal implants, which includes both spine fixation and motion preservation, revenue was down approximately 8% on a reported basis and 7% on a constant currency basis compared to the third quarter of 2021. The decline was due to a change in the procedure mix in the U.S., large international orders in 2021 that did not reoccur, as well as global competitive headwinds in the motion preservation area. However, motion preservation exited the corner with year-over-year growth in September in the US. Turning to our biologic portfolio, revenue was up 8% on a reported and constant currency basis as compared to 2021. The successful launch of new products like FiberFuse and Virtuos contributed to the strong performance. Lastly, in our global orthopedics business, revenue for the third quarter was up 6% on a reported basis and 19% on a constant currency basis over 2021. Double-digit growth at constant currency in both our US and international businesses was driven by strategic investments in our commercial channels and momentum of new product introductions. Our orthopedics business is performing well, and five of the last six quarters have shown double-digit growth. Now, moving on to our strategic initiatives let's start with product innovation and differentiation. In the third quarter we continued our rollout of virtuals live graph shelf stable complete autograph substitute certain feedback has been positive and we continue to work on getting virtuous added to our existing and new accounts. We also saw initial cases of legacy. Our new demineralized bone matrix produced in our partnership with MTF Biologics. Both Virtuos and Legacy DBM are examples of our continued commitment to expand biologic offerings and strengthen our partnership with MTF Biologics to meet the needs of surgeons and their patients. Our cell stem bone growth therapy is gaining traction and we are seeing high rate of physician interest with access to new prescribing doctors. early adoption has has us tracking ahead of plan and we are encouraged by these results we have added sales reps and sales management to grow our fracture channel with both fresh and non-needing fracture indications with addition of payer coverage of over 40 million lives starting october 1st we expect our positive trajectory to continue I would also like to give a quick update on Orthodex's participation at NASS just last month in Chicago. First off, we sure created a buzz at the conference with the merger announcements with C-Spine. We are very encouraged by the positive surgeon, distributor channel, and future partner conversations. They see the value of the combined portfolio and are excited about what lies ahead and the opportunities for the new organization's position for both growth and profitability. Turning to a few key events at the conference or the fix hosted a successful clinical symposium to discuss long term clinical evidence. Radiographic graphic classification and clinical management of cervical disc arthroplasty. We're pleased to be leading this important effort to gather surgeon and research leaders from around the world to develop and share best practices. This will provide clinical experiences and data to support market expansion of cervical motion preservation in our technology-leading M6 cervical disc. On an exciting note, we received a 2020 Spine Technology Award from Orthopedics This Week, the most widely read publication in the orthopedics industry for the Virtuos Lyograph. Virtuos is the first of its kind shell-stable and complete autograph substitute for spine and orthopedic procedures, which was launched in partnership with MTF Biologics late in the second quarter of this year. Lastly, at a celebration held at our booth, we're able to commemorate with CG Bio our new partnership to commercialize Novus' RH-BMP2 bone graft solutions in the US and Canada. Turning to our second initiative, the ongoing development of our commercial channel to expand patient and surgeon access to our products worldwide. In Q3, our U.S. strategic channel partners, which we define as distribution partners that carry multiple orthofix product categories, such as hardware and biologics, generated over one-third of our spinal implants, biologics, and orthopedics U.S. revenue. year-to-date, this strategic group has grown double digits when compared to the prior year. We will continue to invest in the development and optimization of these channels to support our growth initiatives moving forward. We appreciate how well our team has managed the ongoing macro headwinds throughout the quarter and how we've progressed with our transformation, building the framework for long-term growth and innovation while maintaining operational execution. Before turning the call over to Doug, I want to touch on the recently announced agreement to merge with C-Spine. The combined company will be a leading global spine and orthopedics company with highly complimentary portfolios of biologics, innovative spinal hardware, bone growth therapies, specialized orthopedic solutions, and a leading surgical navigation system with products that will be distributed in 68 countries worldwide. a global R&D and manufacturing footprint, and revenues of nearly $700 million, we are positioned to become the sixth largest global spine business. This merger significantly advances our objective to become a surgeon's partner of choice in their efforts to increase patient mobility by enabling us to develop creative, quality-driven solutions. The combined company's unique profile of scale, growth, and profitability, broad portfolio of technology, expanded commercial capabilities, and ability to make greater investments in innovative, differentiated solutions provides a clear roadmap to sustainable, top-tier growth and increasing competitiveness across global markets and a broad spectrum of products and services. The combination of these two innovative and ambitious companies is incredibly exciting. The combined company will ultimately, and most importantly, provide surgeons with the best resources, technologies, products, and procedures needed to improve patient outcomes. I'll now turn the call over to Doug to review our financial performance. Doug?

thanks john and good morning everyone as many of the financial measures covered in today's call are on a non-gap basis please refer to today's earnings release for further information regarding our non-gap reconciliations and disclosures starting with revenue as john noted earlier total net sales in the quarter were 114 million dollars reflecting five percent growth at constant currency when compared to the third quarter of 2021. In the U.S., total net sales were $88 million, or 77% of total net revenue, up approximately 2% versus the prior year. The primary drivers were growth coming from the BGT new product introduction of Excel STEM, Biologics new product introductions of FiberFuse last year and Virtuos in the second quarter, and finally, investments in the commercial sales channel within U.S. orthopedics. International total net sales of $26 million, or 23% of total revenue, for the quarter were up 13% in constant currency over the third quarter of 2021 as a result of strong growth from international direct orthopedic markets and sales to international stocking distributors. Gap gross margin in the third quarter of 2022 was 73% compared to 75% in the prior year period. due primarily to increased non-cash inventory reserve expenses related to set bills for an expanding sales force and increased safety stock requirements driven by the risk of global supply chain disruption. For the full year 2022, we expect GAAP gross margin to be approximately 74%. Gap sales and marketing expenses in the third quarter were 49% of net sales, down from 50% in the third quarter of 2021. This decrease is primarily due to a reduction in event spending and sales training due to the timing of events. These were offset somewhat by increased commissions from changes in our sales mix. For the full year 2022, we believe gap sales and marketing expenses will be around 50% of net sales. Gap G&A expenses in the third quarter were 17% of net sales, up from 15% in the prior year period. The increase reflects higher spending on legal and professional fees related to the merger transaction expenses between OrthoFix and C-SPAN. Gap R&D expenses for the third quarter stayed approximately flat at 11% of net sales compared to the prior year period. Our focus in R&D continues to be on bringing innovative and differentiated new products to the market. We still expect full year 2022 GAAP R&D expense to be approximately 11% of net sales, including an impact of about 200 basis points related directly to our EU MDR implementation efforts for which we adjust within our non-GAAP financial metrics. Adjusted EBITDA margin in the third quarter increased to 13% of net sales compared to 11% in the third quarter of 2021. driven by increased revenue and decreased sales and marketing expense due to the timing of events and training. We continue to expect our adjusted EBITDA margin for the full year 2022 to be approximately 11.5% of net sales. Now turning to tax, we had gap income tax expense of $1.3 million or 14% of the loss before income taxes in the quarter as compared to the prior year benefit of $400,000 or 14% of loss before income taxes in the same period of 2021. The tax rate in both periods is driven by timing of earnings as well as gap losses without a corresponding tax benefit. For the third quarter, we reported gap loss of 53 cents per share as compared to a gap loss of 11 cents per share in the third quarter of 2021. After adjusting for certain items and when normalizing for tax using our non-gap long-term effective tax rate of 28%, adjusted EPS for the third quarter was 13 cents as compared to an adjusted EPS of 10 cents in the third quarter of 2021. Regarding cash our liquidity position remains strong with $52 million at the end of the third quarter of this year, compared to $83 million at the end of the third quarter of 2021. This decrease is primarily related to the increase in that inventory and over $7 million in contractual milestone payments related to our partnerships with the J a CG bio fit bone and then view to accelerate revenue growth capex. was approximately $6 million in the quarter, compared to $3 million in the prior year period. CapEx increased due primarily to investments and operations, the expansion of our manufacturing capabilities, as well as an improved customer training and experience center for our partners at our headquarters in Louisville, Texas. We now expect capital expenditures to be in the 24 to $25 million range for 2022. Now shifting to guidance for the full year of 2022, we now expect reported revenue to be in the range of 457 to $463 million. which when utilizing current FX rates represents 1% to 2% growth at constant currency. This revenue guidance reflects an $11 to $12 million or 2% to 3% anticipated FX headwind to our top line for the full year and reported rates due to the strength in U.S. dollar compared to the 2021 FX rates. From a macro perspective, we continue to expect an overhang through the end of the year and into 2023 related to hospital staffing issues and patient sensitivity to the inflationary environment. Key products like Excel Stem and Virtuos are gaining initial momentum, but we do not expect to see significant contributions to revenue from these new products until 2023. For the full year 2022, we now expect our adjusted EBITDA will be in the range of $52 to $54 million, or approximately 11.5% of revenue, and our adjusted EPS is expected to be between $0.40 and $0.50. I would now like to turn the call back over to John.

Thanks, Doug. Looking to the remainder of 2022, we remain highly focused on solidifying ourselves as the leader in the regenerative healing technologies in the spine and orthopedic space with our leading biologics and bone growth therapy portfolios. We are also delivering sustainable, profitable growth driven by innovation and differentiation within our product portfolio as well as through the optimization of our commercial channel. In the near term, we will continue to advance several of our growth drivers, including the launch of key spine fixation products, continued focus on our fracture channel in BGT with the SL-STEM launch, increasing our channel expansion, product launches to expand our leading platforms in orthopedics with FitBone and TruLock, expanding biologic portfolio, and then continued focus and expanded adoption of M6C artificial cervical disc, I'd like to provide a quick update on each of these growth drivers. Starting with the spine fixation new product introductions, we continue to work towards our five key long-term spine R&D projects. These projects are developing spine product innovations and solutions for anterior column support, minimally invasive lumbar spinal fixation our next generation posterior cervical system a comprehensive deformity correction system and the fifth spine remote telemetry deformity technology platform we anticipate these developments to be introduced beginning in 2023 and phased into 2024. these five key products will build upon or the fixes and c-spines already highly complementing portfolio of innovative spine solutions Next up is our growth coming from our BGT fracture channel through market share capture. In the quarter, we completed the full launch of a cell stem, our ultrasound product for acute fracture bone healing and non-unifractures. We have now finished training the sales force and are on a good trajectory in getting the product into our payer contracts. In 2023 and beyond, we anticipate a more significant contribution to revenue from a sales dim as it continues to gain commercial traction. We have been experiencing double-digit growth already in our orthopedics business through channel investment efforts and product launches that expand our already market-leading platforms. With regards to the Fitbone limb lengthening system, we anticipate higher revenue growth in 2023 and beyond as a result of recently obtained French government reimbursement and the launch of additional products in the Fitbone platform. including the introduction of a trochanteric nail in mid 2023 for US pediatric surgeons. For biologics, we foresee an increase in demand across our portfolio during the balance of 2022 and into 2023, due in part to the early excitement following the launch of Virtuos Lyograph. Our biologics offering is one of the most comprehensive in the industry for spine and orthopedics, thanks to our well-established Trinity Elite CDM, FiberFuse, Virtuos, Legacy DDM, and our Opus portfolio of advanced synthetic graft materials. With a view to the future, we are excited about our investment in the U.S. clinical trial activities for Novacis RHPMP2 in conjunction with our new partner, CGBio. Our final near-term growth driver is our differentiated artificial cervical disc, the M6C. We continue to believe in the growth of the artificial cervical disc replacement market and the value that our next generation uniquely designed M6C brings to the market. At NASS and at Eurospine in October, we sponsored the presentation of data supporting the clinical evidence of cervical disc arthroplasty, including five-year data from our USID study. Results from the Kaplan-Meier analysis of the M6C based on 16 years of real-world evidence suggest a global cumulative survivorship of 99% at 10 years, consistent with other proven joint arthroplasty devices. We believe the cervical market will continue to move towards motion versus fusion for the indicated cases. In conclusion, we remain optimistic about the future of OrthoFix and ultimately the new company formed by the combination of C-Spine. We continue to see the positive impacts of our new product innovation and commercial channel initiatives and expect those to accelerate moving forward. We look forward to executing over the near term to set the organization up for long-term success. In closing, I would like to thank the dedicated OrthoPix team members for their commitment and extraordinary efforts to deliver these results and creating a platform for future accelerated success. Well done and thank you. With that, operator, could you please open the lines for questions?

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes to the line, Dave Turkley from JMP Securities. Your line is open.

Hey, good morning. John, you talk a lot about the commercial channel initiatives and investments. I was wondering if there would be a way that you might quantify some of those for us possibly, like either feet on the street or number of distributors or anything like that that would be a little more granular. And I'd also love your thoughts on D-Spine and their distribution efforts and how you kind of look at those two coming together. What would you keep all these new investments after that deal closes?

Dave, thanks for the question. Regarding channels, for what you need to break them down and let's talk about BGT. Over the last 18 months, we've been building this fracture channel that comes to delivering for not only fracture but non-union care. So we've been investing that with not only Feed on the Street Direct, but also managers as well as distributors. We're seeing the results of that effort as far as in the fracture areas. On orthopedics, we've been investing not only in the U.S. but OUS and putting people not only in our subsidiaries around the world but coming to the U.S. and building that channel with managers and with feet on the street. So you're seeing the results of that as far as the orthopedics business with a 19% growth we posted in orthopedics. And then on the spine side, we highlighted that a third of our revenue is coming from our strategic partners we've put in place, and we look forward to that group growing over a period of time. So we're seeing investment, the results of the investment, and we still have work to do as we go forward. As we look forward to our partnership with C-Spine, they have a great momentum in this area as far as building strategic channel partners, and we're really looking forward to combining those two efforts because they're both works in process, and we see the one-on-one equals even greater results as far as the combined effort.

Great. Thank you for that. As a quick follow-up, you called out something about the mix in the spine fixation, and then I think I read something about that. levels per case. And I was just curious if I could get your thoughts. Is that saying that there's more or I guess less complex procedures being done as we emerge from COVID? I'd just love to get your thoughts on why that would be the case. Thank you.

Yeah, Dave, it's an interesting dynamic right now. We saw procedures increase in the quarter, but we saw levels per procedure decrease. And we're still mapping out where that's coming from. And a lot of it depends on who your distributors are, which surgeons you are basically working with at that point in time. And so we're analyzing that. We see the same macro headwinds in the world that everybody else does, from staffing to the inflationary activities and patient co-pays that basically drive behavior when it comes around to similar products, specifically in the BTT area where there are co-pays that go as well. But we also know that When you start having large, complex procedures, sometimes those co-pays can get quite large, and some patients will basically resist making that investment at that point in time. It's an odd situation, but we've talked to clinicians. They're seeing in their practice where patients will defer or basically postpone towards the end of the year, looking for when their co-pays may be less because they've accumulated more in their deductibles.

Got it. Thank you.

Your next question comes from the line of Matthew Blackman from Stifle. Your line is open.

Good morning, everybody. Thanks for taking my questions. I've got two, maybe to start on a self-stem. As we go into 2023 with a full launch, broader coverage, and contracting, how should we think about the overall BGT portfolio growth profile? Does it step up, and does a self-stem have a halo effect on the broader portfolio? Any thoughts there? And again, one follow-up.

Thanks, Matt. Celsium has been a nice shot in the arm in our acute or fracture channel that we've been investing in, and so we'll see that continued growth and gaining market share in that area. On the balance of the BGT area, in our lumbar area, we're seeing growth as well, and we'll see more growth as those complex cases reemerge. And then the cervical side, we have work to do there because as we move more to cervical discs, and in that nature, those candidates are not necessarily candidates for STEM or service STEM, but there's plenty of marketplace out there for us to go drive and build that channel. And what we're seeing is that people are continuing, and we're investing in, but we're also seeing that surgeons are seeing the value of STEM, whether it be in the cervical, lumbar, or in fracture, and so it's incumbent upon us to continue to invest and grow that channel and that information base that's out there.

Thanks. Got it. And then just a question on M6. John, I think you said it grew in September, but does that mean it was down for the full quarter? And you also mentioned some clinical data. We heard at NASS that there'll be some more real-world data coming out over the next, I don't know, 12, 18 months. How should we think about M6 growth until the clinical community sees a true counter-narrative to the paper out of Australia? Thanks.

You know, we've been spending a great deal of time basically developing that clinical data. We published our five-year IDE clinical data, which is actually very successful. And so from that standpoint, we have that, and we're now collecting our seven-year data as well in that area. We are continuing to invest in our real-world evidence and collecting data out in Europe and Australia and other countries in the world basically that have 10 plus year experience and we had not only seminars at nas we had also at euro spine and had surgeons coming to present their data there which we're looking forward to publishing going forward this is a longer term activity whenever there's data that has been put out there that's highlighted a one clinical episode you have to basically build your real world evidence so we're spending a great deal of time investing in that right now On the competitive headwinds, we've highlighted there's been competitive headwinds out there, and we're dealing with it with data. We're dealing with investments. We're dealing with basically bringing experts from around the world to basically share not only their cervical experience, but also bringing researchers and experts from outside the space and from the large joint area that have lived through these activities and bringing their information and data forward. So we think we're in a good place to basically not only assist in sharing our M6 data, but expanding the cervical disc market. And it's incumbent upon us, and we're really pleased that we're leading in this effort to basically invest here so the cervical disc market has a growth opportunity in the future. And so that's what we're focused at right now.

Your next question comes from the line of Jeff Cohen from Leidenberg. Your line is open.

Hi, John, Doug, and Alexa. How are you? Great. Great job. I did want to follow up with Matt's question on the M6. Any update for us as far as the two-level study that's ongoing?

Jeff, we continue to add sites and add patient enrollment in that. We found that clinical trials are taking a little longer in this environment that we're living in right now, but we have increased our effort there and increased our spend towards enrolling those patients, and we're on track now. So from that standpoint, we look forward to completing that study enrollment as fast as possible, and we'll have to come back to you with the results that come forward. We have seen, though, in our real-world evidence, we're collecting not only one-level but two-level data, so we'll have a data set coming out as far as two-level experience in our real-world evidence to complement our US IDE study.

Would you expect enrollment to complete middle of 2023?

We haven't set that date. Well, we haven't announced that date. We basically have a trajectory going forward to have that done in the 2023 timeframe.

Okay, got it. And then could you talk a little bit about MTF and the partnerships and the updates on the partnerships as far as how that might look, you know, as the merger goes through with C-SPARN? And I guess I was referring to a number of the platforms including the legacy.

Yes, as we looked at the combination of merger with C-Spine, we believe we have one of the broadest and most inclusive portfolios in the biological and regenerative space. And we look at opportunities when even highlighted as far as whether this is a surgeon preference business. And what this combined portfolio allows us to address the surgeon preferences across not only the spine, but the orthopedics area as well. Would that be with CDM cellular-based? Would that be with DBMs? Would that be with synthetics? And because we have the broader base of both spine and orthopedics, we think the portfolio is incredibly well positioned, and we value the MTF relationship and will continue to grow that relationship, as well as with C-spine, we'll continue to grow the overall biologic portfolio and the adoption of that portfolio within the market.

Okay, got it. And then lastly for us, if you could briefly talk about the European Commercial Organization and You know their reaction about the merger and probably their excitement about 70. I'm sure they're somewhat aware of in some of the other opportunities for the merger through

Yeah, this is one of the true synergies of the merger going forward. We've spent time and energy building our international distribution channel and it comes down to that they are excited about the products that will come to them, whether it be 7D or whether it be biologics. We also see a great deal of cross-selling opportunity going forward. What it comes down to, we see the expanded breadth of the portfolio for distributor conversions as well and assisting in that, whether it be international or in the U.S. And we also have this whole area of complementary revenue that we fit, whether it be motions preservation or 7B or BGT that creates, you know, great pull-through opportunities in the U.S. And we're looking for that opportunity outside the U.S. It comes down to that we see this as a really powerful combination because of the portfolio. because of the commercial channels that both parties have and globally looking at it. And so we're looking forward to digging in further and basically seeing those synergies as we move forward in the post-signing of the deal.

Super. Thanks for taking our questions.

Thanks, Jeff. Thanks, Jeff.

Your next question comes from the line of Tim Sedotti of Sedotti & Company. Your line is open.

Hi, good morning, and thanks for taking the questions. So, you know, a lot of interest in the merger. I think most investors feel confident that, you know, from a product point of view, there's not much overlap and that it makes sense. But on the distribution side, can you just talk a little bit more about that? Now, you know, currently you guys have separate channels for your stem line and your orthopedic line. I assume that will continue after the merger. But on the distribution for the spinal products and the biologics, is there a lot of geographic overlap there? And what happens? Will there be more than one distributor in the same territory in areas where there isn't, where you do have two distributors now?

yeah jim thanks thanks for the question let me break that down just a little bit um the first item as far as bgt and then orthopedics they will remain separate but we see significant opportunity to leverage in that area bgt has a very specific both direct and indirect channel but they take uh they take opportunities to have partnerships with other distributors that basically work in that in the spine and orthopedic space so we see that as a positive opportunity in the mergers going forward. On the spine side, when we looked at this deal, we actually looked at not only we created our own channels individually about where there might be overlap and we didn't see a significant overlap. And then we had a third party run a zip code analysis that looked at overlap and we saw minimal overlap as far as in the spine and biologics area. So we thought that gave us comfort. And as we looked at it, we say, even if you have two distributors in an area, we're small, you know, sub-5% market share players, so we have the opportunity to be very nimble in those marketplaces and minimize disruption. And we've already talked to certain distributors that carry both seed sign and orthopix, and we have other distributors that have basically worked with that are looking for bigger channel, bigger portfolio, which this merger brings to us. It also helps not only as far as you know, efficiencies around inventory, asset utilization, things of that nature. When the merged company comes together, we get efficiencies there, which help. And distributor partners are looking for that now. You could be an individual small distributor and carry five lines or five different companies. When you have an organization like our merged company will be with C Spine and OrthoFix, they can come to a one-stop shop and get all of those technologies in one area. And that creates a very powerful position to recruit know, expand its strategic channel and also build, you know, a product line, a portfolio that when you're in a surgery, you can basically sell more than one product and distributors like that. And so your average products per procedure goes up as well. And so we see this as very synergistic from the spine and biologics area, not only because of the breadth of the portfolios, but the opportunity it gives those distributors out there to come consolidate with one organization. And frankly, both C-Spine and Orthofix think about this in a very similar way. As we looked at this deal, Every time we looked at who we behaved the most like in the industry, we behaved like C-Spine. And C-Spine, our business go-to-market model, is very much like OrcaFix. So this is the power of the combination going forward. And we're excited about that from both product, people, surgeon. And really, our end goal is to basically bring more technology and more products to the market so that we can provide those physicians with products and services, portfolios, or procedures to care for their patients.

And then one other question. Were there any one-time expenses in the quarter related to the merger that you think go away in the next couple quarters? Will those continue as you proceed through this merger?

Good question, Jim. This is Doug. You'll see us continue to adjust Sort of what we would characterize as the transaction cost that will go away over time. You'll see an increase in our strategic spend adjustment line in the back of our earnings release to the tune of about $3 million in Q3. And we would expect that to continue into 2023. Not only the transaction costs around all the closing activities and preparation, but also the cost to achieve synergies as we get in. to that over the next few quarters.

Okay, so roughly $3 million a quarter.

I think it will vary, but all the transaction costs will be done at closing, as you can imagine. It's a big effort to merge the two companies, and we've got a lot of integration planning occurring now. But in terms of going forward, we talked about the cost-to-achieve synergies. when we announced the deal at around the same amount of the synergies, about $40 million. But we would expect that most of the cost to achieve synergies would be incurred in year one as we sort of set the stage for all the synergies going forward.

Got it. Got it. All right. Thank you.

Thank you, Jim.

Once again, if you would like to ask a question, please press star followed by 1 on your telephone and wait for your name to be announced. That is star 1 if you wish to ask a question. And there are no further questions at this time, so I'd like to hand back to our presenters for closing comments.

Yes, I'd just like to thank everyone for joining the OrthoFix call this morning and your continued interest in OrthoFix and your ongoing interest in our merged company with SeathBind as post-close. We look forward to exciting activities going forward and a really powerful organization. Thank you for your time and have a great day.

This concludes today's conference call. You may now disconnect.