SI-BONE, Inc.

Good afternoon, and welcome to S.I. Bones' third quarter earnings conference call. At this time, all participants are in listen-only mode. We'll be facilitating a question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Marisa Weiss from the Gil Martin Group for a few introductory comments. Please go ahead.

Thank you for participating in today's call. Joining me are Laura Francis, Chief Executive Officer, and Anshul Maheshwari, Chief Financial Officer. Earlier today, SI Bone released financial results for the quarter ended September 30, 2022. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results, or performance are forward-looking statements. These forward-looking statements are based on the company's current expectations and inherently involve risks and uncertainties. These risks include the duration of secondary impacts of the COVID-19 pandemic, the facility staffing shortages, whether the COVID-19 pandemic will occur in the future, and our ability to effectively commercialize new products going forward. Other forward-looking statements include our examination of operating trends in our future financial expectations, such as expectations for hiring, surgeon training and adoption, active surgeons, new products, clinical trial enrollment, and reimbursement decisions, and are based upon current estimates and various assumptions. These statements involve material risks and uncertainties, that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risk factor section of our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. SI bone disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 7, 2022. And with that, I will turn the call over to Laurel.

Thanks, Marissa. Good afternoon, and thank you for joining us. For today's call, I'll provide a business update And Anshul will provide additional detail regarding our financial results. Before I cover our third quarter results, let me provide an update on recently published CMS final rules for calendar year 2023 hospital outpatient and ASC payments. On November 1st, 2022, CMS posted the calendar year 2023 rule for hospital outpatient and ASC payments. Based on the final rules, calendar year 2023 facility reimbursement for minimally invasive SI joint fusion procedures performed in ASCs and hospital outpatient settings will increase by approximately 26% to $17,109 and 33% to $21,898, respectively. Today, 80% of our minimally invasive SI joint procedures are performed in an outpatient setting or at surgery centers. As these procedures continue to move to ASCs, the higher reimbursement in 2023 could potentially serve as a tailwind to demand and also allow us to maintain our pricing at these sites of service. Now, moving to our performance in the third quarter of 2022. I'm very pleased with our strong execution, which resulted in record revenue driven by continued acceleration in procedure demand and robust surge in interest in our portfolio of solutions. In the third quarter, we generated worldwide revenue of $26.4M, reflecting approximately 19% growth compared to the third quarter of 2021 and 3% growth compared to the second quarter of 2022. In the U.S., our revenue grew 21% compared to the prior year period to a record $24.6 million. This revenue was driven by 25% U.S. procedure volume growth in the quarter. The continued increase in our U.S. procedure volume throughout 2022, while the healthcare system has continued adjusting to staff limitations, reflects strong demand for our solutions. In addition to accelerating top-line growth We gained operating leverage across our organization as our revenue growth significantly outpaced operating expense growth alongside a material sequential reduction in cash outflow in the quarter. With reimbursement tailwinds, expanded indications, and strong surging engagement across our differentiated product portfolio, I'm very excited about our potential to further accelerate growth. Our strategic investments in scalable infrastructure over the last few years provide a strong foundation to support our top-line growth, and drive incremental operating productivity as we get into 2023. Now, let me provide an update on our key initiatives as we look to extend our leadership position and drive strong long-term growth. Starting with our sales infrastructure, our dedicated sales force remains an important driver of growth as we expand our core market and grow our presence in trauma and adult deformity. Our sales force at the end of the third quarter included 85 territory managers and 72 clinical support specialists. With an increasingly seasoned sales force, our average trailing 12-month revenue per territory manager has increased by more than 10% since the start of the year. With our expanded portfolio, we're leveraging our growing distribution network for case coverage and selectively evaluating consignment strategies of high-volume hospitals. We're confident that this hybrid approach will complement our territory manager efforts and create additional capacity to drive surgeon engagement, ensure high-quality support for our surgeons, and continue to deliver strong and consistent top-line growth. Moving on to surgeon engagement, we ended the third quarter with a record active surgeon base of over 800 surgeons. This equates to approximately 27% growth in our active surgeon base over the comparable period in 2021 and approximately 12% growth sequentially. We've now seen seven consecutive quarters of double-digit year-over-year growth, which is a testament to our focused execution in education and outreach over the last several years. Surgeon adoption is one of the best leading indicators of long-term procedure demand. Additionally, we continue to experience a growing surgeon overlap across our various products. For example, in 2022, over half of our active surgeons who performed an adult deformity procedure also performed a minimally invasive SI joint fusion procedure using our solutions. We expect higher surgeon utilization as the synergistic surgeon base continues to grow over time. With the trauma indication expansions for ICU's TORC and the launch of ICU's bedrock grant, we're continuing to invest in surgeon education to drive engagement and activation. We've also experienced a steady increase in the adoption rate of surgeons who have been trained on the simulator, which remains a valuable component in our surgeon training program. Moving forward, we'll continue leveraging our simulator training along with in-person local training and regional training to drive cost-effective surgeon engagement. We continue to expand our academic programs to educate residents and fellows. Since inception of the program, we've held training events at approximately 200 academic facilities in the United States and trained approximately 1,200 surgical residents and fellows. We're also expanding our trainings into new academic centers as we've seen a growing interest in our products among surgeon educators in new facilities. Education on bedrock and IQ's bedrock granite in deformity are now integral to each training, and we're adding content on IQ's TORC trauma applications. We're encouraged by the increase we're seeing in adoption by previously trained residents and fellows as they start practicing. Year-to-date, the number of fellows and residents who have completed a first case has more than doubled compared to this time last year, while their procedure volumes have increased four-fold. Turning to products and solutions, our focused execution has resulted in nearly 3,000 surgeons worldwide performing over 75,000 procedures since the inception of the company. Expanding our platform of sacral pelvic solutions to address SI joint pain, spinal pelvic fixation, and pelvic trauma has been a key tenet of our strategy, and we've made substantial progress on this mission year to date. With iFuse 3D, iFuse Torx, And now, IQ's bedrock granite, we believe that the value of our innovative, versatile, and complementary product portfolio provides surgeons with a comprehensive set of alternatives and positions us as the top choice for surgeons for sacropelvic solutions. IFUSE Torque continues to exceed expectations with another quarter of record revenue. IFUSE Torque has been an important addition to the portfolio and provides a complementary option to IFUSE 3D for our existing surgeons and has been a valuable asset to convert users of competitive screw systems. In trauma, while preliminary, we're seeing an uptick in the application of IFUSE Torque to treat sacral fragility fractures. based on the FDA expanded clearance in June. There are approximately 120,000 of these injuries per year in the United States, most of which are currently not treated surgically. The fragility fracture market is a recognized unmet clinical need and is of strategic importance to us as the sacral pelvic solutions leader. Over 75% of patients with fragility fractures are currently treated with bed rest with a high cost for rehabilitation. and involving significant complications, deterioration, and overall health status in many cases, and a 25% one-year mortality rate. In addition to orthopedic trauma surgeons, many fragility fracture patients are seen by our spine surgeons. We continue to invest in surgeon training and instrument training confinement opportunities as we build out the trauma business, which we believe will be an important avenue for growth over the long term. In September, we also received FDA clearance for IFUSE TORQ to include fusion in conjunction with spinal pelvic fixation. Considering the successful launch of IFUSE bedrock granite, this expansion was important as it allowed IFUSE TORQ to complement IFUSE bedrock granite as a second point of fixation of the joints in the sacro-alar iliac trajectory, which, from a biomechanical perspective, is important to attain fusion. We're excited about the success of iFuse Bedrock Granite, driven by strong surgeon interest in adopting the product and making it a standard of care for stabilizing the base of lung constructs in adult deformity procedures. This was highlighted at a recently conducted spinal pelvic think tank meeting in San Diego. The meeting was hosted by Dr. David Pauly from the University of Minnesota, Dr. Greg Mundus from Scripps, and Professor Jean-Charles Louet from Bordeaux University and attended by approximately 20 leading spinal deformity surgeons. We're pleased with uptake of Granite despite our early stage and launch cycle. Additionally, Granite is providing a significant pull-through opportunity for the overall portfolio as a subset of surgeons are using some combination of our products to achieve two points of fixation across the SI joint on either side. resulting in a higher procedure average selling price. Given the positive experience with IQ's bedrock granite, we've seen surgeons expand the use of the product to stabilize the base of shorter multi-level constructs used in procedures to treat degenerative spinal conditions. Approximately one-third of our IQ's bedrock granite cases have been used in two- to four-level procedures, There are approximately 100,000 short construct procedures to the pelvis per year in the United States. Based on expanded use of ICU bedrock granite and short constructs for certain patients, this could result in an exciting opportunity for us to further expand our total addressable market. Given the broad spinal deformity surge in demand and support for IQ's bedrock granite, we continue to successfully work with major hospitals across the U.S. to get the product on the approved list. This process, which is typically for new and highly differentiated products, can take anywhere from a few days to a few weeks to complete, depending on the hospital procedures. We've also been working with our suppliers to optimize the workflow and address the challenges with near-term delays and adequate availability of implants. While the team is making significant progress on these workflows, both of these factors limited our ability to fully capitalize on the demand momentum in September and into the first half of the fourth quarter. On the clinical research front, in September, we enrolled the first of the targeted 120 patients in our Safran study. As a reminder, the SAFRN study is a prospective randomized controlled trial of surgery using IQ Torque device versus non-surgical management in patients with debilitating sacral fragility or insufficiency fractures. We anticipate results to be available in late 2024. Talking about our patient awareness initiative, in the third quarter, we continued to see high website traffic robust patient engagement, surgeon referrals, and our Find a Doctor low-care metric, while our cost of acquisition steadily declined. We view the Find a Doctor metric as a leading indicator of patient engagement and potential future demand. As a reminder, these outreach programs are targeted at patients in chronic, severe SI joint pain who have been in conservative care for an extended period. Our goal is to connect patients with surgeons in their area who perform mentally invasive procedures using our products. Before I turn it over to Anshul, I'd like to provide an organizational update related to an addition to our international leadership team. In September, we appointed Neville Lorimer as the vice president of international. Neville joined us from ConMed, where he was the general manager of the UK and Ireland, and has 20 years of experience in the healthcare industry, including over a decade at Stryker. Neville's experience across orthopedics, spine, and trauma will allow us to stabilize and grow our business in Europe, expand our international franchise, and further accelerate top-line growth. I'll now turn the call over to Anshul to provide more detail on our financial results.

Thanks, Laura. Good afternoon, everyone. Our third quarter 2022 total revenue was $26.4 million, representing growth of approximately 19% compared to the prior year period and 3% growth sequentially. U.S. revenue was $24.6 million, increasing 21% compared to the prior year period. Growth in the U.S. was driven by strong demand for resolutions, which resulted in 25% growth in procedure volumes versus the prior year period. The robust procedure volume and strong sequential increase reaffirms that the operating environment in the US continues to normalize. Our ASC procedure volumes were in the low 20% range consistent with the prior year period and sequentially. International revenue was $1.8 million, a decline of 5% compared to prior year period, as strong performance in France was more than offset primarily by the continued underperformance in the Germany and the UK markets, as well as from additional foreign exchange weakness. Gross margin for the third quarter of 2022 was 84%. The third quarter gross margin reflects a low single-digit percentage decline in average selling price from procedure, site of service, and product mix, as well as higher freight costs. The gross margin also reflects the higher cost of the new products and the increase in cost of operations, including higher depreciation from the instrument trades deployed to support the strong new product demand. Operating expenses increased 9% to $35.8 million in the third quarter 2022, as compared to $33 million in the prior year period. The increase was driven by higher commissions, increase in travel and freight costs, continued investment in R&D, and higher headcount. On a sequential basis, operating expenses decreased approximately 10% compared to the second quarter of 2022. The sequential improvement in operating expenses reflects productivity gains from an increasingly seasoned sales force, as well as leverage across the investments we have made over the last few years to build a scalable platform to support strong top-line growth. Our net loss was $14.2 million of 41 cents per diluted share for the third quarter of 2022, as compared to a net loss of $15.9 million of 48 cents per diluted share in the prior year period. As of the end of the quarter, our cash and marketable securities were approximately $104 million, and current and long-term borrowings were approximately $35 million. Our cash outflow in the third quarter declined sequentially to 10 million, from 16 million in the second quarter. Based on our anticipated investments and operating expense in Q4, we expect cash outflow to be in the same range as the third quarter. Moving to guidance. We expect 2022 worldwide revenue to range between 104 million and 105 million, implying year-over-year growth of approximately 16 to 17%. the updated guidance assumes no international revenue growth for fiscal year 2022 based on foreign currency headwinds and recovery challenges germany and the uk as well as moderated upside in the u.s from granite through the end of 2022. the annual revenue guidance implies fourth quarter 2022 worldwide revenue to be between 29.5 million dollars and 30.5 million dollars reflecting growth between 17% to 21% over the prior year period. And U.S. fourth quarter revenue growth between 18% to 23%. With that, I will turn the call over for questions. Operator?

Thank you. And as a reminder, to ask a question, simply press star 1 on your telephone. Star 1-1, I apologize. One moment while we compile the Q&A roster. Our first question comes from the line of Kyle Rose with Canaccord. Please go ahead.

Great. Thank you for taking the questions. Yeah, I just wanted to talk a little bit more about the dynamic from transitioning from the Q3 into Q4. Maybe just talk about the macro environment you're seeing as far as procedure volumes and staffing challenges. And then if you could just comment more on the commercial side of the business When you think about going after the trauma market and more into the deformity side of things, do you anticipate meeting additional specialized sales forces? Or I think you talked about a consignment model potentially. Just help us think about what that build-out might be from a commercial perspective. Thank you.

Thanks, Kyle. So, your first question was the dynamic going from Q3 to Q4. What I would say from a Q3 perspective is the team executed really well, and we achieved several record milestones. So if you think about the acceleration of the business worldwide, in Q1, our growth rate was 10%, in Q2, our growth rate was 19%, and Q3 was 19%. Sorry, 10 to 15 to 19. If you look at the U.S., the U.S. was at Q1, 9% growth, Q2, 18%, Q3, 21%. So we're continuing to see this robust rebound in volumes as well as dollars. And so what I'm also excited about is the growth that we're seeing in our active surgeon base. So hitting over 800 surgeons that performed at least one procedure or During the third quarter, that's a 27% increase year over year, and it's a 12% increase sequentially. So that bodes really well for the future of the business. And in fact, we saw that growth continue very strongly into the month of October. You asked a little bit about some of our additional products. Torque had a record quarter. And then Granite, we're seeing strong surge in engagement and significant interest in Granite. for long constructs and for short constructs as well, which has us excited overall for the business. So from a top line perspective, we're seeing that acceleration, but then if you look at the P&L and liquidity, we're seeing strong operating leverage across the organization. The revenue growth rate for the quarter was over double the OpEx growth rate. And then we also saw a double digit increase productivity in the quarter as well. And then our cash outflow declined by 60% sequentially to around 10 million. So all of that is good. As I mentioned, the international environment is challenging from a macro perspective in particular, but given the trends in the U.S., it gives me a lot of confidence in our ability to finish 22 strong and then have further acceleration into the into 2023. I'm going to talk a little bit on the commercial side, too, from a trauma and a deformity perspective to answer your question there. So, from a deformity perspective, the same surgeons that perform primary SI joint fusion also perform our adult deformity procedures. And in fact, there's very strong overlap, as I prepared remarks, between those two procedures. And so very, very close symbiotic relationship. In terms of the trauma opportunity, we actually are seeing a lot of these cases in our core market with orthopedic and neuro-spine surgeons. And in fact, that is the area of focus for us with this particular product. And so We don't see a need to separate out our sales force at this point in time because of the symbiotic relationship between the products.

Great. Thank you very much for taking the question. It's very helpful.

Thank you. One moment for our next question. And it comes from the line of Craig Bejo with Bank of America. Your line is open.

Hey, Laura. Hey, Anshul. Thanks for taking the questions. I want to start with just the guidance. Anshul, I think you said moderated upside from granted is one of the main reasons why you took down the overall guidance. So, just wanted maybe a little bit more color there, and does that have to do with, you know, the challenges and the availability of implants and, you know, maybe just following on that, like, If you've seen it through the first half of Q4, when do you expect that to be back to normal?

Now, hey, Craig, good to talk to you again. You know, why don't I take the first half of the question on guidance, and then I think it might help getting some more context from Laura on what we're really seeing on the granted side, because there's a lot of excitement there. On the guidance side, you know, our updated guidance of 104 to 105, If you look at it from a fourth quarter perspective, it implies a growth rate of anywhere between 17% and 21% worldwide versus the 19% we saw in the third quarter. And in the U.S., it would imply a growth rate of 18% to 23% because our expectations now, based on Laura's earlier comments on the MEA, is expecting no growth out of Europe for the fiscal year 2022. So if you think about rough math, Greg, That means, you know, Europe had an impact of about a million and a half between Q2 to Q4, and I'd say 70% of that impact was in the second half of the year, so circa 1.2 million-ish. And it's evenly divided, I'd say, between the FX impact that we've highlighted previously on our last earnings call that we expected to happen, but also a slower recovery than we had expected coming out of COVID, especially in the UK and Germany. And that's been a bit of a challenge for us. And we think that challenge will continue in the near term. And Neville is doing everything possible to make sure we stabilize the EMEA business and get them back to the growth trajectory. So what I'd say is that was the biggest driver in terms of adjusting our guidance. Now, given what we had seen in the US, Greg, which was the continued acceleration in the business, And this was before Granite launched at the end of May. And the strong demand that we were seeing in Granite for the early part of the launch, we felt pretty confident about that being able to absorb the shortfall out of Europe, both in the FX and also the unknown shortfall from an operation perspective as well. you know with with some of the new product launch dynamics that we had in our prepared remarks and Laura can go into the details you know we're sort of expecting a more moderated impact of it in the entire fourth quarter even though we were seeing it coming into September and the first half of the quarter we just want to make sure that you know we see that work its way through the process uh and and then feel like you know going into 2023 we're positioned well So, we think the adjusted guidance appropriately brackets the risks from Europe and also potential upside from granite if you look at the range of the guidance. And then, Laura, if you want to talk about just granite momentum and what's going on there.

Yeah. And, you know, as Anshul said, the challenge that we have is to just keep up with the demand that we're experiencing right now on granite. It has been exceptional. Surgeons believe it's going to become the standard of care for stabilizing the basal lung construct. We're actually seeing quite a few of our surgeons using the product in short constructs as well, depending upon the needs of that particular patient. And it's also helping to drive deeper engagement with our surgeons, given that over half of them are using our primary products, ICU 3D or TORC, in addition to granite. It also has a nice pull-through from the broader portfolio, given that oftentimes surgeons are looking for two points of fixation on either side of the long construct. So all of those things bode well. We're also being very thoughtful about... you know, how we roll this out to other hospitals. And what we want to do is to make sure that, you know, even though the timeline may vary in order to get the product on the approved list for a hospital, we've made great progress in a short period of time, and we want to make sure to maintain attractive pricing on the product as well. And so our team is doing a good job of doing both of those things. So we think Granite bodes well. for the future of the business in 2023.

Great. Thank you both for all that color. Let me move on to kind of the operating expenses and cash spend. So good to see that it went down in Q3. Anshul, maybe just wanted to understand, were there expenses that maybe you didn't make during the quarter that led to the lower cash spend? And then when I think about $10 million a quarter in Q3 and Q4. How should we think about that rolling into 2023? Should we just kind of take that $10 million a quarter in cash spend and think about that for the quarters in 2023?

Yeah, so, Craig, let me take the question on our OPEX leverage and the cash flow leverage that we saw in the quarter. You know, as we've talked throughout this year, Craig, we've made a lot of investments over the last 24 months across our organization, whether it's building the commercial infrastructure, building the operational heft, and also making investments in R&D to build a platform that can deliver this strong, sustainable growth. And coming into the year, we knew we were at an inflection point from a scale perspective where we would see the fruits of those investments play out, and they have with the accelerated top-line growth. So Overall, you know, there was nothing unnatural that we're focused on to get the leverage. In a prior quarter, we had talked about Q3 being lower than Q2 from an OpEx perspective because there was some timing spend in Q2. But overall, you know, with revenue growth being, you know, 2X, OpEx growth, we feel really good about it. A lot of that is just driven by a more mature sales force, the fact that they have, you know, highly differentiated products calling on a synergistic surgeon base. driving density, so that's having an impact as well. And then as we think about Q4 as well, you know, we think that the OPEX leverage will continue and actually accelerate as we get into 2023, you know, as we continue to make progress with reducing our gap and making progress on the adjusted EBITDA profitability metric that we're closely monitoring as well. And even on the cash flow side, Craig, if you look at our PP&E and our inventory, we've actually made a substantial amount of investment, whether it's in torque trays or granite trays or torque implants. And even though we're working through the supply chain with granite, we made significant investment in implants there too. And now it's about deploying those assets in the field. And you're seeing the timing of that play out on the cash flow side. We do expect to buy more instrument trays because of the growth that we are seeing there and as we evaluate consignment opportunity and case coverage opportunity with distributors. But we think we've got adequate capacity to be able to support the growth that we see ahead of us. Now, when it comes to 2023, Greg, obviously we're not going to provide guidance. You know that it's too early. But from our perspective, the operating leverage should continue into next year because we get more and more mature on our sales force. We continue to drive the deeper penetration. So it's all a ground game for us at this point. And from a cash flow perspective, you know, as the operating leverage comes in, you'll see the cash outflow also decline versus, you know, what you do in annualizing Q4.

Great. Thanks for taking the questions.

Thank you. One moment for our next question, please. It comes from the line of David Rescott with Truist. Please go ahead.

Hi, thanks for taking the questions. This is Sam on for David. I'll just start off with 4Q. When you think about the high and the low end of the range, it sounds like it's really the delta between how much that pressure in EMEA ends up being and how quickly the granite supply issues can get resolved. Is that the right way to think about it? Anything else in the sort of core SI joint fusion market to think about there?

Yeah, no, what I would say is the range that we provided adequately brackets the risk that we see in EMEA. And we think that risk will take a few quarters to sort of work its way through the process as Neville, you know, sort of puts together a growth strategy for that market. The range delta is effectively the potential impact that we could see from Granite in terms of how we keep working through successfully with the VACs at different hospitals to get this on the approved list and also on the supply chain side, making sure we can get the implants in. You know, our focus is to end the fourth quarter strong, but more importantly, make sure that the momentum that we have in Granite, especially from a surge in interest standpoint, that we can capitalize on it starting Q1 of 2023 as aggressively as possible.

Got it. And then just with the final rule confirmation, how significant of an impact can that be in 2023 and where should we think about that coming through in the business most significantly? Should that be more on the ASP side or should we think about that more bringing in new surgeons or maybe even helping to reactivate prior or currently inactive surgeons? Thanks for taking the questions.

Yeah, no, it's a good question. And this is a very significant increase in the facility payment, both in the ASC environment as well as in the hospital outpatient setting. And the total amount of the payment in both of those settings is something of note as well. And so we do think that you know, these sorts of decisions that surgeons are making about adopting SI joint fusion into their practices, you know, part of it is just regularly diagnosing these patients and then treating them. And the health economics of that decision are important. And so, as you know, around 80% of our procedures are in an ASC or an outpatient setting. We do think that it will attract new surgeons who previously were not doing the procedure. We also think that some surgeons who have been inactive will reactivate because of this decision as well. So we do think it's significant, and we expect to see that as a tail end in 2023.

Thanks for taking the questions.

Thank you.

One moment for our next question, please. Our next question comes from the line of Drew Ranieri with Morgan Stanley. Please go ahead.

Hi, Laura and Anshul. Just maybe on the procedure volume commentary, as you're kind of thinking about the year, 14%, 23%, then 25% in the third quarter. I think you mentioned that you're seeing maybe even an acceleration, even in the early days of the fourth quarter. So can you give us a little bit more commentary on that? And just as you are thinking about 2023, I mean, you still have talked about having multiple tailwinds at your back. I mean, do you think that as you're looking at the U.S. business, that these levels you're hitting in the back half a year are sustainable into next year with potential pricing as maybe an offset?

Yeah, thanks Drew for the question. We are pleased with the revenue acceleration that we're seeing in the US. And if you just look at the US procedure volumes in Q1, you gave the number 14% volume growth in Q1, 23% volume growth in Q2, and 25% volume growth in the third quarter. we did not talk about what we're seeing in the fourth quarter thus far, but we do expect to continue to see that acceleration continue partly from our core business, but also from our adult deformity business and from our trauma business as well. And so we do see this as a factor. The other comment that I would make, and it plays off of the question that I just received from Sam, and that is, With the increase in the facility payments and the ASCs and hospital outpatient, what we would like to do is see us hold price in 2023, given that that should take some of the pressure off, especially in the surgery center environment where we saw the most pricing pressure.

And then, Drew, on your question about 2023, you know, again, it's not guidance because, you know, we'll wait for 2023 to come in before we provide guidance. But like Laura said, you know, the trends and the procedure volumes in the U.S. and, you know, do not underestimate the active surge in growth numbers that we have seen, you know, 27% growth year over year, 12% sequentially quarter over quarter. Those are pretty massive numbers in terms of active surge in base growth and they actually are a very good forward-looking indicator for us in terms of procedure demands as we go into the future subsequent quarters. So the underlying U.S. business is actually fairly strong from a fundamental perspective. As we work through these new product dynamics, we feel pretty good about the setup there. When you think about the U.S. growth specifically, and I'm talking revenues, it was 21% growth in Q3, and if you think about the Q4 growth, range of 18% to 23%, depending on the low and the high end range for the year. I think the midpoint of that is about 21%. That gives you a pretty good idea of the trend that we're seeing in the business. Now, EMEA will continue to be a bit of a challenge for the next few quarters, and that may have an impact as we get into 2023. But you were spot on, Drew.

You think about 2022.

Torx had a record... It's continued to do well. 3D is a great product with those two together. They're the market-leading products for SI joint fusion. The facility fee increase that Laura talked about. The broader application of TORC, not just with the clearance for trauma, but also an adult deformity that we got in the September period, the August period, is a big deal to be able to deliver two points of fixation and complement granite So overall, we feel the setup is really, really good in the U.S., and we just need to work through some of these dynamics we talked about today and deliver.

Got it. Then maybe if we can talk a bit about the active surgeon number, and you touched on this, I think, with your answer to Sam a bit. But as you're looking at the 800 active surgeon base in the third quarter and maybe what are your expectations for the fourth quarter growth that you're potentially going to see? And then as you're looking at these new surgeons with the 27% year-over-year increase, how does their utilization or ramp up compare now than maybe what that looked like pre-pandemic? I guess I just want to get a better sense of how sticky these procedures are and if these surgeons are, for lack of better words, becoming like true believers in core eye fuse or even some of the adjacent products. Thanks for taking the questions.

Yeah, yeah, it's a great question, and you're right. We're really encouraged by the continued increase in surgeon interest in our solutions, and hitting that record 800 plus active surgeons in the quarter really highlights that, and I did note in my prepared comments that that trend has continued into the fourth quarter, and you were asking about the stickiness of the procedure. We've seen double-digit growth in our surgeon base for seven straight quarters at this point. And this quarter was particularly notable with a sequential 12% increase just between Q2 and Q3. So, you know, these adoption numbers are great forward-looking indicators for demand trends. We're excited about the surgeon overlap between the different procedures, adult deformity, and our minimally invasive SI joint fusion. It really just reaffirms this comprehensive set of solutions that we have and that our focus on education and training is yielding results. So we're excited about where we're at. It is a very important indicator. That's why we provide it. And it's one of the most exciting metrics we focus on to drive long-term growth.

One moment for our next question, please. And it comes from the line of Dave Turkley with JMP Securities. Please proceed.

Hey, good evening. Laura, I'd love to just get your thoughts that come of the 50% or over 50 adult deformity also used iFuse. I mean, I was kind of thinking that out of the gates, it might be like higher, meaning that you'd hit your core accounts with some of the newer products right out of the gates and that that might make that number even a more significant one. Sorry, I'm getting a call on the other one. But I'd love to get your thoughts about that and where you think that's headed.

So, David, let me be clear about our surgeon base, okay? So, our adult deformity surgeons are orthopedic and neurosurgeons that do spine procedures. And those that are doing adult deformity tend to be in an academic medical center. They're key opinion leaders. They tend to work on the most complex cases that are out there. And so they are the same call point, but what often occurs is there will be certain surgeons in a practice that may be performing the minimally invasive procedures, and those include IQs, and then there are those that are focusing on the open complex cases like scoliosis cases that are using granite. But what we're seeing is a significant overlap between the two, and we're actually quite pleased with that number, with the over 50% who have done an adult deformity procedure also doing a primary case. So, it also, once again, going back to that point that I made, there may be another surgeon within the same practice that is doing the IQs procedures while the KOL at a particular site is doing the adult deformity procedure. So that 50% number does not capture that information within it. But the point that I think is important to make here is that there is significant overlap and synergies between the procedures that our surgeons are doing. And that even does extend to these trauma cases as well. Pelvic ring, fragility, fracture, many times, these patients are actually being seen by a spine surgeon. And historically, they weren't sure what to do with those particular patients. And what we're trying to do now is provide the education effort to say there is a solution for these patients and it is our torque product.

Got it. And then the active surgeon number, I can't remember exactly how you define it, but I mean, you have some folks in there that are are new to probably all your products that you're gaining with some of these new products. And would that be a fair statement? Is that fueling some of the increase?

No, that's correct. And we did provide information that said we now have over 3,000 surgeons worldwide who have performed at least one procedure. So we're seeing a significant increase here. And it's both. And as a reminder, an active surgeon is a surgeon who performs at least one case during the quarter. So we had over 800 surgeons who performed at least one procedure with one of our products. And so it's an important measure, and it shows that we are educating, training surgeons, they're on board, and they're continuing to perform procedures. So we're very happy with that number because it It doesn't necessarily reflect growth in the current quarter, but what it does is really helps you understand what the long-term opportunity is for the business.

Got it. Thank you.

Thanks, David. Thank you. And one moment for our next question, please. Our next question comes from the line of Ross Osborne with Cantor Fitzgerald. Please go ahead.

Hi, congrats on the quarter. So I guess just one for me at this point and kind of just going up a last question. So looking at the trauma opportunity, what pushback or questions do you get for potential TORC users that are currently going down the bedrest route at this point? Or is it really just a function of educating surgeons? And if so, what do you believe surgeons need to see to drive adoption? Yeah.

Thanks for the question, Ross. We do believe that this is an educational effort because historically 75% of these patients have been treated with bedrest. The other 25%, primarily, the surgeons have used trauma screws. And so we're used to this sort of an educational sale. It actually fits very well into our wheelhouse. How we've done this in the past is, first of all, we have a very innovative product that addresses the issue of sacral insufficiency and fragility fractures. So it starts there. The product is already there. Then it is our educational effort with our medical affairs team and with our surgeons. And so those are the sorts of things that we need to engage in. And finally, we did talk a little bit about our saffron study, and that's going to be very important as well because this is a randomized controlled trial that is showing the results for patients that have received treatment using TORC compared to conservative care. And so this is the sort of information when you're going through an educational effort like this you require high-level RCT clinical data in order to go back to surgeons and help them to adopt a new procedure.

That's great. Thank you. Congrats again on the quarter.

Thank you. Thank you. One moment for our next question. It comes from the line of, hello? Can you hear my voice?

Yes, we can.

Okay, perfect. It comes from the line of Young Lee with Jefferies. Please go ahead.

All right, great. Thanks for taking our questions. I guess, so you made a lot of progress this year with surgeons and fellow residency training, new products, and coverage and reimbursement. I guess, you know, it sounds like qualitatively growth can re-accelerate in the U.S. next year. Are there any headwinds we should be mindful of with staffing or supply chain or any macro dynamics going forward, such as potential recessionary impact?

I think we've spoken about the challenges that we're experiencing right now. And international, obviously, is one where we're seeing some headwinds that we're in the process of addressing. And then, as we said on granted, it's really just a matter of ensuring that we have the implants and the instrument trays in order to meet the demands that are ahead of us. So those are really the couple of things that that we're addressing at this point in time and feel very good about our ability to execute on those things.

Thank you. And one moment for our last question. And our last question comes from the line of David Saxon with Needham and Company. Please proceed.

Hi, guys. This is Joseph on for David. Just wondering if there's going to be any impact from C-SPINES pending merger with OrthoPix on your IT's grant partnership with C-SPINES?

Yeah, thanks for the question. We don't expect for there to be any impact with that particular relationship.

Okay, great. Good to know. And then I'll just squeeze this last one in here. Could you maybe talk about your expectations for a sales rep hiring, you know, here in the final couple months of 2022 as well as 2023? And then maybe just on the P&L sheet, some of the timing of the higher cost, you know, inventory working through that and maybe some of the impact on gross margins in 2023 from that.

Sure. So happy to take the question on the rep hiring plans for the year. You know, our expectation is to end the year with about 160 people in our sales force, which includes our territory managers and our territory representatives or TRs. I'd say our TMs will be anywhere between, I'd say 88 to 90 people and the rest would be the TRs. You know, when we think about next year, again, we're not going to be providing numbers there, but We've made a lot of investment in our sales force. We think we'll continue to make those investments, but at a moderated pace. And then between consignment opportunities and also leveraging distributor network for case coverage, we believe we have the capacity to be able to support the strong demand that we see in the U.S. On your second question, Joseph, on the gross margin side and on the inventory side, You know, as we came into this year, we've talked about a gross margin trend and sort of expecting to end the year with a fiscal year 2022 gross margin in the mid-80s range. And if you think about the way we started the year, since then, a few things have happened, right, which we had already forecasted. One was the introduction of the new products into the market with torque and granite. These products generally have a higher cost since they're relatively new. They have been being at a scale where we can get cost efficiencies out of them so that's number one and that will take some time as we build demand and scale of those products the second piece was uh we've aggressively invested and i talked about this earlier in a call as well on instrument trays both for torque and for granite and these trees are more expensive than our traditional 3d trays as well but we're doing that because we see a strong demand ahead of us both for adult deformity and also with torque in our core business and also in trauma. And this is going to lead to elevated depreciation. You know, we depreciate our trades over a three-year period. So by the time you start seeing the trade turns to drive the revenue, you're still seeing the depreciation flow to the P&L. And then the third piece is just general freight increase that everybody's experienced throughout this year. So, you know, our gross margins are trending like we expected. We expect Q4 gross margins to be closer to what we saw in Q3. And then in terms of 2023, we'll provide more guidance as we get into 2023. But, you know, some of the dynamics that I just talked about on new products and trays will continue to have an impact in 2023 as well.

Okay, great. Thank you so much. Congrats on the great quarter.

Thanks, David.

Thanks, David.

Thanks, Joseph. Sorry.

Thank you. And with that, we conclude our Q&A. I will pass it back to Laura Francis for her final remarks.

Thanks to all of you for joining the call today. We talked a lot about our revenue acceleration since the start of 2022, and it gives me a lot of confidence in our ability to capitalize on the strong demand for our solutions and a favorable reimbursement landscape. And As we exit 2022, we have the infrastructure and the liquidity profile to deliver strong and sustainable revenue growth and drive operating leverage as we progress toward profitability. So thanks again for your time. Goodbye.

And with that, ladies and gentlemen, thank you for participating in today's program. You may now disconnect.