SeaSpine Holdings Corporation

Ladies and gentlemen, thank you for standing by. And welcome to the Q3 2020 C-Spine Holding Score Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance during the call, you may press star zero. And I would now like to hand the conference over to your speaker for today, Leigh Salvo, Investor Relations. Ma'am, the floor is yours.

Thank you, Carl, and thank you all for participating in today's call. Joining me from C-SPINE is CEO Keith Valentine and CFO John Bosjancic. Earlier today, C-SPINE released financial results for the quarter ended September 30, 2020. During this conference call, we will make forward-looking statements within the meaning of federal securities laws in regard to our business strategy, expectations, and plans, our objectives for future operations, and our future financial results and conditions. All statements other than statements of historical fact are forward-looking statements. Such statements may include words such as believe, could, would, will, plan, intend, and similar expressions. You are cautioned not to place undue reliance on forward-looking statements. which are only predictions and reflect our beliefs based on current information, and speak only as of today, November 9, 2020. For a description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward-looking statements, please see our news releases and periodic filings with the SEC, which are available on our corporate website, www.cspine.com and www.sec.gov. I will now turn the call over to Keith Valentine. Keith?

Thank you, Lee. Good afternoon, and thank you all for joining us. In my prepared remarks today, I will discuss the key highlights of our third quarter, provide our current views of the market environment and color as we close out the year. Sean will go into more financial details of the third quarter with some additional guidance on our expectations for the fourth quarter. We'll then open the call for your questions. The C-Spine team continues to rise to the challenges presented by the current environment, and we not only aspire to deliver the highest quality patient care, we are building an even stronger company for the future. C-Spine starts with the strength of our employees, and I am thankful for the dedication and passion of our entire team. Our future and our commitment to making a positive impact on spine patients' lives has never been stronger. The spine market continued to be impacted by the COVID-19 pandemic during the third quarter. However, we saw a significant increase in the number of spine procedures performed in the U.S. as the quarter progressed. Many of our surgeon customers have communicated to us they have worked through most of their backlog of spine surgeries and have scheduled cases deep into the fourth quarter when patient demand is typically most robust. However, We are closely monitoring the recent uptick in COVID-19 cases both in the U.S. and globally to determine if that will once again impact surgery volumes as the fourth quarter progresses. Turning to our third quarter results, in line with our announcement in early October, total revenue in the third quarter was $43.2 million, reflecting an 8% increase compared to the prior year period. In the U.S., which comprises more than 90% of our total revenue, we posted 10% year-over-year growth in the third quarter. Our growth in the U.S. was primarily driven by three factors. First, our continued cadence of new product launches and quick, urgent adoption of those new and recently launched products. Second, the recent contracting wins in some meaningfully large health care systems and lastly, by further expansion and diversification of our geographic revenue footprint. This diversification was especially beneficial in light of the continued COVID-related surgery restrictions that many of our surging customers faced during the third quarter. More specifically, California, Texas, and Florida, which combined have historically accounted for approximately 35% of our U.S. revenue, collectively grew less than 2% year over year in the third quarter. However, our total U.S. revenues still increased by 10% as we took share in new markets. We are also generating revenue growth from higher revenue per case as recently launched products allow us to participate in more complex surgeries and from increased utilization of our spinal implant systems and orthobiologics products per procedure. which we believe is the result of the more complete and complementary product offerings we market today. For the third quarter of 2020, there was an average of 1.9 C-spine products and systems used per procedure, compared to 1.7 in the prior year quarter. We have more opportunities to further diversify our revenue footprint and drive accelerating growth in the U.S., both from our tenured core distributors continuing to hire more sales reps, which has been driving accelerating growth in existing territories, as well as from onboarding of new core distributors in currently underserved markets. We are particularly excited about the upcoming alpha launches of our Admiral Cervical Plating System and Meridian ALIF Interbody System. as these products have been important catalysts to attracting new core distributors and for the hiring of additional sales reps by our existing core distributors. All in all, we are quite pleased to now be generating meaningful revenue growth in the U.S. from these important sources. They will no doubt be important drivers of our expected return to double-digit revenue growth if market conditions and surgery levels maintain at pre-COVID levels. Shifting gears to NASS, as many of you know, the annual meeting was held virtually last month. While disappointing that it couldn't be in person, especially since it was scheduled in our backyard of San Diego this year, we virtually showcased the benefits of our recently launched products and highlighted our increasingly comprehensive product portfolio. We're most proud of the four podium presentations related to C-SPIN research and products that were featured at NASS this year with two papers receiving best paper designation. Additionally, just last week we announced the publication in the Journal of Bone and Joint Surgery of a preclinical study that concluded the cells in cellular bone matrix products did not improve fusion or bone formation, and that C-spine's demineralized bone matrix product, Osteostrand Plus, outperformed the cellular graft products that were tested. These research papers and studies are foundational elements of our culture and mission at C-Spine to differentiate our products through strong science and compelling data in an otherwise very crowded field. Furthermore, this study substantiates the increasing payer and provider pushback we see around cellular bone matrix products. When combined with the previously published preclinical study comparing the osteostrand DBM fibers to six leading competitive DBMs, we have a robust set of scientific support for our differentiated DBM offerings. With respect to differentiated product offerings, the C-SPINE team has remained committed to maintaining a steady flow of new product introductions consistently throughout this year. Most recently, we initiated the limited launches of our Explorer TO expandable posterior interbody system and the Waveform C interbody implant system, the first of five 3D-printed interbody devices that we anticipate launching by mid-2021. Collectively, the expandable and 3D-printed interbody platforms provide C-SPINE with new or significantly greater access to a more than $800 million market opportunity. Additionally, we are very pleased by the quick market adoption of our NorthStar OCT and cervical facet fusion systems, which we launched on a limited basis in June of this year. These key additions to our portfolio, along with the full commercial launch in August of our Shoreline RT cervical interbody implant system featuring Reef technology, helped push revenue from recently launched products to 66% of U.S. spinal implants revenue in the third quarter of 2020. Looking forward, we are focused on launching more new products over the next two months, including a line extension of our nanometalline regatta lateral implant, which will include a modular locking plate and will further extend the application of reef topography. the alpha launch of the Meridian no-profile anterior lumbar implant featuring nanometalling and reef topography that includes both a screw and an optional modular locking plate, and a next-generation anterior cervical plating system under the Admiral brand name designed to complement our highly successful Shoreline system. We believe the Admiral plate's ease of use, robust instrumentation, and differentiated driver engagement will help us take additional market share in the cervical market. In the thoracolumbar franchise, we continue development efforts to extend our foundational Mariner modular pedicle screw system for more complex adult deformity surgeries. We expect to alpha launch this new application of the Mariner technology within the next six months. Finally, We are progressing on many leads for the placement of the machine vision image-guided surgery platform that we are co-marketing with 7D Surgical. There is a growing awareness and interest in this enabling technology. Just this past week, we hosted three days of workshops in our Carlsbad cadaveric training facility with a number of surgeons from around the country to highlight the clinical benefits of the 7D image-guided surgery system. Recognizing the relatively long lead time to place this type of equipment, we are optimistic that we will close one or more of these opportunities in the next several months. Our ability to place units of this enabling technology in a capital-efficient manner for hospitals will be particularly valuable in the current environment as hospitals are likely to continue restricting their capital purchasing budgets due to the financial impacts of COVID-19. Despite the business challenges and changes to the market landscape throughout 2020, we have delivered on our effort to continue expanding our product portfolio, capture market share, and limit cash burn. Looking ahead to 2021, we will once again prioritize product launches, most importantly, the migration of the many alpha launches delivered in 2020 to full commercial launch, the addition of more core distributors, and a deeper penetration into existing territories with more sales reps hired by those core distributors. Before I turn the call over to John, I want to reiterate our continually increasing confidence in C Spine's position as a leader in surgical solutions for the treatment of spinal disorders by providing products and systems that are engineered for fusion. Working with our core distributor partners as surgeon customers And with additional insight from our Surgeon Advisory Board, we will continue to plot a course for innovation and aggressive product commercialization, strong scientific data, clinical responsiveness, and superior customer experience that we expect will lead to sustained and long-term double-digit revenue growth when we ultimately emerge from the disruptive impacts of COVID-19. With that, I'll turn the call over to John for a recap of Q3 financial results. John?

Thanks, Keith, and good afternoon, everyone. Total revenue for the third quarter of 2020 was $43.2 million, an increase of 8% compared to the prior year period. U.S. revenue was $39.1 million, reflecting a 10% year-over-year increase, and international revenue was $4.1 million, reflecting a 5% year-over-year decrease. U.S. spinal implant revenue in the third quarter was $19.2 million, reflecting a 10% year-over-year increase. This increase was driven by higher demand for our recently launched products, specifically the Mariner MIS posterior fixation system, our suite of nanomethylene with reef topography, interbody implants, and the posterior cervical Northstar OCT system. This higher demand translated into a 5% increase in surgery volumes and a 7% increase in revenue per procedure from a product portfolio that participates in more complex surgeries and captures more of the procedure, as Keith mentioned earlier. This increase in demand was partially offset by low single-digit unit price declines. We were encouraged to see the percentage of U.S. spinal implant revenue generated from new and recently launched products increase to 66%. Kate noted earlier. U.S. Orthobiologics revenue in the third quarter was $19.9 million, reflecting the 10% year-over-year increase. This increase was driven once again by higher demand of our recently launched products, particularly our fibers-based DVM franchise. The percentage of U.S. Orthobiologics revenue generated from new and recently launched products increased to 31% in the third quarter of 2020. We believe that our continued focus on clinical evidence, as demonstrated by the multiple NASS podium presentations and the preclinical study published in JBGS featuring our orthobiologics products, is helping to drive growth in this portfolio as healthcare systems increasingly appreciate the value proposition of our advanced DBM products. We expect that behavior to drive our future market share growth in orthobiologics. From a distribution perspective, our core distributors collectively generated 55% of total U.S. revenue in the third quarter of 2020, up from 54% in the third quarter of 2019. We continue to recruit for more of these committed and increasingly exclusive distributors in the U.S. and to support the hiring of more sales reps by our existing core distributors. Gross margin of 67.4% improved 350 basis points as compared to 63.9% for the same period in 2019, primarily from lower excess and obsolete inventory charges in the current year as we prioritize more legacy product discontinuation activities. Additionally, higher margin U.S.-based revenue outpaced international revenue. The anticipated shift to more full commercial launches of spinal implant systems in 2021 is expected to generate higher excess and obsolete inventory charges in the future from the substantial investment in odd-sized implant inventory required with these set bills. However, that impact notwithstanding, we believe that we can continue to expand gross margins by 100 to 150 basis points per year over the next two to three years. Operating expenses for the third quarter of 2020 totaled $35.8 million, a $1 million increase compared to $34.8 million for the same period of the prior year. The increase was driven largely by higher headcount-related and stock-based compensation costs. Net loss for the third quarter of 2020 was $6.6 million compared to a net loss of $9.7 million for the third quarter of 2019. Cash, cash equivalents, and short-term investments at September 30, 2020 totaled $93.2 million. We had no amounts outstanding under our credit facility. We had $6.2 million of loans outstanding under the Paycheck Protection Program, which was used in accordance with the requirements of that program and for which we filed forgiveness in the third quarter. Our free cash flow burn, which includes operating cash flows and purchases of property and equipment, was $7.2 million for the third quarter of 2020, a $1.6 million decrease compared to $8.8 million for the third quarter of 2019. Our year-to-date free cash flow burn was $23.6 million. We continue to carefully manage operating costs and cash spend in light of the ongoing impacts of COVID-19 on our business, which has resulted in a $1.9 million decrease in our year-to-date free cash flow burn compared to the $25.5 million for the prior year-to-date period. Turning to our financial outlook for 2020, we are reiterating our guidance for fourth quarter 2020 revenue to be in the range of $47 million to $48 million, reflecting growth of approximately 7% to 10% over fourth quarter 2019. We expect gross margin for fourth quarter 2020 to be within a range of 64% to 65% as we continue to realize the benefits of the operating leverage we have been able to gain at our Irvine manufacturing facility, with some of that likely to be offset by higher excess and obsolete inventory charges from new spinal implant product launches. To date, we have not seen a return of widespread restrictions on spinal surgeries in the U.S. due to the recent resurgence of COVID-19 cases. However, we continue to closely monitor the situation, and should we experience a return of such widespread restrictions, it will very likely impact our ability to achieve our expected revenue and gross margin guidance ranges for the fourth quarter of 2020. I will now turn the call back over to Keith to wrap up. Keith?

Thank you, John. Off the back of a bumpy second quarter, we are very pleased with the improvement we experienced in the third quarter. However, the recent resurgence of COVID-19 cases still presents meaningful challenges and business risks that we will continue to monitor and respond to as needed. With that said, we remain optimistic that we can once again return to sustained and long term double digit revenue growth when we ultimately emerge from the disruptive impacts of COVID-19. With that, we will now open it to questions. Operator?

All right. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. Again, that is star 1 to ask a question. Our first question comes from the line of Ryan Zimmerman from BTIG. Your line is now open.

Good evening. Thanks for taking the questions and congrats on a strong quarter. So Keith and John, I can certainly appreciate the risk around the guidance and, you know, where we stand today. I just, you know, appreciate your thoughts around, you know, around guidance and where you see risk and what level of risk you've kind of accounted for within that guidance. When you put out the pre-announcement, you know, maybe COVID headlines weren't as significant as they are today. And so just maybe help us get comfortable kind of with the guidance for fourth quarter. And then I have a follow-up. Thank you.

Yeah, you know, Ryan, it's kind of a balancing act right now in the sense that, as we mentioned in the call, the larger states that we're most concerned about have a little bit of a run on numbers. And when I say balancing, the good news is I think that as you talk to surgeons and you talk to the folks closest to elective surgeries, they do feel like, unlike the first round, they have a different way and a different perspective of looking at the surgeries and still being able to do most of them and balancing better that profile that they weren't able to do when the first wave came. Now, I say that if the wave comes large enough and the space in the hospital becomes concerning, then I do think that they will resort to restrictions on elective surgery. So, Obviously, we're monitoring it very closely. There's a couple areas that we have greater concern than others. But as of, you know, right now, it still appears to be a very robust fourth quarter like we always see in spine.

Okay. That's very helpful. I appreciate the commentary thus far. John, just one for you. I mean, the operating expenses were up a bit this quarter relative to last quarter. And, you know, it gets you kind of back to your normal run rate. I guess my question for you is, you know, what kind of pace do you want to set as we think about going forward and continue to accelerate the top line?

Yeah, one of the big increases was stock-based compensation. So that was one of the big drivers. But other pieces, Ryan, as we talked about earlier this year, we had kind of put the brakes on hiring, particularly in the depths of the COVID uncertainty, but we've since gotten back to hiring given the growth trajectory we saw for the quarter. The expectations for the fourth quarter and even beyond into 2021 with the product launches all being pretty much back on track for the original commitment we had for this year, we want to make sure that if we're going to invest in the products and systems that we're going to have the right support behind them from a supply chain perspective, a So we really worked hard to fill a lot of those positions of need that are going to help enable the sustained double-digit revenue growth that we plan to get to in both portfolios and picking up activities on the clinical side as well. So after a pretty significant pause through many of the summer months, we got right back into hiring and had fortunately been able to fill a lot of these positions that are going to be so important to not just getting to that sustained double-digit revenue growth, but also enabling it long-term as well.

Okay. I appreciate that. Thanks for taking the questions. I'll hop back into you.

Thanks, Ryan. Our next question comes from the line of Matthew Blackman from Steeple. Your line is now open.

Good afternoon for everyone, and thanks for taking the questions. I just have a couple questions. And to start, and I'm sure you're very eager to provide the 2021 outlook, but just conceptually, should we be thinking about sort of 2021 off of the 2019 base? Is that sort of the right starting point as we think about growth as we look ahead to next year? And to the extent you're willing to comment, if that is the case, if I look at consensus, it's somewhere in the upper teens growth off of the 2019 base. I'm just curious to have your level of comfort with that. where that consensus number is. Granted, we've got some time before you have to guide. And then a follow-up on gross margins.

Yeah, 2019 is the right baseline. Think about it as sort of a two-year CAGR off the 2019 baseline. And with the systems we're launching and deploying and buying more of on the spinal implant side, we anticipate that to lead the growth as it has pre-COVID with the Increase in the distributor network, right, the fact that that portfolio has helped them hire competitive reps that bring surgeon relationships with them so we can go deeper into territories. The fact that we can own more of the procedure with a combination of spinal implant systems. We've got fixation, robust inner body systems, the orthobiologics presence in the OR to help us own that portfolio. that procedure, the fact that we can participate in more complex surgeries, right? Those are all great sources of growth that we think spinal implants is going to be leading the growth, but do have good expectations for orthobiologics as we expect to see more payer pushback on cellular grafts. And I think some of the clinical data we published recently gives us confidence that there's an increasing interest in our advanced DBM portfolio. that if there is continued payer pushback, then we think we can see low double-digit revenue growth in the orthobiologics franchise as well, particularly in the United States.

I appreciate that. There's clearly a lot of drivers. And again, you may not be comfortable talking to it, but does the consensus number in 2021 feel like it's in the right spot? And again, feel free to comment or not. And then again, one follow-up.

Yeah. High teens growth overall seems a bit steeper than we'd anticipate for the full portfolio because there's still some uncertainty for international. And even though it's 10% of our revenue, right, we don't have good visibility to what the growth runway looks like with international because obviously they've had more recent surges of coronavirus. We don't have on the ground visibility because we work through a lot of stocking distributors as well. So international, I think, is a bit of a wild card for us. And I said, orthobiologics, getting to sustain high teens growth for orthobiologics, it's not consistent with the market dynamics and what the overall market's growing. The fact that we're already the number two player in the DBM space, right, we don't have that same upside opportunity that we do in spinal implants to achieve high teens growth. So I think a more balanced growth trajectory for next year, probably in order, but That being said, those numbers do seem within the realm of what our internal expectations would be for spinal implants in the U.S. because of the improvements we've made to the distributor network and all the products we've launched and are planning to launch, particularly the ones launched this year in alpha that go into full commercial launch next year to help drive revenue growth.

All right. That makes a ton of sense. I appreciate that. And then gross margins, you know, the strong gross margins feel like the biggest update we got today relative to the pre-announcement. So I guess the first question is, are you willing to quantify or could you quantify sort of the year-over-year, you know, net impact that you saw this quarter and what that provided in terms of lift? And then as we think about sort of the expansion, the underlying expansion that we're seeing, is it as simple as we're now getting a fuller picture of what some of the 2019 product launches, early 2020 product launches can bring in terms of mixed benefit and then, of course, sort of the scale from the new plan? Are those the primary drivers we should be thinking about?

Yeah, first and foremost, it's the orthobiologics gross margin expansion is the big driver. There's a lot of fixed costs in that facility, and as we drive more volume through it, you get the benefit of the higher absorption, lower cost, but also a lot of the lean manufacturing processes and other efficiencies that we've been investing in, frankly, over the past two to three years. We've seen the payoff over the last year and a half and anticipate that we'll continue to see benefits. So that's going to be the biggest source of gross margin expansion. I think better utilization of our spinal implant systems as we ramp up volumes with some of the full commercial launch products is another opportunity, you know, driving costs through more collaborative relationships with our suppliers, we can have an opportunity to drive costs down. So there's a lot of different levers that we anticipate pulling. I think orthobiologics manufacturing is going to be the biggest driver of that over the long term. And with respect to ENO, yeah, I don't want to get into the dynamics of how ENO might impact one quarter to the next because it can be volatile quarter to quarter, but year over year it's going to be less of an impact and And it's not something I want to be chasing quarter to quarter because, you know, it may be driven by the magnitude of the number of spinal implant systems we launch in a particular quarter, how those launches go versus expectations. So it's not anything I want to get more granular with.

Fair enough. Really appreciate it. Thanks so much.

Sure.

Your next question comes from the line of Kyle Rose from Canaccord. Your line is open.

Great. Thank you very much for taking the question. So I just wondered if we could start on the commercial channel and maybe also a little bit on the contracting wind. So on the commercial channel, it sounds like you're upgrading some of the distribution talent or at the very least driving your existing distributors towards exclusivity. But it sounds like those distributors are hiring individual sub-reps. So maybe just help us understand Can you characterize what the pace or the scale of that hiring can potentially be, and then over what time you expect that to translate into top-line growth? And then secondarily, you talked about some contracting wins with health systems. Help us understand maybe what those represent from a dollar amount. Does that give you the right to play in the account? Does that give you a percentage of that account's implant utilization? Just help us frame that opportunity.

Yeah, I'll answer the second question first if I could, and then Boz can answer the first question. So exactly what you said, there's been a couple opportunities that now we have a new license to hunt, so to speak, and they're big health systems that we feel very good about. In fact, in one of them, I think it's going to be a combined opportunity with spinal implants as well as with 7D implants. And so we're very excited that not only we have an opportunity to participate in this account, but that we're already starting to get great momentum. And the good news was we had started to get momentum, and then we got formally approved onto as a preferred supplier. So, yes, feel good about that. There's a couple others, too, that are in the works or have been just completed that also will give us greater opportunity in that particular area, as you can imagine, with what we talked about in the script, with new distributors coming aboard, we have, with that new distribution opportunity coming aboard, we're also going to have to be very aggressive in how we try to participate in some new accounts. And so I think this will continue, this opportunity in new accounts will continue as we get into 2021 and beyond as well.

And then with respect to the case of hiring, so Two things. With the portfolio we have today, the more complete portfolio, and as Keith called out in the scripted comments, particularly the Admiral Cervical Plate and the Meridian ALIF inner body that were on the cusp of launching, those have been two big drivers of a lot of conversations, not only with new potential exclusive distributors, but also the existing tenure distributors being able to bring on competitive reps into their distributorship, and that brings more immediate revenue with it. So, you know, good examples in the Southwest, we had seen some competitive reps hired into an existing distributorship, and we're already seeing the benefits of that revenue growth. So I think the opportunities can come to fruition faster with getting competitive reps into the existing distributor accounts versus adding new distributors. But we also have good opportunity for growth with adding more core distributors And the ones that, for the most part, we're entertaining tend to be larger geographic coverage areas than in the past. So I think that they have an opportunity to be more transformative in terms of driving revenue growth over multiple states. Whereas in the past, they were more localized opportunities, still big opportunities, and they come with that exclusivity. But again, I can't stress enough how important that more complete product offering is And the products we've got ready to launch, how attractive that is to potential reps joining our existing distributors, but also more larger, transformative, exclusive distributors covering more states and more geography that can help move the needle in terms of revenue growth over larger areas and mostly underserved markets. We haven't really had to swap out distributors. As we've talked about in prior calls, there's still a lot of white space on the map. that's totally additive and just having this much more comprehensive portfolio makes it a much easier conversation. And we've never been more confident in our ability to bring on these distributors and we're making the investments in additional sets to be able to support that growth, not just in the near term, but we're looking six, nine, 12 months ahead to make sure that as fast as they can move, we can support them with new sets.

That's very helpful. And then just to dovetail off that, the last part of that answer was just a question around the state of inventory and supply, particularly for some of the newer, more differentiated systems. When you think about launching into the expandable market and then with the 3D inner bodies, where do you stand from a supply standpoint now? Do you really have the ability to press the gas pedal down there, or is that more incremental investments from a step standpoint?

Well, right now they're all in alpha launch, so there's a specific subset of surgeons and distributors that are priority to getting through the alpha evaluation phase, which is typically six to nine months. That being said, long term, we know we have growing capacity, particularly in 3D printed implants, because that's the newest market entry for us. We'll be ready for the full commercial launch to be able to really push the pedal to the metal and aggressively commercialize those when we get into the full commercial launch. I just want to temper expectations in alpha launch. There's only so far you can push it because it's so important to get that surge in feedback and evaluation and, you know, hopefully make just design tweaks to the instrumentation before you get the full commercial launch. But that's where you put the pedal to the metal, and we're already thinking forward about what the supplier capacities can be for those type of products as they go to full commercial launch.

Great. Thank you for taking the questions.

Your next question comes from the line of Kayla Crum from Tourist Security. Your line is open.

Thanks. Hi, Keith and John. Thanks for taking our questions. So you guys had mentioned, you know, several states that had underperformed relative to sort of the broader U.S. market in the third quarter. So I'm curious what you've seen from those geographies in October. You know, have you started to see some recovery or changes I guess, are you assuming some recovery in your fourth quarter guidance?

Some recovery in which specific territories? You're talking about California, Texas, and Florida?

Yes, yep. I think you mentioned that they grew about 2% in the quarter.

Yes. Based on where things sit today, I anticipate they're going to be a source of growth, unlike they were in the third quarter, and that's where that geographic difference diversity of the revenue footprint really helped us to grow in the third quarter. And we did it largely without any benefit of the three states that represent over a third of our revenue. But given where market conditions are and what surgical volumes look like and, you know, the general lack of any current restrictions on surgeries due to COVID, I would anticipate those three geographies to be growth generators for us in the fourth quarter.

Perfect. Okay, great. And then you guys mentioned the JBJS publication. Can you just speak to how you're using those data in the field and, you know, how surgeons, how hospitals are responding to those data at this point? Just trying to understand, you know, how significant or how material that could be going into next year. Thank you.

Yeah, so, you know, it The key to it is obviously we had an opportunity to present that information previously through NASS, and then now it was accepted in such a well kind of read and understood scientific journal. And so there's a couple different avenues. We've already gotten a lot of – we know a lot of hits to the site to see the article, to understand the article. Obviously, we did a press release in and around it to give greater detail to what the opportunity is, and it will be incorporated into how we think about getting information out, not only to our distributors for training, but also to the surgeons overall in the field as we talk about and get better education and clinical research in and around orthobiologics. I think that a number of folks have already felt the pressure from insurance providers on this exact topic, right? That cells continue to get pushback from insurance providers, not only because of cost, but because of the lack of data. And so I think this is a meaningful shift for us on two fronts. One, that we do go head-to-head often with cells. We are a more cost-effective solution. But I think most importantly, when you look at the space for orthobiologics, DBM across all the United States is accepted as a bone graft alternative with a biologic, and all insurance companies support it. So I think this is kind of a double hit, right, that we're playing right into the fact that insurance companies are concerned about price, they're concerned about the results and lack of published scientific data, and now we have it in a much more cost-effective way.

Great. Thank you.

Your next question comes from the line of Jeffrey Cohen from Ladenburg-Talman. Your line is open.

Hi, Keith and John. How are you?

Good. How are you, Jeff? Good. Jeff, how are you?

Great. Just a few questions from us. Firstly, you made some reference on average per procedure increasing from 1.7 from 1.9. What's the denominator that you're using on that, and could you speak a little further as far as cross-selling, either from the ortho side into hardware or vice versa?

Yeah, we're looking at surgery data where a spinal implant system is used as the denominator and then looking to see how many systems are on that charge sheet. You know, typically it's fixation and interbody data. We don't have complete visibility to every orthobiologic product that's used because some hospitals do stock it on the shelf, so it's not going to be part of the charge sheet. So most of that number that we report is going to be metal systems used in the procedure, but the denominator which we have the most visibility is surgeries that use our spinal implant systems and how many different systems, typically fixation and interbody, would be the most common. are used together in that surgery.

Okay, got it. You spoke earlier about the 31% of revenue from a new product. Just remind us that's inside of 24 months from launch, including alpha sets?

No, so, sorry, the overall number, yeah, in the spinal implant, new product revenue is 66% of U.S. revenue. Orthobiologics is lower. And we're looking at all products launched since the spin is what we define as new and recently launched. The more meaningful ones are clearly in the last year or two, let's say two to three years, but it does reach back to the spin, but those are much less significant contributors than the full launches we've had in the last two to three years.

Okay, got it. And then lastly for me, give us a macro standpoint on what you've seen from Q3 as far as types of procedures out there, anterior, posterior, et cetera, and any particular insight into areas of spine which are driving growth from cervical to lumbar to the thoracumbula. Thank you.

I think the biggest impact, Jeff, on the quarter is the mix to see that more complex surgeries were done. As the country opened up to elective surgeries more so as the quarter progressed, right, early on, It was more simple cervical fusions as things opened up, and then we saw as time goes on in many of the states that we saw the shift to be more complex surgeries with ICU space freed up. So that was one of the things we were tracking. But in terms of giving a mix of surgeries, I don't want to get into the different mixed by thoracolomar, cervical, et cetera. But we did see that we're able to participate in more complex surgeries with the systems we have on the market today. And from checking our channel checks, we saw that more complex surgeries became more prominent as the quarter went on, whereas in the beginning it was much more simple, typically cervical cases.

Yeah, and Jeff, keep in mind, too, I think we show it in a few of our slides at times about the addressable market we're expanding to, right? And so, when you look at thoracolumbar, that is the giant part of the addressable market that we're expanding into, meaning getting into, as John said, complex, getting into MIS, two different MIS opportunities, getting into both 3D printed as well as our proprietary nanomethylene. And so, I think that those are the biggest bucket of new share opportunities that we're driving towards. But again, with the North Star launch, we're also now getting into a very large opportunity for posterior cervical with a newer system, right? We had probably our oldest systems in our bag are getting replaced by that system. So it's a big new market opportunity for us.

Okay, got it. Thanks for taking the questions.

Yeah, you bet. Have a good one, Jeff.

Yep.

Our next question comes from the line of Matthew O'Brien from Piper Sandler. Your line is open.

Afternoon. Thanks for taking the question. So either Keith or Baz, you know, as far as the Q3 result goes, if you net out what was going on in those three territories that made up, you know, 35% of your sales historically, that equates to about 14% growth that you saw in the rest of the U.S. And so what I'm trying to figure out is, you know, I know some parts of the U.S. are still working well below capacity in terms of the number of cases that they could actually do. But it's always, you know, Q3 is a typically seasonally easier quarter. So, you know, quoted a comp off of. So, you know, what are you seeing, I guess, underneath the surface in terms of your business from a share-taking perspective, new accounts that maybe we don't have good visibility on? Was that 14%, you know, much, much higher than that just because, you know, of the inability to, you know, to be as efficient on the capacity side from a volume perspective or You know, just any other commentary you can provide kind of under the surface in terms of what you're seeing from a share-taking perspective.

Yeah. So, you know, this will be an interesting quarter because I think that a number of providers probably did a little bit better. We did have a couple that didn't do as well as I think that were anticipated. But I think overall it was a robust surgical quarter. I think... It just depends on different companies and where their concentration points are, right? So our concentration point was an advantage at one time when there's been some disasters and what have you. And then at other times, it's been our challenge. And so in this particular case, those were the areas that were hotbeds for COVID. So there was some slowdown in certain cases. I think overall, though, we feel good about where fourth quarter is going. We feel good about how hospitals seem to have a new decision tree or algorithm when it comes to how they're going to address spikes or return to the ICU and how that will impact or not impact the elective surgery scheduling. But your math is right. Yeah, I think if those would have been on par to the rest of our growth profile across the United States, you would have seen that lift in growth overall.

Got it. And then that's helpful, Keith. As a follow-up for you specifically, and no offense to John, but you've been in this industry for a while. You've built another company historically. There was a lot of components to building that business, new products, obviously a new approach, getting access to a lot of these larger hospital systems. where are you at as far as the C-spine lifecycle in terms of some of those areas that, again, may not be fully appreciated? I don't even think you have full distribution across the entire U.S. So, you know, where are you at as far as that lifecycle goes, the new distributors, getting into some of these bigger hospital accounts and systems to really, you know, I don't want to say necessarily inflect because it's your old employer, you know, obviously the spine market was much healthier back then. But, you know, to either continue to see this level of growth or even a little bit of an inflection even further when we get into more of a normalized timeframe or period.

Yeah, you know, I think it's a fair question in the sense that at one point we were able to get new distribution just because we were able to show that we were going to innovate. And I think that we're now at a place where we're able to get probably more – tenured and seasoned distribution in markets that we don't participate in because we are now rounding out the portfolio. I mean, if you look at what will be completed as we end 2021, we'll really be a full-service spying company with a new product portfolio, meaning we're not resting on any legacy products to continue the majority of our revenue. And so I think that is a big shift for us, the conversations we're having now, the new folks that are coming aboard in leadership as well as in our distribution channel. I think that we'll have opportunities in some areas to be direct. As we move forward, it'll be opportunistic. We're not out there purposely driving that strategy, but I do think in some cases there's opportunistic opportunities. individuals that want to and prefer to be more in a direct capacity or a modified direct capacity, and we can be receptive to that. I think we also will be in a place soon, too, that we're going to, you know, our partnership as it continues to unfold with 7D, it will be a very strong enabling technology. They have new products coming forward as well that will cater very nicely into our MIS platform that will cater nicely into how we want to drive those new market opportunities that I just mentioned in the previous question. So, you know, from our look, we still feel like we're in that very early stage of how we continue to accelerate growth and, you know, very much want to be focused on, as Boz mentioned earlier, the high teams and getting into the, you know, some quarters of 20% growth or more.

Very helpful. Thank you.

Your next question comes from the line of Brandon folks from Cantor Fitzgerald. Your line is open.

Hi, thanks for taking my question. Can you hear me? Yes, we sure can. All right. Fantastic. Well, congratulations, firstly, on a very good quarter. Thank you. I've been hopping between a few calls, but I was on a call earlier today where a company admittedly in a different vertical was told me that they had received a list of 20 hospitals that had suspended elective presurgeries due to the resurgence of COVID. Obviously, you put up good numbers in 3Q and you put out very strong data in 4Q. So it seems you have a lot of confidence in your business going forward, but I'd love to just get any color that you can provide on that received today and how you're viewing your business.

Sure. Brandon, you were going a little bit in and out for us. What vertical and what area is moving back on elective surgery? Say that again.

So another company today, our speaker, mentioned that they had received a list of 20 hospitals that had suspended elective procedures. So I'd love to get any comment whether this is something you're seeing within your portfolio as well. Granted, you have a very strong 4Q guidance.

Yeah, I think we wanted to approach this based on where we see things now, right? And I know we've caveated that if there's widespread shutdown, we can impact guidance. But we put a lot of thought into it, and we've seen isolated pockets of hospitals stopping or slowing down elective procedures. I do believe that spine is less an elective and more of a deferable procedure. So, yes, it can be shut down short-term, certainly as we saw earlier this year. But based on the intelligence we have as of today, seeing that there are isolated pockets of hospitals that have shut down or slowed down surgeries, that presents a risk, but it doesn't present a material risk such that we wanted to pull back our guidance that we had offered when we put out our revenue in early October. So as we alluded to many times in the call, it's something we have to pay close attention to because we have seen some of that in the news in recent days and we know the cases are ticking upwards. So we're gonna have to continue to track it. As Keith said, we're also optimistic that healthcare providers are more equipped to deal with it than they were back in the spring as well. But, you know, that being said, if hospitalizations significantly increase and ICU capacity is completely consumed by COVID, it does present a risk to the revenue numbers we gave. But we are looking at things as they stand today and as we've been tracking it in recent days and weeks to understand, you know, what the landscape looks like and seeing that there are isolated cases. But it's all based on intelligence we have as of today.

Great, that's very helpful, thank you very much.

All right, as a reminder, if you still have question, you may press star one. I'm showing no further question at this time. I would now like to turn the conference back to Mr. Keith Valentine, your CEO.

Thank you again for joining us for our call, and we will be talking with you again after fourth quarter results. Have a great evening.

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