SeaSpine Holdings Corporation

Thank you for standing by and welcome to the quarter for 2020 C Spine Holdings Corporation earnings conference call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Hunter Covey, Investor Relations. Thank you. Please go ahead, sir.

Thank you for participating in today's call. Joining me from C-SPIN is CEO Keith Valentine and CFO John Bostranczyk. Earlier today, C-SPIN released full financial results for the fourth quarter and year ended December 31, 2020. During this conference call, we will make forward-looking statements within the meaning of the federal securities laws in regards 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, and tend in similar expressions. Your caution to not place any reliance on forward-looking statements, which are only predictions and reflect our beliefs based on current information and speak only as of today, March 1st, 2021. For a description of risk 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 Securities and Exchange Commission, which are available on our corporate website at www.cspine.com. and at www.scc.gov. I will now turn the call over to Keith Valentine. Keith? Thank you, Hunter. Good afternoon, and thank you all for joining us. 2020 was a challenging year due to the significant and volatile business disruptions caused by the COVID-19 pandemic. Yet, I have never been more proud of our team's performance and their commitment to our mission to deliver cost solutions to surgeons and hospitals to improve the quality of patient lives.

That focus translated into the 19 product launches successfully executed in 2020, the most in a single year, and nearly 9% year-over-year U.S. revenue growth in the second half of 2020, with an increased percentage of our U.S. revenue from an expanded and increasingly exclusive network of core Okay. Okay. until mid-November when U.S. hospitals began to restrict or cancel elective surgeries due to the surge in COVID-19 cases. While U.S. revenue continued to grow year over year in both November and December, it did so at a slower rate. We saw those restrictions on spine surgery volumes continue into January and early February. However, With recent decline in COVID cases, spine surgery volumes are improving once again, and many of our surgeon customers have communicated to us that they have once again accumulated a backlog of spine surgeries to work through. While we don't yet have sufficient market visibility to provide revenue guidance for full year 2021, based on these trends, we feel confident in our ability to grow total revenue in 2021 by 20% over full year 2020. Assuming COVID-19 cases and hospitalizations continue to decline. However, given the adverse impact COVID-19 had on spine surgery volumes in January and early February, we anticipate most of this growth will be later in the year and that total revenue growth for the first quarter of 2021 will be in the high single digits. Turning to our fourth quarter results, in line with our announcement in early January, total revenue was $46.4 million, the highest quarterly revenue reported since the spinoff. This reflects a 6.2% increase compared to the prior year period. In the US, which comprises more than 90% of our total revenue, we posted 7.2% year-over-year growth in the fourth quarter. In the U.S., growth was once again led by a higher sales by our core distributors of recently launched products and line extensions. Specifically, new and recent launched products contribute more than 68% of U.S. spinal implant revenue and more than 35% of U.S. orthobiologics revenue. Encouragingly, our growth came from increased spinal implant surgery volumes and from higher revenue per case. as recently launched products allow us to participate in more complex surgeries. We also benefited from increased utilization of our spinal implant systems and orthobiologics products per procedure, which we believe is the result of the more complete and complimentary product offerings we market today. For the fourth quarter of 2020, there was an average of 1.9 C-spine products and systems used per procedure, compared to 1.8 in the fourth quarter of 2019. From a distribution perspective, we have continued to add more committed and increasingly exclusive distributors in the US. For the fourth quarter of 2020, these core distributors collectively generated 56% of our total US revenue. We have opportunities to drive further growth in the US, 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 new core distributors in currently underserved markets. We are particularly excited by the recent alpha launches of our Admiral Cervical Plating System and Meridian ALIF Interbody System, as these products have been important catalysts in driving this progress. We are pleased to be generating meaningful revenue growth in the U.S. from all these important sources. We are confident they will be important drivers in our ability to take more market share and to grow meaningfully faster than the overall U.S. spine market, provided market conditions and surgery levels return to pre-COVID levels. Turning to our product launches, 2020 was an incredibly exciting year for innovation and execution. We completed the most ambitious launch schedule in the history of the company. The full commercial launches of two-line extensions to our Mariner platform for MIS and for more complex revision surgery and of our Shoreline RT cervical interbody implant system, featuring our proprietary reef topography, were major catalysts for revenue growth in 2020. We also launched many new systems in 2020, particularly in our cervical and interbody franchise. Key launches in our cervical franchise included the Waveform C 3D printed interbody implant system for use in ACDS, which offers the next level of 3D printed architectural innovation, balancing key geometric and manufacturing requirements without compromising clinical requirements. Wave4C represents the first 3D-printed interbody device to be co-developed with Restore3D. The NorthStar OCT system features screw technology with market-leading angulation of up to 90 degrees in a novel occipital plate with angled holes that facilitate a new cranial to caudal trajectory in the occipital keel. The performance and rapid market adoption of the Northstar system in alpha launch have consistently exceeded our high expectations, and we eagerly await the planned full commercial launch of this system in mid-2021. The alpha launch of the Admiral cervical plating system represents the next generation of anterior cervical plating designed to strike the optimal balance between strength, profile, and construct rigidity. Among the many alpha launches in our Interbody franchise, I want to highlight the launch of four additional Interbody systems featuring Reef topography, including the aforementioned Meridian ALIF system with Reef A Interbody, plus Reef TA, an articulating implant, Reef TH, a hinged implant, and Reef TO, which accommodates both direct impact insertion and insert and rotate techniques. In fact, we just announced earlier today the full commercial launch of the Reef Keo system. We also launched the Explore Keo expandable interbody system, an innovative posterior interbody solution that offers both parallel and lordotic expansion options, which is our first new product offering since 2017 in the estimated $400 million expandable interbody market. And in late December, we launched the Regatta lateral plate system, featuring our True Profile technology. This launch represents the first stand-alone lateral plate for C-spine, and allows for multiple plating options, including one, two, and four whole plates, to bring maximum fixation with minimum profile, and address a wide range of anatomy and pathologies. Looking ahead for the next 12 months, of our foundational mirror platform with an adult deformity indication in mid-2021. We also have four more 3D printed inner body systems scheduled to alpha launch in 2021, highlighted by the recently announced launch of the Waveform TA articulating inner body system, our first 3D printed lumbar inner body system. We will devote a significant amount of our product development and marketing resources in 2021 to enabling the timely and successful full commercial launches of the many systems we alpha launched in 2020. Those full launches are expected to be significant contributors to revenue growth in 2021 and beyond. In the Orthobiologics franchise, we continue to focus our efforts on conducting studies aimed at differentiating our products through strong science and compelling data in an otherwise crowded field. We are particularly proud of the recent publication in the Journal of Bone and Joint Surgery of the results of a preclinical study that concluded the cells in cellular bone matrix products do not improve fusion or bone formation and that our demineralized bone matrix product, Osteostrand Plus, outperformed the cellular graft products that were tested. 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. Finally, I want to highlight our continued enthusiasm for our strategic alliance with 7D Surgical to co-market their flagship machine vision image-guided surgery platform and to develop C-spine-specific instrumentation optimized to work with their platform. In addition to the systems we directly assisted 7D in selling to our hospital accounts in 2020, we continue to progress on many leads for the placement of 7D's system and are helping to grow awareness and interest in this enabling technology. Recognizing the relatively long lead time to place this type of equipment, we are optimistic that we will close these type of opportunities over the coming months. Our ability to place units of this enabling technology in a capital efficient manner for hospitals will be valuable in the current environment. As hospitals are likely to continue restricting their capital purchasing budgets due to the financial impacts of COVID-19. Continued investment in product innovation and in the deployment of more of our highly utilized foundational spinal implant systems combined with our best-in-class PBN portfolio gives our larger and increasingly exclusive distribution network confidence that we can support their aggressive growth plans as we emerge from the COVID-19 pandemic. Despite the business challenges and changes to the market landscape throughout 2020, We are very proud to have delivered on our efforts to continue expanding our product portfolio and to capture market share. And now, I'll turn the call over to John for a recap of Q4 financial results. John?

Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, total revenue for the fourth quarter of 2020 was $46.4 million, an increase of 6.2% compared to the prior year. U.S. revenue increased 7.2% to $42.1 million, and international revenue declined by 3.2% to $4.3 million. U.S. spinal implant revenue in the fourth quarter increased 8.3% year-over-year to $20.7 million and was led by growth from new and recently launched products, particularly the Mariner MIS and revision systems, the Northstar OCT system, and our expanded line of nanometalline inner-body devices featuring roof topography. Spinal implant surgery case volumes increased by more than 7%, and we were able to capture more revenue per procedure with our expanded portfolio. We continue to experience low single-digit price declines. U.S. Orthobiologics revenue in the fourth quarter increased 6.2% year-over-year, to $21.4 million and was driven by growth in the OsteoStrand Plus product. Gross margin for the fourth quarter of 2020 was 62.8% compared to 64.2% for the same period in 2019. The decrease in gross margin was due to higher spinal implant excess and obsolete inventory provisions in the quarter which, as we indicated on our prior call, can be fallible from quarter to quarter. 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 a substantial investment in outsized 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 expense for the fourth quarter of 2020 totaled $39.5 million, a $2.6 million increase compared to $36.9 million for the same period of the prior year. The increase was driven primarily by $1.8 million in higher selling and marketing expenses, the majority of which relates to selling commissions and spinal implant set depreciation and instrument deployment costs, $300,000 in higher R&D expenses, and $500,000 in higher G&A expenses. Net loss for the fourth quarter of 2020 was $10.3 million, compared to a net loss of $8.6 million for the fourth quarter of 2019. Cash and cash equivalents at December 31, 2020, totaled $76.8 million, and 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 for forgiveness in the third quarter of 2020. Our free cash flow burn, which includes operating cash flows and purchases of property and equipment, was $17.1 million for the fourth quarter of 2020, a $9.5 million increase compared to $7.6 million for the fourth quarter of 2019. A substantial majority of that increase was attributable to higher investments in inventory and spinal implant set build and instrument capital expenditures in the fourth quarter of 2020. Our free cash flow burn for the full year of 2020 adjusted to account for the benefit of a $6.2 million forgivable PPP loan was $34.5 million, a slight increase compared to 2019. We remain focused on expanding our gross margin and continuing to reduce cash-based G&A expenses as a percentage of revenue. However, we plan to continue to redeploy any operating leverage towards sales, marketing, and R&D initiatives and inventory and spinal implant set-built capital expenditures that are critical to driving sustained accelerated revenue growth. We expect our free cash flow burn for 2021 to be slightly higher than that we reported for 2020 as we invest even more in spinal implant inventory and instrument and set-bill CapEx to support the many full commercial launches slated for 2021, and that will be critical to generate the 2021 revenue growth expectations Keith outlined earlier. With the nearly $77 million of cash and cash equivalents we have on hand, plus the additional liquidity that we can access through our $30 million credit facility, which we can elect to expand to $40 million, we believe that we are sufficiently capitalized to continue to invest confidently and aggressively for growth. That confidence is based on the positive results we've seen from investments made in 2020 and before, and is founded on the underlying premise that spine surgery is not elective surgery to those patients who need it. It's temporarily deferrable at best, and the surgery volumes will return to pre-COVID levels as 2021 progresses. At this point, I'd like to turn the call back over to Keith for closing comments.

Keith? Thank you, John. Our priorities for 2021 are very similar to those which I believe we have executed on very well in the past, namely, to timely and effectively develop and launch clinically relevant products, to increase the number of core distributors and their exclusivity to C-Spine, to generate above-market revenue growth through more efficient utilization of our spinal implant sets, and to further expand our gross margins. To that end, we plan to launch more than a dozen products in 2021, the most impactful being the alpha launches of the line extension of Mariner with an adult deformity indication and four additional 3D printed interbody systems and the migration of the many alpha launches we delivered in 2020 to full commercial launch. We expect to exit 2021 generating more than 75% of our U.S. spinal implant revenue from new and recently launched systems and more than 65% of our U.S. revenue from existing and new core distributors. We expect to generate between 150 to 250 basis points of gross margin expansion for more efficient utilization of our spinal implant sets and inventory, and by gaining additional operating efficiencies from our Irvine manufacturing facility. We remain optimistic that we can once again return to sustained and long-term double-digit revenue growth as we emerge from the disruptive impacts of COVID-19. The optimism is fueled by the more than 400 passionate and dedicated employees of C-SPINE who are motivated by our past successes and are driven to deliver clinically superior yet cost-effective procedural solutions that differentiate us with both surgeons and distributors in this competitive market. With that, we will now open it up to questions. Operator?

Thank you. And participants, as a reminder, to ask the question, you will need to press star, then the number one on your telephone keypad. Again, that's star, then the number one on your telephone keypad. To withdraw your question, please press the pound key. Your first question comes from the line of Matt O'Brien from Piper Assembler. Your line is now open.

Hi, guys. This is Jeron for Matt, and thank you for taking the questions. You know, appreciate the early color on the 21 outlook, especially considering all the moving parts over the course of the year here. But maybe you would kind of talk through some of those parts that we should be factoring into our models. I know you had previously discussed international as being a bit of a wild card from a COVID perspective, a smaller chunk of the business, but just wondering if visibility has improved there to a degree. And then obviously I think your spinal business here in the U.S. should be a key growth driver. But, you know, what should we be thinking about from a mixed perspective between your two businesses?

Yeah, I think international is still the area where we have the least visibility, only because all of that business is done through stocking distributors, so we don't have on-the-ground marketing and sales support. We do think it will grow in 2020, but given the lack of visibility we have, we don't – We can't really dial it in, I think, any better than that at this point, given the continuing COVID uncertainties. But I think you got it right on the spinal implants in the U.S. driving the growth, right? We expect both portfolios, ortho and spinal implants, to grow. But I think you picked up on the fact that we're investing in more spinal implant sets, launching a lot of products, obviously, and a lot of those will be moving to full commercial launch. So we are investing aggressively in deploying more of our existing sets, but also deploying sets that come with those full commercial launches. And we do anticipate spinal implants will be leading the growth in the U.S. portfolio.

Okay, that's helpful. I just wanted to follow up on that comment on the new product side. You know, obviously 19 launches last year despite COVID. It's obviously been a big driver for the top line. I think you mentioned 12 new launches here in 21. I guess going back to those 19, what stage are most of those launches as far as contributing to the top line? And then how many limited launches are you currently in that you expect to roll out more broadly in 2021? Thank you.

Yep. So the full launches that were most meaningful to revenue last year and should be impactful going forward was the Mariner MIS, and the revision system that allows us to participate in more complex deformity surgeries. So those were two big contributors from an alpha launch. Shoreline with reef topography is another big addition, right? I think that's been a nice refresh to the shoreline portfolio with that reef topography enhancement. And then everything else was pretty much an alpha launch. Most everything else was an alpha launch, and You know, we've called out the Northstar OCT system for posterior cervical as a particularly successful product in terms of driving growth, and that was an alpha launch in 2020 that's expected to be one of the many products going to full commercial launch in 2021. But, you know, it even outperformed our expectations in an alpha launch in terms of the amount of revenue contributions. We were expecting good clinical uptake by surgeons, given some of the features of the device, but that was one in particular that I'd call out as exceeding even our own internal expectations for an alpha launch with a limited number of sets we had. So all around a good year led by full commercial launches. As you pointed out, a lot of alpha launches last year and more to come this year, but we're really excited about bringing all that technology in a full commercial launch because you think about what we're able to do with just Mariner, Shoreline, Mariner MIS revision and shoreline and what growth that generated, you know, think about all the alpha launches in 2020 that moved to full commercial launch, including our 3D printed interbody portfolio and what we can do there in terms of growth. Thank you.

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

Great. Thank you very much. I appreciate you taking the questions. So I just wanted to talk about the state of the commercial team. Keith, obviously you've outlined plans to drive higher revenues coming from those core distributors. And in your commentary at the end of the prepared remarks, you talked about 65% – I think I heard that right – of 21 revenues coming from that group. That's up from where you ended the year at 56% in the Q4. So maybe help us understand what's been happening behind the scenes that you're seeing from the commercial team that gives you confidence to see, you know, the higher mix of revenues, you know, driving towards that channel when we think about 2021?

Yeah, I think there's really two things. The first one is, of course, we're rounding out the portfolio and getting some, I think, big opportunity items that are very important to the more exclusive distributors. You know, a perfect example is the posterior cervical was one of our last of very old legacy systems, two legacy systems that will now, you know, be obsolete as we continue to go into full launch with that opportunity. The other two is that over the course of the last year, we have brought aboard a number of new distributor partners that, you know, we feel good about, that they will have, they will be fully up to speed. They'll be, the training that goes along with it, just the ability for them to be more functional in the territory representing us you know, often, you know, takes nine to 12 months to really become fully functional. And so we feel good about the fact that the investments that we made a year ago or nine months ago will start paying off as we get into 2021.

Great. And then when I think about the commentary about 21, I know you're not providing formal guidance, but you did talk about, you know, revenue growth, you know, north of 20%, you know, weighted to the second half of the year. When I look at the performance you put in in the second half of this year, almost a record quarter in the Q3. You did have a record quarter in the Q4. You're talking about growing 20%, presumably upside to that number in the second half. Just maybe help us think about the puts and takes first half to second half. Is it really just incremental COVID uncertainty near term, or is there some sort of geographic focus that we should be thinking about as you move through the rest of the year as well?

No, it's exactly that. It's just it's how we saw 2020 end and, you know, the continued COVID disruptions we saw in throughout January and even the early part of February that has us cautious about the first half of the year, right? Things are trending well with vaccine rollouts and lower case counts. But I think until we're, you know, more widely distributed on vaccines and a little bit more stability is why we want to be cautious in terms of the back end weighted growth. But that being said, we're continuing to launch products and launch systems, as we talked about on the call. And, you know, we feel good about the annual number, and hopefully we're able to do more in the first half of the year. But just feel like it's the prudent thing to be cautious, given the fact that there are still our near-term uncertainties presented by COVID, particularly what we saw in the first half of Q1 that, you know, we experienced as we wrapped up the year. But things are trending in the right direction since that time.

Okay, great. Thank you for taking the questions.

Your next question comes from the line of Ryan Zimmerman from BTIG. Your line is now open.

Hey, guys. Thanks for taking the questions, and congrats on the end of the year. Maybe just on the guidance a little bit in the back half waiting, does your guidance contemplate any disruption in the market? I mean, we have a fairly large spin-out coming from one of the major players. And so just trying to get a sense of kind of how you thought about that guidance in the context of maybe some of the market dynamics that could actually provide additional upside.

We haven't specifically addressed what that disruption would be from the spin-out, but we're more focused on what we've done in terms of the distributors we've brought on board and and the ones we've had in our pipeline that we're managing and also the products that we've launched and we'll transition to full commercial launch. I think what you bring us good opportunity for us to take even more market share opportunistically if there is some disruption that comes out of that. But I think our guidance is more just based on the things we control today and what we've been managing in terms of the distribution addition pipeline and new product launches.

Yeah. Okay. Fair enough. That's good to know. And then, you know, Keith, I appreciate this metric around the number of products that you're using today, 1.9 relative to 1.8 a year ago. You know, just broadly speaking, you know, if you could paint a picture of where you think that can go over time, not as an indication of guidance necessarily, but, you know, kind of where you see maybe the opportunity to, you know, get incremental usage of your products and, you know, whether that could trend to, you know, north of 200. maybe, you know, even higher than there. Thank you.

Yeah, I think it's a good conversation to have. And, you know, what goes on, Ryan, if you look back in 2019, where we were really around, as we kicked off the year in 2019, it was 1.5, 1.6-ish, and moving into, you know, as we close the year, closer to 1.8. And where it really can go is, you know, you start getting into the ability to capture both the the pedicle screw case, the inner body case, as well as the orthobiologic, and then you start getting into three and three plus, right? So ultimately, three is phenomenal because that means that you're capturing the entire fusion case. And, you know, you could go beyond that if you were doing, you know, multi-specialty, right, if you're doing a longer construct. But, you know, I think the way we look at it, we want to start getting up over two. We want to start having biologics continue to have a strong influence in the entire case, and we also, with, as we just announced, all of the unique inner body offering that we now have, we feel strongly that we can now carry with the pedicle screw or the rod cases.

All right. I'll leave it there. Thanks for taking the questions.

Yeah, thanks, Ron. Thanks, Ryan.

Again, participants, if you would like to ask a question, you may press star, then the number one on your telephone keypad. Your next question comes from the line of from Truist. Your line is now open.

Hi, guys. Thanks for taking our questions. So just starting out, I mean, we're two months into the first quarter. Can you just speak to what you're seeing year to date? Really, what I'm trying to understand is, you know, you guys have said that you plan to do high single-digit growth in the first quarter. I mean, do things need to get better from here or do they simply need to be stable or can they get worse and you're still confident in that outlook?

Yeah, a couple things to think about. You know, right now we feel good about the fact that numbers are at something more manageable for hospitals that elective surgeries have kicked back, you know, in force. But there's no way to be predictive. There's no way to understand if there's going to be continued ebbs and flows. I mean, there always is a time or there's a concern that holidays create certain better spreading events. There's always a concern that there's new strands that may have to be addressed. So the way we look at it, though, is that we love the progress that's being made at the tail half of this quarter, and we love the fact that it looks like it's going to be a strong book of business as we move forward because there's a number of delays that are now getting rescheduled and getting back on the books. But I still don't, you know, we don't feel we have the crystal ball to figure out whether we're done with elective surgery slowdowns and whether there'll be more, you know, coming forward.

Yeah, but no, that's completely fair. That makes sense. That makes sense, Keith. And then I know a lot of other companies are talking about sort of how well robotics and enabling technologies are doing. I know you guys have mentioned kind of 7D briefly on this call, but it would be great to just get more of an update there, what you're seeing with that relationship and just how you're expecting it could contribute in 2021. Thank you guys.

Yeah, you know, I think that interestingly, you know, we started that relationship in early 2020 and then obviously COVID hit, but it gave us a great opportunity to get better trained and to better understand how we can participate deeper with them. And I think as we exited COVID, we had a number of great training opportunities and collaborations that we're now seeing a lot of different opportunities that we now need to close and help close with them. And so we see the relationship even stronger, obviously, than it was last year. We see a lot of excitement by both of our sales channels to collaborate and try to do the right things in hospitals. And if certain hospitals can purchase it outright, That's a great direction, and if others need to work through a better way to get a unit placed and earn it out, then we're in a great place as well to do that. And so we really feel like the first half of this year we'll start to see additional placements that will give us a great deal of momentum for next year. Not next half of the year, so tail half of 2021, where I do think that we're going to continue to see budgets open up and a greater opportunity. And we've seen certainly from other companies talking about their robotic sales that there is a robustness that's going on right now as far as capital equipment being made, or capital funds being made available by hospitals.

Thank you, guys. Your next question comes from the line of Matthew Blackman from FIFO. Your line is now open. Mr. Matthew Blackman, your line is now open.

Sorry, I've got to learn how to turn off mute button. Apologies. Thanks for taking the questions. I'm a med tech analyst, not a tech analyst. Maybe to start, just curious about the procedure mix in the fourth quarter. Some of your peers have been talking about lower complexity procedures having gotten done while the more complex procedures were disproportionately deferred. So in essence, there was almost like a double headwind in the quarter on volume and mix. Did you see a similar phenomenon? And if so, are the surgeries that are being put back on the books now more complex in nature? And I've got one follow-up.

Yep. So not a significant component of our business today is the more complex procedures. And deformity surgeries, I still believe it's less than 10%. So it doesn't have the same impact on us. We typically do get, you know, the bump in Q2 and the height of scoliosis and a little bit late in the year. So it wouldn't have the same impact on us. But we did see the mix shift a little bit. And we talked about most of the growth came for the procedure volume growth. That was 7%. A little bit of price decline, which has been pretty consistent, you know, throughout the industry. And then we did benefit from mix, but not because of a tilt towards more complex deformity surgeries, you know, the ASP per surgery. But as Keith was talking about earlier, it's the number of systems used per procedure. So we're getting a higher revenue per procedure in the fourth quarter, mostly because we're seeing an increase in the number of our products used per procedure. And I do think we'll see a benefit, like probably other companies are talking about, down the road as some of those more complex cases get rescheduled, and that becomes a more meaningful part of our business. And one of the reasons we're making the investments in extending that Meritor platform into an adult deformity indication, because I think that will allow us to take advantage of that if that dynamic does come to fruition in 2021, when those more complex cases start getting rescheduled.

All right, that makes sense. And then my follow-up, just thinking about all the new product flow, is there any way to characterize the early traction and or interest in existing accounts versus new or under-indexed customers? Are these new products resonating more or less with either of these cohorts? I guess what I'm really asking is, is the portfolio allowing you, clearly it's allowing you to go deeper, but it's also allowing you to go broader. Thanks.

Yeah, it is. Actually, it's a good observation because there's no question that our new product opportunities is giving us the ability to, you know, continue going into a deeper relationship in the hospitals we're already in with those surgeons. But what we're also seeing and was certainly nice in alpha was a lot of new customers coming forward, right? And that's because they not only – they weren't interested necessarily in our legacy products, but they're also very interested in some of the new features that that we've incorporated that other systems don't have. And so we feel good about the fact that both segments, if you will, are working for the new products, but we're especially seeing new customers come aboard, and that will be our goal as we continue through this year and next year is continue to drive going deeper in those accounts that we've gotten an opportunity to finally participate.

I appreciate it, Keith. Thanks so much, and congrats on a great end to the year.

Yeah, thanks.

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

Hi, Keith and Boz. How are you?

Good. How are you, Jeff?

Just fine. Two issues I wanted to drill in a little bit. Firstly, Boz, you were calling on some OPEX of like 2.6 extra items for the quarter, 1.8 sets, 300 R&D, 500 G&A. So that's one time, the 2.6 out of the OPEX for Q4 and We shouldn't think about that as far as our modeling forward.

The depreciation and the instrument deployment expense, I don't want to characterize any of it as one time, but it was particularly higher to spend in the fourth quarter as we were gearing up for all the upcoming product launches. So that was the biggest increase in the OPEX. But the G&A and R&D increases were more permanent in nature, recurring in nature, and reflect growth in the business and the infrastructure to support that. But I'd say of the sales and marketing increase, the instrument deployment expense and depreciation will continue at an elevated rate as we continue to launch more products. But it's also more of the non-cash expense because it's just deploying the instruments or depreciating the instruments that are part of the historical capital expenditures of the business.

Okay. And if I try to correlate that over to inventory, you'd expect inventory up in the order of, what, about 5 to 10 mil for the year?

I mean, off the cuff, inventory is going to go up for the year. Are you talking about 2020 or 2019? I'm sorry, 2021 or 2020? 21 versus 20. Yeah, inventory should go up again in 2021 versus 20 because it went up in 2020 versus 19 with a bunch of alpha launches and with the full commercial launches, right? We're typically doing two or three extra number of sets deployed in an alpha launch. So CapEx and inventory would both be expected to go up as we deploy all those full commercial launches.

Okay, perfect. Got it. And then as we think about the margins, you had a comment about 150 to – 100 to 150 aspirational basis point increase annually. And then Keith was talking about 150 to 250 basis points. Could you clarify the differential between the two ranges?

Yeah, the second one is just the estimation for 2021. We've been saying for a while the long-term expectation to grow 100 to 150 basis points. That's still intact. But I think we've got an opportunity to grow it even more in 2021. So that was the genesis of the percentages Keith gave out.

Okay, perfect. That does it for us. Thanks for the commentary.

Yep, thanks. Thanks, Jeff.

Again, participants, if you would like to ask a question, you may press star, then the number one on your telephone keypad. Your next question comes from the line of Brandon Fuchs from Kenton Fitzgerald. Your line is now open.

Hi, thanks for taking my questions, and congratulations on a good quarter. Maybe just two for me. So obviously you had a fantastic pace of launches in 2020, and you started out 2021 as well. Without getting too greedy, how should we think about kind of 2022 and beyond in terms of new product launches versus sort of this being a bolus of launches, which is going to drive sort of near to midterm growth? And then another one just maybe on gross margin, any additional color you can give us on the phasing throughout the year would be great. Thank you.

Yeah, so on the continuation of product launches, I think that we're still going to see a very healthy pipeline as we've seen the past couple years. And also, as we move forward, and it'll be similar to the 2021, the projects that we're putting in place that will have momentum or launches in 2022 are as numerous as what we're planning this year. I think in addition, though, what you'll see is, you know, you'll start to naturally see us continuing to improve on existing product lines. So, you know, updating and driving additional features and the ability to address different pathologies. We've kind of messaged before that we will start moving into opportunities with tumor trauma, which are important goals for us. They're very important to our distribution network as well. but it's also one that we have taken a very thoughtful approach of when we would be able to effectively launch those and be at the right critical size, and we feel like now is the time to start that development process and direction.

On the gross margin comment, there's a couple of puts and takes there. Overall for the year, we ended up having a higher E&O charge compared to 2019. And again, that's a function of the number of sets deployed because you've got those so-called odd size implants that you don't expect to sell very many of, but you need to have one in every set deployed. And then I would anticipate that to go up a little bit more again in 2021 because you're doing two or three X the number of sets. for the full commercial launch in 2021 compared to the alpha launch in 2020. But the big savings for us, it's tough to quantify, but the savings is the Irvine manufacturing facility of having slower growth overall in the costs of that facility, but absorbing more of those costs through the production of inventory, which ultimately we sold, and Orthobiologics inventory, I think, was down a little bit versus the end of 2019. So we're not just building inventory for the sake of absorbing overhead, but our overhead absorption as we produce at that facility outpaced the increase in cost to produce the higher volumes at a really nice pace. So that's where we get the benefit from is just the lower unit cost to produce. And that's a function of two things, right? Higher production volumes given the fixed cost of that plant, which is pretty meaningful, But then also a lot of the lean manufacturing projects we've implemented at that facility over the last two, two and a half years, that you're able to just produce things more efficiently on a variable cost basis as well, using the tissue more effectively and more efficiently. So it's hard to quantify where it came from, but it's mostly coming from that Irvine facility. because it's a very scalable facility with more room to grow because of the fixed cost component and the fact that we could add a lot more volume without adding many more costs, fixed costs at least.

Great. Thank you very much. Sure.

Again, participants, if you would like to ask a question, you may press star, then the number one on your telephone keypad. That's star, then the number one on your telephone keypad. There are no questions over the phone. Mr. Keith Valentine, please continue.

Thank you, everyone, for joining us, and we look forward to connecting with you after Q1. Cheers.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now leave.