SeaSpine Holdings’ (SPNE) CEO Keith Valentine on Q1 2022 Results – Earnings Call Transcript

SeaSpine Holdings Corporation (NASDAQ:SPNE) Q1 2022 Earnings Conference Call May 3, 2022 4:30 PM ET

Company Participants

Leigh Salvo – Investor Relations

Keith Valentine – Chief Executive Officer

John Bostjancic – Chief Financial Officer

Conference Call Participants

Andrew Stafford – Piper Sandler

Mathew Blackman – Stifel

Jeffrey Cohen – Ladenburg Thalman

Richard Newitter – Truist

Jason Wittes – Loop Capital

Ross Osborn – Cantor Fitzgerald

Operator

Welcome to the SeaSpine’s 2022 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following the management’s prepared remarks, we will hold a Q&A session. [Operator Instructions] As a reminder, this conference call is being recorded today, March 3 – I’m sorry, May 3, 2022.

I would now like to turn the conference over to Leigh Salvo, Investor Relations. Please go ahead.

Leigh Salvo

Thank you for participating in today’s call. Joining me from SeaSpine is CEO, Keith Valentine; and CFO, John Bostjancic. Earlier today, SeaSpine released full financial results for the first quarter ended March 31, 2022. 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 condition.

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, Mary 3, 2022.

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 SEC, which are available on our corporate website, www.seaspine.com and www.sec.gov.

Our discussion today will also include certain financial measures such as adjusted gross margin and adjusted EBITDA loss, which are not calculated in accordance with generally accepted accounting principles or GAAP. Management believes that the presentation of these non-GAAP financial measures provides important supplemental information to Management and investors regarding financial and business trends relating to the company’s financial results of operations.

These non-GAAP financial measures should not be considered replacements for, and should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are provided in the tables accompanying the press release we issued today.

With that, I will now turn the call over to Keith Valentine. Keith?

Keith Valentine

Thank you, Leigh. Good afternoon, and thank you all for joining us. Our first quarter results exceeded our own internal expectations, despite the impact of significant COVID-related headwinds throughout the entire month of January. When these headwinds subsided and spine procedure volumes increased its hospital staffing and OR capacity quickly recovered in early February, our momentum accelerated as the quarter progressed, which translated into strong revenue growth for the full quarter and even more positive energy among our employees, distributor partners and surgeon customers.

We remain excited and optimistic as the momentum continued into the second quarter. I’d like to highlight some of our team’s recent accomplishments that are fueling this optimism, and that gives us the confidence to raise our full year 2022 revenue guidance by $5 million. In the first quarter, we grew total revenue 21% over the prior year period to $50.7 million and exceeded the high end of our Q1 revenue guidance by $1 million.

In the U.S. where we generate approximately 90% of our total revenue, we saw revenue also increased 21% reaching $45.5 million and international revenue grew 16% to $5.2 million. In March, we celebrated our 50,000th implantation of our NanoMetalene® interbody device, which continues to be foundational to our Fusion Engineered focus. It took nearly six years from the original launch to hit the 25,000 in milestone and we were able to double that in just over two years.

The success of our NanoMetalene franchise, coupled with our introduction of our Reef and WaveForm 3D interbody systems demonstrates our team’s commitment to advancing the development of differentiated surface materials and novel designs. We have continued to expand our product portfolio with the full commercial launch of four products and systems, including the Explorer TO expandable interbody system, Torrent DBM Putties with Accell Bone Matrix, the Regatta Lateral Plate System, and the NorthStar Facet Fusion system.

In addition, we also launched FLASH Navigation Lumbar Facet Fusion, which marks our first spinal implant system development integrated with 7D Technology. We’re particularly proud of the Torrent launch, which is an upgrade to our market leading Evo3 DBM Putty that is packed in a dry state to improve osteoinductive potential and shelf life stability.

This is yet another example of how SeaSpine continues to advance both its spinal implants and orthobiologics portfolios through product development to help surgeons improve patient outcomes and by investing in scientific studies to differentiate our products and drive market share gains.

Turning to 7D Surgical. We generated $2.3 million of enabling technology revenue in the first quarter of 2022. To date, we have closed four earnouts for the 7D flash navigation technology representing $2 million of annual revenue commitments. There are now a total of 54 flash navigation systems deployed in the U.S. and 33 outside the U.S. We are also starting to see more non-contractual revenue pull through of those spinal implants and orthobiologics products in select accounts that purchased flash navigation systems.

The pipeline is robust with a more balanced mix of earnouts first capital sales and the combined sales teams continue to work well together, generating cross-selling opportunities across all portfolios. Our increasing organizational focus on leveraging and expanding the 7D flash navigation platform technology combined with the exciting recent product launches I talked about earlier, and those we plan to fully launch throughout remainder of this year such as the entire WaveForm 3D printed interbody portfolio, the Mariner Adult Deformity System, and the 7D MIS module are the key catalysts that are attracting an increasing number of large transformative distributors to SeaSpine. We have already executed on some of those new distributor addition, and we have even more opportunities in the pipeline.

Additionally, this positions us very well to hire our first direct sales reps into white space areas where we have not been able to identify an appropriate exclusive distribution partner and is consistent with the plan shared on our Analyst Day meeting in March.

Before handing off to John, I want to offer some additional recent insights into market conditions that we’re seeing in the field with more positive news about COVID receding and recent expert commentary that were past the pandemic phase, we’re seeing a sustained uptick in spinal surgery volumes across the entire United States and renew confidence by our surgeon customers that we have finally turned the corner towards a degree of the old normal, despite some lingering, staffing shortage concerns.

Additionally, we’re positioning ourselves to take advantage of some of the new dynamics in the spine market that emerged during COVID such as an increasing number of spine surgeries being performed in ASCs and increasing demand by small and midsize hospitals to acquire enabling technologies such as our flash navigation technology, whether through outright purchase or a capital efficient earnout mechanism.

In conclusion, I’m confident that SeaSpine now delivers best-in-class products across all our offerings from enabling technologies to spinal implants to DBMs, and was the primary factor underlying our first quarter revenue be. We have today a product portfolio that is attracting transformational distributors and provides us with a significant advantage. We are now seeing competitive distributors contacting us to see what’s happening at SeaSpine. A shift that we believe is a occurring because increasingly they want to be part of a team that is aggressively innovating and taking market share.

Our recent product launches, specifically the Explorer Expandable interbody and the WaveForm family of IBDs have been game changers. Now is our time. The level of enthusiasm among surgeon and distributors is something I haven’t experienced in years and it gives me a great confidence to raise our full year 2022 revenue guidance by $5 million to a range of $231 million to $235 million. This reflects growth of approximately 21% to 23% over full year 2021. And I believe there is still a long runway ahead. Even this year, as we continue to cultivate other increasingly more substantial distribution opportunities.

And now, I’ll turn the call over to John for more details on our financials and our financial outlook. Then I will wrap up. John?

John Bostjancic

Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, total revenue for the first quarter of 2022, which $50.7 million, the 21% increase over the prior year. In the U.S., we posted 21% growth to $45.5 million. International revenue increased by 16% to $5.2 million. U.S. spinal implant and enabling technologies revenue in the first quarter increased $5.8 million or 31% to $24.2 million with the 7D flash navigation platform contributing $1.8 million of revenue.

Products launched or enhanced via line extensions within the past five years, continue to fuel revenue growth and drive market share gains, and accounted for 74% of U.S. spinal implant revenue. This continues to be a very encouraging indicator for sustained growth throughout 2022.

Note that we slightly changed this reporting metric starting this quarter, as we previously reported the percentage of U.S. spinal implant revenue from products launched since the spinoff in July, 2015. U.S. orthobiologics revenue in the first quarter increased 12% to $21.3 million and continues to be driven by growth in the OsteoStrand Plus fibers based DBM product line. Sales of products launched within the past five years accounted for 43% of U.S. orthobiologics revenue.

Our U.S. spinal implant surgery volumes increased 17% compared to the first quarter of 2021. While revenue per case increased low-single-digits compared to prior year. Utilization of our spinal implant systems and orthobiologics products increased to 2.1 per procedure in the first quarter of 2022, compared to 2.0 a year ago. We experienced low-single-digit average price declines in both the spinal implants and orthobiologics portfolios consistent with prior years.

International revenue in the first quarter of 2022 totaled $5.2 million, a 16% increase compared to the prior year period and included $600,000 of enabling technologies capital sales revenue. GAAP gross margin for the first quarter of 2022 was 59.8% compared to 63.4% for the first quarter of 2021.

The decrease in gross margin was primarily due to $700,000 of technology related intangible asset amortization associated with the 7D Surgical acquisition plus higher spinal implant, excess and obsolete inventory charges associated with recent full commercial launches and additional set deployments.

Adjusted gross margin was 62% for the first quarter of 2022 compared to 64% for the first quarter of 2021. Operating expenses for the first quarter of 2022 totaled $47.2 million, an $8 million increase compared to $39.1 million for the first quarter of 2021 and included $3.4 million of operating expenses directly attributable to 7D Surgical.

The increase in operating expenses was driven primarily by $6.1 million in higher selling and marketing expenses. The substantial majority of which related to 7D Surgical operating expenses and increased commissions on higher sales. $1.3 million of higher research and development expenses attributable to 7D Surgical and $500,000 in higher general and administrative expenses, which was primary early attributable to 7D surgical.

Net loss for the first quarter of 2022 was $16.6 million compared to a net loss of $12.7 million for the first quarter of 2021. Adjusted EBITDA loss for the first quarter of 2022 was a loss of $8 million compared to a loss of $5.2 million for the first quarter of 2021. The increase in adjusted EBITDA loss was primarily the result of the diluted impact of 7D Surgical on the current quarter results.

Adjusted EBITDA loss is a non-GAAP financial measure that we believe provides valuable information on our operating results that facilitates comparability of our core operating performance from period to period and against other companies in our industry. A reconciliation of GAAP net loss to adjusted EBITDA was presented in the financial tables of the press release we issued this afternoon.

Cash and cash equivalents at March 31, 2022 totaled $81.4 million and included the proceeds of $25 million we borrowed under our $30 million credit facility in March. We are well into the process with Wells Fargo is extending the credit facility through April 2025 and expanding the total potential borrowing capacity to $40 million. We expect to complete that during the second quarter.

Our free cash flow burn, which includes operating cash flows and purchases of property and equipment was to $24.3 million for the first quarter of 2022. We anticipated this relatively heavy Q1 spend in the guidance we provided in March, consistent with a large amount of inventory and set built capital expenditures needed for the recent and upcoming whole product launches and to support forward revenue growth expectations.

Turning to our financial outlook for 2022. As Keith noted earlier, we now expect full year 2022 revenue to be in the range of $231 million to $235 million, in which includes the $12 million to $13 million of anticipated revenue in the third quarter from the final EU spinal implant stocking orders and for U.S. spinal implants growth to exceed 20% for the year.

This compares to previous revenue guidance of $226 million to $230 million and expectations for U.S. spinal implants revenue growth to exceed 17%. I’d like to further clarify what appeared to be some confusion as it relates to the impact of the final EU spinal implant stocking orders on our second half of 2022 revenue growth in the context of our full year guidance.

While we expect the revenue generated by those stocking orders to approximate $12 million to $13 million in total that would likely translate into $8.5 million to $9.5 million of incrementally higher European spinal implants revenue in full year 2022 compared to the $6.2 million of EU spinal implants revenue we generated for the full year 2021.

So for those investors and analysts calculating an implied revenue growth rate, excluding EU spinal implants, based on our revenue guidance. We suggest you use $14.5 million to $15.5 million of total revenue for 2022, with a reminder to exclude the $6.2 million of 2021 EU spinal implants revenue in the denominator. Excluding all EU spinal implant revenue, we anticipate that growth rates will be in the mid to high teens in the second and fourth quarters and the high teens or more in Q3.

Moving down the P&L, we still anticipate generating 150 to 200 basis points of adjusted gross margin expansion compared to the 63.5% we reported for 2021 and to reduce our adjusted EBITDA loss by 15% to 20% compared to the $22.9 million we reported in 2021. We expect to generate these operating improvements through a combination of more efficient revenue growth fueled by the onboarding of more exclusive and high quality distributor partners.

From the robust cadence of transformative product launches and from higher adjusted gross margins through an increasingly favorable sales mix, and as we begin to more fully realize the many gross margin upside opportunities that we outlined in our March Analyst Day.

From an inflation and supply chain perspective, there are plenty of macro risks for us to contend with. However, we remain confident that we can achieve our revenue growth targets for 2022, as a result of the more committed and collaborative long-term partnerships we’ve built with our critical supplier base.

Those partnerships have been forged based on regular communications of our forecasts by working proactively with our suppliers to ensure sufficient capacity for our expected growth and by committing to longer term horizon order commitments that extend in some cases into early 2023, which has also helped to mitigate inflationary risk in the near-term.

Additionally, the reputation we have built by delivering on all our order commitments over the past two years, despite the risk and disruption of COVID on our business has added a critical layer of mutual trust between SeaSpine and our key suppliers. We will continue to monitor for any new or emerging supply chain risks and work just as proactively in response to changes.

Likewise, our expectations for free cash flow burn in excess of $60 million for 2022 remain the same as we plan to invest more than $40 million of growth capital in 2022 in the additional inventory and spinal implant sets needed to support the launch of more than 15 new products and line extensions this year and our higher revenue expectations.

At this point, I’d like to turn the call back over to Keith for closing comments.

Keith Valentine

Thank you, John. [Indiscernible] I’d like to congratulate John on his promotion and added responsibility and SeaSpine’s COO and CFO. His focus on operational excellence will enable me to increase my customer facing presence in the field, as well as ensuring our culture and people prosper in a post-COVID workplace.

In closing, I want to reiterate our enthusiasm for the first quarter results we achieved, particularly in light of the struggles, other spine implant providers experience with either market share losses or revenue growth challenges. The entire SeaSpine organization is feeding off this positive momentum as we continue to focus on the relentless execution that has brought us to this point.

Our recent success represents the culmination of our continued and confident investment in product innovation and inventory throughout the past two years. Despite the significant business risks and disruptions that COVID had in particular on the spine market. I truly believe that SeaSpine is at an inflection point to even faster in more efficient growth. And we are confident that we are on track to deliver against or exceed the short and long-term expectations we set out in the March Analyst Day.

With that, we will now open it up to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Matt O’brien of Piper Sandler. Your line is open.

Andrew Stafford

Hi guys. This is Drew on for Matt and thanks for taking the questions and congrats on a good start to the year here. I do just want to start off on the guidance, a couple different components into that number. So maybe you could just help us break those out a little bit. It looks like the changes are primarily related to an acceleration on the U.S. core implant business. How much of that change is a – change in COVID recovery expectations versus strength in the core business. And then just on 7D, any changes to how you’re thinking about the revenue trajectory today and [indiscernible] versus placements versus where we were a couple of months ago.

Keith Valentine

Yes. To give a little bit of kind of where our sound checks are and with surgeons for the marketplace. I think it’s been pretty consistent that they have a reasonable backlog, but their backlog they’re describing now, most surgeons describing it as their typical wait list that they see in their practice. I don’t think there’s a huge additional backlog much beyond that. I think there has been some recovery in the first quarter with some of that. I think there’s also been some consistency in how hospitals are handling it.

And I don’t think we’re getting the flex time or great deal of extra time in the OR, but I do think that they’re managing through and most surgeons I have talked to have a two to three month wait list to get in for surgery. So I think that’s probably going to track pretty consistently throughout the year. I’ll let Bos answer the second part of that question.

John Bostjancic

Yes. We’re seeing in the pipeline for 7D what we expected, right. A greater mix of earn out opportunities in that pipeline compared to just straight up capital sales. As we talked about earlier, we’ve closed four earnouts for that 7D technology, and that represents now $2 million of annual revenue commitments on those four earnouts.

So we’re seeing what we expected to see, which would be ultimately more of the placements turn into earnout. And if our pipeline comes to fruition as we see it now, I think you’ll see a greater – even greater mix of earnouts going forward. And simply, that’s just a function of the timing between capital sales cycle being six to nine months since the acquisition, right. It makes sense that we’d see a higher percentage of earnouts because the 7D capital sales team is equally incentivized for an earnout or a capital sale. And they have been since we closed the acquisition last year.

Andrew Stafford

Okay. That’s very helpful. And I do want to follow-up on 7D here, the comments on, I’m seeing more pull through, maybe you could just expand a little bit on those. What are you tracking there? Are you seeing an uptick in utilization and any halo effect as far as getting more surgeons who had not historically used SeaSpine onto the platform because of the 7D? Thank you.

Keith Valentine

Yes, it’s two things, right? The cross-functional collaboration between the 7D sales force and our sales management team and distributors. 7D’s got great relationships and accounts where they’ve already placed units. They’ve made introductions to our teams that wouldn’t have happened if not for the 7D introduction. And we’re starting to sell in those accounts.

And likewise, we’ve got strong relationships in our legacy accounts for spinal implant in orthobiologics, and we’ve helped 7D sales team get foot in the door and we’ve sold some 7D units in there. So that dialogue has been happening. It continues to happen. And in select accounts, as we said, we’re starting to see non-contractual pull through, wherein unit was sold in the absence of, right, it was a straight capital sale. And we’re seeing an increase in volume.

We’re tracking three and six months before the unit was placed and three and six months after it was placed. So there’s not a great deal of history yet, but the initial signs in some accounts where we’re seeing a meaningful increase in revenue of holds true that, if we can get a 7D unit in the door. Even on a capital sale, there’s going to be pull through opportunity for the spinal implants and orthobiologics, particularly as we make our spinal implants more seamlessly integrated with the 7D technology.

Andrew Stafford

Good to hear. Thank you.

Operator

And our next question comes from Mathew Blackman of Stifel. Your line is open.

Mathew Blackman

Good afternoon, everyone. Thanks for taking my questions. And John, I had a couple for you, start with just a clarification, I want to make sure, I heard you correctly. I think you were talking about the second and the fourth quarter being up mid to high teens and the third quarter up high teens. Did I hear that correctly? That’s number one.

John Bostjancic

Yes. Q2 and Q4 was mid-to-high teens and then Q3 high-teens or maybe even 20% with Delta Q3 last year, right. There’s a big impact from Delta.

Mathew Blackman

Easy comp, yes. Got you. And that’s for total revenue.

John Bostjancic

Correct.

Mathew Blackman

Okay.

John Bostjancic

No, sorry. And then, sorry, that was excluding the impact of his spinal implant EU stocking orders. Sorry.

Mathew Blackman

Yes. Okay. That’s great. And then another one for you, just appreciate your commentary on OpEx and gross margin. I think you said that that 1Q spend was planned to be heavy. Just how should we think about the cadence here for gross margin for the rest of the year? And then I guess similar question on S&M, is $30 million the right sort of run rate to start to lift off of or does it calibrate down again because you had commissions at the first gross. Just any help on sort of the trajectory of each of those lines and I’ve got one 7D follow-up question.

John Bostjancic

Yes. Gross margin, you should see that increase as the year progresses, because in Q4 we had a pretty big E&O charge and in Q1 we had a pretty big E&O charge and that corresponds with a very large full product launches we’ve had in the spinal implant side, right. That’s going to coincide with those. So we don’t anticipate seeing those type of E&O charges continue at that level throughout the year.

So we’re going to have the benefit of all the gross margin expansion levers we talked about in the March Analyst Day plus we should see a step down in the E&O charges as we’ve got these products fully launched and they’re going to be generating more revenue and that should take some pressure off the E&O. So we think that’ll go down and you’ll see a linear progression up on the gross margin side.

From a sales and marketing perspective, right, we have added the cost of the 7D marketing and capital sales team. And we are seeing some leverage on commissions, not a lot yet, but recall in the March Analyst Day, we talked about our go direct strategy and the white spaces where we can’t find good exclusive distribution. So any continued leverage we get out of distributor commissions over the rest of the year.

We expect is going to be offset by the impact of the essentially the guarantees that you’ll need to pay a lot of the direct sales team as you hire them to sit out non-competes, where they have non-compete. So, yes, I think it’s going to be a similar level for the rest of this year, because commissions drive such a large chunk of that. And we do have a full year’s worth of the 7D sales team and marketing team in there.

Mathew Blackman

Okay. Really helpful. Appreciate that. And then if I could squeeze a 7D question and you guys – you brought up the pull through and I appreciate it’s really early here. But we talked to some other companies or when they talk about their enabling technology portfolios and potential pull through, they see at accounts that are using the technology versus those that aren’t they often hear this sort of, well, we get 15% to 20% higher utilization or higher even revenue generation at those accounts with the enabling technology. Again, appreciate it’s really early here. But is that fair bogie to sort of be thinking about here at 7D scales? Is that a fair way to think about the potential pull through that you would get somewhere down the line?

John Bostjancic

Yes, I think that we’re going to – it is too early. We don’t have enough installed placements on earnout, but we do view it the same way, we do view that potential the same way, a lot of what’s already been installed is in accounts that we have very little market share. So this absolutely is going to enable us to not only gain market share, but gain some significant growth rates especially year-over-year. So yes, we look to those metrics, but it’s too early for us to be saying that we’re at those metrics yet.

Mathew Blackman

Understood. Really appreciate congrats on a good start of the year.

John Bostjancic

Thanks. Thanks.

Operator

And our next question comes from Jeffrey Cohen of Ladenburg Thalman. Your light is open.

Jeffrey Cohen

Hi, Keith and John. How are you?

Keith Valentine

Good. How are you?

Jeffrey Cohen

Just fine. John, congrats on the additional title. Just a few questions from our end. So could you talk a little about Explorer TO, is that indicated for just one level and whereabouts are you finding most of the utilization on the spine and is there a – is it being used in two levels at all or is that a pursue their aspiration of yours?

John Bostjancic

Yes. Good – very good question. The exact – I’ll have to – I apologize, but I’ll have to look up what the exact indications are from an FDA perspective. Most of our inner body opportunities are, but that was an interesting one due to the expandability. So I believe it’s two levels, by the time we exit we’ll have an exact answer for you.

Jeffrey Cohen

Okay. That’s super helpful. Just to follow-up on the one or two of Matt’s question. On the 7D side, more importantly on new FLASH Navigation Lumbar side. Are there any early findings that you can talk about? Give us a sense of how many physicians or number of placements or centers that are using the technology and any findings there that you could comment on.

Keith Valentine

So as we talked about before, the number of units we’ve got there’s 54 units – 7D units deployed in the U.S., and I’m trying to recall the number, I think it’s 30 or 24 or U.S. So we’ve seen good growth and one thing that seems system with 7D is when we place the unit, it’s getting good utilization. And in some accounts, we’ve sold two units, because the surgeons there like it so much and like the radiation free profile of the technology and open procedures now that we’ve got an MIS module capability for it, that going to full commercial launch. And the fact that, it fits seamlessly into the workflow and instead of interrupting the surgery for 20 to 25 minutes and willing in an no arm.

You can step on the pedal that’s within the surgeon’s control and register or reregister the patient during the surgery in 30 seconds or less. So I think they’re really understanding and seeing the clinical benefits, the safety profile and the fact that it’s helping them utilize the OR more efficiently, because we’ve got some initial studies that the 7D team’s doing that shows it reduces surgery times.

Jeffrey Cohen

Okay. Got it. And any commentary on the FLASH system with your limited launch thus far?

Keith Valentine

The MIS?

Jeffrey Cohen

Yes.

Keith Valentine

Yes. So we have – for that particular new feature, we have gone from alpha to beta. So it has successfully been expanded in use and we continue to be gathering some great clinical data information. And also obviously, we’re working through how the easiest for setup, the easiest for the seamless workflow. I mean, one of the things I think that we have make sure to identify is that workflow in the OR needs to be seamless. We don’t need – we don’t want to be a technology that disrupts workflow, stops work process. And so we continue to advance it in beta and are looking forward to full launch as we continue the year.

Jeffrey Cohen

Got it. And John question on the inventories from looks like the increase throughout the last year was approximately $18 million in inventories. Do you expect a similar type of increase on the percentage basis or an aggregate basis for 2023 as you continue to put units from alpha and betas into full blown launches.

John Bostjancic

Yes. So last year, the mix, it was over $40 million of investment in spinal implant, the instruments and sets and the inventory and the aggregate. And as we said, we think we’re going to spend more than $40 million to invest in that this year, but you’ll see a higher mix of that or higher percentage should be on the inventory side. Because we’ve deployed a lot of the sets and our goal is to use those instrumentation sets more efficiently and with the revenue growth, obviously, it’s going to require more inventory to be able to support that revenue growth. But I think you’ll see a greater percentage of that $40 million this year being on inventory versus CapEx compared to last year.

Jeffrey Cohen

Okay, perfect. And then one more…

Keith Valentine

Yes. Well, hold on one second. We have a response too on the Explorer. It is – we were correct. It is over two continuous – contiguous levels. So that is from L2 to S1 is the indication.

Jeffrey Cohen

Okay. That’s super helpful. And one more quick one, John, just on our housekeeping, could you give us a breakout of the international by the two segments ortho’s spine on limitations for the quarter?

John Bostjancic

Sure. Ortho was $2.2 million, spinal implants was [indiscernible] and then 7D, as we said was about 600,000.

Jeffrey Cohen

Perfect. Okay. That’s it. Thanks for taking the questions.

John Bostjancic

Sure.

Operator

And our next question comes from Richard Newitter of Truist. Your line is open.

Richard Newitter

Hi, thanks for taking the questions guys and congrats on the momentum in the quarter. Nice performance. Wanted to start off, just on the underlying environment. I appreciate that that January and February were weaker, but it sounds like things picked up nicely into March and Keith, I was wondering if you could comment on the – what the trend has been given since March and into April. And more specifically, what are your assumptions for whether it’s backlog worked down or just underlying trend of continued improvement from March levels into the full year guide?

Keith Valentine

Yes. So fair, fair question. We saw a strong April again with double digit growth in all categories. We feel that the market is at a point of, as I said, that surgeons we’re talking to have wait lists that are two to three months out. They are talking about good clinic time, meaning that the patients coming through their office as good as it’s been. And we’re hearing positive signs that hospitals continue to be working through any kind of staffing shortages or staffing issues. And that they’re seeing light, right. They’re seeing greater light at the end of the tunnel, so to speak.

So all of those spell very positive signs, not to mention that, there – as we mentioned, a number of new product introductions that are coming forward, that there’s a lot of excitement, not only in our distributor teams, but also from the surgery – surgeon side committing that they will be trialing the new products as they’re available.

Richard Newitter

Thanks for that color. That’s helpful. Maybe just another one on the capital environment. I totally appreciate that, that you guys are early on in the launch here and rollout but still, I’d appreciate any perspective you have both just on the overall environment. Any – you mentioned six, nine-month capital purchasing cycles, I guess any elongating of that just from a – from the environment and potentially hospitals kind of reconsidering their priorities and spending, but also from the competitive side of the equation, there’s just a number of imaging technologies and kind of various types of capital imaging robotics that are getting launched or moving into more full scale launches in 2022 and beyond. And I’d be curious kind of how you guys see 7D position there, and if there’s any brewings or some changing in capital or trialing that would be helpful. Thanks.

Keith Valentine

Yes. We’re are certainly keeping a close eye on it. Obviously, we’re painfully aware of what our competitors have been signaling on challenges they may be having. There is a component though that, that we feel gives us an advantage, and that is the price point that we fall in on our navigation technology is much more cost effective, then some of the commitments that need to be made for our competitors.

So that gives us I think a little bit more freedom or flexibility to create a better selling experience and consistent with maybe some of the pullback that some of the hospitals may be seeing. We’re still within a price point that becomes more affordable. But that said, we’re certainly keeping an eye on it. We have a great deal of items in our funnel. And we also are looking towards continuing focus on earnouts and earnouts are great opportunity, as I mentioned earlier, because many accounts we’re talking to, we don’t have a presence in. And so this would give us a new presence on the implant orthobiologic side as well.

Richard Newitter

Got it. Thanks again. Congrats on the performance.

Keith Valentine

Yes. Thanks.

John Bostjancic

Thanks.

Operator

And our next question comes from Ryan Zimmerman of BTIG. Your line is open.

Unidentified Analyst

Hey, this is Phil on for Ryan. Can you hear me all right?

Keith Valentine

Yes. You bet.

John Bostjancic

How’s it going?

Unidentified Analyst

Okay, great. Yes, I’ve got just two questions here. One with the higher allocation to R&D in the past, you said, 12% plus in FY2022, 2023. Do you have a sense for where you expect to allocate that spend among your product families?

John Bostjancic

Yes. We’ve got a good outlook for it and historically, it was 9% to 10% of our revenue with just the spinal implant center with the biologics and it was heavier – significantly heavier on the spinal implant side within that 10%. And the 12% were expecting this year of total revenue. You could probably kind of back your way into it’s going to be higher than 12% for the 7D portfolio as a percentage of their revenue because we’re still going to be in sort of that 10% range on the legacy spinal implant and orthobiologics business, but more on the 7D side is a percentage of their revenue just because there’s so many exciting new technologies and product line enhancements that we’re going to bring to the market that we wanted to have the 7D team as worked as quickly as they can with the additional liquidity we can provide to be able to accelerate those programs.

Unidentified Analyst

No, that’s great and thanks for that color. And the second one’s in a similar vein, with the vitality index of the company improvement over the last several years, what’s the right way to think about how high that can go and what’s the goal for a proportion of sales from newer products?

John Bostjancic

I mean, ultimately for this spinal implant side, our new products, we expect to get well above 90% because we’ve really transformed the portfolio most significantly in the last two years or so. When we spun off in 2015, so long ago, seven years, three quarters of our revenue came from products that were seven or eight years or older. And now if you look at products that are seven years or less, I believe we’re close to 90% at this point.

And we’re just going to continue to cannibalize the legacy products and grow and take market share with the new products and also convert the surgeons still using the legacy products to those with better features and benefits and help ourselves become more efficient, less complex, supply chain so that we’re managing fewer systems, but also making sure that surgeons have the best and most current products in hand to take care of their patients with.

Unidentified Analyst

Right. Make sense and congrats again on the good quarter.

John Bostjancic

Thank you.

Operator

And our next question will come from Jason Wittes of Loop Capital. Your line is open.

Jason Wittes

Hi, thanks for taking my questions. So first off, in terms of cash flow, did you kind of cash burn that is, did you kind of indicate kind of where you think cash burn will be for this year? And related to that, you mentioned you’re going to be doing some debt refinancing. Where does that put you in terms of a cash position is especially in relation to I think you said you kind of pointed to the end of 2024, you reaching EBITDA breakeven?

John Bostjancic

Yes. We’re still on expecting to expend more than $60 million in free cash flow burn this year consistently what we talked about in the Analyst Day, as we invest $40 million of that’s going to go to spinal implant inventory, orthobiologics inventory and the spinal implant that’s the capital expenditures and the instrumentation. So we’re still on track for that.

And the growth we put up in Q4 shows why that’s a good investment because we got to make sure we comfortably have enough sets to service current surgeons and distributors. And we’ve got some really ambitious plans to onboard some new, larger more transformative and exclusive distributors. So it’s really important to be able to hit the ground running and have enough sets for them to grow their business and convert their business from day one and not try to ramp it up over time, but to try to convert that as fast as we can.

And we feel like the portfolio is in a position now where we want to aggressively make those bets and flip that business, because we know distributors have been waiting on the sidelines until these products go to full commercial launch and they can convert their business much quicker than we could have two years ago. So that’s kind of what’s driving the aggressive bet again, another year of $40 million plus on inventory and sets because we know we’ve got the portfolio to take market share faster, and we want to make sure we’re in a position to do so while continuing to service the legacy distributors who are also growing their business.

Jason Wittes

Okay. That’s helpful. Thank you. And also in terms of if we summarize kind of your outlook for the year on revenue growth just how much of that is new product or ASP related growth? How much of that is sales force distribution expansion and how much of that is 7D related? If you could just maybe summarize that as best you can. I appreciate it.

John Bostjancic

Yes. So ASP, as we talked about, they’ve consistently like many other spine companies, low-single digit declines. So all of our growth is coming from volume growth and it’s really difficult to quantify where it comes from, but there’s really three primary legs of growth for us. It’s adding new distribution and we’ve got some good opportunities we’ve already begun onboarding this year and late last year, more opportunities in the pipeline for these more exclusive and transformative distributors.

So it’s going to be taking market share by bringing onboard new distributors. It’s going to be penetrating deeper into the territory of our existing distributors. And I think we’ve been really successful in some regions, particularly in the west, in flipping competitive reps to come join existing distributorships that are exclusively selling SeaSpine products and being able to grow the business that way based on the product innovation we’ve launched and how well our distributors have received that technology and been able to grow their market share.

They will convince some competitive reps to come join their business and represent SeaSpine as well. So that’s the second leg. And the third leg is just more revenue per procedure, and that can come from either two areas just competing in more complex and deformity surgeries. And that’s where Mariner Adult Deformity and kind of reinvigorating that franchise is going to help us generate more growth or more revenue per procedure by participating in more complex and deformity surgeries or by using more products and systems per procedure.

So if we have the interbody, we want to make sure we have the fixation and the orthobiologics or vice-versa. So the growth, the good news is it’s coming from all those legs. It’s just very difficult to try to quantify how much of it’s going to come from what and with respect to 7D, we’ve been reluctant to provide any guidance on in terms of how much 7D is going to contribute to growth in terms of capital sales.

Because as I’ve said, many times if every 7D that we placed in the U.S. was under an earnout the capital sales would be zero, but I’ll be one of the happiest guys in the room because we’re locking in long-term revenue commitments at new accounts or growth in existing accounts because of those earnouts. So I don’t want to put a number out there for 7D because we could miss it because we end up placing more units on an earnout, which like I said, long-term earnings wise market share, taking market share preservation wise. I’ll take that seven days a week.

Jason Wittes

Okay. That’s helpful. Can I just a couple of follow-ups related to that? First on 7D, how should we think about earnouts for the – for a place system in terms of like an annual revenue number potential there? And then secondly, I think you mentioned this quarter your kind of revenues growth was low – per case was low-single digits. So I assume that’s kind of a good assumption going forward. And the rest of the growth is 7D and Salesforce expansion just sort of close out the original question I had.

John Bostjancic

Yes. On the earnout commitments, it’s range, right. And it depends on the account. But I don’t want to get into too much detail just for competitive purposes in terms of what we’re looking for, but it’s good growth.

Jason Wittes

Fair enough.

John Bostjancic

Right. And the one data point we gave was, we’ve got four earnouts already completed, and those represent over $2 million of annual revenue opportunity. So that’ll give you a sense of at least what we’ve been able to achieve. But yes, I don’t want to get into too much detail there. And then the second part of that question was…

Jason Wittes

It just – if I look at the quarter, you mentioned – I think you mentioned this quarter average revenue for cases up, I think, low-single digits. I assume that’s a reasonable assumption going forward. So the rest of the growth is coming from the other parts of the bucket that you kind of highlighted sales force expansion in 7D.

John Bostjancic

Yes. A fair question. The bulk of the growth is going to come from bringing on new distributors, probably as the number one source. Number two would be penetrating deeper into existing territories with existing distributors. And then yes, more products and systems per procedure and participating in more complex and deformity surgeries would probably be call it a tie for third. And 7D is going to help us with growth across all of those different legs.

John Bostjancic

Very helpful and congrats on the promotion. I’ll jump back in queue.

John Bostjancic

Thank you.

Keith Valentine

Thank you.

Operator

And our next question comes from Ross Osborn of Cantor Fitzgerald. Your line is open.

Ross Osborn

Hi everyone, thanks for taking my questions and congrats on the quarter. I guess just starting off just quick on your revise guidance, it sounds like you’re pretty comfortable with the new range. But just curious, does it consider any new variants in the revised range or do you all assume an improving operating environment for the balance of the year?

John Bostjancic

Yes, it largely assumes no new variants. As we talked about in the scripted comments, it seems like a good landscape, right? Lot of experts who are much smarter than us are talking about having moved past the pandemic phase. We have seen an increase in case counts banked around in the news lately, but the good news is we are not seeing any constraints in hospital staffing or hospital bed capacity, notwithstanding the fact that cases have increased.

And so it does not contemplate a large scale type of variant coming up that would disrupt surgeries again. But again, we say that with growing confidence based on how things have trended the last four months that we’re in a better spot. And hopefully, all of that disruption to our business is in the rear view mirror with the vaccines and therapeutics we now have in place.

Ross Osborn

Got it. Thanks for additional color there. And it maybe switching some other products portfolio, is there any feedback you share on NorthStar since it’s full launch in the 4Q last year, and it may be ahead of the Mariner Adult Deformity System and 3D transitioning a full launch. How would you characterize the demand with the limited launches so far this year?

Keith Valentine

So what was the back half that question how do we look at what with those launches, sorry.

Ross Osborn

Just how given that they’re in limited launch now just how demand’s been so far, any feedback sort of ahead of transitioning into a full launch.

Keith Valentine

Yes. So NorthStar’s full launch and it’s going extremely well. We – as we kind of mentioned previously, it was one that did beyond our expectations in alpha to the point that we were really stressing the system, how many surgeries we were getting. So we actually invested in more sets for launch.

And it is one of our hottest systems as far as demand and the excitement surgeons have with what features there are and the simplicity for implantation. It also works very nicely and seamlessly with 7D. And so that’s been a nice system for a difficult procedure, not only making it easier, but enabling surgeons to use the system with a better workflow. 7 – are the 3D entire implant portfolio all going to be at different stages of launch throughout the year, but it clearly is in high demand throughout the entire alphas. We’ve – we’re really pleased with not only how busy alphas have been, but also the great feedback we’re getting to make sure that we’re making all the subtle refinements that we need for a complete launch. And there was one other ones that you had mentioned some color on. What was that?

Ross Osborn

Yes, the last was Mariner Adult Deformity System.

Keith Valentine

Yes. Yes. And so that will advance as well. And we have some exciting features that will also incorporate and make it easier and more seamless with 7D that’s one area. When you get into deformity surgery, the difficulty of the anatomy, the difficulty of how you need to pursue that anatomy and how much easier it’s made with 7D and giving feedback, not only on screw trajectory, but also the great part is as you’re making certain corrections and adjustments that 7D is able to keep up with you, so to speak, it’s able to keep up with it by constantly taking a look at the topography of the spine and making accommodations. So that, that combined launch we’re very excited about and it’s got some nice momentum as we’ve been going through pre-launch surgeries.

Ross Osborn

Sounds great. Thank you. Congrats again on the strong quarter.

Keith Valentine

You bet.

Operator

I would now like to turn the conference back to Mr. Keith Valentine for closing remarks.

Keith Valentine

Well, thank you, everyone for joining us this afternoon or approaching evening in some areas. And I hope – I wish a good evening to everybody, talk soon.

Operator

This concludes today’s conference. Thank you for participating. You may now disconnect.

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