Conformis, Inc.
Q2 2017 Earnings Call Transcript

Published: 6 Aug 2017

[Operator:]

Good afternoon. My name is Kevin, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the ConforMIS Second Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. Before we begin, I'd like to remind you that management will make statements during the call that include forward-looking statements within the meaning of the federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be considered to be forward-looking statements. All forward-looking statements, including without limitation, statements about ConforMIS' strategy, future operations, future financial position and results, gross margin, product margin, operating trends, financial guidance, market growth, total revenue and revenue mix by product and geography, the anticipated timing of the limited launch of our hip product offering, the potential impact and advantages of using customized implants, business initiatives and transitions in our commercial operations, are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements, including those discussed in the Risk Factors section of ConforMIS’ public filings with the Securities and Exchange Commission. Accordingly, you should not place undue reliance on these forward-looking statements. While ConforMIS may elect to update these forward-looking statements at some point in the future, ConforMIS disclaims any obligation, except as required by law, to update or revise any financial projections and forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as the live broadcast today, August 3, 2017. I will now turn the call over to Mark Augusti, the Company's President and Chief Executive Officer. Mark?

[Mark Augusti:]

Thank you, Kevin, and welcome everyone to ConforMIS' Second Quarter 2017 Earnings Call. With me on the call today is our CFO, Paul Weiner. During the call, Paul and I will share our prepared remarks on a variety of topics including our second quarter financial and operating performance. Following the prepared remarks, Paul and I look forward to answering your questions. As discussed during our last call, 2017 is a transition year for ConforMIS, as we make changes in our commercial operations and improve our gross margin, including the development of a more targeted commercial strategy, the addition of sales reps and further investment in commercialization activities and gross margin improvement, which I’ll discuss in more detail later in this call. Q2 was a challenging quarter for us. The impacts of reimbursement changes and distribution transition clearly affected our overall growth. As mentioned in the previous quarter, we expected to execute changes in our sales organization, and we did just that. Since our last earnings announcement, we have new leadership in place in our top leadership roles, as well as some of our local sales management roles. Importantly, on July 3, we welcomed a new leader for our field selling organization, Dan Krupp. Dan brings more than 20 years of sales leadership experience to the role. His extensive experience in leading top-ranked sales teams will be a tremendous asset for ConforMIS going forward. We're excited to have him on Board. In the second quarter, we’re pleased to see the first significant peer-reviewed publication of Health Economic Data indicating the potential savings of a better approach to total knee surgery. The paper by Culler, Martin, and Swearingen entitled Comparison of Adverse Event Rates and Hospitalization Costs Between Customized Individually Made Implants and Standard Off-the-Shelf Implants for Total Knee Arthroplasty was published in the June edition of Arthroplasty Today, and it demonstrates that treatment with the ConforMIS iTotal CR customized implant led to significantly lower transfusion rates, fewer adverse events and reduced need for discharge to a rehabilitation facility or a post-acute care facility. The results of the study also indicate that improved outcomes among patients treated with iTotal CR customized implants were achieved without increasing overall costs and that post-discharge costs were significantly lower among patients treated with customized implants. We believe that this is another concrete example that ConforMIS has differentiated technology and capabilities that can make a difference to patient outcomes. Additionally, in the second quarter, we continued our investment in consumer awareness via digital and social media campaigns, much of which highlights our improved outcomes and patient satisfaction. We continue to believe an active informed patient will prefer ConforMIS over off-the-shelf solutions. Lastly, on June 14th, we received FDA clearance for iTotal Hip product. FDA clearance of iTotal Hip demonstrates the ability to apply our proprietary iFit Image-to-Implant technology to joints other than the knee. I will provide more detail on our hip launch plans later in the call. It has been a busy quarter for us, and while much of our operational plans are on track, we have to acknowledge our current sales trends and adjust accordingly. As such, we have taken actions to lower operating expenses and reduced our headcount resulting in over $2 million of annualized – of annual savings. With that, let me turn the call over to Paul for a more detailed review of our financial results. Paul?

[Paul Weiner:]

Thank you, Mark. Total revenue for the second quarter decreased $800,000 to $18.5 million or 4.4% year-over-year on a reported basis. Excluding the negative impact of changes in foreign currency exchange rates of $146,000, the company's total revenue decreased 3.6% on a constant-currency basis. Total revenue in the second quarter of 2017 and 2016 included royalty revenue of approximately $438,000 and $229,000, respectively, related to patent license agreements. The year-over-year increase in royalty revenue in the second quarter of 2017 was related to timing of royalty payments received. Second quarter product revenue decreased $1.1 million to $18 million or 5.5% year-over-year on a reported basis and 4.8% on a constant currency basis. Product revenue decline was driven by sales of the company's iTotal CR, iDuo and iUni products, which decreased $2.5 million to $13.3 million or by 15.6% year-over-year on a reported basis and 14.8% on a constant currency basis. These base product lines represented approximately 83% of total product revenue in the second quarter of 2017, compared to approximately 91% of total product revenue in the same quarter last year. This decline was partially offset by an increase in sales of iTotal PS, which increased $1.4 million to $4.8 million or 42% year-over-year on a reported and constant-currency basis. U.S. product revenue increased $200,000 to $15.2 million or 1.5% year-over-year. The increase in U.S. product revenue was driven by strong sales of our iTotal PS product, which increased 43% year-over-year, offset partially by a decrease in sales of the company's base business product lines, which decreased 10% year-over-year. Second quarter U.S. product revenue represented 84% of total product revenue, compared to 79% of total product revenue for the same quarter of 2016. Rest of world product revenue decreased $1.3 million to $2.8 million or 31.1% year-over-year on a reported basis and decreased 27.5% on a constant currency basis. This year-over-year decrease in Rest of World product revenue was due to a decline in sales of the base business product lines, primarily due to the Germany's partial knee reimbursement rate change. Second quarter Rest of World product revenue represented 16% of total product revenue, compared to 21% of total product revenue in the same quarter of 2016. Turning to a review of our results across the rest of the P&L, second quarter gross margin was 34% of total revenue, compared to 31% of total revenue last year, a 300 basis point increase. The increase in gross margin year-over-year was driven primarily by manufacturing efficiencies and cost reductions as a result of vertical integration and the timing of royalty payments received. Second quarter operating expenses remained relatively flat with an increase of $42,000 to $20.2 million or 0.2% year-over-year. Net loss was $12 million or $0.28 per share, compared to $14.1 million or $0.34 per share for the same period last year. In the beginning of this year, we secured up to $50 million in term financing, of which $15 million was borrowed in January and an additional $15 million was borrowed in June. There is still an additional $20 million available to borrow at our option through June 2018 subject to the satisfaction of our revenue milestone and customary drawdown conditions. Turning to a discussion of the update to our 2017 financial guidance, which we introduced in this afternoon's press release. For the full year 2017, the company expects total revenue in a range of $75 million to $78 million from previous guidance in a range of $80 million to $84 million. The company's 2017 revenue guidance assumes the following, product revenue in a range of $74 million to $77 million, compared to previous guidance in a range of $79 million to $83 million. Royalty revenue of $800,000 related to ongoing patent license royalty payments remains unchanged from our previous guidance. The company expects total gross margin in a range of 34% to 36% from previous guidance of 36% to 38%. With that, I'll turn the call back to Mark for more color.

[Mark Augusti:]

Okay, thanks, Paul. As I've mentioned previously, we are focused on four strategic priorities at ConforMIS, commercial execution, gross margin improvement, innovation and talent management. On commercial execution, let's start with international first. As you know, we have the reimbursement headwinds related to our partial implants in Germany, which are affecting our overall growth there. That dynamic did not change in the quarter and represents a headwind for us. However, I am pleased to report that on July 1st, we executed a distribution agreement with IdealMed in the United Kingdom. This deal more than doubles our distribution personnel in the UK and Ireland, providing for greater coverage throughout both countries. In the U.S., as mentioned, the transition is underway with our sales force. As noted, we have a new Senior Vice President of Sales, this is in addition to the leaders we have hired for our market access and national account roles. We continue to invest in additional distribution, improved account targeting and sales rep training. I have confidence that the changes we are making are the right changes and believe they will improve our sales execution moving forward. In the second quarter, we have seen an increase in the denial of coverage for CP imaging of the knee for osteoarthritis mainly by two commercial payors, BlueCross/BlueSheild in certain states and Cigna. I previously identified the need for improved payor strategy and as such, we’ve hired a VP of Market Access at the beginning of the year. This role is a responsible for communicating directly with payors and explaining the medical necessity for CT scans in our manufacturing process and reviewing our clinical and economic benefits during the coverage decision process as well as advocating for revised guidelines. In addition, this role is charged with providing appeal support. We have already had some success in changing local coverage decisions and coordinating successful direct and third-party appeals. Finally, as mentioned previously, consumer awareness is an area of focus. We have added an additional resource to our patient relations team and we have hired a Director of Marketing Communications and Demand Generation. Our Patient Ambassador Program has been helping to increase patient awareness and educate patients on the benefits of our products, while our Track My Implant program is allowing us to communicate directly with patients prior to their surgery, both of which helps patients make informed decisions with respect to their care. These are key components of our current commercial strategy. Regarding gross margins, we had a 300 basis point improvement in gross margin over the prior year. We remain confident in our gross margin improvement plans as we continue our in-sourcing and cost-reduction initiatives. Additionally, we are actively evaluating a number of new opportunities to improve gross margins. Further, expanding on my previous comments regarding cost-saving initiatives, we have taken actions, including canceling non-strategic programs and workforce reductions that we estimate will result in over $2 million in annual savings moving forward. We determined that these cost reduction actions were prudent given our revised revenue estimates and our desire to focus on sales investment, improved physician and consumer targeting programs, and new product development opportunities, including expediting our iTotal Hip launch. Turning to innovation. Our next-generation iUni and iTotal Knee programs remain on track. We received FDA clearance on June 14 for our iTotal Hip. We believe that this provides a significant growth opportunity for ConforMIS, as we should be able to extend our customer reach and leverage our distribution network. As mentioned in our press release on June 20th, while we presently don't anticipate a full commercial release until 2019, I am however pleased to announce that we have moved up the timing of the limited launch of our hip offering from 2019 to the second half of 2018. In summary, given the commercial disruption and exogenous market factors, we have new guidance for the remainder of the year, as Paul mentioned. We continue to execute on our commercial and operational plans, our patient-specific iTotal and iUni products continue to deliver above-average patient satisfaction. We have a great team here at ConforMIS. We consider ourselves agents of change in the field of orthopedics and are committed to producing the best total knee system possible. We are passionate in our belief that everyone should have access to our technology and everyone should have the ability to make a choice that leads to better outcomes and better satisfaction. Thank you very much. With that, operator we're willing to take questions now. Operator [Operator Instructions] Our first question comes from Larry Biegelsen with Wells Fargo.

[Larry Biegelsen:]

Hey guys. Good afternoon. Thanks for taking the question. Mark, let me just start with the changes to the field sales organization and the impact. Could you talk a little bit – give us a little bit more color about what's going on there? And how long do you expect this transition to take? Just big picture, Mark, do you expect to be able to grow this business in 2018? And I had a follow-up.

[Mark Augusti:]

Yes, thanks, Larry. To your question, yes, as mentioned, we changed out the top leadership of the organization and very excited about Dan joining the team. We have also made changes at multiple levels down below. So, couple of changes in our Access sales force as well as one of our AVPs. And so as a result, there is always challenges with the distribution changes in orthopedics. We had anticipated some of those and have accounted for that. To your second question, yes, I absolutely believe we can grow in 2018. These changes have been taking place over the last six months. We'll certainly have a few more in the latter half, but mostly that will relate to adding talent, both adding direct as well as distribution talent. So, while the change will continue, I am confident that we'll start to see the investment of that in 2018.

[Larry Biegelsen:]

That's helpful.

[Mark Augusti:]

You had a follow-up?

[Larry Biegelsen:]

And then, for Paul on the second half guidance, if I am doing the math correctly, Paul, it's about, I think product revenue is down about 7% year-over-year in the second half versus, I think, down 4% in the second quarter. So could you help to kind of bridge from what you saw in the second quarter to the second half of this year? Any color you can provide on the third quarter versus the fourth quarter directionally and OU.S./U.S. trends? So, thanks for taking the questions guys.

[Paul Weiner:]

Yes, yes, so I think that based on where we are in the second quarter, we are seeing comparable – I would say, comparable results going into the third quarter based on early indicators. So, we would expect the third quarter to come in somewhat within the range of the second quarter. And then, usually seasonally, certainly the fourth quarter is stronger than the rest of the year. So as far as our guidance, we would expect to end up somewhere in the middle part of that guidance. We feel comfortable with the middle part of that guidance. That should fill in the rest of the year. As far as U.S. and OU.S., we have difficult comps for the rest of this year in OU.S. because of the partial reimbursements and in the first quarter of this year, we didn't see that big decrease in partials, again, because the word was just getting out as far as the change in the reimbursements and a lot of the orders were already in before this change occurred and we talked about that in the last quarter. So we did see though in this second quarter the change that we expected with the decrease in the partial orders and we would expect that to continue into the third and fourth quarter and certainly into next year. On the U.S. side, that's where we have a lot of the growth as far as the PS is concerned. We would expect that continued growth in the PS area with relatively flat to single-digit growth in the base business on a quarterly basis, but not necessarily year-over-year.

[Larry Biegelsen:]

Paul, let me just sneak one more in on the gross margin. You took down the guidance from 36% to 38% to 34% to 36%. Could you talk a little bit about that long-term ramp? I know, could you remind us again of what that long-term ramp was? I think it was about a 1,000, you expected about a 1,000 basis points a year, I think over the next few years. How has that changed with the reduced guidance today, just looking beyond 2017? Thanks for taking the questions guys.

[Paul Weiner:]

Yes, so the big portion, the big reason why – primary reason I should say of the decrease in the gross margin guidance, a lot of it is tied to revenue when the decrease in revenue and the volume and material costs, that kind of plays into us adjusting the gross margins. As far as our cap to the higher gross margins, which we are targeting up at or around 60% in some years ahead, we are still on track to that as far as our volumes go to where we think that they can go over the coming years, we should be still be on track for the 60% gross margins. In the future, our vertical integration is going well, as far as bringing the manufacturing in-house for most of our components and that's the biggest driver as well as other cost efficiencies that we are seeing throughout our factory. So we will continue with those in the second half of this year and certainly into next year. So we still do see the biggest improvement in gross margins in 2018 and then continuing incrementally beyond that.

[Mark Augusti:]

Yes, just if I could add some color on that, I mean, I feel very good about our – the things that are in our control and gross margins as it relates to the – what the operations teams and support teams are doing. We are executing on those plans in many cases ahead of schedule and we will certainly continue on those. The biggest challenge, as Paul said, in the quarter was volume, but I still feel good about our long-range guidance about where we'll get to on margin.

[Larry Biegelsen:]

Thanks for taking the questions guys.

[Operator:]

And the next question comes from Michael Weinstein with JPMorgan.

[Unidentified Analyst:]

Hey guys. This is actually Alan on for Mike. So, just to start off, I know you mentioned that, I think one of you main goals now you've trying to overhaul sales management is that you are going to kind of get rep hires back on track and really kind of get aggressive there. Did you manage to grow kind of your sales force this quarter? What kind of, like attrition rate are you looking at and what kind of growth rate are you really looking at in the back half of the year to really get you back to where you need to be?

[Mark Augusti:]

Sure. Alan, we don't give out actual numbers of reps. But what I can tell you is, we have had that situation which you expect in the beginning, where we are adding feet on the street but as we are also working out, let's say, less than productive sales assets, you are working against that. So, we are probably a little bit behind where we would have liked to have been as far as overall net adds, but not far off as you would expect with going through a transition like this.

[Unidentified Analyst:]

Okay. So, would you say like low-single-digits would probably be comfortable or just no range at all?

[Mark Augusti:]

Yes. Again, I think you are asking for a specific kind of net adds or additions and we typically don't talk about those numbers, so.

[Paul Weiner:]

Yes. I mean, we are adding both direct as well as agents, as we've talked about in the past. When we add agencies, then there is many times a lot of reps underneath those agencies. So it is a mix of adds of direct as well as agents that we are looking to bring on in the second of this year.

[Unidentified Analyst:]

Okay. And then, I guess, kind of looking out to 2018, kind of piggybacking and ask one of the questions that was asked before. So you are really looking to kind of go back on the aggressive and really get growth like kind of back on track? But the problem is you are also going to have like – your competitors are also kind of some of them are also kind of working through their own periods of disruption and are launching their own kind of new products. So how do you really see yourself competing with them? Thanks for taking the questions.

[Mark Augusti:]

Yes, thank you. I think that's a great point. I mean, there is a couple things. One is we continue to invest in our clinical outcomes, patient outcomes and direct-to-consumer. That will drive certain growth. We are really excited about our new product program. So, we'll be launching, actual, there will be multiple launches of our G3 throughout the year, next year, which always helps in orthopedics when you got kind of new products to talk about. And then of course, our hip, we are very excited about being able to move up towards targeting kind of mid-year, second half of 2018 and think that's going to help us with how we add agents and leverage, those discussions that we are currently in as well as leverage the customer base that we have. So we are excited about those opportunities, Alan, in the 2018. Okay?

[Operator:]

Our next question comes from Kyle Rose with Canaccord.

[Kyle Rose:]

Great. Thank you very much. Can you hear me alright?

[Mark Augusti:]

Yes, Kyle.

[Kyle Rose:]

Great. Thank you for taking the question. So, I just wanted to talk a little bit about some of the sales force changes. You talked about new leadership at the top, but then also some other changes at the mid-tier level and then the local levels there. Just wondering how much of that is contemplated in your guidance for the second of the year? I guess, my question is here is, if the new leader came on, on July 1st, I assume that he is going to want to make some of his own decisions. I am just wondering, is this disruption contemplated in the second half? Or is there an expectation that some of that might still play through?

[Mark Augusti:]

Yes, Kyle, I appreciate the question. I feel very confident that it's baked in and contemplated in there and I will tell you that a lot of this I believe was contemplated even heading into the year. Clearly, some of the stuff that we saw happening from the scanning standpoint hurt us in the second quarter. But it's a fair question, when you bring on a new leader. But I've spent a lot of time with Dan prior to him joining and we've been through kind of where the planning is and he definitely had some strong ideas and thoughts, as you've mentioned, given his years of experience. But I feel pretty confident we are on the same page and all that's baked into where – what we have just disclosed this afternoon.

[Paul Weiner:]

And I would add to that, I think a lot of the changes that we are looking to make were made. I can't say all of them, but for the most part, they should be. And I think that Dan will be focusing on increasing the number of feet on the Street moving forward. That's really his primary focus.

[Mark Augusti:]

Yes, that's a great point, Paul. So that's goes to my response to an earlier question. So you tend to when you are making these changes can work out people sooner than you can add people, so it's a little bit of a lag and so, that's a great point.

[Kyle Rose:]

Great. And then I was just wanted to see, can you go into a little more detail with respect to the reimbursement pushback that you are seeing for the CT scans? I just want to trying to understand where we are at that, is it still on the early sides, could we continue to see that pushback accelerate as we move into the second half of the year, and then just help us understand how that's been impacted on the Q2 and then the full 2017 results?

[Mark Augusti:]

Sure. Again, we are talking about the CT scans, just to be clear and I mean, we've got, CMS coverage, Medicare reimbursement, the majority of commercial coverage. But in an attempt to manage kind of, I think, the imaging costs overall, there has been this increased scrutiny in the second quarter around CT scans. So we've seen that we've had to respond to that. To answer your question, I don't expect it to accelerate. I am not omnipotent. I don't know where it's going, but we've looked at this. I don't expect it to accelerate. I think we've, fortunately, have put some of the assets in place to already deal with this at the start of the year, just the anticipation to recognize with our good health economic data, we want to able to initiate these discussions with payors in a proactive manner. Some of these guidelines are old guidelines that the payors in particular, their named have really just recently with the start of 2017 and really kind of more in the March, April timeframe started to put some teeth into. And you have to remember for us, it affects us because we can't build the implant without getting the scan, whereas for the companies that, say, do PSI or do robotic surgery or any type of MRI or CT-navigated surgery. If it's denied it's not a big deal, they just go on and do traditional procedure. So it's a bit of an unanticipated headwind from where - we are starting in Q1, but we've got that baked into our numbers and again, I can't predict anything. But I don't expect it to accelerate using your words.

[Kyle Rose:]

Okay, thank you very much for taking the questions.

[Operator:]

Our next question comes from Steven Lichtman from Oppenheimer.

[Steven Lichtman:]

Thanks, hi guys. Just wanted to touch on Germany. Is the – do you feel like the issue there has sort of bottomed out? Have you – where are you in terms of how much of the Uni business you had being lost? And, once you anniversary this, what's your outlook in Germany looking ahead?

[Mark Augusti:]

Yes, so, I mean, I think that in the second quarter, it is as expected, I would say, as far as where it fell in the second quarter as opposed to first quarter, like I said, it took a while for it to catch on. So the second quarter is probably what we would expect moving forward through for the rest of the year - this year as well as, moving forward in the future years. Certainly through 2018, with a possible change of the reimbursement back in 2019. If that happens, then we would expect the partials to pick up again. But based on the current reimbursement in Germany, we would expect to these lower levels to continue until there is a change.

[Mark Augusti:]

Yes, but to your point, I mean so I would suggest that we saw this communicated and frankly did a pretty good job of planning where it would it be. And so the big issue for us is it's a huge optical headwind to our overall corporate growth number that is not going to change until we, as you mentioned, annualize out of it, which will happen in Q1 of 2018. Well, really more Q2, because they didn't really operationalize as we talked about on previous calls in 2018. So it will be a little bit in Q1 of 2018 and then in 2000 – Q2, it will definitely annualize up.

[Steven Lichtman:]

Okay, thanks. And then, my follow-up, just on the P&L, Paul, you touched on some gross margin dynamics. But given some of the initiatives, what – how should we be thinking about OpEx, maybe on an absolute basis or percentage basis, as we look out here over the next few quarters?

[Paul Weiner:]

Yes. So, I think that it should be pretty consistent with where we ended up in the second quarter moving forward as far as at least a percentage of revenue on the variable pieces like commissions and so forth. But the operating expenses should continue to – we should be able to leverage that as revenues increase. One of the things that Mark did talk about was that we have taken some actions more recently as far as reducing some of our expenses in light of the reduced revenue guidance. So, I would say that, that decrease in operating expenses should start to take effect in the fourth quarter. Although we've taken the actions now, sometimes it takes a while to get through the P&L. So I think that starting – we estimate that starting in the fourth quarter of this year and continuing forward, we should have a reduction in our fixed operating expenses of about $500,000 per quarter.

[Steven Lichtman:]

Okay, got it. Thanks, guys.

[Paul Weiner:]

Thanks, Steve.

[Operator:]

Our next question comes from Bruce Nudell with SunTrust Robinson Humphrey.

[Bruce Nudell:]

Good evening. Thanks for taking the call. Last year, we did some math and came up with you having about 6% to 8% partial share, 3% to 4% CR share and certainly less than 1% PS share and then - and clearly stalling at this point is discouraging. And I guess, are there – what would you say to investors with regards to apportioning the blame for this relatively speaking on failure to resonate with customers? And if that's the case, what are the specific reticence – areas of concern that they might have in adopting the new approach even though the data looks very good versus operational sales disruption due to the change in leadership and tactics?

[Mark Augusti:]

Hey, Bruce, it’s Mark. That's actually a really insightful question and it's hard to quantify discretely around it. But, first off, I want to delineate. This product and what we do and the quality we achieve resonates greatly with patients and we see that day in and day out. So, when we think about our customers as being patients, we really like the way it resonates. When you talk about customers being surgeons, there is no doubt that, as I have stated in the past, we have work to do and part of that is, is the fact that we are going up against really tough competition that in general do a very good job and we've got to be that much better at what we are doing. And that includes both in how we execute our commercial strategies and how we work with our distribution partners, whether they are indirect agents or direct field sales organization and going up against that. So, those are the challenges – those are the challenges that we have and at the same time, we have to continue to innovate in an incremental manner based on the feedback around our products and that's why I am excited about what we are doing with our third-generation iUni and third-generation iTotal product. So it's kind of the traditional blocking and tackling. I would say that, most of it is probably around commercial strategy. But a bit of it is around continuing to kind of break into that -- I keep using the phrase, but the entrenched competition that is there and exists.

[Bruce Nudell:]

And I guess, my other question is about the gross margin trajectory. By our math, there is something like 800,000 or 850,000 primary knees Unis plus Totals annually the U.S. Like to get to 60% gross margin and I know there are multiple parts, there are process changes, there is off-shoring, but there is also absorption of overhead. What kind of volume do you need in units to get to that 60% level?

[Paul Weiner:]

I'll let Paul maybe think doing some of that. We clearly have that because we have some ideas of where we want to get to from a top-line standpoint, but I don't have the unit breakdown right in front of me.

[Paul Weiner:]

Yes, I think that – let me just – I would say, roughly around 10,000 units a quarter or 40,000 a year, somewhere in that neighborhood.

[Bruce Nudell:]

So basically 5% aggregate share, roughly or a little more?

[Paul Weiner:]

Somewhere in that range.

[Bruce Nudell:]

Okay, perfect. Thanks so much guys.

[Operator:]

Our next question comes from Ryan Zimmerman with BTIG.

[Ryan Zimmerman:]

Hey guys. Thanks for taking the questions and I apologize. I've been hopping on calls – between calls. So this question may have been asked. But just on the gross margins, have you commented previously about variations within margins or between products specifically? And just breaking out the margins between the products and if not, just any difference between them and the plans specific to a specific product line that could remedy the gross margins going forward?

[Paul Weiner:]

Okay, yes. So, as far as gross margin amongst products, so the iTotal CR, we have had that out there for a while. We have a lot of software that goes into that as far as the design that's well developed. We are coming out with new versions of software to decrease the design time on the PS. So the PS is relatively new compared to the CR, as well as even the partials. So, as far as gross margins are concerned, the partials and the iTotal CR have better margins today than the PS. The PS is expected by the end of next year to be comparable gross margins to the CR and partials or certainly the iTotal CR. But today, it is lower gross margins on the PS.

[Ryan Zimmerman:]

Understood, thank you for the color, Paul. And then, again I apologize if these questions have been asked. But, I wanted to just get your thoughts around the removal of TKA from the inpatient-only list from CMS and how do you think about the outpatient opportunity and the shift in practice habits going on within TKAs today and how you are positioned for that?

[Mark Augusti:]

Well, as we said previously, we are like all orthopedic companies closely monitoring that. We think it's a great opportunity for the ASC centers and we think from that standpoint, it's going to play in really well for us going forward because of the consumer engagement possibilities that we have with our product. So we are watching it. In the short term, I don't think it's going to drastically change the trajectory a little bit, given to where some of the proposed pricing is and the fact that it's still hospital outpatient-only, as I understand it. So, but I think it's an important point on the journey. So that, clinicians can figure out kind of – continue to figure out patient selection and how they manage the procedure and it's clear that that's the direction the market is going in and I think we are definitely well-positioned to take advantage of that.

[Ryan Zimmerman:]

Okay, thanks for taking the questions guys.

[Operator:]

Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call back over to our host.

[Mark Augusti:]

Okay, with that again, thanks everybody. We appreciate the questions and joining us for our call. Thank you very much.

[Operator:]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.