Conformis, Inc.
Q1 2016 Earnings Call Transcript

Published: 13 May 2016

[Operator:]

Good afternoon. My name is Takaya [ph]. I'll be your conference operator today. At this time, I would like to welcome everyone to the ConforMIS First Quarter 2016 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 would like to remind you that the management will make statements during this call that include forward-looking statements within the meaning of the federal securities law, 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 fact should be considered to be forward-looking statements. All forward-looking statements, including without limitation statements about ConforMIS strategy, future operations, future financial positions and results, market growth, total revenue and revenue mix by product and geographies, gross margins, operating trends, the potential impact and advantages of using customized implants, the results of broad commercial launch of iTotal PS, the company's targeted regional commercial strategy, and the impact of our voluntary recall, are based on our current estimates and various assumptions. These statements involve material risk 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 the 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 to accept, as required by law to update or revise any financial projections, and forward-looking statements whether because of new information, future events or others wise. This conference call contains time sensitive information, is accurate only as of the live broadcast today, May 12, 2016. I will now turn the call over to Philipp Lang, the company's President and Chief Executive Officer. Philipp?

[Philipp Lang:]

Thank you, Takaya [ph], and thank you all for attending this call today. Joining me on the call this good afternoon is Paul Weiner, our Chief Financial Officer. There have been many developments at ConforMIS since our last earnings call, on which we will update you now. I would like to start out by defining a brief agenda for today's call. I'll briefly summarize our Q1 financial results. Paul will provide a detailed financial review of the first quarter, along with an outlook on the remainder of the year. I will then update you on our overall commercial progress, the progress made with our C-suite selling approach and pricing strategy, our progress with hospitals that will participate in the Medicare Comprehensive Care for Joint Replacement Bundling or CJR, about which we're very excited, progress with our clinical programs with more clinical data releases, the broad commercial launch of iTotal PS at the American Academy of Orthopedic Surgeons in March, and the progress that we've made since the launch. And finally, we will also provide an update on our plans to enhance our management structure. We will then open the call for questions. First quarter of 2016 showed strong revenue growth, with product revenue up 36% year-over-year on a reported basis, and 39% year-over-year on a constant currency basis. Product revenue growth in the first quarter was driven primarily by strong contributions from the limited launch of iTotal PS, and benefit from improving order lead times and rescheduled cases from the second half of 2015 related to the voluntary recall. While we're pleased with the first quarter results, be remindful that the reduction in order lead times and rescheduled cases following the recall benefited this quarter's result, and we do not expect this to continue. Paul will provide details of our revised product revenue guidance for 2016. In the interim, I would like to emphasize the fact that our revised product revenue expectations for the year reflect the impact of a slower-than-expected ramp in new orders for iTotal CR, iDuo, and iUni, our base business, but not for iTotal PS. To that end, I'm very pleased with the performance of iTotal PS in the first quarter of 2016, and have seen strong demand for this innovative product following the broad commercial launch in March, 2016. We continue to anticipate strong growth and increasing contributions for product revenue from our iTotal PS over the balance of the fiscal year. With this background, let me turn the call over to Paul for a detailed financial review. Paul?

[Paul Weiner:]

Thank you, Philipp. Total revenues for the first quarter of 2016 increased $5.6 million to $20.3 million, or 38% year-over-year on a reported basis, and 40% on a constant currency basis. As a reminder, beginning in the second quarter of 2015, our total revenue results also includes non-product revenue consisting of royalty related to the settlements of patent litigations from Wright Medical and MicroPort. Total revenue in the first quarter of 2016 included $268,000 in royalty revenue related to the settlements which did not exist in the results in the same period last year. First quarter product revenue increased $5.3 million, to $20 million or 36% year-over-year on a reported basis, and increased 39% on a constant currency basis. Product revenue for the first quarter was positively impacted by the post recall order lead time reduction from eight weeks, back to our standard six weeks, and cases that were rescheduled into the first quarter following the recall. U.S. product revenue increased $4.4 million, to $14.7 million or 43% year-over-year. Rest of the world product revenue increased $900,000, to $5.3 million, or 20% year-over-year on a reported basis, and 28% on a constant currency basis. As detailed in our press release, this afternoon, first quarter product revenue from sales of iTotal CR, iDuo, and iUni, our base business, increased $3 million, to $17.6 million or 21% year-over-year on a reported basis, and 24% on a constant currency basis. First quarter product revenue from sales of iTotal PS, which we launched on a limited basis in February, 2015, and initiated a broad commercial launch in March 2016 increased $2.2 million to $2.4 million year-over-year. First quarter U.S. product revenue represented 74% of total product revenue, compared to 70% of total product revenue in the same quarter of 2015. First quarter rest-of-the-world product revenue represented 26% of total product revenue, compared to 30% of total product revenue in the same quarter of 2015. For modeling purposes, our largest exposures to changes in foreign exchange rates are related to revenue in Germany, and U.K., our two largest markets outside the United States. Total first quarter revenue was negatively impacted by $391,000 due to change in foreign exchange rates compared to last year. Turning to our review of our results across the rest of the P&L; first quarter gross margin was 35% of total revenue, compared to 36% of total revenue in the same quarter of 2015. The decrease in gross margin compared to the prior year was primarily caused by unfavorable changes in foreign exchange rates compared to the prior year. First quarter operating expenses increased $2.8 million, or $22.2 million, or 14% year-over-year. Sales and marketing expense accounted for $1.9 million of that increase, the majority of which came from increases in personnel cost as a result of hiring additional direct sales representatives and sales support, and increases in commissions as a result of the increase in sales volume. Research and development expense increased $400,000 or 10% year-over-year compared to last year. And general administrative expense increased $500,000 or 9% year-over-year. Net loss was $15 million or $0.37 per share, compared to $14.3 million or $3.32 per share for the same period last year. The change in net loss per share compared to last year was impacted by an increase in our weighted average shares outstanding, specifically the fully diluted weighted average shares outstanding for EPS purposes increased to 41 million shares in the first quarter of 2016, from 4.3 million shares in the first quarter of 2015. The increase in shares relates to an issuance of shares in our initial public offering, and the conversion of outstanding shares to preferred stock, and to shares of common stock upon the closing of the IPO. Turning to a discussion of the update to our 2016 financial guidance, which we introduced in this afternoon's press release, for the full year 2016, the company expects total revenue in the range of $76 million to $81 million from previous guidance in the range of $84 million to $87 million. The company's 2016 revenue guidance assumes the following. Product revenue in a range of $75 million to $80 million compared to previous guidance in a range of $83 million to $86 million. Royalty revenue guidance of approximately $800,000 related to ongoing patent license royalty payments have not changed. Previous product revenue guidance for 2016 reflected our expectations for measured growth in the first half of 2016, with improving growth in the second half of the year. This growth trend reflected the uncertainty related to ongoing impacts of the recall on sales of iUni, iDuo, and iTotal CR. This outlook was supported by the early trends in order rates that we had experienced through mid-February, and that assumed improvement order trends for iUni, iDuo, and iTotal CR over the balance of the year. To-date, we have not experienced this rate of improvement in orders. We are however seeing strong demand in iTotal PS. Orders to-date for iTotal PS have exceeded our initial plan, and we anticipate continued strength throughout 2016 rather we have initiated a broad commercial launch. In fact, based on the strong market response in the first couple of months of broad commercialization, we have modestly increased the expected contributions to full year 2016 results from iTotal PS in the revised product revenue guidance. For modeling purposes, for the full year 2016, we have also updated our gross margin expectations as follows

[Philipp Lang:]

Thank you -- excuse me. Thank you, Paul, for that detailed financial update. Paul has explained how our base business with iTotal CR has not fully returned to its pre-recalled growth rates. Despite the setback, we have seen an expansion of our estimated market share in cruciate-retaining total knee implants in the U.S. from 1.5% in 2013 to 2.5% in 2014, and 3.5% in 2015. Notwithstanding our small sales force that is worked by the sales forces of our orthopedic competitors and it only covers select regions on metropolitan statistical areas in the U.S., and does not have nationwide coverage. A steady progression in market share in an industry that has seen little share shift in recent years, speaks to the disruptive nature of our products in the market that has lacked significant innovation in the last two decades. We've also made great progress at our C-suite selling approach and pricing strategy. Our C-suite sales team has been successful in leveraging the benefits of our technology, allowing for reduction over time potential for faster set up and turnaround time and reduction in sterilization cost with fewer instrument rates, as well as reduction in inventory management. These benefits are further supported by our economic data. In one direct comparative study with off-the-shelf implants for which we provide a financial support, the economic data show that a statistically significant lower percentage of patients in the iTotal CR study the discharged to rehab or other post-acute care facilities rather than home, as compared to patients in the off-the-shelf arm. Patients in the iTotal CR study arm were 4.4 times more likely not to experience an adverse event during the initial hospitalization, and they were 2.5 times more likely not to experience an adverse event up to the 90 days post-discharge than patients in the off-the-shelf study arm. By utilizing this data, our C-suite sales team has been able to achieve an average contracted price, which is higher than our historical average selling price. This increase in average contracted price is a remarkable achievement in an industry that has experienced progressing experience in progressive downward pressure on implant prices. We've made further progress with hospitals that are participating in the Medicare Comprehensive Care for Joint Replacement bundling program or CJR. As of today, we have signed new contracts that allow us access to nearly 100 contracted hospitals that participate in the CJR program. This shows how interested hospitals are in using our technology in view of opportunity for reduced adverse event rates in the 90-day episode of care, and for reduced referrals to post-operative care facilities, including rehab facilities after the hospital stay. Our clinical programs have also made significant progress. The recent publication in a peer-reviewed orthopedic journal reported that iTotal offers a significant bone preservation advantage over off-the-shelf implants. The average bone resection increase for all tested competitive implants from major manufacturers compared to the iTotal CR regardless of implant size was 28%. In small patients, such as, for example, petite female patients, the bone resection increase with off-the-shelf implant was 49% compared to iTotal CR. The investigators concluded that, "The ConforMIS total patient-specific implants preserve significantly more bone than standard total knee replacements due to both the sequence [ph] of the required bone resections, as well as the implant fitness being tailored to each patient's individual need." This means that more native bone will be available in the event that a patient requires a revision. The hope is that this customized approach may enable revision to a standard primary total knee in the future rather than a revision implant. We have also made significant progress with our single time point step study, for which we previously reported interim results in August 2015. Here we have recently surpassed a major milestone with more than 500 patients recruited. In this trial, patients who have received an iTotal CR compared directly with patients who have received an off-the-shelf implant with regard to patient-reported knee outcome scores and functional measurements of knee performance measured by operators blinded to the treatment arm. We expect to report updated data from the study in the second half of 2016. The broad commercial launch of iTotal PS almost tripled the available market of ConforMIS. We are really thrilled about the progress of iTotal PS. The broad commercial launch occurred, as scheduled, at the American Academy of Orthopedic Surgeons in March 2016. Our sales force is training and converting new PS solutions as we speak. Our new surgeon training for iTotal CR and iTotal PS are heavily subscribed, which we believe will help us in the second half of the year as these surgeons start ramping volume. In Q1 of 2016, while iTotal was still in limited launch, the number of surgeries completed using the iTotal PS exceeded our expectations by more than 20%. While it is still early, we are seeing a similar trend in the second quarter. Last, I would like to update you on important plans, how we would like to enhance our management team in the future. As many of you know, I founded the company in 2004, together with Daniel Steines, our CTO. And I have run the company, since 2008, in my capacity as CEO when I led it through the global financial crisis. Over the years, we have developed an impressive portfolio of customized knee replacements, including iUni, iDuo, iTotal CR, and as our latest and most important product, iTotal PS. We've taken the concept into the hip, and we're developing our first product in that segment. We anticipate to have a similar impact in the hip replacement market. In short, our goal is to disrupt the $15 billion joint replacement industry with a truly impressive product portfolio. Surgeons have demonstrated clinical superiority of iTotal CR in multiple clinical trials directly comparing our product with leading off-the-shelf devices. Our surgeons are sending powerful messages to our patients regarding the superior performance of our products. The disruptive nature of our technology and the data supporting its superiority has helped make ConforMIS one of the fastest growing medical device companies. I believe this is only the beginning of an opportunity that can be much bigger. This is a technology platform company applicable to many different applications in the orthopedic industry. The last nine years as CEO have been tremendously gratifying. My passion for the company is the same as when I founded it. It is actually even greater, because now we have proven that we really make a difference in the lives of our patients, and that is what this is all about. After nine years at the helm I have entered into discussions with the Board, and we have agreed to look for a successor in my role as a CEO. As the Board and I collectively move forward with a search for potential candidates, we have no time constraint. It does not matter how long the search will take, because we're searching for the best qualified and available person for the job. I will remain CEO until that candidate assumes the role. The intent is to identify a highly experienced new CEO, who will bring deep commercial expertise in a high-growth environment to ConforMIS to help us strengthen the team and accelerate our growth plans. In the meantime, I will be available to our surgeons who have helped us develop our products, and to many, many surgeons who helped build this great company. I will also be available for our shareholders, many of whom have supported us for years, and to whom I feel personally greatly indebted for all of their support, and their passion for ConforMIS. Upon the appointment of a successor, I will remain fully committed to the company. I will serve on the Board of Directors, and offer advice, and counsel, and support the new CEO. I look forward to this next stage of the company's growth, and I remain as enthusiastic as ever about ConforMIS and the technology, our employees, and the surgeons that are supporting it. In summary, the first quarter of 2016 showed stronger than expected revenue growth, with product revenue of $20 million. Our base business with iTotal CR, iDuo, and iUni has not yet returned to the growth rates that we saw in 2015 prior to the recall. We are however seeing a gradual recovery which we are actively supporting through a number of management programs. We are very excited about the continued progress with our pricing strategy, and with progress with hospitals that participate in the Medicare CJR program. We believe we will be able to further support this progress with our growing body of evidence, corroborating clinical superiority of our devices in multiple direct comparative studies. We are thrilled about the reception that iTotal PS is receiving in the PS surgeon community. While it is still early in the ramp, we are excited about the growth that we're experiencing with this highly differentiated and disruptive product. Operator, let us please go ahead and open the line for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question will come from Mike Weinstein of JPMorgan.

[Mike Weinstein:]

Thank you. So my first question is your new guidance for 2016. What does it imply for growth in products ex to PS, so what are you assuming in that for CR and Uni?

[Paul Weiner:]

Yes, Michael, so we're anticipating continued growth in the base business, let's call it the base business, the iTotal CR, iUni, and iDuo for this purpose. So we did have growth from the -- in the first quarter. We're expecting growth in our guidance from the first quarter into the second quarter as far as new orders are concerned, and we are expecting continued growth going into the second half of the year on our base business at a level that's not at the same ramp rate as what we were seeing when we had our year end call, and that's the cause for the adjustment in the guidance. So if we -- go ahead.

[Mike Weinstein:]

I'm sorry. So can we put some numbers behind it? I mean what's -- so your guidance now assumes what for the base business?

[Paul Weiner:]

We don't have -- we don't give the guidance specifically for the, let's say, the base business versus the iTotal PS. I could tell you that we have increased in our numbers the guidance, the part that relates to the PS. With the CR we do have continued growth in the base business that would bring us to the midpoint of the range. To help you with a little bit more details, if we exceed that number certainly I think we could be in the high end of that range. If the ramp in orders flattens out, and we do not see growth for the rest of the year, that would bring us to the bottom-end of the range. Again, which is not what we're anticipating, we're anticipating somewhere in the middle of that range.

[Mike Weinstein:]

Okay. Can we try and get a little better insight into what's going on in the business. So few things that probably be helpful is to understand, number one, what's going on, on the distribution side, because if you could talk about your sales force and turnover? Number two, this could drop off in orders for CR in Uni. Could you just describe that a little bit better? Because are you losing surgeons that were previously ordering or are there surgeons lowering their allocation to ConforMIS versus where it was, say, pre we call it, and your expectations coming out?

[Philipp Lang:]

Michael, let me answer the first question, and then I'll come to the second part. So there were no significant changes in our sales force that would have affected revenue in Q1. Clearly, we are opportunistic. The example of these underperforming reps, we made changes from time to time with more stronger talent. We're also opportunistic with some of the distributors' relationships. But on that front there were no significant changes that affected the result. With regard to your second question, what's happening in the base business, basically after the disruption related to the recall, what we're seeing here is the business has not fully recovered yet. Specifically, the expected -- what we're seeing is that the expected number of our total CR surgeons -- the CR surgeons continue to order, but they're ordering at a lower rate, and -- yes, go ahead.

[Mike Weinstein:]

So I understand that. So the number of surgeons that are ordering from you looks relatively constant over this period, but the rate at which they're ordering has come down. Meaning they're just allocating less share of their practice to ConforMIS.

[Philipp Lang:]

That's correct. As it pertains to the base business, I would like to emphasize that we believe we haven't lost any of the key customers. And so what we're seeing is really the factors, such as the disruptionary costs to the business contribute to this low order rates.

[Mike Weinstein:]

Okay. And then last, then I'll let some others jump in here. Could you just update us on the hip product?

[Philipp Lang:]

So with regard to the hip, we are actively progressing with our plans. There's no significant change from what we shared on the last earnings call. And so the manufacturing development is progressing. And we are planning for a resubmission to the FDA, we'll update on that in the second half of the year…

[Mike Weinstein:]

Okay…

[Paul Weiner:]

Mike, go ahead. Sorry.

[Mike Weinstein:]

No, go ahead.

[Paul Weiner:]

Just going back to your last question to clarify something, you had mentioned lost share to competitors. It's not clear that we have lost share to competitors. It's a multi-factorial fact. So it might also be that I don't believe that we've lost share. It's just that the surgeons that we are working with, from indications that we've gotten, have not been ordering at the same rate that they have over the last few months. And that's what we've been seeing in orders. We would expect them to potentially increase orders if we haven't lost share, which we don't believe that we have.

[Philipp Lang:]

A key point there is also we are clearly seeing recovery in the base business. But what we've experienced now, that recovery was -- we saw a significant uptick between mid-January and mid-February. And we had anticipated continued improvement, which then however we didn't see. Overall, we're clearly seeing that there is improvement in the business, but it is happening at a slower rate.

[Mike Weinstein:]

Understood. I'll let some others jump in, thank you guys.

[Operator:]

And our next question comes from the line of Kristen Stewart from Deutsche Bank.

[Kristen Stewart:]

Hi, thanks for taking my questions. Just wondering, to what extent have you seen, or are you seeing any sort of cannibalization of PS from CR? I know originally all the surgeons that you had targeted for CR were pretty much CR surgeons. But is that at all impacting your forecast?

[Philipp Lang:]

So, Kristen, we have factored into our forecast some level of cannibalization, but it's quite small. And the key reason is -- so why any cannibalization at all, that is because in some of the existing accounts, if you have an indication for -- so CR account. If you have a patient with an indication for PS, PS may be used. And we're seeing a few select customers who are really excited about this PS product now, and who actually increased that in relationship with the CR. But that's really the exception. So in that regard the business is very much as expected. We are really focusing with the sales force on the PS surgeons. And so let me take a step there, as we have two groups, the CR surgeons. CR surgeons use in the majority of their patients is CR. But then have patients where, for example, a ligament is damaged or the deformity is too advanced and they have to use the PS. And then the other category is the PS surgeon, and PS surgeon use PS really in the majority of their cases unless they do the occasional partial knee. And we're focusing now specifically on the PS surgeons and business sales force. And this is one of the reasons why overall we're not anticipating -- but we're really not seeing much cannibalization.

[Kristen Stewart:]

Okay. And do you feel that the PS launch has taken away the focus on the CR side then? And could that be some of the explanation for perhaps the slower reorders or is it just in a way that surgeons just are more reluctant to go back to using the iTotal post the recall? I'm just trying to get a sense for what you're hearing in the field as to why they're not reordering that freely?

[Philipp Lang:]

Yes, so I think those are the -- the order rates for the base business, that's really sort of a different issue. What -- there's clearly a lot of excitement about the PS in the field, and with our field sales force. And what we have to be mindful, what's really great is how these new PS surgeons are being on-boarded, that's fantastic. And as we penetrate this account, that way it's really a terrific opportunity going forward. But that volume is basically deferred volume because there's a lack of a -- first of all, there's a 60-day lag period from the time they are seeing the patient to the actual surgery. More important, there's a lag period, typically over the course of 12 months, how the surgeons progressively ramp the volume with us. And so this forward investment in PS doesn't help the business in the near term, it will help the business in the second-half of this year, and I believe in 2017.

[Kristen Stewart:]

Okay. And then, Paul, for you, I was wondering if you could just talk about your cash burn, and expectations going forward. And then secondly, maybe update us on the transition with the vertical integration for manufacturing?

[Paul Weiner:]

Yes, those cash burns should be somewhat similar to what we've experienced, I think, in the first quarter for the rest of the year, somewhere in that range.

[Kristen Stewart:]

What was that again, sorry?

[Paul Weiner:]

It's around $13 million I think with the total difference in cash. So it should be similar between, I would say, $13 million to $15 million, somewhere in that range. And, I'm sorry the second part?

[Kristen Stewart:]

Just the transition with the vertical integration with manufacturing.

[Paul Weiner:]

Yes, thank you.

[Philipp Lang:]

Let me answer that. So the vertical integration is progressing nicely as scheduled. We had previously shared that we are, again for background, this company is a company that still has, in 2015, had the majority of its component outsourced, and it still does as of today in regards to the implant components. So the focus for us to reach attractive material cost levels is really this vertical integration. We're progressing very nicely there with the vertical integration of our pivotal trace. And we are on track with regard to the plans there. And we're progressing very nicely with the vertical integration of our in-house polyethylene manufacturing, of which we had none in 2015. That is on track. And literally, with all of the other key activities, they are progressing as we have planned.

[Kristen Stewart:]

Okay, thank you. I'll just jump in, get back in the queue.

[Operator:]

And our next question will come from Larry Biegelsen from Wells Fargo.

[Larry Biegelsen:]

Hi, guys, thanks for taking the question. Any chance, Paul, you'll give us the number for the amount of the catch-up in Q1 from Q4, so you kind of have an underlying base business, sales and growth?

[Paul Weiner:]

Not the numbers as far as directionally. The two items that affected the first quarter as we had mentioned, one was the rescheduled recall cases, that to one extent, to a larger extent was the reduction in the lead times from the eight weeks post-recall to six weeks, and those additional couple of weeks, for most part affecting and benefiting Q1. If you look at that, the numbers without those in there, then we have -- in our Q2 guidance and in the orders that we have received and receiving, in fact Q2 versus Q1, we're seeing a growth in orders from our base business from Q1 to Q2.

[Larry Biegelsen:]

Okay. And then it's a follow-up on Kristen's question earlier, do you think you have enough cash to get you to profitability?

[Paul Weiner:]

Again, as we had said in the past, we will have to evaluate that as we get closer to that point. It really depends on -- we're concentrated on reduction of cost as far as decreasing COGS and increase gross margins as well as looking at operating expenses as far as where we can reduce cost, and that's where we're really gliding in 2016. The variable that we will have to continue to look at is the revenue growth that will also affect use of cash throughout this period of time, and we continue to evaluate that as we move forward.

[Philipp Lang:]

And we are very nimble on that front. So example, when we saw that in the base business the order rate while growing was not growing at the rate we had anticipated, we actually implemented the changes already by the same token, and what as CEO I really personally hope for is that we are seeing a significant recovery in the second half of the year, where we're today, I can't say this. And by the same token, I very much hope that the iTotal PS will continue the strong trend, which is exceeding expectations. And if that were to happen then we're certainly nimble to make adjustments to meet that volume ramp. So, by all means that's the intent, but we have to work off what we're currently seeing in the business.

[Larry Biegelsen:]

Just lastly for me, two quick ones; PS is $2.4 million or so in the quarter, can you talk a little bit about what percent coming from new surgeons versus current CR users? And just lastly, Philipp, the recall -- can you talk about -- the recall obviously, it hurt you, can you talk about like why you think the recall has impacted the base business? I mean, on the surface of the time it seemed pretty benign as far as recalls go, but what do you think is happening there? Thanks.

[Philipp Lang:]

Let me answer the question related to iTotal PS, so you asked what percentage of these are new surgeons as compared to CR surgeons, so from the get-go it's a limited launch. We had really focused on new surgeons to -- and those RPS surgeons to solicit the feedback with the product. We had existing CR users in there, but sales force -- so clearly we were opportunistic with regard to working with some of our surgeons who supported the company strongly for years to whom we have been grateful, but the sales force and the product management team really focused on those new PS surgeons. So that was the focus all along that continues to be the focus. So, some of these "new surgeons," they are not new today anymore, because they think this is not for you, so it's a limited launch. And we actually -- some of those you've really deeply penetrated into the account, both we thought on Q4 and Q1, those are obviously all, I think you would call new surgeons. With regard to the recall, I think the fundamental issues is really disrupted the solutions business and I think the difficulties here was to really have good visibility into how quickly we can get that business to recovery. I think this is what this comes down. And what we are seeing today, to be clear, recovery is clearly happening except but quite at the rate that we had anticipated. That's the reason why we elected to address the guidance.

[Larry Biegelsen:]

Thanks. Thanks for taking the questions.

[Operator:]

And our next question will come from Steven Lichtman from Oppenheimer.

[Steven Lichtman:]

Thank you. Hi, guys. Just one question from me as a follow-up, Philipp, you mentioned that you are initiating programs to try to further re-accelerate that growth in the base business; can you talk a little bit more about some of the outreach to your customers and what you are doing to further accelerate?

[Philipp Lang:]

So, I think the key here in the base business is installing confidence and being with the customer, and that's what our sales force has done, and that's what our marketing has done, and we've initiated a number of different products, so we had these really exciting clinical data releases, which I shared with you. Some of them there was actually even more than that. And so, example, these types of data we reached out to the customers reinforcing how good the product is, how much data this compare to the off-the-shelf friends. And then simple stuff being in front of the customer, the reaching out from the CEO, which I personally tried a bit, and our senior sales team being in front of the customer, those types of things, and we continue to do that. And I think that's why we're seeing the recovering in our -- but I have to admit it seeing a lot harder than we had anticipated.

[Steven Lichtman:]

Okay. But overall the message is -- in terms of the majority or the key customers, you haven't lost any, it's just a sort of reduction at this point in terms of their volume?

[Philipp Lang:]

That's exactly right, Steve. So their order volume has decreased, not everybody, but there are quite a few key customers of our top services, where order volume has decreased. We're seeing the recovery there. Now we are clearly getting the traction, and -- but as I said, that is taking us longer than we had anticipated.

[Steven Lichtman:]

Okay, got it. Thanks, Philipp.

[Operator:]

And our next question comes from Kyle Rose from Canaccord.

[Kyle Rose:]

Great, thank you. Can you hear me all right?

[Philipp Lang:]

Yes. Hi, Kyle.

[Kyle Rose:]

Hi, I appreciate you taking the questions, and I apologize I'm redundant, I was jumping between a few calls, but I just wanted to follow-up on the previous question there, I'm just trying to understand when you think about the set down and the longer lead time to return to historical run rate from the underlying business. Has there been any changes from a field standpoint, as far as rep turnover or loss of any major customer? I'm just -- if you got a big user and they're just doing last cases, I mean, where are those cases going, what did those -- what are those specific high-volume users asking for as far as, you know, to bring that business back? I mean, what's the big set down here, and how do we -- how does that turnaround?

[Philipp Lang:]

So let me answer this with Kristen call, so I mentioned it a little earlier that there are no significant changes that occurred in sales force that would have affected revenue in Q1. Clearly, like all orthopedic companies, we're opportunistic; we're making changes as we go. If we have an opportunity to find a stronger performance, a particular territory, we certainly do that, but there were no significant changes on that front. And yet we haven't loss any of the key customers, but we are seeing these low order rates. With regards to your question, what is it that we have the do to bring them back? That situation, I can tell you that's really highly variable from surgeon-to-surgeon. That's the example where you have to be in front of the customer. So there are different factors. They work with baseline disruption, so to say, but then there are different factors, different type of feedback that may drive how we have to respond here. And this is why the sales force is so proactive, and it's done a stellar job, including starting with our Senior VP of Sales and the two Vice Presidents we have, they've been super-practiced being out there working with each customers, we have -- each individual customers basically detailed reports what their concerns are, and then we've been working and we continue working, and so it's also a big part of my job, how we can address these concerns and make sure that these customers are satisfied and that they are increasing the order rate again. And again, we seeing that, but it's going more slower than we had anticipated. It's harder to do that, right? So we're looking at a point in time where we are today. And again when we had our year end call we saw a run rate as far as the orders coming in, and that's set our guidance for the rest of the year. At this point in time, since then, we're seeing a different ramp rate in orders. And so at this point in time we want to give you as much visibility as possible, along the lines that we can fit. And that's why we've adjusted our guidance for the full year and given you insight into the second quarter as well.

[Kyle Rose:]

Okay. I appreciate the additional color. And then, turning to different focus, just wanted to talk about the broader IP strategy of the firm, obviously you've got the royalty now and the agreement last year with Wright Medical, and in MicroPort, in the Q1 I believe you initiated some IP litigation against Smith & Nephew. I just wanted to -- if you could give us some insight into, is that process and then what your overall strategy is from an IP standpoint from a broader market spend and expectations moving forward?

[Philipp Lang:]

So Kyle, you are correct that it did initiate legal actions for infringement of our intellectual property, as it pertains to the use of off-the-shelf implants, the use of patient-specific instrumentation, in this case probably Smith & Nephew. That is ongoing active litigation. As you'll understand, I can't comment on how that is progressing, and the broader strategy is clearly the belief we have, key intellectual property related both to patient-specific instrumentation which you can use with off-the-shelf implant or with the customized implant such as ours. Even stronger IP position pertains into customized implants, and we are completely open to license as it pertains to PSI and this has not certainly entered into that phase, the first step was this Wright and MicroPort. And the intent is that we -- ultimately we will have the benefit from this intellectual property that has been created here.

[Kyle Rose:]

Okay, thank you for taking my question.

[Operator:]

And we have a follow-up question from Kristen Stewart from Deutsche Bank.

[Kristen Stewart:]

Hi. Thanks for taking the follow-up; a couple of questions, are there any publications or data announcements coming up over the next couple of months, you know, there is the Pan Pacific Conference, anything that might help give comfort to physicians just in addition to what has already come out that might help the trajectory?

[Philipp Lang:]

Yes. There is actually a lot coming out, and that's the reason more why I'm very -- we've adjusted the guidance today, but I can't tell you -- I'm very confident in the fundamentals of this business, and data are key, to driving that long-term success. So you will see, for example, a clinical data presented at the international orthopedic meeting in Seekonk, there is the ICT of 10 Pacific, there is a whole list of different meetings that will be upcoming, where we have plans to be present or the abstract has been submitted or accepted. So you are going to see a lot of continued activity. There's also update on the double-blind randomized trial. There are -- personally I'm actually very pleased with how that's progressing. And that will -- that's why I will ultimately not only yield clinical and functional outcome measurements in the double-blind fashion and direct comparisons to some of the major brands is an awful yield in due time economic data with regard to potential hospital savings and so forth. So you will see a lot in that front.

[Kristen Stewart:]

Okay. And just more specifically, what will be the update on the double-blind trial and -- with regard to that enrollment-wise?

[Philipp Lang:]

So, on the double-blind, specifically we haven't planned an update yet. I think that's going to be some time, probably first update in 2017, I would anticipate. And that's longer term study, also the recruitment is clearly more involved, and some of the alpha trials, interesting is the fundamental challenges that we are seeing there in recruitment is that many times when patients hear that there is a customized device versus an off-the-shelf device, and the surgeon explains the differences, many patients may actually shy away and say, no I don't want to participate under trials like to have a customized device. Irrespective, actually our clinical team has done a really good job moving that trial forward. But as I said, it's going to be a while until we can share data on that.

[Kristen Stewart:]

Okay. And then just with respect to the announcement of you stepping down as CEO, will you remain on the Board as Chairman or just remain on the Board as just a board member?

[Philipp Lang:]

No, I will continue to be heavily involved with the company first and foremost. I am the CEO. We have no immediate plans. I've been running the company for nine years. I'm heavily vested and invested in this company. And I have all intent to support it wherever possible. The way how we look at this really is that we've got it to this commercial stage. It's a hyper-growth company, despite some of the issues that we have seen. And the company has all of the fundamentals to continue along that path. So we're looking for someone, Kristen, who comes preferably from the orthopedic industry, and has experience, has a proven track record of scaling a business, for example, from a $100 million, to $250 million, to $500 million in a high-growth environment. And really take the company through that to the next level. And from my perspective, my role will really be then, when once we've found that person, is to support that person and support the team. We have a terrific senior management team. And as I said, take it to the next level.

[Kristen Stewart:]

And so just more about finding someone with a little bit more commercial experience within orthopedics?

[Philipp Lang:]

Yes, but specifically hyper-growth situation, and proven scale of experience.

[Kristen Stewart:]

Okay, perfect. And then the last question, I just want to go back to -- not to beat the dead horse, but the comments that you made going back to this ramp in order timing. On the last call you had said in the middle of January, as trying to, observe this progressive increase. And that you are going to get to this normalized commercialization activity over the next two quarters. But is there any way, I know Mike had asked this, just to better quantify this in terms of this increase in order, just to help us understand exactly where you were seeing things in the middle of January, and kind of where things are now, just so people don't necessarily think orders have declined, or is it just a ramp, and now it's flat, are you moving back? I think the perception is going to be that we don't have a good sense in terms of what the ramp is. And I think the fear from the market is going to be that it's flat or moving backwards. Let's start by that.

[Paul Weiner:]

All right, to try to help you with that, let's start with the bottom-end of the range. So, the bottom-end of the range, which we're not anticipating, we're looking at the middle of the range. The bottom-end of range would be if we were flat for the rest of the year in our base business. All right, so that gives you some indication as far as where we are, where we've been over the last couple of months since our year end call. Prior to that, the year-end call, as I said, middle of January to, let's say, the middle of February, we saw an increased ramp in orders, and if we continued, not at the same ramp rate, because there was a high ramp. But if we continued at a certain level we would've ended up in the middle part of our original range. That ramp that we're expecting, with the increased number of orders that we were expecting, did not happen over the coming last couple of weeks -- or a month, I should say. And so we're taking a more conservative approach as far as bringing down the number of orders that we expect from our base business over the rest of this year. So, what we've modeled internally here, and where our guidance is, is in the middle of that range based on our -- what we anticipate the potential growth to be. Again, if it's flat from here on out, then we're talking about the low end of that range. And certainly if the ramp does increase in the second half of this year, then we would see the top end of that range. So I hope that's helpful as far as at least starting with the bottom -- the assumptions that bring us to the bottom-end of that range.

[Kristen Stewart:]

Okay. So you haven't seen the ramp go negative, I guess, because swaps still kind of sounds not very encouraging, I guess?

[Paul Weiner:]

No. We have not seen it go negative. We have seen the rate of orders increase, again, from what we brought in the first quarter and recognized in the first quarter to the leading orders that are now going into the second quarter, and that's why we can give you visibility into the second quarter. And there is clearly growth there. So if we continue at that type of a growth rate, where similar, then we are talking about the middle-end of the range. We are looking at the bottom-end of range only if it actually slow down from where it is today, and was flat. That is not what we're anticipating.

[Kristen Stewart:]

Okay, so you're flat as you're speaking to that 11% to 17% growth, flat as in zero, is that case of growth is flattish?

[Paul Weiner:]

11% to 17%, that's the year…

[Kristen Stewart:]

Yes. When you say flat, it's in terms of the growth trajectory, is flat?

[Philipp Lang:]

Yes. For the base business, as I remember, there is iTotal PS, also.

[Paul Weiner:]

Right.

[Kristen Stewart:]

Yes.

[Paul Weiner:]

So we're -- that's right, so we're only talking about the base business here. iTotal PS, we have actually increased the expectation there within the guidance. So, literally if it is the base business, iTotal CR, iUni, iDuo, is flat as far as the number of orders that we are receiving. We expect it to be recognized in revenue in Q2. If that same level of orders continues, not an increase, but just flat, it goes into Q3 and Q4, then we would end up at the bottom-end of the range, but again we're not anticipating that.

[Kristen Stewart:]

Not meaning flat in terms of dollar sales, just the order of growth rate?

[Paul Weiner:]

No, flat as far as from what we're anticipating into Q2. If that same level both orders and revenue recognized on the base business continues through the third quarter and the fourth quarter; that would bring us to the bottom-end of that range.

[Kristen Stewart:]

Okay. All right, thank you.

[Philipp Lang:]

The intent clearly is working with our existing customers for the base business, and in the second half of the year, achieve better growth, but where we're today is, we are not seeing that and this is basically how we have to develop a guidance.

[Kristen Stewart:]

Okay. All right, thanks very much.

[Operator:]

At this time, I'm showing no further questions. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect.