NuVasive, Inc.
Q2 2016 Earnings Call Transcript

Published: 27 Jul 2016

[Operator:]

Greetings, and welcome to the NuVasive's Second Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Carol Cox, Executive Vice President, Internal Affairs and Corporate Marketing. Please go ahead.

[Carol A. Cox:]

Okay. Great. Thank you, Shay and welcome everyone to NuVasive's second quarter 2016 earnings call. I want to apologize for the technical difficulties that we had. I appreciate everyone's patience, and we'll try to get through this as quickly as we can. Today's earnings release, which we issued earlier this afternoon, is posted on our website, as is an investor presentation, both of which have been filed on Form 8-K with the SEC. We've also posted supplemental financial information on the IR website to accompany our discussion. On today's call, we will be covering information that is included in the investor presentation, and I encourage you to access these materials so that you can follow along. Before we begin today, we would like to remind you that the discussions during today's call will include forward-looking statements, which are based on current expectations and involve risks and uncertainties, assumptions and other factors, which, if they do not materialize or prove correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements. Additional risks and uncertainties that may affect future results are described in NuVasive's news release and periodic filings with the SEC. We assume no obligation to update any forward-looking statements or information, which speak as of their respective dates. This call will also include a discussion of several financial measures that are not calculated in accordance with Generally Accepted Accounting Principles, or GAAP. We generally refer to these as non-GAAP financial measures. These measures include our cost of goods, gross margin, sales, marketing and administrative expenses, research and development expenses, operating margin, non-GAAP earnings per share, free cash flow and EBITDA. Reconciliations to the most directly comparable GAAP financial measures can be found in the news release and the supplementary financial information, which are accessible from the Investor Relations section of the NuVasive website. Joining me on today's call are Greg Lucier, our Chairman and Chief Executive Officer; Pat Miles, our President and Chief Operating Officer; and Quentin Blackford, our Chief Financial Officer. With that, I'll turn the call over to Greg.

[Gregory T. Lucier:]

Thank you, Carol and good afternoon, everyone. I'm pleased to report results for the second quarter of 2016 that reflect continued strong execution against our commitments to take market share, expand our operating profitability and deliver earnings growth as we continue to invest in the business today for future growth. Earlier this afternoon, we reported second quarter year-over-year revenue growth of approximately 16%. During the quarter, we continued to outperform the spine market, delivering double-digit top line growth for the second quarter in a row. On an organic basis, our revenue grew approximately 9%, in line with our commitment to drive mid- to high-single digit growth in our core business and reflecting strength across business lines and geographies. This strong revenue performance, coupled with year-over-year improvements in our gross margins and continued improvements in our core SM&A spend, drove our non-GAAP operating profit margin higher than our internal expectations, with 60 basis points of expansion to 15.9%, and resulted in a 28% increase in non-GAAP EPS to $0.40 a share. Now let me elaborate on our Q2 results. Total revenue exceeded our expectations, coming in at $236.2 million. Momentum with our Integrated Global Alignment System, or iGA, continued during Q2, marking the one-year anniversary of the successful launch of our game-changing surgical planning technology. We continue to see strong acceptance of the platform across the core product areas within iGA strategy. Our results continue to outpace our expectations with strength across all demographics. The strength of iGA is also driving the pull-through of spinal hardware. As a result, we had another standout performance in NuVasive's core U.S. spinal hardware business, largely driven by our thoracolumbar business, which was up again double-digit year-over-year, as well as continued strength across all procedural categories; posterior lumbar, anterior, lateral, and cervical. We continue to get favorable feedback from prominent surgeons who are adopting iGA. I want to share the feedback I recently received from Dr. Ivan Cheng, who is Associate Professor of Orthopaedic Surgery and Neurosurgery up in the Bay Area at Stanford University. Dr. Cheng was an early adopter of our iGA technology and he praised the benefits the platform is having on his practice. Let me share a recent observation Dr. Cheng passed on to me. He said that, "the utility of iGA has allowed me to minimize the morbidity to patients who have traditionally required significantly more reconstructive surgery. This has had both a clinical and economic benefit to my patients and the hospital." Dr. Cheng's comments echo those of other surgeons who are realizing the benefits of NuVasive's procedurally integrated solutions. Additionally, in the quarter, we benefited from the inclusion of the results from our NuVasive Specialized Orthopedics business or NSO, for the full quarter, which reflected continued strong growth from our MAGEC and PRECICE products. So, over the course of the quarter, we have made significant progress in integrating NSO into NuVasive to capture commercial and operational synergies. During the quarter, we completed the transitioning of the U.S. MAGEC distributors to our own NuVasive sales force, allowing us to further integrate the NSO offerings and capitalize on opportunities that the NSO surgeon network is providing. Based on the progress so far, we remain on track with the integration, and expect to achieve the milestones we laid out at the time of the acquisition. In Q2, international revenues grew 33% on a constant currency basis to $37.8 million or 35.8% as reported, including the contribution of NSO during the quarter. Excluding the contribution from NSO, our core international revenues grew 18.5% on a reported basis. As further evidence that our strategy to concentrate and go deep in each country is taking hold, we also delivered significant sequential acceleration in our core international revenue, with revenue growing 24% sequentially from Q1. With the ramp-up we have seen in growth from Q1 to Q2 and our expectation for the second half of the year, we remain on track to grow our core international revenue by more than 20% for the full year 2016. In Q2, we successfully drove year-over-year growth in our core direct markets, including Japan, Australia, New Zealand, the U.K., Italy and Germany. In June, I spent time in several of the European markets meeting with the local management teams alongside Jason Hannon, who took over the international leadership role a year ago. Jason and his team are very impressive and passionate about the business they are building and they're making great progress in executing against their stated plans. As a result of this work, we saw revitalization in our core NuVasive EMEA markets in Q2, fueled by strong sales in Germany, Italy and U.K. Importantly, we are also seeing meaningful initial contribution of thoughtful investments we made in smaller markets, such as Belgium, Spain and South Africa. We are pleased the localized business plans we put in place in the second half of last year are driving these nice, improved results in the European theatre (7

[Quentin Blackford:]

Thanks, Greg, and good afternoon, everyone. Before we get started with the financials, let me remind you that many of the financial measures covered in today's call are on a non-GAAP basis unless noted otherwise. Please refer to today's earnings release as well as the supplemental financial information on nuvasive.com for further information regarding our non-GAAP reconciliations. As Greg noted, we are very pleased with the strength we are continuing to experience in the business. Our results for the second quarter of 2016 reflected this momentum, with year-over-year double-digit top- line growth, continued expansion in our non-GAAP operating margin and nearly 30% growth in our non-GAAP earnings per share. Turning to the results for the second quarter of 2016, revenue came in at $236.2 million, or 16.4% growth year-over-year, including a $700,000 benefit from currency. On a constant currency basis revenue for the quarter was $235.5 million, or 16.1% growth year-over-year. NSO generated $15.1 million in revenue for the quarter, which contributed approximately 7 percentage points to our overall growth rate on both a reported and constant-currency basis. NuVasive's core business, excluding the impact of NSO during the quarter, grew approximately 9% on a reported basis. On a pro forma basis, NuVasive and NSO combined to grow nearly 10% in the quarter, in line with our commitment to deliver high-single-digit growth as a combined company. Our U.S. Spinal Hardware business, which includes MAGEC and PRECICE, performed well for the quarter, coming in at $137.8 million, an increase of 18.3% year-over-year, including roughly 9 percentage points of growth from the acquisition of NSO. Excluding the benefit of NSO, our core U.S. Spinal Hardware revenue grew 9.5% year-over-year to $127.5 million, demonstrating the continued momentum of our iGA product platform. Notably, in the quarter, our core U.S. lumbar business again delivered double-digit growth, growing more than 10%. Revenue from U.S. Surgical Support came in at $60.7 million, up 3.5% compared to the same period last year, primarily driven by growth in our M5 neuromonitoring disposables business. For the quarter, while nominal, we saw an improvement from our biologics portfolio, which returned to slight growth after several quarters of year-over-year declines. Our international business came in at $37.8 million, up 35.8% on a reported basis, or 33.3% on a constant-currency basis. NSO contributed 17 percentage points of growth for the quarter on both a reported and constant-currency basis. Notably, on a sequential basis, our core NuVasive business grew nearly 24% from the first quarter as the momentum in our European business, where our revitalization strategy of focusing on the value of our differentiated procedural solutions, is taking hold, and the benefits of going direct in our Latin America business are beginning to pay off. At the same time, Asia Pacific, which has been fueled by the strength of Japan, continued to grow very well in the quarter. In summary, we are very pleased with our overall revenue results for the second quarter. Based on the strength we saw in the first half of 2016 and the impact of the Biotronic acquisition, we are now expecting revenue of approximately $962 million for 2016, which now includes a $1 million benefit from currency. For the full year, this represents approximately 19% growth year-over-year on both a reported and constant-currency basis. The Biotronic acquisition closed on the first day of our third quarter, and going forward, we will report the results from Biotronic in U.S. Surgical Support as part of NuVasive's Clinical Services. While we do not normally provide quarterly guidance, we have a number of moving pieces that are impacting the cadence of growth, including the recent acquisition of Biotronic and the expectations of more pronounced seasonality in the back half of the year as a result of one less selling day from the second quarter to third quarter than normally experienced. As a result, we are guiding to revenues of approximately $243 million for Q3, which includes roughly $13 million from Biotronic. Turning to the rest of the P&L, non-GAAP gross margin for second quarter was up 170 basis points year-over-year to 77.8%, improving from 76.1% in the same period last year. This improvement was primarily driven by the suspension of the medical device tax, which provided a benefit of approximately 80 basis points and a favorable contribution from NSO of 90 basis points. Pricing pressure remained in the very low single digits at negative 1% and had a negligible impact on gross margin. As a reminder, we did not realize any contribution from our in-house manufacturing initiatives in the quarter, as those benefits are expected beginning in 2017. As a result of the recent acquisition of Biotronic, which has a lower gross margin profile, we now expect full-year non-GAAP gross margins to approximate 76.4% versus prior guidance of 77.4%. Non-GAAP SM&A expense as a percent of revenue increased 40 basis points year-over-year to 56.9%, up from 56.5% in the same period last year due to the addition of NSO in the current year period, which contributed 40 basis points of headwinds. In addition, increased non-cash share-based compensation expenses created incremental headwinds of approximately 70 basis points compared to the prior year as a result of the higher share price, increased performance expectations and a prior-year benefit did not repeat, as it was related to departing executives. Normalizing for those items, our focused efforts to drive asset efficiencies continued to drive meaningful improvements in our underlying SM&A spend profile versus the prior year. To reflect the impact of the recently acquired Biotronic, we now expect full-year, non-GAAP SM&A expense as a percent of revenue to approximate 55.4%, down from a prior expectation of 56%. We increased non-GAAP R&D investment during Q2, with spending up 70 basis points to 5% of revenue, compared to 4.3% in the same quarter last year. This was primarily attributable to the continued investments into the game-changing technology of NSO and our core NuVasive platform. We now expect full-year non-GAAP R&D expense as a percent of revenue to approximate 5.1% versus the prior expectation of 5.6%. The lower R&D expense as a percent of revenue is reflective of the lower R&D spend profile associated with the recently acquired Biotronic. In all, we are making great progress in our efforts to drive profitability improvements with non-GAAP operating profit margins up 60 basis points year-over-year to 15.9% in the second quarter, compared to 15.3% in the same period last year. The 60-basis-point improvement was meaningful when considering the fact that at the same time we increased our R&D spending by 70 basis points, as we continue to invest in opportunities to drive future growth and absorb another 70 basis points of headwinds related to non-cash, share-based compensation. Adjusting for those items, the underlying business realized an improvement of approximately 200 basis points in its operating margin profile. The underlying improvement is meaningful and coming from the areas that present the greatest opportunities, both cost of goods sold and selling, marketing and administration expenses. Most importantly, we are making this progress on the profitability front while at the same time accelerating the growth profile of the overall business and investing in research and development initiatives. We are pleased with our performance for the first half of 2016, and to that end, we are increasing our profitability guidance and now expect a non-GAAP operating margin of approximately 16% for the year, which includes the impact of the recently acquired Biotronic business, an improvement of 20 basis points from our previous estimate of 15.8% for the year and 60 basis points of improvement compared to 2015. Given the seasonality of revenue mentioned earlier and the impact of integrating the recently acquired Biotronic, we expect a non-GAAP operating margin in the third quarter of 15.5%. Moving further down the P&L, interest and other expense, net, on a non-GAAP basis was $5.6 million in Q2, up from $3.3 million in the same period last year. This increase is primarily a result of the new interest expense associated with the 2021 convertible notes we issued late last quarter, as it impacted all of Q2. We expect full-year interest and other expense, net, on a non-GAAP basis to be approximately $21 million, unchanged from prior guidance. Now, turning to tax. Our non-GAAP tax expense in the quarter was $11.6 million, resulting in a non-GAAP effective tax rate of 36.6%. Included in the quarterly results was the impact of the early adoption of the new FASB Accounting Standards Update, ASU 2016-09, which relates to stock-based compensation and is mandatory for all U.S. public companies to adopt January 2017. The ASU early adoption requires treatment as if it were implemented from the beginning of the year, and therefore requires a recap of first quarter results and impacts both second quarter results and full-year expectations. On a non-GAAP basis the impact was a benefit of $0.02 for the first quarter and a benefit of $0.05 for the second quarter. For the remainder of the year, we expect the adoption of ASU 2016-09 to favorably impact non-GAAP earnings per share by roughly $0.04 in each of the third and fourth quarters, resulting in a benefit of $0.15 for the year. We now expect a full-year non-GAAP effective tax rate of approximately 37%, an improvement from the prior guidance of 41%. I'm extremely pleased by the work of our tax and accounting teams who have been hard at work to address our abnormally high tax rate. They have been making tremendous strides, and based upon the recent work of the team, including the early adoption of the previously discussed accounting standards, we now expect the future progress of our tax rate reduction efforts to materialize much faster than anticipated. While we expect our 2016 non-GAAP effective tax rate to be approximately 37%, we anticipate that our rate in 2017 will move below 35% and will now be sub-30% and approaching the mid to high 20%s by 2020. The improvement is being driven by underlying operational improvements as the benefit we realize from the adoption of ASU 2016-09 will diminish significantly in 2017 and future years due to the fact that the majority of all outstanding stock options that have been issued have now been exercised. To help you better understand the progress that has been made, we've included a slide explaining our future expectations in the slides that we filed today on Form 8-K and posted with our supplemental information file on the NuVasive website. Second quarter non-GAAP net income was $20.6 million, or non-GAAP EPS of $0.40, compared to non-GAAP net income of $15.7 million, or non-GAAP EPS of $0.31 in the same period last year. Based on our overall performance for the first half of 2016, the addition of Biotronic NeuroNetwork and the early adoption of ASU 2016-09, we are increasing our full-year non-GAAP earnings per share guidance to $1.64, up from our previous guidance of $1.48. Included in this increased outlook for non-GAAP earnings per share is the expectation that diluted weighted average shares outstanding will be 52 million shares for the year. Turning to our GAAP results, GAAP net earnings for the second quarter of 2016 were $30.2 million, or $0.57 per share, an increase of 186% compared to $10.3 million or $0.20 per share in the same period last year. On a full-year basis, we now expect GAAP earnings per share to be approximately $0.84. Please refer to our earnings press release for the supplemental financial information file posted on NuVasive.com for further information related to our GAAP versus non-GAAP adjustments for both our second quarter performance and full-year expectations. Adjusted EBITDA margin, which excludes the impact of non-cash share-based compensation, was 25.3% for Q2, a 40-basis-point improvement compared to the 24.9% in the same period last year. Our cash and investments balance at the end of the second quarter was $331 million, and for the quarter, free cash flow was $9 million due to planned higher capital expenditures totaling approximately $34 million in the quarter to support new product launches and an anticipated ramp-up in volumes in the back half of the year. As Greg mentioned earlier on the call, in June, we reached agreement on terms to settle all ongoing patent litigation matters with Medtronic. This multi-year overhang is now removed, and let me discuss how this impacts our financials. First, we have more than sufficient liquidity to cover the one-time $45 million payment to Medtronic. As you may recall, when the original verdict in the litigation was issued back in 2011, the court ruled in favor of Medtronic with damages calculated at $101.2 million, plus royalties. Over time, as the company grew, the company accrued a litigation liability reserve of approximately $144 million, and based on favorable court decisions in the first quarter of last year, the company reduced the reserve and recognized a litigation gain at the time, and as of our most recent quarter-end, the reserve was at $88.3 million. The final settlement amount of $45 million was significantly lower than our current reserve and the cash that we had set aside to manage through this matter. This removes the risk of ongoing litigation as well as the incurred costs of this type of patent litigation into the future. In closing, we executed very well during the quarter. We are certainly making strong progress towards our year-end financial goals, giving us the ability to raise our full-year guidance for several key P&L items. We are doing exactly what we said we were going to do – we're investing wisely in the business organically and through acquisitions that meet our laid-out criteria, we're integrating them quickly and efficiently and continuing to take market share through our differentiated spine procedural portfolio. Based on this solid execution, we're confident about our ability to execute in the back half of the year. Thank you. Now, we'll take the call to Q&A.

[Operator:]

Please also note that we ask that participants limit their remarks to one question during today's Q&A session. One moment, please, while we poll for questions. Our first question comes from Matthew O'Brien from Piper Jaffray. Mr. O'Brien, your line is live.

[Carol A. Cox:]

Yeah. Shay, let's go to the next one. We may be losing people with the technical difficulties.

[Operator:]

Our next question comes from Richard Newitter from Leerink Partners.

[Gregory T. Lucier:]

Go to the next one.

[Operator:]

Our next question comes from Kaila Krum from William Blair. Our next question comes from Josh Jennings from Cowen & Company. Our next question comes from Matt Taylor from Barclays.

[Young Li:]

Hi. This is Young Li in for Matt. Can you hear me?

[Gregory T. Lucier:]

Yes.

[Young Li:]

Okay. Great. Sorry about the technical difficulties. But I guess, thanks for taking our questions. Just to start, I guess, so some of the other spine companies reported their results with strong results in the U.S. but weak results outside. There were some distributor inventory drawdowns, and that's expected to persist through 2016. I guess, can you just talk about broadly the strength in the U.S. that you're seeing as well as what you're seeing in the international markets, developed and emerging?

[Gregory T. Lucier:]

Certainly. So as Quentin and I said in our prepared remarks, the U.S. saw continued strength. We think it's being driven by the Integrated Global Alignment technology that then pulls through the hardware. And it's reflective of innovation that I think NuVasive has come to be recognized for. Internationally, we're making good progress across a number of geographies, Europe, Asia. We're starting to get our Latin America business cooking. So we didn't, and we would not be, reporting any distributor drawdowns or anything else like that. The business is just good and strong.

[Young Li:]

All right, great. Thanks. I guess, can you also maybe just talk about your competitive position in complex spine, with products like iGA and MAGEC now in your portfolio? I'm just wondering how competitive you think your portfolio is and are there other products or areas you would like to add?

[Gregory T. Lucier:]

Yeah, certainly. Let me have Pat Miles, our President, answer that one. Pat?

[Patrick Miles:]

Thanks, Greg. The whole complex – there is nothing more complex than fixed spine in – when a spine is fixed, controlling the alignment of a spine is probably the hardest thing that spine surgeons do. And I would tell you that our growth profile is reflective of progress in that arena. We couldn't be more excited really, kind of, to have found a market for us is going to be on the early onset and idiopathic side. And so we're in the process of running after the proceduralization of solutions in both of those markets. So our perspective is hugely bullish with regard to what we consider complex spine, which is fixed adult deformity. And then from an idiopathic, early onset standpoint, I think with the addition of MAGEC, I think we are in great shape to kind of stay the course and build meaningful portfolios in the other two areas.

[Young Li:]

All right, great. Thank you. Maybe I can squeeze in one more. So one of your other competitors recently bought a robotics company, another competitor will be launching one as well. You mentioned in your prepared remarks investments in imaging and navigation. But just curious, what's your view on robotics? Is it an area you're interested in investing in as well?

[Gregory T. Lucier:]

Most certainly. So let me ask Pat to follow on my comments. I would simply say that for us, we believe that surgeons need to drive the innovation, that the procedure needs to have a set of requirements, and not the other way around, that a robotics engineer has innovated an arm that could be applied to spine. So that's why we are approaching it in a very thoughtful way in terms of the needs around imaging for minimally invasive surgery, navigation that allows true navigation to the procedure. And then, ultimately, some level of automation. But we think the cart is before the horse a little bit with some of these systems that are expensive, don't really automate the right things, and in the end won't give the payback to the customers. Pat, please, why don't you say a few words about where we're going?

[Patrick Miles:]

Yeah. I guess foundationally you can't have great navigation unless you have good imaging and you can't have an arm holding a cannula in space without good navigation. So the things that Greg talk about are really foundational to ever doing or ever really automating anything. And so as you look at the history of navigation, and even imaging, and you look at Stealth which is a navigation from Medtronic that's been there for close to 20 years, and it really hasn't been a hurdle from a market perspective. And so I would say the adoption of those technologies have been less than what we see with something like neurophysiology, with what Greg talked about as completely integrated into a procedure. And so what we're trying to do is really proceduralize technology that minimize radiation and enable people to get things done in a more rote way. And so we don't feel like robotics is quite there from a market perspective. We're watching it closely but more enthusiastic on the imaging and navigation end.

[Operator:]

Thank you. Our next question comes from Matthew O'Brien.

[Matthew O'Brien:]

Okay. Can you hear me now?

[Gregory T. Lucier:]

We can.

[Carol A. Cox:]

Yeah. We got you.

[Matthew O'Brien:]

Outstanding. Okay. So just one question, maybe a couple of parts to it, but the performance in the U.S. lumbar business has been fantastic the last several quarters. You've been tripling to quadrupling the market growth rate recently. And that performance as we think about it going forward, I'm just wondering how we gain comfort that that level of performance can continue, and specifically – and maybe Pat can address this – but iGA, are you seeing an acceleration in the number of those, that software that's being placed and the corresponding pull-through revenue accelerate for you guys right now? And is that the real area of strength we should expect and the reason you can put up this type of market share taking within the U.S. business going forward?

[Gregory T. Lucier:]

Yeah. Good question. Let me first just make sure we're grounded on the answer that our financial guidance around revenues is mid-single-digit to high-single-digit growth. We're really feeling good about where we are right now, which is at the high end of that, but we're grounded, that's our long-term financial guidance, and it's just important that we stay kind of sober-minded around all of that. But with that, let me have Pat talk about iGA and how it's getting us new surgeons.

[Patrick Miles:]

Yeah. One of the things that I recall is stating from one of the publications is the most correlative element to a durable launch of an option (38

[Matthew O'Brien:]

Okay. And I know we're supposed to keep it to one, but let me just slip in one more real quickly, and this one's for Quentin. And I apologize, with all of the confusion with the call today, I may be miscalculating this. But was the tax change that you made in the quarter, was that a $0.05 tailwind to your adjusted EPS number? The reason I ask is you did $0.40 and I think the consensus was $0.36, so...

[Quentin Blackford:]

Yep. No, that's the way it is.

[Matthew O'Brien:]

You would have been $0.01 below where the consensus was at?

[Quentin Blackford:]

You're right. It was a $0.05 impact in the quarter, the ASU adoption was, so $0.40 would have been $0.35. Now, obviously, we don't give quarterly earnings guidance. We're well ahead of where we expected to be internally and feel very good about where we're at, but yeah, it was a $0.05 impact on the quarter.

[Operator:]

Thank you. Our next question comes from Jonathan Demchick from Morgan Stanley. Mr. Demchick, your line is live. Our next question comes from Andrew Hanover from JPMorgan. Mr. Hanover, your line is live, if you could please un-mute your phone line. Our next question comes from Kyle Rose from Canaccord.

[Kyle Rose:]

Great. Can you hear me all right?

[Gregory T. Lucier:]

Yes.

[Kyle Rose:]

Thanks. I appreciate you taking the question. Just wanted to touch on the Biotronic acquisition a bit here, and then circle back on U.S. Biologics. So first on Biotronic, really recommitting to the services line here, just wondered what you could give us – when you think about the acquisition and then thinking out in a couple of years, I mean what's your view for the services and solutions business? Obviously, that's becoming more of a key selling point as that integrates into the Integrated Global Alignment. Just wondering how we should think about this being a value-driver over the mid- to long-term?

[Gregory T. Lucier:]

We like this business for a number of reasons; one, it integrates in our neuromonitoring capabilities in a way that we think is unique to NuVasive in terms of being able to extract value. Second, we like it because it broadens the conversation with hospitals as they build out their spine service line. So not only are we about hardware, in time we'll be about imaging, navigation, automation, and with Biotronic merged now with IMI, we have a very big service footprint to be in the operating room with them on tens of thousands of spine cases. So it makes us just that much more strategic. Lastly, we like it financially, because there are economies of scale in this business. And so as we merge those two entities and continue to acquire more, we can really drive up the financial profile to meet or exceed the core NuVasive profile that we had laid out for all of you. So we like it for those three reasons. We think it's a great part of the franchise, and you'll see us do more.

[Kyle Rose:]

And then quickly, it sounded like you're seeing a broad improvement this quarter in the U.S. Biologics. Just wondered if you could give us some of the puts and takes there? What's been the turnaround from that perspective? And then also, with the sales forces integrated and the distribution integrated on the Ellipse side, just wondered if you could give us your thoughts with the first quarter here? But then also some of the longer-term pipeline products and what we should expect from that type of development cadence?

[Quentin Blackford:]

Yeah. On the Biologics side, as I mentioned, we saw that return from what has been a drag on growth, it was down 3%, 4% for the last couple of quarters. Still was up slightly a bit over a point in the quarter. So we're seeing that turn, or start to turn. And so far it's been Osteocel Pro that continued to lead the results there. That's the majority of the overall portfolio. And I think what you have is, you've had a lot of new product introductions into this space over the course of last 12 months to 18 months. Any time you have that, you can typically see some trailing, and ultimately you can see surgeons come back to the product they like the best. I think that's what you're seeing happen with Osteocel Pro at this point in time. Now, in the back-half of the year, we have some exciting things the track that we will have launched – fully launched in the back-half of the year, you really haven't seen that play into results just yet. And repeat the question on the Ellipse side?

[Operator:]

Thank you. Our next question comes from Andrew Hanover from JPMorgan. Mr. Hanover, you line is live. If you can please un-mute your phone line on your end. We'll go to our next question. Our next question comes from Jeff Johnson from Robert Baird.

[Jeff D. Johnson:]

Thanks. Can you hear me, guys?

[Gregory T. Lucier:]

Yep.

[Carol A. Cox:]

Yes.

[Jeff D. Johnson:]

Great. Good evening. So, I hate to burn my question on guidance, but Quentin, I'm going to just ask a question on guidance. And primarily I just want to crosswalk maybe from prior guidance to current guidance on both revenue and the EPS side. When I look at your prior revenue guidance of $928 million, I think now you've got $4 million of less of a currency tailwind this year and then you're adding $27 million from Biotronic. So it looks like to me maybe you're raising core revenue expectations for the year by about $11 million, just want to cross-check that math. And then more importantly on the EPS side, raising guidance by $0.16, $0.15 of it from the FASB change, I would think a couple pennies maybe from Medtronic lower litigation expense throughout the year and then maybe a penny or two from Biotronic. So just help me understand how guidance is kind of getting helped by those three factors, and they all kind of add up maybe more than the $0.16 that you're raising guidance by.

[Quentin Blackford:]

Sure. So from a revenue perspective, you're pretty close. Think about as core business is up $10 million with about $3 million of incremental headwinds from currency, and that gives you that same kind of net $7 million that you were talking about when you mentioned $11 million and $4 million. So, core business, up $7 million on a net basis and then you add the $27 million from Biotronic, you get right into the $962 million. From an EPS perspective, there's going to be about $0.15 impact coming from the adoption of the ASU benefit, and then you're going to get about $0.04 from Biotronic coming in. You mentioned the litigation costs, most of that litigation has been incurred in the first half of the year, so there wasn't a lot of litigation to take out in the back-half of the year. You'll start to see those benefits in future years. So you're not going to get much of that in the current year. And then offsetting those tailwinds that I mentioned was just the increase in the share count, and given where the share prices moved, up into the $60s, obviously, you still have a bit of the old convert, the 2017 converts that still remain out there. They trade further into the money and create some incremental dilution on EPS. We have the opportunity either to take those out (46

[Jeff D. Johnson:]

All right. That's helpful. And then, Greg, maybe if I could squeeze one more in here; you guys have done a great job on kind of bundling, doing these bundled procedural solutions with MDM 5 (46

[Gregory T. Lucier:]

We continue to make good progress in 2016 of getting national contracts, big health care systems to adopt that very set of procedural pricing, service integration as you described. We fundamentally believe the industry is moving past the pieces and parts that you could buy from these smaller entities that are losing relevance. And they really want to partner with a company that can do this integration that we just described. It drives their economics, it makes our economics better, too, and I think it explains some of the growth that we're seeing.

[Operator:]

Thank you. Our next question comes from Larry Biegelsen from Wells Fargo. Mr. Biegelsen, your line is live. Our next question comes from Matt Miksic from UBS. Our next question comes from Raj Denhoy from Jefferies. Our next question comes from Mike Matson from Needham & Company.

[Carol A. Cox:]

Shay, I think we might hold. I'm hearing from a lot of people that they're calling in and you're not able to hear them and they're not on mute. So I think we're having some technical difficulties. We'll just go ahead and conclude the call and try to catch up with people separately.

[Operator:]

Okay.

[Carol A. Cox:]

Again, I apologize for the technical difficulties. I know it was a real unpleasant experience, and we will get out the transcripts soon. It will be posted to our website so you have access to that sooner rather than later.

[Operator:]

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your patience.