Orthofix Medical Inc.
Q2 2008 Earnings Call Transcript
Published:
- Operator:
- Welcome to the Orthofix International guidance conference call. (Operator Instructions) I would now like to introduce Dan Yarbrough, Vice President of Investor Relations of Orthofix.
- Dan Yarbrough:
- Good morning and thank you all for joining us today to discuss Orthofix International’s financial results for the second quarter of 2008. During this call we will be making forward-looking statements that involve risks and uncertainties. All statements other than statements of historical fact are forward-looking statements including any earnings guidance we provide and any statements about our plans, beliefs, strategies, intention, expectations, objectives, goals, or prospects. Factors that could cause actual results to differ materially from the forward-looking statements we make on this call include the risks disclosed under the heading Risk Factors in our 2010 Form 10-K and subsequent form 10-Q that we file with the SEC. Presenting on this mornings call will be Orthofix’s CEO Alan Milinazzo and our CFO Tom Hein.
- Alan Milinazzo:
- As you have hopefully seen we issued two press releases earlier this morning
- Operator:
- (Operator Instructions) Your first question comes from Vincent Resee [ph] from Wachovia Capital.
- Vincent Resee [ph]:
- My first question is going to be on the turnover and kind of transition that you still have going on with your spine division. Specifically you gave us 17 direct reps, I mean how many feet on the street do you have and what percentage of that is around exclusivity now?
- Alan Milinazzo:
- I don’t think we’ve given a feet on the street number before, but as you know we’ve talked about exclusivity in the past and we don’t have a tremendous number of independent reps that are exclusive. The direct reps we’re hiring are exclusive, so I would tell you we have 17 exclusive reps out there in the marketplace right now. The rest of the network, as we bring them on, we seek to bring them on as exclusive reps.
- Vincent Resee [ph]:
- How is that kind of proposition brought up with, what is it that attracts them to Blackstone at this point considering all of the things that you guys are going through?
- Alan Milinazzo:
- I think the potential that exists for us over the next several quarters and years is still very evident to those that are in the middle of the spine business. It has certainly been a tough go from an investor’s standpoint here, but on the spine front I think we still have an ability and in fact we’ve had tremendous success in attracting new distributors and direct reps. We’ve got 38 distributors right now along side of 17 direct reps, so I think the potential for a highly differentiated biologic product, we think that the medal portfolio that we’ve got in development, the number of products that we have coming out as well as some of the existing products that are out there, we have not had an issue in terms of attracting people for product purposes.
- Vincent Resee [ph]:
- In the past you have given us a percentage of your spine business that was biologic. Could you give that to us again?
- Alan Milinazzo:
- It’s in the range of 25% give or take. You want my next total biologics right?
- Vincent Resee [ph]:
- That’s correct. You’ve never given us the product line guidance there. Then in your trauma division you guys have kind of streamlined things if I’m not mistaken. Can you just talk to us a little bit more about those initiatives and also from a market perspective, have you guys seen any change in trends recently, particularly there’s been some discussion of potential impact of oil driving down accidents because of people not driving as much.
- Alan Milinazzo:
- I think for us, when we were exploring the divestiture, we said that if we kept the business we had a strategy to make it more profitable and focus down on certain key areas we thought we could drive revenue and profitability. So we really began that early in the year and it’s really bifurcated by geography. In the US it’s around Physio-Stim as a cornerstone, as I mentioned the 16% growth in Physio-Stim on top of an 11% quarter prior, so that’s working well; but our deformity correction devices are also doing very well. Internal fixation overall is doing well and outside the US really the strategy has been to consolidate down to certain markets where we feel as though we can have a bigger impact, not being as broad from a focused standpoint, being more focused on key markets. So those two initiatives in combination with some very high quality managers, we went through this process and we had 100% retention which speaks to the commitment of that team and the leadership in those organizations. Industry trends, we haven’t seen anything affecting our business negatively at this point. We don’t see any procedural issues in trauma, at least given our limited share it hasn’t been anything we’ve noticed.
- Vincent Resee [ph]:
- Unfortunately my last question is also on spine. You differentiated from an investor standpoint, from an industry standpoint. From an investor standpoint it seems to be a consolidating industry right now. I’m just curious how you guys kind of fit into that overall landscape and maybe if that is an improper way to look at it you could correct us on that.
- Alan Milinazzo:
- I think, don’t be disappointed to ask us spine questions. We’re excited about what we’re doing in spine right now, although it’s been a tough year for us I think we’re really doing the right things to establish ourselves for growth in ’09 and beyond, so we’re delighted to be in this space. We think we’ve got a very good strategy emerging. How we play in the consolidation of spine space, certainly at this point we view ourselves as very focused internally on executing on the key initiatives that we’ve got on our plate. Obviously the MTF initiative is critically important to us and we didn’t think that we were capable of doing something like that on our own, so we kind of put a list together of the things that we thought were critical in a partner in that space and MTF hit virtually every one of them for us; so we’re going to use kind of our next 12 months or so to focus internally on getting the distribution system in order, releasing some outstanding new products that we think are going to further differentiate us on top of our stimulation business, which is again a unique asset in this business. Our plan is to keep our head down, execute on our current strategy, look for opportunities like Intelligent Implant Systems or INSLING, which are tuck-in, but important tuck-ins for us and kind of keep ourselves internally focused in that regard.
- Operator:
- Your next question comes from Peter Bye with Jefferies & Co.
- Jeff Huntington:
- This is actually Jeff Huntington for Peter. My first question has to do with Blackstone and the sort of revision of guidance. Is this really primarily due to the distributor turn over and sort of production out of them, or are there other factors that you’re seeing in the market place.
- Alan Milinazzo:
- We have been moving from a distributor to a hybrid model. Our distributors that we’ve brought on this year have actually performed well. As I mentioned, we’re up 5%, but the distributors that we’ve taken out proactively, we replace with direct reps and we’ve not having the traction initially, partially as a result of the negative impact. The Osteocell/Nuvasive news created some distractions for our sales group, so that set us back a little bit. There are some other, it’s a little bit more difficult today. There is Vincent’s question earlier about the competitive market. You might get evaluations in the hospital, but then you’ve got to queue up to be in a committee to be approved to be brought into the hospital, so those are the factors that we would say that really contribute to the revised guidance on the revenue side.
- Thomas Hein:
- Also again, from our earnings release and other information, recollect we are going to invest in the third and fourth quarters $10.8 million in the contract R&D to bring both the MTF product and the ISS product to market.
- Jeff Huntington:
- Great and congratulations on the MTF agreement; I just have a quick question in terms of the second half of ’09 timeline for commercialization and the US launch. Is that a realistic goal and can you give us a little bit of detail in terms of where MTF is in the developmental process?
- Thomas Hein:
- As I mentioned, we have been talking to them for about a year and they had already done a significant amount of work in this area, given their expertise. At this point, we really can’t give you any more detail as to when we would complete the development stage. I can tell you that we’re looking to launch this in the second half of 2009, but beyond that I really can’t give you any more detail.
- Jeff Huntington:
- Can you give us any assumptions on type of regulatory approval you’re going to pursue or what type of rating process the product will undergo?
- Alan Milinazzo:
- We’re going to talk in more detail about the MTF program, but we don’t view the regulatory process, this is the same process that Osteocell has gone through. It’s a tissue-based product.
- Jeff Huntington:
- Last question in terms of the gross margin guidance reduction, from Q1 now to Q2 for the rest of 2008 is this primarily due to a change in the international mix? I know there’s a number that you gave us in the press release and that you went over and can you give us a break out of international sales versus US sales for the quarter?
- Alan Milinazzo:
- I’ll let Tom dig through the international piece, but the things that we noted really contributed in somewhat equal parts. You’ve got the currency issues, again we do a fair amount of manufacturing in Europe still, although we have, over the past two years, moved manufacturing our of Europe and into lower cost locations, but we still maintain a fair amount in Europe. Additionally the mix of sales coming from Europe is higher, our spine business is doing well in Europe, our orthopedic business is doing well in Europe and so revenues generally coming out of there have lower ASPs and then finally you’ve got the mix issue in the US where you’ve got a higher percentage of biologic products than metal products with our spine business and so those are really the three key drivers. I’ll let Tom answer the second part of your question.
- Thomas Hein:
- The international sales, the $34 million of the $130 reported for the second quarter and that’s been growing with the growth of the orthopedic business, because international is principally orthopedic oriented and the biologic mixed in coming in earlier which, again, has been growing for us.
- Jeff Huntington:
- Has there been any of those sort of items that are affecting the GMs has anything drastically changed from Q1 to Q2 or anything that sort of pushed that revision further or is it just sort of across the board everything has continued in those trends?
- Thomas Hein:
- Yes the trends have discontinued, that’s exactly right.
- Operator:
- Your next question comes from John Putnam with Dawson James Securities.
- John Putnam:
- Turning to the biological area, will you be able to deliver biologics based on your old contract consistently, if you are able to launch the MTF product in the second half of ’09?
- Alan Milinazzo:
- Our plan is to continue to distribute the Trinity product, the Osteocell product into 2009 and if we commercialize the MTF based product in 2009, we have contemplated that there will be a period of time when we would be selling both products in the market place, so that could happen.
- John Putnam:
- But, you won’t run out of Trinity before you’re able to sell the MTF product?
- Alan Milinazzo:
- That is not our expectation. If you look at our working capital we’re putting a lot of money into buying inventory in Trinity right now, so we expect that the inventory that we have and the inventory that we expect to receive would cover us through that time.
- John Putnam:
- Just talking a little bit more about the spine business, do you think you’re losing market share in the metal part of that business?
- Alan Milinazzo:
- Yes, our business declined so that’s right. Again, I would look at it as more of a transition where you’ve got new reps coming in. The business that we were enjoying from distributors that have transitioned out, we’ve put the ball in the hands of direct reps and so that business where those distributors were selling, we’re opening up new accounts, we’re opening up new users as we said. We haven’t got the ramp of business yet from those new reps, so we haven’t been able to cover what we’ve taken out. I would say it’s the loss of market share in metal. We do expect to have some positive impact in the cervical area. Some of the recent news out there around the cervical area, we think we may be able to capitalize on because we’ve got a very nice line of cervical plates, as you know, in conjunction with Trinity we think that’s a compelling value proposition.
- John Putnam:
- On the direct sale force, what are your plans over the next couple of quarters with respect to adding people?
- Alan Milinazzo:
- We’ve got 17, we accelerated that, we got them in earlier in the year than we anticipated. We have a few areas that we are still looking at adding people in. I’m going to probably step back as Brad Mason sorts through exactly what he sees as an opportunity there. He has been in this role about a month. The collaboration between our stem organization, which is performing at a phenomenally high level and Blackstone is increasing virtually every week, so we will evaluate our needs. If we feel like we need to add some reps in certain geographies we’ll do that thoughtfully, but at this pointing time I would say we are sitting where we are and assessing. We are letting Brad get some sense of what he wants to do with that.
- Operator:
- Your next question comes from Steve Ogilvie with ThinkEquity.
- Steve Ogilvie:
- I wanted to ask on the orthopedic growth, it’s just so impressive. Did you say how much of that was FX and maybe if you don’t have that exact number, maybe what percent of the orthopedic franchise is international?
- Thomas Hein:
- The total was $2.9 million, the majority of that is, in fact all of it is international in terms of the FX, and I think we said earlier $24 of the $34 million of the $130 million is international.
- Steve Ogilvie:
- That $2.9 million, is that all in orthopedic?
- Thomas Hein:
- The majority is orthopedic, yes, because again the majority of our foreign operations are orthopedic oriented.
- Steve Ogilvie:
- I wanted dig deeper into the distribution dynamics with your biologics. Could you maybe walk us through how much inventory you’re going to get? I mean you have the right to purchase 80% of what Nuvasive is now going to make of Osteocell and I imagine you ‘re going to stockpile through the end of the year, but if they make less do you get less, are there minimums? Then how far can you stretch that independent of what MTF does, how do you see kind of like the last day when you’ll sell your last cc of Trinity?
- Alan Milinazzo:
- As you know supply on Osteocell has been kind of the challenge for us over the past couple of years, so in the past when we’ve had some shortages on supply it was a result really of inability to hit some of the production plans that they had. We understood that and I think that’s improved dramatically, as we said in our Q1 call. So we will take 80% of whatever they manufacture, that is our intent. If they manufacture les than they forecasted, as in the past, we’ll take that 80%. Right now we have the right to sell that product through the middle of next year. Now there are some things under way that may give us the right to extend that time period, but suffice to say that at this point we would view June next year as the earliest date that we would stop selling Trinity and again, pending the outcome of some other discussions it may be longer.
- Steve Ogilvie:
- You guys took some legal action, do you see if Nuvasive either is revamping or comes up with their own excuse as to reasons why supply isn’t good, are there recourses you feel you can take in order to get more?
- Alan Milinazzo:
- I don’t see any reason why Nuvasive would do that. We have had good conversations and we feel like from our standpoint we certainly have other recourse if we needed it to, but it’s probably not appropriate to comment at this point, but from our standpoint we have no reason to believe what we’ve heard from Nuvasive, what they’ve said publicly.
- Steve Ogilvie:
- In the development with the MTF, have you any insight into the patents? I mean it seems like in the hourglass market it’s pretty much free game and I just wondered as you step into stem cells in the processing, looking through those IT portfolios of what o’cyrus [ph] did, do you feel like that’s a minefield or do you feel there is still a lot of room to create a similar stem cell product?
- Alan Milinazzo:
- We have looked at this very carefully and we don’t feel that we’ll run into any IP issues related to this allograft.
- Operator:
- Your next question comes from Jim Sidoti with Sidoti & Company.
- Jim Sidoti:
- I’m trying to work on consolidated guidance a little bit. You kept the top line intact, but you took the bottom line down pretty significantly and I understand there is some pressure on the gross margin. Are there operating expenses that you expect now, in the second half of 2008, that you didn’t expect earlier?
- Alan Milinazzo:
- A couple of things
- Thomas Hein:
- I would point you to the reconciliation of non-GAAP performance measures for the third quarter and full year at the back of our press release. You will identify under strategic initiatives again, as we noted earlier, we will incur in the second half of the year $10.8 million of R&D expense, corporate R&D related to the development of the new products under the MTF and ISS agreements, [interposing] $0.10 of additional reorganization costs we expect to experience in the second half of the year.
- Jim Sidoti:
- But when you talk to that $1.40 accretive $1.53 number, those expenses are all excluded out of that right?
- Thomas Hein:
- That’s correct.
- Jim Sidoti:
- All right, because that number used to be $2 to $2.12 or something like that, so I mean there are definitely some other expenses in there now that weren’t in there —.
- Thomas Hein:
- That reflects, as Alan noted, the additional pressure on gross margins for the balance of the year coupled with the expenditures that we are carrying related to the sales and marketing structure for our Blackstone business.
- Jim Sidoti:
- Okays so I think the answer then is the sale to marketing and the percent of sales is a little higher than you thought it was going to be a the beginning of the year.
- Thomas Hein:
- It is.
- Jim Sidoti:
- Then on the interest expense you mentioned that you may have to renegotiate some of the covenant. Just going forward to 2009 should we expect interest expense to stay about flat where it is in ’08, because you’re paying down some of the debt, or do you still think you’d be able to cut interest expense in 2009 from where it is in 2008?
- Thomas Hein:
- No I think with the renegotiation of the covenants in the current environment you’d have to expect the interest rate and the interest expense to go up some.
- Jim Sidoti:
- I know someone asked this already, but I just want to make sure I understand the timeline for the new stem cell product. It sounds like you think you’ll have something completed, at least the development stage completed in early ’09 and then go through some kind of quick review process and have that in the market by the end of ’09 does that sound right?
- Alan Milinazzo:
- Yes you know development process has been going on for some time. We expect that that will roll into a commercialization phase in which we would expect in the back half of ’09. It’s hard to be more specific than that, but that back half of ’09. At this point we are letting MTF with our activities in the development phase kind of run with the ball on this one. These guys are the experts. We believe if you set in your mind kind of the back half of ’09 as a time frame, again we have to get through the first part of this. This is the development activities, but if all goes well there then we would expect the second half of ’09.
- Jim Sidoti:
- With this product, what is the term of the distribution agreement? Once it gets out there will you have it for two years, five years, forever, can you tell us that?
- Thomas Hein:
- Ten years. That was an important piece for us.
- Operator:
- Your next question is a follow up from Vincent Resee [ph] with Wachovia Capital.
- Vincent Resee [ph]:
- With the potential adjustment that you guys had going on with your lenders because of the covenants issue, is there a risk you guys are going to need to raise some kind of financing?
- Thomas Hein:
- Currently we believe, at least for the foreseeable future, we can generate sufficient internal cash flow to continue to finance both the investments in R&D and the investments in working capital to support the business. We think we can generate, currently, enough internal cash flow. Obviously we are going to have to manage our inventory closely, that’s going to be key to accomplishing that. I think we ought to point out that we do note the potential covenant issues and amendment prospects in the third quarter. The other area that we will be discussing with our lenders and being sure we are clear as part of that covenant process is the possibility of any further impairment. I think as everybody recognizes the impairment as a result of evaluation tests, which are based on revenue projections, discounted cash flows of market statistics and with the reduction I the guidance related the Blackstone business, we do have the possibility that there could be a future impairment as we approach the end of the year and go through that year end process again.
- Alan Milinazzo:
- Let me just say that at this time we don’t have enough information to know if there would be an impairment in ’08. As we prepare the budget for ’09 and other revenue projections this year, we may want to be prepared for that, but at this point we don’t have anything to tell you to factor that into your equation.
- Operator:
- Your last question is a follow up from Steve Ogilvie with ThinkEquity.
- Steve Ogilvie:
- On the vascular and other businesses I was wondering if there is any new perspective on that in terms of looking for potential acquires as you focus and that is something you’ve got investment opportunities in spine and orthopedics.
- Alan Milinazzo:
- In the past couple of months we have actually kind of reorganized that group under the heading of the med/surg groups and we have taken some steps to enhance the top and bottom line performance there. We are mid streaming that implementation which I think is going to be the right move for the business and the employees. We haven’t explored anything specifically. We remain open to ideas around that, but at this time we are not really actively looking. If someone were to approach us we would certainly entertain it, but we are running it as if we are keeping it. We are optimizing the revenue and the bottom line contribution.
- Alan Milinazzo:
- Thanks for joining us today. Key messages I would like to leave you with today are that we continue to execute our core business strategies in stimulation, orthopedics, and sports medicine and we’re seeing very strong revenue profit results in all those segments. Our spinal implants business, although financially short of our expectations, is showing some very positive signs, which indicate that we’ve taken the initial steps to rebuild our revenue momentum as we head towards 2009. The exciting news about our collaboration with MTF further underscores our commitment to creating a strong spinal franchise over the coming years and we look forward to seeing many of you in New York on September 8.
Other Orthofix Medical Inc. earnings call transcripts:
- Q1 (2024) OFIX earnings call transcript
- Q4 (2023) OFIX earnings call transcript
- Q3 (2023) OFIX earnings call transcript
- Q2 (2023) OFIX earnings call transcript
- Q1 (2023) OFIX earnings call transcript
- Q4 (2022) OFIX earnings call transcript
- Q3 (2022) OFIX earnings call transcript
- Q2 (2022) OFIX earnings call transcript
- Q1 (2022) OFIX earnings call transcript
- Q4 (2021) OFIX earnings call transcript