Earnings Call Transcript - GMED Q3 2020

Operator, Operator

Welcome to the Globus Medical Third Quarter Fiscal 2020 Earnings Call. At this time, all lines will be on mute and the question-and-answer session will be held after the prepared remarks. I will now turn the call over to Brian Kearns, Senior Vice President of Business Development and Investor Relations. Mr. Kearns, please go ahead.

Brian Kearns, Senior Vice President of Business Development and Investor Relations

Thank you, Chanel, and thank you, everyone, for being with us today. Joining today's call from Globus Medical will be Dave Demski, President and CEO; Dan Scavilla, Executive Vice President, Chief Commercial Officer; and Keith Pfeil, Senior Vice President and Chief Financial Officer. This review is being made available via webcast accessible through the Investor Relations section of the Globus Medical website at www.globusmedical.com. Before we begin, let me remind you that some of the statements made during this review are or may be considered forward-looking statements. Our Form 10-K for the 2019 fiscal year and our subsequent filings with the Securities and Exchange Commission identify certain factors that could cause our actual results to differ materially from those projected in any forward-looking statements made today. Our SEC filings, including the 10-K, are available on our website. We do not undertake to update any forward-looking statements as a result of new information or future events or developments. Our discussion today will also include certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We believe these non-GAAP financial measures provide additional information pertinent to our business performance. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are available on the schedules accompanying the press release and on the Investor Relations section of the Globus Medical website. With that, I'll now turn the call over to Dave Demski, our President and CEO.

Dave Demski, President and CEO

Thank you, Brian, and good afternoon, everyone. I'm very excited to report record revenue, record non-GAAP EPS, and outstanding adjusted EBITDA for Q3. Not only are we seeing a healthy bounce back in surgical procedures, we are taking market share and growing. Revenue for the quarter was $216 million, up 10% from Q3 '19. Musculoskeletal Solutions increased by 14%, led by our U.S. spinal implant business, which grew at a stellar 17% in Q3. The revenue from enabling technologies was $9 million, up 66% sequentially compared to Q2, but down by $5 million compared to Q3 '19. To give some perspective on the enabling technology results, the third quarter is traditionally the slowest quarter for capital sales. However, last year, we grew by 125% in the third quarter and posted $14 million in revenue, tying our highest quarter for the year. Given these challenging comparisons, the sequential improvement is more indicative of the health of this part of our business. As the economy opened back up in Q3, our capital teams were able to begin rebuilding our pipelines and moving deals along. Many of these deals closed in October, and we have actually sold more robots in October than we did for all of Q3. Non-GAAP EPS was $0.49 per share, up 15% from Q3 '19, matching the best quarter in our history. Adjusted EBITDA was also a healthy 35% for the quarter. These results highlight the lean, efficient operating philosophy built into our business. Our profitability was somewhat inflated in Q3 due to issues unique to the pandemic, such as limited travel, the elimination of the most peer-to-peer cadaveric educational activities, and the change in industry conference participation to virtual events. On the flip side, the results also reflect continued investments in trauma, which resulted in a drag of $0.09 on non-GAAP EPS and 6 percentage points on adjusted EBITDA. In other words, aside from INR and trauma, the rest of our business produced 41% in adjusted EBITDA in Q3. Our U.S. spinal implant business grew by 17% in the quarter. This team is firing on all cylinders. We've launched five new products in 2020 with continued strong uptake in the HEDRON line of 3D printed interbody spacers and our fourth generation expandable MIS Tilo spacer. As we alluded to last quarter, we have had to limit access to these products until we expand our 3D manufacturing capacity, which should be online this quarter. We also saw significant growth from resonate, our new low-profile extreme angle anterior cervical plate that features automatic locking. In addition, we have resolved many of our supply issues in Biologics, which grew by 16% in the U.S. during the quarter. Implant pull-through for robotics continues to be a source of growth. In addition to the ever-growing installed base, we have put a major emphasis on adoption and usage of ExcelsiusGPS, driven largely by our implant sales team. Finally, we launched the ExcelsiusGPS interbody module late in Q3 and are beginning to see increased interbody usage as a result. Competitive recruiting and onboarding continue to be a significant factor in taking market share. Onboarding revenue for Q3 was an all-time high, and recruiting is comparable to the record performances achieved in the last two years. Our international spine business was down by 1% for the quarter. While most markets showed very strong growth in the quarter, the overall results were dampened by countries experiencing upticks in COVID cases, namely India, the U.K., and Japan. Trauma continued its strong performance in Q3, growing 16% sequentially and 96% over Q3 '19. We continue to invest in this business with an aggressive sales rep expansion plan and several new products expected to launch in 2021. Revenue from Enabling Technologies was $9 million in the quarter. This part of our business was most impacted by the lockdowns earlier this year. Even when surgical volumes were low, our implant teams had a reason to be in the hospital, which gave them opportunities to call on surgeons. Territories for the capital team have much larger geographies, which require air travel, and they typically need to set appointments to call on surgeons and executives. These aspects of the business were effectively shut down for the entire second quarter. While we attempted to maintain visibility and momentum via virtual events, it simply was not as effective in building pipelines. As the economy opened up, we have been able to resume the activities that lead to sales and are now seeing a robust pipeline emerge. As I mentioned in my opening, we have actually sold more robots in October than we did for all of Q3 and expect to produce year-over-year growth in enabling technologies for Q4. Surgeon interest and demand for radical technology is strong and growing. On the product development front, we launched the ExcelsiusGPS interbody module in September and upgraded several systems. Early feedback on the technology has been very favorable. We also made great progress on the final development and validation activities for our imaging system and expect to file with the FDA in November. We are beginning to build units for an expected Q1 launch. Finally, as we reported last quarter, we received FDA clearance on the cranial module for ExcelsiusGPS. We anticipate doing our first procedures in January. Overall, we had an outstanding third quarter in what has been a remarkable year for our company. I'm proud of the resiliency, determination, and grit the team has shown in the face of challenging circumstances. The U.S. spinal implant business is on track to achieve positive growth on a year-to-date basis by the end of this week. That in itself is an amazing accomplishment for a company our size, and it is our goal to achieve positive growth on a consolidated basis by the end of the year. Of course, that assumes no major COVID resurgence and continued excellent execution by our team, but it is certainly within our grasp. I will now turn the call over to Keith.

Keith Pfeil, Senior Vice President and Chief Financial Officer

Thanks, Dave, and good afternoon, everyone. Though we continue to navigate through uncertain times, Globus delivered an exceptional third quarter performance demonstrating strong market share growth while seeing a return of elective procedures. As we progress through the pandemic, we remain focused on competitive recruiting and onboarding and continued investment in R&D to drive new and exciting product launches, the contributions from those new products, and a focused approach to selling our Excelsius robot. These objectives, coupled with our focus on execution, have proven successful and are evident in our Q3 results. We remain well positioned to continue driving above-market share gains as we look to the future. Overall, our Q3 revenue was $216.1 million, an increase of 10.1% as reported, with the same number of selling days in the U.S. and international, but one less selling day in Japan. Third quarter net income was $44.2 million, up 15.4% over the prior year third quarter. Non-GAAP net income was $49.1 million, driving $0.49 of fully diluted earnings per share, representing 14.9% growth over the prior year. Adjusted EBITDA was 34.8%, and our free cash flow was $35.9 million. Turning our attention to sales. Our third quarter U.S. revenue was $182.1 million, up 11.9% compared to the third quarter of 2019, driven by the strong bounce back of U.S. spine partially offset by lower INR sales due to the lingering impacts of COVID-19. Our U.S. spinal implant business showed great momentum in the quarter and continues to drive above-market growth as we penetrate further. International revenue for the third quarter was $34 million, higher by 1.4% over the prior year quarter. The performance of our spinal implant business varied by region, showing strong growth within Spain, Australia, Germany, and Italy; however, we continue to see ongoing COVID impacts in Japan, the U.K., and India. Our third quarter gross profit was 73.6% compared to 76.9% in Q3 of 2019. The decline in gross profit was due to higher inventory reserves. Adjusting for that impact, gross profit would have been 75%. And consistent with my comments last quarter, noting that we expected a mid-70s gross margin as revenues return to pre-COVID levels. Research and development expenses for the third quarter were $14.4 million and 6.7% of sales compared to $14.5 million and 7.4% of sales in Q3 of the prior year. During the year, we have continued to maintain our high level of investment. We expect our R&D expense to run approximately 7% of sales looking ahead, which is inclusive of continued significant investments in our INR and trauma businesses. SG&A expenses for the third quarter were $89.2 million or 41.3% of sales compared to $88.5 million and 45.1% of sales in the third quarter of the prior year. The increase in spending is reflective of higher sales compensation due to the increased sales volume but is offset by lower expenses related to travel and training. While travel and training expenses increased sequentially from Q2 to Q3, they are still lower than the prior year, driven by the continued impacts of COVID-19. The impact of lower travel and training is worth approximately 150 basis points of SG&A. We expect these expenses to rise in the fourth quarter, but not return to pre-COVID levels until sometime in the first half of 2021. Our effective tax rate for the quarter was 16.8% compared to 18.1% in the third quarter of 2019. The slight decrease year-over-year reflects the favorable tax impact of stock option exercises in the current year period. Looking ahead, we expect our 2020 full year tax rate to be approximately 21%. The adjusted EBITDA margin for Q3 was 34.8%, well above our Q2 margin of 14.7% and 137 basis points ahead of our Q3 2019 adjusted EBITDA margin of 33.4%. It is worth noting that included in our Q3 adjusted EBITDA, our total INR and trauma investments were 610 basis points. Our results demonstrate the lean, efficient operating philosophy contained within our business culture while also highlighting our strategic approach to investing in worthwhile initiatives. Looking ahead to 2021, we expect to deliver an overall mid-30s adjusted EBITDA range, assuming no major recurrence of COVID-19. We ended the quarter with $685.2 million of cash, cash equivalents, and marketable securities. Net cash provided by operating activities was $53.2 million, and free cash flow was $35.9 million. Our free cash flow was $7.9 million lower than Q3 of 2019, driven by the deferral of our federal income tax payment from Q2 to Q3 as a result of the CARES Act, which we commented on last quarter. On a year-to-date basis, our free cash flow is $69 million, or 10% higher than our year-to-date free cash flow in Q3 of 2019. I highlight this given the fact that we've been able to grow our free cash flow year-over-year despite the impacts of COVID-19 and our commitment to continue investing in inventory. In Q3, we did not repurchase any of our Class A common shares in connection with the previously authorized and announced share repurchase program. Consistent with last quarter, we currently have $95.3 million remaining on the original $200 million authorization. The Company will fund the share repurchase with its operating cash flows. As I conclude my comments, I'd like to take a moment to recognize our Globus team members for the strong third quarter. Our results continue to reflect the spirit and can-do attitude of our employees. As Dave mentioned, we look forward to closing the year on a strong note and hope to be able to drive overall year-over-year sales growth, assuming no major resurgence of COVID. We will now open the call for questions.

Operator, Operator

Our first question comes from Matt Miksic with Crédit Suisse. Your line is open.

Matt Miksic, Analyst

Can you hear me okay?

Dave Demski, President and CEO

Yes, Matt.

Matt Miksic, Analyst

Congratulations on a very strong quarter considering the circumstances. Could you provide some insight into the trend of robot purchases? It seems like there’s some acceleration happening. What is the general tone and interest level in that area? How has that changed since the summer and into October, especially as things appear to be gaining momentum? I also have one follow-up question.

Dave Demski, President and CEO

Yes. Thanks, Matt. I think I would characterize it as strong, certainly strong interest. If you go back kind of to our history with this technology, when we first bought it, there was a huge amount of skepticism; most surgeons thought they'd never use something like that. It started to grow where there was interest from sort of tire kickers and then the early adopters. I feel like we're switching over, and we're about on the verge where the question is, when am I going to adopt this in my practice? It's becoming much more mainstream and common. Not that people have done that yet, but the attitude of surgeons is well beyond the skepticism we saw early, and they're interested in understanding how we can benefit them, coming at it with that perspective. So the pipeline is really strong right now. A lot of interest, and we really haven't experienced a ton of impact due to COVID in terms of closing them. So it's really encouraging.

Matt Miksic, Analyst

That's great. I guess the other point is that you might have spent a good amount of time discussing this recently, possibly today and in the coming week. It's about the current tone of procedures. Things were looking positive from June to July and appeared to remain so into August and September. However, given the news, there's increased concern about the potential for a rise in cases in the next couple of months. Can you provide any insights on what you’re observing or what your surgeons are anticipating over the next several months, particularly in relation to what we learned back in July and August in areas facing heightened pressure?

Dave Demski, President and CEO

Yes. Good question. Our results in the third quarter really reflect the fact that we've seen rolling shutdowns of electives in various pockets throughout the country, even in Q3. San Antonio was down for a little bit. We do a lot of business in Charleston, South Carolina. There are parts of that were shut down. They've come back on, and we're hearing reports like Flagstaff was down a couple of weeks ago. So there are pockets. We're not seeing that massive across-the-board shutdown of electives, and they're coming back much quicker as well. Our business has actually grown in October. We had the best week in our history last week as a company in the U.S. So even in spite of these rolling shutdowns, the volumes out there are very strong. I think that, coupled with the fact that we're growing as a company, has produced the results we continue to see even into last week and this week.

Operator, Operator

Our next question comes from Shagun Singh with Wells Fargo. Your line is open.

Shagun Singh, Analyst

I'm wondering if you guys can give us a little more color on the growth rate you may be seeing in October. I know you mentioned that you're up at any incremental color there. And then I'm just curious if you can talk a little bit about the imaging platform. You were to make the submission in Q4 with expected launch in Q1 '21. I'm just wondering, are you guys on track and should we expect a limited or a full launch once you commercialize?

Dave Demski, President and CEO

Thanks, Shagun. No specifics on October; we're having a great month, just to put it that way. As I talked to Matt about, we're seeing strong surgical volumes in the U.S. from an implant side, and clearly, we had a good month when it comes to robots. In terms of the imaging system, yes, we're on track. We're actually very happy with the final touches of the verification, validation activities, and the various tests that it has to pass. We're in the final throes of that where we expect to file with the FDA in November. And it's up to them, but we expect that we'd be able to launch this in Q1. I don't think you'll see much revenue impact in Q1, and as we ramp our production, even the first half of the year will be a little bit muted, but we think this could have a significant impact in the second half of next year.

Shagun Singh, Analyst

That's helpful. And then if I could just squeeze in one other additional question. Could you just discuss your initial thoughts on the corporate tax reform under a likely Biden administration and what should we expect? And how do you expect to offset the impact?

Keith Pfeil, Senior Vice President and Chief Financial Officer

Thanks, Shagun. I mean, at this point, I really have no comment on that. Our view is that if there is a change in corporate tax due to an administration change, it's going to affect the market as a whole, and we will deal with that at the appropriate time.

Operator, Operator

Our next question comes from David Lewis with Morgan Stanley. Your line is open.

David Lewis, Analyst

Just a couple for me here. I guess the first may be for Dave, for you. I mean, the U.S. traction last quarter and this again, this quarter is pretty substantial. I just wonder if you can give us some more granularity on what you think is driving that? I know we have COVID recovery, but it's pretty clear the momentum you built last year is sort of returned this year and it does appear that you're taking share. I sort of wondered if you could kind of flush out new products, rep acquisition, lower attrition, what has sort of accelerated what looks like a kind of a share capture situation these last six months for you? And then I had a couple of follow-up for Keith.

Dave Demski, President and CEO

Sure, David. You hit a couple of major factors. First of all, we've had some great product introductions this year. We're getting a lot of traction from our HEDRON line, our 3D spacers. SABLE is, I think, our fourth generation of expandable T lift device. That's been going extremely well. We saw resonate, which is our new cervical plate take off this quarter. Combine that with the growing base of robots out there, each one produces some pull-through. But as we've got this large installed base, there's some momentum behind that. Our recruiting and onboarding, and I separate that into two buckets, right? Recruiting is just getting the folks hired; onboarding is the process that our folks go about trying to convert that business. While the rep is on his non-compete, our folks around him have to do that. And then, as they come off their non-competes, either at 12 months or 18 months, that's when we'll see significant growth as well. So you're seeing all those factors occurring and really being executed quite well by our U.S. sales team. So it's all of the above.

David Lewis, Analyst

Okay, very helpful. And then, Keith, I appreciate the margin commentary you gave us for next year. I wonder if you could just help us kind of underpin your confidence in sort of getting to those margin numbers, which are materially up over 2019, and maybe you could help us. I mean, numbers clearly have you growing double digits in '21 over '19, and any granularity you can provide in terms of how we should be thinking about U.S. trends? Obviously, ex-U.S. is probably going to be a little more sluggish. Any focus you can give us on the top or bottom line for next year other than margins would be very, very helpful?

Keith Pfeil, Senior Vice President and Chief Financial Officer

Yes. Thanks for the question. I'll talk a little bit about margins. We've talked before about Globus being in the 33% to 37% range for EBITDA. This quarter, we landed on the upper end of that range. I did call out that we had a little bit of a tailwind because of some travel and training in SG&A, but we did have a little bit of a headwind in COGS because of that higher inventory reserve. Assuming that we go into next year and have normal sales, or what I would say, sales not impacted by COVID, I'm pretty comfortable that we're going to be in that 33% to 37% range. But I would still caution that I don't want to give a specific number at this point. As I look at gross margin as we move ahead and continue to drive penetration in the U.S. market, the profitability on those U.S. sales will help drive incremental dollars dropping to the bottom line, which helps the overall story because you're going to get leverage on your fixed costs. But at the same time, you're going to see continued investment in depreciation or city investment in sets. This is going to drive additional depreciation expense. So as I look ahead, I still feel good about a mid-70s gross profit in a non-COVID environment or in sales that aren't impacted by COVID.

Operator, Operator

Our next question comes from Ryan Zimmerman with BTIG. Your line is open.

Unidentified Analyst, Analyst

This is Max filling in for Ryan. I want to revisit the pull-through aspect of robotic deployments. In previous discussions, you've mentioned that as the installed base increases, we should see pull-through grow significantly. Could you share more details about the efficiencies and pull-through you experienced in the third quarter due to having robotic systems already in place? Also, looking ahead, in terms of an exponential pull-through graph, is there a specific number of placements that you believe is necessary for pull-through to take off? If that's the case, do you have an estimate of when that milestone might be reached?

Keith Pfeil, Senior Vice President and Chief Financial Officer

Thank you, Max. I may not have much insight to offer on the analytics. Conceptually, our robots operate much more efficiently, and our screws enhance performance, which creates some demand. We have also made deals that include an implant purchase component, adding a structural advantage. Over the long term, as surgeons begin to adopt this technology, we aim for their colleagues and others at the hospital to use the robot, potentially boosting their implant sales as well, particularly through the lead surgeons who typically champion the robot's purchase, even though there are often several surgeons working in the hospital. Our recent focus has been on fostering this adoption and ensuring a successful launch for those who purchased it, which provides a foundation to attract other surgeons. While I don’t have specific analytics or figures to share regarding this impact, I can confirm that it exists and it's a key reason for our growth.

Unidentified Analyst, Analyst

Got it. And then switching topics a little bit, I'm going to go back to HEDRON and Sable again. And just trying to get a sense of how much demand you weren't able to fill in the third quarter. And whether or not you can provide any detail around what that potential impact would have been to the top line? And then you had your increased manufacturing capacity come online in the fourth quarter. Will you be able to backfill any of these orders? I'm just trying to get a sense of whether or not we could see a bulge of revenue from these products in the fourth quarter and/or early 2021.

Dave Demski, President and CEO

Yes. You're probably not going to see it in the fourth quarter; the capacity is coming online in November, and we really can't get products actually made and through the whole process and sterilized until late in the quarter. So I don't think you're going to see a big incremental impact from Q3 to Q4, but that should be in place next year. There really is no opportunity to backfill the orders. Those cases are done. Those surgeries have been performed, and the patients are hopefully home and doing well. So we just have to focus on the future. To give you some quantitative metrics, we're doubling our capacity, so we expect to double what we can sell as we go forward. Clearly, if we have more traction than that, we'll continue to add capacity as we see it.

Operator, Operator

Our next question comes from Matthew O'Brien with Piper Sandler. Your line is open.

Unidentified Analyst, Analyst

This is Patrick on for Matt. We really appreciate you taking the time and answering our questions. I wanted to look at robotics to start. I found it really interesting. Last quarter, you kind of talked about the spectrum for capital. It seems like a lot of the work you've done, you have a ton of surgeon interest, which is really great. But you mentioned there are certain hospitals who just don't have the time to speak with you because they're impacted by coronavirus. At the same time, you have hospitals who really want to differentiate themselves, get that Excelsius in, and take advantage of the situation. I'm curious if you could kind of expand on the dynamics you're seeing in that marketplace right now? Are things shifting more towards hospitals wanting to differentiate themselves or some of those customers willing to talk to you? Any color there would be appreciated. Then I have a quick follow-up.

Dave Demski, President and CEO

Sure, Patrick. We're gaining more access. I mean, that's really the message. In Q3, we were shut down from face-to-face interactions, which we attempted to stay in front of folks as best we could virtually, but that just wasn't that effective in terms of really cementing their interest and getting them to go forward with executives to purchase the equipment. I think now that we're able to be in front of folks, as I mentioned to one of the earlier callers, the tone has changed a little bit towards how is this going to help my practice versus I don't need it. The skepticism that we saw in the early days, I think has dissipated. I think will continue to change as we get more and more systems out there. It's just going to become the way surgery is done. At that point, the battle is who's got the best system, who can offer the most advantages, and I feel good about where we stand competitively.

Operator, Operator

Our next question comes from Richard Newitter with SVB Leerink. Your line is open.

Richard Newitter, Analyst

And congrats on the quarter in a challenging environment. I just want to sure I heard correctly: I think you said that you're on track to grow on a total consolidated revenue basis for 2020. If that's the case, especially since you said that you expect growth in enabling technologies in 4Q relative to last year, I'm just curious if that implies a double-digit trend sustaining for total revenue growth in 4Q of this year? Is that the underlying assumption there? That the U.S. continues at this mid-to-high-teens level? Or is there a pickup in international to kind of get there? I'm just curious what the embedded expectation is you're going to continue to grow double digits and, in fact, potentially accelerate on a total revenue basis?

Keith Pfeil, Senior Vice President and Chief Financial Officer

Hey, Rich, thanks. Just to clarify, so we're on track in the U.S. to achieve year-to-date growth, the U.S. implants, actually by the end of this week and the end of October. It's a goal to grow consolidated for the year. So I would not say that we're on track for that, but I think we have a really good shot at it. We really haven't sliced and diced where those components are coming from. But on an overall basis, we believe that that's achievable, and we're certainly working hard to get there.

Richard Newitter, Analyst

Okay. But based on the trend that you're saying is strengthening seemingly in October, there's nothing else equal to suggest that you wouldn't at least be stable in the U.S. core spine business, if not better, on the implant side, all else equal for the rest of the quarter, correct?

Dave Demski, President and CEO

Our U.S. spine business is really strong right now. We had a great October. I haven't gone back and said what we did last October. So I don't have the growth numbers in my mind. But I can tell you sequentially and qualitatively, we're having a really good month. So I'm expecting enabling to grow for the quarter, given the strong start in the pipeline that we have. How it all shakes out into each piece? I'm not sure what those growth rates are.

Richard Newitter, Analyst

Okay, that's helpful. And then just, I think someone got at this in an earlier question. I just want to clarify it. Kind of the market improvement in the U.S. versus what you're doing better than others and share gains? Could you give us a sense of what you think the normalized kind of spine market growth rate is right now relative to your kind of 17%? You're clearly taking share. How much does the market potentially just pick up from some of the backlog work down and maybe be shaped recovery versus just purely Globus specific issues that are benefiting you?

Dave Demski, President and CEO

Yes, I really don't know where to draw that line. Both are occurring. We certainly saw a nice bounce back in procedures overall. So it would be interesting to see how the other folks report on that. But I know that we're taking market share. We just don't have the granularity in our systems to differentiate those two. Sorry, that can't be more helpful.

Richard Newitter, Analyst

Okay. And actually, maybe one last one. Biologics, I think you called out low teens growth for that business. I know that had been a business that was pressured due to some product disruption issues in the past. What was the growth rate last quarter? And is that a good trajectory for that business going forward?

Dave Demski, President and CEO

I don't know the growth rate last quarter. We didn't comment on it. We saw some things resolved this quarter. That's why we called it out. And frankly, we have some more opportunities in front of us. So I'm hopeful 2021 will be even better as we resolve some of the outstanding issues.

Operator, Operator

Our next question comes from Matt Taylor with UBS. Your line is open.

Matt Taylor, Analyst

So I guess I just wanted to focus again on the robotics pickup here. It's a little surprising, frankly, given the environment. Do you think any of the enhancements that you're working on are helping to separate you from competitors? Or do you think this is more of a demand for overall robotics? I'd love to hear about how those enhancements could be playing into the yes.

Dave Demski, President and CEO

Yes, I do think the enhancements are helping us sell robots. Not only the enhancements but just the longer we get out there, I think it's established that our programs are operating at a really high level. There's a lot of adoption. Surgeons are really seeing value in the technology. I'm not sure that's always true for our competition. So that's also a factor. I can't really speak to what the overall market is doing, but I know that as we get into head-to-head evaluations from a technology, usability, and functionality standpoint, we consistently grade out as much better than the other alternatives.

Matt Taylor, Analyst

And I was hoping you could offer some thoughts on the outlook for your trauma business. I imagine it's harder to break into some hospitals when the environment is like you do have some momentum going now. Do you think that could continue to back up? And what are the gating factors for trauma to become a bigger part of your business?

Dave Demski, President and CEO

Thanks. I appreciate the question. We did have record sales in Q3. What's promising with that is over half of that growth came from new surgeons. While COVID is certainly taxing the committees to allow for new products and selling is down somewhat, we're getting the right traction and the right approach. I think we all remain bullish on the investment and see growth coming out of trauma through the rest of this year and certainly into 2021. Again, certainly hindered by some COVID activity, but offset again by strong recruiting that still continues with us.

Operator, Operator

Our next question comes from Kyle Rose with Canaccord. Your line is open.

Kyle Rose, Analyst

So I kind of want to stick on the robot theme here and maybe less what you're seeing, I guess, year-to-date, but talk more about the future. So you've just recently launched the interbody module, you're going to submit the imaging platform at year-end and launch that next year. I guess, just help us understand what the addition of the imaging platform does for your enabling strategy and then how we should think about the next steps of innovation across robotics?

Dave Demski, President and CEO

Sure, Kyle. The imaging component, if you think about computer-assisted spine surgery, you have two components. One would be just navigation. So pre-hand navigation, where you're using 3D images combined with navigation to track where you are in the case. The robotics is the next evolution, where you're using the robot to guide the instruments to do the procedure. We've been competing in the robotics space clearly, but there's a strong installed base of pure navigators, and not all of them experienced a lot of benefit from going from freehand to navigated. We want our portfolio to be able to address the navigators, if you will, who are not ready to make the move into robotics. That's a pretty substantial segment. It gives us one more tool to address that overall computer-assisted group. I think as you look forward, I don't think we've really unveiled much of what we're working on beyond imaging and navigation. I think we've talked about the fact that we're working on a robot to help do total knee, and then ultimately total hips. That will be probably the next thing on the horizon. We do have a couple of other projects, but we're not ready to unveil those just yet. We're focused on the next steps, which will be the imaging system, the navigation that goes along with that, and then the cranial rollout.

Kyle Rose, Analyst

Great. I appreciate that additional color there. You talked the last couple of quarters just about some of the encouraging metrics you're seeing from a utilization side and the pull-through on the robots. You also talked about focusing more on utilization with the implant sales team. Can you maybe talk about how that focus with the implant sales teams has evolved over the course of the past several years? Is it just the fact that you've got enough systems in place that now you can have the implant guys call on it? Or is there something different about the sales process that you're seeing evolve?

Dave Demski, President and CEO

It's not the sales process so much. We still have a capital team that works together with our implant teams to follow through on the capital sale. It's really once that robot gets installed, we want the implant team to own the day-to-day operation of it. As they become experts in how that technology benefits surgeons and patients, they become more effective in converting the competitive surgeon down the hall who doesn't use our implants to use the robotic technology and the advantages that it brings. To convert that surgeon over to using that robot, which means they're going to use our implants as well.

Operator, Operator

Our next question comes from Taylor Crumb with Securities. Your line is open.

Unidentified Analyst, Analyst

And congrats on the quarter. So we're getting asked, I think, quite a bit about 2021, and just any guidelines or commentary you guys can provide going forward would be helpful. I mean, a lot of companies, I think, are looking at 2019 as sort of a baseline or normal year. Right now, The Street is modeling mid-teens growth off of that 2019 level for you guys in 2021. Is that sort of a reasonable place to be? Or is there anything else we should be considering as we look into next year?

Keith Pfeil, Senior Vice President and Chief Financial Officer

Thanks for the question. This is Keith. As we think about 2021, I think it's really premature to be discussing where we think we're going to land. We really want to get through this quarter. Some of the news that came out today regarding cases rising across Europe and concerns that it's going to come over to the U.S. I think given that, I would like to get through this next quarter. As we get to 2021, if we're in a position to provide guidance, we will give guidance at that point.

Unidentified Analyst, Analyst

Great. And then just a couple on the enabling tech business. I mean it sounds to me like you guys are on track right now to deliver a record quarter in the robotics segment. So I guess I just want to understand sort of the durability of the momentum you're seeing in October. I mean, could this be a $15 million to $20 million quarter for the enabling tech business? And then just a follow-up on the imaging system, I mean, it sounds like you guys are expecting to launch in the first quarter. Just would love to understand how you're thinking about the launch strategy and just compare, contrast it with what you saw when you launched Excelsius? Because I think, Dave, you made a good point that docs were super skeptical, I think when you first launched the robot. So I think I would love a little bit more clarity on both those items.

Dave Demski, President and CEO

Sure, Kayla. Last year, we achieved $14 million in the fourth quarter, and we expect to exceed that this time. That's about all I can disclose regarding our expectations for this quarter. As for the imaging system, this launch is quite different from our initial experience with ExcelsiusGPS, which was more of an evangelical sale. The imaging system is specifically aimed at our existing base of navigators. Robotics is significantly expanding opportunities for computer-assisted technologies, where we plan to engage our installed base with the imaging system. Our focus will be on large installations and demonstrating to surgeons the advantages of our technology compared to their current tools. We've had some preliminary previews and gathered feedback from our design teams and various presentations at ASK. The advantages we are seeing are quite compelling, and there is a lot of excitement and anticipation leading up to the launch.

Operator, Operator

Our next question comes from Jason Mit with Northland Securities. Your line is open.

Jason Mit, Analyst

First off, I'm not sure if we can measure the impact of COVID for the quarter. Was there any effect at all in the U.S.? You mentioned some outside the U.S., but I'd like to understand how you quantify that.

Dave Demski, President and CEO

I'm not sure I understand when you say the impact. Analytically, no, we don't have the ability to sort of differentiate between whether that was a patient that was supposed to be operated on in May or one that came in last week. But I can tell you anecdotally, we've certainly got to bounce back. As we alluded to last quarter, we started seeing a real uptick in procedural volume in June, and that continued through the entire third quarter, which is kind of unusual from a seasonality standpoint. Clearly, a lot of that activity was because of the bounce back from the second quarter. But I can say, at the same time, I know from our recruiting and our new products, the information we gather on that that we're getting new surgeons and new customers. So it's both. But we don't have the ability to tell you which piece is growth and which is the market. So I think as the other folks report, as the bigger companies report, you guys will get a sense for that overall growth and how market shares have shifted.

Jason Mit, Analyst

Okay, that's helpful. And then on the recruiting side, I mean, that is a big driver or one of the pieces of your driving success here. Obviously, you continued at a record pace. I think you've hinted it in the last couple of quarters that it seems like where you pull from, which is the larger companies in general, there's a lot of excitement to come up with Globus, for a variety of reasons. I wonder, though, it sounds like the pace is continuing. Do you sense that your larger competitors are pulling back at all? And as I look across the landscape as well, do you have a sense of whether other companies are trying to step up recruiting efforts or actually pulling back given the uncertainty?

Dave Demski, President and CEO

No, I think everybody is recruiting. The advantage we have is the technology we have, the implant technology, which we've been a leader in for 17 or 18 years. Now you couple that with our enabling platform, the success we've had in robotics, the imaging system coming. I think perhaps we’re just excited about selling new technology. It gives them the ability to grow and to grow their business, so they're coming to a company that has great technology. I don't think it's the fact that we recruit; I think it’s just the tools we have to recruit with.

Kyle Rose, Analyst

Okay. And then just last quick question. NASS was kind of online and not getting a lot of attention. Is there any new product 3D launches that you had during NASS that you think are worth highlighting that will likely drive 2021?

Dave Demski, President and CEO

No, I don't think we rolled anything out at NASS. We're focused on those 3D printed cages that we alluded to earlier. The new cervical plate is doing really well, stable. We've got a couple more things we're trying to get out by the end of this year. But we always, at any time, have 20 or 30 projects in development in spine alone. Over the years, we've established just a continuous pipeline of innovation.

Operator, Operator

Our next question comes from Steven Lichtman with Oppenheimer. Your line is open.

Steven Lichtman, Analyst

We were just wondering if you could provide maybe some more color on what you're seeing in terms of patient flow today versus pre-COVID. Last quarter, I think you called out an average of about 85% of pre-COVID levels. Has that returned to 100% at all during Q3? And looking ahead, do you see the increasing shift of procedures to ASCs offsetting any downturns?

Dave Demski, President and CEO

Thank you, Steve. We gathered that information last quarter because we recognized it was a significant concern for many, although it's not part of our usual analytics. Therefore, we did not provide an update. I know our volumes remain strong, which suggests that clinic flow is sufficient and possibly robust. Regarding your second question about ASCs, I didn't fully catch it, so could you please repeat it?

Steven Lichtman, Analyst

Yes, I was just wondering if the increasing shift of procedures to ASCs could potentially offset any future downturns if the virus has more of a resurgence in the fall/winter timeline.

Dave Demski, President and CEO

Certainly, and we saw that the first time around. There was some shift into ASCs for the easier cases, but they can't really do the complex stuff in the ASC. If we have a big country-wide kind of shutdown that we saw in the past, we will be impacted. As I spoke about earlier, what we're seeing now are the sporadic smaller, less duration kind of shutdowns, which have not impacted us to the extent that we saw back in the second quarter.

Keith Pfeil, Senior Vice President and Chief Financial Officer

This is Keith. I don't have any comments regarding the number of representatives. We will continue to recruit and expand our business as we progress and keep an eye on its growth both sequentially and year-over-year.

Operator, Operator

Our next question comes from Matthew Blackman with Stifel. Your line is open.

Matthew Blackman, Analyst

I just wanted to actually start on international, where it looks like you're back to roughly pre-COVID revenue levels. Can you help us think through how that business tracks back towards pre-COVID growth rates? And I appreciate that the resurgence of the cases is a confounder, but beyond COVID, are there specific items you need to execute on to get you back to sustainable double-digit growth?

Dave Demski, President and CEO

Beyond COVID, we just have to do the things we've always done to be successful, which starts with technology, getting our best technology in front of surgeons, hiring reps, and having to make sure we have a strong sales force and good representation. As we've added in the last several years, driving the enabling technology, which has frankly been surprisingly strong. When we first got into this, I was concerned that the price tag would be prohibitive for some of the international markets, but we haven't really seen that. We've seen strong demand and really around the world, and the placements have been really encouraging. We have approval in Japan now, which is our largest international market, and we're hopeful that we can get a system or two installed in the fourth quarter. Certainly a lot of interest there, and that will be a big opportunity for us going forward.

Matthew Blackman, Analyst

I appreciate that. Now, regarding my last question, you've been asked about trauma before, but I'd like to approach it from a different angle. I'm curious about the key factors that remain to be addressed. When I consider this, there are several components such as the portfolio, hiring, training, and deployment. Are there one or two specific areas that you foresee as being particularly critical in the next 12 to 24 months, and how should we view their development during that time?

Dave Demski, President and CEO

Well, I think you picked most of the points, but we'll go at it from 12 months from now. Right now, it's going to be about expanding the footprint through feet on the street. So recruiting and taking the existing pipeline that we have will be key. At the same time, gaining access and additional access into the accounts where we're in, and getting more procedures with the sets we have that will become the majority of growth drivers for us in the first 12 months. The second 12 months, which will be going into year two, it's going to be a continued expansion of the portfolio to where we can meaningfully displace existing competition with our full portfolio. That's really what the second wave will come in, while we continue to expand feet on the street and gain access.

Operator, Operator

With no further questions, I will now conclude the Globus Medical Third Quarter 2020 Earnings Release Conference Call. Thank you all for joining us. You may now disconnect.