Orthopediatrics Corp Q4 FY2021 Earnings Call

Good morning and welcome to OrthoPediatrics Corporation Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. We’ll be facilitating a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Basco from the Gilmartin Group for a few introductory comments.

Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer; and Fred Hite, Chief Operating and Financial Officer. Before we begin today, let me remind you that the company's remarks include forward-looking statements within the meaning of federal securities laws, including the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous risks and uncertainties, and the company's actual results may differ materially. For a discussion of risk factors, including among others, the risks associated with COVID-19, the impacts this pandemic may have on the demand for the company's products, and the company's ability to respond to the related challenges, I encourage you to review the company's most recent annual report on Form 10-K which will be filed with the SEC soon. During the call today, management will also discuss certain non-GAAP financial measures which are supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period-over-period. For each non-GAAP financial measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release. Please note that the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for OrthoPediatrics financial results prepared in accordance with GAAP. In addition, the content on this call contains time-sensitive information that is accurate only as of the date of this live broadcast, March 3, 2022. Except as required by law, the company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call. With that, I would like to turn the call over to David Bailey, President and Chief Executive Officer.

Thanks, Matt. Good morning, everyone and thank you for joining us. We hope you are safe and well. Before providing a business update and review of the financials, I'd like to highlight that we helped over 9,500 children in the fourth quarter and approximately 38,000 for the full year 2021, which was a record year for the company. Since inception, OrthoPediatrics has helped more than 234,000 children in total; doing the right thing for children remains our top priority. Consistent with our preannouncement on January 10, we generated quarterly revenues of $24.8 million, representing growth of 31% compared to the fourth quarter of 2020. For the full year of 2021, we generated $98 million, representing growth of 38% compared to the full year 2020. We are extremely proud of our 2021 performance and believe we have navigated through the pandemic very well which we view as a testament to our durable business and strong commercial execution. Before commenting on each business segment, I'd like to speak to some macro trends we experienced in the fourth quarter and full year 2021 that have impacted the entire healthcare system and specifically, the medical device industry. The first being COVID. While pleased with our 31% growth rate in the fourth quarter, it is important to point out that the spike in Omicron variant cases in December deferred elective procedure volumes, which we estimate negatively impacted our growth by 10 percentage points. As we enter the first quarter of 2022, headwinds associated with the Omicron variant continued to negatively impact our growth in January and the majority of February. In early March, we're seeing signs of improvement with reduced COVID case volumes and the rescheduling of surgical cases. We see this as an indication of progress toward a more normal operating environment and an opportunity to capture pent-up demand. Specifically, we believe there is a sizable backlog of deferred domestic cases which we expect will largely be worked down by the end of the third quarter of 2022. This brings me to my second point. While the backlog of cases has increased since September, we believe the recapture of deferred cases will be flatter in 2022 compared to 2021 due to continued hospital staffing shortages. However, we believe the underlying demand for our products remains strong, and we are working closely alongside our customers to ensure that they have the necessary resources and support to operate through this challenging period. Lastly, many have asked about a possible disruption associated with the global supply chain and increasing inflationary risk. Although we were not significantly impacted in our 2021 by supply chain issues, we are starting to see inflation in pockets with some of our vendors and extended lead times. While we view this as a minor risk to our business, we believe we'll be able to offset increased costs with modest price increases to our customers over time and manage the extended lead times. We are proud to say we source approximately 90% of all materials and inventory domestically which significantly reduces our exposure to global supply contracts. Moving to our revenue segment. In the fourth quarter of 2021, we generated quarterly Trauma and Deformity revenue of $16.5 million, representing growth of 47% compared to the prior year period. Despite increasing Omicron headwinds in mid-December, our nonelective trauma business delivered strong growth, led by the high rate of search and adoption of our PNP Femur System as well as our new Cannulated Screw and SCFE Systems. Specifically, PNP Femur and Cannulated Screws continue to capitalize on positive customer preference and increased set deployment. In the United States, we expect this trend to continue into 2022, supported by additional set deployment and continued surgeon adoption. Additionally, we are planning a more robust launch of the PNP Femur and external fixation systems in key international markets. In the fourth quarter of 2021, we generated quarterly Scoliosis revenue of $7.2 million, representing growth of 8% compared to the prior year period. Our core Scoliosis business continues to be driven by our response system and the onboarding of new users. Given the number of new accounts added in the back half of 2021, we view consistent adoption of response as a tailwind to growth in 2022. Additionally, we are seeing strong growth from our small stature system from both existing customers and new users. Turning to ApiFix; we continue to make progress on patient registration and are proud to say we surpassed our 2021 target of active commercial sites at year-end, setting us up nicely for 2022. Lastly, we are happy to see strong demand for the 7D surgical navigation platform, having completed several evaluations in the fourth quarter. As of today, we have built a strong pipeline of leads and continue to view 7D as a transformative platform that will improve patient outcomes, drive increased surgeon engagement and allow us to leverage our entire product portfolio to pull through sales of our other products. Specifically within the international business, the negative impact of Omicron was more pronounced since infection rates started to spike in late November, while domestic infection rates accelerated in mid-December. In the fourth quarter of 2021, we generated quarterly international revenue of $5 million compared to $1.1 million in the prior year period. It is important to point out that quarter growth was highly skewed due to DACH region converting to an agency sales model and a $2.7 million sales return in December of 2020. As we move into 2022, we believe we have a number of international catalysts that will be tailwinds to growth, including several key product regulatory approvals in the first half of 2022, more normal distributor set purchasing patterns, additional inventory deployment in agency markets such as DACH and a large backlog of cases that we estimate is roughly 18 months. I'll now provide an update on our key initiatives. Since the beginning of the pandemic, we have adopted the mantra of controlling what we can control and have continued to execute on our five strategic pillars: First, we continue to focus on the top 300 children's hospitals where the majority of pediatric orthopedic procedures are performed. Given our strong relationships and positive reputation, we continue to convert more surgeons into users of more of our products which resulted in 2021 domestic revenue growth of 24% and continued the expansion of our market share. After a successful year in 2021, we entered 2022 with more surgeons using more of our products than ever before. Second, we've made substantial progress towards our goal of surrounding pediatric orthopedic surgeons with an industry-leading product portfolio designed specifically for children. Our Scoliosis franchise executed a full-scale domestic launch of our RESPONSE neuromuscular system while the Trauma and Deformity correction business, our largest, saw tremendous revenue performance and the recently launched next-generation Cannulated Screw system and the Slipped Capital Femoral Epiphysis System. Additionally, we continue to launch our largest trauma products; PNP Femur and external fixation, both in the U.S. and markets around the world. These two products are rapidly taking market share and we expect this trend to continue in 2022 and beyond. Third, through the deployment of $14 million in consigned inventory and the addition of 19 U.S. sales professionals in 2021, we improved surgeon access to our products as well as improved the customer experience. Given the level of demand across all 37 product lines, we are committed to leveraging our balance sheet to expand our market share and drive revenue growth. While we've highlighted a number of product lines already, it's important to remind everyone that in 2021, nearly every OrthoPediatrics product line grew double digits which is a testament to the strength and breadth of our portfolio. Fourth, we made great strides in advancing innovation in pediatric orthopedics by furthering development of new products in early onset scoliosis and intramedullary nailing for fractures and rare bone diseases. We continue to expand our external fixation portfolio with new products and preplanning software. In 2020, we acquired the Israeli-based company, ApiFix which boasts innovative technology for non-fusion scoliosis surgery. This past year, we gained significant momentum in filling a patient registry for the United States. We also took major steps in our digital transformation initiative by extending our long-term partnership with Mighty Oak Medical in the patient-specific Firefly technology and we secured the pediatric rights to the 70 intraoperative surgical navigation technology through a partnership with SeaSpine. Combining these navigation solutions with the breadth of our product portfolio, we believe there are material revenue synergies with each capital placement. Moreover, we continue to add talented professionals and build infrastructure to accelerate the velocity of new product development. We also took major steps forward in quality and regulatory that continue to improve the customer experience and will enable us to be EU MDR compliant in 2022. Lastly, we are particularly proud of our execution on our fifth strategic pillar; to help train the next generation of pediatric orthopedic surgeons. In 2021, we continued our leading support of the major pediatric surgical societies and carried out more than 300 training events for healthcare professionals. Our commitment to noncommercial clinical education keeps us true to our cause and signals our dedication to advancing the entire field of pediatric orthopedics. In summary, we believe our business is beginning to see fundamental improvements. While Delta and Omicron deferred elective procedures, it's important to point out that these headwinds are temporary and that cases do not go away. The reality is untreated deformities simply become more severe as they progress. These deferrals will be a tailwind for domestic sales through the third quarter and at least 18 months internationally. Meanwhile, we continue to increase surgeon conversions, acceptance of our new systems remains strong, the potential for ApiFix and Orthex have never been better and there remains an absence of focused competition in the pediatric orthopedic space. With that said, I'll turn the call over to Fred to provide more detail on our financial results.

Thanks, Dave. Our fourth quarter 2021 worldwide revenue of $24.8 million increased 31.1% when compared to the fourth quarter of 2020. Growth in the quarter was driven primarily by strong performance within the Trauma and Deformity segment, offset by the unfavorable Omicron impact on elective procedures in December. For the full year of 2021, our worldwide revenue of $98.0 million increased 37.9% when compared to 2020. Growth in the year was primarily driven by strong international recovery as well as the continued impact of new products and new users. In the fourth quarter of 2021, U.S. revenue was $19.9 million, an 11.2% increase from the fourth quarter of 2020. The growth in the quarter was primarily driven by our nonelective trauma business. U.S. revenue for the full year of 2021 was $77.8 million, representing an increase of 23.5% when compared to 2020. Growth in the year was driven primarily by continued growth of our nonelective trauma business, Response scoliosis product benefiting by the halo effect from ApiFix, additional ApiFix surgeons, ex-Fix users, growth across our legacy product lines as well as Telos growth. International revenue for the fourth quarter was $5.0 million compared to $1.1 million in the fourth quarter of 2020. As Dave mentioned earlier, growth was impacted due to the Germany, Austria and Switzerland converting to an agency sales model which resulted in a $2.7 million sales return in December of 2020. International revenue for the full year of 2021 was $20.3 million compared to $8.1 million in 2020. From a geographical basis, growth was driven primarily by strong sales in EMEA, benefiting from our agency conversion as well as South America. In the fourth quarter, trauma and deformity revenues of $16.5 million increased 46.5% compared to the prior year period. Growth was driven primarily by the high rate of surgeon adoption of our PNP Femur system as well as our new Cannulated Screw system. Full year of 2021, Trauma and Deformity revenue was $65.8 million, representing an increase of 38.1% when compared to 2020. Growth in the year was driven primarily by continued growth of our nonelective trauma business, driven by PNP Femur, cannulated screws as well as ex-Fix users and growth across our legacy product lines. These growth rates were also impacted by the previously mentioned $2.7 million sales return in the fourth quarter of 2020. In the fourth quarter of 2021, Scoliosis revenue of $7.2 million increased 8.1% compared to the prior year period. Growth was primarily driven by our response system and the onboarding of new users. Full year 2021 Scoliosis revenue was $28.0 million, representing an increase of 35.2% when compared to 2020. Growth in the year was primarily driven by response product line benefiting by the halo effect from ApiFix, additional ApiFix surgeons as well as Firefly growth. Finally, Sports Medicine/Other revenue in the fourth quarter of 2021 was $1.1 million, representing 10.3% growth over the prior year period. Full year 2021 Sports Medicine/Other revenue was $4.2 million, representing an increase of 56.7% when compared to 2020. Growth in the fourth quarter and full year was driven primarily by strong Telos performance. Turning to set deployment. In the fourth quarter, we continued to execute our strategy of set deployment. Specifically, $2.4 million of sets were consigned in quarter four of 2021 compared to $5.1 million in the fourth quarter of 2020. We did have a few late deliveries which pushed deployment out of the fourth quarter of 2021 and into the first quarter of 2022. For the full year of 2021, $14 million of sets were consigned compared to $18 million deployed in 2020. The slight year-over-year decrease is primarily driven by additional sets deployed in 2020 despite flat revenue growth, plus better capital efficiency of the ApiFix and ex-fix product line growth. The demand for more sets continued, both domestically as well as in the 14 agency countries outside of the U.S. and provides opportunity for us to fulfill more of that demand in 2022 and beyond. Touching briefly on a few key metrics. For the fourth quarter of 2021, gross profit margin was 72.9% compared to 79.9% in the fourth quarter of 2020. For the full year of 2021, gross profit margin was 74.9% compared to 77.4% in 2020. Both fourth quarter and total year 2021 gross profit margin was unfavorably impacted by a $500,000 penalty for purchase minimums not being achieved due to COVID and not getting any relief from a third-party provider. Aside from that unusual impact, higher international revenue as a portion of total revenue also impacted the margin rate. Total operating expenses declined $4.2 million or 15.1% from $27.9 million in the fourth quarter of 2020 to $23.6 million in the fourth quarter of 2021. The decline in operating expenses was driven by the fourth quarter of 2020 unusual $6.3 million accrual related to multiple legal settlements, partially offset by an increase in employee-related expenses and commissions. Full year of 2021 operating expenses of $91.4 million increased 11.8% versus $81.8 million for the full year of 2020. Fair value adjustment of contingent considerations benefited the P&L by $5.5 million in the fourth quarter of 2021 compared to a charge of $1.7 million in the fourth quarter of 2020. This impact was generated from an updated Monte Carlo simulation from our third-party valuation firm. Full year 2021 impact benefited the P&L by $1.8 million compared to the full year 2020 charge of $3.5 million. We reported an adjusted EBITDA loss of $0.6 million in the fourth quarter of 2021 compared to a loss of $2.6 million for the fourth quarter of 2020. For the full year of 2021, we reported an adjusted EBITDA loss of $0.2 million compared to a loss of $5.9 million for the full year of 2020. The improvement in adjusted EBITDA was driven by higher revenue combined with expense management and would have been better without the unfavorable impact of Delta and Omicron in the second half of 2021. We ended the fourth quarter with $54.9 million in cash and restricted cash and we continue to have $25 million available on our line of credit. I also feel it is important to mention that the acquisition payable as well as the contingent consideration shown on our balance sheet only requires a minority portion to be paid out in cash and the remaining majority portion will be paid out in equity. Finally, turning to our outlook for 2022. We are entering 2022 with several fundamental tailwinds, including an increasing active surgeon base, a growing backlog of deferred procedures and expanded product portfolio, the addition of key strategic partnerships and pending international approvals. However, we remain cognizant of the unique external operating environment due to COVID-19 and its impact on elective procedures as well as the healthcare staffing levels. Our 2022 outlook is highly sensitive to the assumptions on a steady global recovery which anticipates case scheduling and elective procedure levels normalizing throughout the year. For 2022, we expect annual revenue to range between $118 million to $121 million, representing year-over-year annual growth between 20% and 23%. The guidance assumes first quarter of 2022 revenue growth in the mid-single digits when compared to the first quarter of 2021 due to Omicron headwinds. Lastly, we plan to deploy between $24 million and $26 million of new sets in 2022, representing year-over-year annual growth between 80% and 90%. This increase is driven by pent-up demand for new product introduction systems, legacy systems as well as consignment of 70 intraoperative navigation systems. In addition, we expect to generate several million dollars of adjusted EBITDA for the full year of 2022, crossing a major milestone for our business. At this point, I'll turn the call back to Dave for closing comments.

Thanks, Fred. I'd like to reiterate our optimism for the future. During the last two years, through uncertain times, we have doubled down on our commitment to pediatric healthcare. And while case volumes have been negatively affected, our company is stronger than ever. In addition to the list of accomplishments mentioned previously, we've organized ourselves internally to move with even greater velocity in product development and have successfully positioned the company to comply with ever increasing international regulatory demand. Given this strong foundation, we entered 2022 knowing the unshakable truths that there are now more children who need our products and we have more surgeons using more of our products than ever before. We are a company on the move, striving every day to help more and more children with orthopedic conditions. With that, I'd like to turn the call back over to the operator to open the line for questions.

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

Good morning. Thank you for taking my questions. Fred, can we start with what you just mentioned about Q1 and what it means for the rest of the year? So mid-single digit year-over-year growth in Q1 suggests around 26% growth for the last three quarters of the year. Considering we’re facing a somewhat challenging environment, what gives you confidence in achieving those numbers, especially since I don't believe the sets will significantly impact us until later this year? Where do you anticipate that major increase in the last three quarters will originate from?

Yes. No, yes, it absolutely correct. The first quarter in that single to high mid-single to high-digit revenue growth year-over-year which we're pretty pleased with, given the negative headwind with Omicron which obviously was not here in the first quarter of last year. And then, the second half of '22, we have the easier comps, right? So the third quarter and the fourth quarter of '21 was negatively impacted by Delta and Omicron. So you are correct that the second half growth rate is going to be higher than given that first quarter is going to be pretty soft.

Okay. I have a couple of questions. First, what do you expect the contribution from EpiFix to be this year? Is it mainly a 2023 event because you're still gathering patient information to ensure optimal outcomes? Secondly, regarding the PNP Femur launch, which you mentioned is your biggest one, will it significantly drive overall growth this year, or are there other products that will also contribute to that growth?

We expect ApiFix to significantly contribute to our Scoliosis revenue, likely doubling the number of procedures from 2021 and 2022. We're pleased with the progress of completing the registry, although it has been affected by the pandemic's resurgence. We plan to finish the registry and have successfully added commercial sites in the fourth quarter, a bit ahead of our onboarding timeline. We feel optimistic about ApiFix and its contributions. We consistently observe that accounts starting with ApiFix tend to increase their usage of our entire Scoliosis platform. Whether through direct billings from ApiFix cases or the association of ApiFix with new accounts, we anticipate a substantial impact on our Scoliosis growth, complemented by the 7D technology. Regarding the PNP Femur, we're still in the early stages of its launch, with limited deployment outside the U.S. Despite that, it has become our largest product domestically, demonstrating our market share growth in trauma and limb deformities. We are seeing increasing deployments and believe PNP Femur, along with Orthex, is creating a positive ripple effect across our entire trauma and limb deformity portfolio. The key growth drivers are PNP Femur, Orthex, and our established ex-fix products like Cannulated Screw and PediFoot, alongside the legacy products. For Scoliosis, we expect significant contributions from ApiFix technology and 7D, including related billings and the overall pull-through of our Scoliosis franchise. This is our perspective on the situation.

Yes. I would just add, Dave, in your earlier comments, in 2021, almost every single one of our product lines, our 37 product lines grew by double digits. And so that's one of the strengths we see in the business is we're not dependent on any sort of single product line and we would expect every single product line to continue to grow in '22 and beyond as well.

Got it. Thanks so much.

Thanks, Matt.

Our next question comes from Rick Wise with Stifel. Your line is open.

Hi, good morning, everyone. It's great to see a strong finish despite the challenges. I want to start by discussing set deployment. I'm really impressed by that figure, Fred, $24 million to $26 million. That's a significant number, and I understand there may be some pent-up demand. Could you elaborate on where those sets are being sent? It seems to me that the implications of all those sets, along with the expanding pipeline and recovery, as we begin to think about 2023, are noteworthy. I know you're eager to provide guidance for 2023, but could you help us understand what that might mean for our outlook? Certainly, under normal circumstances, it sets the stage dramatically for 2023.

No, you're absolutely right. A couple of things driving that, right? The first is we're a much bigger business today than we were two or three years ago. And as the business continues to grow and we want to maintain that high growth rate, more sets are needed to deliver that growth rate. And so you're absolutely right, the sets deployed this year is really setting the stage for '23 and beyond. So that's the first comment. The second is that the 70% is new to this category. So right now, I'm viewing if we can sign a unit into a hospital that would show up in our deployed set number because to me, it's just another investment that we're making in the hospital to drive future revenue growth. And so, there is a small impact, a couple of million dollars probably impact from that which was not there previously. But listen, we continue to be encouraged by the long list of demands for sets, both domestically as well as outside of the U.S. which will generate revenue in '22 but more importantly, to your point, out into '23 as well.

Rick, this is Dave. You always ask about the progress of key account conversion. It seems like we discuss this every quarter. Without getting into specifics, I can say that our confidence in this progress is evident in the new capital we intend to invest in those markets. The number of active users of our products and how we track those metrics give Fred and me a lot of confidence that if we deploy these assets, they will be utilized. There is significant demand in the field right now for additional inventory based on those factors.

I'm looking for some clarification on the OUS sales returns. You reported $5 million in sales for the quarter, with $2.5 million in returns. If those returns hadn't occurred, what would the normalized number have been? I'm trying to gauge the level of recovery we're seeing on a normalized basis. I realize it's not a straightforward figure, but I'm interested in how we should view the outlook for this year, 2022.

Yes, yes. So the $2.7 million negative sales was in the fourth quarter of 2020 and when we converted DACH to our agency. And so yes, in looking at the fourth quarter of 2021, roughly $5 million of revenue, the growth rate obviously was impacted by that. But for the full year of '21, those revenues does not include the $2.7 million returns. So it's a more normalized basis that we're looking off of for 2022.

Got you. And just to clarify some of your comments regarding profit and loss, gross margins have been around 74 to 75 percent. How should we anticipate changes in 2022 along with the factors involved? The same question applies to operating expenses, considering your remarks about supply chain issues and inflation.

Thank you, Rick. So yes, we are seeing a little bit of inflation in pockets. We don't think that's going to impact gross margin. We anticipate offsetting that with some small slight price increases. So that would be neutral on the gross margin rate. The thing that may put some pressure on the gross margin rate is we're hoping that we start selling some more sets outside of the U.S. We saw some of that in the second half of '21, really none of it in 2020 or the first half of '21. So as set sales continue which we did see in the second half, that puts a little pressure on the margin. We think those sets are needed outside of the U.S. to start fulfilling some of this pent-up demand outside of the U.S. So that will definitely put a little pressure on the gross margin rate in '22 compared to unusually strong gross margin in 2020 when we were not selling those sets. But with that being said, we think that 75% for the combined business is probably where we will be operating here in '22 and probably beyond for the next couple of years.

Thank you.

Our next question comes from Samuel Brodovsky with Truist. Your line is open.

Thank you for taking the questions. To start, could you provide more detail on the backlog? Where should we expect that to come in, in terms of business line, and how confident are you in seeing that fully return this year based on your previous experiences?

Go ahead, Fred.

Our Trauma business continues to perform very well and is experiencing growth. The areas most affected are deformity correction and scoliosis, which have seen softer performance in the latter half of 2021 and the beginning of 2022. We expect pent-up elective surgeries to begin making a comeback starting in March and continuing into the second and third quarters. Historically, these recoveries have been quick, but we anticipate a longer time frame this time due to staffing shortages in hospitals. Internationally, the situation varies by country. Notably, in the U.K. and South America, there is significant pent-up demand that may take up to 18 months to resolve. Domestically, we estimate a backlog of approximately $2.5 million, which we expect to benefit from in the second and third quarters, aiming to address it by the end of the third quarter. For international markets, we foresee the backlog extending throughout 2022 and into 2023 before it is fully resolved.

And maybe just put a finer point on that, that 2.5%, is that fairly even the mix between deformity and scoliosis lines or is there maybe more than one direction?

No, I would say it's pretty evenly mixed between those two product lines.

Yes. What's important here, Sam, is that these are progressive conditions, particularly regarding elective scoliosis and limb deformity. One could argue that limb deformity correction, like our Orthex business, is most affected because those are our most elective procedures. While none of these are elective, they can be delayed. The fact is, these conditions are progressive, and these procedures will need to occur. We believe that hospitals will ultimately prioritize these complex elective procedures. While this situation is unfortunate for children, it certainly provides us with a tailwind as we approach the second and third quarters.

Great. And then just shifting towards the international launch of Orthex. I mean, how should we think about the pace of the rollout there? And how can that contribute to growth in the market mean pretty sizable opportunity there, I think?

We believe the rollout of Orthex and PNP will play a significant role in our story as international markets normalize, particularly regarding purchasing patterns. In most regions where we have stocking distributors, PNP and Orthex products have not yet been added. For instance, in Brazil, we have several new products awaiting approval that we anticipate will be authorized in the first half of the year, contributing to growth as our distributors adapt to more typical purchasing habits. We have prioritized the launch of Orthex and PNP in markets where we have agencies, and we’ve seen notable success in Australia and Canada, while starting to gain traction in the DACH region with new users in Germany, Austria, and Switzerland. Although it’s still early, if we see a similar response outside the U.S. as we have in the U.S., this could significantly boost our growth.

Great. Thanks for taking the questions.

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

Hey Dave, Fred. Thanks for taking the questions. Just want to follow up on ApiFix a little bit, if I could. I'd love, Dave, if you could just kind of talk about some of the scaling up of the commercial sites and kind of how to think about that in conjunction with the registry that's ongoing and just kind of the benefit that, that can drive in parallel to the registry?

Thank you, Ryan. We are being cautious with our commercial sites and ensuring we review the X-rays and verify the patient. We believe the long-term value of the technology is too significant to risk poor data due to a loss of control. There is a lot of interest. I think we have around 10 commercial sites that are either trained or capable of scheduling ApiFix cases. We anticipate adding a few more each quarter for the rest of the year. We're prioritizing sites based on their interest in ApiFix, their commitment to performing more surgeries, and their enthusiasm for our other products. This will help create a positive impact. We plan to complete the remaining part of the registry, which will significantly boost revenue this year. By Q3 or Q4, it would be reasonable to expect that more surgeries will be performed at our commercial sites compared to our registry sites.

Okay. That's very helpful, Dave. And then I think I heard you or it might have been Fred. You added 19 sales professionals in the quarter or the year. I think either way, you're kind of landing around that 190 or so number if I'm not mistaken and correct me if I'm wrong but just help us understand where that could be going over time based on certainly the set deployment numbers as maybe an indicator for where sales professionals as part of the agencies can go over time?

Yes, thanks, Ryan. Fred and I were quite pleased to see our sales team aggressively add new personnel during what was a challenging and uncertain year. The additions in the latter half of the year, along with the demand from our sales team for more resources, gives us a lot of confidence as we head into 2022. We've mentioned before that the number of sales professionals added each quarter isn't something we overly worry about. Generally, we expect this number to rise as our revenue grows. However, for higher average selling price products like ApiFix and Orthex, there may be a slight lag in growth due to the efficiency we drive within the sales team. In discussions with our agencies in the U.S. and abroad, I see a willingness to invest, and they are encouraging us to invest as well, particularly in their sales forces. So far, this approach has been effective, and we're delighted to see such growth in a challenging environment in 2021.

Thank you.

Thanks, Ryan.

Our next question comes from Mike Matson with Needham & Company. Your line is open.

Yes, good morning. Thanks for taking my questions. I wanted to ask about the consignment of the 70 navigation systems. Is the intention there the systems are there to do demos and things like that, they would eventually be sold or are these essentially like your other instruments, where they're just going to be loaned out to customers that are using your products? And in other words, are these something that are going to generate revenue for OrthoPediatrics or is it more of a tool to kind of capture market share?

Yes, great question. Capital equipment is new to us. So we're just getting our feet wet. But we think that about 80% of these units will be consigned to the hospital with earn-out agreements. So incremental market share will come for us consigning those units there and the other 20% will actually be capital equipment sales that will show up as incremental one-time sales into those hospitals. So we really prefer the consignment model because they benefit, we can deploy some capital and we can lock up some market share.

Okay. From the $24 million to $26 million for new sets, if you remove the nav systems, what is the figure for just the instrument sets, if you’re able to share that?

Yes. Yes. I think there's probably rounding a couple of million dollars in those numbers that would be associated with the 70 consignment.

Okay. All right. That's lower than I would have guessed but okay. And another question I had was just given the ZimVie spin-off that just occurred, they had an Investor Day and they were talking up the Tether product quite a bit. So just curious what your thoughts are on that? And if you expect to see any kind of changes competitively now that it's a separate company?

Yes. We do not anticipate any competitive changes. The feedback we’ve received regarding Tether, especially from surgeons, has only reinforced our commitment to collecting data transparently and honestly. Our goal is to present that data to our customers so they can determine which product is the safest and most effective for young children. This is why we consistently emphasize the importance of gathering quality data from patients who meet our inclusion criteria. I believe that by doing this, we are taking the right approach, and this customer base is very academic; they will appreciate our efforts, which will ultimately be crucial for the long-term adoption of this technology.

Okay, great. Got it. Thanks.

Thanks, Mike.

Our next question comes from Dave Turkaly with JMP Securities. Your line is open.

Hey, good morning guys. You mentioned new DACH onboarding in the scoli side and I was wondering if you might be able to give us a little color about how many of these guys are new that you're adding either in '21 and anything we should expect for '22? And is it the new product that's driving these new surgeons to onboard?

We haven't released specific numbers, but I can say that at the beginning of the year, we aimed to onboard key products like Orthex and response. This goal was known to our selling organization and its leaders, and we either met or surpassed our onboarding target in 2021. This onboarding was spread throughout the year, not concentrated in one quarter. It gives us an idea of what we can achieve in 2022 based on the influx of new users, combined with our goal for new user onboarding. Primarily, we are seeing increased adoption of the scoliosis side of the response system, but overall, there is a continued adoption of our company. We are heavily investing in pediatric orthopedics and healthcare. Our focus isn't only on new product development; we are also committed to education and R&D, which are critical aspects that set us apart from other companies. This is creating momentum around our entire product portfolio. With technologies like 70, ApiFix, PNP, and Orthex enhancing our technology profile and contributing to the appeal, these factors are driving adoption of our scoliosis franchise and trauma products. It’s really a combination of all these elements.

Got it. And appreciate the color on the guidance, the large backlog you see and the comments you made about the comps. As we look at the back half of the year from a cadence standpoint, do you think '22 is the year where you might actually be up sequentially as we come out of COVID in the back half versus some of that seasonality sometimes you see in the third quarter?

Yes. I would say that we still expect our third quarter to be the strongest quarter of the year. It has been historically prior to COVID and we're hoping that we can get this thing behind us and move on to more of a normalized schedule. So strong third quarter and fourth quarter, maybe down just a little bit as it has been traditionally. But obviously, the growth rate is going to be very strong given the weakness in '21.

I would say the only thing that could potentially disrupt that would be how fast we can get back to, not just a normalized environment but capture backlog. And to me, that's still a staffing-related issue. And that's why we are pretty confident this is going to create a tailwind for a number of quarters here, not just a couple of months where we capture what essentially is a backlog that started in Q3, expanded in Q4 and expanded further in January and February of this year.

Got it. Maybe one last quick one here. You may have said this, the $5.5 million fair value adjustment that was specifically from what? And should we think of that as sort of your accrued liability that was bigger than you now assume you're going to have to pay?

Yes. The ApiFix system is related to the year four system sales payment for the full year of 2021, which positively impacted the P&L by $2 million. I expect that to translate into a charge of about $5 million in 2022. This will result in a significant shift in the P&L, all connected to the ApiFix and the updates to the Monte Carlo model and its underlying assumptions.

Thanks a lot.

Thank you.

There are no further questions at this time. I'd like to turn the call back over to David Bailey for any closing remarks.

Great. Thanks, operator. We appreciate all of your time. Thank you for the good questions. And we look forward to talking to each one of you over the course of the next several months. Thank you.

Thank you. This concludes the program. You may now disconnect. Everyone, have a great day.