Orthopediatrics Corp Q2 FY2023 Earnings Call

Good morning, and welcome to OrthoPediatrics Corporation's Second Quarter 2023 Earnings Conference Call. At this time all participants are in listen-only mode. We will 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 Trip Taylor from the Gilmartin Group for a few introductory comments. Please go ahead.

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, I encourage you to review the company's most recent quarterly report on Form 10-Q, which will be filed with the SEC today. 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 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 measure to the most directly comparable GAAP financial measure 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 substitute for other OrthoPediatrics' financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, today, August 1, 2023. 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, Trip. Good morning everyone and thank you for joining us on our second quarter 2023 conference call. As we start all earnings calls, I’d like to begin by highlighting that we helped a record 21,000 children in the second quarter of 2023, and since inception, we have now helped over 670,000 kids. Helping more children remains the best measure of our success. In the second quarter of 2023, we generated record high revenue of $39.6 million, representing growth of 20%, compared to the second quarter of 2022. Despite a challenging operating environment within children's hospitals, we continued growing our business by taking market share and are encouraged by the momentum we generated in the first half of the year. We are proud to have again generated growth of 20% against the strongest comparable period of the year while deploying $9.2 million of sets. Altogether we are positioned favorably for the second half of the year. As expected, we are experiencing a gradual month-by-month improvement in the inpatient surgical environment where nearly all of our procedures are performed. As you may have read, many insurance companies have reported increased overall volumes, but lower inpatient procedures. Our observations are consistent with this recent commentary and we continue to feel the impacts of lower than historical average volumes in the children's hospital environment. Nevertheless, execution of our historically successful strategy is leading to consistent quarter-over-quarter share gains and is producing sustainable growth regardless of market conditions. Therefore, we are reiterating our revenue guidance of $148 million to $151 million, representing growth of 21% to 23%. Moving to our revenue segments, in the second quarter of 2023, we generated total Trauma and Deformity revenue of $27.5 million, representing growth of 22% compared to the prior year period. Revenue growth in the quarter was led by strong performances in Deformity Correction and Pega products. The quarter saw a record ApiFix performance from our external fixation portfolio driven by Orthex the recently launched pre-planning software and the new driver Assist. PediFoot, DFOS plating system and PediPlate, a system we first launched in 2008, all were particularly strong in the quarter. Although the trauma franchise grew slightly slower than it has in the last few quarters, PNP/femur and cannulated screws continued their dynamic growth trends. Additionally, Pega product sales have been better than we ever expected, nearly doubling in the U.S., and we are just now seeing the early returns of additional deployed inventory. International Pega revenue, while strong, has yet to reach its full potential as we are working through several conversions of stocking distributors to our agencies. We expect this to become a strong tailwind and a solid source of growth in the second half of 2023 and beyond. Overall, strong Pega revenue will continue to benefit the company for the next several years and we are very pleased with how this is trending. Speaking of Pega, in June, we announced the limited launch and first procedure using the GIRO system, developed by the Pega R&D team in Montreal. This unique tethering system utilizes guided growth, providing surgeons a new way to treat limb deformity without the need for osteotomy. This system builds on our legacy of innovation and illustrates another reason why we are so pleased with the Pega acquisition, as it strengthens the OrthoPediatrics' R&D pipeline. Lastly, on the trauma deformity R&D side we are eagerly anticipating the FDA approval and beta launch of our PNP/Tibia system, which will be a first of its kind pediatric rigid tibial nailing system modeled after our market leading and largest trauma product the PNP/Femur. PNP/Tibia will serve as a follow-on to our largest and fastest growing trauma PNP/Femur and we are extremely excited about its growth potential. If we see a successful approval, we are targeting the first case late in the third quarter. Within the T&D business, our non-surgical specialty bracing business continues to perform well, highlighted by the MDO Clubfoot Brace. In the second quarter the non-surgical specialty bracing business launched the Clubfoot Move Bar expanding the MDO portfolio, which has received a very positive customer response. We are eagerly awaiting the launch of several additional products from our team in Ireland, as well as the much-anticipated DF2 femur fracture brace, which recently went through final validation and is launching this month. With respect to MDO, the addition of new products in existing markets and expansion into new markets is bolstering growth. Now slightly more than a year into launch we have validated our thesis that OrthoPediatrics can and will build a large and profitable business in the specialty bracing space. Our customers are presenting us with several unmet needs in the areas that can truly impact care for kids and we are planning to further invest in R&D that can help deliver much needed solutions. Our specialty bracing business represents the most capital-efficient opportunity for growth in our portfolio and reduces the need for continual capital deployment. While we are very early, we see this business growing to in excess of $100 million in the next several years, providing a new and exciting growth opportunity. Moving to the Scoliosis business in the second quarter of 2023, we generated revenue of $10.9 million, representing growth of 16% compared to the prior year period, driven by a continuation of our strategy of promoting the combined strength of ApiFix, RESPONSE and 7D placements. The second quarter started uncharacteristically slow, but dramatically improved into May and the usual summer seasonality started to show up in June, which we expect to carry forward throughout the summer. We also expect that multiple 7D units placed in Q2, along with our strong consignment and sales pipeline to bolster scoliosis growth in the second half of the year. We're pleased to see the value proposition of the combination of ApiFix, 7D and RESPONSE comprehensively addressing surgeon needs and driving market share gains. Again, total users in Q2 increased meaningfully compared to the prior year period, enabling technologies such as additional 7D placements and ongoing FIREFLY usage is driving share gains for our RESPONSE fusion platform and ApiFix non-fusion is helping expose new surgeons to all our scoliosis technology leading to new customer acquisition. ApiFix usage is growing, both in terms of new users and increases among existing users. Our scoliosis growth continues despite an absence of revenue from three of our largest sites as those surgeons have transitioned to new practice locations. We expect this will normalize in the coming quarters. We continue to make progress on the development of ApiFix's non-fusion clinical data, which we believe will lead to increasing KOL support and podium presence. For example, one year data of 148 patients was presented from the podium at POSNA by Dr. Geoff Haft. This showed just five of 148 ApiFix patients went on to fusion and the low device-related re-operation rate of just 6.7%. We're pleased to see these results, especially given that these are the first cases done in the U.S. As we learn more, work through the learning curve and make further advancements on the implant and technique, we expect results will get even better in the coming years. Given the early data, we expect to see several additional publications in the quarters to come. On the R&D front, in Q2 we launched several key products and line extensions, including RESPONSE Power, RESPONSE Power Torque, RESPONSE cannulated screws and RESPONSE de-rotation instrumentation. During the quarter we performed several surgeries with each of these new products and received positive surgeon feedback, especially glowing commentary about our power system. Lastly, we continued progress on our EOS suite of products and achieved major milestones on our EOS guided growth systems during Q2. We expect FDA submission of this key product by year-end. Moving on to international, in the second quarter of 2023, we generated international revenue of $10 million, compared to $8 million the prior year period, delivering 25% growth, primarily driven by strong performance with our legacy products slightly offset by slower MDO growth due to timing of stocking purchases by new MDO distributors that were very high in Q2 of 2022. Agency market sales in Europe were particularly strong, signaling a normalizing surgical environment and progress in our German direct sales model is a bit ahead of schedule. We are pleased with this rebound and expect the strength to continue in the second half of this year. While small at this time, we are at the very beginning of launching our scoliosis business in Europe and expect this to positively impact revenue as early as 2024. Additionally, sales of Pega products are just starting to contribute to revenue growth outside of the U.S., as we begin to transition stocking distributors to our agencies in 14 markets. Once complete, we expect to see very similar results to that of the U.S. and believe this will be a major tailwind to international growth in the second half of 2023 and beyond. Additionally, we've worked toward expanding our international distribution footprint. And I have a few updates to share. This quarter, we signed two new stocking distributor agreements. The first is for distribution of our scoliosis product in Brazil. And the second is an agreement to distribute the broader OrthoPediatrics' portfolio in Peru. These distribution agreements will strengthen our international presence and we expect them to contribute to our growth in the second half of the year and beyond. Lastly, we've received positive audit feedback related to the long process of EU MDR compliance with OrthoPediatrics' products and expect to achieve EU MDR approval in the coming year, thus opening opportunities to launch several new products in Europe in 2024. It is our intention to have the full suite of products compliant in 2024. That brings us to surgeon training and education. To support our goal of helping advance the entire field of pediatric orthopedics, we continue to prioritize outsized support of pediatric orthopedic clinical education and training. This pillar of our strategy is central to who we are as a company, and we believe signals to our customers that we are different than our competitors. Throughout the second quarter, OrthoPediatrics held over 90 events, which included training sessions and educational programs, reaching over 1,200 healthcare professionals. In May, we unveiled our new Emerald sponsorship at POSNA in Nashville, solidifying our position as the leading supporter of the surgical society. The 2023 meeting saw record attendance and the society continues to grow in both membership and prominence in pediatric healthcare. Through our long-term commitment to POSNA, we are providing ongoing support of rigorous training events for surgeons and other healthcare professionals, offering educational grants and scholarships and have founded a women's affinity group to support our combined efforts in diversity, equity, inclusion, and belonging across the sub-specialties. Additionally, we hosted interactive case-based seminars to discuss novel treatment options in adolescent idiopathic scoliosis, utilizing our ApiFix technology and we celebrated our colleague and friend, retired Chief Medical Officer, Dr. Peter Armstrong as he was inducted into the POSNA Hall of Fame. Lastly, before I turn it over to Fred, I'm delighted to welcome Dr. George Dyer to our Board of Directors. He is a renowned orthopedic surgeon at Brigham and Women's Hospital in Boston, as well as being Associate Professor of Orthopedic Surgery at Harvard Medical School. For 10 years, George was the program director of the Harvard Combined Orthopedic Residency program, one of the largest orthopedic residency programs in the country. His deep experience will allow him to contribute to our clinical training program as well as our product portfolio strategy. With that, I'll turn the call over to Fred to provide more detail on our financial results.

Thanks, Dave. Our second quarter 2023 worldwide revenue of $39.6 million increased 20% compared to the second quarter of 2022. Growth in the quarter was driven primarily by continued share gains across our legacy portfolio as well as growth of our non-surgical specialty bracing business. U.S. revenue was $29.6 million, a 19% increase from the second quarter of 2022. Growth in the quarter was delivered across our trauma and deformity product lines, including our non-surgical specialty bracing business and across our scoliosis product lines. We generated total international revenue of $10.0 million, representing growth of 25%, compared to the second quarter of 2022. Growth in the quarter was driven by strong performance within our scoliosis products, as well as our trauma and deformity product lines, including the non-surgical bracing. In the second quarter of 2023 Trauma and Deformity revenue of $27.5 million increased 22% compared to the prior year period. Growth in the quarter was driven primarily by share gains across our entire portfolio, with strong contributions from deformity correction. In the second quarter of 2023, Scoliosis revenue of $10.9 million increased 16% compared to the prior year period. Growth was primarily driven by the combined strength of ApiFix, RESPONSE and 7D. Finally, Sports Medicine/Other revenue in the second quarter of 2023 was $1.2 million, which increased 23%, compared to the prior year period. Turning to set deployment, $9.2 million of sets were consigned in the second quarter of 2023, compared to $3.4 million in the second quarter of 2022. Year-to-date, we have deployed $12.2 million, compared to $7.3 million in the first half of last year. The increase was driven by significant new product development deployments, significant Pega deployments, as well as multiple consigned 7D units. Touching briefly on a few key metrics. For the second quarter of 2023 and 2022 gross profit margin remained constant at 75.9%. Total operating expenses increased $6.9 million or 24% to $35.6 million in the second quarter of 2023. The increase was primarily driven by the addition of incremental personnel-related expenses required to support the ongoing growth of the company, as well as increased sales and marketing expenses, driven by the increase in revenue. Sales and marketing expenses increased $0.7 million or 6% to $13.2 million in the second quarter of 2023. The increase was primarily driven by increased sales commission expenses. General and administrative expenses increased $5.1 million or 35% to $19.7 million in the second quarter of 2023. The increase was driven primarily by an increase in non-cash G&A expenses, including depreciation, amortization, stock-based compensation, as well as some additional personnel-related expenses required to support the ongoing growth of the company. Research and development expenses increased $1.0 million or 60% to $2.8 million in the second quarter of 2023, driven by an acceleration of new product introduction efforts. Total other income was $2.3 million for the second quarter of 2023, compared to $3.0 million for the same period last year. We reported adjusted EBITDA income of $2.3 million in the second quarter of 2023, compared to $2.1 million for the second quarter of 2022. We ended the second quarter with $94.8 million in cash, short-term investments and restricted cash. We continue to maintain a strong cash position, as well as $50 million available to us on our line of credit. Turning to guidance, we are reiterating our expectation for full year 2023 revenue to be in the range of $148 to $151 million, representing year-over-year growth of 21% to 23%. Lastly, we continue to expect around $25 million of new sets deployed in 2023, representing a year-over-year annual growth of 24%. Additionally, we continue to expect to generate between $3 million to $4 million of adjusted EBITDA in 2023. I'll now turn the call back over to Dave for some closing remarks.

Thanks, Fred. I'd like to remind you that OrthoPediatrics has systematically put into place an impressive array of long-term growth drivers that will continue to produce annual growth of 20% or more for years to come. New product launches, second assignments, surgeon education and great technologies such as ORTHEX, ApiFix and 7D are driving surgeon conversions and market share gains. Acquisitions such as MDO and Pega Medical will also continue to grow rapidly. Further, we are building a new non-surgical specialty bracing franchise, while also investing in digital health solutions that create new and exciting growth opportunities for the future, that are profitable and capital-efficient while helping more and more kids on a global basis. In closing, I'd like to thank our surgeon partners and all of my associates for their tireless effort to improve pediatric healthcare around the world. And I'd like to thank you, as shareholders for supporting our cause. Thank you.

The first question comes from Ryan Zimmerman with BTIG. Your line is open.

Hey guys, can you hear me okay?

Yes. Loud and clear. Good morning.

Good morning, Ryan.

Good morning. Good to speak with you guys. So I just wanted to ask a couple of questions, if we could get started here. So just about the environment in the pediatric hospitals, and it sounds like it's improving but I guess I'm curious kind of why it still remains challenging in your view, kind of what they're doing to address it? And kind of what's the expectation is for quote-unquote normalization in the pediatric space?

Yes, good question. So it's still not normal, certainly. And we think that's just due to specialized staffing, particularly in the more complex procedures. We're not seeing the same throughput. And that's pretty consistent with what we've seen now for better part of the year. That said, I think we've kind of moved beyond this in terms of not wanting to dwell on it. I mean we have to continue to execute the things that we do to drive growth and I think in the quarter, we saw a really nice customer acquisition that has really, obviously, produced 20% growth. We offset a lot of some of the volumes that just weren't normal in some of our major accounts. So I think this is improving, Ryan, I think you're seeing it. We're seeing this improve month to month as these children's hospitals are staffing up. Obviously, we're just pointing to the reports that are pretty consistent with what we are seeing that the outpatient environment is very strong, and we do very little of our surgery in the outpatient environment, as you know. And the inpatient environment is a little weaker, and I think when we look at our accounts by account, particularly places where we have really high share we see that very clearly. And now it's just a matter of are we onboarding new customers fast enough to offset that. And as this improves, and again it will, maybe we have a couple more quarters here where this is a gradual improvement. We will be in a better spot, but overall I think we've tried to point it out but not dwell on it and we have to move forward.

Thank you for sharing that. You've introduced a lot of new products that investors have to consider as we look towards the second half of the year and into 2024. A couple of things caught my attention. First, regarding Pega's deployment and market penetration, you mentioned that Pega's revenue has doubled in the U.S., which is promising. How would you assess Pega's current market penetration, and what potential do you see for growth? You’ve also noted that MDO represents a significant long-term opportunity. Do you view Pega in a similar way? Additionally, I'd like to ask about your portfolio. Do you consider the scoliosis portfolio complete with the combination of 7D, ApiFix, and Response? I'm interested in your thoughts on this as well. Thank you for addressing my questions.

Yes, those are great questions, Ryan. The Pega business in the United States has nearly doubled since we acquired it, which I wanted to clarify. We are definitely seeing significant adoption of Pega products. The impact from the U.S. sales organization has been much greater than that from deployed inventory, a lot of which just came in during Q2, so we're not seeing a significant pull-through from that yet. Regarding market share in the U.S., the FD product has a very high share. However, due to limited access to the products, we're observing an expanding user profile, with more procedures being performed with the FD Rod than before when surgeons had difficulty obtaining it. As for the other products, we've mentioned there are six or seven, and six of them have not yet had a presence in the U.S. or international markets. While we appreciate the new product launches, we need to coordinate these with Pega developments, as these new products are also fresh to our sales team and our customers. We are confident that now that we are a year into the Pega integration, we have the potential to grow significantly, with expectations of over 20% yearly growth in the coming years. On the international front, we are undergoing a transformation from relying solely on stocking distributors to transitioning some of those to OrthoPediatrics agencies in these 14 markets, which could lead to a revenue doubling in those areas and allow us to manage inventory more effectively. Our outlook for this is very positive and we anticipate benefits extending beyond just the latter part of this year. We believe the non-surgical specialty bracing segment will present a significant opportunity. We acquired MDO with the purpose of establishing a new growth platform in pediatric orthopedics and non-surgical specialty bracing, and it’s clear there are considerable growth opportunities in that market with minimal competition and good reimbursement, requiring less capital investment. This won't just be a second half of the year phenomenon. By 2024 and 2025, we expect this non-specialty bracing business to accelerate substantially over the next few years. Lastly, I think our scoliosis product line is not yet complete. We are currently working on three different R&D projects focused on early onset scoliosis, which represents about 15% of the scoliosis market not effectively addressed by our current portfolio. These niches are complex and involve challenging surgeries with leading opinion leaders in top institutions. We expect to see our pelvic rhythm system and the guided growth system yielding substantial penetration in this market segment. Much like with ApiFix and 7D, we anticipate these developments will help us reach more major institutions that are only somewhat engaged with our products currently.

Got it. And thanks for taking the questions. It was very helpful.

You bet.

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

Good morning, and thanks for taking my question. So Dave or Fred, can you just drill down a little bit more on the domestic business in the quarter? It was a little bit softer than Q1. I know you still got some headwinds. How meaningful are those headwinds? Can you quantify it at all? I know you said deformity was a little bit softer than you expected. Or maybe just talk about how things built throughout the quarter, and then can you delineate the share gains that you're seeing underlying some of these headwinds that you're facing? Are things coming back to kind of pre-pandemic levels which I can't imagine they won't, or pre-RSV levels, how big a tailwind could that be given the share gains that you're taking?

Yes, that's a great question. Thanks, Matt. We've been in this industry for a while, and a sign that the market isn't always behaving rationally was evident in Q2. We really struggled with growth in April, which we highlighted during the call. However, we experienced a significant rebound in May, which was quite strong. Clearly, our customers didn't abandon us in April; they returned in May, and we noticed a transition into June that reflected typical seasonal patterns, continuing into a fairly standard summer. The monthly results have been inconsistent, more so than what we observed before the pandemic. This inconsistency gives both Fred and me some reason to hesitate. While we are pleased with the market share gains, the presence of an unusual month in a quarter makes us cautious about being overly optimistic and setting aggressive guidance, as that doesn't feel normal. Looking ahead to the next few quarters, especially in 2024, we expect things to start to even out. June was encouraging, and the seasonal trends in our business were positive. We had some concerns about whether June would meet our expectations due to staffing challenges, and while it didn’t hit record throughput, it was still substantial, leading to a successful summer for us. We haven't fully factored in what will happen as we return to normal conditions, but more customers using more products in an improving market bodes well for us. While we aren't certain there will be explosive growth in Q3 and Q4, the trend remains toward the 20% growth we've consistently achieved over the years.

Got it. I appreciate that. And then as far as the bracing business, you mentioned a $100 million business eventually. It sounds like more like ‘25 that's really going to start to ramp up significantly. But can you just talk about the investment needed, how you build that business to $100 million and how you do that alongside the rest of the company that's growing nicely as well? Thanks.

We see a lot of potential in R&D. We recognized this before acquiring MDO, but once our customers observed the acquisition and the growth stemming from our collaboration with MDO, it reinforced our confidence in the decision. The introduction of Move Bar has already shown positive growth, and we have DF2 coming up. DF2 has been highlighted in significant KOL papers at POSNA for the past two years, creating considerable excitement around these product lines, especially given the limited competition. With significant investment in R&D, which is relatively low-cost to develop due to less rigorous regulatory requirements compared to our implants, along with some investment in our sales organization, we believe we can grow this business rapidly. We expect it to contribute to our growth in 2024, and it could play a key role in maintaining our 20% growth trend. It is likely to become even more significant in 2025 and 2026. This area of growth has not been discussed much, but we believe it will give investors confidence as we pursue additional growth opportunities alongside our surgical endeavors, which are also driving strong revenue growth and profit without needing consigned inventory, thus conserving cash.

Got it. Thank you.

Please stand by for our next question. The next question comes from David Saxon with Needham and Company. Your line is open.

Yes. Good morning guys, and thanks for taking my questions. I guess first I wanted to ask on ApiFix. I know there's a competitive product launching. So are you seeing any impact around the ApiFix docs trialing that new product? I know you called out new and existing user growth, but just would love to hear kind of what you're seeing from a competitive perspective. And also, just any update on ApiFix and kind of just the expectations for the year?

Yes. We haven't yet heard about anyone using the product in the U.S., although I'm sure it's a good product and is being used elsewhere. It has been around for several years internationally. Our view on non-fusion surgery is that as more competitors enter the tethering market, it increases awareness among patients and surgeons that non-fusion surgery for pediatric scoliosis is here to stay and will continue to expand. We see the market as still developing, so new players will emerge. No one can directly compete with our approach on the posterior side since our procedure is easier. When we compare early one-year results with the usability of this product, we find that this is what encourages surgeons to adopt the technology. We've added several new users, and numerous sites are applying for their first IRB to start using this product commercially. We expect this product to grow as the market expands and more competitors enter, particularly on the anterior side, which likely benefits us by increasing awareness. We stand by our forecast that this business will approximately double this year and likely do so again next year. We are pleased with the results we are seeing.

Okay, got it. That's helpful. And then just on OpEx, it was, I think, mid-20%s in the first half versus last year. It looks like a lot of that's R&D behind some new product launches and G&A. So like does that continue or can we see some more leverage in the model as we go into the back half?

Yes. We'll see some more leverage in the back half of the year. It's really volume-dependent, right? As the volume increases significantly, second quarter to first quarter, we get some nice leverage. Dave mentioned earlier the lack of consignment on the non-bracing side. Those products are all sold basically through our e-commerce website. So we're not paying a commission on those bracing products, which gives us nice leverage on the sales and marketing side. R&D, we will continue to invest in that pretty heavily. And then on the G&A side, it's really the stock comp depreciation and amortization that's driving that. We are getting leverage on the cash side of G&A. So yes, we should see some leverage continue in the second half of the year and really into next year as we have different growth drivers, I guess, improving the topline.

Okay, got it. And then just a quick follow-on question, what was the inorganic contribution in the quarter?

So the only impact is Pega. So Pega was purchased July 1 of last year, and that was about a $6 million run rate business, so $1.5 million pre-acquisition.

Please stand by for the next question. The next question comes from Dave Turkaly with JMP. Your line is open.

Great. Good morning. Can you hear me?

Yes. Hey, there.

Great. Just to clarify upfront, I'm assuming that the month-to-month comment is typical for Q2. It sounds like things started slow but improved significantly. Is this the usual pattern for you in Q2, or is it not typical in terms of progression?

Yes. Yes, Dave let me clarify. It is typical to see that ramp. I guess what we saw is growth rates. The comparables were not normal, at least as it pertains to April. Normally, we see this nice smooth ramp into June, and then obviously, June, July, August, those are big months in terms of volume. But as we just look at what April did versus what April did prior year, and frankly what April does prior years in the past, we're still seeing that sharp. That was what I was trying to point out. It's not that there wasn't a steady ramp into the year that was normal. It was just that what we saw in the month was pretty inconsistent with what we historically see in terms of kind of the growth rates that we would see over prior year. And then we saw almost complete reversal of that in May where revenues shot up and carried us into the summer. Does that makes sense?

Thank you for that. As a quick follow-up, you mentioned enabling technologies, FIREFLY and 7D driving some responses. I would like your thoughts on how your doctors are adopting these technologies. Are they more open to it, or are they taking a conservative approach that is causing a delay? Any insights you could provide on the rollout of that initiative would be appreciated. Thank you.

There is a significant interest among pediatric orthopedic surgeons, especially in relation to scoliosis and spinal care, regarding enabling technologies. We believe there is a substantial opportunity in the Trauma & Limb Deformity area, which is why we are enthusiastic about our partnership with SeaSpine, 7D, and Orthofix. The demand for navigation systems with very low radiation for pediatric patients is exceptionally high. Historically, navigation platforms have used high radiation levels which are harmful to pediatric patients, but now we have a solution that minimizes this exposure and eliminates the need for operating room teams to wear lead during lengthy surgeries. Feedback from surgeons and healthcare providers about the enabling technologies, particularly 7D, is very positive. However, we were somewhat surprised by our inexperience in the capital equipment sales sector. This domain is new for us, and we had a naive perspective on how hospitals would handle the purchase or consignment contracts for these units. Over the past year, we have worked diligently to explore various options, and we're beginning to see progress, particularly in Q2. We expect this trend to continue over the next year to 18 months, with many units starting to be contracted on a consignment basis. We also anticipate some sales, though while they may not occur in Q3, we expect capital sales in Q4. Overall, we are pleased with the progress, though it seems there has been a delay not in surgeon adoption but in hospital acceptance and implementation of the product.

Yes, thank you for that.

Please stand by for the next question. The next question comes from Sam Brodovsky with Truist Securities. Your line is open.

Hey, thanks for taking the questions and congrats on a good quarter. The first one, just to put a finer point on it. Were May and June sort of back to the normal inpatient census level that you're expecting or are still a little bit of room to go there, and just relating that to guidance. The second half still assumes that environment is going to be choppy in terms of patient volume, right?

In May and June, the inpatient environment was still not completely normal. When we consider the accounts where we have nearly full market share, especially in elective limb deformity and scoliosis procedures, it's fairly straightforward to assess that based on volume and revenue generated. We have observed significant activity in our major accounts, especially those that are part of our fixed and scoliosis fusion accounts. Some of these accounts performed far below our expectations compared to the previous year. However, we didn't lose market share in those accounts. While things are improving, they are not yet back to normal. May and June showed some progress, but April was quite unusual for us. We're not suggesting that everything is fully back on track yet, although it has improved. We don't anticipate reaching full operational capacity as we would expect in the upcoming quarters.

Got it. Thanks. That's helpful. And then just one on the international Scoliosis. Can you help us think about how big of an impact that could be, how much scale do you think you can have in '24 in international markets with Scoliosis. And should we think about sort of the whole portfolio being launching internationally including ApiFix or is that more just starting with some of the core products and then going from there? Thanks.

Yes. Currently, we do not sell any Scoliosis products in Europe, but we do have a solid business in Scoliosis in Australia and Latin America. The reason we haven't launched Scoliosis products in Europe is primarily due to the EU MDR approvals and uncertainties regarding which products will be approved and when. There are several products that are well accepted in the U.S. that are not available in Europe due to pending EU MDR approval. We don't have a specific timeline for when we expect our full portfolio to be approved in 2024, but once it is, it will serve as a growth driver for us, especially into 2025 and 2026, when we plan to introduce new products in our largest markets outside the U.S., with Scoliosis being one of them. While the impact of Scoliosis on our overall business next year may not be significant, it will still contribute to the growth rate, even if it amounts to just a few million dollars. Regarding ApiFix, since the acquisition, we've paused some procedures outside the U.S. that were allowed under the previous leadership to collect and ensure quality data. We are in the process of relaunching ApiFix as part of our Scoliosis strategy, anticipating that this will similarly attract customers to our broader product portfolio. We aim for these dynamics to replicate in major European markets, with the understanding that while the impact won't be large in 2024, it will positively affect the growth rate.

All right. Thanks for taking the questions.

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