Orthofix Medical Inc. Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Orthofix Fourth Quarter 2020 Earnings Call. At this time, all participation lines are in listen-only mode. After the speakers' presentations there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Ms. Alexa Huerta, Senior Director of Investor Relations. Thank you. Please go ahead.

Thank you, operator and good morning everyone. Welcome to the Orthofix fourth quarter and full year 2020 earnings call. Joining me on the call today are our President and Chief Executive Officer, Jon Serbousek and Chief Financial Officer, Doug Rice. I'll start with the Safe Harbor statement and then pass it over to John. During this call, we will be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical facts are forward-looking statements, including any earnings guidance we provide and any statements about our plans, beliefs, strategies, expectations, goals or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements, as there is no assurance that the matters contained in such statements will occur. The forward-looking statements we will make on today's call are based on our beliefs and expectations as of today, February 26, 2021. We do not undertake any obligation to revise or update such forward-looking statements. Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risk factors disclosed under the heading Risk Factors and our Form 10-K for the year ended December 31, 2020 and filed this morning as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at Orthofix in Lewisville, Texas. In addition, on today's call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to the financial measures determined in accordance with U.S. GAAP. Please refer to today's press release announcing our fourth quarter and full year 2020 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results. At this point, I will turn the call over to Jon.

Thank you, Alexa. Welcome everyone and thank you for joining our fourth quarter and full year 2020 results conference call. On today's call, I'll provide an update on our fourth quarter performance. I will then review the progress we have made within each of our strategic initiatives throughout the year before handing the call over to Doug, who will provide a financial update. I'll close with perspective on the business in 2021 before opening the line for questions. Shifting to our fourth quarter performance, we're pleased with our performance for the quarter delivering total revenue of $118 million, which was down 3% on a reported basis and 4% on a constant currency basis, compared to the prior year quarter, largely driven by strong performance of our spinal implants, and a rebound of our BGT business. All offset by COVID-related elective procedure volume headwinds that impacted our entire business, including our biologics and extremities business. Total revenue during October and November was flat to slightly up compared to the prior year. But moving into December, we did see a negative impact on revenues in various geographies based on the COVID slowdown in elective procedures. On a sequential basis, total revenue grew 6% over the third quarter of 2020. Despite the uncertain operating environment, we're very pleased with our performance during the quarter, which reflects continued execution throughout our organization. Now, let's turn to the performance within each of our business units. I'll first cover our spine products category starting with bone growth therapies. Sales were down 1% versus the prior year, with performance at many of our legacy accounts continuing to be impacted by COVID-19. These declines were offset by revenue contributions from competitive conversions. On a sequential basis, bone growth therapies was up 7% over the third quarter. The sequential growth in this business demonstrates our ability to continue to work with our physician customers to identify patients in need of our products. Our team has truly adapted to the environment to provide flexible service solutions for these patients including remote and virtual fitting when necessary. Moving to spinal implants, we are excited to report that global revenue was up 9% as compared to the fourth quarter of 2019. As a reminder, this category is made up of our spine fixation and motion preservation products, which are typically used in elective procedures. The primary driver of this result was an 11% growth in U.S. spine implant revenues largely as a result of strong M6 disc sales. Within spinal implants, spine fixation was down 6% as compared to 2019 which was caused not only by the slowdown of elective procedures but a reduction in the number of complex cases being performed. The COVID environment has limited these cases by hospital policy in many regions. This softness was offset by continued strong performance in our U.S. motion preservation business, with sales growth of $3.7 million up 129% over the prior year quarter. The demand for our marketing lead M6 artificial cervical disc has continued with strong support towards surgeon training and revenue driven by new surgeon customers. This will be the last quarter that we will break out the motion preservation business from the rest of the spinal implants as we'll focus on our portfolio performance moving forward. Turning to our biologic portfolio, revenue was down 9% versus the prior year primarily due to a reduction in elective procedure volumes during the quarter, combined with channel disruption and continued price pressure in the market. Now moving to our global extremities, business sales were down 15% on a reported basis versus the prior year and 18% on a constant currency basis, primarily due to lower procedure volumes attributed to COVID-19 particularly in our international markets, and the non-reoccurrence of certain large stocking orders occurring in the fourth quarter of 2019. Next, I would like to provide an overview of the progress we have made within each of our core focus areas. Our commentary is previously focused on our accomplishments during the quarter. Given how chaotic 2020 was, I'd like to take a step back and review what we're able to accomplish during the COVID headwinds. Starting with our first initiative to improve structure and leadership. At the beginning of 2020, we looked significantly different than we do today. In a relatively short period, we overhauled a majority of our organization. Structurally, we completed the realignment of our business units to focus on spine and extremities, which has improved our coordination and set up an opportunity to maximize revenue across the enterprise. Along with the realignment, we also completed the integration of our biologics and spinal implants products under a single sales management team, which has allowed us to better leverage our portfolio and our brand. One of the things that I'm most proud of is the team we now have at Orthofix. Since becoming the CEO, we have brought an incredible amount of talent into key roles throughout the leadership of the organization. This talent has complemented the solid foundation of legacy talent already within the organization. Within spine, we added a President of Global Spine, a Managing Director of International Spine, a Vice President of the U.S. Spine and Biologic Sales, and a Senior Vice President of Motion Preservation. Late in 2020, we brought in a new Global President of Extremities. On a corporate side, we added a Global Head of Quality Regulatory and Clinical Affairs, in addition to a Head of Global Operations. Beyond the leadership team, which is now fully in place, we have and will continue to add talent throughout the organization to support our long-term growth strategy. Moving on to our second initiative, operational execution. During 2020, we made tremendous progress under the guidance of our new Global Head of Operations. COVID surprised us early in 2020, but we managed to successfully operate through the uncertainty while beginning some of our long-term initiatives. In early stages of COVID, we strategically realigned our facilities and operations to ensure that we met near-term demand to be able to deliver to our customers, and patients while we kept the team members safe. For the last three quarters in a row, we have been dealing with COVID, and we've had no manufacturing or supply disruptions. Today, we are fully operational at our facilities in the U.S. and Europe, and we will now be able to shift away from managing through uncertainty to beginning our longer-term initiatives to become a faster-moving, more efficient organization. Our third initiative is product innovation and differentiation, where we are focused on developing and acquiring products and procedures solutions to meet unmet needs in the marketplace. While COVID diverted some of our attention during the first half of the year, we're able to activate our product innovation and new product introductions in the back half of the year. On the spine side, we announced the launches of FIREBIRD SI Fusion System, the O-GENESIS Bone Graft Delivery System and AlloQuent Structural Allograft Q-PACK. In addition, early in the fourth quarter, we announced a partnership with Neo Medical, where we are focusing on collaborating in the ASC space and the co-development of a cervical platform including single-use sterile pack procedure solutions. On the extremities side, we acquired integrated and launched the FITBONE intramedullary lengthening system in some of our international markets and now well-positioned to make a positive revenue impact in 2021, as we just recently announced, the launch in the U.S. With the recent 510(k) clearance for FITBONE, we are the first and only company in the market to have a pediatric cleared product. This has bolstered our innovation commitment to the pediatric community. We have initiated our global launch in the first quarter of 2021. We've also just received FDA clearance for our OrthoNext Surgical Planning Software platform and we are preparing to launch this for use within our JuniOrthopedics portfolio of pediatric extremity treatment solutions. In support of these innovative products, we continue to focus on and value our investment in clinical data as highlighted at NAS in October of 2020. At the virtual event, we had a strong podium presence with five presentations. We've recently announced a publication of strong two-year data of our M6-C Artificial Cervical Disc IDE study in the Spine Journal, demonstrating that the M6-C disc had significant improvements in neck and arm pain, functional and quality of life scores, and verifying the benefits of this unique next-generation technology. Our fourth and final initiative is commercial channel development. Our priority for 2020 is to invest in and begin transforming our commercial channels to create a stable and highly predictable distribution organization. One of our focus areas was to add or develop long-term strategic distribution partners. A number of the structural changes and leadership additions we have made in the early part of the year positively influenced our ability to optimize our commercial channel. I'm very pleased with the initial progress we have made as we continue to add more high-quality distributor relationships and continue to capture synergies across product lines and geographies. In summary, I'm incredibly proud of what our organization was able to accomplish during one of the most challenging years we as a company, as an industry, and as a society have ever had to endure. Rebuilding an organization during a global pandemic was not easy, but that's exactly what we did, which speaks to the dedication of our team and the excitement we've been able to build and generate in order to retain and attract such high-quality people. We have a solid foundation in place and we are excited about what we can do and achieve in 2021. With that, I will turn the call over to Doug to review our financial performance.

Thanks, Jon. And good morning, everyone. I will provide additional details into our net sales and earnings results and then discuss some of our other financial measures. Many of the financial measures covered in today's call are on a non-GAAP basis. Please refer to today's earnings release for further information regarding our non-GAAP reconciliations and disclosures. Starting with revenue, as Jon mentioned, total net sales for the quarter was $118 million, down 3% on a reported basis and down 4% on a constant currency basis when compared to the fourth quarter of 2019. In the U.S., total net sales for the fourth quarter were flat to prior year and U.S. total net sales were down 15% on a reported basis, due primarily to the timing of certain stocking orders in Q4 '19, that Jon mentioned earlier. Gross margin in the fourth quarter of 2020 was 75%, compared to 78% in the prior year period. The decline was primarily a result of increased inventory reserve charges that resulted from lower sales as well as increased depreciation expense related to the addition of new instrument sets over the previous 12 months to support new product launches. For the full year, 2021, we expect gross margin to be in the range of 77% to 78% in line with our pre-COVID historical averages. Sales and marketing expenses in the fourth quarter 2020 were 46% of net sales, down from 48% in the fourth quarter of 2019. The decrease was primarily a result of lower variable sales compensation during the quarter and reduced spending on travel and marketing events in the COVID environment. In 2021, we expect sales and marketing expense to increase to approximately 49% to 50% of net sales as travel and event spending are expected to return to normal and we invest in our commercial channel. GAAP G&A expenses in the fourth quarter of 2020 were 16% of net sales, down from 18% in the prior year period. This decrease was mainly due to reduced succession and transition charges when compared to the fourth quarter of 2019. For modeling purposes, because most of our stock-based compensation falls under G&A expenses, we wanted to give some color around it for next year. We expect stock-based compensation to be about $17 million to $18 million in 2021. GAAP R&D expenses for the fourth quarter were 9% of net sales up from 7% in the prior year period. This increase reflects spending to support new product development as well as costs associated with our EU MDR compliance efforts. We intend to continue to ramp-up our efforts to drive organic innovation and differentiation, invest in clinical trials such as our M6-C to level indication study and build a robust product pipeline in both spine and extremities. As a reminder, this will cause our R&D spending as a percent of net sales to significantly outpace revenue growth in the near-term. As a result, we expect 2021 R&D expense to approximate 12.5% of net sales, including an impact of about 250 basis points related directly to our EU MDR compliance efforts, which we are adjusting for. Adjusted EBITDA in the fourth quarter decreased slightly on an absolute basis to $22.1 million, compared to $22.5 million in the fourth quarter of 2019. However, on a relative basis, adjusted EBITDA increased to 19% of revenue up from 18.5% of revenue in the fourth quarter of 2019. Jon will provide 2021 overall adjusted EBITDA guidance in a few minutes. Now turning to tax, we had an income tax expense for the quarter of $15 million, or 270% of income before income taxes as compared to an income tax benefit of $8 million or negative 180% of income before income taxes in the same period of 2019. The tax provision for this quarter was significantly impacted by the timing of earnings during the year. In addition, we recognized a reserve against certain foreign deferred tax assets, which was a non-cash charge in the quarter. For non-GAAP results, we will continue to use 27% as our long-term adjusted tax rate in 2021 as that reflects our expected adjusted earnings and eliminate certain non-cash impacts to our effective tax rate. For the fourth quarter of 2020, we reported a GAAP loss of $0.48 per diluted share as compared to GAAP earnings of $0.60 per share in the fourth quarter of 2019. After adjusting for certain items and when normalizing for tax using a non-GAAP long-term effective tax rate, adjusted earnings for the fourth quarter of 2020 was $0.44, compared to $0.51 in the fourth quarter of 2019. This decrease was primarily driven by the lower net sales as well as increased R&D spending to accelerate our top line growth. Regarding cash, we continue to maintain a strong liquidity position with $97 million of cash at the end of the year 2020 compared to $70 million at the end of the previous year's fourth quarter. As previously mentioned, we received $14 million in Medicare advance payments as part of the CARES Act benefits during the second quarter of 2020. We will commence repaying those advances in Q2 this year. We continue to have no borrowings outstanding under our $300 million secured revolving credit facility. During the fourth quarter, we announced a new partnership with Neo Medical to develop and market single-use spinal instruments solutions focusing on improving patient outcomes. As part of the partnership, we invested $10 million in Neo Medical to support the ongoing partnership through a combination of convertible term loans and an equity investment. Net cash provided by operating activities was $22.3 million in the quarter, up $10 million compared to $11.9 million in the fourth quarter last year, largely due to strong collections on outstanding accounts receivable. Capital expenditures were $4.4 million in the quarter compared to $5.6 million in the prior year period due to decreased spending on new instrument sets due to the timing of new product launches. Capital expenditures are expected to be in the $23 million to $25 million range for 2021. Consistent with our increased operating cash flow, our free cash flow, which we define as cash flow from operations minus capital expenditures, was $18 million during the quarter, up from $6 million in the fourth quarter of 2019. Free cash flow for the full year 2020 was $57 million. However, in 2021, our free cash flow levels will decrease significantly due to several items, including the repayment of the Medicare advance mentioned earlier, the anticipated next spinal kinetics milestone payment, additional investments in our sales channels and in product innovation and increased spending on our EU MDR compliance efforts. I'll now turn the call back over to Jon.

Thanks, Doug. Before providing our outlook for 2021, I wanted to lay out our key focus areas for the year. At a high level, these will look similar to those we focused on in 2020. With the promise we made over the last 12 months, we're shifting from a design and strategy phase into an execution phase. Our focus areas remain in structuring leadership, operational execution, product innovation and differentiation, and commercial channel. Starting with structuring leadership. There is still some more to be done to add talent in select areas within the businesses to finish building out certain teams, which we expect to be complete in the first half of 2021. I'm very proud of the transformation that has occurred within the organization and with the full team in place, we can accelerate the execution of the rest of our initiatives. Our next focus area is operational execution. While COVID will likely continue to be a factor in the operating environment for some time, we've adapted to the situation and are 100% operational across the globe. In 2021, we'll focus on the refinement of our global supply chain to become a more efficient and agile organization while allowing us to more rapidly introduce new products, integrate new distributors, focus on working capital management, and deliver innovation to our customers and patients. Our third focus is product innovation and differentiation. We've spent a considerable amount of time reviewing our current portfolio and have developed a comprehensive long-term roadmap to refresh our current products and bring new innovations to Orthofix. We started to see early progress towards that roadmap in late 2020 with several new product introductions. And we will continue to work to drive adoption of those in the marketplace. Looking ahead, over the next 12 to 24 months, we anticipate contributions coming from both organic and inorganic strategies. On the organic side, our near- and medium-term efforts will focus on key spine procedural segments of anterior spinal care, posterior cervical, minimally invasive surgery, and deformity care. For the extremities business, we will focus on the key orthopedic markets of pediatric deformity in reconstruction, foot and ankle, and especially trauma. We will also work to roll out enhancements to our existing products with line extensions and continue to pursue additional indications and expansion of efforts to open up new addressable markets in the years to come. We have expanded our interaction with leading key opinion leaders and global spine care institutions that will work closely with us and our teams to guide our thinking and our development of our portfolio broadly. Our ability to attract this level of talent speaks highly to the excitement we have created around Orthofix in our recent innovation strategy. On the inorganic side, we'll look to be more active in bringing products and technologies into our portfolio to supplement our internal R&D efforts, all aimed at bolstering our portfolio and accelerating top-line growth. Our fourth and final focus area is our commercial channel. The playbooks here remain the same as they did in 2020. Invest to create a stable and predictable channel that is highly effective. As we've said in the past, we're looking to expand our network of strategic relationships and we are agnostic to the model of these partnerships. We are looking at quality people in organizations who can help us grow our business. We grew the number of these strategic relationships in 2020 and will continue to focus on developing these relationships in 2021. Now, shifting to guidance. For the full year 2021, we expect top line revenue to be in the range of $445 million to $460 million. This guidance assumes the COVID impact on proceedings will continue throughout the first half of the year with the first quarter being more heavily impacted than the second quarter, and that procedure volumes will pick up in the second half of the year as vaccines become more widely distributed. We'd also like to point out that from a quarterly cadence perspective, we continue to see headwinds associated with COVID during the first half of 2021, but expect the back half of the year to show low to mid-single-digit growth over 2019. In order to provide more clarity in the near term, we'll provide a revenue range for the first quarter only and do not anticipate providing quarterly guidance ranges respectively. For the first quarter, we expect revenue to be in the range of $95 million to $96 million due to continued COVID-related hospital restrictions. We want to communicate that we're seeing additional pressure early in Q1 on current procedure volumes compared to Q4 of 2020. In the U.S. we're seeing about a 50% decline in procedures in January, and the first part of February, with most of the decline coming from more complex procedures that require multiple nights of hospital recovery and stay. The impact on this segment not only reduces our procedural average selling price but also delays the procedures where patients would most likely be prescribed a bone growth stimulator to aid in their healing. Last week, the national weather emergency created further disruption to our procedural volumes in all storm-affected areas. Our hearts and thoughts go out to those impacted including many of our own employees. Although the storm has passed, it caused major challenges and disruptions to our entire local community, state, and regions around the country. We are fortunate to have a great headquarters facility and staff that allowed us to get back to normal operations following the storm cleanup. With regard to the U.S., we anticipate hospital restrictions to begin to ease in March, with improvement in elective and complex procedure volumes, as we believe this trend will continue into the second quarter of 2021. The third and fourth quarters are expected to show continued improvement in elective procedure volumes. In our international markets, we continue to see country restrictions on elective procedures. We believe that markets will begin to open up in the second quarter, but timing of increased procedure volumes will vary from country to country specifically. As we have mentioned, we will begin to ramp up our investments in product innovation and differentiation, EU MDR spending, operational execution, and our commercial channel developments in 2021. Our expense reductions from travel restrictions, hiring, and project delays in 2020 will not continue into 2021. We expect our adjusted EBITDA to be in the range of $50 million to $54 million and our adjusted earnings per share to be $0.45 and $0.55 using a non-GAAP long-term tax rate of 27%. Despite the backdrop of a challenging 2020, we are very excited about the future of Orthofix. We have assembled a world-class leadership team and organization and work tirelessly to implement a culture and strategy to drive this business forward into the future. We are no longer in planning mode. We're now transitioning into execution phase. There is no doubt there are headwinds to navigate in 2021, but we are prepared to address any uncertainty that comes. We will continue to work to bring high-value solutions to patients, surgeons, and hospitals around the world. With that, I would like to transition to the question-and-answer session. Operator, please open the lines.

Thank you. Your first question goes to the line of Anthony Petrone of Jefferies.

Thanks, and good morning. I hope everyone is well and staying healthy. A couple of questions on my end, one for 2021 on new product contribution. Just wondering how we should be thinking about the Q-PACK and FITBONE contributions for 2021 just considering the launches. And then a follow-up on FITBONE would be its focus on the pediatric space. I'm just trying to get a sense of where Orthofix currently is in pediatrics, and how it views that market opportunity? And I'll come back with a couple of follow-ups.

Thank you, Anthony. Let's start with FITBONE on that. Our position in the deformity or the pediatric area is focused around deformity care and limb reconstruction. In that area, we basically focus on highly elective cases, predominantly around external fixation. With the addition of FITBONE, we now have internal fixation and correction methods. This combined with our JuniOrtho Plating System provides us a comprehensive portfolio to address this market. We are positioning ourselves to execute more heavily in the U.S. as we've already begun to execute in the international markets. Regarding the Q-PACK, that product is basically being introduced into our interbody line and we basically use it as a portfolio opportunity to address with not only our PTC and also our titanium antibody devices. So, it's a comprehensive portfolio for the surgeon to utilize.

That's helpful. And then a couple of follow-ups would be, one is there a way to kind of quantify overall backlog just coming out of COVID, where we sit in terms of backlog? We were on a few orthopedic calls this week, specifically also in spine and fourth quarter did see some deferrals. And I believe that is extended into early part of '21. So, is there a way to quantify the deferral backlog? And then the last one for me would be, what should we be expecting post the FDA ad-com meeting where it's recommending more data, and post-market surveillance in order to down classifying in the bone stem space? Thanks.

Let's begin with deferrals. As we examine the trends in the fourth quarter, we observed that elective procedures continued to occur early in December but then saw a significant decrease later in the month. The extent of this pull-forward varies by segment. In some areas, particularly cervical procedures, there was a shift towards the ASC environment, allowing some procedures to continue into late December. However, the more complex elective cases started to decline earlier in December. This pattern has continued into January and mid-February, with complex procedures being postponed due to the need for multi-day hospital stays. It’s challenging to estimate how much is being pushed forward, but it’s important to note that these complex cases are deferred, and they will not resolve independently. We expect these deferred cases to increase in the coming months, although defining the exact timing is difficult due to hospital capacity constraints. Regarding the FDA re-classification, we are uncertain about the timeline. In October, they concluded their open comment period. Typically, a re-classification takes six to twelve months for reaffirmation of their position or acceptance of the panel's decision. This situation is somewhat unique, and the timeframe could range from three to twelve months following the close date. We are closely monitoring this process. The positive aspect is that even with a re-class that has strong clinical data, we believe we are well positioned. We have an excellent sales and service team, a solid order to cash process, a large contract base, and robust clinical data, which strengthens our market position. While there may be new entrants, we are confident in our ability to compete effectively.

All right, thank you very much. I'll hop back in.

Your next question goes to the line of Mathew Blackman of Stifel.

Good morning, everyone, and I hope everyone there is doing well as well. Maybe I've got a few questions. To start, can you remind us what percent of your spine implant business is skewed to complex procedures, even just in the roughest sense? And then I've got a couple of follow-up questions.

As we look at the numbers, we have a good portion of complex procedures. It balances out right now in our mix, because we have a higher percentage of M6 coming into play. So, when we talk about spinal implants, that balances out some of that activity as far as overall revenue. We're still monitoring that right now as far as how much is complex versus simple. Much of the simple, one-level type of low back cases, we're still monitoring how that plays out between the ASC and the hospital environment. But we've largely captured, we've not lost any business as far as between account basis during this last period of time.

Okay, great. A few questions on the profitability outlook. It sounds like there are very specific growth-enhancing investments in 2021. Just want to make sure though, that there isn't any change in your longer-term profitability trajectory. And then the second part of that, can you talk through where some of these investments are going? You mentioned commercial channel, and also how much of this overall spend is new versus perhaps catch up on deferred or paused 2020 investments?

Let's talk about the investments first. We've talked through 2020 and we'll continue discussing through 2021 about our channel where we're essentially continuing to onboard new distributors, train new distributors, and spend time and energy working with them. A significant portion of it is in the new product innovations and differentiations initiative. This initiative involves building platform projects, and we're also looking for additional inorganic activities which always entail some type of spend when you're bringing them into the organization. We look at that as well. The other side of the R&D spend is related to EU MDR compliance, which Doug mentioned in his prepared remarks. This is a heavy lift for all organizations in the company, and we think we're positioned at a percentage comparable to what others are spending to be in that European or EU market.

Matt, this is Doug; just an overall comment on profitability: our investment in longer-term growth is not new. This time last year, pre-COVID, the guidance that we provided at that time—not expecting COVID—sort of the midpoint was in the 14% range. The range that we provided for '21 is certainly COVID impacted here at the beginning of the year, but reflects sort of 11% to 12% EBITDA, which reflects both short-term and long-term investments that we've been discussing for a while with regards to things like FITBONE and other investments. But I would say in the short-term, your question surrounds expense re-accumulation for 2021, we certainly hope to be able to travel and meet with our customers and partners. We certainly hope to pay full commissions on all of our sales plans that we didn't get to do in '21. So overall, it's a balance in terms of how we're investing and why we guided EBITDA on flow-through the way we did.

Okay, and then if I could sneak one last one in. Jon, I just want to get your thoughts on the competitive environment. And in particular, there were a couple of recent developments in BGT and now in cervical discs. So just any thoughts on how these new competitors may impact your growth outlook in those two franchises? Thanks so much.

Yes, regarding cervical discs, we've been monitoring the latest entries into the market for years now. We've tracked it very closely in our sales activities for the last six months. We view this cervical disc market as still being in its infancy in terms of adoption. We believe that additional competitors in that market, especially new innovative technologies that excite surgeons to want to try artificial cervical discs, ultimately benefit us. We're having great success with M6 and we're not only converting business from other disc companies but also converting new surgeons to the disc market. That latter category, I think, is benefited by having new high-tech innovations in the marketplace. Regarding the BGT area, we spend a great deal of time developing our channel and also investing in this business. We have multiple investment discussions in BGT, such as stem on track, and we're also looking at other ways of essentially enhancing that product. Additionally, we have clinical trials ongoing in the area of shoulder repair, our rotator cuff repair is an ongoing clinical trial. We'll see new entrants come in, it's an exciting area. So we believe we are well positioned as I stated earlier, to take full advantage of the marketplace and address any competitive entries.

Thanks so much.

Your next question comes from the line of Dave Kirkley of JMP Securities.

Great, thank you and thanks for the guidance as well. Doug, maybe if I could, maybe push you just a little bit. The revenue side, it looks like we get back to potentially back to where we were in '19. Obviously, we all know spinal implants are going to grow based on the disc product. And I would imagine you might think that the implants may come back too, but I'd love to get any color you might want to share. Given that 2020 was so chaotic, as you mentioned, for either bone growth therapies, biologics, or extremities, did they all return to growth? I mean, I know they'll have easy comps, but maybe any color on what you'd expect from them in this year that might be implicit in that $445 million to $460 million guidance. If you could help out, that'd be great.

Yeah, no, good question, Dave. I'll start with some of the numbers and I'll let Jon provide some color on the product categories, but overall, we got in Q1, which is at its midpoint down, but versus '19 about 12%. We think we've got more pressure and COVID-related activities going into Q2 obviously. But the back half of the year, as you look at it, will exceed growth rates in 2019, as Jon said in the script, low to mid-single-digits as we exit the back half of the year. That growth comes from a handful of different product categories, including spine implants. And I'll let Jon provide color on the rest of it.

Certainly. Starting with spine implants, they went through a low period in let's call it, from 2012 to 2017. It started to come back as far as the interest and innovation in new products, new procedures. There is excitement among these surgeons out there as far as they want to innovate now. They want to bring new technologies in. If you take that combined with the demographics of the U.S. population, we are in the middle of the baby boom, basically in the post-65 age group right now. This is a high-demand area for spinal procedures. Additionally, millennials are reaching the 35 to 40 age group, which is another predominant age range where spine conditions present themselves. We believe we are well positioned not only from product innovation and surgeons wanting to advance, but also demographics are working in our favor. We believe we are well positioned in that space as demonstrated by artificial discs and other minimally invasive approaches that are rewarded in the marketplace. Regarding the extremities business, we see good position for us, especially with FITBONE. It rounds out our portfolio and allows us to provide a comprehensive approach to deploy our resources in deformity and reconstruction in the pediatric space. It also will augment our foot and ankle space going forward. We also mentioned our FITSPINE initiative, a growing rod that allows a procedure to be executed in a pediatric environment without requiring a second surgery to correct deformity. Thus, we are quite excited about that. On the BGT area, I highlighted that we are advancing in new areas. This has now begun to be recognized and has been recognized for its effectiveness in these cases that are slow healers or non-healers. This ultimately provides great value to the healthcare environment when you can do a non-surgical repair of a non-union versus having to perform a secondary service. Thus, we are well positioned and expect favorable outcomes moving forward.

Great. And maybe just as a quick follow-up, if you looked at your biologics and then let's say, your fusion spinal implants, I would imagine that, in some procedures you're getting both of those sales. I don't know what percent that is, if there's anything you could share there. But I mean, over time, I would imagine that you would think that those would track more closely together or I mean, and if not, maybe any color there as to how much of your biologics businesses are used with your implants? And as we move forward, should we expect them to sort of be more closely aligned in terms of growth?

Yes, we would expect them to be more closely aligned going forward, and that was the fundamental reason why we put the spine and biologics sales management under one individual to align those businesses and get the leverage in that area. So, we would expect that. We're very pleased with our Trinity product line and our MTF biologics partner. You can't find a better partner than MTF. We are looking to expand that portfolio as well. We have also the fiberFUSE program coming into play, which is another product. So, we continue to expand the portfolio and also have better collaboration between the biologics and the spine fixation sales organization.

Thank you.

Thank you.

Your next question comes from the line of Ryan Zimmerman of BTIG.

Hey, thanks for taking the questions. Good morning, everyone. So, Jon, I think you mentioned a little bit within BGS you won some competitive conversions. I just wondered if you could expand on where you're taking share and who you're taking share from on the BGS side? And then I have one follow-up.

Throughout the 2020 year, we focused on not only growing the business organically but also attracting new distribution in that area. We've mapped out exactly where the business is coming from. We are an equal opportunity share taker in that regard. We look for opportunity on the street, and so we don't work particularly on one specific area. The reality is we've been successful in multiple areas, and we will continue to work on that. We have a very talented sales management team, and we enjoy a strong reputation in the marketplace that attracts sales representatives to work with us.

Okay. Doug, for you just what's your comfort level from a leverage standpoint regarding M&A?

No good question, Ryan. In terms of our ability to invest and grow, we're really happy with our capital structure and our firepower. As you mentioned, we've got a revolver that can scale up to $300 million; we were able to tap during the lowest of the lows last year to get us through COVID. We knew we were going to come out on top as we end the year with almost $100 million in cash. With the cash flow that we do have, it puts us in a great position to invest. We'd like to draw down; we're certainly open to using leverage since we recognize the acceleration that business development can provide inorganically. In terms of comfort level, I'd say it's deal-specific; we generally look for two to three times would be a comfortable ratio. Beyond that, we’d assess how quickly things would pay down and rationalize our investments, but we are certainly not afraid of leverage. I would add that we're ramping up our business development team. We're screening more deals than we’ve ever screened right now. I'm certainly motivated to put new technologies and new products and programs into this company, and we'll take full advantage of our financial capacity to do so.

Got it. Okay, and then just lastly for me, I'll hop back in queue. The $23 million to $25 million in capital spend that you're targeting this year, Doug, maybe you could just elaborate if that - a lot of that is focused on instruments, or is there manufacturing expansion? Just help us understand where those dollars are going specifically in CapEx for the year? Thank you.

I'd say, probably a third of our spend is related to instrument sets. We've got technology investments as well, that work into our CapEx. We also have some new products and tooling and molding that we're investing in. So, I hope that answers your question.

Thank you.

Your next question comes from one of Jeffrey Cohen with Ladenburg Thalmann & Company.

Hi, Jon, Doug, how are you?

Great, Jeffrey.

Just fine. I was wondering if you could shed any further light on any changes or modifications on your distributor channels as far as upgrades and exclusives, at least domestically.

Domestically, we're as I stated, we are agnostic to how we move forward. If we can get exclusivity, that's great. If we don't, our channel has been well populated by non-exclusive relationships. We’re looking for strategic partners that want to create a stronger relationship with us and commit more of their time to us. The work in the process we have from where we are at today, will build stronger partnerships over time. The goal is ultimately to develop exclusive relationships eventually, but that is a longer-term goal. We will take non-exclusive relationships along the way to make that happen. Building these channels takes time and it’s about finding the right partner; we are more focused on the right talent and relationships. We will create a business around that talent.

Okay, got it. As a follow-up to Dave's question earlier, specifically on O-GENESIS. Can you talk about the specific approaches that are being taken there? Is that helping drive biologics? I know that you're also selling prefilled so, are you seeing your biologics being used on a larger percentage there and how's that going on the firm?

On O-GENESIS, it can be used wherever you'd like to, basically minimally invasively or percutaneously deliver graft. That's the beauty of the system. We are still in the early days in the blend and launch of that. We launched in the fall, partly due to the dynamics surrounding COVID; many hospitals and surgeons were hesitant to bring new technologies in during that period of time. We are making headway there, but we’re looking forward to 2021 to really drive that product forward. We will adopt this in all of our procedures when we go out and sell. We are looking for leverage and also working on prefills; that’s part of the pipeline we’re focused on, particularly around Trinity, because Trinity has specific characteristics that will work with it. We’re looking forward to Trinity prefills in the future, but they are not available as prefilled right now.

Got it. And then lastly for me, could you talk about your outlook a little bit as far as the U.S. versus international sales, and provide us a little more color there, if you're able to? Thank you.

We'll need to break it down between spine and extremities to do that. In the extremities business, we look forward to building our U.S. sales. We’re very strong in the U.S. right now. That's where the business was founded. We have a high-quality channel put together there. They are working diligently to grow that business. They are enthusiastic about new technologies such as FITBONE. In the U.S., we continue to build that channel and diversify it to make better impacts in both foot and ankle and pediatrics. On the spine side, it's sort of the reverse. The U.S. distribution is stronger, and we are building the international business. We've brought in key talent in the international markets, both in continental Europe and emerging markets in Australia, and we look forward to executing there in 2021.

Got it. Okay, thanks for taking the questions.

Thank you.

Thank you. There are no further questions at this time. I would now like to turn the call back over to management for any closing or additional comments.

Thanks, operator. And thank you again for joining us today. We look forward to updating you on our progress on our next quarterly call. Have a great day.