Orthofix Medical Inc. Q3 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the Orthofix Q3 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Alexa Huerta, Senior Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to the Orthofix Third Quarter 2021 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 Jon. 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 November 5 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 in our Form 10-K for the year ended December 31, 2020 and Form 10-Q for the quarter ended September 30, 2021 filed this morning November 5, 2021 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 US GAAP. Please refer to today's press release announcing our third quarter 2021 results for reconciliations of these non-GAAP financial measures to our US GAAP financial results. At this point, I will turn the call over to Jon.

Thank you, Alexa. Welcome everyone. Thank you for joining our third quarter 2021 results conference call. On today's call, I'll provide an update of our third quarter performance. I will then review each of our strong progress we've made against each of our strategic initiatives before handing the call over to Doug who will provide our financial update. I'll close with our perspectives on the balance of 2021 before opening the line for questions. Starting with our third quarter performance, total revenue in the quarter was $112.4 million, growing above 1% over 2020 on both a reported and constant currency basis. During the quarter, we experienced the negative impacts of hospital restrictions on elective and complex procedures and hospital staff shortages in each US key geographies namely the Southeast, Mid-Atlantic and South-Central regions. However, despite these COVID-19 challenges, we were able to grow relative to 2020 highlighted by double-digit growth in both our global spinal implants and orthopedic businesses. Our performance in the quarter was aided by our diversified portfolio that includes therapies and sites of service less impacted by COVID as well as our international footprint that includes areas beginning to recover from COVID restrictions. Despite these disruptions in the third quarter, we made solid progress against all of our growth initiatives and remain confident in the investments we have made and will continue to make in product development, commercial channel and operational excellence. Now let's turn to the performance of each of our product categories. Starting with bone growth therapies or BGT, sales for the quarter were $45.2 million, down 4% compared to the third quarter of 2020. The decrease in the quarter was largely a result of increased COVID-19 related restrictions affecting complex overnight procedures, which are a large part of the patient population receiving BGT spine therapies. These restrictions were a reversal of the positive trends we saw in the last quarter. The decline in the quarter for spine procedures was offset somewhat by 13% growth in our Physio-Stim, our bone healing therapy for nonunion of long bone fractures. Our commercial channel investments are yielding benefits in these nonelective trauma segments. Moving to Spinal Implants, which includes spine fixation and motion preservation, revenue was up over 10% on both a reported and constant currency basis compared to 2020. This growth was primarily driven by US M6 artificial cervical disc and international spine fixation sales. In the US, gains were led by the M6 disc revenue driven by our continued success in attracting new users as a result of our ongoing education and training efforts. Internationally, growth was driven primarily by a mix of new distributors coming online and existing stocking distributors reinvesting following COVID delays. Turning to our Biologics portfolio, revenue was down 16% compared to 2020. The decrease was not surprising given that a large percentage of the procedures, where our biologic products are used are complex elective procedures, requiring multiday hospital stays and these procedures were impacted by the restrictions in key US COVID affected geographies mentioned prior. This decrease was partially offset by the increase of new customers driven by new distribution and strong early adoption of new technologies. Lastly, moving to our Global Orthopedics business, sales were up 14% on a reported basis, and 12% on a constant currency basis over 2020. The increase was primarily due to the rebound in the international markets from COVID restrictions and reorders from international stocking distributors following COVID elective delays. During the third quarter, we also saw a solid contribution from the FITBONE limb lengthening system, with over 30% sequential growth over the second quarter of 2021, and encouraging physician training trends with over 180 surgeons trained since the acquisition of this technology platform. Before providing an update on our key initiatives, I want to share how excited we are to have Wayne Burris join our Board of Directors. He brings over 35 years of experience in US and international finance from various diagnostics, pharma and orthopedic businesses. Mr. Burris spent much of his MedTech career at Roche Diagnostics, where he served in a number of executive roles, including CFO of North America from 1996 through his retirement in 2019. We are excited to add someone with his financial and business leadership experience, and we look forward to working with him for years to come. Now moving to our first initiative product, innovation and differentiation. During the quarter, we made solid progress in our efforts to develop and acquire products and procedure solutions to address unmet needs in the marketplace. Since January 2020, we have launched 23 Spine and Orthopedic products, which include expansions into key product categories during the quarter. Within Spinal Implants, we expanded our Firebird SI 3D offering by launching new implant and instrument additions in this high-growth market segment, further improving our differentiated MIS solution designed to compress and stabilize the sacroiliac joint. Within Biologics, we expanded our portfolio with the full market launch of our Opus Mg Set, an osteoconductive injectable scaffold to fill nonstructural bony voids, or gaps during orthopedic fracture care or trauma surgery applications. I will now touch on our second initiative, commercial channel development. For this initiative, we are focused on our US channels for Biologics, Spinal Implants, Orthopedics, and working to make these channels as dedicated and predictable as our BGT channel. In Q3, our US strategic channel partners, which we define as distribution partners that commit to Orthofix and carry both hardware and biologics, generated over one-third of our Spinal Implants, Biologics and Orthopedics US revenue. Revenue related to these strategic distribution partners grew 9% when compared to the third quarter of 2019, despite being mostly in the heavily impacted COVID regions. While investment in these channels is ongoing we have made steady progress in this initiative to date. Our final initiative is operational execution. Given the recent regional occurrences of COVID-19, our global supply chain remains our top priority. Our goal is to make our company as nimble as possible, with efficient structures and processes that encourage product innovation. Our success in securing a future supply of microchips for our Bone Growth Therapies devices in light of the continued disruption of global supply chain, highlights the improvements we have made in our operational execution. There will always be continuous improvement in operational efficiency, and we intend to adapt as needed to keep up with the changing macro environments, and build value within Orthofix. I am very pleased with our results in the quarter. Despite the return of COVID-19 in certain geographies, we've kept moving forward with our transformation, laying the groundwork for long-term growth and innovation while maintaining operational execution. We're excited to build on that momentum as we approach year-end. With that, I'll turn the call over to Doug to review our financial performance.

Thanks, Jon, and good morning everyone. I will provide some additional details into our net sales and earnings results and then discuss some of our other financial measures. Because 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 in the quarter were $112 million, up 1% on a reported basis, and on a constant currency basis when compared to the third quarter of 2020. In the US, total net sales of $86 million for the third quarter were down 4% over the third quarter of 2020, mainly due to hospital restrictions on elective procedures offset by US M6-C growth that Jon mentioned earlier. International total sales of $26 million were up 25% as reported over the third quarter of 2020, reflecting the growth from our FITBONE limb lengthening system as well as strong sales to stocking distributors. Gross margin in the third quarter of 2021 was 75% compared to 76% in the prior year period. The decrease was primarily due to sales mix and the short-term increase in electrical procurement costs due to the global microchip shortage offset somewhat by decreased non-cash inventory reserves. For the full year 2021, we now expect gross margin to be approximately 75% to 76%, which reflects the continued impact of the changes in our sales mix as well as an expected short-term increase in microchip costs as a result of the global microchip shortage. Sales and marketing expenses in the third quarter of 2021 were 50% of net sales, up from 48% in the third quarter of 2020. The increase was primarily a result of the timing of three major tradeshows in the third quarter of 2021 that did not take place in-person in 2020 as well as an increase in travel expenses. As anticipated, spending in the third quarter was more in line with our pre-COVID levels. In 2021, we still expect sales and marketing to approximate our year-to-date average of 48.5% of net sales as travel and event spending has seen a return in line with historical spend and as we invest further in our commercial channel. GAAP G&A expenses in the third quarter of 2021 were 15% of net sales right in line with the prior year period. As a reminder, spending levels in the third quarter of 2020 reflected several cost savings measures including 401(k) match suspension, a travel freeze and a pause in investment spending offset by succession related expenses in 2020. GAAP R&D expenses for the third quarter increased to 11% of net sales, up from 9% in the prior year period. The increase reflects spending to support new product development, clinical studies, FITBONE integration, expense, as well as costs associated with our EU MDR compliance efforts. We will continue to ramp up our efforts to drive organic innovation and differentiation by investing in clinical studies, such as rotator cuff and our M6-C two-level indication study and continued spending to build a robust product pipeline in both Spine and Orthopedics. As a reminder, this is causing our R&D spending as a percent of net sales to significantly outpace revenue growth in the near term. Due to the timing of certain expenses, we now expect 2021 GAAP R&D expense to be approximately 11% of net sales, including an impact of about 175 basis points related directly to our EU MDR compliance efforts for which we adjust within our non-GAAP financial metrics. Adjusted EBITDA in the third quarter decreased to $11.9 million or 11% of sales compared to $19.7 million in the third quarter of 2020 driven by the investments we have made in R&D related to product development and clinical trials, as well as increased spend in marketing tradeshows as they return to in-person. Our COGS have also increased with the changes in our sales mix and the expected short-term increase in microchip costs. We mentioned all of these investments and temporary increases during our second quarter call, so the reduction in adjusted EBITDA is in line with our expectations. Now turning to tax, we had GAAP income tax benefit for the quarter of $400,000 or 14% of loss before income taxes as compared to GAAP income tax rate of 12% of income before income taxes in the same period of 2020. The primary factors affecting tax rate for the third quarter of 2021 were the financial expenses not recognized for tax purposes related to the acquisition-related remeasurement, as well as losses in certain foreign subsidiaries for which we did not recognize a tax benefit. For our non-GAAP results, we continue to use 27% as our adjusted long-term effective tax rate, which normalizes for acquisition-related expenses certain law changes and operating losses that have no GAAP tax benefit. For the third quarter of 2021, we reported GAAP loss of $0.11 per share as compared to GAAP earnings of $0.24 per share in the third quarter of 2020. After adjusting for certain items and when normalizing for tax using our non-GAAP long-term effective tax rate, adjusted earnings for the third quarter of 2021 were $0.10 per share compared to an adjusted earnings per share of $0.31 in the third quarter of 2020. The decrease was primarily driven by the increased short-term expenses, due to the global microchip shortage, increased R&D spend to drive organic innovation and differentiation and increased travel and marketing tradeshow spend. Regarding cash, we continue to maintain a strong liquidity position with $83 million at the end of the third quarter of 2021 compared to $81 million at the end of the second quarter of 2021. We currently have no borrowings outstanding under our $300 million senior secured revolving credit facility. We commenced repayment of the $14 million 2020 Medicare Advance from the second quarter. The balance as of September 30 2021 is about $8 million. We still expect the repayment to be substantially complete by early Q2 next year. Net cash provided by operating activities was an inflow of $6.4 million in the quarter down $15.5 million compared to an inflow of $21.9 million in the third quarter of last year primarily due to the recoupment of the 2020 Medicare Advance inventory investments this quarter and the savings in 2020 related to the cost reduction initiatives such as the 401(k) match suspension travel freezes and conferences only being held virtually. Capital expenditures were $3 million in the quarter compared to $3.4 million in the prior year period, due primarily to the timing of spend for instruments to support our future growth plans. We now expect CapEx to be in the $19 million to $21 million range for 2021. The decrease over prior guidance is due to the timing of the deployment of instrument sets and the implementation dates of certain projects. Consistent with our decreased operating cash flow, our free cash flow, which we define as cash flow from operations minus CapEx was a $3.4 million inflow during the quarter, which was down from an $18.5 million inflow in the third quarter of 2020. As anticipated, our free cash flow has decreased significantly in 2021 compared to 2020 due to several items including the repayment of the Medicare Advance, additional investments in our sales channels, and product innovation to support our future growth and the Spinal Kinetics milestone payment, as well as increased spending on the EU MDR compliance efforts. I'll now turn the call back over to Jon.

Thanks Doug. Looking to the remainder of 2021, we remain highly focused on our three near-term growth drivers including M6-C, FITBONE, and our comprehensive spinal interbody portfolio. I'd like to provide a quick update on each of these growth drivers. Starting with M6-C, artificial cervical disc, demand for M6's innovative motion preservation technology continues to grow as evident by over 1,000 US surgeons we have trained since the launch in 2019 and the recently surpassed milestone of 60,000 global M6-C implants. We remain confident that our ability to attract and onboard new surgeons as well as support expanded utilization by existing surgeons allows us to expand the market and take market share to drive growth for the foreseeable future. From a US indication expansion perspective, we are progressing the M6-C 2-level clinical trial, which remains on track. Sites are actively enrolling and we expect to continue to initiate additional sites for both the M6-C investigational and concurrent ACDF control study arms. We also recently kicked off a real-world evidence study that will access over 3,000 patients and bolster our body of clinical evidence in support of M6. The second key near-term growth driver is FITBONE. We have made quick progress in commercializing the FITBONE system with a third quarter revenue contribution of $2 million as compared to $800,000 in the third quarter of 2020. Early demand has been strong with over 180 surgeons trained since the acquisition, the majority of whom are located outside the US. A key differentiator and growth opportunity for FITBONE is its adult and pediatric labeling, which no other interventional limb lengthening solution has. In early September, we announced the first US pediatric patient implanted with FITBONE for the femur and tibia. Given the current limited options available for pediatric surgeons and the clinical performance of the FITBONE system, we expect to see accelerated adoption and use as more surgeons are trained. The third key near-term growth driver is our technology-leading interbody portfolio. Overall, we believe we have one of the most comprehensive interbody portfolios in the industry with technology offerings spanning PEEK, PTC and now 3D printed titanium materials. All 3D printed titanium designs incorporate our innovative Nanovate Technology and optimized design, porosity and surface that allows bone to grow into and through the device. We are seeing accelerated adoption of these technologies with strong performance of our FORZA XP expandable cliff TLIF cage in our new CONSTRUX Mini titanium 3D printed cervical interbody product, which we expect to see continued focus in the future. In addition to the number of exciting near-term growth opportunities, we also have select high-priority segments of our business that we believe will drive growth over the medium and long-term periods. The first is expanding our commitment to the bone growth stimulation market. The second is the expansion of the FITBONE technology platform from limb lengthening to spinal deformity. Third is our spinal fixation platform expansion in the areas of posterior cervical, MIS, anterior column support and deformity correction. And last is the focused expansion of our Biologics portfolio offering. I want to highlight two key updates on these initiatives. The progression of our BGT portfolio as part of our IGEA partnership and the launch of new biologics products. As announced during the second quarter, we entered into a partnership with IGEA to commercialize a portfolio of stimulation devices in the US. As part of this, we've recently submitted a PMA application to the FDA for the approval of AccelStim bone healing therapy, a low-intensity pulse ultrasound product for the healing of fresh fractures and nonunion fractures. Upon approval, this will expand our bone growth therapies portfolio and complement our current PEMF technologies that focus on nonunion fractures and spinal treatments, positioning us as a leader in regenerative bone healing technologies. The initial market release is expected during the second half of 2022. Within biologics, our goal is to have a comprehensive offering of biologic products and solutions for surgeons to use with our spine and orthopedic procedures. With the recent additions of Opus MG set bone buoyed filler and fiberFUSE Strip, which we launched in partnership with MTF Biologics, we have meaningfully bolstered our portfolio, which we believe will not only support the top line growth of our Biologics segment but will also help drive incremental pull-through of our spine and orthopedics hardware offerings. Now shifting to guidance. For the full year of 2021, we now expect top line revenue to be in the range of $460 million to $464 million, which includes approximately $1 million in FX rate headwinds since our last guidance update. This range assumes modest seasonality disruption due to the continued COVID impact throughout portions of the US and certain European markets. We now expect our adjusted EBITDA to be in the range of $57 million to $58 million and our adjusted earnings per share is expected to be between $0.71 and $0.75 using a non-GAAP long-term tax rate of 27%. Despite an increase in COVID-19 pressure on procedures across the business that we have experienced, we continue our transformation, concentrating on executing against not only our short-term, but long-term goals of providing physicians with innovative products and solutions to care for their patients. We made significant progress already and expect to continue to do so in the last quarter of this year and beyond. In closing and with enduring gratitude, I would like to thank our worldwide team for all their hard work, resiliency, adaptability and commitment to delivering our patient-centric mission. With that, I'd like to transition to the question-and-answer session. Operator please open the lines.

Thank you. Your first question comes from Mathew Blackman with Stifel.

Good morning, everybody. Thanks for taking my question. I kind of have three questions. Maybe to start reflecting on the quarter, is there a way to quantify how much COVID impacted 3Q results? And is there also a way to maybe tease out how much of that headwind was volume-based versus let's call it mix headwinds?

Yes, Matt, this is Jon. Thank you for the question. We are experiencing the same macro environment as others in the market. The volume is primarily in the mid to high single-digit range. With that, we are advancing our technology and adapting to the necessary site applications for those procedures. We noticed stricter restrictions in hospitals regarding large multilevel procedures, which has affected both our Biologics and BGT business over the long term. However, we saw an increase in volume for same-day surgery activities. Therefore, the situation is mixed depending on the type of procedure and the impact of COVID.

All right. I appreciate that. And I don't know if you're willing to comment on sort of how October played out, but if so how does that fit with what's sort of baked into the 4Q guide as we think about COVID headwinds and some of the persisting staffing headwinds? And then how should we think about deferred procedure recapture cadence? Is it fourth quarter will bleed into the first half of 2022? Just help us think through that. And then I have just one follow-up on a product.

Yes. Let me begin by discussing the impact of COVID. We experienced its effects in August and September, believed it peaked in the latter half of September, and began to decline in October, which we are still navigating. We anticipate this situation will extend into the fourth quarter and affect us, and we have factored this into our future outlook. Regarding the reallocation of procedures, we recognize that larger cases, multilevel cases, and revisions are still present. Patients are eager for care, surgeons are ready to perform those procedures, and hospitals are prepared to handle them. The return of these cases will depend on the availability of hospitals, and this varies by region. We noted that certain areas in the US faced more significant challenges during the third quarter, and we've also observed some resurgence of COVID in parts of the northern states. Thus, it will be a case-by-case and region-by-region situation. Fortunately, in international markets, we have observed greater stability and a leveling off of COVID cases, resulting in more predictable business trends. As we look ahead in the upcoming quarter, we have adjusted for these dynamics in our perspective.

All right. I appreciate that. And I'll sneak this last one in. Could you just remind us of the opportunity maybe addressable market opportunity with AccelStim? And as we think about sort of primarily 2023 and beyond what kind of impact could it have on segment growth? Thanks so much. Appreciate it.

Yes. Thank you, Matt. AccelStim, when we looked at that market in the US we were up around $100 million of the market opportunity. And we'll launch this in the second half of 2022 based on all the variabilities we'll deal with the FDA. That's our prediction as far as what we know as the FDA works, but I think we have a good submission going in and so how we look at that as far as it's a portfolio for us. We have a very strong distribution channel with BGT. And as we highlighted in our remarks we saw an uptick in Physio-Stim 16% in the quarter dealing with nonunion care. And that nonunion care we looked at that as far as a portfolio and it's another piece of that activity where we can go after fresh fractures as well as nonunion care.

Thank you so much.

Your next question comes from Anthony Petrone with Jefferies.

Thanks and hope everyone is doing well. First question would be just sort of a macro question then I'll go into a couple of product-specific questions. And so maybe just kind of going through Jon the themes of this quarter, which certainly is still Delta, but also staffing shortages at hospitals and then supply chain. If we could just kind of go over those three headwinds. You spoke on Delta. Maybe a little bit deeper on staffing shortages. We're hearing a lot about that this quarter. And then anything on the supply chain of note that may or may not be impacting Orthofix? And then I'll have a couple of product-specific questions.

Sure. Thanks, Anthony. We discussed the Delta aspect, and we're still addressing the effects of COVID Delta. More hospitals are starting to reopen and gradually returning to normal. The important point is that both surgeons and patients are present, and hospitals are eager to provide care. This demand will continue, as patients aren’t improving on their own. The return of patients over the next month or two, and into 2022, will depend on how these conditions evolve. Regarding staffing shortages, we acknowledge they are significant. A high-volume surgeon recently visited us and mentioned he's back to performing the same number of cases as before. However, he expressed uncertainty about how sustainable this would be, as his workday now extends from 7:00 A.M. to 8:00 P.M. to complete the same amount of cases, indicating that he effectively requires double the staffing he used to. While this is just one account, it reflects broader feedback that the demand and willingness to treat patients are strong, although staffing challenges persist. Many nurses are opting for locum tenens positions, moving around the country for better financial incentives and lifestyle choices, which adds to the staffing issues in various locations. On the supply chain front, we're addressing not only microchip shortages but all materials we handle, ensuring we maintain adequate supply levels. We've actually increased our inventory to be prepared for when cases return, ensuring we have all necessary products available to meet any demand. Additionally, we have collaborated with our sales teams to identify potential case scenarios, allowing our supply chain to adjust and ensure that the right products are prepared for upcoming surgeries.

That's helpful. Perhaps a quick follow-up on staffing. If you could predict, how long do you think this particular headwind will last? Is it temporary, or could it extend over a couple of quarters? Additionally, regarding product-specific questions about M6, it seems like another record quarter. Could you provide some insight into the Q-over-Q dynamics with M6 in terms of adoption? Also, anything you can share regarding the IDE for the 2-level indication would be great, and then I will return to the queue. Thanks.

Staffing is quite variable across regions, but we are monitoring it closely. We've heard from some hospital systems that early retirements have occurred, which means they will need to onboard new nurses and staff. This issue isn't limited to nurses, as there is also turnover in rooms and other areas where staffing is required. Hospitals are facing challenges in this area, but they are working hard to manage it. I can't specify whether this will impact us for one quarter or two. A relevant point is that in the UK, there is a reported need for 70,000 new nurses over the next four years, indicating an ongoing educational process to replenish the workforce. As for M6, we have maintained a steady pace in terms of its development. We are successfully attracting new surgeons, and many are interested in M6 due to its unique capabilities. This device offers six degrees of natural motion, making it appealing to surgeons as it mimics the natural disc. We track surgeons not only at their initial use but also to see if they continue to utilize the product, and we are observing a positive trend among both first-time and returning users. M6 has proven effective in various settings, including hospitals and same-day surgeries, which has allowed us to navigate through the challenges posed by COVID. We are also making solid progress in adding key sites for our 2-level study, and we will continue to enroll study patients for both M6 and ACDF to build a valuable database for future use.

Your next question comes from Jeffrey Cohen with Ladenburg Thalmann.

Good morning. Thanks for taking the questions. Just to follow-up to Anthony's question on timing on the M6 study, what does that look like or what's your current anticipation as far as filing and a commercial launch?

Thanks for the question Jeff. We initiated that study in late July and it's a traditional prospective randomized study. It's in a four to five-year window if we accelerate on our enrollment, which we're basically putting good energy behind. So as we map it out, we can look at it in that range as far as the four to five-year horizon before there. I would note that we do multilevel cases throughout Europe and that's part of our real-world evidence plan that we put together and I highlighted. So we're going to track those patients in Europe and also bolster our IDE with the real-world evidence because we have great results in Europe as well. And so, we look at it as standard basis and this is one of those items we want for future benefit and we're going to continue to put M6 in the market with the current indication we have and be relative there.

Fantastic. And some of that study some of the enrollment is coming out of outside the US as opposed to the US. What's the breakdown?

All of the enrollment for the US IDE 2-level is coming from the US. We have bolstered a second study of real-world evidence where we're going out to collect data of patients that have already been treated with M6 outside the US. The FDA allows us to bolster that IDE study with real-world evidence. That doesn't impact our study it's a two-level study per se, but it just bolsters our overall portfolio clinical evidence for M6.

I got it. That's helpful. And then for AccelStim, you did submit the PMA for that. What does that look like as far as timing?

We have submitted a PMA submission to the FDA and anticipate being in the market in 2022. Generally, PMA submissions take about 180 days for review and approval or to receive questions. If we do not face any secondary questions, we might receive approval within six to seven months. However, if additional questions arise, it could take up to three months longer.

Got it. And then lastly for me, could you talk about external fixation, and specifically how those channels look for Europe and how the outlook looks there?

Just on external fixation, it's one of the real strong points for our Orthopedics business and specifically in Europe. I will tell you right now, there's 12 surgeons being trained on external fixation in our building in our skills lab today, they were just here today. There's a keen interest in external fixation in a couple of different areas. One in the foot and ankle area, specifically for Charcot, most of those Charcot patients get external fixation. In Europe, it's a little different. It's used not only in those patients, but also in a broader trauma application. And so, we'd use our TL-HEX for rings and lengthening deformity activities. We also use our Galaxy product for external fixation. And we proceduralize those, so there's a Galaxy shoulder and a Galaxy ankle. And those are very attractive procedures for surgeons in Europe and other parts of the world. And so the team in Europe, this year is really excelling in that external fixation area.

Got it. Thanks for taking my questions.

Thank you, Jeff.

Your next question comes from Jim Sidoti with Sidoti & Company.

Hi. Good morning, and thanks again for taking the questions. First one is regard to distribution. You did a really good job today laying out all the new products you have in the Spine Fixation and Biologics and Stimulation. But can you talk a little bit about what changes you've made over the past 12 to 18 months on distribution and how that's been impacted by COVID and where you think that's going over the next couple of years?

Jim, thanks for the question. Distribution channel is one of our key investment areas and drive areas. Let me break it down a little bit as far as US and OUS. In the US we're looking to bring in strategic distributors and we're looking to bring them in not only in our Spine business but our Orthopedics business. Strategic distributors are those that commit to Orthofix to use both our fixation products and our biologics products. And in doing so, we invest in specific regions initially, but we then go broadly for all regions of the US for strategic distributors. And those people will build an organization will want to build more and more of their volume being committed to Orthofix. And so we track it. We track it by day. We had two of them here this week who were looking to basically engage and there's a continual effort for not only the spine leadership but also the orthopedics leadership in the US. Outside the US, we use a combination of distributors and also our subsidiaries. And so we continue to invest in our subsidiaries. Those are company-managed areas and those are the large areas in Europe and so we continue to invest in distribution sales reps in those areas. As well as distributors to go to different parts of the world that we may not want to set up a subsidiary. So, the distribution channel is an area where we have our sales management keenly focused on it and bringing talent that can basically sell a broader portion or a broader array of our products.

And has COVID helped you add, or has that been more of a headwind in regards to distribution?

COVID has had a neutral impact, with no significant positive or negative effects. Distributors who are currently in business but may not be fully satisfied might hesitate to make changes in a COVID environment. They are cautious about switching to new products and adapting their operations. However, this situation allows us to take more time to engage with these individuals, fostering relationships and trust. Onboarding a new distributor is a long-term endeavor. Our experienced team has solid connections across the industry, and we are continually focused on developing these relationships and facilitating conversions on a regular basis.

And then the last one for me is on strategic investments. You're calling out several million dollars a year on strategic investments. Can you just remind me exactly what that is? Is that you shopping for new deals or what else is involved in that?

We have both organic and inorganic strategies. And I highlighted some of the key features on the organic side as far as building in the Spine business and also in the Orthopedics business. On the external side as far as inorganic, we look at technology we look at tuck-ins. And I stated previously that we were not looking for bigger deals because we couldn't consume them. But actually we're expanding our view that we could be looking for mid-sized deals that could basically complement our existing portfolio and bring channel with it as well.

And similar question with COVID has that process been hindered, or is it possibly more people are likely to sell as a result of COVID?

I think in the first year there were people that may have panicked a little bit and wanted to sell. I don't think that's the case right now. I think that the valuations are quite high and people are very proud of it. I think it does allow new time to work with these companies and basically get to know them and then see, and they actually want to mature their companies a little more right now before they transact. But at the end of the day, it's variable. And we have a great team that looks at these deals and does diligence on these deals. And so we combine that with our commercial teams and also our in-house product teams. And we have a good process going here and we look forward to being active in that space.

Great. Thank you.

Your next question comes from David Turkaly with JMP Securities.

Hi. Thanks. Good morning. The $100 million you mentioned for AccelStim, I was just curious is that fresh fracture and non-unions, or can you segment that at all?

It is fresh fracture and non-union. And it's with LIPUS low-ultrasound.

So that's your view of sort of the ultrasound market, as it sits today correct? So the addressable market is probably much larger, but that's sort of your guess of maybe what Exogen is doing?

Yeah. David, thanks for raising that. We think that the whole BGT market actually has areas that have potential to expand. And so that's the reason why we're investing here. AccelStim is focused ultrasound fresh fracture nonunion. But we think that that market as I highlighted is $100 million will expand. If you think about the dynamics today and part of the reason we had the lift in our Physio-Stim is that it's non-operative. It's done in the office. And so where some of those patients may have gone back to be revised in the OR, now it's a good opportunity to go ahead and try the ultrasound before you go back and operate. So I think we're seeing some traffic there. And from a fracture standpoint, it avoids the second surgery for a patient. And it's a good opportunity for them to seek a firm fusion in that fracture.

When comparing PEMF and ultrasound, will your PMA include any data that could help us understand how these devices operate? They might be quite similar, but I’m not certain. What are your thoughts on this?

The energy source is very different and PEMF is a very proprietary process that we basically have developed over decades. And so it is our mainstay. We have all of our clinical data in spine. We have our nonunion data. And so we're not going to steer away from that at all. That is part of that robust portfolio we have. The AccelStim with ultrasound is going to be focused at fresh fracture and basically put us in that market to expand the portfolio not only AccelStim and there's other technologies out of the IGEA license agreement that we have opportunities to explore as well.

Got it. Thanks a lot.

Thanks, David.

At this time, there are no further questions. I will now turn the call back over to Jon Serbousek for closing remarks.

Thanks Operator. Thanks everyone for joining the call. I appreciate your interest in learning more about Orthofix and the progress we're making. And with that I'll close the call. And thank you very much. Have a wonderful day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.