Earnings Call Transcript
Orthofix Medical Inc. (OFIX)
Earnings Call Transcript - OFIX Q2 2021
Operator, Operator
Thank you for joining us for the SeaSpine 2021 Second Quarter Financial Results Conference Call. This call is being recorded today, August 2, 2021. I will now hand it over to Lee Salvo from Investor Relations.
Lee Salvo, Investor Relations
Thank you, and thank you for participating in today's call. Joining me from SeaSpine is CEO, Keith Valentine; and CFO, John Bostjancic. Earlier today, SeaSpine released full financial results for the quarter ended June 30, 2021. During this conference call, we will make forward-looking statements within the meaning of federal securities laws in regard to our business strategy, expectations and plans, our objectives for future operations and our future financial results and condition. All statements other than statements of historical fact are forward-looking statements. Such statements may include words such as believe, could, would, will, plan, intend and similar expressions. You are cautioned not to place undue reliance on forward-looking statements, which are only predictions and reflect our beliefs based on current information and speak only as of today, August 2, 2021. For a description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward-looking statements, please see our news releases and periodic filings with the SEC, which are available on our corporate website at www.seaspine.com and at www.sec.gov. Our discussion today will include certain financial measures, such as adjusted EBITDA, loss and adjusted gross margin but are not calculated in accordance with generally accepted accounting principles or GAAP. Management believes that the presentation of these non-GAAP financial measures provides important supplemental information to management and investors regarding financial and business trends relating to the company's results of operations. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are provided in the financial tables accompanying the press release we issued today. I will now turn the call over to Keith Valentine. Keith?
Keith Valentine, CEO
Thank you, Lee. Good afternoon, and thank you all for joining us. Q2 was a quarter of significant achievement for SeaSpine. We transformed the company with the acquisition of 7D Surgical and its enabling technology platform and meaningfully strengthened our balance sheet with a $94.5 million equity raise. From a financial and operational results perspective, we saw a continuation of the revenue growth momentum that started in the back half of Q1, and we further expanded our gross margins. Despite pockets of COVID-related surgery disruptions that impacted some of our larger markets, we delivered a solid quarter of growth. Through our commitment to innovation and customer experience, we took additional market share in both the spinal implants and orthobiologics markets, and we benefited from higher spine surgery volumes as surgeons worked through much of their backlog. We've had a very strong quarter, with total revenue increasing 66% over the prior year period. In the U.S., where we generate approximately 90% of our total revenue, revenue increased 64% year-over-year. In the U.S., growth was once again led by higher sales of our new and recently launched products, which comprised 74% of U.S. spinal implant revenue and more than 40% of U.S. orthobiologics revenue. Surgery volumes increased by more than 50% compared to the second quarter of 2020 and in the low teens sequentially compared to the first quarter of 2021. We also generated slightly higher revenue per case and further increased the utilization of our spinal implant systems and orthobiologics products per procedure. For the second quarter of 2021, SeaSpine products and systems used per procedure averaged 1.9 compared to 1.8 a year ago. Turning to 7D Surgical. We closed the acquisition on May 20, and we placed our first unit under an earnout arrangement during the second quarter. We are also excited to receive FDA 510(k) clearance for the percutaneous spine module for minimally invasive surgery and are on track to launch the MIS module later this month. We have progressed rapidly to integrate the 7D team and brand into the SeaSpine organization and to accelerate certain high-priority development programs. We revised the capital sales force incentive compensation plans to be agnostic to a capital sale or an earnout arrangement. As a result, we are already seeing a greater percentage of the financially more attractive earnout opportunities in the U.S. pipeline than we originally anticipated. With respect to our product launches, we recently initiated the alpha launches of the WaveForm Lateral and WaveForm anterior 3D Printed Interbody Implant Systems. We are now on track to alpha or fully launch more than 15 products and line extensions in 2021. We remain particularly excited about the next line extension of our foundational Mariner platform with an alpha launch of an adult deformity system expected late third quarter and the full commercial launches of our NorthStar OCT system for posterior cervical fixation, the Admiral Anterior Plating System, expected early fourth quarter, and the WaveForm C 3D-printed interbody implant system, expected late fourth quarter. This week, we began to deploy an additional 15 sets of what we believe is a truly innovative and differentiated NorthStar system, and we plan to deploy an additional 50 sets in 2 separate tranches mid-third quarter and late fourth quarter. Those full launches, in particular, are expected to be significant drivers of revenue growth in the fourth quarter of 2021. Continued investment in product innovation and the deployment of our high-demand foundational spinal implant systems combined with our best-in-class EBM portfolio and market-leading flash navigation system featuring 7D technology gives our expanding distribution network the assurance that we can support their aggressive growth plans. Maintaining confidence is so important to our efforts to further capture market share. With the stronger balance sheet we now have after the recent financing, we have even more capability to invest for growth. We remain cautiously optimistic that despite the recent escalation in the number of COVID-related hospitalizations, as more people get vaccinated, we will get a sustained return to pre-COVID spine surgery volumes during the second half of 2021. Confidence in the long-term opportunity, coupled with the expected contributions of upcoming product launches and the 7D Surgical technology platform, continues to drive our investment decisions, the most notable of which is the significant increase in spinal implant sets. In total, we plan to invest nearly $40 million this year in the alpha and full commercial launches of numerous spinal implant systems as well as deploying more of existing spinal implant sets that are in highest demand. These investments, which represent an almost 60% increase compared to 2020, solidify confidence with our distributors that we can comfortably support their ambitious growth plans for the second half of 2021 and beyond and give us the confidence to increase the bottom end of our revenue guidance by $1 million to a range of $201 million to $205 million. This reflects growth of 30% to 33% over full year 2020 revenue and 26% to 29% over full year 2019 revenue. And now I'll turn the call over to John with more details on our financials and our financial outlook. John?
John Bostjancic, CFO
Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, revenue for the second quarter of 2021 totaled $47.5 million, a 66% increase compared to the second quarter of 2020 and a 13% sequential increase compared to the first quarter of 2021. U.S. revenue totaled $42.6 million and included $600,000 of 7D Surgical capital sales revenue, a 64% increase compared to the second quarter of 2020 and a 14% sequential increase compared to the first quarter of 2021. U.S. spinal implant and enabling technologies revenue in the second quarter of 2021 totaled $21.4 million, a 62% increase compared to the second quarter of 2020 and a 16% sequential increase compared to the first quarter of 2021. That growth was led by new and recently launched products, predominantly those that were launched alpha or fully in 2020 and the first half of 2021. The rapid clinical adoption of our most recently launched products is a very encouraging sign for the growth that they can drive in the second half of 2021, particularly in Q4. We continue to experience low to mid-single-digit declines in average selling prices common in the spine industry. U.S. orthobiologics revenue in the second quarter of 2021 totaled $21.2 million, a 67% increase compared to the second quarter of 2020 and an 11% sequential increase compared to the first quarter of 2021. Those increases were once again driven by growth in the OsteoStrand Plus product. International revenue in the second quarter of 2021 totaled $4.9 million, an 81% increase compared to the second quarter of 2020 and a 9% sequential increase compared to the first quarter of 2021. In our press release, we also provide comparisons of our revenue results for the second quarter of 2019 as the impacts of COVID-19 on our business in the second quarter of 2020 make a comparison to the second quarter of 2019 a useful supplemental metric to measure growth. COVID-19 had a larger adverse impact on our U.S. orthobiologics business in the second quarter of 2020 compared to the spinal implant business, which resulted in atypical relative growth rates, with orthobiologics growing faster than spinal implants by that measure. The growth rates compared to the second quarter of 2019 are more in line with the typical relative growth rates, with spinal implants growing meaningfully faster than orthobiologics. GAAP gross margin for the second quarter of 2021 was 63.2% compared to 59.2% for the second quarter of 2020. The increase in gross margin was primarily due to idle plant costs recorded in the second quarter of 2020 associated with the nearly 2 months' shutdown of orthobiologics manufacturing operations at our Irvine facility. The year-over-year gross margin benefit from increased sales in the U.S. of our high-margin spinal implant products was mostly offset by two factors: higher kitting and logistics costs incurred in preparation for the full commercial launches of the spinal implant systems expected in the second half of 2021 that Keith mentioned earlier and from $300,000 of technology-related intangible asset amortization associated with the acquisition of 7D Surgical. Adjusted gross margin, which excludes technology-related intangible asset amortization and idle manufacturing plant costs, was 64.5% for the second quarter of 2021 compared to 63.5% for the second quarter of 2020. The anticipated shift to more full commercial launches of spinal implant systems in 2021 is expected to generate higher excess and obsolete inventory charges relative to prior years from the substantial investment in outsized implant inventory required with those set builds. However, that impact notwithstanding, we believe that we can continue to expand adjusted gross margins by 100 to 150 basis points per year over the next 2 to 3 years. Operating expenses for the second quarter of 2021 totaled $41.1 million, a $10.5 million increase compared to $30.6 million for the second quarter of 2020 and included $1.6 million of 7D Surgical operating expenses. The increase in operating expenses was driven primarily by $8.4 million in higher selling and marketing expenses, the majority of which relates to selling commissions; $1.1 million in higher general and administrative expenses, which included more than $500,000 in legal and other professional fees incurred in connection with the 7D Surgical acquisition and integration; and $900,000 in higher research and development expenses. We reported a $6.2 million non-operating gain and other income net in the second quarter of 2021 in connection with the forgiveness by the SBA of the total amount outstanding of our Paycheck Protection Program loan. Net loss for the second quarter of 2021 was $5.2 million compared to a net loss of $13.7 million for the second quarter of 2020. Adjusted earnings before interest, taxes, depreciation and amortization for the second quarter of 2021 improved by $4.3 million to a loss of $3.5 million, compared to a loss of $7.8 million for the second quarter of 2020. Adjusted gross margin and adjusted EBITDA loss are non-GAAP financial measures that we believe provide valuable information on our operating results that facilitates comparability of our core operating performance from period to period and against other companies in our industry. A reconciliation of GAAP gross margin to adjusted gross margin and of GAAP net loss to adjusted EBITDA loss was presented in the financial tables of the press release we issued this afternoon. Cash and cash equivalents at June 30, 2021, totaled $120.7 million, and we had no amounts outstanding under our credit facility. We received $94.5 million of net proceeds in April 2021 from an underwritten public offering of 5.2 million shares of our common stock. We paid $28.3 million in cash consideration in May 2021 in connection with the acquisition of 7D Surgical and, in April 2021, repaid the entire $20 million of outstanding borrowings under our credit facility. Our free cash flow burn, which includes operating cash flows and purchases of property and equipment, was $14.7 million for the second quarter of 2021, a $3.2 million increase compared to $11.5 million for the second quarter of 2020 and was $21.4 million for the first half of 2021, a $5 million increase compared to $16.4 million for the first half of 2020. Those increases were primarily attributable to higher investments in spinal implant set build and instrument capital expenditures needed to support a greater number of full commercial launches in 2021. Turning to our financial outlook for 2021. We remain focused on expanding our gross margin and continuing to reduce cash-based G&A expenses as a percentage of revenue. However, we plan to continue to redeploy any operating leverage towards the sales, marketing and R&D initiatives and inventory and spinal implant set build capital expenditures that are critical to driving the sustained accelerated revenue growth implied by our 2021 revenue guidance. As Keith noted earlier, we now expect full year 2021 revenue to be in the range of $201 million to $205 million, reflecting growth of 30% to 33% compared to full year 2020 revenue and 26% to 29% over full year 2019 revenue. In addition to expressing our confidence via a $1 million increase in the bottom end of the revenue guidance range, we also want to provide more color on our expectations for quarterly revenue progression for the second half of 2021. Based on a number of factors, including surgeon feedback regarding taking vacation time this summer, the timing of the North American Spine Society meeting in late September, the rescheduling due to COVID-19 of other large industry trade shows into the third quarter and a greater percentage of 7D placements expected under an earnout arrangement than originally anticipated because of the new compensation model we introduced for the 7D sales team, we are now expecting more seasonality than we did earlier in the year. For Q3 2021, we now anticipate 16% to 18% year-over-year growth and, for Q4 2021, expect 33% to 39% year-over-year growth. That represents a roughly 5% to 8% sequential increase for the typically seasonally weak third quarter compared to the second quarter of 2021, which is typically one of the strongest quarters of the year. While the near-term impact of a higher-than-expected 7D earnout placement assumption has the effect of lowering 7D's anticipated contribution to third quarter 2021 revenue, it provides a much greater upside benefit to revenue and contribution margins for the fourth quarter of 2021 and for the next 2 to 3 years through the longer-term contractual relationship contemplated by the earnout commitments from those accounts. We expect to further reduce our adjusted EBITDA loss in 2021 compared to last year, including the anticipated dilutive impact of 7D Surgical on our P&L this year. We expect our free cash flow burn for 2021 to be between $46 million and $49 million. That increase versus 2020 is due in part to anticipated adjusted EBITDA dilution from 7D Surgical in 2021 but more significantly from the more than 60% planned increase to nearly $40 million in spinal implant inventory instrument and set build CapEx investments Keith mentioned earlier to support the many full commercial launches slated for 2021. With respect to the 7D Surgical acquisition, certain 7D shareholders elected to receive exchangeable shares at the closing, which allows them to defer certain taxable events until they tender those exchangeable shares for shares of SeaSpine common stock. As a result of the roughly 4.3 million shares of SeaSpine common stock in total that will ultimately be issued to 7D shareholders, a total of 1.3 million exchangeable shares that were actually issued will not be reflected in the denominator for loss per share calculations until the 7D shareholders tender those exchangeable shares because of their anti-dilutive effect. Those exchangeable shares, which will be treated consistent with common stock equivalents, like RSUs and stock options, in the loss per share denominator, must be tendered within 5 years of their issuance. At this time, we can't predict the timing that the 7D shareholders who elected to receive those 1.3 million exchangeable shares will tender them for shares of SeaSpine common stock, and that will likely be a decision each 7D shareholder makes based on their own personal tax planning. With more than $120 million in cash and cash equivalents on hand, plus the additional liquidity that we can access through our $30 million credit facility, which we extended for at least 1 year to July 2022 and for which we can elect to expand to $40 million, we have never been better capitalized to continue to invest confidently and aggressively for growth. At this point, I'd like to turn the call over to Keith for closing comments.
Keith Valentine, CEO
Thank you, John. We are all very excited to add the 7D Surgical team to the SeaSpine family and to be able to leverage their outstanding enabling technologies to spread our growing influence beyond just the operating room. That will be additive to our commitment to execute at a high level on our foundational priorities that have transformed SeaSpine into the organization that we are today, namely to timely and effectively develop and launch clinically relevant products, to attract and retain the highest-quality distribution, to generate above-market revenue growth through more efficient utilization of our spinal implant sets and to further expand our gross margins. Our mission is to collaborate with surgeons to develop cost-effective solutions to treat spinal disorders and improve patients' quality of life. Our goal is to be a market share taker and grow 4 to 5 times faster than the overall spine market. We believe that we have the right products and systems, a highly effective and growing distributor network and the best team in the spine market to accomplish this. Today, SeaSpine is an organization of more than 500 passionate and dedicated employees who are motivated by our past successes and are driven to deliver clinically superior net cost-effective procedural solutions that differentiate us with both surgeons and distributors in this competitive market. With the recent return to the office after nearly 15 months of working remotely, we are reenergized and enjoying the face-to-face collaboration that is so important to our culture. That energy and excitement is palpable and has been noticed by the increasing number of surgeon and distributor visitors we've hosted in the past couple of weeks. It's so great to be back. With that, we will now open it up to questions. Operator?
Operator, Operator
We have your first question from Matthew O'Brien with Piper Sandler.
Matthew O'Brien, Analyst
Great. I'll focus on two questions, although I have many more. Keith or John, the increase in implants and sets compared to 2020 is quite remarkable. Can you discuss whether it's more heavily weighted towards sets or implants? Which one has a greater share? Additionally, why do you believe now is the right time to increase this investment? What growth opportunities do you see in this category both domestically and internationally?
John Bostjancic, CFO
The primary factor driving our growth this year compared to last is the number of full commercial launches we're undertaking. The distribution between implants and instruments is fairly balanced. We are making significant investments in both implant inventory and the sets of instruments, which reflects our capital expenditures. However, the most significant catalyst is the number of impactful product launches we have this year. We're excited about several alpha launches, including the WaveForm 3D interbody technology and the highly anticipated NorthStar initiative. We plan to release an additional 15 sets and deploy 50 more by the end of the year. The Explorer expandable interbody and the Reef TO are set for their full commercial launches as well. Moreover, within the alpha launches, we're looking at the Mariner adult deformity indication, which is complex and comes with high costs even at this stage due to the nature of deformities. This demonstrates our confidence in our growth, which will be largely driven by these significant product launches.
Keith Valentine, CEO
I think the other thing, too, to think about, Matt, is the overlap of bringing aboard some larger distribution groups that require more of an inventory commitment. Also, on top of that, for each of those earnouts that we're anticipating, those earnouts are done much through the newer systems and done through the excitement in and around the newer systems. So we want to make sure that whether it's a 7D earnout or whether it's a new distributor coming aboard that we can instantly or quickly deploy sets that make them comfortable and make the hospital comfortable that they're going to have the right equipment to either earn out or the right equipment to sell into their new accounts.
Matthew O'Brien, Analyst
Okay. That's helpful. And just to push a little bit further here, guys. Just because I think investors are pretty attuned to the impact of new sets, is it more skewed on the set side or really the implant inventory side that you're able to support all these new distribution groups?
John Bostjancic, CFO
Again, it's both because the sets get deployed with, what we call, trapped inventory, all the implants that travel with the instrument sets to be able to conduct the surgery. So we're investing in both, but then we also need to have inventory on the shelf to be able to replenish the implants as they're consumed. So it's not a 50-50 mix, but it's pretty even in terms of the investment in both the capital expenditure side and the inventory side because you need both to be able to do a surgery, and those all travel with a set. But then you got to have the replenishment inventory on the shelf so that when distributors consume the implants from a set and want to move on to the next surgery, we can easily and readily replenish those inventories to maintain their confidence.
Matthew O'Brien, Analyst
Got it. That's super helpful. For the follow-up question, just talking about the earnout opportunity here. Is it pretty much straight line over a 2- or 3-year period? Is it back-end loaded, kind of based on how things go? And then with you getting the MIS indication, do we expect really more of the impact late Q4 into next year in terms of your placements? Or can you quickly update the system or provide an upgrade for people that want to get their hands on 7D open right now and then move quickly in MIS?
John Bostjancic, CFO
Yes, the first question is that the conversations we're having mostly indicate a straightforward impact on the revenue. It doesn't mean we wouldn't consider a structure with a gradual increase. However, we're generally seeing engagement with a direct commitment over a 3-year period for the earnout revenue. And what was the second question?
Keith Valentine, CEO
Yes. On the upgrade, yes, there'll be different options if you buy a system new as to whether you choose to have that module, and then, of course, there is an opportunity for that module to get introduced into existing installs if they choose to purchase.
Operator, Operator
We have your next question from Kyle Rose with Canaccord.
Kyle Rose, Analyst
I wanted to talk about just the state of the sales force now. I mean, the comment about bringing on a lot of new surgeons and new distribution groups to the company to do trainings and education and things of that sort. And then also dovetailing off of your answer to Matt's question, just about new sets to support some larger distributors, maybe just help us understand where are you in the life cycle of upgrading the distribution talent. Obviously, you've got ambitious goals for taking share. How much of that comes from just having better products to sell versus you now will have better distribution talent carrying more weight in the market?
Keith Valentine, CEO
Yes. I think really, both continues to go on. I think as we start getting more and more of our legacy systems become obsolete, we're moving, obviously, to a greater amount of our revenue coming from new product introductions and new product sales. That creates a better opportunity for us to continue to fill in that white space and solidify some of our current distribution teams. We're working in some of our larger areas on some nice additions that are being added to the team, either through combination or through hiring. We feel like the reason for that is absolutely because of what the pipeline is presenting. 3D technology is certainly an important one that now we have a leading interbody portfolio in NanoMetalene, and we have the opportunity to offer 3D across many of our interbody platforms. Again, that creates a different conversation and opportunity with new distribution. But most of the new distribution is going into white space and going into areas that we don't currently have exclusive or more focused distribution.
Kyle Rose, Analyst
Great. And then on 7D, I mean, encouraging to see the MIS clearance come through that's going to roll out. Maybe when do you expect to have the R&D teams such that you'll have new implant or instrument designs that are actually kind of utilizing some of the 7D technology more directly? When will we see those first R&D projects move into alpha launch?
Keith Valentine, CEO
We have introduced new instrumentation specifically designed for SeaSpine. However, it's important to note that the 7D system was originally intended to be versatile. It has been compatible with SeaSpine instruments for a considerable time and can also be used with competitive products. As we progress, you will notice that integration with SeaSpine will become more streamlined through software enhancements and other features that facilitate the use of our instrumentation. Our instruments can be easily assembled onto certain components of the 7D guidance platform. You will see ongoing improvements in this area, and there are likely to be updates showcased at the upcoming NASS event. We are already in motion with this initiative, and it is set to evolve further with subsequent software generations.
Kyle Rose, Analyst
Great. And then just one last one and then I'll hop back in the queue. You commented about some of the quarterly progression and certain vacations and things on that side. But maybe just update us on anything you're seeing with respect to the recent increases in COVID volumes across the United States. Is there anything from a Delta variant perspective that you need to call out as far as what you've seen in the last couple of weeks?
Keith Valentine, CEO
Yes, there is. There was just recently the joint sections meeting in San Diego. So I had a good opportunity to talk to surgeons there and not only talk to others in our industry. Yes, there are spotty places. Certainly, Florida has become a hot area. There is a big neurosurgical meeting coming there in Orlando. Specifically, in Orlando is in a place of, I think, requiring masks now for that meeting and even having some elective surgery slow down in the Orlando area, as we understand it from last week. So yes, I think there are some accommodations being made in some markets. We don't feel like yet, it's something of the same concern that we've had previously, but it is something we're keeping an eye on. Certainly, there are some markets where the Delta variant does seem to be at higher numbers and at numbers that certainly health authorities are starting to be concerned about whether they need to make accommodations at hospitals.
Operator, Operator
We have your next question from Ryan Zimmerman with BTIG.
Ryan Zimmerman, Analyst
Just a few for me, following up from Matt's and Kyle's question. Just Keith, dovetailing that question with Kyle, you did make a comment about backlog dynamics. And I appreciate all the quarterly cadence commentary that we have. Where are we at, in your view, from a backlog perspective? It sounds like some of the surgeons you're working with are working that down, but I'd love to just get your sense for kind of how long that tailwind may potentially last.
Keith Valentine, CEO
Yes, it's a good question because we ask every surgeon that visits and I was even discussing this at the meeting last week. It certainly seems that most of the backlog has been addressed. There was a period when backlog items were being held up due to patients being hesitant to visit surgeons' offices. However, now they report a much better balance. The backlog is largely being managed, and they don't expect it to linger throughout the entire third quarter unless there are unforeseen delays. They are also recognizing an improved patient flow to their offices compared to before. This is what we've been trying to clarify during the call; the fourth quarter continues to appear very strong in terms of surgery volume.
Ryan Zimmerman, Analyst
Okay. Appreciate those comments. And then turning to 7D for a little bit. Two questions for me around that. Just one, I think at the time of acquisition, there was roughly 54 systems in the field. I would love to understand kind of how those are working through your placing systems. You're putting these earnout agreements in place for the new systems. But of the 54 that were there, how many were you able to convert already to spine product or have the opportunity at least to get some spine hardware in front of those? And then just for John, and I'll just ask my question upfront. The second part of that is on the cost synergy side, kind of where are we at in that process. And what are your expectations from a cost standpoint if there are any synergies that you can work through?
Keith Valentine, CEO
Yes. Currently, all the placed units were outright sales. We are involved with a few of those accounts and are working to expand our presence there. Fortunately, over the last couple of months, several specific accounts have begun using some SeaSpine products, including those geographically closer to us. This process continues, but it's not an easy task. It provides an opportunity to discuss SeaSpine products, but there is no incentive for them to "earn it out" since they have already purchased the items. The opportunity will keep arising as we discuss the MIS module and strategize for the future. Additionally, new software will be launched that will enhance our discussions. We have had some successes, and our sales team has leveraged the fact that they now have something new to discuss with the surgeons, who are more aware of us due to the 7D being present in their operating rooms and recognizing that SeaSpine is associated with it.
John Bostjancic, CFO
And then on the synergy side, Ryan, this is still very much a '1 plus 1 equals 3' revenue synergy opportunity. There are modest cost savings in things like trade shows and driving more collaborative relationships with 7D suppliers with higher volume commitments over time with our stronger balance sheet that we can drive down cost of goods sold some, too. But really, this is all about revenue play. It's taking more market share faster and growing because 7D is pretty much bolt-on, right? They have specialties that we don't have in terms of product development, optics and software development. So it's all complementary to our base of strength, and it's all about the revenue and market share taking opportunity.
Operator, Operator
We have your next question from Sam Brodovsky with Truist.
Samuel Brodovsky, Analyst
So first, I want to ensure I understand the impact of 7D on guidance correctly. You mentioned that a greater mix from earnouts is expected than initially anticipated. Should we interpret that to mean that perhaps slightly less than $7 million will come into revenue from 7D? Additionally, regarding the $1 million rate at the lower end, should we view that as primarily the strength of the core business, or how much is 7D contributing to sales through those earnouts?
John Bostjancic, CFO
Yes. Again, the caution we took when we talked about 7D on our last call was to not give an assumption around the mix of that revenue, that $7 million incremental revenue between capital and earnout revenue, which is kind of the base business. So we're still not providing that mix because we're incentivizing the sales team to convert as many of those opportunities to earnouts as possible. As we said on our scripted comments, the expectations for earnout models, we've been able to do more than originally anticipated, which does impact the short-term capital sales revenue opportunity, particularly in the third quarter. But when you say is 7D weaker or the base business stronger to bring up the bottom $0.5 million, well, it's both, the base business is stronger. But part of the reason it's stronger is because of the revenue pull-through we're going to get from the 7D earnouts generating more spinal implants and orthobiologics sales in those accounts in a more meaningful manner starting in Q4. We still have the same expectations that we've got that $7 million of upside, but we intentionally didn't give any color on the mix on the last call of what that $7 million is comprised of capital versus implants because of that very reason. As we didn't have great visibility into what the earnout would be, we had an assumption. The good news is what the pipeline is, is the assumption for earnout opportunities is even greater than we originally anticipated, which is good because that's exactly why we restructured the incentive plans for the sales team is to motivate them to focus on earnouts because they're better long-term financially, long-term in terms of maintaining access to accounts through contract periods. It's the same assumption, and we're just not going to provide color on that because it's a slight impact to the third quarter in terms of capital sales but it's upside longer term.
Samuel Brodovsky, Analyst
Great. That makes perfect sense. And then just on those earnouts, we'll be curious to hear what you're hearing from your sales force. Obviously, restructuring it is going to have an impact on their activity. But are they seeing more interest from accounts now that potential customers have that earnout option? Or do you think it's more earnouts coming strictly from that change in the incentive model?
Keith Valentine, CEO
I think there's an excitement that this is a very strong capital equipment sales team that has had to deal many, many times with only one option. That option was they had to get an entire sale, and that cycle at a hospital can be quite long. The fact that they're able to offer either and get a hospital excited about possibly getting the equipment placed sooner than later has been very motivating, especially in accounts that they knew full well going in that they probably didn't have capital equipment allocated for it for at least a year or 9 months. We're working on really shortening that cycle and getting an opportunity. The price point and features of 7D give us a real ability to have a very reasonable earnout model that doesn't intimidate the hospital. I think some of the earnouts for some new technology really intimidate the hospital, and they have a difficulty feeling comfortable signing aboard. Ours, I think, is much more reasonable, and we're able to do that because of the feature to cost consideration that 7D has.
John Bostjancic, CFO
Particularly in ASCs, right? We see more surgeries moving there.
Keith Valentine, CEO
Yes, especially with the MIS application, I believe it opens up new opportunities for ASCs as we move forward. This MIS application will continue to be launched over the next few quarters, and we see it as something that ASCs will find appealing.
Operator, Operator
We have your next question from Jeffrey Cohen with Ladenburg Thalmann.
Jeff Cohen, Analyst
So firstly for you, Keith. I hate to keep beating on 7D, but perhaps give us a little flavor as far as certain spinal levels, spinal regions or procedures that you're seeing some uptick from and how that matches up with your current offerings as far as pull-through, that would be helpful.
Keith Valentine, CEO
Yes, we're really excited about the two launches we discussed in the call. NorthStar performed best in terms of numbers. We are also committed to having a larger alpha group than usual to ensure we thoroughly test it. We're thrilled to have recently validated our launch labs, and it's full speed ahead. This will provide a strong procedure or implant system for 7D technology in the cervical spine, specifically in the posterocervical region. Additionally, the new deformity products align well with what many users of 7D are already utilizing. Obviously, degenerative procedures account for the majority of cases, and it is a very straightforward system for standard degenerative work. We are considering everything from a broad perspective, especially with our new system launches. Ultimately, the effort on the deformity and posterior cervical sides will create an interesting interaction with 7D. We'll share more on that at NASS.
John Bostjancic, CFO
Yes. Got it. And then second for me, for you, Bost. Can you talk a little bit about efficiencies and leverage? It looks like your OpEx, which was like $600,000 lower than what we estimated drove in 6% higher on your top line of $475 million. So it looks like you're pulling out some efficiencies in leverage. Could you talk about that a little bit? Is it beginning or you just happen to see more of it during this quarter? We're looking at a combination of factors. As mentioned earlier, we are focused on improving gross margins and increasing efficiency, particularly in general and administrative costs, which have only increased by about 5% on average, compared to the long-term growth rate of 11%. Additionally, we are starting to realize more synergies in sales and marketing, with commission rates decreasing slightly as anticipated. Over the past two years, we've made significant investments in marketing to employ more product managers due to the number of new products being launched. Now that we are nearing the market with an alpha launch and transitioning to a full launch, we don't need to keep hiring more marketing staff as we have adequate coverage. We're seeing the expected leverage and efficiencies we aimed for, and the second quarter was another demonstration of our commitment to this strategy. We will continue to reinvest those synergies to support greater revenue growth.
Jeff Cohen, Analyst
And John, when might you take the inventory up toward the end of the year? Are you looking at another 20% or so on current levels?
John Bostjancic, CFO
I don't know if it will be that high because, again, it's going to be a mix of orthobiologics and spinal implants. But of the $40 million we had, it's not going to be a total increase. It's pretty close to 50-50 between the $40 million going towards spinal implant sets, which is the capital expenditure side, and the other half going towards inventory. So that's the rough breakdown of how that spend should hit the balance sheet.
Operator, Operator
We have your next question from Mathew Blackman with Stifel.
Mathew Blackman, Analyst
I have two questions. First, I would like to know about the early reception of 7D now that it's fully available. In terms of cross-selling, which opportunity do you think is greater in the near term? Is it the existing 7D customer pull-through or introducing 7D to current SeaSpine customers? Please help me consider these two areas. My second question, which Keith somewhat addressed, is about what to expect at NASS. You're hosting an Analyst Day where we will hear more about 7D, but is there anything else important that we should be aware of before the meeting?
Keith Valentine, CEO
The first thing to consider is whether there's a larger opportunity in placing these units in existing accounts or how much is related to new accounts. Both avenues present opportunities and are gaining traction. We have existing accounts where we can expand our relationship if they decide to adopt more products. Additionally, there are several accounts we're engaging with where we currently don't have a presence. Our sales team is tackling this from both angles, aiming for deeper market penetration and increased market share within accounts we're familiar with, as well as exploring brand-new accounts that present unique opportunities. We’re also looking at the upcoming NASS event, where we'll discuss not only the 7D experiences in an Ambulatory Surgery Center (ASC) and the learning curve associated with it, but also introduce new products slated for full or alpha launch around late Q3 or early Q4. Additionally, we'll cover various enabling technologies that have progressed since our last face-to-face meeting at NASS.
Operator, Operator
We have your next question from Brandon Folkes with Cantor Fitzgerald.
Brandon Folkes, Analyst
Congratulations on another good quarter. I just want to talk about the revenue per case. I saw you mentioned that it's sort of slightly up. Any color in terms of how this is trending versus your expectations longer term of where you can get this to as you bring in these new products? Just trying to put into context how much of a tailwind we should think of the new products contributing to revenue growth from a pricing perspective, granted that you're also ticking up on the usage procedure.
John Bostjancic, CFO
Yes. So revenue per case has gone up low single digits in pretty consistently in recent quarters. That's because we're able to participate in more complex procedures with the entire Mariner portfolio. We're seeing a consistent uptick there. The other thing it does in terms of price is it mitigates what is typically mid-single-digit price declines, I think, which is kind of the norm for spine. Having the new products helps us maintain price. Typically, we see low single-digit price declines because of the innovation we're constantly making to the portfolio. I don't think we see the same price declines other companies that are less innovative are getting. The other thing we can't track is the orthobiologic usage in every surgery because there is a percentage of our orthobiologics revenue, about one third of that revenue is direct stocking orders, and it's pretty consistently been the case for a number of years. If they do a stocking order, we don't see the orthobiologics on the charge sheet for a surgery when our spinal implants are used. So to the extent we're tracking revenue and products or systems and products used per case, we're approaching 2, but we know it's higher than that. We just don't know exactly how much higher because when the orthobiologics are used in an account that buys it direct through a PO, we just don't have that visibility. The good news is the revenue per case is increasing because we're participating in more complex surgeries. With the Mariner adult deformity indication on the near-term horizon, that opens up even more opportunities to take market share in some of these higher revenue per case procedures. Mariner Outrigger, right, that revision system allows us to do longer constructs. We're seeing good growth in revenue per case, low single digits consistently every quarter for a number of quarters now.
Operator, Operator
I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Keith Valentine for any closing remarks.
Keith Valentine, CEO
Yes. Thank you, everyone, for joining us today, and I hope everyone has a great evening. Cheers.
Operator, Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.