SI-BONE, Inc. Q4 FY2023 Earnings Call

Thank you for participating in today's call. Joining me are Laura Francis, Chief Executive Officer; and Anshul Maheshwari, Chief Financial Officer. Earlier today, SI-BONE released financial results for the quarter ended December 31, 2023. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. These forward-looking statements are based on the company's current expectations and inherently involve risks and uncertainties. These risks include SI-BONE's ability to introduce and commercialize new products and indications, SI-BONE's ability to maintain favorable reimbursement for its products and procedures, the impact of potential economic weakness on the ability and desire of patients to undergo elective procedures, SI-BONE's ability to manage risks to supply chain, the impact of future capital requirements driven by new product introductions and risks to the continued renormalization of the healthcare operating environment. Other forward-looking statements include our examination of operating trends and our future financial expectations, such as expectations for physician training and adoption, active physicians, new products and clinical trial enrollment and are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. During this call, management may discuss certain non-GAAP measures, including the company's adjusted EBITDA results. For a reconciliation of these non-GAAP measures to GAAP accounting, please see the company's full earnings release issued earlier today. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. SI-BONE disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 26, 2024. With that, I'll turn the call over to Laura.

Thanks, Saqib. Good afternoon, and thank you for joining us. 2023 was a stellar year for SI-BONE, our physician customers and their patients as we delivered record worldwide revenue and attained new heights in physician engagement. For the full year 2023, we generated worldwide revenue of $138.9 million, reflecting 31% growth compared to the full year 2022. This worldwide performance was led by robust U.S. demand as over 1,600 U.S. physicians performed more than 15,000 procedures. We started 2023 with an initial revenue expectation of $124 million to $127 million. With the strong demand for our highly differentiated solutions, growing physician engagement and increases in our surgical capacity allowed us to significantly exceed that expectation. The momentum in the business was clearly evident at our national sales meeting in February. Our sales organization was not only enthusiastic about our performance in 2023 but was even more energized by the potential opportunity ahead of us in 2024. Having been at the company for almost nine years, I can say the mood in the company and the confidence in our future has never been stronger. Our foresight and discipline over the last few years in building scalable operating infrastructure in a methodical fashion drove approximately 48% improvement in adjusted EBITDA in fiscal year 2023. We also reduced our cash usage while continuing to invest in R&D and clinical evidence to support the planned portfolio expansion in 2024. Before I provide an update on our strategic priorities, I'd like to recognize our team. Working together to deliver 25% cumulative annual U.S. procedure volume growth since 2018, our first year as a public company, is a testament to your hard work. We transformed into a multiproduct company that is solving unmet clinical needs across multiple procedures. We're just getting started given the nearly 500,000 target sacropelvic procedures per year. Your focus on delivering for our customers is allowing us to capture this large market opportunity and deliver strong and sustainable revenue growth. Now let me provide an update on our key initiatives as we look to extend our leadership position and drive strong long-term growth. Starting with sales infrastructure. We're extremely proud of our sales and commercial team known for their industry-leading expertise and extensive experience across our target markets. Their execution has allowed us to build new markets and deliver several quarters of record revenue. We ended the year with 82 quota-carrying U.S. territory managers. We complement our territory manager bandwidth with clinical support specialists as well as a growing network of third-party sales agents for case coverage. This hybrid strategy has worked well as we continue to see growth in revenue per territory. In 2023, revenue per territory was $1.6 million, reflecting 39% growth compared to the prior year. We're confident in our ability to further increase revenue per territory and get closer to the high end of our $1.5 million to $2 million target over time. In addition to growing territory productivity, we plan to selectively add to our 82 territories over the next few years. The expanded territory footprint will enable us to maximize the potential of our growing portfolio and facilitate deeper engagement with our physicians to capture the over $3 billion total addressable market opportunity. Moving on to physician engagement, we exited the fourth quarter with nearly 1,130 active physicians, an increase of over 200 active physicians in the quarter compared to the prior year period. The 22% growth in U.S. active physicians over the fourth quarter of 2022 was the 12th consecutive quarter of double-digit year-over-year growth. This elevated level of physician interest and engagement is a great forward-looking indicator and underscores the long-term growth trajectory of our business. Patients suffering from SI joint dysfunction can undergo different types of care, ranging from nonsurgical pain management for short-term relief; interventional procedures, which can provide medium-term relief; and surgical procedures that provide long-term durable pain relief. Over the last few years, we've seen an increase in interest in SI joint stabilization procedures from interventionalists, particularly for cortical bone allograft. Given that the SI joint fusion market is less than 10% penetrated today and the interventional spine physicians' growing interest in the space, we've expanded our engagement with this specialty. We believe the partnership with our surgeons as well as interventional spine physicians, which include anesthesiologists, physical medicine and rehabilitation specialists and interventional radiologists will accelerate our ability to capture this market opportunity. Over the last 15 months, we've been targeting a subset of the estimated 4,500 interventionalists in the U.S., who have prior experience with other minimally invasive spine procedures. We've engaged and trained highly skilled interventionalists in our lateral technique using iFuse-TORQ. While still early, we're encouraged by the level of interest, the caliber of interventionalists we have trained and their pace of adoption. Clinical evidence has always been an important part of SI-BONE's commitment to its patients and physicians. In June 2023, we also initiated the STACI study, which is a prospective study on the use of iFuse-TORQ in patients with sacroiliac joint dysfunction by interventionalists. The enrollment is ongoing and we expect to publish early results by the end of 2024. As the market leader, we believe that our broad product portfolio, training expertise, clinical evidence and experienced sales force are clear differentiators that are leading to strong interventional engagement. Going forward, we expect active physician growth to remain strong as we engage the nearly 8,000 target surgeons and 4,500 target interventionalists. We also expect our growing product portfolio and publish clinical evidence to drive deeper engagement and increase procedures per physician over time. Turning to Products and Solutions, we have a demonstrated track record of building innovative products and surgical techniques to address unmet clinical needs and improve patient outcomes. The robust procedure volume growth we've experienced in the U.S. substantiates the value of our innovation. In 2024, we're launching new products in each of our target markets to further extend our leadership position. Within SI joint dysfunction in degeneration, iFuse 3D and iFuse-TORQ provide our physicians with the most comprehensive solutions for minimally invasive SI joint fusion procedures reimbursed under CPT code 27279. Effective January 1, 2024, the AMA adopted a separate CPT code 27278 to describe minimally invasive sacroiliac procedure performed using an intra-articular implant, typically a cortical bone allograft placed directly in a joint from a posterior approach. As I shared earlier, this technique is more commonly used by interventional spine physicians. With the new CPT code 27278 established for both facility and office-based procedures and with coverage likely available from some payers, we expanded our interventionalist training to also include our new allograft product, iFuse INTRA. iFuse INTRA builds on iFuse Bone, which was launched in 2019, with enhanced surgical techniques that enable accurate placement of the implant into the joint using a posterior approach. We recently completed the first iFuse INTRA procedure in an office-based lab setting. With iFuse-TORQ and iFuse INTRA, we now offer interventionalists multiple products to address their treatment references. Moving to pelvic fixation. Based on the strong adoption demand and growing surgeon interest, we believe our breakthrough device iFuse Bedrock Granite can become the standard of care for fixation infusion of the SI joint, providing a strong foundation at the base of long construct adult deformity procedures. A recent publication with early SILVIA results highlighted the prevalence of SI joint pain in 16% of the patients undergoing spinal deformity surgery, further underscoring the need for inclusion of pelvic fixation infusion as part of these procedures. On the Granite line extension at the end of January, we received 510(k) clearance from the FDA for the 9.5-millimeter diameter implant with S1 and pediatric deformity indication. Since Granite was launched in 2022, approximately 40% of our Granite case volume has been in shorter 2 to 4 level constructs, which are generally degenerative spine fusion procedures. Based on published data, postoperative SI joint incidents in shorter level surgeries are estimated to be up to 20%. Additionally, some patients undergoing shorter level lumbar fusion procedures are at a higher risk of revision due to screw loosening and other hardware failure from underlying conditions such as high pelvic incidents, osteoporotic bone or high BMI. The current adoption of the larger diameter Granite in these shorter level fusion procedures illustrates the increasing interest among the surgeon community regarding including pelvic fixation in high-risk patients. We believe the availability of the smaller diameter implant will provide an offering for the approximately 100,000 annual degenerative spine procedures that end at the sacrum, as well as engage deformity surgeons who have expressed a preference for a smaller diameter implant. We plan to launch the smaller diameter Granite implant in the second quarter. In trauma surgery, we've made significant progress over the last 12 months to develop the market for treating sacral insufficiency fractures. We're engaged with major trauma center thought leaders and are encouraged by the pace of iFuse-TORQ adoption for treating these patients. Toward the end of 2024, we will launch another product targeting the pelvic trauma market. We believe the new product, combined with the initial results from a SAFFRON trial in late 2024, will be key to capturing the trauma opportunity. With over 120,000 sacral insufficiency fractures a year and a one-year mortality rate of up to 25% for the patients who are treated with Bedrock, the trauma market will be a crucial long-term growth driver for us. With that, I'll hand the call over to Anshul to discuss our financial performance.

Thanks, Laura. Good afternoon, everyone. My comments today will be focused on fourth quarter and fiscal year revenue growth, gross margin, productivity and liquidity. Additionally, all the comparisons provided will be versus the same period in the prior year unless noted otherwise. Starting with revenue growth. Our fourth quarter worldwide revenue was $38.9 million, representing growth of approximately 22%. U.S. revenue was $36.7 million, representing approximately 22% growth, predominantly from an increase in procedure volume. International revenue in the fourth quarter was $2.2 million, representing approximately 12% growth. For the full year 2023, we generated worldwide revenue of $138.9 million, reflecting 31% growth. Our U.S. revenue grew approximately 32% to $130.6 million. U.S. revenue growth was driven by approximately 32% increase in procedure volume growth. International revenue for the full year 2023 was $8.3 million, representing 8% growth. Moving to gross margin and productivity. Our gross margin for the fourth quarter and the full year 2023 was approximately 74% and 79%, respectively. The fourth quarter gross margin includes an approximate 4 percentage point impact from a $1.7 million excess inventory reserve. To provide some context, when we launched iFuse-TORQ in 2021, we introduced two designs, a fully threaded and a partially threaded lag implant to meet physician preference. We are seeing physicians prefer the fully threaded iFuse-TORQ across all our target markets, and in fact, demand for this implant type has exceeded our expectations. Accordingly, the reserve is related to our lag implant. Operating expenses were $41.2 million in the quarter, representing approximately 8% growth. For the full year 2023, operating expenses increased approximately 4% to $156.4 million. The increase was driven by increase in compensation, higher commission related to revenue growth and research and development investments. Our net loss was $11 million or $0.27 per diluted share for the fourth quarter of 2023 as compared to a net loss of $11.2 million or $0.32 per diluted share in the prior year period. For the full year 2023, net loss improved by approximately 29% to $43.3 million or $1.13 per diluted share as compared to a net loss of $61.3 million or $1.79 per diluted share in 2022. Net loss per diluted share for the fourth quarter 2023 and full year 2023 includes the impact of the increase in shares outstanding because of the follow-on stock offering in May 2023. Our adjusted EBITDA loss in the fourth quarter was $4.8 million compared to $4.2 million in the comparable period. Adjusted EBITDA loss in 2023 was $17.3 million compared to $33.2 million in 2022, reflecting approximately 48% improvement. Adjusted EBITDA for fourth quarter 2023 and full year 2023 was negatively impacted by the $1.7 million inventory reserve highlighted earlier. Turning to liquidity. We exited 2023 with a strong balance sheet, including $166 million in cash and marketable securities. Our total cash usage in the fourth quarter was less than $800,000. Our strong liquidity position, combined with our continued progress towards adjusted EBITDA breakeven, provides us the flexibility to self-fund our long-term growth priorities. Finally, moving to our outlook for 2024. As Laura noted, we have several tailwinds and growth initiatives coming into 2024. We expect 2024 worldwide revenue of $162 million to $165 million, implying year-over-year growth of approximately 17% to 19%. Our guidance assumes low to mid-single-digit ASP deterioration driven by site of service and procedure mix, moderate impact from new product launches accounting for timing of launch and pace of adoption and modest international revenue growth. We expect 2024 annual gross margin to be approximately 78%. Based on current revenue guidance, planned product launches as well as commercial footprint expansion, we expect 2024 annual operating expenses to grow approximately 9%. Considering the anticipated operating leverage in the business, we expect significant year-over-year adjusted EBITDA improvement for the full year 2024, putting us within reach of our adjusted EBITDA breakeven goal. With that, I will turn the call over to Laura.

Thanks, Anshul. I hope you can feel our excitement and confidence built on consistent innovation and execution coming into 2024. We believe the procedure demand will strengthen in 2024 as we roll out complementary products in each of our target markets. With a strong balance sheet, I believe we're uniquely positioned to deliver sustainable growth over the long term and have a clear line of sight to adjusted EBITDA breakeven. With that, we're happy to take questions. Operator?

Our first question comes from Craig Bijou with Bank of America.

Congrats on a good finish to the year. I wanted to start with kind of what you're seeing in the SI joint fusion market? And with respect to the new allograft product, does the recent focus on allograft by pain docs add to SI joint fusion procedures? Or are they potentially taking away from the traditional implant market? And then maybe if you could just give us a little bit more color on the strategy behind allograft and what you expect contribution either on a procedure basis or from a revenue perspective?

Craig, thanks for the question. And what I first want to do is just highlight the milestone year for us hitting new highs on revenue, growing 31% worldwide, surgeon engagement growing to over 1,100, surgeon territory productivity growing almost 40%, and then the operating leverage, with a 48% improvement in our adjusted EBITDA. So what we're doing is we're coming into 2024 with strong momentum. And so what we're excited about is the opportunities that we have in 2024. Building on the momentum that we had in 2023 and focusing on growing the SI joint fusion market, capitalizing on the launch of Granite in order to capture more of the opportunities with the new introduction of a product toward the end of the year that's targeting sacral insufficiency fractures. We are the undisputed leader in that market space, and we are the original pioneers. When you think about the patient journey, they start out with medication, physical therapy, injections. But there's also this interest in the next level, which are these post-infusion procedures typically performed by interventional spine specialists with cortical bone allografts. We have seen good progress with our STACI study that has been working directly with interventionalists. Now at the beginning of the year, we launched a new allograft product called iFuse INTRA. We aim to provide a broad product portfolio to meet these market needs and are targeting over 280,000 patients per year.

And maybe for Anshul, you saw a tremendous operating leverage in 2023. You're forecasting more in '24, but not to the same extent. Can you talk about the guide and how you're balancing driving that top line growth and still working towards EBITDA breakeven? And can we see EBITDA breakeven come in 2025?

Craig, thank you for that question. Please let me know if you have any difficulty hearing due to static. We are really proud of the operating leverage that we've demonstrated over the last couple of years, benefiting from the investments in the scalable infrastructure we've built throughout the pandemic. For 2024, we expect OpEx growth rate to be around 9%. We do have a huge opportunity ahead of us and want to make sure we're making thoughtful investments to capture these growth opportunities. Laura talked about several of those coming into 2024. So while we anticipate a standard merit increase, higher commissions, and some expansion in sales territory, we're making strategic investments that will allow us to approach adjusted EBITDA breakeven.

Our next question comes from Drew Ranieri at Morgan Stanley.

To follow up on one of Craig's questions about the allograft product, I want to confirm that you're not seeing a significant change in underlying market dynamics from these products taking procedures away from surgeons? What are you seeing on the underlying market?

We're excited about the opportunity with interventionalists. Our primary call point has always been spine surgeons, and we've focused on building our market presence. Yet we are less than 10% penetrated into the market right now. This gives us the opportunity to reach more patients by working with interventionalists alongside spine surgeons. As for pricing, the physician fee for posterior procedures like allografts is around 40% less than it is for our lateral products. However, we believe this offers the chance to capture this market and build our reach.

To address your question regarding OpEx, the majority of our increase will come from commissions, pay increases, and standard territory expansions. We expect additional training expenses for both interventionalists and surgeons, especially with the new Granite product rollouts. There is no major shift in OpEx strategy due to interventionalists; it's simply an opportunity to pursue growth.

Our next question comes from David Saxon with Needham & Company.

Congrats on a strong end to the year. Maybe I wanted to talk about TORQ to begin with. In your script, you mentioned STACI, but another study is SAFFRON. How should we think about SAFFRON as it relates to market development for TORQ? Can that trial drive TORQ adoption?

You're correct regarding TORQ. The STACI study is engaging interventional spine physicians, and SAFFRON focuses on surgeons treating sacral insufficiency fractures. We see a significant opportunity in trauma as we anticipate launching another product this year. We want to demonstrate clinical efficacy since these patients typically don't receive surgical treatment.

From a seasonality standpoint, for our stage of growth, the seasonality in 2024 will continue to be impacted by the timing and the rollout of products. Historical trends may not be applicable, but Q1 typically sees revenue that is about 6% to 7% lower compared to Q4. Our focus remains on improving through execution.

Our next question comes from Sam Brodovsky with Truist Securities.

Can you discuss the launch of the short construct? How should we think about the impact of that versus the initial long construct launch that we saw with Granite?

We are quite excited about the opportunity with our Granite 9.5 product. The product was cleared earlier than anticipated, and this launch should be more rapid than the original Granite launch, as we're using the same instrument trays that are already in the field. Our territory managers have been discussing short construct cases with surgeons, and we aim to target 100,000 short construct cases in the U.S.

Could you compare pricing for the new allograft relative to iFuse?

In terms of pricing, the construct pricing should be comparable for iFuse and the new allograft products.

Our next question comes from Caitlin Cronin with Canaccord Genuity.

Congrats on a great quarter. Just touching on the new focus on interventionalists. You're training them in lateral procedures with 3D and TORQ, and is the new allograft product using your posterior approach?

We are training interventionalists with our TORQ product for the lateral procedure, and we are also training them on our allograft product, which typically does not involve the iFuse 3D triangular-shaped implant.

Is revenue per procedure less for interventionalists versus surgeons?

The pricing overall is very similar, whether we're selling to interventionalists or spine surgeons.

The international business was about 6% of our worldwide revenue in 2023. Our expectations for the year factor in ongoing improvements in France and a gradual recovery in the U.K. and Germany. We expect modest growth in international revenue. Regarding TORQ in EMEA, we are making efforts to ensure its market entry, which could become a growth driver in early 2025.

Can you discuss the pediatric deformity market in terms of size and standard of care?

The pediatric deformity market is small; the target market size is around 10,000 procedures per year. Although it's not a big focus for us, we received inquiries from pediatric deformity surgeons interested in pelvic fixation. The new Granite 9.5 does cater to that need. Thank you so much for your time. I apologize for the technical issues. I hope that we've given you all of the answers that you needed. We're thrilled with the year that we just came off of and excited about 2024 with all the new opportunities in front of us and building on the momentum that we generated in 2023. Thank you again, and goodbye.

Thank you for your participation. You may now disconnect.