Filed by SeaSpine Holdings Corporation
pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Filer: SeaSpine Holdings Corporation
Subject Company: SeaSpine Holdings Corporation
SEC File No.: 001-36905
Date: November 2, 2022
Event Type: Q3 2022 Earnings Call (Corrected version)
Company: SeaSpine Holdings Corp.
Keith C. Valentine - SeaSpine Holdings Corp., President, Chief Executive Officer & Director
John J. Bostjancic - SeaSpine Holdings Corp., Senior Vice President, Chief Financial Officer & Chief Operating Officer
Ryan Zimmerman - Analyst
Kyle Rose - Analyst
Jeffrey S. Cohen - Analyst
Ross Osborn - Analyst
Jason Wittes - Analyst
MANAGEMENT DISCUSSION SECTION
Welcome to the SeaSpines 2022 Third Quarter Financial Results Conference Call. At this time, all participants are in listen-only mode. Following managements prepared remarks, well hold a question-and-answer session. As a reminder, this conference call is being recorded today, November 1, 2022.
I would now like to turn the conference over to Greg Chodaczek (00:00:50). Please go ahead, sir.
Thank you for participating in todays call. Joining me from SeaSpine is CEO, Keith Valentine;
COO and CFO, John Bostjancic. Earlier today, SeaSpine released full financial results for the third quarter ended September 30, 2022.
During the conference call, we will make forward-looking statements within the meaning of the federal securities laws in regard to our business strategy, expectations and plans, our objectives of future operations and our future financial results and conditions. All statements other than statements of historical facts 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, November 1, 2022.
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 Securities and Exchange Commission, which are available on our corporate website, www.seaspine.com, or at www.sec.gov.
Our discussion today will also include certain financial measures such as adjusted gross margin and adjusted EBITDA loss that 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 results of operations.
These non-GAAP financial measures should not be considered replacements for or should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are provided in the tables accompanying the press release we issued today.
I will now turn the call over to Keith Valentine. Keith?
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Keith C. Valentine
Good afternoon, and thank you all for joining us. Our organizations consistent execution and the performance of our distributor partners, including a large transformational distributors we added during the past year, delivered record third quarter revenue growth and accelerating momentum. The tremendous momentum combined with our innovative product offerings in orthobiologics, spinal implants, and enabling technologies continue to attract larger, more exclusive distributors and fuel our growth as we finish 2022 and look forward to consummating our planned merger with Orthofix, which we expect to close early next year. The momentum gave us the confidence to raise full year 2022 revenue guidance to a range of $236 million to $238 million, representing year-over-year growth of 23% to 24%.
In the third quarter, we grew total revenues by 45% over the prior year period of $67.1 million. In the US, where we generate approximately 90% of our total revenue. We saw revenue increase 24%, reaching $51.1 million, and international revenue grew 207% to $16 million, largely as a result of the spinal implants stocking orders we shipped to our European distribution partners ahead of our planned exit from the spinal implants market there. We continue to expand our product portfolio with the full commercial launches of the WaveForm TLIF Articulating Interbody system and the Mariner MIS Wayfinder System.
The WaveForm TLIF system is the next iteration of our proprietary 3D printed interbody technology that is manufactured entirely of a repeating and continuous wave-like structure that absorbs and distributes compressive loads more efficiently than other 3D printed architectures in the market without compromising strength. The Wayfinder system, a novel one step k-wireless screw delivery system for pedicle screw fixation that is designed to reduce the number of steps associated with fixation placement. These launches demonstrate SeaSpines continued commitment to advance its portfolios through product development, to help surgeons improve patient outcomes and to drive market share gains.
Turning to 7D Surgical, we placed six units in the third quarter. From an earnout perspective, we have executed a total of five deals since the acquisition, with an aggregate annual revenue commitment of $2.8 million per year. The sales pipeline for our FLASH navigation system continues to shift to a higher percentage of earnout opportunities. Additionally, in terms of non-contractual revenue pull-through of our spinal implants and orthobiologics products, we continue to see increased revenue six months post capital sale in over half of those accounts.
Before handing off the call to John, I would like to take a few minutes to discuss our recently announced intent to merge with Orthofix Medical. We believe our combined portfolios will put us in a highly differentiated position in the spine market, combining leading bone growth therapy, enabling technologies, spinal fixation, motion preservation and orthobiologics. The combined distribution network will have access to greater than a $200 million base of complementary revenue with immediate pull-through opportunity via the Motion Preservation, 7D-enabling Technologies and bone growth therapies portfolios.
Additionally, we believe that the revenue risk is manageable as our due diligence efforts confirm that there is minimal geographic overlap in the United States. This merger of two patient-focused companies will create far more significant revenue upside and cost synergies than the two existing companies could accomplish on their own.
And now Ill turn the call over to John for more detail on our financials and our financial outlook. Then I will wrap up. John?
John J. Bostjancic
Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, total revenue for the third quarter of 2022 was $67.1 million, a 45% increase over the prior year. In the US, we posted 24% growth to $51.1 million. International revenue increased by 207% to $16 million. U.S. spinal implant and enabling technologies revenue in the third quarter increased 30% to $27.4 million.
Products launched or enhanced via line extensions within the past five years continue to fuel revenue growth and drive market share gains and accounted for 76% of U.S. spinal implant revenue in the third quarter of 2022. This continues to be an encouraging indicator for sustained, long-term revenue growth.
U.S. orthobiologics revenue in the third quarter increased 18% to $23.8 million and continues to be driven by growth in the OsteoStrand Plus fibers-based DBM product line. Sales of products launched within the past five years accounted for 49% of U.S. orthobiologics revenues.
Our U.S. spinal implants surgery volumes increased 30% compared to the third quarter of 2021 while revenue per case increased low-single digits compared to the prior year. Utilization of our spinal implant systems and orthobiologics products increased to 2.2 per procedure in the third quarter of 2022 compared to 2.1 a year ago. We experienced low-single-digit average price declines in both the spinal implants and orthobiologics portfolios consistent with prior years.
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GAAP gross margin for the third quarter of 2022 was 60.3% compared to 60.6% for the third quarter of 2021. Adjusted gross margin was 61.8% for the third quarter of 2022 compared to 64.3% for the third quarter of 2021. The decrease in GAAP and adjusted gross margin was primarily due to the lower gross margin associated with the $10 million increase in spinal implants revenue to European distributors in the third quarter of 2022 compared to the prior-year period, which was partially offset by lower excess and obsolete inventory charges.
Operating expenses for the third quarter of 2022 totaled $55.2 million, an $8.8 million increase compared to the third quarter of 2021. The increase in operating expenses was driven primarily by $5.4 million in higher selling and marketing expenses attributable to increased commissions and freight and logistics costs associated with increased revenue, $3.1 million in higher general and administrative expenses due primarily to increased head count-related compensation expenses and by legal and other fees associated with the planned merger with Orthofix, and $300,000 in higher research and development expenses.
Net loss for the third quarter of 2022 was $15.5 million compared to a net loss of $17.6 million for the third quarter of 2021. Adjusted EBITDA loss for the third quarter of 2022 was $2.7 million compared to a loss of $7.4 million for the third quarter of 2021. Adjusted EBITDA loss is a non-GAAP financial measure that we believe provides 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 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 September 30, 2022 totaled $46.8 million and includes $25.8 million of outstanding borrowings under the credit facility. Our free cash flow burn, which includes operating cash flows and purchases of property and equipment, was $19 million for the third quarter of 2022. This spend is in line with the large amount of inventory and set billed (00:11:55) capital expenditures to support the recent and upcoming full product launches to fulfill the final European spinal implant stocking orders and our aggressive US revenue growth expectations for the full year.
Turning to our financial outlook for 2022. As Keith noted earlier, we expect full-year 2022 revenue to be in the range of $236 million to $238 million, reflecting growth of approximately 23% to 24% over full-year 2021. This revenue range reflects growth of 16% to 19% for the fourth quarter of 2022 after excluding European spinal implant revenue generated in the fourth quarter of 2021.
Moving down the P&L, we still anticipate generating 150 basis points to 200 basis points of adjusted gross margin expansion for the full-year 2022 compared to the 63.5% we reported in 2021. We expect to reduce our adjusted EBITDA loss by 10% to 15% compared to the $22.9 million we reported in 2021. We expect to generate these operating improvements through a combination of more efficient revenue growth fueled by the continued onboarding of more exclusive and high-quality distributor partners from the robust cadence of transformative product launches, from further market penetration of the unique 7D FLASH technology, and from higher adjusted gross margins through an increasingly favorable sales mix.
Our expectations for free cash flow burn for full-year 2022 has increased to more than $70 million. This increase is driven primarily by two factors. One, the cash expenditures we anticipate making in the fourth quarter of 2022 related to legal, accounting, and other fees associated with the Orthofix merger; and, two, the greater investments in additional inventory in spinal implants sets to nearly $50 million for the full year. This higher spend underscores the confidence we have in generating long-term, sustained revenue growth as we continue to support product launches and the onboarding of more transformative distributor partners as we seek to exceed the 15% to 18% long-term revenue growth rates we committed to earlier this year. To-date, we have received and paid more than $35 million of that significant growth investment.
At this point, Id like to turn the call back over to Keith for closing comments.
Keith C. Valentine
Thank you, John. SeaSpine continues to gain momentum as evidenced by our sustained and outstanding results while increasing revenue guidance. We are simply winning and taking market share. The winning recipe requires hard work, take a lot of product innovation combined with proper execution and mix in a great crew. The outcomes are increased market share, improving financial results and overall success. We are taking this winning recipe with us as we turn our course into our future merger with Orthofix. And I look forward to the combined entity yielding even better outcomes by becoming stronger together.
With that, thank you, all, for your time and, more importantly, your support. We will now open it up to questions.
QUESTION AND ANSWER SECTION
Thank you, sir. Ladies and gentlemen, at this stage, we will begin the question-and-answer session. The first question we have is from Ryan Zimmerman from BTIG. Please go ahead.
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Question Ryan Zimmerman: Good afternoon. Thanks for taking the questions.
Answer Keith C. Valentine: Good afternoon, Ryan (00:15:59).
Question Ryan Zimmerman: Hello. Just want to ask if you could take us through kind of your thoughts on the low and high end of guidance for the fourth quarter. Kind of what your underlying assumptions are for the low end, what your underlying assumptions are for the high end as we think about the revenue implied for fourth quarter.
Answer John J. Bostjancic: Yeah. Its obviously driven by US revenue with 90% of our revenue coming in the US in spinal implants and orthobiologics, so both coming off great quarters and were getting deepening penetration with the capital sales team from 7D. So, again, the expectation is its going to come from across the board in the US. We exited the spinal implants market in Europe in the third quarter with those final stocking orders. That doesnt change our ability to sell spinal implants elsewhere in the world and it doesnt impact our ability to sell orthobiologics or 7D in Europe, right, because it was a different distributor network. But obviously, the European piece (00:16:59) youd expect to see down for OUS. But the growth is picking up with the momentum weve seen in the US in both spinal implants and orthobiologics from recent product launches.
Weve got expectations for upcoming product launches with Mariner adult deformity. And really, its just continuing to see the benefits of those larger transformative distributors we brought on board most meaningfully in the past year or even six months. And weve got a pipeline of additional distributors we want to bring in in that exclusive capacity, and think well be able to capitalize on some of those opportunities in the fourth quarter. So, really, its a lot of the same of what we did in the third quarter minus the stocking orders for the European distributors.
Question Ryan Zimmerman: Okay. And just to be clear, theres no kind of underlying macro assumption of a COVID wave or anything. I just want to get it off the table for anyone that may have been concerned about that.
Answer John J. Bostjancic: Correct. No assumptions for COVID. Assuming continuing volumes at the same level weve seen really all this year since the Omicron wave, weve been fortunate that we have not been impacted by any COVID waves and expect to see the same kind of volumes continuing in the fourth quarter that we saw in the third quarter.
Question Ryan Zimmerman: Okay. And then just a follow-up question for me. I mean, as we think about the merger, Keith, and I appreciate the commentary about revenue synergies and also certainly revenue opportunities. Maybe just, one, how you feel (00:18:35) like youre mitigating any risk around the merger, especially around integration of the two organizations. And just where you see kind of the greatest revenue synergy whether thats in opportunities within, say, motion preservation or enabling tech or specific product categories that youre where you think you can capture the most cross-sell? Thank you.
Answer Keith C. Valentine: Yeah. You bet, Ryan. I think you captured all of them. I mean, theres components to each. I mean, one area that we are excited about is we feel like in the research that we did, that theres minimal overlap. And so, dealing with minimal overlap means that were going to be able to really hit the ground running with distribution, especially our exclusive distributors, who will have the ability to now have motion preservation with what we think and feel strongly about is the best cervical fusion product portfolio, and that combination will be very powerful. In addition to that, I think that theres going to be interest in us exploring how exclusive distribution has the ability to drive a greater BGT opportunity, so bone growth therapy and what we can do on the Stem (00:19:46) business by having focused distributors also interested in driving that platform.
I think also when you look at enabling tech, I think, as we know, 7D is a great agnostic platform. Meaning not only can it be used in all different spine surgeries, but it can also be used in surgeries outside of spine. And I think thats going to be a great opportunity for us as we start combining and understanding what other areas of the organization can benefit from the use of 7D and benefit from either placements outright or some sort of earn-outs.
Question Ryan Zimmerman: Got it. Appreciate it. Ill hope back in the queue. Thanks, guys.
Answer John J. Bostjancic: Thanks.
Next question we have is from Kyle Rose from Canaccord.
Question Kyle Rose: Great. Good afternoon, everyone.
Answer Keith C. Valentine: Hi, Kyle.
Question Kyle Rose: I wonder, just to start, if we could get just a US/OUS breakout for 7D in the quarter. And then just your expectations as far as how you expect that will trend through year-end here.
Answer John J. Bostjancic: Yeah. Remember, Ryan (sic) [Kyle] (00:20:58), we talked about giving revenue guidance on capital sales revenue through the anniversary of the acquisition because we wanted to provide organic versus inorganic. But now that weve anniversaried the acquisition, were shifting to just focus on placements because the placement is the critical part, right? We get the benefit of either a capital sales revenue, which is the upfront revenue, or we get the benefit of the longer term revenue growth from an earn-out.
So, were not going to give color on the different capital sales opportunities or results, but were going to instead stay focused on talking about units because the more units replacing the field, whether its capital sale or earn-out, were seeing the uptick in spinal implants revenue. Obviously, with the earn outs, its contractual. But as we mentioned, over half the accounts were 7D unit has been sold were starting to see noncontractual pull-through of revenue for our spinal implants and orthobiologics. So, its kind of that other benefit to the capital sale.
Question Kyle Rose: Great. Thank you. And then with respect to just both the merger as well as the commercial team, you talked about your new transformative, exclusive-type distributors. Could you just help us understand? I realized its still early, but how have those conversations with either potential distributors trended since the merger announcement as well as how have the conversations with your existing commercial team now that you presumably had a chance to check in with everybody at NASS and thereafter? Just overall reaction after a little bit of the dust had settled with respect to the merger.
Answer Keith C. Valentine: Ill tell you, there was a real palpable energy at NASS. I think that we were really pleased with not only the enthusiasm that our distribution team had, which was the enthusiasm a lot along the lines of what I just answered previously on what the synergies can be and the upside opportunity can be for them.
But I was also impressed with our sales management team and marketing teams and development teams. They were all there as well. I mean, obviously, these kind of news can create a certain level of tension or apprehension, so to speak, and everyone was very excited. Theyre excited about what this opportunity is going to bring. Theyre excited about being part of a larger company thats going to have certainly a strong balance sheet that will enable further investments in spine and further growth opportunities.
So, I think even post-NASS meeting, that momentum and enthusiasm has continued. Were excited about how the quarter shaping up. And I think its a demonstration to how focused the teams are and where they want to see their roles moving forward as the companies combine.
Question Kyle Rose: Great. And then just overall, just kind of piggybacking on Ryans question previously with regards to the macro. Any changes youre seeing with respect to staffing challenges across the environment, expectations when youre speaking to hospital partners? Do we think those will get easier into the Q4, just macro demand trends into the end of the year would be really helpful? Thank you.
Answer Keith C. Valentine: Yeah. Some kind of our market checks and conversations with surgeons have been very positive. Most are completely booked up for their fourth quarter, not unusual knowing how that usually shapes up in Q4. No one seems to be expressing any concerns about staffing. I think that everyone wants there to be more flexibility, the ability to work weekends or work longer shifts in the OR. Not sure everyone is going to have that flexibility. I think most surgeons have spoke that it is stable again and that theyre not worried about any kind of slowdowns from an OR perspective and absolutely looking forward to getting through their scheduling. And so, I view it as it should be very similar to what we saw in the third quarter as far as staffing and availability and everything else and dont anticipate any kind of disruption at this point.
Question Kyle Rose: Great. Thank you for taking the questions.
Answer Keith C. Valentine: Yep.
Thank you. Next question we have is from Richard Newitter from Truist Securities.
Question Unidentified speaker: Hi. Thanks for taking the question. This is Sam (00:25:23) on for Rich. Just the first question from us in terms of the plans to add direct reps, are those conversations still happening and how should we think about, as a combined entity, when those direct reps are going to come on board and where they should be felt there and when they should be felt?
Answer Keith C. Valentine: Yeah. So, the strategy all along has been to add direct reps second half of the year, and we have been. And I know that in general speaking during the process diligence that were all in agreement that direct reps do make sense in a progressive manner, meaning in areas that we have both now well have white space or have areas that good distribution cant be found. But a direct is an alternative that we will pursue it.
So, technically speaking, the strategy hasnt changed and it may even accelerate once we have the combined entities. Well just have to see once were able to look at that and look at the overlaps and where there could be white space for both of us and take advantage of it.
Question Unidentified speaker: Got it. And then pick up in R&D sequentially here in 3Q. Can you just give us any guidance on how to think about OpEx and spend sort of over the next few quarters leading up to the merger? Thanks.
Answer John J. Bostjancic: Yeah. R&D spend has picked up and a lot of it is influenced by the acceleration of the 7D development programs in the next-generation camera system and proceeding with the integration of the 7D system with our spinal implants and making that more seamless. So, we talked about that dating back to the acquisition of 7D and how wed expect that to pick up over time and gave some guidance and accelerating R&D spend as a percentage of revenue in 2022.
So, I think youre seeing that play out largely influenced by 7D. And then, consistent with that long-term guidance, we expect R&D expenses, at least on a stand-alone basis, would have been similar for 2023 as a percentage of revenue, again, heavily influenced by accelerating all those 7D development programs. How thats going to shape up post-merger, right, we obviously havent given guidance on that yet. But were continuing to invest aggressively in spinal implant, in orthobiologics product development programs and gathering clinical data. So, that hasnt changed and has not grown at the same rate as revenue has grown. But the increase in R&D is mostly coming from that increasing spend in 7D because we want to continue to keep that technology ahead of all the competition before theres another entry into the market.
Question Unidentified speaker: Great. (00:28:17) like similar commentary on SG&A over the next few quarters, how we should think about that (00:28:22)?
Answer John J. Bostjancic: So, the G&A component, which we split out, adjusted G&A has been growing typically mid-single digits year-over-year. So, I think that will continue to be the long-term trends because were able to get leverage on that G&A line. Again, how that changes with the merger, weve yet to give guidance. But I dont see that changing fundamentally of getting leverage out of the G&A line. And from our stand-alone sales and marketing perspective, were really starting to see the benefits of those more efficient commission rates on distributors because were well into multiple-year arrangements with distributors and where we had offered premiums in the past because we didnt perhaps have the most up to date portfolio to take market share. We did offer premium commissions early on, but now that weve got a complete bag and we believe the best hardware spinal implant portfolio in the business across the board when you look at cervical interbody thorax (00:29:23) lumbar, we dont need to offer those premium commission rates. Yet were still able to sign up these transformative large distributors that are driving market share.
So, I think well continue to see gradual leverage in the commission lines from the distribution model, but also as we continue to hire more direct sales reps, longer term, were going to get more leverage out of that. But because of typical upfront costs of bringing on a direct sales force, it might be a bit dilutive in the near term, but I think the distributor commission efficiency can outweigh that in the near term as well.
Question Unidentified speaker: Okay. Thank you.
Thank you. The next question we have is from Jeffrey Cohen from Ladenburg Thalmann.
Analyst:Jeffrey S. Cohen
Question Jeffrey S. Cohen: Hi, Keith and John, how are you?
Answer John J. Bostjancic: Good. How are you doing, Jeff?
Answer Keith C. Valentine: Good.
Question Jeffrey S. Cohen: Good. Just two questions from our side. I guess kind of the macro question (00:30:18) with the close. As weve seen the pull-through from the 7D folks with respect to your hardware and your penetration in the marketplace. So perhaps you can hypothesize how that might play out through 2023 with the Orthofix portfolio in addition to yours?
Answer John J. Bostjancic: Yeah. I think it opens up more opportunities for both capital sales and earnouts. And as Keith said, right not just in the spine space, but theres opportunity to leverage 7D technology in the same way through the orthopedics channel with Orthofix, whether its capital sale or earnout in those accounts. So I think the merger only increases the opportunity of what weve been able to take advantage of and earn out some capital sales and drive pull through, whether its contractual revenue, pull through on an earnout with a broader revenue base to now include motion preservation in addition to our spinal implants and biologics, but also the non- contractual pull-through that were seeing when a unit is placed in an account.
So Im excited to see where we can take it with the merger, because it just increases the opportunity weve already been able to take advantage of with 7D.
Question Jeffrey S. Cohen: Okay. I got it. And could you hypothesize how that might play out in the future as far as the two research organizations, both at Orthofix broad (00:31:41) SeaSpine as they integrate and perhaps talk to us a little about on your side some of your thoughts on motion preservation and other areas of the skeletal system.
Answer Keith C. Valentine: Yes. What was that again? How the research is going to combine, was that the question?
Question Jeffrey S. Cohen: Yeah, the R&D related to perhaps taking some of your spine innovation to other areas of the body and vice versa?
Answer Keith C. Valentine: Yeah, I guess (00:32:14). So the combined groups for spine havent been decided. Thats a workstream in effort on how that combination will look and how will be splitting up not only talent, but also how well be thinking about new product introductions and new product innovation. So that workstream is not done yet. But were excited from the perspective of theres really a big bag of products right now and theres really not a lot to fill out. A lot of what well be doing is working on next generation products, probably moving forward as well. So but again, that workstream is in process and wont be finalized really until after the combination.
Question Jeffrey S. Cohen: Okay, got it. Super thanks for taking the questions.
Answer John J. Bostjancic: Yeah. The one thing Ill add, Jeff, is weve been pretty clear it doesnt change our commitment to innovation across all the different portfolios of the combined business right. So thats something I think both groups are aligned on as we continue to invest in innovation and take market share as a large organization.
Question Jeffrey S. Cohen: Got it. Perfect. Thanks for taking the questions.
Thank you. The next question we have is from Ross Osborn from Cantor Fitzgerald.
Question Ross Osborn: Hi, everyone, congrats on the quarter and thanks for taking my questions. So starting off, I realize the full launch of Percutaneous is still new but is there any feedback youd like to share at this point, maybe from conversation at NASS.
Answer Keith C. Valentine: 7D Percutaneous, yeah, so percutaneous continues to we had a good alpha and beta with it which created some minor changes that went into the considerations for full launch. I think whats interesting with the Perc module, it is a seamless perc system to use. When you look at what other competitors use for Perc, but one big advantage that we found that was just the definition of perc, perc is very clear, but a lot of folks do mini opens as well.
And so with a mini open, you can use the regular system. You dont have to have a have to use the perc, which would require the intraoperative scan. And so thats a big feature because some folks do, do traditional very percutaneous-type procedures, but most do a mini open and that mini open can give enough exposure that we can use the standard system which makes it even a quicker registration, if you will.
Question Ross Osborn: Okay. Got it. Thank you for that. And then just one on the merger, given Orthofixs international presence how should we start to think about the sales ramp with respect to SeaSpines current portfolio OUS. What areas of the portfolio do you expect to perform particularly well and what areas do you expect to be more challenging to gain traction initially?
Answer Keith C. Valentine: Yeah. So, I think that one opportunity which were looking forward to is the enabling technology, broader footprint internationally now and so thats one that I think is super exciting. We havent really evaluated yet and it probably wont happen until after the merger is finalized. Does this present a new opportunity for us with spine implants in Europe, for example. I still think its a very burdensome regulatory commitment, but there may be other pathways now that we can consider and that were holding that open as a wait-and-see.
I think from a spinal implant perspective, other than the European presence remains to be seen its just something that we havent really spent a great deal of time on, but it is part of one of our integration streams that well be looking at. But for sure, the 7D, I think, is going to be a much broader opportunity with the broader distribution network that Orthofix brings internationally.
Question Ross Osborn: Great. Thanks for taking my questions.
Answer Keith C. Valentine: Yeah.
Answer John J. Bostjancic: Thanks.
Thank you. Our final question is from Jason Wittes from Loop Capital.
Question Jason Wittes: Hi. Thanks. So maybe if I could just ask, the spread has closed quite a bit but theres still a spread here. Youve spoken to shareholders, I mean, what has been in support of this deal with Orthofix, can you give any quantitative commentary on that?
Answer John J. Bostjancic: I mean, weve spoken to our shareholders and were touching base with Orthofix because obviously the shareholder vote will be important. So were making sure that were getting the message out clearly that this is a great opportunity to create scale and growth and profitability at the same time, right. Theyve got channels that we can leverage and weve got channels they can leverage. So I think that the conversations with investors has been positive.
I think were starting to really beat home the message that this is not a spine merger of giant companies, right, that we sometimes get lumped into where youre going to have big dis-synergies. Youve got two companies with a combined market share of less than 5% in spinal implants. You shouldnt see a lot of geographic overlap and revenue dis-synergy risk, and thats what the due diligence bore out. So I think were really putting that to bed because that was an initial concern after the announcement of the merger, but it just doesnt make sense that thered be (00:37:54) a lot of overlap and thats why we focus that on the due diligence.
And now were really focusing on as well, just talking about the $200 million of complementary revenue that represents upside for revenue synergies, right? There were none that were built into the model and thats the way the deal model was built. But with $200 million of complementary revenue that each side can pull through its distribution channel, theres going to be revenue synergies there. And thats something were working and focusing on in the integration planning to be able to jump on that from day one, right. So I think those conversations, its becoming a lot clearer to people as we talk to them that theres not that big revenue dis-synergy risk. But theres a lot of upside on the revenue synergies that were going to really focus on and dont forget the operating expense synergies, right?
Were going to get scale and efficiency out of this combined organization. So with an opportunity to grow revenue even faster, get cross-selling opportunities and take out costs, I think its a situation that people appreciate better than I think after the initial announcement.
Question Jason Wittes: Thats very helpful. And I know youve probably made some comments, but I dont know if you could maybe review them in terms of I understand you guys are both companies are underscaled, especially you guys in terms of sales force penetration and distribution. But are there regions that youre strong in that theyre not strong in? Or how would you characterize the overlap as much detail as I guess youre able to provide at this point?
Answer John J. Bostjancic: So, I mean, if you take it portfolio by portfolio, the motion preservation, right. Thats all opportunity upside for us because we dont have motion preservation. You know, both sides have talked about the investments weve made in the spinal fixation hardware and the market share weve been able to take. And theyve got similar plans to take market share by innovation. And the great thing is, is the combined company, we can continue to move forward with projects theyve got in their pipeline, projects weve got in our pipeline. But we can immediately bring to the market the portfolio weve got through their distributor network. So again, I view that as a lot of upside and were going to continue to invest in innovation.
On the orthobiologics side, weve got, we believe, and data shows the best DBM in the entire marketplace. Theyve got the best cellular graft and Trinity (00:40:09) in the marketplace. And theres a very clear surge in preference in some cases where some are going to be true believers in cells and they want to use cells in their patients. Others are true believers in DBM and the data weve been able to provide.
So we now as a combined company, we dont think of it as is competing. We think of it is, as we can span the spectrum of surgeon preferences in an area that has very clear surgeon preference. So we have the best offerings in both world of DBM and cellular graft.
Orthopedics is a great channel, as Keith talked about to pull-through 7D and enabling technologies, not just through our spine business, but through the orthopedics business and through their much larger international sales channel that they can bring to bear. So to me, its all opportunity to be able to take advantage of the complementary nature of the products. And theres cross-selling opportunities everywhere you look.
Question Jason Wittes: Great. Ill jump back in the queue. Thanks (00:41:03).
Answer John J. Bostjancic: Thanks.
Thank you, sir. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the floor back over to Keith Valentine for closing comments.
Yeah. Thank you everyone, for joining us and we will talk with you again on our next call. Have a great evening.
Thank you, sir. Ladies and gentlemen, that then concludes todays conference. Thank you for joining us. You may now disconnect your lines.
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This report contains statements which, to the extent they are not statements of historical or present fact, constitute forward-looking statements under the securities laws. From time to time, oral or written forward-looking statements may also be included in other information released to the public. These forward-looking statements are intended to provide Orthofixs and SeaSpines respective managements current expectations or plans for our future operating and financial performance, based on assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as believe, expect, expectations, plans, strategy, prospects, estimate, project, target, anticipate, will, should, see, guidance, outlook, confident, on track and other words of similar meaning. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, uses of cash, tax rates, R&D spend, other measures of financial performance, potential future plans, strategies or transactions, credit ratings and net indebtedness, other anticipated benefits of the proposed merger, including estimated synergies and cost savings resulting from the proposed merger, the expected timing of completion of the proposed merger, estimated costs associated with such transaction and other statements that are not historical facts. All forward-looking statements involve risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the U.S. Private Securities Litigation Reform Act of 1995. Such risks, uncertainties and other factors include, without limitation: (1) the effect of economic conditions in the industries and markets in which Orthofix and SeaSpine operate in the U.S. and globally and any changes therein, including financial market conditions, fluctuations in commodity prices, interest rates and foreign currency exchange rates, and the levels of market demand in the health care segments in which our products are purchased and utilized; (2) challenges in the development, regulatory approval, commercialization, reimbursement, market acceptance, performance and realization of the anticipated benefits of new products of the combined company; (3) the scope, nature, impact or timing of the proposed merger, including among other things the integration of the businesses and realization of synergies and opportunities for growth and innovation and incurrence of related costs and expenses; (4) future levels of indebtedness, capital spending and research and development spending; (5) future availability of credit and factors that may affect such availability, including credit market conditions and our capital structure; (6) delays and disruption in delivery of materials and services from suppliers; (7) cost reduction efforts and restructuring costs and savings; (8) new business and investment opportunities; (9) the ability to realize the intended benefits of organizational changes; (10) the anticipated benefits of diversification and balance of operations across product lines, regions and industries; (11) the effect of changes in political conditions in the U.S. and other countries in which Orthofix, SeaSpine and the businesses of each operate, including the effect of changes in U.S. healthcare policies, on general market conditions in the near term and beyond; (12) the effect of changes in tax, regulatory and other laws and regulations in the U.S. and other countries in which Orthofix, SeaSpine and the businesses of each operate; (13) negative effects of the announcement or pendency of the proposed merger on the market price of Orthofix and/or SeaSpines respective common stock and/or on their respective financial performance; (14) the ability of the parties to receive the required regulatory approvals for the proposed merger (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction) and approvals of Orthofixs and SeaSpines shareholders and to satisfy the other conditions to the closing of the merger on a timely basis or at all; (15) the occurrence of events that may give rise to a right of one or both of the parties to terminate the merger agreement; (16) risks relating to the value of the Orthofix shares to be issued in the proposed merger, significant transaction costs and/or unknown liabilities; (17) the possibility that the anticipated benefits from the proposed merger cannot be realized in full or at all or may take longer to realize than expected, including risks associated with third party contracts containing consent and/or other provisions that may be triggered by the proposed transaction; (18) risks associated with transaction-related litigation; (19) the possibility that costs or difficulties related to the integration of Orthofixs and SeaSpines operations will be greater than expected; (20) the ability of the combined company to retain and hire key personnel; (21) the intended qualification of the merger as a tax-free reorganization to Orthofix and SeaSpine shareholders for U.S. federal income tax purposes; and (22) the impact of the proposed merger on the respective businesses of Orthofix and SeaSpine. There can be no assurance that the proposed merger will in fact be consummated in the manner described or at all. For additional information on identifying factors that may cause actual results to vary materially from those stated in forward-looking statements, see the reports of Orthofix and SeaSpine on Forms 10-K, 10-Q and 8-K filed with or furnished to the SEC from time to time. Any forward- looking statement speaks only as of the date on which it is made, and Orthofix and SeaSpine assume no obligation to update or revise such statement, whether as a result of new information, future events or otherwise, except as required by applicable law.
Important Additional Information and Where to Find It
In connection with the proposed transaction, Orthofix intends to file with the SEC a registration statement on Form S-4, which will include a document that serves as a prospectus of Orthofix and a joint proxy statement of Orthofix and SeaSpine (the joint proxy statement/prospectus). Each party also plans to file other relevant documents with the SEC regarding the proposed transaction. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS AND OTHER RELEVANT DOCUMENTS FILED WITH THE SEC WHEN THEY BECOME AVAILABLE, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. A definitive joint proxy statement/prospectus will be sent to Orthofixs shareholders and SeaSpines shareholders. Investors and securityholders may obtain a free copy of the joint proxy statement/prospectus (if and when it becomes available) and other relevant documents filed by Orthofix and SeaSpine with the SEC at the SECs website at www.sec.gov. Copies of the documents filed by Orthofix with the SEC will be available free of charge on Orthofixs website at http://ir.orthofix.com/ or by contacting Orthofixs Investor Relations at (214) 937-3190. Copies of the documents filed by SeaSpine with the SEC will be available free of charge on SeaSpines website at http://investor.seaspine.com/ or by contacting SeaSpines Investor Relations at (415) 937-5402.
Orthofix and SeaSpine and their respective directors, executive officers and other members of management and employees may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction. Information about directors and executive officers of Orthofix is available in the Orthofix proxy statement for its 2022 Annual Meeting, which was filed with the SEC on April 27, 2022. Information about directors and executive officers of SeaSpine is available in the SeaSpine proxy statement for its 2022 Annual Meeting, which was filed with the SEC on April 22, 2022. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the joint proxy statement/prospectus and other relevant materials filed with the SEC regarding the proposed transaction when they become available. Investors should read the joint proxy statement/prospectus carefully when it becomes available before making any voting or investment decisions. Investors may obtain free copies of these documents from Orthofix and SeaSpine as indicated above.
No Offer or Solicitation
This report and the information contained herein shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.