Orthofix Medical Inc. (OFIX) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining me today to learn more about Orthofix. But first, for those of you who don't know me, I spent my career working in the medical device field with a number of companies such as Medtronic and J&J and most recently at Biomet Orthopedics during its private equity period prior to its sale to Zimmer. I hope to share with you today the uniqueness of Orthofix and the potential opportunity to strategically transform Orthofix into a differentiated, higher growth medical device company in the spine and orthopedic space. As we transition to Slide 2, you'll see our safe harbor statements. And on Slide 3, for those of you that aren't familiar with Orthofix, we are a global medical device company focused on musculoskeletal products and therapies. As we continually focus on providing technology to improve patients' lives, shown here is a patient who is a competitive swimmer, who was allowed to return to her passion following spine surgery and utilizing an Orthofix bone growth stimulator device. Transitioning to Slide 4. We are primarily focused in bone healings in both spine and extremities. In 2019, we generated sales of $460 million. 3/4 of this business is Spine where we focus on bone growth stimulation, biologics and spinal implants, including our rapidly growing motion preservation business with M6. 25% of our business is Extremities. We sell products in the pediatric, specialty trauma and foot & ankle markets. We are global organization with around 20% of our sales coming from outside the U.S. and we manufacture in Italy, California and including our headquarters in Texas, as noted on the map in the lower right. Let's transition to Slide 5. When I joined Orthofix, I found a company that was extremely well positioned for growth. First, we have several well-defined market leadership positions, bone growth stimulation therapies, cellular based allografts, which enhance bone healing at a surgical site. We have the most comprehensive cervical offering in the markets, which includes our differentiated M6 artificial disc. We have a high-quality internal and external limb preservation -- or excuse me, limb lengthening offering, which was recently bolstered with our acquisition of FITBONE. And lastly, we have a strong extremity deformity correction portfolio with a significant opportunity for us to enhance and build around. Second, we have a strong business foundation that can support a large-scale global organization. We have an experienced management team, which has built a strong corporate infrastructure, including accounting, legal, compliance and other functions, a very robust compliance program, and we have established global commercial footprint with a differentiated portfolio we can expand on. We have a very strong balance sheet that can support investments into key areas, and we have an experienced commercial management team that we have added to over the last few months. With our market leadership positions and strong foundation, we believe the company is extremely well positioned to compete -- to complete its commercial restructuring and execute commercially. In Slide 6, we'll transition to an overview of our product portfolio in Slide 7. Starting with an overview of our Spine business, which is comprised of 4 major areas: bone growth therapies, biologics, spine fixation and motion preservation. Starting with bone growth therapies. These are external stimulation devices that can provide patients treatment options for the promotion of spine fusion and the healing of nonunion fractures and extremities. These devices are durable medical equipment, which means they are used at home as a noninvasive treatment and are FDA Class III approved with PMA level data. We currently have the #1 market share in this space. We have a broad product offering and that we are the only company with an FDA-approved cervical spine indication. Moving on to Biologics. While we have traditionally focused on our Trinity allograft tissue, we also offer a range of biologic products utilized for bone healing. The Trinity product line is our leading allograft solution and has been used in over 200,000 procedures worldwide. We're currently the market leader in cellular allografts supported by our partnership with MTF Biologics, providing us with the best-in-class tissue service. Transitioning to Spine. This is our traditional spine hardware business, where we offer a wide range of implants used in a diverse portfolio of spine fixation procedures. We primarily focus on cervical and lumbar procedures, and with the addition of M6 approximately 1 year ago, we now have the most comprehensive cervical product offering available. Lastly, looking into motion preservation. Within Spine, M6 is the primary offering within our motion preservation business. M6 is highly differentiated. It's an artificial disc designed to mimic the motion and the natural motion of the disc -- of the natural disc. With over 65,000 discs implanted globally, there has been a strong early adoption of the product. We have seen strong initial success over the past few quarters in the U.S. following the FDA approval in 2019, and we look forward to continuing to drive widespread adoption. So let's transition to Slide 8. The other major segment of the business is our Global Extremity Fixation Business. Orthofix was originally founded as an extremity fixation business in Verona, Italy, and as a result, this segment is primarily European business. However, we are increasing our distribution efforts to bring more volume to the U.S. We currently focus on 3 primary areas: pediatrics & limb reconstruction, foot & ankle and fracture management. In the Pediatric & Limb reconstruction area, our solutions are at the forefront of limb reconstruction, whether post-traumatic correction to deformity, limb lengthening or pediatric surgery. Primarily, it's comprised of a comprehensive deformity correction portfolio with both an external and internal limb lengthening options. We recently added FITBONE to our portfolio earlier this year via acquisition. That rounds out our limb reconstruction offerings. In the Foot & Ankle area, our Foot & Ankle portfolio includes products used in the treatment of a wide range of deformities and traumatic injuries. An area where we have success is in the treatment of Charcot Foot, a condition caused by diabetes. For fracture management, these solutions provide external stabilization allowing for functional trauma recovery. Our products are primarily utilized in complex limb reconstruction with a focus on specialized trauma. And we move to Slide 9. Since joining Orthofix late last year, we have implemented a number of strategic focus investments to enable us to accelerate our growth rate over a long term. In Slide 10, our primary focus -- strategic focus areas are structure and leadership, operational execution, product innovation and our commercial channel. I'll discuss each of these in more detail in following slides. Leveraging our solid foundation and product portfolio, I believe that if we have success implementing these initiatives, we can drive both accelerated and sustainable growth and truly differentiate Orthofix from our orthopedic and spine peers. Transitioning to Slide 11. A key component of our strategy is building out a talented leadership team. We have a number of highly effective, tenured and experienced leaders who've built a robust business structure in the areas of finance, accounting, order to cash, legal, compliance and IT, but we had a large void in our spine and operations leadership when I arrived. We've made significant progress in adding to that team. We've recently appointed a President of Global Spine, a Head of U.S. Spine sales, a Head of International Spine sales, a Head of Global Motion Preservation, a Leader of Global Quality, Regulatory and Clinical Affairs and a Global Operations Leader. While we still have some positions we need to fill, we are in a great position to leverage pool of talent and execute on our long-term strategy. In Slide 12, our second area of focus is operational execution, which is not specifically focused on cost savings. It's ensuring that our customers get the highest-quality products when and how they want them. There are a number of components under this umbrella. Instituting agile culture focused on flawless execution, optimizing our global supply chain and working capital management, shortening the demand to delivery time and instilling market-driven customer service and satisfaction. While not all of these are directly quantifiable, our aim is to move quickly and more effectively to put our products in the hands of our customers worldwide. In Slide 13, our third focus area is innovation and differentiation within our product portfolio. More specifically, we're bringing together a portfolio of high-value, differentiated products and procedure solutions. We will do this through both organic and inorganic activities. Organically, we are looking to accelerate our R&D efforts and consistently introduce new products to the market. Our near-term product innovation cycle is a key focus and we are investing now to expand the breadth of our portfolio and the speed at which we're able to bring them to market. This includes line extensions, product improvements and truly differentiated product innovations. Inorganically, we have been disciplined acquirers in the past, and we continue to look for a series of attributes and acquisitions. Companies are assets that fit within our core competency that we're able to acquire for a reasonable price and have the ability to drive accelerated growth. To transition to Slide 14, our final focus area is transforming our commercial channel to realize synergies and sustain the growth of our business. We currently have an established global commercial infrastructure. However, I believe there is room to improve our global market penetration by focusing on dedicated partnerships. In each market, we are looking to find partners that can drive scale and stability and carry multiple product lines. With that, we are completely agnostic to the model, and we look for partners who can be successful in their specific situation and setting. I also know that we are currently missing out on certain revenue synergies between our spine and extremities businesses, so we'll continue to look and take advantage of those opportunities. Slide 15. Now that we've provided an overview on our strategic transformation initiatives, I'd like to turn to the key growth drivers of our business in Slide 16. We've broken these key drivers into time frames. In the near term, the next 6 to 12 months, we believe we'll see growth from the 2 recent acquisitions of the M6-C and the FITBONE. In addition, by optimizing our sales channel, we can drive sales growth across the entire portfolio. In the medium term, the next 2 to 3 years, we believe we'll start to see the benefit of our expanded portfolio of products, primarily in the deformity corrections business and broadly across our Spine and Biologics portfolio. In addition, we should see benefits from our operational execution initiatives. Over the long term, we have a number of key product introductions, which we believe will be very successful, including the rotator cuff repair stimulation, M6-C 2-level indications and FITSPINE, as a result of our recent acquisition. On top of these specific initiatives, we look to -- we are looking to add new products, both organically and inorganically to bolster our product portfolio and fill any gaps that exist. In Slide 17, we'll begin the transition to our financial overview, starting on Slide 18. Since 2015, we've grown our business to a $460 million run rate with a CAGR of approximately 4% per year while maintaining a strong gross margin profile. With the strength of our balance sheet, over $175 million in cash and access to incremental cash through our credit facility, we believe we are well positioned to drive accelerated growth once we're on the other side of the COVID pandemic. In Slide 19, as with all companies in the spine and orthopedic space, we have seen a material impact from COVID during the early parts of 2020. In Q1, we were on track to hit our previously stated guidance of $111 million. Beginning in March, we started to see a negative impact of COVID, both internally -- internationally and in the U.S. We have taken a number of proactive initiatives during COVID. While many elective procedures have been either delayed or canceled, there have been a variety of procedures, which continue to be performed. We have executed to satisfy immediate and near-term product and procedure support, while also planning for the pent-up demand that could lead to higher procedure volumes later in the year. We are taking advantage of this time to accelerate in many areas, such as virtual trading -- product trainings for our surgeons, sales reps and distributors. And from a cash perspective, we are focused on closely managing expenses, implementing a number of cost-saving initiatives, such as temporary salary reductions and suspension of the 401(k) matching contributions for 2 quarters. This, while we kept our commercial team intact and ensuring that we're able to take advantage of the opportunities that exist once the world reopens and the pent-up demand in the market rebounds. We've taken steps to ensure access to capital for continuity, including a drawdown of $100 million from our existing credit facility. We've also utilized a number of benefits under the CARES Act, including the CMS accelerated advance payment program and the payroll tax deferral for U.S.-based employees. And now turning to our second quarter performance. In April, top line performance was 40 -- approximately 40% of April 2019 revenue. These results could be indicative of the impact to Q2 as far as our consolidated net sales, but the situation is too fluid to predict the timing of the rebound in elective procedures, which in large are our procedures. So we transition to Slide 20. With consideration of all the points listed here, combined with our direction to execute on our strategic focus areas of structure and leadership, operational execution, product innovation and commercial channel enhancements, I believe we are in a special opportunity to strategically transform Orthofix to become a differentiated, higher growth medical device company in the spine and orthopedic space. Thank you for taking the time to learn more about Orthofix today, and I look forward to addressing any questions you may have at this time.

Thanks, Jon. I just have one question for you. I appreciate the color on the trends in April. I just wanted to -- I know it's difficult to predict, but I just wanted to get a sense of kind of what you're seeing in clinics and hospitals right now, what kind of improvements you're seeing? Are you seeing cases get rescheduled and what are your expectations there and how we can think about that throughout the year just based on what you know now? When I look at consensus numbers for different spine companies out there, a number of players, the Street is estimating, returning to growth or getting close to normalized levels in Q4. So I just wanted to get your views, given that, that could be a high bar to meet.

Thanks, [ Kyle ]. We read the same reports and the same surveys that you do, as well as take our own primary channel checks in all of our businesses. And the one thing that is clear is that procedures are coming back from a standpoint that patients want to proceed -- surgeons want to perform the procedures in hospitals, want the procedures -- the elective procedures to come back. How it shapes up in Q4 is yet to be determined, it will weigh heavy as far as what happens in Q2 and Q3. The good news is that there's process and protocol being established at a hospital level to basically start the elective procedures. And we are seeing elective procedures come back. It's just -- unfortunately, it's so choppy because the hospitals all have different directives about how to manage it. There's different state directives as far as how in-patients can come back out. California is different than Texas is different than New York, and so it's really hard to predict. But the good news is people want their elective procedures done and especially in Spine since -- I mean these are debilitating issues as far as when you're wrenched in pain. And so as the CMS is set forward, elective procedures -- we're kind of in the middle of those elective procedures. We're not as elective as, say, a total joint, but maybe not as prescriptive as a cardiovascular event in some cases. So we're right in the middle. So we see -- we're in a good position for the elective procedure rebound.

Thanks, Jon. That's all for me. I really appreciate you coming to the conference and unless you have any final comments, we'll end it there. Thanks so much.

Kyle, thanks for the invitation. We appreciate the opportunity to share Orthofix, and we look forward to handling any calls or questions offline that the listeners may have had. Mark Quick's on the call, our Investor Relations number is there. And thank you very much for having us.

Thanks, Jon.

Thank you.