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

Welcome to the Orthofix presentation. My name is [ James Dawson ]. I'm a member of the JPMorgan health care investment banking team. Thank you all for joining today. It is my pleasure to introduce Jon Serbousek, President and CEO of Orthofix; and Doug Rice, Chief Financial Officer. [Operator Instructions] I will go ahead and hand it over to you, Jon.

Thank you, [ James ]. Good morning, everyone, 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. Most recently, I spent time at Biomet Orthopedics during its private equity period prior to its sale to Zimmer. Today, I hope to share with you the uniqueness of Orthofix and the potential opportunity to strategically transform the company to become a differentiated, higher-growth medical device company in both spine and the orthopedic space. On Slide 2, we have our safe harbor statements. Moving on to Slide 3. We have facts about Orthofix and our mission. For those of you unfamiliar with Orthofix, we are a global medical device and biologics company focused on spine and extremities, and our mission is to deliver innovative, quality-driven solutions as we partner with health care professionals to improve patients' lives. This slide shows a patient who was a competitive open-water swimmer who is allowed to return to her passion following spine surgery and utilizing an Orthofix bone growth stimulator device. Slide 4 are some facts about Orthofix. We are primarily focused on bone healing in both spine and extremities. In 2020, we generated sales of approximately $407 million. In '19 -- 2019, prior to COVID-19, our annual sales were $460 million. 3/4 of our business is in spine, where we focus on bone growth stimulation, biologics, spinal implants and including our rapidly growing motion preservation business with M6. 1/4 of our business is in extremities. We sell products in the pediatric, specialty trauma and foot and ankle markets. We are a global organization. Around 20% of our sales come from outside the U.S., and we manufacture in Italy, California and at our headquarters in Texas as shown on the map. Now on 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, as listed here, bone growth stimulation therapies, cellular-based allograft, which embraced bone healing at the surgical site. We have the most comprehensive cervical offering in the market, which includes the differentiated M6 artificial disc. We have a high-quality internal and external limb-lengthening offering, which was bolstered further with the 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 very strong business foundation that can support a large-scale global organization. We have an experienced management team, which built a strong corporate infrastructure, including accounting, legal, compliance and other functions, a robust compliance program. We also have an established global commercial footprint with a differentiated product portfolio that 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, which we have added to over the last year. With our market leadership positions and strong foundation, we believe the company is extremely well-positioned to execute commercially. Shifting gears to our product portfolio, Slide 6, and then transitioning to Slide 7. The business is comprised of 4 major areas: Bone Growth Therapies; Biologics; Spine Fixation; and Motion Preservation. Beginning with the Bone Growth Therapies area, these are external stimulation devices that provide patient treatment options for the promotion of a spinal fusion and the healing of nonunion fractures and extremities. These devices are durable medical equipment, which means they are used at home in a noninvasive fashion. We currently have a #1 market share position in this space. We have a broad product offering and are the only company with an FDA-approved cervical spine indication. Moving on to Biologics. While we traditionally focused on our Trinity allograft line, we also offer a range of Biologics products utilized for bone healing. The Trinity product line is our leading allograft solution, which has been used in over 200,000 procedures worldwide. We are currently the market leader in cellular allograft, supported by our partnership with MTF Biologics, providing us with the best-in-class tissue services. Transitioning to Spine Fixation, this is our traditional spinal hardware business, where we operate a wide range of implants used in a diverse portfolio of spinal procedures. We primarily focused on cervical lumbar procedures, and with the addition of M6, we now have one of the most comprehensive cervical product portfolios available. Lastly, looking to the Motion Preservation segment. With spine, M6 is the primary offering within our Motion Preservation business. M6 is a highly differentiated artificial cervical disc designed to mimic the motion of the natural disc. With over 70,000 discs implanted globally, there has been a strong early adoption of the product. We have seen a strong initial success over the last year in the U.S., following the FDA approval in 2019, and we look forward to continuing to drive widespread adoption. On Slide 8 is the other major segment of our business, Global Extremity Fixation. Orthofix was originally founded as an extremity fixation business in Verona, Italy, and as a result, this segment is primarily a European business. However, we are increasing our distribution efforts to bring more volume to the U.S. We currently focus on 3 primary areas in this business: pediatrics, limb reconstruction; foot and ankle; and fracture management. On the pediatric and limb reconstruction front, our solutions are at the forefront of limb reconstruction, whether post-traumatic correction of deformity, limb lengthening or pediatric surgery. Primarily, it's comprised of a comprehensive deformity correction portfolio, with both external and internal limb lengthening options. We added FITBONE to our portfolio in the first quarter of 2020, and that rounds out our limb reconstruction offering. On the foot and ankle front, our foot and ankle portfolio includes products used in the treatment of a wide range of deformities and traumatic injuries. An area where we have great success is in the treatment of Charcot Foot, a condition caused by diabetes. On the fracture management front, these solutions provide external stabilization, allowing for functional trauma recovery. Our products are primarily utilized in complex limb reconstruction, with a focus on specialty trauma. Moving to Slide 9. Since joining Orthofix late last year, we have implemented a number of strategic focus areas to enable us to accelerate our growth over the long term. On Slide 10, you'll see the 4 primary strategic focus areas: they are structure and leadership; operational execution; product innovation; and our commercial channel. I'll discuss each of these in more detail on the following slides. Leveraging our solid foundation and product portfolio, I believe that if we success -- we are successful in implementing these initiatives, we can drive both accelerated and sustained growth and truly differentiate Orthofix from our spine and orthopedic peers. On Slide 11, let's discuss structure and leadership. A key component of our strategy is the buildout of a talented leadership team. Upon my starting, we had already had a number of highly effective tenured and experienced leaders who had already built a robust business structure in the areas of finance, accounting, order to cash, legal and compliance and information technology. But we had a large void in our spine and operations leadership when I arrived. Since then, we had made significant progress by adding to that team. We've appointed a President of Global Spine; a President of Global Extremities; a Head of U.S. Sales; a Head of International Sales; a Head of Global Motion Preservation; a leader of Global Quality, Regulatory and Clinical Affairs; a Global Operations Leader; and a Head of Enterprise Strategy. While we still have some positions to fill within the organization to fill out our team, the executive leadership team is now in place. And we are in a great position to leverage this pool of talent and execute our long-term strategy. On Slide 10 -- excuse me, Slide 12, are more details around our second area of focus, operational execution. This initiative is not specifically focused around 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 an agile culture focused on flawless execution; optimizing our global supply chain and working capital management; shortening the delivery -- 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 improve quickly and more effectively put our products in the hands of our customers worldwide. Our third focus area on Slide 13 is innovation and differentiation within the product portfolio. More specifically, we are bringing together a portfolio of high-value, differentiated products and procedure solutions. We will do this through both organic and inorganic activities. Organically, we look -- we're looking at accelerating our R&D efforts and consistently introducing 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 are able to bring these products 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 and plan to continue in this direction. Companies or assets that fit within our core competency that we are able to acquire for a reasonable price and have the ability to drive accelerated growth will be our focus. Flipping to Slide 14. Our final focus area is the transformation of 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 sustainability and will carry multiple product lines. Having said that, we are completely agnostic to the model and look for partners who can be successful in their specific situation and setting. I also know that we are currently missing out on certain revenues and synergies between our Spine and Extremities business. So we continue to look forward to taking advantage of those opportunities. Now that we have provided an overview of our strategic transformation initiatives, I would like to turn to the key growth drivers of our business on Slide 16. We've broken these up into key areas as growth drivers and timeframes. In the near term, the next 6 to 12 months, we believe we will see growth from our 2 acquisitions of M6 and FITBONE. In addition, by optimizing our sales channel and accelerating our NPI cadence, we can drive sales growth across our entire portfolio. Over the mid-term -- medium term, the next 2 to 3 years, we believe we will start seeing the benefit of an expanded portfolio of products primarily in our deformity corrections business and broadly across our Spine and Biologics portfolio. In addition, we should see benefits from the application expansion of FITBONE in our new investment in Neo Medical. Results of this operational execution efforts will start to take place, and we'll see them materialize as well. Over the long term, we have a number of key introductions which we believe will basically be very successful, including rotator cuff repair stimulation, M6-C 2-level indications and FITSPINE. On top of these specific initiatives, we will look to add new products, both organically and inorganically, to bolster our product portfolios and fill any gaps. Now moving on to the financial overview, I would like to hand it off to Doug Rice.

Thanks, Jon. Moving on to Slide 18, the financial overview. From 2016, we were able to grow our business top line from $410 million in 2016, to a $460 million run rate in 2019, which represents a CAGR of 4% per year, while maintaining strong gross margins. And as announced this week, you can see our COVID-impacted 2020 revenue was $407 million. Regarding margins on the right-hand portion of the slide, with the impact of COVID on elective procedure volumes this year, we've seen significant deleverage across all lines of our P&L. You can see, in particular, our gross margin and EBITDA margins in 2019 of 78% and 16% have delevered in 2020 on a trailing-12 basis as of September 30 to 76% and 12%. With the strength of our balance sheet, at the end of the fourth quarter, we had about $96 million in cash despite the challenges that COVID-19 has brought, which we believe positions us very well to accelerate growth once we're on the other side of the COVID pandemic. Moving on to Slide 19. You can see our quarterly revenue update through the fourth quarter of 2020. You can see the second quarter of 2020 was the most significantly impacted by COVID due to the uncertainty and shutdown in electives. The percentages on the bars on this chart represent our 2020 performance as compared to 2019. Some Q4 revenue highlights. Q4 sales of $118 million was a 6% sequential increase over Q3 of 2020 and within 97% of our sales in the fourth quarter of 2019 despite the nonrecurrence of certain large nonstocking -- or stocking orders in the fourth quarter of 2019 in our Extremities business. U.S. Spine implants had fourth quarter sales growth of 11% over the prior year, led by Motion Preservation, which in the U.S. had its best quarter ever, with sales of approximately $7 million, which is up 27% sequentially over Q3 and up over 125% versus the prior year. Also, I want to remind everybody that the FDA advisory panel recently recommended preclinical -- pre-market clinical evidence via requirement in the proposed reclassification of bone growth stimulators, but full guidelines are still not expected for a while. With that, I'll turn it back to Jon.

Thanks, Doug. With consideration of all the points listed here on Slide 20, 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 have 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 your time to learn more about Orthofix today. And I'll now turn it back over to [ James ] for any further comments.

Thanks so much, Jon. At this time, there are no questions. [Operator Instructions] With no questions at this time, I'll hand it back to Jon for closing remarks.

[ James ], thank you very much, and thank you for everybody who attended today. I think we have something special at Orthofix, and I look forward to reporting out in future quarters. And if you have any questions, you can reach us on our website or Alexa Huerta in Investor Relations. Everybody, have a wonderful day, and enjoy the rest of your conference.