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

Hello, everyone. Good afternoon. Welcome to the 2022 UBS Global Healthcare Conference. I hope you all have been enjoying the speakers thus far. My name is Carlos Vazquez, an Associate Director here on the health care team. And thank you for joining us for our conversation with the management of Orthofix, a global spine and orthopedic medical device company. To walk us through the story today. We're pleased to have President and CEO, Jon Serbousek; and CFO, Doug Rice. This is meant to be an interactive session. If you have questions, please feel free to submit them by scanning the QR codes provided on the table. After management goes through the presentation, we can dive into those. So Jon, Doug, thank you for joining us. The floor is yours.

Thank you, Carlos, and thank you for everyone coming out to listen to the Orthofix story. Good afternoon. And first, for those of you who do not know me, I've spent my entire life in the device world working with organizations such as Medtronic and Johnson & Johnson. And prior to Orthofix, I spent a number of years at Biomet during its private phase until its time to sell for -- to Zimmer. First of all, I'll also give you a little apology. I do have a little bit scratchy throat today, so I apologize for that in advance. But first, in my first 2 years at Orthofix, it has been very gratifying to help transform the company and develop an organization that basically has a strong executive team and a commercial leadership. And also, we've been launching a number of innovative and differentiated products while constantly focusing on operational excellence. Today, I hope to share with you each of the uniqueness of Orthofix as our evolution to an innovative and differentiated high single-digit growth company and focused on spine and biologics in orthopedics. So we'll see if we get the slide to advance. There's our forward-looking harbor -- safe harbor statement. A little bit about Orthofix. If we move into Slide 3, and I'll be announcing the slide numbers for those that are listening in. This is our Orthofix mission and vision. For those who aren't familiar with Orthofix, we're a small-cap global medical device company and biologics company focused on spine and orthopedics. Our mission is to deliver innovative, quality-driven solutions while partnering with health care professionals to improve patient mobility. This slide shows a patient. Her name is Helen. She was able to return to a very active lifestyle after falling and breaking her leg in several locations. Following several months of recovery and physical therapy, she did not get the pain relief she wanted. She was then prescribed an Orthofix bone growth stimulator for daily use. Following her prescription -- her prescribed treatment of our Physio-Stim device, she's able to find -- regain her mobility and pain. It is due to a nonunion that basically the stim overcame and she did not have to go to a secondary surgical event. Slide 4 is our leadership team. Leading the charge of the transformation. When I joined Orthofix back in 2019, I found a company with a solid foundation and a core of talented team members anxious to build a growth company. Today, we have a very strong business foundation that can support a large-scale global organization. As you can see, we have an experienced management team with a strong corporate infrastructure, including finance, legal, compliance and other functions. We do have a robust compliance program, and we established a global commercial footprint and a differentiated portfolio that we can expand on. We have an experienced commercial management team. And with the recent addition that we've added over the last 2 years, with the most recent addition of Kim Elting, our new Orthopedics President. Now on Slide 5, you'll see an evolution of Orthofix over the 40-plus years we've been in operations. We have several defined market leadership positions in our 4 product categories: bone growth stimulation therapies, cellular-based allografts with enhanced bone healing at a surgical site, we have the most comprehensive cervical spine offering in the market, which includes our differentiated M6 artificial cervical disc, and we have a strong limb lengthening and deformity correction portfolio and product procedures, which were bolstered by the acquisition of a FITBONE product in 2020. Today, we are the new Orthofix, investing in an innovation while delivering differentiated solutions, and we have established a global footprint and are supported by strong margins and a strong balance sheet that can support investments into key areas. With our market leadership positions and strong foundation, we believe the company is extremely well positioned to execute commercially and drive sustainable high single-digit growth with improved profitability by: one, taking market share, building on the core strengths, as well as accelerating R&D launches, investing in strategic partnerships and continuing to look into disciplined M&A activities; and finally, we must become a procedural solutions partner and a choice of -- a company of choice in ASCs in the hospital environment. Shifting gears into our overview of our markets, so we compete within our product portfolio. Slide 7 is a quick way of looking at our business and how our core strengths and our synergies within the spine implants, orthopedic limb reconstruction and deformity care in the biologics and regenerative technologies. Our biologics and regenerative technology business combines our biologic solutions, including those which we partner with MTF Biologics, as well as our bone growth therapies devices, which is just over half of our revenue. Our biologics and regenerative technologies create synergies with our hardware businesses and can be used during surgical procedures or clinically following spine and orthopedic procedures. We'll take a deeper look at each of these businesses on the following slides. Starting with our spinal implants business. First, let's look at the motion preservation. M6 is our primary offering in the motion preservation business. M6-C is a highly differentiated artificial cervical disc designed to mimic the motion of a natural cervical disc with 6 degrees of motion, progressive resistance to rotational motion, axial compression and restoration of the natural center of rotation. M6-C was commercialized outside the U.S. in 2006 and has an established over 16-plus year robust clinical history with over 60,000 discs implanted over 20 years. 12,000 have been implanted over 10 years, 25,000 implanted over 7 years and 45 were implanted prior to the U.S. FDA approval in 2019. Based on this robust clinical foundation, with a 2-level clinical study underway and real-world evidence being collected, we continue to expand our investment in the understanding and the expansion of this growing market segment. We believe the U.S. market opportunity could be $800 million, including market expansion and shifting fusions to artificial cervical disc procedures. Now let's talk about spine fixation. This is our traditional spine hardware business, where we offer a wide range of implants used in the diverse portfolio of spinal fixation procedures. We have a comprehensive interbody portfolio solutions using PEEK, PTC, 3D-printed titanium as well as expandable options for surgical procedures. We primarily focus on cervical and lumbar procedures with the -- and with the addition of M6, we now have one of the most comprehensive cervical product portfolios available. We have a robust pipeline of competitive lumbar offerings as well. There's around $9 billion in the global market opportunity here. So we have significant room to grow. On Slide 9, we'll have -- we'll talk about our limb construction and deformity correction orthopedic business. Orthofix was originally founded as an orthopedic business in Verona, Italy. And as a result, this segment is primarily a European business. However, we are increasing our distribution efforts and investments to bring more volume to the U.S. We are an innovator in certain focused surgical specialties and the focus of 3 primary areas such as pediatrics, charcot foot and post-traumatic limb reconstruction. Starting with pediatrics. Orthofix has a history of cutting-edge pediatric solutions. We have 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, rounding out our pediatric limb reconstruction offerings. The pediatric market is currently around $800 million today and a larger, faster-growing opportunity. Our next focus area of Orthopedics is Charcot Foot. Our foot and ankle portfolio is used in a treatment of a wide variety of deformities and traumatic injuries. An area where we built the success is in the treatment of Charcot Foot, a condition caused by diabetes. The current market opportunity, we believe, to be around $300 million and growing. The third area of focus is post-traumatic fracture management and limb reconstruction. These solutions provide external stabilization, allowing for a functional trauma recovery. Our products are primarily utilized in complex limb reconstruction with a focus on specialty trauma. The total market opportunity for this is currently at $1 billion around the world. Finally, on Slide 10, we have our biologics and regenerative technologies. Beginning with bone growth therapies, these are noninvasive external stimulation devices that provide patients treatment options for the promotion of a spinal fusion and the healing of fractures in orthopedics. These devices are durable medical equipment, which means they are used at home as a noninvasive and nonsurgical option. 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 spinal indication. We just recently received the newest indication for fresh fractures with our AccelStim bone healing device, which utilizes LIPUS or ultrasound technology. We estimate the current bone growth stimulation market to be around $600 million with opportunity to expand. Moving on to biologics. We have traditionally focused on our trinity allograft tissue. We also have a range of biologic products utilized for bone healing. Trinity product line is our leading allograft solution and has been used in over 200,000 cases in the U.S. We are currently the market leader in cellular-based allografts, supported by our partnership with MTF Biologics, providing us a best-in-class tissue services. We have recently expanded our portfolio of solutions, including demineralized bone matrix or DBM through the MTF Biologics relationship that will launch in the third quarter this year. Our latest biologic solution through our MTF partnership is a virtuous LYOGRAFT, which is derived from a breakthrough tissue processing and preservation approach developed by MTF. LYOGRAFT preservation is a process in which the inherent growth factors and viable cells are preserved in the graft to provide a shelf-stable option for clinicians. This means our solution is procedurally ready, which means efficiency in the OR. Our portfolio growth is to have a biologic solution for all spine and orthopedic surgeries. The current market opportunity is a little over $2 billion and is a fast-growing segment as well. Slide 12. We are currently making a disciplined strategic efforts in a couple of areas. And we are building sustainable high single-digit growth. The 2 areas that we are focusing on are product innovation and differentiation and commercial channel expansion. Starting with product innovation and differentiation. We are bringing together a portfolio of high-value, differentiated products and procedure solutions and creating a consistent cadence of new product launches with a shortened development cycle. We are planning and partnering with some of the best KOLs to deliver innovative solutions to the market. We believe in and we'll continue to invest in clinical evidence and regulatory initiatives to support those programs. Our investments will be both organic and inorganic initiatives. Organically, we are accelerating our R&D efforts and consistently introducing new products to the market, including line extensions, product improvements and truly differentiated product innovations. Inorganically, we will continue to be disciplined acquirers as we continue to look for a series of innovative or disruptive products and procedures. Moving to our commercial channel. Our goal is to focus on more dedicated strategic sales partners that choose Orthofix as their primary partner of choice. We have expanded our distribution, utilizing both direct and indirect channels and we are leveraging synergies among all of our product categories and commercial channels to provide full utilization of both. We currently have a solid foundation of product portfolio, and we believe we are in the areas to be successful in 2 areas: product innovation and differentiation and commercial channel expansion. We can drive both accelerated and sustainable profitable growth and truly differentiate Orthofix among the spine and orthopedics categories. On this slide, we have an innovation timeline since our transformation began that shows how we are accelerating new product introductions and creating value for Orthofix. Let's talk briefly about what we have done since I became CEO in Orthofix in 2019. So starting in 2020, we kicked off a few new things and worth mentioning as the COVID era ramped up. Our first activity was the acquisition and assets of the FITBONE intermediary lengthening system for limb lengthening of the femur and tibia bones and also includes a potential application in an exciting area called FITSPINE. In the fall of 2020, we finalized the Neo Medical partnership to develop and market single-use spinal solutions focused on improving patient outcomes. Finally, we launched our innovative Firebird SI system designed to compress and stabilize the sacroiliac joint during fusion. Moving into 2021, we ramped up both our organic and inorganic efforts. Organically, we launched our CONSTRUX Mini 3D titanium spacer system, our FORZA 3D-printed titanium TLIF/PLIF spacer system, both systems are used with our Nanovate Technology, which has been shown to increase alkaline phosphate activity in human cells to enhance fixation. We also hit a few milestones over the course of 2021. We had our first patient implanted our FDA clinical study for M6-C 2-level indication. We reached a milestone of 60,000 M6-C artificial cervical disc implant worldwide since inception. We also had our 1,000 M6-C surgeon trained in the U.S. And finally, we hit our 1 millionth BGT -- BGS device prescribe, meaning we have changed the lives for over 1 million patients through our Bone Growth Therapies technology. Inorganically, in '21, we did the following: we signed an exclusive licensing and commercialization relationship with an innovative portfolio of products from an Italian-based, IGEA, for bone, cartilage and soft tissue, noninvasive stimulation in the U.S. and Canada and filed our first PMA for approval through this partnership. We received the FDA clearance for the FITBONE bone in the U.S., and we are the only limb-lengthening device in the market with a pediatric clearance. We launched the partnership with MTF and fiberFUSE and we advanced the mineralized fiber allograft. It contains both various components of cancellous and basically preformed shapes. And finally, we launched our Opus MG Set osteoconductive scaffold, a synthetic magnesium-based bone void filler for orthopedic procedures. Although we are only 5 months into the year, we've had a few accomplishments as well. Organically, we extended the relationship with MTF Biologics through 2032. It's an important relationship for us. We also launched the TrueLok EVO ring fixation system, which now has both radiolucent rings and struts, and I'll explain that to a further extent later, and also launched the Galaxy Gemini system, which is a next-generation modular fixation system for fracture management of lower and upper limbs. Inorganically, we received a PMA for our AccelStim bone growth stimulator. We closed the nView enabling technology investment and co-development relationship, and we launched Opus BA, a synthetic bioactive graft solution for cervical and lumbar spine fusions and procedures. As you can see, we've been very busy, and we're still increasing our innovation efforts. Next, I'd like to highlight the near-term growth drivers and then follow up with some mid and long-term growth drivers. On this slide, we have 5 current areas of accelerated growth for Orthofix. First, we have our novel M6-C artificial cervical disc. We have a differentiated design in the market that mimics the natural movement of the native disc. M6-C has continued to attract new users as well as expand the overall cervical disc market, and we continue to offer 1 of the most comprehensive surgeon training programs. We're just now publishing our data for the 5-year IDE study in the U.S. for the M6-C. Next up, we have FITBONE. We continue to see strong early adoption of FITBONE and it is the only limb lengthening system in the U.S. for adult and pediatric FDA clearances. Moving on to interbodies. Orthofix has a comprehensive interbody portfolio, including PEEK, PTC and 3D-printed titanium as well as expandable options. Our most recent titanium offerings have the Nanovate Technology. Now let's talk about biologics. In biologics, our goal is to have a portfolio with a solution to fit any surgeon's need during a spine or orthopedic procedure. We also continue to leverage our extensive and exclusive MTF Biologics partnership with a portfolio with Trinity, fiberFUSE, Virtuous, LYOGRAFT launching this month and legacy DBM launching in the third quarter. And our last near-term growth driver is a AccelStim. After just receiving the PMA approval on May 3, we now have full access to a $250 million U.S. market opportunity. This product utilizes an ultrasound technology and provides a new fresh fracture indication and rounds out our fracture management solutions for BGT. Our mid- and long-term growth drivers are on this slide. Starting with our midterm growth drivers. First, we have our ASC solutions. We are creating a cervical platform with procedure-centric solutions that are appropriate for the ASC setting. We are also utilizing our Neo Medical partnership to bring single-use sterile instruments to the ASC, and we plan to introduce later in the fourth quarter. Moving on to pediatrics. We just recently launched and are the first in the market with both radiolucent rings and struts in our ring fixation system. This allows for clear imaging of the procedures while they're following the patient. We are also creating a comprehensive pediatric placing system and offering additional solutions for children. The last midterm growth driver is the expansion of our FITBONE. We are currently developing a trochanteric nail for the U.S. pediatric patients after listening to the needs of our U.S. pediatric surgeons. We are also expanding our size offerings for FITBONE to create a solution for anyone who needs the product. Finishing up with our long term -- finish up with our long-term growth drivers. First, here is the rotator cuff stim solution, a multiyear clinical trial, which is underway for RC stim device, and we want to explore this new application in markets. A PMA submission and approval in this device would be the first of its kind therapy and would allow us to enter into the market of soft tissue repair generation -- regeneration. We believe there is currently a large unserved market to improve the rotator cuff surgery and surgical repairs. There are about 650,000 rotator cuff repairs in the U.S. per year. And finally, on this slide, we have FITSPINE. FITSPINE is an early intervention growth rod that utilizes the FITBONE platform technology that was acquired in 2020. This technology would be used for pediatric and adolescent scoliosis patients and would further differentiate our pediatrics portfolio. Flipping to Slide 16. Our final focused investment area would be the transformation of our commercial channels to realize synergies and sustain the growth for the business. We currently have an established global commercial infrastructure. However, I believe there is room for us to improve our global market penetration by focusing on dedicated partnerships. In each market, we have -- looking at the following partners to basically drive scale and stability and will carry multiple Orthofix product lines. We've said that we are completely agnostic to the model and looking for partners who can successfully work and partner with us in strategic systems and also settings. I also like to -- also, there are some further revenue synergies between our spine and orthopedic businesses. So we'll continue to look to taking advantage of those. Now that I've provided an overview of the strategic investments and growth drivers, I'd like to turn over the mic to Doug Rice for a financial overview of the company. Doug?

Thank you, Jon. Good afternoon, everyone. It's good to see everybody. It's good to be back in person. Starting on Slide 18, somewhere. There we go. A quick revenue snapshot for us. So starting with top line, you'll see in '21, we had $464 million of revenue, 14% growth year-over-year. And our current revenue mix, you can see in the ring around the $464 million, is roughly about half of our revenue comes from biologics and regenerative technologies like BGT and about 25% each for our metals businesses, spine implants as well as orthopedics. Breaking down our revenue between U.S. and OUS, you can see about 78% of our sales are domestic, and the other 22% were international. On Slide 19, you can see quarterly for the last few quarters, a lot of COVID impact here. You can see the first quarters in each of '21 and '22 were negatively impacted. Our revenue was negatively impacted by restrictions on elective procedures in hospitals, as well as the third quarter of last year. But in the first quarter this year, we're also starting to see a large impact from staffing shortages at hospitals and their ability to affect enough capacity for procedures. The percentages on the bars on this chart represent our performance as compared to the prior year in constant currency. Jon mentioned a few of these already, but just to recap some of our Q1 highlights from our earnings call and press release a couple of weeks ago: we had $106 million in net sales in Q1, a 2% constant currency growth rate over '21. New product sales led to a lot of that growth, solid growth in biologics, spine implants and orthopedics, including M6-C and FITBONE that Jon mentioned earlier. The FDA granted PMA approval for our AccelStim bone growth stimulator just a couple of weeks ago, which utilizes LIPUS technology and expands our indications into fresh fracture care. We also received FDA clearance for the TrueLok EVO ring fixation system, which enables clear radiographic visualization. We also, at that time, reaffirmed our 2022 guidance that we gave at the end of February despite FX headwinds of approximately $4 million on revenue for the year. Moving on to Slide 20. Further to our financial profile, you can see from '21 to '22, we're anticipating growing our business mid-single digits to $483 million as the midpoint of our guidance this year. Our gross margins have hovered around 75% to 76% over the last couple of years despite pressure from recent supply chain and inflation issues. We also have positive adjusted EBITDA and have been able to balance sheet fund our recent investments in growth based on the cash flow and EBITDA and profitability. So with the strength of our balance sheet at the end of the first quarter, we had $72 million in cash despite all of the macro challenges from COVID, the Russian war on Ukraine, and all the supply chain issues resulting therefrom. But we believe we're very well positioned to drive accelerated growth into 2023 and beyond with this financial strength. Lastly, just wrapping up, investment highlights around Orthofix quickly. We currently have momentum. We're building to be a sustainable, high single-digit revenue growth company with improving profitability. We have a strong balance sheet that allows us to invest internally and inorganically. We have a portfolio and a pipeline of innovative and differentiated products. We're expanding our strategic sales channels and increasing surgeon users. We continue to focus on operational excellence, especially in this current environment. And our margin profile is attractive. We actually make money compared to some of our peers. And with consideration to all the points listed here, combined with our strategic investments in product innovation and differentiation and expanding the commercial channel, I believe that we have a special opportunity to strategically transform Orthofix to become a differentiated, sustainably higher growth medical device company in the spine and orthopedic space. Thank you for taking the time today to come learn more about Orthofix. Carlos?

Thank you, Jon and Doug. It was great to hear about the progress Orthofix has made thus far since 2021. And now we'll move on to the Q&A portion of the presentation. [Operator Instructions] To kick things off, Orthofix has a relatively broad portfolio. You mentioned spine, Biologics, BGT, Orthopedics, what synergies are derived from having these assets under 1 roof?

Thank you, Carlos, the way we look at our business is we have 2 product -- surgical businesses, spine and orthopedics. And then we have our biological regenerative that basically can stand on its own, but also feeds into those other areas to get the synergies. So we have in our regenerative or BGT area, we have Spinal-Stim and Service-Stim that goes right into the -- leverage into the spine business, and then we have our Physio-Stim, with which we recently acquired AccelStim, which goes into our trauma area. So there's synergies there. While the spine and ortho don't necessarily have synergies directly between the 2 of them, as far as from channel, we do get technologies that we can lever across those areas and gain impact.

Right. No, that makes a lot of sense. And you mentioned a AccelStim. You guys recently got the PMA. How does management view it in relation to its existing PEMF portfolio? Are there synergies there? Or is there a threat of cannibalization from LIPUS?

We look at -- we sought it out. We looked at the synergies because the AccelStim is a different base energy technology, but it's focused on fresh fracture. Our PEMF is actually used in our nonunion. So that's where we've been building our physio channel on with our PEMF activity. And all of our spine activities are PEMF and there's no ultrasound basically that works in our spine. So we see it as 2 different technology. We see it as a fast entry to the marketplace. We licensed it. And 6 months later, we had a PMA in place and 6 months later, we have a PMA approval. And that was part of the reason we saw an expediency to market, and that's where we look at our investments as far as not only the innovation that we get, but how fast we can bring them to market. We do have items in clinical trials that will take 5, 6 years, 7 years. But when we see an opportunity to go into a market with expediency, we look at and we go. And -- but we saw good synergies there. And actually, it allows the sales associates to basically take a little bit different take, rather be in just dogma in one, we have a wonderful spine technology with BGT and we'll continue to invest in that, and we are investing in that. We also, though, the diversity in the fracture business gives another opportunity for the reps to go in and interact with the physicians and help patients.

That's great. Just pivoting a little bit based off the questions. The global supply chain remains impacted from COVID and other macroeconomic factors. How has this affected your business? And what has been done to mitigate this?

I would say from an overall cost view that we've seen supply chain issues impact our gross margins, the cost of semiconductor chips went up a lot last year and continue into this year, that's negatively impacted our gross margin line, in addition to just seeing general supply pressures on our vendors, as well as hospitals and notwithstanding talent and trying to onboard talent in today's world. I know that's not strictly supply chain, but we've got an awful lot of open positions and it's tougher and tougher to fill all those in today's kind of macro turbulence.

Yes. I might add this is that operating a running company in today's world is very different than we've done pre-COVID. Continuity is really key. You always want to make sure you have the product to sell. And we did some very creative things through COVID, and we proactively, almost 12 months ago, started looking at these requirements, make sure had the right raw material, had the right finished goods levels. We increased safety stocks. And then we also started doing work in process to basically make more products available to move faster. So when you're dealing in our space, you always want to have the product to sell because the disruption to the customer is just absolutely key. So we consciously took and took some gross margin deleverage because to protect ourselves and have business continuity. And so from that standpoint, as we work our way through this and basically make sure we have raw materials that are available, we'll lean those out and out gears when supply chains and the world gets back to normal, as we say getting back to normal in our operational world.

Right, right. It seems like these macroeconomic factors are depressing valuations across the street levels have come down, as well as M&A activity. How has the current market dynamic affected your M&A appetite? And how do you think about capital deployment at this point, i.e., M&A versus returning capital to shareholders?

Well, I think what we did with FITBONE says a lot. We closed FITBONE March 26, 2020. That's right when everything was in pretty much a free spin. And -- but we saw it as a strategic initiative, and it's really the benefit of Orthofix, the way that we're set up as far as being profitable and also balance sheet funding all these deals. So we've done small tuck-ins and technology deals and creating such a string of pearls where we did that in self-funding. But we also have capacity, which I'll let Doug talk to, to do larger deals, should they be available. We look within our capacity to do these deals, and we're not -- we'll always be disciplined, but we're actively pursuing those if we can get acceleration to move us faster as far as -- and bring more return to the investor. But Doug, maybe a little on the capacity.

Yes, I would just echo the same thing. At our size, we have to be very disciplined and choosy about the assets that we go after and acquire. We can't simply buy revenue for the sake of buying revenue. We look to longer term, more strategic investments. And with our financial wherewithal with $70-plus million of cash, an untapped credit facility that will go up to 3.5x EBITDA or $300 million today, it gives us an awful lot of opportunity for us to evaluate a lot of deals.

Great. Great. Well, I think that's it from our end. Thank you again, Jon and Doug.

Thank you very much for your time -- everyone, for your time.

Thank you.

Enjoy the day.