Orthofix Medical Inc. ($OFIX)

Good morning, everybody. Thank you. We are so excited to have Orthofix here with us. To my right, we have Massimo Calafiore, CEO; Julie Andrews, CFO; and Julie Dewey, Chief Investor Relations and Communications Officer.

Starting off high level, Massimo joined Orthofix in 2024. Talk about what the company was like when you first joined and what has changed since then?

So when we joined in 2024, we found a company with a pretty solid portfolio across the vertical where we compete but with a lot of challenges from -- on the operating model. So if we need to divide the journey, let's say, in a lot of the different phases, since we joined with Julie, step #1 was stabilize the company. So we did a big thorough work to work on our balance sheet. We spent a good amount of time to build up the leadership team and start to understand the core pillar of the company where we need to be focused on. Step number 2 has been, okay, start to work on the innovation pillar that could drive the company forward. in the future and at the same time, start to understand and realize what was the best commercial model for the organization. So we went -- so if you look at all of the verticals that we have, find OTS and line construction we start to ask ourselves, okay, what is the best way to go to commercialize our product in the most efficient way. So we start the journey in spine, working segment. And now we define it, the market we compete at liberation. So pretty much a bigger rationalization in the company at every level.

Great. So I guess, looking forward from here, where do you expect the company to be if you look out, let's say, 3 years in terms of end market serve, what the revenue growth profile could look like and profitability?

Yes. So starting this year and '27, '28 and beyond is now the moment to start to bear the fruit all of the decisions that we made at that time. So from the innovation perspective, in spine, we are pretty much gearing up to the biggest launch of the organization with the VIRATA Pedico skull system. It's going to be a multiyear product launch that is going to address all of the different market segments. So we're going to be started with the open degen segment fine. And over time, we're going to work in MIS and deformity. Keep investing in 7D, our enabling technology platform that is very highly discourageable in the marketplace. -- a lot of exciting innovation there. If you move into orthopedics or in reconstruction, we are keep investing on TrueLok Elevate, it has been a great commercial success for us addressing user for ulcer in the food for our patients. And OTS keep thinking that we are investing a good amount of money and energy to optimize the back office that we have. So now we work very hard on our commercial model. We were very targeted on our investment in innovation. And now is the moment to keep focusing on it.

Got it. Turning to recent results. How would you characterize the Q1 growth rate on a normalized basis, let's say, excluding selling day headwind and international stocking tailwind. How does that compare to your internal.

Yes. So for -- when you normalize in Q1 for the selling day and then also the CMS teams impact where there was a pilot program, our growth was approximately 5% in the quarter, which was in line with our expectations. We had about a $2 million international stocking. Not -- I wouldn't characterize that as like a real pull forward. It's just timing, which can be lumpy from quarter-to-quarter. Don't expect to call back in the future quarter related to that?

Yes. You referenced CMS team. Can you talk a little bit about the pilot program? I think you had initially laid out the impact. It turned out to be a little less than that. Why was that? And how should we think about the impact from CMS?

Yes. So CMS teams was really a onetime change. So we don't expect an ongoing impact related to that. And it was a pilot program that CMS does from time to time for certain episodes of care and it included BGT this time. And it was a small, very limited number of accounts. And so ultimately, with just the volume and the impact on those accounts, really the hospital kind of helps manage the timing of those orders, and it had a limited impact. So a little less than 0.5% impact, and I think we'd expect about 100 bps of impact.

Got it. On the topic of CMS, I think since you had last reported earnings, there was a change to CMS reimbursement for noninvasive bone growth stimulators. Can you walk through what changed.

Yes. So the key point is that CMS updated billing requirements and then also recalculated the reimbursement for bone growth stimulators following the FDA reclass from a Class III to a Class II device in April. The underlying coverage framework remains in place, but the reimbursement levels went down about 10% for the Medicare reimbursed portion of the business. And so this is updated and reflected in our updated guidance that we released May 21, and we are engaging with CMS now on the process that they used to change that. It was kind of an atypical process that they went through to introduce that reimbursement change. But the reimbursement change does impact only the Medicare portion of our business, you have commercial payers and other businesses not impacting.

How did you go about establishing your new guidance? Like what parameters did you use just as an example, like what percent of the boom growth to their business is reimbursed by?

Yes. We don't break that out specifically. And there's really 3 kind of primary revenue streams that will be somewhat impacted. Medicare where Medicare is primary, of course, 100% of that population is impacted by the 10% reimbursement reduction. And then we have Medicare Advantage and commercial payer plans. A portion of those plans, we have contracts with all of those payers. A portion of those contracts use CMS as a reimbursement rate is part of the calculation of their reimbursement. So those will be impacted, we believe, as well. So we basically looked at the volume we expect from all of the payers that would be impacted and kind of applied from May 18 is when we expected it. For Medicare, it will be May 18. For the commercial payers, that are -- have a contract that would be impacted. It could be longer but we felt like it was prudent to expect that it may be starting May 18.

As part of this guidance change, you also pulled your -- should we be looking for a new set of LRP targets? How are you thinking about your long range plan?

Yes. I mean I think we're right now in the process of assessing what this means long term. We're, of course, looking at our cost structure as well. We did update our EBITDA guidance. But if you think about the revenue impact of $12 million was our revenue impact, it is pricing. So it is basically a full -- you would expect a full drop-through, our EBITDA guidance, we changed at $5 million at the point and so we're doing a lot internally in terms of operating discipline, and of course, the near-term things that you do, hiring freeze, travel reduction, those types of things. But as we think about the longer-term plan, we're really thinking about how we can use AI and automation and those types of things to really address our cost structure in a different way.

Got it. I guess looking at your new guidance, what are the key areas of upside and downside on both top and bottom line?

Yes. So I mean I think upside One, I've said we did build in basically the price reduction starting from May 18 for all of the impacted, when we have a price increase, which has been the our contracts and Medicare Advantage plans that are calculated based on the CMS reimbursement rate can take 1 to 3 quarters to update their pricing I assume that is a decrease, they may be a little faster to update their pricing. So that could be some upside. And then we have launches this year with the VIRATA launch on the spine side. And we believe we baked in the appropriate number, but potentially, there could be some upside with our launches.

Got it. I guess turning to the businesses now in spine, it seems like it was a pretty significant commercial transition. Can you talk about that being mostly behind you, what percent of U.S. spine revenue would you say is now flowing through the larger and more targeted distributors that you're targeting?

Yes. So as I said at the beginning of the journey, the goal was to build a sustainable company. So if you see in med tech, especially in companies that compete in the market where we compete, the utilization of resources can be very daring. This is why I think we were ready to support even the changes that we got from the CMS. As Julie pointed out, we've been very efficient on managing our organization. And one of the things that we did when we joined, we found, especially in spine and a commercial organization that's very fragmented. What was the direct outcome of this fragmentation is where a pure utilization of our assets. So in order to have a much higher return on the investment capital in our assets, the idea was, okay, let's start to analyze all of the partners that we have, and lesser to identify that 1 can scale the 1 can create density. The 1 that actually can have -- can commercialize more efficiently our products. So when we join -- so now after a couple of years of work, we have a 75% of our revenue now is managed by our larger shop, and we're very excited to have done to went through this journey because fast forward today, we're going to have a partner that can really start to work on all our technology take a start to commercialize 7D with our hardware. So we said since day 1 that we want to create a sustainable business and I think that like how we reacted, how we absorb this impact with the change of reimbursement, it's just a testament of the good stuff.

Yes, I think to follow on to that, just a couple of that. So our top 30 distributors in the U.S. grew 27% in Q1 and 24% on a trailing 12-month basis. So again, there -- they now have greater than 75% of our revenue in spine, up from less than 50% in Q1 of 2024 when we joined.

Got it. Are those new distributors or more just shifting more of the revenue for this?

I think that it's a mix. So we start -- we went to -- we start to consolidate revenue to, as said, to the partner, we believe that to scale. But we are very -- we've been very focused also converting and attracting a new distributor. We have been pretty successful of bringing new revenue in areas that were not underserved by the current team. And I was very pleased to see the interest that is around our entire portfolio. It speaks very loudly about the quality of the products that we have and across the board. .

Throughout the spine commercial transition, you realigned incentives as it relates to quotas rebates and bundling. I think this is something your consumers do a lot of. So it would be interesting to hear?

Yes. I mean, we don't really talk about the specifics of our quota, but we have realigned incentives to support higher growth and profitable growth and stronger execution. And I think it's modeled now with aligned with our strategic accounts that are high-performing distributors and integrated portfolio just versus just looking at specifically pure volume. So we are really focused on kind of that profitable growth model. And so that's what we're using to kind of make decisions to drive off of not just revenue growth at all costs.

Got it. Okay. Turning to 7D FLASH. You describe the importance of this product launch? And then also, what are the placements year-to-date? And how is this tracking against your internal plan?

Yes. So we plan to do our 7D metric kind of on an annual or biannual basis. So our last metrics we disclosed was in our Q4 call in 2025, and we're really focused on our Voyager earnout placements rather than the capital sale model because we believe that the strength that can bring to our spine hardware portfolio, and that synergy there is really strong that pull-through. But in 2025, our Voyager earnout placements grew 30%. And then as of Q4, what we're really seeing and what's exciting for us in terms of its ability to pull through is that those earnout customers collectively exceeded their purchase volume commitments by more than 50%. So to us, that's the real key metric that we're looking at in terms of what we're able to pull through on the spine hardware side to continue to drive deeper account penetration.

Yes. And for us, 7D was one of the main pillars of our strategy -- this is why we decided, okay, in order to really take advantage in arable technology, you need to create pull-through. If you see within the ecosystem, on competitors that work in Orthopaedics and Spine. They have been successful creating this direct relationship between placement of enabling tech and utilization of hardware we believe on the quality of the hardware product that we have, we believe on the strength of 7D and the metrics that Julie provided before, it's just a testament of the strength that we're seeing there. And all of this is always -- if you think about everything, every decision that we make, it just brings what I said before, a business that is very sustainable. -- because you create density, you create a higher utilization, you can optimize the cash that you need in order to buy.

Sticking with 7D for a second. What do you think are the gating factors to broader adoption? Is it just the change in workflow, surgeon interest, sales reps or companies?

For us, it's just we need to strengthen the collaboration. We are doing that, strengthen the collaboration between the capital team and our commercial team One thing that we did a few months ago was kind of reshuffle a little bit the leadership around 7D. We put in charge a person that is very -- that has been a leader is fine for many years that has a very deep connection within our distribution network. And all of this is helping us to keep opening up more doors. At the same time, what is very important is that everybody is seeing within my network that having a 7D placement in an account help for growth. So it's leader by leader, I think that we are making very substantial projects on commercialization. At the same time, we changed the strategy about how we were approaching our medical community. One thing that we start to be focused on is resident fellow ship big institutions, something that originally the organization was not doing and all of this entering within skip showing the 7D FLASH technology to residential fellow, placing the 7D FLASH technology in a big institution is just to create direct relationship between us, the technology and the medical community. So now we start to burn the fruit because we start to see followed the move from the institution now they go to work is often happen that the first thing that they ask is for 7D in the hospitals. So I think that we're doing the right stuff. It does for us to keep investing on the commercial infrastructure, keep investing on the evolution of the technology because we believe that we have winning moat.

I should also just say if anyone in the audience has questions, feel free to raise your hand. There we can keep going, but feel free to come. Okay. Turning to VIRATA a little bit. Can you talk about some of the feedback from the limited market release? What types of accounts did you specifically target while you were in limited market release and how are you planning to expand this as you're entering full market release in the second half of the year?

Yes. So VIRATA is important for us as organization because spine at the end, predicates are the products that are most utilized in the OR. And within the portfolio that we found, our Mariner that our system was the oldest. So we embraced this journey of development. And you can imagine that we were able to bring within a system, years and years of experiences within the spine market. So a lot to focus on the efficiency in the OR on the economics of the system. We start to think about all of the what the surgeon will need to start to address everything, all of the challenges can happen during the surgery. But at the same time, we have a system which was designed from the getgo with 7D mind. We saw with a great -- we are creating a great synergy and a great experience of utilization of VIRATA with 7D. The feedback that we are getting on the limited release on both when it was for the open procedure, opening procedure and now for mini-movie procedure, been stellar and all of this like motivated to make a very sizable investment on capital. And we are -- and there is a of excitement about the product coming in to the marketplace. From the commercial point of view, we are being very augmenting how we're going to approach the market. The company has been leading historically using our cervical portfolio. So there is a lot of room -- a lot of accounts where there is still a limited use of our product. So we are seeing a lot of low hanging fruit where we can go because, again, we are replacing a product that was now at the end of the useful life. So it's going to be a great vector of growth.

Got it. Can you talk about what it means that 7D and VIRATA were designed to be used together? What does that actually mean in practice for surgeons? And then also, how much incremental revenue do you get for a case using both of these?

The first part of your question was how they work together.

Yes, what does the mean in practice that they are designed to work together? And how does that influence surgeon?

Okay. So what we do is pretty much we -- all of the boring technology are open system by definition. So you can use it for -- with all of the different products. But what we had in mind, how can we create a much better experience utilizing VIRATA with 7D. So 7D FLASH we call it flash because it creates you imagine that right now, when you go into the OR, you need to spend 20, 25 minutes with competitive product in order to -- just to start the procedure, you can flush in less than 60 seconds. So you can imagine already the efficiency that you have in the system per se. Now when you're journey with VIRATA, there is a lot of little nuances between our instruments are design, how our instruments are recognized by the system. So there is a lot of efficiencies that we're going to bring the surgeon on being able to go through the procedure, taking advantage of the core efficiency the 7D has with additional efficiency on the unpairing instrumentation with enabling technology plus. So a lot of a lot of excitement, a lot of -- around what we are doing because now surgeon can even go beyond what they learn in what the learn during their journey in the OR applying now with VIRATA.

Got it. How much incremental revenue per case you get for using 7D and VIRATA and how much of this is included in your current guidance?

Yes. So our guidance incorporates VIRATA. We don't break that out specifically. Our 2026 guidance incorporates the late year launch of VIRATA And then, of course, VIRATA will be a foundational system for us, as Massimo talked about, we have the open DGEN and MIS and deformity launches that will be multiyear. And so we expect it to continue to contribute to our revenue growth in 2027 and beyond be a strong contribution.

Got it. Into biologics for a bit. You've talked about the improvements you've seen in Spine as kind of the blueprint for improving growth in biologics. I guess what is the cause for softness in biologics historically? And how are you planning to stabilize the business?

So we -- 1 thing that we did, we tried to -- we had within the organization, a leader with a lot of experience in biologics. So we start to see some softness within the segment. And we decided to change leadership in order to get a renewed focus within the vertical that is very important to us, we are like market second, the third position in most of the categories where we participate but the synthetic market. So we said, okay, it's time to change the course. And what we are doing, first of all, we start to try to expand the market and start to focus on utilization on the biological side, spine also in orthopedics. So start to use the Libre construction network we have to start to commercialize our biologic product. At the same time, we start to open up our commercial model to -- so let's say that in the areas where we have a pretty large distributor, we tend to concrete the distribution of hardware and biologics in 1 single partner. In other areas, we start to see a lot of traction also utilizing commercial network that has also competitive door. So a more, let's say, consultative model around biologic -- so with Patrick now, we are looking at how we can spend commercially within segment. How can we be more thoughtful about how we go market to market? And finally, we start to see the vertical to the corner I think that we are having -- month over month, you can see, let's say, a pretty steady progress on the biologics side. So I'm very pleased to see the direct impact that the decision that we made is having, and we see biologic to be a good contributor moving forward.

Therapeutic Solutions grew around 5% in Q1, which I think is around double the market growth that you guys characterized. Can you talk through what is driving this outperformance and whether you think you can keep up this growth rate for the rest of the year?

On TS, one of the things that we did since we joined, it's really, okay, how can we leverage the network that we have in order to have a deeper penetration? So we start to work very hard on creating much more synergies between all our different commercial channels, not be disjointed anymore, but be much more collaborative and there was a direct impact on all of the strategy on just looking at the number. In the Stim business, we are the market leader -- and since we joined, we just -- we experienced above market growth quarter-over-quarter, which has been pretty rewarding a fantastic, if you see where we are with our vertical there. But at the same time, being the market leader, we start to do a lot of work to keep expanding the reach and the understanding of what this technology brings to patients. So similar to what I said is fine, a great focus on resident fellows and teaching institution. A lot of focus on creating more a synergistic approach with the surgeon community. And at the same time, keep investing on what we believe is a very differentiated factor for us which is the customer experience that we give. And when a customer is a patient level, but also on how the patient interact with surgeons and in the STIMConnect has been very important for us now towards all of our verticals, fine and what we call fracture, we can create a more direct tonation experience between the patient and the surgeons -- and so bringing innovation at the same time, keep leveraging the commercial network that we have. And frankly, the fact that the -- we experienced the classification now from Class III from Class II in the vertical is actually bringing new opportunities because if you think and if you follow the story, we never talk much about innovation within the vertical. But now I think that we're going to have the opportunity to start to explore other how to utilize the commercial infrastructure and the commercial leadership that we have expanding outside what is what was the base business. So another good lever for us of growth in the foreseeable future.

In the prior guidance, it included assumptions for first half versus second half constant currency growth. I guess a new guide I want to talk for you guys. Do you have any updated expectations for the cadence of constant currency throughout the rest of the year and updated expects?

I mean just from a currency standpoint, we've baked -- we're not assuming any changes to current rates. Our implied guidance for the rest of the year would be about a 4% back half revenue growth when you adjust for the CMS reimbursement change.

Got it. I think you guys have talked about greater consistency and execution. I guess what does this look like in practice? What are the causes for some of the inconsistency in the past?

I think that 1 of the -- at the end, when you go through all of the changes that I described in the last hour - in the last 40 minutes, we talked it's kind of a natural effect that sometimes you have like tackle balances between everything that we did. So maybe the growth trajectory has not been for some as strong as was expected. But at the same time, we always said since day 1 that our goal was to deliver great technology but with profitability in mind. Our EBITDA improved since we moved to, we always improved the wealth of the organization. We also improved the return to our shareholders. So 1 with the other with faster Yes, but it's going to be a determined of something else. This is why I believe that the company right now is clearly undervalued and underestimated because it needs to be -- our story is saying that if you see we can be profitable and make great progress in markets that -- or that normally can drive utilization resources at desire than other markets. we were able to absorb, as said, a pretty sizable market change without making a sudden move to let's say, to address the challenge we had in front of us. So we were steady on our strategy. We never deviate and we arrive in the second part of '26, center in '27. As said before, we're expecting to bear the fruit of our decision. We kept investing in technology, the technology is getting released. We were steady on how we want to optimize our commercial network in order to have a better utilization of our resources and we are investing now in order to support a higher growth moving forward. So I think that there is an underestimation about all of the stuff that we did, we've done internally in order to create a company that is much more solid maybe more solid than many in the market where we compete.

Got it. I think that's a great place to wrap up, and we're out of time. Thank you guys for being here.

Thank you very much.