SI-BONE, Inc. (SIBN) Earnings Call Transcript & Summary

All right. Good morning, everybody. I'm Andrew Ranieri, one of the medical device analysts here at Morgan Stanley. And it's my pleasure to have SI-BONE with us today, Laura Francis CEO; and Anshul Maheshwari, the CFO. Before I jump into kind of Q&A, I just have to go through our disclosure. But for important disclosures, please see the Morgan research disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please feel free to reach out to your Morgan Stanley sales rep. But again, pleasure to have you both here with us in town live and in the flesh.

Thanks, you too.

Thanks for coming and maybe how we kind of like to -- how I'd kind of like to spend the 30 minutes is just to kind of briefly touch on macro factors and some of the things that we've heard last week and even at our conference over the past few days and then really spend most of the time really better understanding the revenue growth for the company, the tailwinds at your back and touching on operating leverage, too. I think that's becoming more of an important component of the story.

So maybe first on the macro side. We've heard from spine and ortho companies that there's been kind of softness in June, July, some commentary about stepped-up vacations or at least elevated versus even pre-pandemic times. So how has that maybe factored into your procedure volumes of what you're seeing from surgeons? And how did you kind of better reflect that into your guidance since you last reported, I think, early August?

Yes. I think first of all, thanks for the invite. Really appreciate the opportunity to be here today, and thanks to everybody that's here as well as virtually. In terms of the macro environment, obviously, we've gone through a very unique period for the last 2.5 years. And I think that SI-BONE has really navigated very well through the pandemic. So even in 2020, when the pandemic initially hit, we grew during 2020, it was 9% that we grew during 2020. And then 2021 came back even stronger at 23% growth. And entering 2022, I think a little bit of a surprise to all of us was the COVID overhang that we had. During the first quarter, our growth rate was around 10% year-over-year. But then we started to see that reacceleration of the business into the second quarter. So we grew 15% in the second quarter. And so from our perspective, we're obviously still in a unique environment with supply constraints in some places in terms of labor constraints in the hospital setting. But with all of that said, what we see this is as is the new normal. And when we speak with our surgeons, they're just navigating through the situation. We recognize any of the issues from a supplier perspective and plan accordingly. And so for us, it's really more about our business itself and all of the tailwinds that we have in the business right now. First of all, in our core SI joint fusion business and then with some of these additional indications and products that we've launched in the last 12 months. So for us, this is actually a very exciting time and in terms of how things are developing in the third quarter, they're consistent with what we were expecting when we talked to you in August when we announced our second quarter earnings.

So you feel pretty good about at least where third quarter numbers kind of set from your commentary in August?

We're feeling good about the conversations that we had during the second quarter earnings and haven't changed that view based upon being deeper into the quarter.

And maybe just another macro question, but on supply chain inflation. I mean one of the nice things about the SI-BONE business has been less capital intensity versus your traditional spine company, and you're introducing TORQ and Bedrock Granite will come kind of later down the road, but -- or later this year. So can you kind of update us on maybe any type of supply chain issues? Do you have adequate capacity for -- on the manufacturing side as you're kind of going to be rolling out granite over time and even TORQ?

I'll take that. We work with third-party manufacturers. And in terms of implants, we really have not seen a significant impact from a supply chain perspective. New product is always interesting. You mentioned our TORQ product that came out around a year ago that has been very well received primarily in our core market. And then we have the new indication for trauma applications and fragility fractures that we just received in June from the FDA. And so we're really just touching the surface in that particular opportunity. Granite, we actually did launch in the second quarter, although we're just starting to gain momentum there. And so that's where supply side can be a little more challenging is with the new products, the longer lead times, especially more in the instrumentation side is what we've seen. But I think we've done a good job of planning accordingly, understanding what the environment actually is and making purchases as we needed to in order to ramp up those businesses. So certainly a little bit of pressure in terms of prices of product, especially on the instrument side. The implant side, not so much. We haven't necessarily seen that. And then just more the lead times have been more of the challenge, especially on the instrumentation side, which with our core product, we already have significant instrumentation in the field, so it's more of making sure that we have the instrument trades available to perform these cases given the momentum that we have with some of the new products that are out there.

The one thing I would also add is, if you look at our spend in the back half of last year and the first half of this year, we were very judicious in making investments in our instrument trades well in advance, knowing that we expected a big half second half ramp. And as we get into 2023, we derisk some of that issue.

And let's get into the fun stuff. So one thing investors often ask me about is just market penetration when you're looking at your core SI joint fusion business. So there's around 300,000 procedures in the U.S. Our model has about 10,000 procedures you've done in kind of a trailing 12 months. So you're only low single-digit penetrated. But does SI-BONE have all the pieces today to really double, triple, quadruple kind of that penetration rate over time? And just like how quickly can you get there? I mean, volume growth has been 20% over the past few quarters, and you have all of these tailwinds at your back.

Yes. I'm excited where we're at currently. I've been with the business for over 7 years at this point. And at the time, we were a private company. And SI-BONE is a very unique company in the medical device space from the perspective that we really identified a completely new opportunity, and that was a surgical procedure for SI joint dysfunction and degeneration. We were the pioneer in this space. And we're very proud of that because there are hundreds of thousands of patients each year that are suffering with this issue, and it's debilitating to those particular patients that are in chronic pain. And so we're very proud of the fact that we are a company that identifies unmet clinical needs, and we address them. And so when I think about our core business, the challenge of being the pioneer is that the reimbursement was very challenging just because it was a new space. And so what we had to do was actually build out this entire space. And that was the education of the surgeons, the development of the product, the development of the technique, the clinical data that was required, and most importantly, the coverage of the procedure. And so I'm really excited about where we're at, at this point in time because I do believe that we have all of those building blocks in place to capture the opportunity here in the core business. And we are the undisputed leader in this space. Our estimate is that we have close to 70% market share. The reimbursement is in place. We have pretty much universal coverage in the United States. A lot of that coverage is actually exclusive to SI-BONE based upon our unique product. We have the sales force in place in order to capture the opportunity. We have trained over 1,700 surgeons, I think it's 1,800 at this point who've treated at least 1 patient. And so when I think about the core opportunity that's here, I really do believe that we're at this inflection point with the business. And then you tack on some of the new products that we have where we're capturing a broader opportunity in sacropelvic surgical solutions, which is diversifying the business or at a really exciting point in time for the business.

Maybe there's a lot of growth drivers there. So we'll try to just focus on one at a time. But with the sales force for a moment, I mean, out of the -- or you spent kind of the last couple of years really expanding your territory managers and kind of building in clinical support specialists too. So can you just maybe help us think about sales force expansion from here versus kind of productivity and really a focus on driving utilization in the core or even in some of the newer opportunities that you have?

Yes. So we ended the second quarter with 85 senior reps. And those senior reps are responsible for, I mentioned the education side of this, and they really are focused on more the educational part of the sale. And on average, right now, those senior reps, their each territory has around $1.1 million, $1.2 million of productivity per year in their territories. Our best estimate is that sales force productivity can reach approximately $2 million, and that includes the sales rep plus a junior clinical support specialist in the territory. And so as I said, we feel that we've really built out the infrastructure at this point from a sales perspective. And so now what we're really looking at is gaining leverage on that sales force and in driving the productivity of our numbers. And obviously that will have a significant impact from a profitability perspective too.

Maybe we'll go into operating leverage a little bit later. But maybe just kind of on the active surgeon side. I think you've previously discussed about a 15% increase in surgeons for this year. Just kind of help us think too about where the surgeons are coming from in a sense of are these true new surgeons or are you kind of reengaging prior surgeons that 3, 4 years ago when reimbursement wasn't fully there, but now you do have coverage and you have new training tools and DTC. Just help us kind of think about maybe active surgeon adds and engagement from here that could drive utilization?

Yes. So in total, in the U.S., our best estimate is there are around 7,500 target surgeons. And as I said, we have 1,800 surgeons who have been trained and treated at least 1 patient. And in the second quarter, we had 720 surgeons who had performed at least 1 case. And so your point is correct. We really have a 2-pronged approach in terms of growing the number of active surgeons. And just to be clear, the way that we identify an active surgeon is doing at least one case in a 3-month period. That's how we identify an active surgeon. And so there's 2 ways that we can increase that number. Number one is to train more of those approximately 6,000 surgeons that are still left out there and get them to perform their first case. But we have spent a lot of time this year, especially with our simulator technology, looking at those surgeons, those approximately 1,100 surgeons who did not do a procedure in the quarter and reactivating those surgeons. And a couple of the reasons why we go after those inactive surgeons is if COVID was an issue, do we need to go in and retrain them using our simulator. If reimbursement was an issue, we were -- into 2021, there were still very significant reimbursement decisions that were being made. Anthem, for example, was not covering this procedure regularly until the third quarter of 2021. And so there's been a lot of activity to go back to those surgeons who were not regularly performing the procedure because the reimbursement wasn't there and to get them to perform the procedure. So it's really both of the things that you just mentioned. It's training new surgeons and then it's also reactivating surgeons who have previously performed procedures, but haven't done so recently. I would say the third thing that's important to us is, there are certain surgeons that sporadically perform procedures. They understand how to perform an iFuse procedure, but they're not regularly diagnosing. So that's a third element that we're really focused on is for those surgeons that are just sporadically performing procedures. How do we get them to regularly diagnose these patients and treat these patients? Because a typical surgeon in the second quarter did approximately 4 cases in the quarter and a surgeon who is regularly diagnosing and treating does more in the 8 to 9 range. So there's this opportunity to grow the number of surgeons, but there's also a very significant opportunity to grow the number of procedures per surgeon as well.

And with growing that number of procedures for surgeons, is this -- how do you kind of get them to maybe change workflow or changing kind of the diagnostic pathway? Is it solely revolving around the surgeon or is it also kind of clinical staff supporting the surge?

Yes. It's -- sometimes it's education. And so as I said, we really focus on that. We have a wonderful medical affairs group that is constantly out there working closely with our salespeople. So sometimes it's just training. Sometimes it's actually working with the nurse practitioner or the physician assistant as well. So they tend to play a very significant role in the diagnosis part of the SI joint process. So bringing the patient in, taking the patient history, performing provocative tests, making sure that the patient receives a diagnostic injection in order to determine that the SI joint in fact is the issue that they have. So the assistant to the surgeon is usually very important in that initial diagnosis and workup process. And then the surgeon is critical, obviously, with the procedure itself. So there's a lot of training that's going on, and we've seen a lot of success. Those surgeons that I mentioned that are regularly diagnosing and treating patients typically do have a trusted physician assistant or a nurse practitioner that's helping them to work up those patients.

And let's go into Granite for a moment. And does that or does that potential to really reengage or bring some surgeons into the SI-BONE active surgeon base and really with the NTAP starting October 1. I mean how is kind of the, your limited launch kind of playing into this in your initial commercial strategy? How should we kind of think about the ramp in 2023? I mean are you going to be disappointed if this isn't like a $10 million or $15 million product for the company next year with the NTAP?

I see what you did. You tried to slip in a number there. But we are incredibly excited about Granite. And SI-BONE has been working with surgeons on adult deformity procedures since middle of 2019 with our core product. And at the time, it was using iFuse-3D at the bottom of the long construct case for a scoliosis patient to provide a stable base to the construct. And Granite is really a revolution in spinopelvic fixation and fusion. We did receive a breakthrough device designation from the FDA as part of this. Based upon that designation, we have received an NTAP for Medicare inpatient cases up to approximately $9,800 that will go into effect on October 1. And so this is an incredibly exciting technology because we do believe that it's going to become a standard of care in scoliosis procedures. And the market opportunity there is around $250 million. It's an adjacent market. It is completely separate and distinct from our core market opportunity. And the need is very clearly there. These adult scoliosis cases where long constructs are used, there's a couple of issues. There are biomechanical forces that actually drive those forces down into the SI joint, which can cause adjacent segment disorder and pain after these procedures. That's number one. And then number 2, there are very significant problems with fixation failures in these cases in around 30% of the cases. A recent study came out from ISSG that showed this issue and in over 20% of those cases, revisions are actually required. So there's an understanding that there is a need for spinopelvic fixation in these cases. The reimbursement is there already. We've had over 300 surgeons who have actually performed a bedrock case. And as I said, this is the next stage where Granite actually integrates with the long construct and provides that stable base at the bottom of the construct. And in some cases, we're seeing the use of just 2 Granite implants. In other cases, we're actually seeing 4 implants being used because the surgeon is actually looking for fusion at the bottom of the long construct, which usually requires 2 implants on either side. So we're the leader in this. The product is quite unique, as I said, and then the NTAP will be exclusive to our product for the next 3 years. So very exciting times for us with this product. I think what's most important here, too, is that -- and you had asked about how this might open up the overall opportunity for SI joint fusion. And the answer is definitely yes. The call point is the same with these surgeons that do Granite procedures. It's orthopedic and neurosurgeons that perform spine procedures. But the typical surgeon that's performing an adult deformity procedure is usually in an academic setting. These are the key opinion leaders in the space. And so what's typical for us to see is in 2/3 of Granite cases, those surgeons are actually also performing minimally invasive SI joint fusion procedures. In other cases where they're not, it's typical that one of their colleagues will actually start performing SI joint fusions in their practice. And so there is definitely a symbiotic relationship between our adult deformity business and our core primary SI joint fusion business.

Maybe to actually go back to a question I asked on the call. But when you kind of look at the thorough registry and kind of the untapped data, I mean, Medicare put out maybe like 1,400 procedures, they think they could or budget for 2023.

Yes.

Is that a realistic target? And could the company's surgeon-based instrumentation base kind of support that growth opportunity in 2023?

The short answer is we will be able to support the opportunity that we have in the business. The numbers that were provided are more hypothetical numbers. But as I said, I think there are -- that $250 million number that I provided to you, that equates to approximately 33,000 procedures that are performed per year adult deformity procedures that go all the way to the sacrum. And so that's the -- that is the opportunity that we have here. And so your 1,400 cases versus the 33,000, you get a picture of what's possible here. And as I said, our belief is that this, in fact, is going to become the standard of care in the industry. The reimbursement is available, the need is recognized and we're creating a lot of excitement with the product that we have.

Maybe over to Anshul. So -- the last few quarters, I mean, your volume growth has been 20%. There's been some pricing pressure with just mix changes. As you're looking ahead, and this is a question I'm often asked by investors is just what's the right longer-term growth rate for the company? There at one time was a pathway to get to 25% or pre-pandemic. And I mean, even through the pandemic, I mean, there's been more tailwinds that have just been added. Can you just help us with that? And is it 25%, 30%? Are you more confident now today with the tailwinds at your back, at least for things that you can control than you were in 2019?

So you're trying to get to 2023?

No, not yet.

Not yet. So when you think about the growth of the business, the environment feels like you're getting into the pre-pandemic environment, when you look at the volume bounce back that we had in Q2 in the U.S. with 23% volume growth and sort of our expectations for the back half of the year, if you -- as you've done the math, it shows an acceleration in the business. And that confidence comes from the momentum we are seeing in the core market from a lot of the tailwinds Laura's talked about with better reimbursement that we now have in place. TORQ which is helping with surgeons who weren't comfortable using an impact-based implant. You then have the potential tailwind from a higher facility payment if the final proposal aligns with the preliminary proposal from the CMS in 2023. So the setup is there where we should continue to see growth acceleration in the back half of the year and into 2023 and beyond. And this is within the core and then you add on the Granite opportunity that we have. And Laura's talked about -- a little bit about trauma in the past, but it's got a longer -- in our view, it's going to take a bit longer for that opportunity to play out, maybe late 2023 is when you start seeing a true impact of that. We feel pretty good about the growth going back to pre-pandemic levels, where Q4 of 2023, I think we were at 27%. And then Q1, we were going to exceed that coming into 2020 before the pandemic hit, right? So from our perspective, we have the perfect setup to be able to accelerate growth, not just in the back half of the year, but also carry forward into 2023 and beyond.

To go back to kind of the operating leverage kind of topic. So with that growth acceleration, the sales force is built and kind of just looking at the numbers over 2019 to 2020, I mean, the company spent about $150 million of incremental revenue on incremental OpEx and a lot of that was SG&A, building out the sales force and R&D. So how should investors kind of be thinking about incremental spending going forward now that it's kind of in the base? And just maybe help bridge us to breakeven to profitability. You talked about growth, but maybe what the gross margin profile is kind of steady state or any pressures there? And is this really just all about SG&A leverage at this stage?

Sure. So let me start with SG&A and then I'll get to gross margin. So if you look at our strategy over the last few years, we were very deliberate in making investments that we made, not just in post-IPO, but even through the pandemic. We did pull back a little bit in the early part of the pandemic. But in the second half of 2020, we started making the investments into 2021. And all of those investments were made with the anticipation that when the market normalizes, we will have a mature infrastructure to be able to accelerate growth. So for example, our sales force, our quota-bearing reps expanded by 30% in 2021, right? And what we're seeing as we get into the back half of this year is a majority of our sales force is going to be mature. So you start seeing some leverage come out of that starting into back half of this year, into 2023 as well. And we saw some of that in Q2 when you had sequential revenue growth of 15% and sequential OpEx growth of 10%. So you're already starting to see that. And that was our expectation coming into this year, growing as we go into the back half. The second piece that we invested in, and we continue to do so was in surgeon education. And you've seen the impact of that. We've had 6 consecutive quarters of double-digit active surgeon growth throughout the pandemic. So set us up really well and a very good forward-looking indicator. And the third piece we invested on was on the R&D side. And as Laura has alluded to, we came up with TORQ, which has been a game changer within the core market as we add more surgeons, the opportunity in trauma and now with granted the opportunity to expand the presence in adult deformity. So we now have a setup as a business coming into 2022 that was at an inflection point to drive towards natural productivity. As our sales force matures, they have more products, they can drive more surgeon engagement and actually deeper surgeon penetration with the broader product suite. So this is just a natural progression for us, and that's what you're seeing play out in the P&L in Q2 and for the rest of this year and into 2023.

So growth in operating leverage for 2023 is what we should be thinking about?

The operating leverage will continue. The growth will continue. We expect the operating leverage to accelerate as we get into 2023 simply because you've got to have a much more mature sales force. You've got to have the products starting to get more seasoned in the market as well to be able to drive that deeper penetration.

With time coming to a close, but one quick question on 2023 guidance. Given that you're kind of getting closer to profitability and leverage is becoming more important, is that a metric that you're going to give some more framework around as you're thinking about next year?

Yes. We'll be able to talk more about it when we get into early part of next year in terms of the framework that we want to talk about. But our focus is we've got a huge TAM ahead of us. We've expanded the TAM. We want to drive as the market leader growth in that TAM. We're going to do that judiciously. We have the liquidity. We have the infrastructure to be able to do that. And we feel pretty good about our path to adjusted EBITDA breakeven over time, both driven by the growth on the top line and the leverage on the bottom line.

Great. We'll have to cut it there. But Laura, Anshul, thanks for joining us today. Really appreciate the time.

Thank, everyone.

Thank you.