SI-BONE, Inc. ($SIBN)

[Audio Gap] Bank of America. Today, I'm joined by Anshul Maheshwari, as Chief Financial Officer and Chief Operating Officer for SI-BONE. Thanks for joining us, Anshul.

Yes. Thanks for having us.

So just to start out maybe more big picture on the story. You're seeing a lot of current momentum in the business, set up with a nice multiyear tailwinds in reimbursement, surgeon adoption and new products. So what excites you most about the SI-BONE story today? And what do you think maybe is most underappreciated by investors?

Yes. Thanks for the question. We actually announced our earnings last night. And if I was to break down things that we as a company are really excited about, I'd break it down into 4 buckets. The first one would be innovation. The second would be engagement. The third would be commercial expansion, the fourth would be growth and profitability. And we're firing all cylinders on all those 4 priorities. So starting with innovation, we just launched another product in the SI joint space in Q1, INTRA Ti. That's focused on ASCs and interventional specifically. That product is tracking really well. We've got another product that we expect to commercialize in the fourth quarter. That is our third breakthrough device product. That's going after one of the largest unmet needs in spine surgery and it's going to be a massive expansion of our TAM, a huge opportunity for us going after the same [indiscernible] and actually have a lot of procedure and physician density. So really excited about the innovation side for this year. Equally exciting is what we're doing on the R&D side and getting into what we've been talking about as an innovation super cycle, where we expect to launch products at a pretty regular cadence over the next 5 years, go after large unmet needs in the compromised bone space. These are patients that have osteoporosis, osteopenia where you have poor quality of care today or the outcomes are very poor. And we've actually got a demonstrated track record of coming out with unique technologies to service that market, and I can talk more about that. So I'd say innovation is a huge exciting opportunity for us over the next 5 years. The second would be on the engagement side, and I break the engagement down into 2 things. One is the physician engagement. We had our 21st consecutive quarter of double-digit physician growth in a quarter, and we ended with a record over 1,650 active physicians in the quarter, which was up 17% year-over-year and which was also up sequentially from the fourth quarter, even though Q1 generally tends to see a step down. And what that tells us is that our innovative platform is resonating with our customers, and we're seeing that demand and interest at a pretty elevated level. And to us, that's a really good forward-looking indicator of where demand could go. So that's really exciting. Equally exciting on the engagement side is reimbursement. There are 2 big reimbursement themes that I would want to talk about. The first one is, as you think about our office-based lab procedures where our allograft solution plays really well, that had a 17% increase in reimbursement starting January 1. And we've really seen a good traction on the interventional side with our overall intra portfolio, and that reimbursement provides an additional tailwind. You've also got Granite, which has been our fastest scaling product within pelvic fixation. And CMS has proposed a new DRG family, and Granite would be pushed into that new DRG family, and that could drive a pretty significant increase in reimbursement for that solution, which we do believe should become a standard of care when you're doing pelvic fixation in deformity and B10 procedure. So I think that's a huge tailwind on the reimbursement side. On the commercial side, you've got the excitement around the strategic partnership we have with Smith & Nephew that will allow us to really go after the trauma opportunity. It's a new call point for us with Smith & Nephew's field force. It gives us a real opportunity to capitalize on that market potential with TNT, which is also a breakthrough device with about $4,000 of new technology add-on payments with it. Then we've got our own commercial footprint expansion coming. We want to get to 100 territories. And so that should be a nice tailwind for us. And lastly, what I'd say is when you look at all those top line drivers, what you're seeing is a really nice inflection in profitability. We have the industry-leading gross margins of close to 80% at 79.8% for the quarter, we're close to 80%. You're seeing that translate into really good operating leverage and a really good expansion of adjusted EBITDA, which was up like 400-plus percent year-over-year this quarter. So those are all the tailwinds that excite us, right? And what's special and unique about us is these aren't tailwinds that are specific to one quarter. These are tailwinds that are multiyear tailwinds. So what I would want investors to think about SI-BONE is a growth acceleration story coming into 2026, but that growth acceleration continues into '27, '28 because as these tailwinds get mature and seasoned, we really start seeing the impact of that in the outer years.

Yes. Great. And we'll dive into each of those topics more in depth as well. But maybe just one more is, so your platform has been used in over 140,000 procedures worldwide. So what have you learned from this experience that's really shaping those next-generation products?

Yes. So for us, we've actually completed 150,000 procedures as of yesterday. So it was a huge milestone for us. And our focus has been since inception on the sacroiliac anatomy. And what most people now are aware of is your sacrum has some of the most poor quality bone. And through 150,000 procedures across 3 different disease states, we've really built a core competence of driving fixation infusion of one of the poorest bone qualities in the human anatomy. And we've had a lot of clinical data that shows the efficacy of all our solutions. So what you're seeing us do is we're taking that to a whole new level by thinking about how do we take this skill set, this biomechanical knowledge base that we've built, this additive manufacturing knowledge base that we've built and how do we take that and build out this platform of technologies that go after this osteoporotic/osteopenia patient population. So go after clinical adjacencies, stay true to spine and interventional and go after TAMs that have either subpar technologies today or have no good treatment of care. We've talked about the product that we're going to be launching in the fourth quarter. That's the first foray into outside the SI joint anatomy. And we've got a lot of other products in the hopper over the next 5 years that are going to allow us to significantly expand our TAM, especially as we go after these compromised bone patients. What's also exciting is these markets are going to be faster growing because osteoporosis and osteopenia is a growing patient condition. So we know this is a fast-growing market for us. And we look at Granite, for example, when Granite was going after was going after a deformity market, but by coming out with unique technologies, we were able to grow multiple times the underlying market growth. So this is a playbook we've had for a while. We've executed it well. And so we feel really excited about the potential we can build up with it.

You reported a very good Q1 earnings, as you alluded to. Your revenues are $52.6 million, beat the Street by about $1.5 million, raised full year guide by $1 million. So why not raise by the full beat? Is this just a level of conservatism earlier in the year? Or can you talk about what you saw in Q1 also that gives you confidence in sustained momentum throughout 2026 and you can expect a similar cadence of beat and raise throughout the year?

Yes. So in terms of what we saw in Q1, that's very encouraging for us is the level of engagement that we saw across all our call points, they all grew double digit. As I said earlier, that's the best forward-looking indicator for us. When you're seeing demand go that strong, 17% growth in physician base is a really good forward-looking indicator. So that's point number one. Point number two is, in the quarter, we saw a nice acceleration in the business. January was a little bit soft because of some weather-related issues. We did catch up on that in the quarter, but we saw a nice acceleration in Feb into March, and we saw that same trend continue into April. And that's -- we've barely launched some of the new products. INTRA Ti launched in March, our European products, TNT and TORQ in Australia launched in April. So really good tailwinds coming out of the quarter. In terms of our guidance philosophy, we did raise the midpoint of the guide above $1 million -- around $1 million. We want to be very deliberate and thoughtful. We're still early in the year. And we have a lot of these tailwinds. So if I was to reiterate them, we're still in the early stages of seeing the impact of INTRA Ti. We're seeing really good traction with interventional across the INTRA portfolio. So we feel good about how that product will be received, especially in the ASC setting as we progress through the year. That's number one. Number two, you've got the Smith & Nephew partnership. We signed it in March. We started engagement and training and rollout in April. That's going to continue through the second quarter. So that could be a nice tailwind for the back half of the year. And then you've got the third breakthrough device that we expect to file for FDA clearance in the third quarter and are looking to commercialize in the fourth quarter. So again, a really nice opportunity there. And then you've got the potential for an improvement in reimbursement with the new DRGs that would specifically impact Granite starting October 1, assuming they're approved. But again, these are tailwinds that are either nascent or will materialize as we progress through the year. So our approach is let's be thoughtful, let's grow into these tailwinds and let's incorporate the upside as we see it play out in the P&L. So we think there's opportunity for upside, but it's still early in the year.

You've mentioned this earlier, but the 1,650 physicians performing your procedures in Q1, up 17% year-over-year. I believe it was your 21st consecutive quarter of double-digit growth in physician adoption. So what do you think is the key drivers of that sustained momentum? And what would potentially be the ceiling for physician penetration, if any?

What I would say the key driver of the physician engagement is innovation that is solving unmet clinical needs that are known by our physicians. Number two is backing it up with good high-quality clinical data. We are a very clinically focused company. Three is working on health economics, making sure that as we are solving some of the biggest problems in interventional and spine that we can get appropriate level of reimbursement, and we have a really good track record with 2 NTAPs, a TPT, the potential reassignment of the DRG. And it's a commercial sales force. We have the best commercial sales force in the industry. We do a lot of education-related sales because you're changing and addressing some of the largest unmet needs. So I'd say those are the 4 things that drive the level of engagement that we see across all call points. Now in terms of the potential, what I would say is there's about 8,000 spine surgeons that we're going after. There's about 4,000 interventionists that we're going after. And there's a few thousand trauma docs that we're going after as well. So it's a pretty huge opportunity for us to go after. And at 1,640 physicians in a quarter, we think we have a significant amount of runway there. The second thing that we're focused on as we continue to build out the platform is while we expect the physician base to continue to grow, what we're really also targeting is how do we go deeper with that call point. It is our most underappreciated asset to have 1,640-plus docs do a procedure in a quarter. So our focus is how do we come up with innovative solutions that solve a known unmet need, that physician workflow and get more cases, so help them with multiple procedure types, but also have a synergistic portfolio where we can have more products in a case and over time, get higher ASP.

Great. Just to maybe switch over to the reimbursement. So talked about the new now including Granite, you said could be as high as $50,000 per procedure. So including this is obviously a big incremental bump in reimbursement for the product. Can you walk us through the benefit of where you're starting today, what's being reimbursed at and then its effective in October 1, how this could drive upside both in 2026 and maybe preliminary thoughts on '27 as well and a full year impact there.

Yes. So Granite is a very unique product. It's a great example of us leveraging our core competence on the biomechanical side to drive fixation infusion to come up with a solution. That was a known unmet issue. And we came up with -- and that was prone to failures before Granite came on the market. And Granite with its clinical evidence has really proven to be a superior product, and we believe it should be a standard of care. And we recently, in March, published a study called POLA. It was a 160-patient study that demonstrated no breakage of Granite, no loosening of the implant and a significant improvement in pain scores for patients in the first 12 months. So when you think about adoption of Granite, the reason we say it's been the fastest scaling product is because it truly is a superior product. It's improving the quality of outcome for patients, and that's why it's been such a success for us. Now with the new DRG that has been proposed, so in April, CMS proposed this new DRG family and Granite would be 1 of 2 products that would be automatically mapped to DRG. If you recall, Granite was a breakthrough device. It had a new technology add-on payment. It actually has a transitional pass-through payment as well for outpatient. The NTAP did expire a year ago, and we've been working with CMS to get Granite reassigned to a higher DRG because of the cost and complexity of procedures that Granite us. We provided CMS with a lot of data. And what CMS concluded when they looked at the data is instead of just moving it to a higher criticality of a DRG, they believe that it was best to assign a new DRG family for Granite. So that's really exciting for a few reasons. One, I think it will ensure that patients, hospitals, physicians have uninterrupted access to Granite, assuming this DRG methodology is approved. So that's number one. Number two is the NTAP was limited to Medicare patients only. The DRGs, generally, commercial payers will also adopt the DRG. So you now open up the opportunity with commercial payers as well and 60% of our Granite business was commercial. So I think that's a huge opportunity. And the uplift on the reimbursement could be as high as $50,000 based on the diagnosis and severity of the patients. So I think it's going to be a nice tailwind for the business, assuming it's approved starting October 1. It will address one of the barriers that can often come up on cost of the product because of the new DRG. And we do think it should become the standard of care going forward for deformity and degen and procedures.

Maybe just because of that also, what are your latest thoughts around ASP trends, procedure mix underpinning 2026 guidance, but then also how maybe this incrementally positive benefit on reimbursement could impact pricing in the future?

Yes. So when I think about ASP, I think about ASP at the procedure level because different procedures have different number of implants that use and that varies your ASP. So on average, our ASP is around $9,000 because you've got certain products that you use 4 implants in, right? Granite could be 4 implant cases. In deformity, that's $12,000 on the flip side. You've got certain degen or trauma cases where you could use 2 implants and you've got the SI joint dysfunction where you use 3 implants. So when we set up our guidance, we generally assume a low-to-mid-single-digit ASP degradation at the procedure mix level, and a lot of that is procedure mix. Our implant ASP has been fairly stable over the last several years. So any deviation you see in ASP is generally driven by the procedure mix. So that's our underlying assumption. We obviously have been able to do better than that over the last few years, including in Q1, you saw our ASP actually be better by 3% improvement year-over-year, again, because of procedure mix. Now we have a huge underpenetrated opportunity ahead of us with Granite. Granite is going after 130,000 annual procedures, so about $1 billion TAM. So for us, what this new reimbursement does is it allows us to continue to penetrate that market, take pricing as a question mark for hospitals off the table, focus on clinical evidence, focus on better outcomes for patients and focus on long-term durability and pain relief for patients and continue to drive that adoption.

Great. And then you did announce the Smith & Nephew partnership entering into a strategic partnership to distribute iFuse-TORQ and iFuse-TORQ TNT in Level 1 and Level 2 trauma centers. So how is that partnership ramping? And any more color on the agreement now that it's starting to ramp throughout the year?

Yes. So trauma is a really nice opportunity for us. It's around -- our target patient population is around 60,000 patients a year. So it's around $300 million opportunity for us. It's the only product we have in trauma. TORQ's used in trauma as well, but TNT is the true beachhead that we've launched in trauma in the last couple of years -- a couple of years ago. It does have NTAP, like I said, about $4,000 plus NTAP on the procedure in Medicare cases, which is mostly what these cases are. But with one product, it's not the most efficient use of our commercial sales force, like I said, that's the biggest asset we have in our company, and we want to focus them on the largest opportunities, which is within SI joint dysfunction and pelvic fixation. So this partnership with Smith & Nephew is a perfect situation for us to work in Level 1, Level 2 trauma centers. They have the footprint. They have the skill set at all those sites. It's very synergistic with what they bring to the table. It's a gap in their portfolio when it comes to a solution like TNT. So it fits well there. So we're very excited about the potential for this. When you add the quality of the product, solving an unmet need, great reimbursement and now the footprint that Smith & Nephew brings, it truly positions us to harness the full potential of TNT and trauma. We're still early. Like I said, we're in the rollout phase of both training, getting the product on the approved list at several of these Level 1, Level 2 sites as well and deploying surgical capacity, which -- the first initial phase should be done in Q2, and you should start seeing the ramp in the impact in the back half of the year. Again, for us, it's not just what happens in the back half of the year, but how it positions us to actually drive the penetration of trauma in 2027 and '28 as well.

And just what percentage of your business is trauma today? And what is the growth rate of that? How to think about that?

We don't break it out at a percent level. It's a relatively young market for us. If you think about it, TNT came out a couple of years ago. So it's relatively young. This partnership with Smith & Nephew was really important for us to really accelerate the penetration of the trauma opportunity. It's done well for us. It's actually exceeded our own internal expectations even without having that dedicated trauma field force. So it's just exciting for us to see what we can do with that product now. When you have our sales force that's really good at the educational sale, partnering with the Smith & Nephew sales force to get access and be able to cover those cases.

And is there any way to quantify or maybe more color on how to think about what's currently in the guidance for 2026, maybe quantitatively as well?

Yes. So trauma was in our guidance when we provided our initial expectations at the end of February. What the Smith & Nephew opportunity does is 2 things. Our approach to trauma was always going to be the hybrid model. So leveraging our sales force for training, but then leveraging agents for case coverage and making sure they were available when these procedures get scheduled at Level 1, Level 2 trauma sites. Now that build-out strategy will be a lot more slower. It will take a lot of time because you would have to cast the wider net. With Smith & Nephew, what you get is a really large footprint with one organization that is focused on trauma. So for us, what it does is it really accelerates our ability to penetrate this trauma opportunity as we get into 2027.

Maybe you talk a little bit about the new products that you said launching Q4, filing Q3. So any updates on the time line and what makes this go faster or slower? And what should we be looking out for next?

Yes. So really excited about this new product that we're going to put out there. What we have shared publicly is, one, we're ahead of schedule. We're in the midst and the deep depth of our testing and validation work before we go for 510(k) filing, which should be in early Q3. And assuming it goes to regulatory clearance on an accelerated time line because it is a breakthrough device product. We're hoping to be able to be commercializing this in the fourth quarter. And what's really exciting about this product is a few things. One, we believe it's addressing one of the largest unmet needs in spine. So that's really attractive. Number two is because it's an unmet need, surgeons are already using subpar technology or similar solution to solve it. Two, it fits within the physician workflow. And those things are similar to what we have in Granite. Granite was solving an unmet need. It fit into the physician's workflow and it had differentiated reimbursement and clinical data. So that really positions us well to be able to monetize this opportunity. So we think it's going to be a really growth driver for us, more so in '27, you might see some impact in '26, but more so in '27, '28, '29. So it's a really exciting opportunity. The other piece that's really exciting about it is not only does it go off to the same call point, it has complementary usage with Granite. So in cases where Granite is used, we know this product is also going to have application. So it allows you to drive surgeon growth. It allows you to drive density with those physicians to get more cases per doc, but it also allows you to get more product per case, which, again, Granite has the highest ASP per procedure for us. This should allow us to even increase that over time.

And how do you think about maybe just walking us through how that expands your TAM as well?

Yes. Again, like I said, it's -- we'll share more details about the specifics of the TAM once we commercialize the product. Like I said, it's a really exciting opportunity for us. And it really builds out our focus on the pelvic fixation side. I think we did talk about it yesterday that between Granite, this new product, the DRG changes and the product portfolio that we want to bring into market over the next 5 years, the spine pelvic fixation market could be one of the biggest markets for us from a revenue perspective over time.

Makes sense. Well, excited to hear more about it. So maybe turning to margins and a little bit about profitability. You're expecting 79% full year 2026. You started out '25 guiding 77% to 78%, ended up at 79.6% for the full year. So can you just walk us through maybe what drives upside? And is this sustainable as you launch new products? And should we kind of expect a similar cadence of gross margin expansion or beats in 2026?

Yes. So again, when you think about everything we've talked about, we've talked about the top line reacceleration as we go through the year in '26 also going into 2027. So very excited about that top line. Equally exciting is the discipline we've managed to maintain on the gross margin side. We do have industry-leading gross margins at close to 80%, and we're really proud of that. And we really like the outperformance we've demonstrated on gross margins through 2025. A lot of that was our focus on supply chain optimization, our focus on how do we get costs lower as we get scale on some of the new products that we launched over the last 3 years. And we've seen that being a sustainable advantage for us, and you saw that happen in Q1 as well. We started the year with gross margin guidance of 78%. We actually increased that by 100 basis points to 79% for the year. And so we feel very good about the trajectory of the gross margins there. Now what -- where does gross margin go from here? We said we're going to be at 79% for the year. Part of that is us incorporating the benefits of the sustained operating activity that we have in the business, but offsetting that with some of the higher CapEx spend that we have. So most of the delta between Q1 and for the year is noncash depreciation because of surgical capacity for the Smith & Nephew partnership, the new products that we want to commercialize that we'll put out there. There is a time lag when you put capacity out and you start depreciating it before really start seeing the optimal level of utilization on those assets. So you're seeing some of that baked in. Now what it doesn't bake in is the continued focus on operating discipline. So we're really excited about where gross margins can go in the future. But I think if you look at the next 3 years, some of that 78% gross margin would be a nice baseline.

Okay. And just quickly, maybe last minute here, but you achieved great positive free cash flow for the first time in 2025. So what operational levers drove this inflection? And how do you think about balancing continued investment in innovation with margin expansion in 2026 and beyond?

Yes. So for us, it's all about top line growth. And we know that, that top line growth through innovation and through scaling of the commercial infrastructure can drive a significant amount of operating leverage in the business. What we have planned in our guidance for this year is 12.5% increase in OpEx. That's fully loaded OpEx. That assumes the spend on marketing, commercial expansion, R&D work, but it does not incorporate some of the upside that we talked about tailwind in the business that could provide more upside in the business. So assuming that upside plays out as we progress through the year, you could see a higher operating leverage in the business. So we feel really good about the trajectory, not just of the top line growth, but of gross margins and the continuation of the operating leverage, which for this year is 1.2x, but we think over the medium to long term, could range between 1.2 and 1.75x, which should drive a really nice margin expansion. And given our asset-light business model should translate into really nice free cash flow as we scale the business in '27 and beyond.

I think we're out of time, but thank you for joining us.

Thanks so much for having us.

Thanks.