Globus Medical Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

There are 13 speakers on the call.

Operator

Thank you for standing by, and welcome to the Globus Medical's Third Quarter 2023 Earnings Call. At this time, all lines will be on mute and a Q and A session will be I will now turn the call over to Brian Kearns, Senior Vice President of Business Development and Investor Relations. Mr. Kearns, please go ahead. Answered.

Speaker 1

Thank you, Leeway, and thank you everyone for being with us today. Joining today's call from Globus Medical will be Dan Scobilla, President and CEO and Keith File, Chief Financial Officer. This review is being made available via webcast accessible through Investor Relations section of the Globus Medical website at www.glovusmedical.com. Before we begin, let me remind you that some of the statements made during this review are or may be considered forward looking statements. Our Form 10 ks for the 2022 fiscal year And our subsequent filings with the Securities and Exchange Commission identify certain factors that could cause our actual results to differ materially from those projected recorded in any forward looking statements made today.

Speaker 1

Our SEC filings, including the 10 ks are available on our website. We do not undertake to update any forward looking statements as a result of new information or future events or developments. Our discussion today will also include certain financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We believe these non GAAP financial measures provide additional information pertinent to our business performance. These non GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures.

Speaker 1

Held. Reconciliations to the most directly comparable GAAP measures are available on the schedules accompanying the press release and on the Investor Relations section recorded at the Globus Medical website. With that, I'll turn the call over to Dan Scavilla, our President and CEO.

Speaker 2

Thanks, Brian, and good afternoon, everyone. This quarter's earnings release will have a different format than our usual approach. On September 1, after clearing the FTC second request time frame, We executed the Globus NuVasive merger. With the timing of this event, we have a full Q3 revenue and financials for Globus combined with the month of September only for NuVasive revenue and financials. For this quarter and possibly the next, We'll share total financial results and comment on standalone Globus and standalone NuVasive to show how these businesses are performing.

Speaker 2

However, As we move into 2024 as one company with one focus, we're not planning on providing standalone company information. For Q3, We delivered record sales of $384,000,000 a day adjusted growth of 53% or $130,000,000 versus Q3 2022, Reflecting 3 months of Globus and 1 month of NuVasive sales. Non GAAP EPS was $0.57 up 15% And cash flow remains strong with $29,000,000 or 38% increase from prior year. Adjusted EBITDA for the quarter was 29%. Globus standalone sales for Q3 were $281,000,000 increasing $27,000,000 or 12% on a day adjusted growth versus prior year, delivering an adjusted EBITDA of 32%.

Speaker 2

Sales were driven by the continued above market growth of 8% in the U. S. Versus prior year and increasing momentum internationally of 25% growth including significant gains in Japan. Enabling technology sales remain strong with 10% growth and over 59,000 procedures performed to date. Trauma achieved its 15th consecutive quarterly record adding 53% annual growth or 12% sequentially.

Speaker 2

The foundation remains strong And I'm proud of the GeMed team delivering solid growth and profitability as we enter into our combined future with Nuva. NuVasive standalone sales for the month of September were $102,000,000 down 2%, primarily driven by one less selling day in the U. S. Combined with a one time 2022 credit not repeated in 2023 for U. S.

Speaker 2

Spine. NuVasive clinical services and Pulse sales were lower prior year, partially offset by continued strength in International and NuVasive Specialty Orthopedics or NSO. Post sales have been impacted by customer uncertainty with the merger, while international remains focused on continued market penetration and NSO on market reentry of key technology. I'm seeing the incredible talent we have with our new teammates from NuVasive and I'm excited to join forces as we focus on gaining momentum throughout our businesses. In Q3, we launched Hedronae, our anterior 3 d printed interbody fusion device and Stretto, a cerclage wiring system for trauma.

Speaker 2

Year to date, we've launched 9 products and plan to launch several more new products by the end of the year. Our product pipeline is full And further enhanced by what is being developed in San Diego, setting the stage for a record year of product introductions in 2024. Over the next few months, we'll be adding to our best in class expandable portfolio, new INR offerings including Ehub navigation system to provide seamless navigation when combined with our E3D system and expansion of the PreciseTrauma Nailing System. Moving into integration status and starting with the deal rationale. Both companies recognized that a combination of Globus and NuVasive would create a leading world class organization.

Speaker 2

The global scale and expanded customer reach with minimal sales force overlap, combined with a comprehensive and innovative portfolio in spine, enabling tech and orthopedics, positions us well for long term sustained growth. Combining our product development strength focused on rapid development of innovative solutions to address unmet clinical needs of our surgeons and their patients, While continuing to focus on surgeon education and research will help us shape solutions through the continuum of care as we bring procedural solutions into the marketplace. Investing in our complementary operational footprint will allow rapid expansion of in house capabilities to support commercial growth and drive cost savings. Our financial discipline provides the ability to redirect investments into key growth areas while improving combined profitability and cash flow. With the unblinded data available to us after September 1, we were able to move from integration planning into execution focused on a combination of sales forces.

Speaker 2

The actual surgeon overlap is better than we projected both domestically and internationally, falling below the 5% we shared previously, which helps in defining territories and reducing overlap. We're completing and communicating our U. S. Commercial structure currently. Newly formed teams are beginning to develop 2024 action plans, cross training and account building as they complete the busy Q4 season and prepare for launching into the New Year.

Speaker 2

International is also progressing well with regional and market leadership defined. We're completing international in November with cross training planned in December. Overall, I'm pleased with our work here and look forward to completing this shortly as we get as we set the stage for the New Year. We're also receiving significant inbound interest from competitive sales professionals who are seeing the opportunity to carry a bag second to none. The combined company will be a destination of choice for sales personnel who cherish an incredible product portfolio, Financial Security and Longevity.

Speaker 2

To date, we've seen some smaller sales dis synergies, but these still fall well within our projected estimates provided in the S-four. One of the immediate benefits of the combination of our is our ability to cross sell our existing portfolios. We made significant investments in key product sets earlier this year and are poised to begin cross selling as early as next quarter, expanding it over time as we get more sets completed. Surgeons will soon start gaining access to our broader expandable offerings, 3 d printed interbody portfolio, cervical disc, Robotic prone lateral system, EGPS E3D, neuromonitoring solutions, improved retractors, Magic and the Precise family of limb lengthening trauma products. We also made significant investments in long lead time components and manufacturing resources To scale up our enabling tech capacity and we're increasing production output now in preparation for increased demand.

Speaker 2

For implants and instrumentation, We're not rationalizing the product offerings as part of our synergy targets. We believe our surgeons should have their choice of products and will over time without negative impacts while continuing to innovate future offerings. In our product development innovation engines, we will carry forward our rich histories rapid development and launch to remain an industry thought leader, working with our surgeon partners to address unmet clinical needs From pioneering the XLIF procedure that is now the gold standard of lateral surgery, market leading expandable cage technology, the best spinal robot and the most advanced interoperative CT imaging. We are working to create surgical proceduralization of all key spine procedures, combining with enabling technology to create the standard of care across all of spine. Our intellectual property portfolio has been number 1 in the final industry for the last decade and we are committed to further expanding this lead especially in the enabling tech arenas as we continue to be at the forefront of imaging, navigation and robotics.

Speaker 2

We remain committed to continuing all in progress projects on both sides and expect to have a core PD hub on the West Coast. We brought together significant resources to enhance our surgeon engagement program from adding scientific affairs, increasing research and clinical investments, adding strong talent to our professional affairs team, coordinating education programs and enhancing our presence in teaching institutions. In addition, We've added the NuVasive marketing communication teams. We're well poised to increase our impact with surgeons and further strengthen how we interact with them in all aspects of our business. The complementary fit of our operations remains a strength of the merger.

Speaker 2

Our strong financial position will allow us to expand investments in West Carrollton production facility to support our inventory needs. The Memphis distribution center is expected to support global distribution for the combined organization. We will continue to invest in high-tech manufacturing equipment for our implants, instrumentation and enabling tech production capabilities. We're currently working to consolidate volumes and orders with 3rd party vendors to accelerate delivery times and drive cost savings. Synergy targets have been refined and communicated to functional leads who are planning out actions for the next several years, focused on out of pocket spending and prioritizing investments to match our future growth plans.

Speaker 2

Organizational designs are in progress with planned rollout in the beginning of 2024. As we've said before, this is not a slash and burn exercise. The acquisition payback is not driven by deep spending cuts And we're not racing to impress the market with a quarterly flash. We remain focused on long term sustained growth and not making cuts that impact our strengths. I want to conclude by sharing a recent event that reminded me of who we are.

Speaker 2

As part of the integration, we sent a group a former Nuva teammates to visit our enabling tech facility in Methuen. They expressed excitement regarding the number of employees focused on the marketed products, The short term development launches and the long term game changers along with the building square footage we have invested in supporting enabling tech. This increased the realization that an ecosystem designed and built from the ground up to seamlessly communicate with each other with options to expand functionality over time is positioned to outperform patchwork to market alternatives. We will continue to accelerate and increase our investment in this space and place these offerings through our expanded commercial team as part of addressing unmet clinical needs And shaping procedural solutions. I believe the potential for Gluvus has never been greater.

Speaker 2

It's up to us to harness our resources and shape the future of our market. We have at our fingertips everything we need to realize this. I will now turn the call over to Keith.

Speaker 3

Thanks, Dan, and good afternoon, everyone. Of the September 1 merger completion with NuVasive is such that my discussion on our results will seek to identify the underlying legacy Globus Medical results as well as the contributions from the inclusion of NuVasive Financial Information. I ask everyone to remember that our Q3 2023 results Include 3 months of legacy Globus financial information and 1 month of NuVasive, reflective of the September 1 merger closing date. My comments today will seek to provide insights into our quarterly business performance, insights into our capital allocation priorities, early insights into integration and synergy tracking as well as views on overall guidance for the remainder of the year. As I move through my discussion this afternoon, I will first comment on our as reported results, providing insights into the legacy Globus business as well as high level comments on the contributions from NuVasive on an as reported basis.

Speaker 3

All information presented is done so based on Globus accounting policies and is consistently applied in the as reported results for both legacy Globus and legacy NuVasive. We are extremely pleased with our Q3 results both with and without the impact of NuVasive. Our sales results clearly demonstrate that we are still driving market share growth. 3rd quarter revenue was $383,600,000 growing 51% on an as reported basis and 50.3% on a constant currency basis as compared to the Q3 of 2022. Day adjusted sales growth was 52.9 percent with 1 less selling day in Q3 'twenty three versus Q3 'twenty two.

Speaker 3

Net income in the Q3 of 2023 was $997,000 reflective of merger and acquisition related costs scheduled due to September 1 merger completion with NuVasive. Non GAAP net income was $65,500,000 compared to $50,300,000

Speaker 2

recorded in the prior

Speaker 4

year quarter,

Speaker 3

resulting in $0.57 of fully diluted non GAAP earnings per share. Our fully diluted non GAAP EPS grew 14.7% versus the prior year quarter despite our diluted share count growing to by 13.7% versus Q2 of 2023 to to 115,200,000 fully diluted shares. Adjusted EBITDA was 29.4%, and we generated $29,000,000 of free cash flow during the quarter. Legacy Globus business adjusted EBITDA was 31.6%, while legacy Globus free cash flow was $26,000,000 Delving into revenue further, our 3rd quarter net sales of $383,600,000 reflect legacy Globus sales totaling $281,200,000 growing 10.7% as reported compared to the prior year. Legacy Globus musculoskeletal revenue was $254,700,000 growing 10.7% as reported.

Speaker 3

Legacy Globus Enabling Technologies revenue was $26,500,000 growing 10.2% as reported. NuVasive contributed $102,400,000 of revenue during the quarter, inclusive of $92,800,000 of musculoskeletal revenue, $8,500,000 of neuromonitoring revenue and $1,100,000 of Enabling Technologies revenue. U. S. Revenue during the Q3 of 2023 was $309,300,000 growing 42.5 percent as reported.

Speaker 3

Legacy Globus U. S. Revenue during the Q3 of 2023 was $234,700,000 growing 8.1% versus the prior year quarter. Our legacy Globus business continues to drive share growth across its U. S.

Speaker 3

Spine and trauma portfolios, while our Enabling Technologies business is benefiting from the continued uptake of our systems, namely eGPS and E3D. Q3 international revenue was $74,300,000 growing 100.2% as reported and 96% on a constant currency basis. International revenue for the legacy Globus business was $46,600,000 growing 25.5 percent as reported compared to the prior year quarter. The continued strong growth from our international business was driven by further penetration of our focus countries, including Australia, Italy, Belgium, Poland, Austria and Ireland. Shifting to NuVasive, standalone September 2023 results totaled $102,400,000 which was $2,500,000 2.4% lower as compared to the prior year month.

Speaker 3

This is driven by 1 less selling day in the month of September as well as a $2,700,000 non repeating sales credit in the prior year, which did not repeat in the current year. Gross profit in the 3rd quarter was 64.7% compared to 74.2% in the prior year quarter and is inclusive of the mix impacts from NuVasive as well as $19,000,000 of inventory step up amortization related to the merger. Given the impact of step up amortization on GAAP results, we are introducing an adjusted gross profit metric to better provide comparability with actual operating results. Adjusted gross profit was 69.7% compared to 74.2% in the prior year quarter. Looking ahead, we expect step up amortization to impact GAAP gross profit for at least the next 4 fiscal quarters.

Speaker 3

Thus, we plan to report on this metric more during this time. Legacy GLOVIS GAAP and adjusted gross profit was 73.9%, essentially in line to the 74.2% in the prior year quarter with a slight decline being driven by primarily higher inventory obsolescence reserves and write off expenses. NuVasive adjusted gross profit was $59,400,000 or 58% in the quarter. On a pro form a basis, NuVasive gross profit of 58% in September 2023 compares to 62% in the prior year month, reflective primarily of higher depreciation expenses and operational spending. Q3 research and development expenses were $29,300,000 or 7.6 percent of sales compared to $18,700,000 or 7.4 percent of sales in the prior year quarter.

Speaker 3

Legacy Globus R and D expenses totaled $20,400,000 or or 7.3% of sales compared to the prior year quarter of 7.4%. The growth in legacy Globus R and D spending is reflective of additional headcount primarily within our Spine and Enabling Technologies businesses, which is in line with our expectations. Our consolidated R and D expense of $29,300,000 Includes $8,900,000 of R and D expense from NuVasive, which equates to 8.7% of sales based on the $102,400,000 of revenue contributed from NuVasive during our fiscal Q3. The September 2023 NuVasive R and D expense of $8,900,000 or 8.7 percent of sales compares to September 2022 R and D expense of $7,500,000 or 7.1 percent of sales. The increase in pro form a NuVasive R and D expense in 2023 is primarily the result of adopting Globus accounting policies, Specifically, that internal labor and third party consulting expenses are treated as period costs and not capitalized on the balance sheet and ultimately amortized.

Speaker 3

SG and A expenses for the Q3 were $156,200,000 or 40.7 percent of sales expenses were $118,700,000 or 42.2 percent. The increased spending is primarily reflective of additional sales compensation costs from higher volume, higher benefit costs and some additional bad debt expenses. NuVasive contributed $37,500,000 of SG and A expenses in the quarter or 36.6 percent of sales. Turning our attention to cash and liquidity. As part of the merger closing on September 1, Globus paid off the outstanding NuVasive line of credit balance and subsequently terminated the former NuVasive line of credit.

Speaker 3

The total amount paid was $420,800,000 In addition to the line of credit, Globus also assumed the 0.375% senior convertible notes due in 2025, which have a principal balance of $450,000,000 Our current intent for these notes is to remain part of our capital structure until they are due to be settled in March 2025. Held. During the month of September 2023, we entered into a new 5 year unsecured $400,000,000 syndicated line of credit agreement. At our request, this line of credit has the ability to flex up to $600,000,000 if needed. As of September 30, 2023, We have not borrowed under this credit facility and fully expect this credit facility to provide sufficient additional liquidity if needed.

Speaker 3

Cash, cash equivalents and marketable securities were $744,900,000 at September 30. Our net cash, defined as total cash, cash equivalents and marketable securities less debt was $335,200,000 at September 30. Shifting to cash flow. Our net cash provided by operating activities was $50,400,000 and free cash flow was $28,900,000 scheduled for the Q3 of 2023. Net cash provided by operating activities for the 9 months ended was $138,800,000 And free cash flow was $83,400,000 Our capital allocation priorities remain unchanged.

Speaker 3

Our primary use of capital will be to fund internal investment and drive complementary M and A. Our share repurchase program will remain an integral part of our capital allocation priorities. However, we will continue to focus our primary use of capital on driving investments for long term growth. During the quarter, our Board of Directors authorized an additional $350,000,000 to be used to fund share repurchases, bringing the total amount authorized to $500,800,000 The company will utilize its cash reserves to fund share repurchases. Turning our attention to integration.

Speaker 3

Dan provided a detailed update in his earlier comments. However, I'd like to add a few comments in addition to his prepared remarks. We are actively working to integrate the business and are laser focused on the key activities that will help drive commercial success and generate internal efficiencies. Our integration activities are deliberate and aggressive. We want to go fast to maximize our ability to generate value.

Speaker 3

However, we are taking the time to differing processes and approaches as we bring the 2 organizations together. Our Globus culture is one where we will seek to move and drive actions, which lead to swift decision making. When we announced the deal earlier in 2023, we commented on generating $170,000,000 in cost synergy savings over 3 years. Internal synergy targets have been defined and the team is actively taking steps to achieve the savings previously stated. Given the delay in our merger closing with the FTC second request process, we now expect our synergy targets to push out to 2024.

Speaker 3

As such, we still expect to generate the $170,000,000 in synergies as previously communicated. However, this will begin with the 2024 fiscal year And will be realized over 3 years with 40% in year 1, 70% in year 2 and 100% by year 3. The realization of synergies will come predominantly from the legacy NuVasive business and will be across most facets of the business with the exception of the commercial portion of the business. The primary areas of focus are on A, operations B, spending, specifically more stringent spending controls as well as see the elimination of redundant costs. Our operational synergies will focus on manufacturing in sourcing, renegotiating supplier and raw material contracts and enhanced controls around capital expenditures.

Speaker 3

Spending controls will seek to eliminate or greatly reduce third party spending while further centralizing decision making around cash and cash expenditures. Cost reductions will occur in a manner that allows us to deliver best in class service to our internal organization while setting the business up for success through greater cash and profitability. As Dan stated earlier, We do not need a slash and burn exercise to drive success. We seek to institute a more disciplined approach to spending and investment moving ahead to drive greater value creation. Shifting attention to guidance.

Speaker 3

The company is updating its financial guidance for 2023. We expect our full year 2023 revenue guidance $1,550,000,000 representing 51.5% growth over the prior year. Our non GAAP EPS guidance remains unchanged at $2.30 per share. However, it is important to note that our full year share count will increase as a result of the merger and the 0.75 exchange ratio of Globus shares for each former NuVasive share. On a pro form a basis, assuming Globus and NuVasive were together on January 1, 2023, Our $1,550,000,000 revised guidance for revenue implies full year pro form a revenue of $2,377,000,000 or 6.9% growth over the prior year 2022 combined revenues of Globus and NuVasive, which was $2,225,000,000 I also point out that our revised revenue guidance of $2,377,000,000 is in line with the Globus Management combined standalone revenue estimate of $2,361,000,000 as reflected in our S-four document.

Speaker 3

2023 has been a year of dramatic change for Globus as well as the larger spine industry. Our merger with NuVasive brings together 2 industry powerhouses. To our patients, we will remain focused on improving your outcomes by bringing a best in class product portfolio to market. The combined resources will drive future innovation to solve unmet clinical needs. To our surgeons, we will continue to expand our product offerings and drive procedural improvements with our implants and enabling technologies.

Speaker 3

We will leverage the talent of both organizations and remain committed to global surgeon education and research. To our employees, We will drive passion and a shared commitment to patient focused innovation. Specific to our commercial team, we will bring our groups together in a manner that drives success for the organization And for you, remember that you have access to the best products in the market and you will be someplace where the innovation engine keeps running, giving you new and exciting things to discuss with your customers. To our shareholders, we will remain focused on driving innovation and investing for the long term, taking our globalist approach to advance patient care while maintaining operational excellence and a focused disciplined approach to cost containment driving expanded profitability. We couldn't be more excited with where we are.

Speaker 3

There's still a lot of work to do. However, we have a team capable of executing the integration and truly separating ourselves from the competition. As always, thank you to the Globus team, including our newest team members from NuVasive as we continue our pursuit for excellence. The best is yet to come. We'll now open the call for questions.

Operator

Thank you so much, presenters. Your first question comes from the line of Matt Miksic of Barclays. Your line is now open.

Speaker 5

Can you hear me okay? Yes.

Speaker 6

Great. Well, congrats on a solid start here to the new company. Maybe first, I think we'd love to hear about what kinds of things were sort of positive surprises to you as you sort of like wrapped up this quarter and headed to the end of the year in terms of momentum or The synergies or lack thereof and then maybe what are some of the areas where you feel you need to maybe work a little harder And I focus areas maybe, and I have one follow-up.

Speaker 2

Hey, thanks, Matt. It's Dan. I'll start with that. Truthfully, a lot of positive things. And you're right, like anything when you come into this size, some things are working, some things are not.

Speaker 2

So it's It's not all sunshine. It's a lot of hard work. But with the positive things, it really is going to get back down to the people and the fit. I know that everyone goes to streamed to talk about different cultures. But I'm going to go back and say the more I work with everybody, the more I see how much we have in common versus apart.

Speaker 2

I really think that's big. The rates and the depth at which I see the teams working together, whether it be U. S. Commercial or international commercial Grieve and all the support teams. It really is amazing.

Speaker 2

I think that they're positive more than anything. Areas of harder focus. Look, we're creating a great deal of disruption and in that create some uncertainty and there are some folks that are looking to get answers faster. So what I'd like to do is move at a faster pace. I know we're moving quickly, but the sooner we can move and create a steady state and get back into the stronger growth that we're poised to do all the better.

Speaker 2

So for me, it's about keep moving forward, make the tough decisions And get into the steady state at a faster pace.

Speaker 7

That's great. So follow-up On the cost side, if you could

Speaker 6

maybe remind us, I know there was a number of cost avoidance opportunities For you as a combined organization and distribution, there is obviously, as you talked about, Thomas, Leverage opportunity of existing facilities to do ramp up in sourcing and things like that. If you could remind us maybe specifically what's included and what's excluded in that $170,000,000 target. I have lots of follow ups, but I'll just stop there and I'll pass it back to you guys

Speaker 1

and the rest of the group.

Speaker 3

Sure, Matt. Great question. This is Keith talking. As we think about the 170,000,000 It's going to touch on a couple of things. It's going to touch on manufacturing and product in sourcing.

Speaker 3

I might say that we have the ability to positively impact Gross margin on a combined basis going forward, that's really going to be achieved by bringing products from the outside in, getting more efficient with our spending. From a distribution perspective, we believe that there's efficiencies to be gained. NuVasive has a facility in Memphis. We think that we could further leverage that facility to drive distribution for both companies moving forward. So that's included in the $170,000,000 And then on top of that, It's redundant cost that you primarily find in SG and A and focused approaches to taking a more discerning look at cash spending.

Speaker 3

That's what's contemplated in the $170,000,000 As we've closed this merger and are looking forward, we We feel confident about achieving that $170,000,000 And at this point, it ties back to Dan's earlier comments that we're finalizing ORB design. We're really going to be rolling things out as we get into 2024.

Speaker 6

That's great. Well, thanks. And I'll pass it on to the whoever's next. Thanks.

Speaker 3

Thank you.

Operator

Thank you so much. Your next question comes from the line of Shavan Singh of RBC. Your line is now open.

Speaker 8

So much and congratulations on the combined entity. I'm sorry for any background noise here. I was just wondering if you can help us with the framework for 2024. How should we think about top line growth? What are you assuming initially for maybe dis synergies?

Speaker 8

Is mid single digit growth the right target? I think on a combined basis, You guys called out 6.9% for 23%. And then for EBITDA, should we be in the high 20s? Any comments on EPS accretion? I think last time you had indicated plus 20% at Tier 1.

Speaker 8

Any puts and takes on 20 24 even directionally would be really helpful. Thanks, surely would be really helpful.

Speaker 3

Thanks, Shigun. We're very limited on the information we're going to provide for 2024 at this time. I would reference folks back To the S-four document, we still feel positive that this could be EPS accretive in year 1. So we feel good about that. But As time passes and we get closer to providing initial insights in the 24 in early January, we'll have more color then.

Speaker 3

I'll just add to that too that with Keith and the

Speaker 2

team and the projections they put out in the S-four, we're not anticipating making any material moves off of that at this We certainly have 1 month under our belt and a whole quarter to go, but feel positive that we're in the right direction and have shared that earlier with our recent with our submissions.

Speaker 8

Got it. And then I was just wondering if you can elaborate a little bit more on Salesforce integration plans, How you're thinking about territories? Obviously, that has been kind of a sticking point for a lot of previous mergers, but we do think this is different. So maybe you can elaborate on sales force integration and how you think about that. Thank you for taking the questions.

Speaker 2

You've got it and I'll take that for you. So we'll go down into the 2 areas, obviously, being U. S. And international With that, and remember what we've called out and have been calling out is we felt that there is a small amount of overlap. And what we're signaling is with the That's proven correct and better than we anticipated.

Speaker 2

And remember, we're not a 20 share company and a 20 share company coming together and bumping Both of us were in that range of say 7% to 9% of market share in

Speaker 3

the U. S. So it

Speaker 2

did naturally leave a lot of room for us to move around and grow without redundancy. What I would tell you is throughout the world, we really did well with the existing management team with very small changes And our intent is and to date has been to keep all reps. Like I said, we don't see any reason why we would have to shift or change from that. Even with our distributor partners, the message is clear. We want to go forward with you and work with you on that.

Speaker 2

And To date, we've been lucky with that unlike other acquisitions of the past where we have less redundancy and the chance therefore to grow and focus faster.

Operator

Thank you. Thank you so much. Your next question comes from the line of Rick Chopra of Wells Fargo. You may now ask your question.

Speaker 7

Hey, good afternoon. Thanks for taking the question and congrats on the deal close. So 2 from me. I guess on the first one is maybe on the guidance, you provided the top line guidance, which you increased as a result of NuVasive, But you kept the EPS, the same at $2.30 Maybe just talk about why the EPS guide is not being raised from deal close? And then I just had one follow-up, please.

Speaker 3

Yes, sure. Thanks, Vic. This is Keith. Really the primary driver of that is you have to remember the share count is increasing. So we had give or take 102,000,000 shares coming into or coming out of the Q2.

Speaker 3

That grew to about 115 here in Q3 and that will grow to about 140 in Q4. So your share count is really growing there and that's really the driver of keeping it to 230.

Speaker 7

Okay, great. Thanks for that And then I was just wondering on the hiring trends, maybe talk about what the hiring trends were like in Q3, heading into And how you see your recruiting and retention efforts shaking out given the deal close. Thanks so much for taking the questions and congrats again.

Speaker 2

Answered. Thanks, Vic. No problem. So admittedly, we obviously went a bit slower in the Q3 even though we are getting a lot of activity with competitive reps, but just making sure that we fleshed out where our territories would be and what we're doing. We're on the tail end of that now, which is good news for us as moved forward.

Speaker 2

And so we're going back as we enter into the Q4, ramping up competitive recruiting, been very active with it. And like I said, now that we really know and We're able to see where some of those opportunities are. And I think like I said, it was an okay Q3, intentionally a bit slower. We'll accelerate in the Q4 now that we've got the roadmap in place.

Operator

All right. Thank you so much. And your next question comes from the line of Steve Lipman from Oppenheimer. Please go ahead.

Speaker 4

Hi, guys. Thanks for all the color. I Appreciate, the color on the surgeon overlap. Can you give us a sense of what the overlap is By account, which I assume would be higher than that?

Speaker 2

Steve, probably not right off the top of my head. What I would tell you is it's not materially different where you would get into because Keep in mind, if you've got a surgeon, which is what you're right, we were talking about and it's there, this is okay. We'll keep the reps in both of those places we're capable of doing that if we can support the sales. So we're not parsing this out by account. We still keep a surgeon focused where that is.

Speaker 2

I would certainly agree with you that, that would get up higher, but it's not going to get into the teens of an overlap or anything material that way when it really looks at it. Again, but we're more focused on the surgeon side of this than it is by a hospital or location.

Speaker 4

Okay, got it. Thanks, Dan. And Keith, Again, thanks for the color on the layout of the cost synergies. What is going to be the cash outlay to achieve those synergies and will that be about the same percentages in terms of the timing of those costs?

Speaker 3

It's a great question. Our assumption is that the cost to achieve the synergy will be $0.50 on the dollar, and I would lay that out over the trajectory of the 3 years equally as I stated in my prepared statements.

Speaker 4

Okay, great. Thank you, guys.

Speaker 9

You're welcome.

Operator

Thank you so much. And your next question comes from the line of Matthew O'Brien of Piper Sandler. Your line is now open.

Speaker 10

Phil on for Matt. Thanks for taking our questions. For starters, on the enabling tech side of things, how are those early conversations going with placing a robot I can appreciate the uncertainty that led to some weakness in sales on the Pulse side of things as well, but any color on that would be helpful.

Speaker 2

Sure. I'll take that. So let's start with The Globus enabling tech, like I said, we've actually been working with our former NuVasive counterparts to train them on the systems, get them familiar with what we offer, understand where these things are going and create that Familiarity as we start getting out to the surgeons. We've not been pushing hard on surgeons. We have done several.

Speaker 2

But the real goal is to make sure that we have one team that can support this and do it in a way that's non disruptive. And so that's been progressing and it will accelerate into the Q4 as we get ready for next year that way. The Pulse system itself, I think there is a natural hesitancy of customers who thought we are going to pull it and get rid of it. We've been communicating that our intent is to support it, not only as is and in the field, but actually enhance it and finish up some of the in progress ways to expand its capabilities. And we'll make sure that we take that forward in a way that they can perform the functions they want with their systems.

Speaker 7

That's helpful. And just as a

Speaker 10

quick follow-up, any color on upcoming pieces of the enabling tech ecosystem? How big of a deal is it I combined the legacy offering with Neuromonitoring, the Nuva's Neuromonitoring down the road. Any idea in terms of Excelsior software updates for areas of target and then any update to the extended reality headset. Thank you.

Speaker 2

Sure. So, but you kind of hit a lot of those things. So one of the first things coming out is going to be our NAV Hub and the instrumentation for that, So that we've got the robotic navigation through GPS and now we'll come out and do the freehand navigation with our hub that we plan to put out. A key part of that can be, as you said, the augmented reality headset. The anticipation is an approval See in 2024, I'm hesitant to give you a date, but I would tell you in mid year, possibly into 3rd quarter is what I'm looking at depending on what we get or pushback from FDA.

Speaker 2

So we're waiting for that through the thing. As far as one of your questions, which if I understood it correctly, We are evaluating the benefits of Pulse and Neuromodering and seeing where it would make sense, if at all, to build that capabilities to our existing enabling tech and in fact blend them together. So that progress is occurring right now. We'll decide Probably within next month or 2, what we think the future of that will be.

Speaker 9

Thanks so much.

Operator

Thank you so much. Your next question comes from the line of David Saxon of Needham. Your line is now open.

Speaker 9

Great. Good afternoon, Dan and Keith. Thanks for taking my questions. Maybe I'll I have a follow-up question on the integration of the sales force. I guess, how long does that take?

Speaker 9

I think you said You're doing territories in November, crossing in December. So what are the next steps after that? And then which, I guess major milestones or steps in that process do you think carries the most risk?

Speaker 2

That's a great question. So We're doing it in 2 phases. The U. S, we're just finishing up territory. So we've gone from the senior leadership into the field leadership to the territory level and we're just communicating that out and getting them together.

Speaker 2

We're doing cross training in the Q4 for products And the availability for them as they form teams to obviously support each other, so that they would be active in doing that beginning in January. We're looking to do something similar internationally. We're probably, say, about a month behind with that, where we have the leadership defined. We're finishing up territories Probably in November, start to cross train as well in December. And I think that will probably take us into January with a little more solidity internationally in the February timeframe.

Speaker 2

Rate limiting steps, I think are just going to be the availability of the people To get together and train without disrupting surgeon support, we're going to make sure that that's 1st and foremost. I would think one of the key milestones for us is the a combination of our systems that will support the field and the replenishment and the ordering. We're working on that at a rapid pace as well. And I would think that they are the 2 items that are probably 1st and foremost on us to make sure we get right.

Speaker 9

Okay. Super helpful. Thanks for that. And then, just on the knee robot, I feel like I ask about it every once in a while. So just what's the update there, especially around timing?

Speaker 9

Is that an early 'twenty four launched and then also how are you feeling about the Cellcast implant portfolio and the strategy With that, on the back of the knee robot launch? Thanks so much.

Speaker 2

No, you're welcome. I'll answer that one as well. The knee robots really progressed I think we're in the process of fine tuning what we want to do for filings. I would tell you the first half of twenty twenty four is the target. Again, Remember, we're at the FDA's disposal with that.

Speaker 2

But I would be surprised, honestly, if we didn't exit the first half of the year with that. And with that comes obviously the cementless knee, which I think will be the major player there and that as well progressing on a good pace with it. I think 2024 we'll start talking obviously more about the joints in total. While I don't know if given our current sized with the merger, it will be a material lift. It will be nice to actually get out the door with this, start talking about it and then see it contribute in the years after that.

Speaker 9

Great. Thanks so much.

Operator

Thank you so much. Your next question comes from the line of Mark Blackman of Stifel.

Speaker 11

Answered. I appreciate you taking my questions. And I appreciate it's really early, but just curious if you're seeing any, Called green shoots as we think about cross selling and potential revenue synergies, for instance, any uptick in surgeon engagement or training from the NuVasive side, just anything worth calling out. And I've got one quick follow-up.

Speaker 2

I would say that that's probably a great question. And the answer is yes. So what you're seeing is there are some great products that come together, whether it be the pedicle screw system with a different retractor, our expandables with the lateral, Different items like that. So as we've talked about, when we begin coming out with one combined portfolio, the surgeons are excited about that. They see the ability to do that.

Speaker 2

Obviously, we need surgeons to help us cross train our reps and to help spread those around. So you're right, We're looking to increase surgeon engagement through different paths like that. We're also being mindful as to what products are in development for the Nuva team and the GMAT team and looking to make sure that they come out as a complementary approach and not conflicting. And again, working with surgeons in those development teams to do that as well.

Speaker 11

Okay. I appreciate that. And then a specific question, do you need 510 approvals to get the NuVasive implants on the robot, or any help on how to think about potential timelines for

Speaker 2

I think we have to evaluate what that would warrant. We're obviously going to do what's required. Some may and some may not depending on the extent of where we're going with that. So we're in the evaluation of it. Your real question and what I'm going to answer is we're actively modifying software and making sure that there's instrumentation that allow our systems to use the NuVasive products and that is 1st and foremost with enabling tech.

Speaker 2

Doing it in a compliant way that makes sense is what we'll do as a next step.

Speaker 11

Thanks again.

Operator

And your next question comes from the line of Jason Wu of Roth. Your line is now open.

Speaker 5

I'm just curious on sales force dis synergies, things like that. I know there's been quite a few questions on this for obvious reasons. But When do you guys think you have a handle on sort of where things fall? Is that after you've kind of just made your final decisions on management territories? Or is it 6 months out after that?

Speaker 5

Or is it kind of something that lingers for 2 years?

Speaker 2

Yes. Jason, it's a good question. Look, like anything, you've got to tease out natural moves and attrition with maybe something that is a bit more because of the disruption created. Things will always be ongoing, but I wouldn't say that because of the coming together of the merger that we would be experiencing this 2 years from now. We've already defined the U.

Speaker 2

S. Sales force in particular and that's where most of you guys have your focus on all the way down and just finishing up rep levels. And so I think as we un tease that and make sure that people understand where they sit and how beneficial this is to them, I would think that as we get through the Q3 and the Q4, through this call and into it that we should see things settle down more. And then as we get into a stabilizing of this in the Q1. That's where I'm going now.

Speaker 2

I think folks will decide and move as always. But I don't think there's a big holding the breath and all of a sudden this will happen. I don't anticipate that at this point.

Speaker 5

Okay. That's very helpful. And maybe just a very quick follow-up. I don't know if this has been asked in the past, but I assume for the knee products, it's going to be completely focused on robotics. There's not going to be manual Tools to put them in as well.

Speaker 5

I just want to clarify that for the knee launch.

Speaker 2

Yes. There's definitely the ability to do it freehand, do it robotically, do it through navigated procedures. We're going to give all of the options needed, so the surgeons choice to do that, not just a pure robotic move for our implants.

Speaker 5

Got it. Thank you very much.

Operator

Thank you so much. And your next question comes from the line of Richard Nudor of Tudor Securities. Your line is now open.

Speaker 11

Sam on for Rich. Can you hear me okay?

Speaker 5

Yes.

Speaker 11

Just I know we're not talking about 2024, but just wanted to see if we could put a finer point on the EPS side of things. Pretty wide range of consensus right now. Looks like about a $0.40 range in 2024 for EPS. I mean, is the midpoint of, Call it like $2.60 to $3 directionally a good place to start. And could you just walk us through the puts and takes

Speaker 3

2024. What I will tell you is we're excited about where the business is going. There's Lots of products coming. Dan talked about the number of product launches that we had this year. Next year, there's a lot of capital coming out.

Speaker 3

The cross selling is going to take effect. Obviously, that's going to be offset by some sales dis synergies, but that to me points positive and really ties back to the earlier comment that I made That for now, I would focus on our S-four estimate for revenue. As it relates to cost synergies and achieving synergies, A couple of things that are going to happen. Obviously, you're going to be looking to eliminate redundant costs, but one of the things that I talked about was manufacturing and manufacturing efficiencies and Supply chain efficiencies. You have to remember that some of those costs will get captured on the balance sheet and roll through the P and L in future periods.

Speaker 3

The thing to pay attention to is the cash and the cash flow generation of the business as we move forward. That's about all I would say right now as it relates to 2024. If I think about consensus and consensus estimates, I know there is a wide range out there, But I also recall that not all of the models were updated for 2024. So that's how I'd leave it.

Speaker 11

Got it. And then I guess on the synergy side, I think one of the areas a little bit less focused on is potential for trauma overlap and

Speaker 3

Could you just sort of

Speaker 11

tell us how you think about those portfolios getting integrated and where that growth rate can go going forward? Thanks.

Speaker 2

Thanks. And I'll take that. So there's a couple of things. Really the NSO Specialty Orthopedics part It's a fantastic add to our bag. That nail will allow us to do many things for long bones.

Speaker 2

Its ability With ankle fusion will be amazing with hind foot. And so that in itself we see bringing in and bringing to our existing trauma team that will further accelerate growth and create pathways into accounts. The majority, if not all of the NuVasive Activity is really done through 3rd parties and so we're evaluating those distributorships and understanding where they are, and making the determination if We want to do anything with our Globus Trauma business that way or not. But really the goal here and what was a great add was those nails from NuVasive coming into our bag and actually pulling us forward several years in our innovation and ability to address the market.

Operator

And your next question comes from the line of Drew Raniere of Morgan Stanley. Your line is now open.

Speaker 5

Sorry about the background noise here. But could you just speak to maybe some of the enabling technology trends that you saw in the quarter? And just as we do think about the merger looking ahead, You've had a history of really kind of placing systems via capital versus lease, but you have a significant cross selling opportunity ahead of you with the new basis account. So Do you expect a dramatic change in the mix of capital versus leasing looking ahead? And then I have a follow-up.

Speaker 3

This is Keith. I'll take the question. So as I think about Enabling Tech, the market is The market still has a lot of appetite for enabling tech. I will say that I think capital dollars are perhaps a little bit tighter. So there are More options available to customers in terms of how they acquire the capital.

Speaker 3

You commented on leasing. I want to remind everyone that, yes, the majority of our capital purchases are outright sales, in net 30 terms, But we have the ability to offer other ways to acquire the capital, including rental programs, leases, you name it. So as the market shifts, we have the ability to respond to the market. We're taking into consideration the point of obviously all these new invasive territories opening up to ourselves To sell the capital, Dan commented earlier that from a manufacturing perspective, we've been building that capital to have it ready Because we want to be able to strike as we really roll out the cross selling plan. But to answer your question, we will be able to address the market to sell the capital in any way that the customer needs to acquire it.

Speaker 5

Thanks, Keith. And maybe also for you, With breaking out kind of 3 segments now for revenue, can you just give us a little better sense of maybe how you expect growth to play out in the 4th quarter Now that you are breaking up this revenue a little bit of a different way. Thanks for taking the question.

Speaker 3

The revenue is broken So historically, we reported on musculoskeletal and enabling technologies. That obviously remains. We added the neuromonitoring services. As I think about Q4, you would expect to see the same seasonality in capital as you always do. Q2 and Q4 are the 2 highest quarters.

Speaker 3

We don't expect that to change. And obviously, you would expect to see the seasonal bump that you would experience in Spine as it gets towards the end of the year and the harvest season.

Speaker 2

Yes. Drew, one thing I would add too from my earlier comment. We are breaking that out more for visibility right now. We may decide that it fits better, consolidated over time. But right now, we're just kind of following through what our Nuva guys did as we got into the year for our first time announcing some of this.

Speaker 5

Got it. Maybe one last question. But as you are looking at the businesses today that you're now combined, Do you see any incremental opportunities to divest anything non core or slower growth just to refine the portfolio and Really get some more accretive growth out of the merger. Thanks.

Speaker 2

Yes, I would say no, not at this We're evaluating everything. We've not seen anything that would be a good candidate at this point. We'll always do what's best. But right now, there's nothing that comes to mind.

Operator

And your next question comes from the line of Ryan Zimmerman of BTIG. Your line is now open.

Speaker 12

Glad I could get Squeezed in here. Just on the quarter itself, if I look at kind of NUWA's revenue, look at kind of next quarter, I think The Street was estimating around $445,000,000 or so. For consensus for Nuva, we're kind of, kind of hone in on maybe $415,000,000 And just wondering if you can kind of comment on That delta, is that in line with kind of where you're tracking from a dissynergy standpoint, Kind of how to think about that difference there. And then I'll ask another question afterwards. Thanks.

Speaker 3

Thanks, Ryan. This is Keith. Your question, you said The Street was modeling 415 for NuVasive?

Speaker 12

No, I think well, if you take the 102, and you assume that coupled with, I think, next quarter, Which was maybe about $300,000,000 or so. You kind of come out to $415,000,000 And I think this should be around $445,000,000 for the if my numbers are correct.

Speaker 3

Yes. I think that it's a great question. As I think about the numbers we put out, the implied guidance represents $2,377,000,000 Coming into the year, Globus projected guidance of $1,100,000,000 in NuVasive, they were a range of 6% to 8%. If I take the low end of the range and our number that's 2,374. We're projecting 2,377 on a combined basis.

Speaker 3

We think that, That relative to what we've previously stated in our S-four, we feel that the business is lined up as to where it should be.

Speaker 2

Yes. And Ryan, one thing I'd add in there because I'm not sure if I'm reading this between the lines, so forgive me. But we're not saying we're bleeding out because of the synergies. We've not Seeing anything that would have materially moved us off of any of our estimates related to that.

Speaker 12

Yes. I appreciate that. And recognizing Right now, consensus is kind of messy, but with the integration and the merger, just want to ask. And then the second question I want to ask is just around your margins, Particularly gross margins, Keith. I recognize there's this step up in inventory that you're accounted for.

Speaker 12

Just maybe help us because I'm not entirely clear where your gross margins can go on a combined basis And how to think about those, not just for the Q4, but really into 2024?

Speaker 3

Longer term. Yes. No, that's a great question. It's always our intent to be extremely clear to be a mid-70s gross profit business. That is the goal of Globus.

Speaker 3

It has been and it will be going forward. As we work through bringing the businesses together, I commented on earlier about some of the manufacturing efficiencies that we see, Some of the warehousing efficiencies that we see, those to me will all contribute to us showing an increasing consolidated gross profit from where we are Obviously, there's going to be some step changes as we get there, as we bring the companies together. But the Globus goal of mid-70s It hasn't changed.

Speaker 2

Yes. And Ryan, I'll build on that too. So we talk a lot about in sourcing and investing in manufacturing and additional what Keith said Because that will be a key driver. We can drive our product cost down. That will allow us to not only improve gross margin, but instead to turn around and invest deeper into the sales force.

Speaker 2

So it's a major focus of us to do in house manufacturing, line up with our contracts and come out with the best pricing with our vendors. And that in itself will help lift us back to our targets that Keith mentioned.

Speaker 12

Okay. Thanks guys. Thank you.

Operator

Thank you so much. And your next question comes from the line of Matt Taylor of Jefferies. Your line is now open. Answered.

Speaker 9

Hey, thanks guys. I wanted to ask a similar question in a slightly different way. I I guess I'll start with some of your competitors that made noise about taking reps from the combined entity, big for them, kind of small for you. And everything I heard on this call from you today in terms of lower surgeon overlap and being within your targets and seeing competitive activity Coming your way, sounds positive for the integration. So my question is really, is that right?

Speaker 9

Are You're on track. And is there any thought or potential for you to actually outperform the synergy or the synergy estimates that you've put out there? Or is it right to think about being straight down the fairway or

Speaker 6

Yes. Matt, we're early on

Speaker 2

on that. So I'm going to let you know in about 3 years. No, but I think what we'll do right now is We've not seen surprises. And I think we're standing behind our numbers is what we're saying. And again, there's 1 month of actual and everything you've said is legitimate.

Speaker 2

What we've got to do is focus on getting the commercial team stabilized, make sure we train, get our products delivered, accelerate how we have common systems, bring in house manufacturing for more flexibility and then go back and flex all of that strength to become who we need to be. But at this point, we're going to shy away from saying we can outperform or fall short. We're going to stick to the synergies that we've thrown out. We've got a pathway to go get there. As we get more data and experience under our belt, maybe that's a different conversation.

Speaker 3

And the only comment that I would add there is obviously change creates disruption in the market. But as I think about Globus, we Globus needs to be Globus and focus on our plan. We obviously need to be aware of the competitive landscape, but we have to stick to our plan and work our plan. And if we do that, we believe we'll be successful.

Speaker 9

Okay, great. Thank you, guys.

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Earnings Conference Call
Globus Medical Q3 2023
00:00 / 00:00