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Executives

Patrick Williams - Vice President of Finance

Alex Lukianov - Chairman and Chief Executive Officer

Keith Valentine - President and Chief Operating Officer

Kevin O’Boyle - Executive Vice President and Chief Financial Officer

Analysts

Taylor Harris - JP Morgan Chase & Co.

Mark Hopkins - Banc of America Securities

Matt Miksic - Piper Jaffray

Ben Andrew - William Blair

Raj Denhoy - Thomas Weisel Partners

David Roman - Morgan Stanley

NuVasive Inc. (NUVA) Q4 2008 Earnings Call February 25, 2009 5:30 PM ET

Operator

Greetings and welcome to the NuVasive Incorporated, fourth quarter 2008 earnings conference call. At this all participants are in a listen-only mode. (Operator Instructions) As a reminder this conference is being recorded. We will be holding a question-and-answer session after the management’s prepared remarks (Operator Instructions). We ask that all participants limit themselves to one question and a brief follow-up.

I’d now like to turn the call over to Patrick Williams, Vice President of Finance. Thank you Mr. Williams you may begin.

Patrick Williams

Thanks operator. Welcome to the NuVasive fourth quarter and full year 2008 earnings conference call. NuVasive Senior Management joining us on the call today will be Alex Lukianov, Chairman and Chief Executive Officer, Keith Valentine, President and Chief Operating Officer and Kevin O’Boyle, Executive Vice President and Chief Financial Officer.

During our management comments and our responses to your questions, certain items maybe discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements that involve risks, uncertainties assumptions and other factors which if they do not materialize or proved correct could cause NuVasive’s results to differ materially from those expressed or implied by such forward-looking statements.

These and other risks and uncertainties are more completely described in today’s press release and NuVasive’s most recent 10-Q and 10-K forms filed with the Securities and Exchange Commission.

With that I’d like to turn the call over to Alex

Alex Lukianov

Thank you, Patrick and thank everyone for joining us this afternoon on our fourth quarter and full year 2008 conference call. Our results in 2008 provide continued evidence that NuVasive strategy of accelerated market growth is working. We believe there is a unique opportunity for NuVasive to continue growing faster than our competitors and become the number four spine company over the next several years, surpassing our interim goal of $500 million in revenue and moving towards $1 billion.

In today’s call, I would like to review our market by segments, as well as some of the major things in the marketplace and how we intend to reach $1 billion in revenue. First, let me review our financial performance in the fourth quarter and 2008 and talk about guidance for 2009. Revenue in the fourth quarter increased 59%, year-over-year to $74.6 million; revenue for the full year 2008 was $250 million, a 62% increase over 2007.

Excluding one-time charges, full year earnings per share were $0.10, which exceeded our guidance of $0.07 to $0.09. Our fourth quarter GAAP earnings per share were $0.10, which reflects reduced spending related to the timing of product launches and R&D expense including clinical trials. We plan to aggressively invest in the growth of our business in 2009 including the initiation of our XL TDR clinical study, increase scientific and marketing investment in our biologics platform, continued international expansion and the launch of 15 new products and line extensions.

Despite uncertain economic conditions, we see 2009 as an opportunity for NuVasive to continue taking market share with the speed and creativity that we have become known for. We look forward to capitalizing on current market conditions to accelerate our move into the top tier of global spine companies.

For 2009; we’re guiding to 345 million the 350 million in revenue, about 40% growth over 2008 results. Excluding the impact of the recent investment in Progentix, we expect 2009 non-GAAP operating margins to be 11% to 13%. We are on track to achieve our stated goal of 20% non-GAAP operating margins at a 500 million revenue run rate in the next several years; however, we see the opportunity for NuVasive to drive well past 500 million, with even greater operating margins.

This will of course require additional investment as evident in our recent transactions and will impact near term earnings. We are confident to taking advantage of these investments now in the current market conditions will provide beneficial over the course of the next several years. Kevin will give a more detailed review of our 2008 results and 2009 guidance later in the call incorporating the impact of our recent strategic investments.

Now, I’d like to review the various segments of the spine market and our strategy in each area to take market share. First, I will start with the biologics market. In the past two years we have made three strategic investments into biologics. First, with Formagraft, next Osteocel plus and most recently with Progentix, together these three products provide NuVasive with an offering to suit any surgeon preference. We believe our products will generate compelling clinical data that will allow us to take share from both BMP and lower price commodity bone grafts, thereby creating a new middle segment of the biologics market.

Our Osteocel plus launch is going well and we are seeing early acceptance of a unique stem-cell based allograft in the market. We anticipate sales will be $28 million for the year, but moderate in the first half as we launch the product through our exclusive sales force, with the bulk of the revenue coming in the second half of the year. Going forward, we believe that Osteocel plus will contribute to a hundred million biologics business in the next few years.

Last month we announced an investment in Progentix, a Dutch biologics company. The preclinical data generated by Progentix novel synthetic bone graft material, attracted us to the company. We anticipate additional data to the come forward in 2009, to further prove out the qualities of the technology. We believe that Progentix current product platform following FDA clearances will generate $10 million in revenue in 2010 growing to $30 million over the next several years.

What is truly exciting about this technology is our belief that through an expanded product offering and successful preclinical and clinical studies Progentix technology has the potential to successfully compete with any other biologic in the market and be a standalone $100 million product line.

Next I’d like to discuss the thoracic lumbar market segment which includes our revolutionary XLIF procedure that continues to transform the fusion market. XLIF continues to improve patient care by providing less traumatic surgery, shorter surgical times, quicker recoveries and shorter hospital stays. 2008 was a landmark year for me personally as I received the two levels XLIF fusion with outstanding results.

Our continued efforts to trend surgeon and improve our own product line has made us the unquestioned leader in lateral surgery and has prevented competitive knock-offs from taking our market share. We will continue to focus on expansion of this procedure thereby cementing our position as the only provider of reproducible and clinically proven lateral surgery.

In 2009, we look forward to leveraging our domination in XLIF into other areas of this market segment. We remain committed to developing innovative products and we’ll have several new product launches and line extensions in 2009. The new product launches include expandable or retrievable body replacement devices and a next generation of our XLP lateral plate.

We also have line extensions for our MaXcess thoracic product to better equip surgeons as they move XLIF further up into the thoracic spine and new implant sets targeting deformity, which is a new market segment for us.

Through this aggressive launch plan, we will seek to address the most important sub segments of the market as well as expand our own established product lines thereby staying ahead of our competitors. We are going to provide additional insight into our new product launches at our Analyst Day on May 12, this year in New York City, where we will feature these products including a demo of our next generation NeuroVision M5 system. There will also be a surgeon panel to answer questions.

The motion preservation market and the lumbar spine has been less promising than anticipated especially with respect to the total disk replacement or TDR market. We believe this is due in part to the limitations associated with implanting devices from an anterior approach.

As the market leaders in lateral surgery, we planned to be the first company to embark on a FDA clinical study for a laterally implanted lumbar TDR. We are confident that we will begin enrolling in 2009. We believe the lateral TDR will prove to be the superior device for the lumbar market.

Next, I’ll discuss the cervical marketplace. Over the past year as we have developed and launched a complete suite of cervical fusion products covering all surgical techniques both anterior and posterior, which encompasses the vast majority of today’s market. In 2008 we also finished enrollment of our clinical trial for NeoDisc, a unique technology for disk replacement and motion preservation in the cervical spine.

We believe that the cervical TDR market will grow more rapidly than the lumbar market and look forward to cementing or offering with both mechanical and compliance devices. 2009 we’ll also see further product launches and line extensions in our cervical platform, which notably will include a new helix cervical plate providing translational fixation, also of note is our belief that cervical sales will be bolstered in 2009, by our biologics product portfolio, as doctors look for safer alternatives to BMD in the cervical spine.

Historically, NuVasive has been best known for innovation in the lumbar spine, but we feel that with our current and planned offering of cervical products, we are poised to achieve greater penetration into the cervical market.

Finally, we turn to NeuroVision. 2008 was an important year as the total number of NeuroVision cases surpassed 100,000 a remarkable achievement. We also announced the arrival of our new NeuroVision platform M5, which provides additional monitoring and guidance capabilities, but more importantly further solidifies our place as the leading lateral access company by enabling safe and reproducible approaches.

In 2009, we also plan to launch new additions to the M5 platform to further distance ourselves from the competition. The M5 software system will have the capacity to receive new updates via the Internet allowing for real-time updates, throughout the installed base without the need to return the system for upgrades.

Also this year, we plan to launch a NeuroVision tool set for the cervical market as well as expanded guidance applications. 2009 will be a very busy year for NuVasive with over 15 product launches and line extensions, this lead to me to NuVasive’s premier exclusive selling organization We finished the year with over 300 representatives, this number includes sales leadership and support and going forward, we will disclose the number of quota carrying salespeople, which was 225 at the end of the year.

We have divided the U.S. into 11 regions as you know in 2008 and recently promoted four new area Vice Presidents to manage those regions as we further penetrate and geographically segment the market in 2009.This year, we anticipated the number of quoted carrying reps to increase from 20% to 25%. Internationally, we grew revenue 100% and while small, we are adding new people and new countries on a most recent hire coming in Australia. We believe there’s strong potential in the international markets and are particularly excited for the continued growth in our core markets of Germany and the U.K.

Internally, we continue to build NuVasive to support our growth potential. In 2008, we moved into a new corporate campus with a state-of-the-art training facility with ample of room for growth and expansion. We also implemented an ERP system that will facilitate management of a much larger company. While the transition of operating systems is always challenging, we are now beginning to reap the benefits of the advanced system. We have also greatly expanded our distribution facility in Memphis with total headcounts rapidly approaching 100 shareholders.

I will now briefly discuss a couple other current issues before I turn the call over to Kevin for a financial review. First, the Medtronic litigation, we are still expecting up to $5 million in litigation expense for 2009 related to the Medtronic action. We remain confident in our patent position. We will keep you posted, but we have no updates to provide at this time.

On a macroeconomic perspective, we have not seen a slowdown in our core business as those that undergo implants related spine surgery will attest that it truly is not an elective procedure. We are prepared and continue to ready ourselves for changes in the healthcare landscape with a greater emphasis toward patient outcomes and the economic impact of surgical technologies.

We believe we are uniquely positioned to take advantage of this cost sensitive focus as our excellent procedure provides unmatched patient outcomes, while simultaneously lowering cost to hospitals ensures in the entire system. To further demonstrate this to the healthcare community, we are undertaking further studies to document the economic efficacy of the excellent procedure to improve our ability to communicate these benefits.

On the compliance front, we expect the government and medical societies to adopt stricter policy related to disclosure of surgeon relationships. We will continue to acquire innovative ideas and intellectual property from physicians and we will continue to work closely with surgeons to proctor and teach our innovative technologies, all within the balance that have been determined by the government and industry groups.

We believe doctors are crucial for driving innovation in the spine market and helping companies like NuVasive to develop products that deliver outstanding patient outcomes. The added clarity likely to come from increased government regulation will help to ensure consistent compliance for our industry.

Now I would like to turn the call over to Kevin, for a detailed review of our financial results and updated guidance.

Kevin O’Boyle

Thank you, Alex. Our revenue for the fourth quarter of 2008 was $74.6 million, a 58.9% increase over Q4, 2007 and 11.5% increase over Q3, 2008. Osteocel revenue for the fourth quarter was $5.6 million and $10 million for the year, ahead of our $9 million estimate. Excluding Osteocel revenue, the fourth quarter was a 46.7% increase, over Q4 2007 and then 10% increase over Q3, 2008.

International revenue remained on target with the 2% to 3% revenue contribution that we guided to for 2008. Gross margin for the fourth quarter was 82%, compared to gross margin in Q4, 2007 of 82.9% and gross margin in Q3, 2008 of 81.8%. The lower gross margin in the third and fourth quarters primarily reflects the lower margin sales of Osteocel through pre-existing distribution agreements.

Our Q4, 2008 GAAP net income was $3.7 million or earnings per share basis, $0.10. For the full year, our GAAP net loss was $27.5 million or a loss per share of $0.77. For the year, excluding charges for in-process R&D expenses related to vacating our previous corporate headquarters, transitional support costs for the company’s ERP system and IP litigation, our 2008 earnings per share was $0.10 exceeding our previous guidance of $0.07 to $0.09. Please reference the table in the press release for more detail.

The fourth quarter GAAP net income of $3.7 million demonstrates the ability of the company to leverage our top line growth to generate earnings and cash flow. However, we believe that in order to compete for the number four globally ranked Spine Company on a market share basis, we need to make strategic investments, such as clinical trials and taking advantage of opportunistic acquisitions.

We’ll continue to maintain a strategic approach to the industry, as we drive to achieving $500 million and then on to $1 billion in revenues. It’s also important to note that we remain confident in achieving a 20% non-GAAP operating margin commensurate with $500 million in revenues.

Operating expenses for Q4, 2008 totaled $57 million, compared to $41.2 million in Q4, 2007 and $77.7 million in Q3, 2008. The decrease in operating expenses in the fourth quarter from the third is due to having no in-process research and development cost, no one-time leasehold charge related to vacating the company’s previous corporate headquarters and lower transitional support cost for the company’s ERP system.

Our legal expense related to the Medtronic lawsuit in the fourth quarter was $1 million and for the year $1.5 million, which was inline with our guidance. For 2009, we are estimating the cost of our defense to be $5 million. R&D expenses excluding stock-based compensation for the fourth totaled $5.2 million versus $5.5 million in the third quarter. The decrease in R&D spend from the third quarter was principally due to the completion of enrollment in the NeoDisc trial in Q3.

Excluding stock-based comp, R&D as a percentage of revenues for Q4, 2008 came in at 7% versus Q3, 2008 at 8.2%. Sales marketing administrative expenses excluding stock-based comp and other adjustments for the fourth quarter totaled $43.9 million versus $42.1 million in the third quarter. Excluding stock-based comp and other adjustments the percent of revenue was 59% for Q3, 2008 and 62.9%. The decrease in the percent of revenue from 62.9% to 59% was related to timing of sales and marketing initiatives.

The interest and other expense cost for the quarter were 432,000. This reflects a continued downward trend in yields on our cash investments due to market conditions. With $223 million in cash and investments, our primary focus has been and will be going forward safety of principal. As a result of the majority of our invested cash is in securities backed by the U.S. Government.

The stock-based compensation charge for the quarter of $5.2 million was recorded in our operating expenses and allocated as $1 million in research and development, with the balance of $4.2 million in sales, marketing and administrative expenses. We had positive cash flow in the quarter of $1.7 million.

Our inventory position was $68.8 million at the end of Q4 or 23.1% of annualized fourth quarter revenue. As we have commented in the past, we expect our inventory to sales ratio to average between 20% to 25% which may spike in the quarter, depending on how many and what types of products are launched. Day sales outstanding or DSOs were 63 days in Q4 2008, compared to 60 days in Q3 2008. The increase in DSOs can be largely attributed to hospitals extending their payments.

I would now like to turn to review of our 2009 financial guidance. For the full year 2009, we are maintaining our revenue guidance range of $345 million to $350 million, which is approximately 40% growth. As previously guided, we expect Q1 2009 to be sequentially flat at approximately $75 million, as we transition the Osteocel product to our exclusive sales force.

Importantly, we expect our core MAS business to continue to ramp in the first quarter with sequential growth from Q4, 2008. Our 2009 revenue guidance includes a contribution from Osteocel of $28 million for the full year with minimal contribution in Q1 and ramping in the second half of the year. International sales should be in the range of $13 million to $15 million for the year.

Now I would like to give more detail on our Q1 and full year 2009 guidance. Gross margins should be in the 81% to 82% for both the first quarter and the full year. Excluding stock-based compensation, research and development expenses, as a percent of revenue should be 11%, for both the first quarter and the full year. Excluding stock-based compensation and amortization of intangible assets, sales marketing and administrative expenses should be 67% for the first quarter and 58% to 59% for the full year.

Stock-based compensation should be $7.4 million for the first quarter and approximately $27 million for the full year, with 20% allocated to R&D and 80% allocated to sales marketing and administrative. Amortization of intangible assets should be approximately $1.3 million for the first quarter and $5 million for the full year. Interest and other expense should be approximately $1.3 million for the first quarter and $5 million for the full year.

Alright, now I’d like to give some insight into the trend of our operating expenses in 2009. Our operating expense trends for 2009 take into account, full year revenue of $345 million to $350 million and we are spending to reach those goals. Similar to prior years, we expect revenue to grow significantly through the year, while fixed expenses should be more consistent from quarter-to-quarter.

As a result we expect our first quarter to have a significantly lower non-GAAP operating margin than the full year. This is true across all business lines and is particularly pronounced in biologics with expenses from marketing and clinical studies coming in advance of the revenue ramp.

Also coming in 2009 is the lateral lumbar, total disk replacement IDE trial and a continued commitment to developing our MAS platform. As our revenue increases throughout the year, we should experience strong leveraging of our sales marketing and administrative expenses thus driving more earnings to the bottom line in the second half of the year, which is similar to our 2008 trends.

First quarter 2009 loss per share guidance have a loss of $0.21 to $0.19 in a full year earnings per share guidance of $0.02 to $0.04. This range excludes IP litigation expenses and acquisition costs related to the Progentix transaction.

Our non-GAAP earnings which excludes IP litigation, acquisition related costs, stock-based comp and amortization of intangible assets should be in the range of $0.01 to $0.03 cents earnings per share for the first quarter and $0.83 to $0.85 for the full year.

As Alex described we plan to take advantage of current market conditions and invest aggressively in our business in 2009 to expand our market position and advance our technological leadership.

Our most significant investments are the XL TDR study which could cost more than $15 million, our international expansion plan is a breakeven strategy for the next several years, our cost to build segment scientific evidence documenting the efficacy of biologics platform and continued investment in our product pipeline. These are important investments and will help cement our position as a dominant Spine company.

Now I’d like to turn the call back over to Alex for closing commentary.

Alex Lukianov

Thanks Kevin. Overall we are very pleased with our 2008 results. We believe that our planned extensive product launches along with our expanding pipeline and biologics and motion preservation will keep our product offering ahead of the competition for years to come. We remain well positioned to continue strategically expanding our geographic footprint both in the United States and abroad leveraging our innovative lateral approach, enhanced corporate infrastructure and unique culture of absolute responsiveness to continue to take market share.

Together we believe that these initiatives strongly support our drive towards our interim sales goal of $500 million, combined with growing profitability and will accelerate us towards the goal of $1 billion in revenue and becoming the number four spine company. All of this will be accomplished by at herring to core values of absolute responsiveness, outstanding customer service, pioneering technological advances and shear speed, these of the things that differentiate us from the competition.

We will now be willing to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Taylor Harris - JP Morgan Chase & Co.

Taylor Harris - JP Morgan Chase & Co.

Thanks a lot. Alex I just wanted to start with some of your comments on the macro environment and first of all maybe talk to us about what you are seeing, if the comments you made relate just to your business or what you are hearing more broadly in the spine industry.

Then you also made a number of comments to the call about how you think now is a particularly good time to be investing, to be spending ahead of growth. Are you seeing anything from the competitors in terms of reduced investment that you think makes now particularly good time from a competitive perspective?

Alex Lukianov

Well I think there is a couple of things. I was talking really about spine specifically, I think spine has been the least affected if anything, as you all know maybe it’s down 1%, but it’s growing at least a 10% rate. So, I think all those things are positive.

For us obviously it’s is ability to take market share right now very affectively and so the reason that we look at it right now is that this a great time to be putting on the gas peddle, because we are so affective with our technology, so affective in terms our ability to penetrate markets that we are going to do everything we can to push forward on resources and take advantage of perhaps some of the other company’s that are either more cash constraint, perhaps have other limitations with regard to larger owners from a corporate standpoint than we do.

Operator

Our next question comes from Mark Hopkins - Banc of America Securities.

Mark Hopkins – Bank of America

Hi, thanks can you hear me okay? So I might have missed this, I apologize but in your non-GAAP earnings guidance for 2009 are you assuming to pay any taxes?

Alex Lukianov

No.

Mark Hopkins – Bank of America

And what exactly Kevin, are you assuming in terms of interest or other expense or revenue for 2009?

Kevin O’Boyle

What used to be interest income for us in prior years has moved to an interest expense position in 2009, we’re anticipating our $5 million interest charge because our effective yield on our cash is now below the coupon rate of the convertible debt which is really what creates that interest expense position.

Mark Hopkins - Bank of America

Okay. So, that I think is the difference between what I was modeling for ‘09 and then just one little question on the pricing front. I understand you are not seeing anything on the unit side and given since these very strong numbers it looks like the market maybe growing a little bit in excess of 10% in the fourth quarter, so very healthy market right now, but are you seeing any science of any incremental push back on pricing of the product in recent weeks or months in light of just all general pressures that everyone is well aware of?

Alex Lukianov

Nothing any difference than we’ve seen over the last year or even 18 months. It’s really been very consistent. There is nothing new that’s happened as of the last several months that I would say is tied to the market or to the economic conditions.

Operator

Our next question comes from Matt Miksic - Piper Jaffray.

Matt Miksic - Piper Jaffray

A couple of questions on the EPS impact and can you talk a little it about your sales strategy maybe as could follow-up there, but on the P&L I think I understand the $5 million net interest expense which is higher than we were modeling, I think higher than most people are modeling.

What are the other items, you talk about $0.03 solution in Progentix in Q1 related to or I guess the acquisition related charges. You also mentioned, the investments in R&D increasing to the clinical trials, if you could give us an idea or maybe what some of those other items are and maybe you put dollar round numbers around what those incremental investments are that you are making in 2009 and the how we should we think about that dropping through the P&L, that would be very helpful?

Alex Lukianov

Well Matt, we we’re talking about XLTDR we talked about, biologics investing around Osteocel and certainly Progentix as well as the on going R&D pipeline, where we plan on introducing 15 new products or product extensions that is certainly there.

We talked about Progentix, really the Progentix number of really $0.03 in the first quarter has to do with the new accounting rules where you have to expense the deal cost to get the deal done whether it be legal, accounting and other due diligence cost are now expense well before they were part of the opening balance sheet if you will, so that’s kind of a new item for everyone and certainly one for us in the first quarter with the acquisition or the investment in Progentix.

The other piece was stock-based compensation is certainly higher in 2009 over 2008 level, so with that in the present guidance we gave the different departments. I think you should be able to model the company along with lines with our effective guidance.

Matt Miksic - Piper Jaffray

Okay, on the sales territories and the expansion you are planning for 2009. I remember you talking about sort of a stratified approach going forward for your sales force were maybe less hunters and more sort of case coverage or farmer type reps rather than having everybody out there just hitting it as they were last two couple of years.

Is that something that comes into play in 2009, does it come into play in 2010 and maybe as part of that is there any opportunity as we go out to 2010 and beyond to start reigning in some of the stock based comp as a percent of sales going forward?

Alex Lukianov

I’m from New York, I don’t really know much about farming. So, I’m a pretty aggressive guy. I don’t think it would have been me that said that. I’m not sure exactly what you’re thinking, Matt but my guess is we talked I don’t think it was last year, I think it was the year before we talked about the need for having coverage reps and what we were doing was adding coverage reps which were less expensive in order to round out the ability for a representative to be more affective.

A coverage rep though does not carry a quota. So every organization has coverage reps. So, I’m not sure if I’m getting that exactly what you are saying, but anyway what we’re planning to do when we talk about adding reps and we talk about adding quota carrying reps, they are hunters. When we’re talking about management and we’re talking about sales support that would include in some cases what you are calling farmers.

Matt Miksic - Piper Jaffray

That does get to my question and then on the stock-based comps side? Any thoughts, it’s been 8% of revenues for 08 and looks like it will begin in ‘09. Is that a number that we assume goes on in perpetuity or is it possible to bring that NOL in the out years?

Alexis Lukianov

That’s certainly possible in the out years.

Operator

Your next question comes from Ben Andrew - William Blair.

Ben Andrew - William Blair

Two questions, first if you look at the different studies that you’re doing on excellent and what kind of timeframe are you thinking about in trial design? Are these going to more register like or can these be randomized in some form to really get Class I level evidence to use in the field?

Keith Valentine

Ben, are you referring to the comments in the script on how we’re trying to map out your new data on economics?

Ben Andrew - William Blair

Yes, basically because I mean clearly with the whole world’s suddenly now more focused on comparative clinical effectiveness. It’s good that you guys are going down that path. So, just really kind of timeframe Keith, when we might see some data coming out and what kind of trial design you’re looking at?

Keith Valentine

Sure, what we’re working out and this is being done through the sales organization and the idea is that we are going to be looking at retrospectively data across the board for a number of clinicians and try to really get a good comparison of what the economic landscape looks like sampling across the country.

Obviously, you can’t be doing this from an individual side and really trying to capture what those up ticks are from shorter stay, quicker surgery, quicker recovery, all the things we talked about for a number of years and we do think that there is a very powerful set of data that is out there that can capture that.

Ben Andrew - William Blair

Okay, so it’s primarily an economic focus as opposed to necessarily doing more comparative clinical work?

Keith Valentine

That’s right. It can be a combination of both though, Ben. There is also other items that are going on throughout the course of the year and even into it that would be done next year that will further substantiate and validate excellent not only in the lumbar spine, but also it claims up into the thoracic spine. So, it’s more than a one, it’s a multi-pronged approach.

Alexis Lukianov

It’s something that we’ve going to keep going with, so as we start this approach we want to keep this going into a whole series of different studies. So, our intents to the get this first study that Keith talked about done in nine. So, we have that ready for ten and that we have further studies ready for ten and beyond as we feel that we maybe appropriately on to need them.

Ben Andrew - William Blair

Okay and then you talked about the need to kind of invest in additional acquisitions to really position yourselves for longer term growth on top of the things you already done plus the internal development. Talking about maybe some of that the areas to focus, obviously trauma is one opportunity, but are there other more niche applications within cervical or lumbar to say were you are focused on trying to do something there as well.

Alexis Lukianov

Our business focus right now is cash preservation for obvious reasons. We gotten a number of things done, we spent a lot of money on integration. So we feel that we have what we need to grow our business this year. At the same time we’ve got our eyes open, we’re looking at BBR, we’re looking at all the things you mentioned, but I wouldn’t narrow it down to just one thing.

Ben Andrew - William Blair

Okay. Great and then maybe last question for Kevin. Gross margins assumptions on Osteocel a little bit better this quarter. What are you baking in for 2009?

Kevin O’Boyle

The gross margins assumptions for Osteocel should be in the low 60s on average, Ben although we are not selling through another distributor. So, we are comfortable in the low 60s, Ben.

Operator

Your next question comes from Raj Denhoy - Thomas Weisel Partners.

Raj Denhoy - Thomas Weisel Partners

Wondering if I could ask about the early experience you had with Osteocel, I think you mentioned that you’re pretty pleased with what you’re seeing so far and I’m curious where are you seeing the up tick, are you ceding with existing users that are now come over to you now that you are seeing or are you seeing with your current base of sergeants or just really where is the recent activity right now?

Kevin O’Boyle

We are getting good diversity, was that actually you have to keep in mind, we are in a lot of surgeries especially with Osteocel and the point for use with the complimentary lumbar technology that we have. There is a great deal of effort that’s being done by the sales force for a lot of new expansion.

Raj Denhoy - Thomas Weisel Partners

So when you say your expansion, I mean is that into --

Kevin O’Boyle

Into our existing customer base.

Raj Denhoy - Thomas Weisel Partners

Okay, that’s primarily where you are seeing the up tick at this point. My second question was just on the macro environment, I’m curious about the visibility you might see in to that. How far out can you see when you talk to clinicians here about their ability to predict whether they’re seeing any slowing in your business or not?

Alex Lukianov

No, that’s really hard to say. I mean I think that’s anywhere from six months to a year. So, I’ve answered the question this way several times as I said at the outset, I know that our ability to take market share, our technology has got so many attributes to it that will allow us to hit our numbers extend and it’s very well next year. Who the heck knows what’s happening, but I think it’s hard for the clinicians to see much further than that, but we keep hearing consistently and we ask them everyday they are here, they are here Friday again, they keep saying the exact same thing that they are completely backed up, that they’ve never been busier. So I mean, it’s very consistent, nothing seems to be changing.

Raj Denhoy - Thomas Weisel Partners

So maybe just give thought that when you look at the guidance you given for the quarter, the core products going sort of low 30% range. When you gave that guidance, did you include conservatism for what might develop in the economy?

Alex Lukianov

No.

Patrick Williams

We’re going to just take up one more question. So, I don’t know if we have any questions left, but we just got time for one more question.

Operator

Your last question comes from David Roman - Morgan Stanley.

David Roman - Morgan Stanley

Kevin, could you just clarify, the $1.7 million of positive cash flow is that for the quarter or the year?

Kevin O’Boyle

Quarter.

David Roman - Morgan Stanley

Could you give us some senses to what we can expect next 2009 in terms of cash flow?

Patrick Williams

I think, cash flow before any payments for obligations we have with Osteocel in 2009 would be about $20 million positive cash flow affect, that in sort of operating cash flow less CapEx, that’s right and then from there we have the opportunity to do cash or stock with milestones and when we get to those we’ll make the determination what makes more sense.

David Roman - Morgan Stanley

Okay and then lastly, in terms of I guess development time lines on NeoDisc or the XLTDR sounds like XLPDR the trial would begin, are you starting rolling this year, when is the next milestone on NeoDisc which we should be looking for?

Patrick Williams

The next milestone for us is, we’re still at follow-up phase and so, we’re have to get through our two year data point and from our two year data point compiling it to data and for submission. So, you’re still looking at well past somewhere new order of 18 months. Something in that timeframe.

David Roman - Morgan Stanley

Then lastly, there are a number I think I believe two of your competitors who plan to come to market with a lateral approach this year. Could you give us maybe some sense as to measure you are taking to either proactively address that potential competition or what you sort of factored into your thinking for 2009?

Patrick Williams

Sure, the thinking really hasn’t changed it’s about safety reproducibility and it’s about the complimentary technology that goes along with just the excellent implant. When you talk about excellent, I know the thought is about the implantation, but it’s a much more comprehensive portfolio, most important to the portfolio of course is the safe Neuro access and the ability to get down to the so as and certainly the publication that are out there, the podium presentations, the success rates that are out there indicate very clearly that the only way to safely do the sort of surgery is to be doing it with NeuroVision or knew new NeuroVision, which we call M5.

Alexis Lukianov

I’ll put it to you this way. Ask a surgeon whether or not he have an XLIF done or he have somebody else’s procedure done and I’m not trying to be a smartass because obviously my own situation that will be your answer and it’s no different than what’s happening.

Right now, there is quite a few stars and professional athletes that are having the procedures and we’re not at liberty to say who they are, but there is nobody right now that’s willing to sign up for any other approach for all the reasons that Keith just mentioned.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.

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Source: NuVasive Inc. Q4 2008 Earnings Call Transcript
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