Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

NuVasive (NASDAQ:NUVA)

Q4 2012 Earnings Call

February 26, 2013 5:30 pm ET

Executives

Quentin Blackford

Alexis V. Lukianov - Chairman and Chief Executive Officer

Michael J. Lambert - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Matthew S. Miksic - Piper Jaffray Companies, Research Division

William J. Plovanic - Canaccord Genuity, Research Division

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Raj Denhoy - Jefferies & Company, Inc., Research Division

Matthew Taylor - Barclays Capital, Research Division

Richard Newitter - Leerink Swann LLC, Research Division

Michael Matson - Mizuho Securities USA Inc., Research Division

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

David H. Roman - Goldman Sachs Group Inc., Research Division

Operator

Greetings, and welcome to the NuVasive, Inc. Fourth Quarter 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to your host, Quentin Blackford, Senior Vice President, Finance and Treasury for NuVasive. Thank you. Mr. Blackford, you may begin.

Quentin Blackford

Thanks, operator. Welcome to NuVasive's Fourth Quarter 2012 Earnings Conference Call. NuVasive's senior management on the call today will be Alex Lukianov, Chairman and Chief Executive Officer; Keith Valentine, President and Chief Operating Officer; and Michael Lambert, Executive Vice President and Chief Financial Officer.

During our management comments and responses to your questions, certain items may be 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 prove 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.

[Operator Instructions] With that, I would like to turn the call over to Alex.

Alexis V. Lukianov

Thank you, Quentin. Good afternoon. The fourth quarter of 2012 marks a strong close to a difficult year. We implemented a strategy to aggressively address market and competitive challenges that surfaced in the third quarter. And as our results demonstrate, we are well established on the path to rebuild sales momentum and maintain operating profit translation.

Revenue in the quarter was strong, growing 10% to $166 million. With the exception of our Impulse Monitoring service, every major product category accelerated in the fourth quarter to contribute to revenue outperformance. Capital and stocking sales to hospitals were down fractionally compared to last year, indicating solid organic procedural revenue growth driven by market share gains.

Operating profit translation was also strong. We generated a non-GAAP operating margin of 15%. For the full year, revenue grew 15% to $620 million, and we generated a non-GAAP operating margin of 14.5% in 2012.

Today, I'll provide an update of the spine market, address 2013 guidance and detail the drivers of NuVasive's strategy for market share growth and differentiation, which we believe will take us to $1 billion in revenue and beyond. I will start with a quick overview of the forces impacting market growth. First and foremost, the global shift for minimally invasive spine surgery and game-changing new technology will continue to provide a backdrop of growth for innovative spine companies. Minimally invasive solutions now represent close to an estimated 25% of the U.S. spine market. And we believe that as superior patient outcomes and clinical evidence continue to drive surgeon adoption, less invasive solutions will become the standard of care. Additionally, as new product approvals expand the options available to surgeons, new technology like cervical motion preserving devices are overcoming reimbursement hurdles and opening entirely new avenues of growth for the industry.

Nonetheless, insurer pushback and PODs continue to be formidable factors, and for the time being, are offsetting much of the U.S. market's growth. Surgeons continue to report insurer delays or outright denials of coverage for patients in need of spine fusion procedures, and surgeons are routinely experiencing pushback. While the impact of insurer pushback is unlikely to diminish for the foreseeable future, progress is being made to demonstrate the positive benefits of properly indicated spine surgery via clinical data.

As you know, we actively support surgeons to develop the Health Technology Assessment, or HTA, related to fusion and degenerative disc disease. The HTA is a collection of clinical evidence in support of spine fusion that surgeons and societies can use in dialogue with the insurers. The systematic review titled Lumbar Spine Fusion for Chronic Low Back Pain due to Degenerative Disc Disease was authored by Drs. Frank Phillips, Paul Slosar, Jim Youssef and Gunnar Andersson. It specifically focuses on the benefits of spine fusion for patients suffering from DDD. The paper has already been published and is available for download online. As well, it will appear in the April issue of Spine, a widely read peer-reviewed journal. This marks a giant step in the right direction and one that we've talked about now for the last couple of years. The next step is for the surgical societies to establish a set of clinically supported and consistent guidelines for spine fusion and then to encourage broad insurer adoption of those guidelines. That process has begun, but it is a lengthy undertaking involving multiple parties. It will take time, and we intend to continue to support its completion. We will also continue to do the utmost to ensure that surgeons are able to choose the best course of care for their patients versus actuaries or consulting firms using questionable clinical algorithms to improve insurance payor profitability.

Insurer pushback has created a difficult environment, incentivizing some surgeons to adopt POD models, which we estimate represent as much as 15% of the U.S. spine market. As the proliferation of PODs comes under increased scrutiny, leading hospitals are increasingly prohibiting POD-sourced products. We will continue to focus on educating doctors, hospitals, surgical societies and elected officials of the ethical issues at stake. We are raising awareness that PODs stifle research and development in the spine market in need of ongoing innovation and improved outcomes for even more surgical applications.

The challenging spine environment has also driven some of our competitors to adopt unsustainable tactics to poach our sales representatives. Those tactics negatively impacted our results in the third quarter. And in response, we acted quickly to implement solutions designed to rebuild sales momentum. The strength of our fourth quarter results gives us confidence in our ability to execute that strategy. And as we enter into 2013, we intend to sustain that momentum. The quality and pedigree of our new sales representatives is excellent.

We reengaged our sales force with improved mobile resources and new asset management programs that change the way we communicate within the field. Our sales representatives have been outfitted with iPads, complete with all of the tools they need to collaborate with each other, to access charge receipts and price lists to improve surgeon scheduling, to increase inventory turnover and to share case reviews. After the first PCM Cervical Disc case was completed, the sales representative was immediately able to share the experience of that case in a form that other representatives can easily access and share with their own surgeon customers through our mobility platform.

We motivated the team with incentives to drive new account growth and mix. And at our NuVasive sales meeting just a few weeks ago, we unveiled exciting initiatives for 2013. We've put in place new U.S. and international sales leadership that will execute our future growth goals. We accelerated the pace of sales force hiring to more than compensate for losses in the third quarter. We reinvigorated our NUVA Touch program, enlisting the executive team to consistently engage with our top customers. And we continued the domestic and international expansion of SOLAS, the Society of Lateral Access Surgerons, that we founded some 6 years ago. SOLAS finished 2012 with 700 surgeon members and is still growing. Finally, we are sustaining the enthusiasm and new product excitement generated at NASS late in the year, and we will have more new launches to speak to surgeons about in 2013.

The third quarter was disappointing, but we addressed the market and competitive challenges head on, and we are proud to be back on track so quickly. We believe that the momentum generated in the fourth quarter will be sustained throughout 2013. However, we have to be mindful of recent experience and of the quarter-to-quarter lumpiness that we have seen. There are market forces at play in the spine industry with the potential to have abrupt impacts on our business. As a result, our 2013 guidance assumes that we will continue to take market share, though at a slower pace than in years past, due to ongoing impacts from insurer pushback, PODs and a difficult general economic environment.

In view of these market challenges, we expect global spine market growth 2013 to be about flat. Pricing will continue to be a challenge with the continued negative low single-digit impact on market growth. We anticipate 2013 U.S. spine market growth will be flat to down slightly, and growth internationally will be at a high single-digit rate.

So turning to our guidance. We expect 2013 revenue to approximate $655 million, a growth rate of about 6%. Revenue growth will ramp over the course of the year as the contribution from new product introductions and new geographic expansion accelerates and as we anniversary the challenges that surfaced late in 2012. We do not intend to adjust our guidance this year but to stay with our annual forecast following quarterly earnings releases. We run our business based on a multiyear plan with focus on one full year at a time.

Let me offer some insight on our expectations for the growth of our key product categories in 2013. U.S. lumbar grew 5% in 2012. We expect growth to approximately 2% in 2013, which contemplates continued market share gains and solid contribution from newer solutions like Precept, MAS PLIF and MAS TLIF, offset in part by the macro and competitive challenges I just reviewed, which have the greatest impact on our U.S. lumbar growth.

U.S. biologics grew approximately 8% in 2012. We expect growth in 2013 to mirror that of our U.S. lumbar growth at around 2%. There is still uncertainty regarding the pending clearance of AttraX, and as a result, 2013 guidance does not contemplate contribution from that product.

U.S. cervical grew approximately 15% in 2012. We expect growth of about 14% in 2013, including a $3.5 million to $5 million contribution from the launch of our PCM Cervical Disc. Our innovative cervical spine solutions are increasingly being adopted. And at just under 10% of our total revenue, we have a long runway of growth ahead before our cervical business approaches the roughly 20% of overall spine industry revenue that the cervical segment represents.

We generated $39 million in U.S. Intraoperative Monitoring service revenue in 2012, which was slightly shy of earlier expectations. Our ability to offer surgeons comprehensive monitoring and procedurally integrated solutions is increasing the penetration of XLIF, driving our share within the lateral market and expanding our relationships with hospitals. The success of the strategy was evidenced by solid IOM volume growth in 2012 and clear examples of field synergies between the sales and clinical teams. However, we experienced difficulty with reimbursement collections, and in 2013, we expect similar volume and reimbursement dynamics. We anticipate IOM service revenue growth will be about flat in 2013. We are actively addressing the reimbursement challenges by engaging an advocacy with the payors and working to maximize the profitability of our IOM operations.

International, which includes Puerto Rico, grew over 45% in 2012. We expect growth of about 35% in 2013, which contemplates an approximate $10 million contribution from our expansion into Japan in addition to the continued penetration of and expansion in various key geographies like Germany, the U.K., Belgium, Italy, Australia, China, Singapore, Brazil, Mexico and other countries in Latin America.

We are simultaneously implementing a share-taking strategy to lay the groundwork for sustainable future growth and aggressively addressing market and competitive challenges. As we make the strategic decisions in pursuit of those initiatives, improving our profitability profile will remain a key priority. In 2013, we expect our non-GAAP operating margin to approximate 14% compared to 14.5% in 2012. Excluding the impact of the medical device tax, our 2013 non-GAAP operating margin would approximate 15.5%, demonstrating close to 100 basis points of organic profitability improvement this year. Finally, we expect non-GAAP EPS and GAAP EPS of approximately $1.07, respectively.

Michael will provide additional color on 2013 guidance in just a few minutes. So let me turn to a discussion of our market share-taking strategy. That strategy is what guide us to where we are today, and it is what we expect will sustain the NuVasive's differentiation and industry-leading growth in the future. Our strategy is 100% focused on delivering surgeries that result in the best possible patient outcomes. We are changing spine surgery, and to be disruptive, we are taking a long-term vision and executing to a long-term plan. Our strategy is not based on copying or an unsustainable sales hiring or aggressive marketing tactics. Our strategy is not based on price competition or aligning with PODs or unbundling to minimize surgeon influence. The NuVasive share-taking strategy is built upon 3 pillars: number one, data-driven, superior patient outcomes; number two, an absolutely responsive culture; and number three fast game-changing innovation that will disrupt the market. I will spend a moment conveying the importance of each of these to our growth opportunities.

So number one, Superior Outcomes. We are strong believers that clinical and procedural differentiation will prevent commoditization in spine. NuVasive is well recognized in an increasingly crowded marketplace, not just for the unique nature of our solutions but also for the years of experience that our early entry into the minimally invasive space has afforded us. Surgeons have been treating patients with the NuVasive lateral approach for a decade. NASS 2013, this year, marks 10 years since the launch of XLIF. That has enabled NuVasive and NuVasive alone to hone in on what it takes to make minimally invasive spine surgery safe and reproducible to thousands of surgeons and their patients. As the penetration of MIS procedures within spine has progressed, our effort to convince surgeons and hospitals of the benefits of MIS has also expanded. We are building a body of clinical evidence specific to NuVasive solutions. We clearly demonstrate to patients and payors that NuVasive's fully integrated procedures offer the best spine surgery outcomes, and our decade of experience in MIS is facilitating that process. NuVasive's specific clinical evidence is a unique and effective tool when it comes to winning over hospitals, surgeons and insurers.

In a systematic review of published studies, looking at degenerative conditions with fusion as primary endpoint, the fusion rate for XLIF procedures was over 97%. The fusion rate bested traditional treatments for fusion by several percentage points. We also can share data with decision makers that speaks to the cost effectiveness of XLIF. In separate studies that compared that preoperative costs associated with XLIF to those in traditional fusion procedures, researchers concluded that XLIF costs were lower by over 10% and by close to 14% savings from multiple levels. XLIF is saving money for the system.

We are using the basic specific clinical evidence in negotiations within the C-suites of our hospital customers. That strategy is becoming an increasingly important focus for us, so we recently added resources to our national accounts team. The new directors and our executives will be meeting directly with hospital decision makers armed with XLIF's specific data and focused on driving our superior outcomes and cost effectiveness [indiscernible]. Their conversations are aimed at getting NuVasive approved as one of just a few preferred vendors at hospitals nationwide. The strategy is working. Hospitals are recognizing that XLIF is faster, better and cheaper.

We are also using data to distinguish XLIF from other lateral products. There have been 110 journal articles, over 60 book chapters and 26 white papers published on the XLIF procedure, and there have been 8 journal articles, 4 book chapters and 8 white papers published on our neuromonitoring platform. Competitive lateral approaches have yet to publish results in peer-reviewed literature. We are using data and years of experience to distinguish XLIF at L4-5 where the majority of spine fusion procedures happen. XLIF can be safely employed at L4-5 because unlike other lateral solutions, XLIF is a platform fully integrated with neuromonitoring. Over 35 XLIF L4-5 cases have been reported in the literature, and the research shows the complication rates with XLIF are consistently lower than other procedures. NuVasive owns L4-L5, and we are driving this distinction in a very big way. In sum, we have the evidence to confirm that our solutions are clinically proven and that clinical differentiation will continue to distinguish NuVasive.

The next pillar of our market share-taking strategy and a key differentiator is our unique culture of Absolute Responsiveness. One major example of how we distinguish NuVasive from the competition in spine is our state-of-the-art surgeon training facilities and programs. As we mature as a company, we continue to improve what NuVasive offers to surgeons. In 2012, we hosted a record number of surgeons in training sessions. Going forward, we intend to maintain the magnitude of training sessions and focus on creating greater impact with our training sessions. We continue to make progress in shifting the mix of surgeon training toward advanced training, which is enabling us to strike the optimal balance between educating surgeons new to XLIF and providing education on the full NuVasive portfolio. We also are educating the next leaders of the spine surgeon community by hosting spine fellows and residents in our training sessions.

Earlier, I mentioned our progress in expanding SOLAS. SOLAS is a fantastic forum for surgeons to collaborate. And its focus on research, education and best practices is increasingly having an impact on industry outcomes and on our ability to stay at the forefront of innovation and surgeon training. Our patient-driven education efforts are great examples of how NuVasive's Absolute Responsiveness culture and commitment to research and education differentiates us at the patient level as well. Our Better Way Back program is achieving critical mass and ended the year with over 1,000 patient ambassadors, up significantly from last year. The initiative is a way for patients to connect with each other and discuss their experiences. It offers a resource not previously available to back pain patients. Spine Care Alliance, which we helped develop for patients who have exhausted the appellate process for medically indicated spine surgery, is also expanding its impact and helped close to 40 patients reverse payor denials and receive the spine care that they needed in 2012.

Our sales force is the face of Absolute Responsiveness in the field. And despite the challenges we faced in the third quarter, we grew our team back to the ideal level by year end. There remains an exceptionally strong pipeline of qualified candidates, and you can expect that we will continue to gradually and opportunistically progress toward the 500-member team that we envision as $1 billion company.

During the fourth quarter, we appointed Matt Link as the new head of U.S. sales. Matt's proven leadership and exceptional performance elevated him quickly through our sales organization since he joined us in 2006. I am confident that he can spearhead our industry-leading sales team in a steadfast commitment to drive top line growth.

We are also introducing international surgeons to the NuVasive culture and are very excited about the opportunity to sell into Japan, an exciting plus $400 million market. Late in the year, we received Shonin approval to sell implants used in posterior spine fusion procedures, broadening our offering in Japan to include a number of cervical solutions and a comprehensive posterior product offering. And I am pleased to announce that we have now received Shonin approval for our XLIF implants and completed the required paperwork to be able to sell the XLIF procedure in Japan. In fact, 2 Japanese patients were successfully treated with the XLIF procedure by 2 different surgeons at different hospitals, yesterday and today. More are in the works. We are working to align ourselves with thought leading surgeons and hospitals in Japan and are making excellent progress. By the end of this first quarter, we will have already trained 30 Japanese surgeons on our solutions.

As we lay the infrastructure overseas, we are especially mindful of the need to establish leadership that can champion Absolute Responsiveness globally. During the fourth quarter, we appointed Russell Powers Executive Vice President of International. He is an accomplished leader with 20 years of experience in ortho and spine, who has served NuVasive exceptionally well in executive positions in marketing and in operations. His focus and successful history in international markets will enable us to execute our growth goals in existing and emerging markets. Russell is overseeing an outstanding deep bench of regional leaders, who I'm comfortable and confident can drive NuVasive's penetration overseas.

Takaaki Tanaka, our Executive Vice President of Asia Pacific, oversaw the effort to expand the foothold that we established in Australia in 2009. Today, Australia is our largest international market. He led the effort to establish NuVasive in Japan and has successfully attracted the region's most elite leaders and sales representatives to the NuVasive team. I am looking forward to our team's accomplishments in Japan this year.

Our international revenue, which includes Puerto Rico, represents only 10% of total revenue today. But this leadership team will work toward a 20% contribution as we approach $1 billion in revenue. And despite the key investments we are making to establish an international infrastructure, we expect international will increasingly contribute to profitability moving forward beginning in 2013.

The last pillar, Speed of Innovation, is our commitment to changing spine surgery with game-changing solutions as a true differentiator for NuVasive fundamental to our market share-taking strategy. We view ourselves as a procedure company, not a product company. And consistent with that vision, we offer surgeons a comprehensive portfolio of both minimally invasive and traditional fully integrated procedural solutions that are capable of treating any level of the spine and of addressing any spine pathology. Our representatives have an array of exciting new solutions to introduce certain customers to this year. Within thoracolumbar, we continue to roll out Precept, a multilevel percutaneous posterior MIS solution that allows for more correction than anything on the market and gives surgeons a host of different options to treat a host of different pathologies. Surgeons love Precept because they can achieve superior outcomes regardless of whether they are treating a simple or a complex case. And in 2012, Precept made itself known as the fastest-growing product in NuVasive's history.

We also introduced MAS PLIF last year, a less disruptive approach for a conventional surgery. MAS PLIF enables bilateral decompression under direct visualization while using significantly less fluoro [ph].

Within cervical, we announced the first patient treated with the new PCM Cervical Disc late in December, and we are actively training surgeons. We have already completed 3 fully booked surgeon training sessions this year, and the demand for PCM training at both of our facilities is strong. The PCM device marks NuVasive's foray into a fast-growth $100 million market, and its low-profile design offers a differentiated and viable treatment option for levels adjacent to prior fusion.

As well, the reimbursement landscape continues to improve. Over last few months, additional major private insurers have updated their policies to include coverage of motion-preserving cervical discs.

Integrating IOM into the NuVasive platform is introducing NuVasive to new accounts and converting surgeons that were formerly using competitive lateral solutions. In 2012, we signed contracts with over 50 new IOM customers in addition to renewing contracts that will retain and extend our relationship with Impulse's preexisting customer base. There are now almost 800 surgeons nationwide using our IOM service, and surgeon interest continues to grow.

And we ended the year with great momentum, covering a record of over 8,000 cases in the fourth quarter alone. We are experiencing great successes in the field within accounts for NuVasive and IOM overlap, and that existed prior to the combination with Impulse. At one such account in South Carolina, where Impulse and NUVA collaboration began midyear, product revenue jumped 40% between the first half of the year and the second half. Collaboration nearly doubled the revenue at another account in Pennsylvania. These are extraordinary examples, but they speak to the power of being able to offer a fully integrated procedural solutions and are indicative of our long-term vision for the combination.

Surgeons look to NuVasive for disruptive innovation, and we will not disappoint in 2013. Within thoracolumbar, we are further differentiating XLIF by expanding the indications that it can treat. We are improving how XLIF procedurally treats degenerative disc disease and scoliosis. And this year, we will introduce XLIF for ancillary column realignment and minimally disruptive approach to correct sagittal balance. As well later this year, we plan to introduce a new lateral plate that will improve single-position surgery. Within cervical, we plant to introduce the next generation of our VuePoint posterior cervical solution, as well as a new cervical plate system. In 2013, we expect to launch 10 new products or line extensions, expanding the total NuVasive offering toward 90. I will provide additional new product insight as we approach NASS, where most of this year's new launches will be featured.

Beyond this year, the depth and innovation within the NuVasive product pipeline is very exciting. Within thoracolumbar, we're developing more streamlined systems, new and advanced MAS applications and innovative rod-bending technology for fixation systems. Within cervical, we are working on new solutions for tumor and trauma on 360-degree integration capabilities and on differentiated material alternatives. And within biologics, we are developing procedure-specific treatments and varied handling capabilities. We are laying the groundwork to drive continued and sustainable future growth with innovation that will change spine surgery and improve patient outcomes.

Before I turn the call over to Michael, I'll provide a quick update on our ongoing Medtronic patent litigation case. The District Court still has not yet determined the royalty rates that will apply during the period of time from the verdict through the appeal. The federal appellate process for Phase 1 has been put on hold until the District Court has ruled on the post-verdict royalty. We have taken the necessary steps for securing cash and incorporating the anticipated financial impacts into our guidance.

Regarding the NeuroVision trademark case, we expect our new trial to occur in June of this year. We have contemplated the expense associated with that legal effort in our guidance, and we'll provide additional updates related to the trial if necessary.

With that, I'd like to turn the call over to our CFO, Michael.

Michael J. Lambert

Thank you, Alex, and good afternoon, everyone. Our revenue for the fourth quarter 2012 was $165.8 million, a 10.4% increase over the fourth quarter of 2011. Year-over-year revenue growth in the fourth quarter for both U.S. lumbar and U.S. biologics was approximately 6%. U.S. cervical revenue grew about 11% in the quarter, and the services revenue from our Impulse Monitoring business was $9.6 million. International revenue, which includes Puerto Rico and the biologics components of our international business, grew approximately 65% in the quarter. All of this detail is provided for your reference in the supplementary financial information posted on our website in the Investor Relations section.

Our Q4 2012 GAAP net loss was $2.7 million or a loss per share of $0.06. Excluding an aggregate adjustment of approximately $17.7 million net of tax for the adjustments detailed in today's press release, fourth quarter non-GAAP earnings were approximately $15 million or $0.34 per share. Financial statements released today reflect the reclassification of certain expense items to more accurately reflect the split between research and development expense and sales, marketing and administrative expense. Changes were made to the impact of the expense lines in 2010 and 2011 to conform to this year's presentation. Importantly, the reclassification had no impact on our total operating expense results for any of the affected periods. Please refer to the file of supplementary financial information on our website, which will be an aid to you in making the required adjustments to your models.

With that, let me walk through the rest of the P&L. Gross margin in the fourth quarter was 74.5% compared to 75.3% in Q4 2011 and 74.6% in Q3 2012. Year-over-year, gross margin was pressured by international margin and international mix, offset in part by reduced net royalty expense related to revenue mix. Hospital pricing pressure was relatively neutral in the quarter.

Research and development, or R&D, expenses, adjusted to exclude stock-based compensation and acquisition-related items, totaled $7.9 million in Q4 2012 compared to $8.2 million in Q4 2011 and $7 million in Q3 2012. R&D expense as adjusted was 4.8% of revenue for Q4 2012 versus 5.5% in Q4 2011 and 4.7% in Q3 2012. Relative to last year, the decrease in R&D as a percent of revenue was primarily caused by lower spending on clinical trials. We continue to invest in our product pipeline through 510(k) applicable products.

Sales, marketing and administrative, or SM&A, expenses, adjusted to exclude stock-based compensation, certain intellectual property litigation expenses and acquisition-related items, totaled $90.8 million in Q4 2012 compared to $83.1 million in Q4 2011 and $81.4 million in Q3 2012. SM&A expense as a percent of revenue was 54.8% in Q4 2012 versus 55.3% in Q4 2011 and 54.9% in Q3 2012. Relative to last year, the decrease in SM&A as a percent of revenue was primarily caused by G&A leverage and the addition of Impulse, which runs at a lower SM&A percentage than the rest of our business. On an absolute dollar basis, the year-over-year growth in SM&A expense is primarily attributable to headcount and related compensation increases including higher commission spend on our growth, investments behind new product launches, continued international expansion and higher legal spending.

Fourth quarter non-GAAP operating margin was 15% compared to 14.5% in Q4 2011 and 15% in Q3 2012.

Let me spend a moment on the $9.7 million asset impairment charge detailed in today's press release. We booked an $8.3 million noncash goodwill impairment charge related to a lower valuation for assets acquired in the Impulse Monitoring transaction. Alex provided a few examples of how well the strategic rationale behind the Impulse transaction is materializing in the field, which leads us -- continues to leave us as strong believers in the long-term strategy underlying the acquisition. However, on the impairment, we revised valuation input assumptions, which included the current forecast reflecting an updated view of the reimbursement landscape for monitoring service, which has been more difficult than we anticipated at the time of the transaction.

We also booked a $1.4 million noncash IPR&D impairment charge related to a lower valuation for assets acquired in the Cervitech transaction, which as you remember, was the deal that brought us the PCM motion preserving cervical disc. After a lengthy but successful PMA approval, the first in NuVasive's history, we are very excited about the commercialization of the PCM device. The revised valuation output was primarily impacted by the longer-than-anticipated FDA approval process, which once again was reflected in the updated view of the regulatory and competitive landscape. Both of these noncash charges have been excluded from our non-GAAP result calculations.

Interest and other expense net totaled $5.9 million in the quarter compared to $7 million in Q4 2011 and $6.4 million in Q3 2012. For the fourth quarter, cash provided by operating activities came in at just under $31 million, bringing us to about $130 million year to date. Normalizing for the Q4 2011 tax overpayment and refund in Q1 2012, the full year number is about $119 million. The comparable full year free cash flow number is approximately $78 million.

We are pleased to see 2013 strong performance given the team's continued focus on enhancing our cash generation capabilities. Those efforts are clearly having an impact. We are now squarely on the trajectory where we generate significant positive cash flow on an annual basis. That said, as we head into 2013, we expect the magnitude of 2013's cash generation to be below what we achieved in 2012. In 2013, we will transition to being a cash taxpayer. In addition, we will face a significant cash impact from the newly imposed med device tax. Finally, we anticipate that the significant working capital progress achieved in 2012 will not be matched in 2013.

Our cash and investments balance at the end of the fourth quarter was approximately $346 million, which is up nearly $61 million from last quarter and up about $4 million from the end of last year. Given the many moving parts this quarter, let me help you bridge the quarter's ending cash and investments balance. In Q4, our changes were driven by significant free cash flow generation, plus the final Cervitech milestone payment of just over $32 million, plus the return of the NueroVision trademark litigation escrowed funds totaling roughly $63 million. Our current cash and investment totals now exclude, from a litigation standpoint, only the $113 million restricted for the patent litigation royalty.

One other item of note, as we head into 2013, we will redeem the approximately $74 million remaining on our March 2013 convertible notes in cash upon their maturity in the first quarter.

At the end of Q4 2012, inventory was roughly 19% of annualized fourth quarter revenue compared to about 20% at the end of Q4 2011 and roughly 22% at the end of Q3 2012. We continue to work to more efficiently manage inventory in the field and are pleased with our progress in 2012. Day sales outstanding, or DSO, when run off of our net AR balance, was 48 days in the quarter compared to 53 days for last year's Q4 and 47 days at the end of Q3 2012. The AR team posted a very solid year of cash collections, which helped us improve DSO year-over-year by 5 days in spite of roughly a day's worth of upward DSO pressure due to the addition of Impulse and to the outsized growth of our international revenues, both of which generally have longer collection cycles. I couldn't be prouder of the progress our team has made, especially in a continued difficult economy.

Now let me turn to our updated guidance for the full year 2013. Please reference the tables in today's press release for the supplementary financial information posted on our website for additional detail. As Alex mentioned, we are providing full year 2013 revenue guidance of approximately $655 million, which contemplates some continuation of the difficult market and competitive dynamics that negatively impacted us in Q3 2012. We expect that we'll have to work through the full year in order to prove that we have successfully overcome these challenges. As a result, our 2013 focus will be on achieving full year expectations, not only results in any given quarter. As you think about how to model the year, be mindful that the impact of new products and international expansion will accelerate toward the back half of the year. That will cause the magnitude of revenue growth and the corresponding degree of operating leverage to increase over the course of the year.

Turning to the rest of the P&L. We expect full year 2013 gross margin to be approximately 74%, which contemplates an approximate 150-basis-point impact from the newly imposed med device tax, and in addition, assumes there is no change to the patent litigation royalty rates. We currently expect to pay around $9.5 million related to the med device tax in 2013, which is calculated by multiplying our anticipated full year sales of U.S. lumbar and U.S. cervical products, less allowable adjustments under the IRS interim guidance at a 2.3% rate. We expect international U.S. monitoring and U.S. biologics sales to be exempt from the tax. Excluding the impact of the med device tax, we anticipate gross margin will be up slightly year-over-year.

We expect full year 2013 non-GAAP operating margin to be approximately 14% or approximately 15.5%, excluding the med device tax. This compares to the 14.5% reported for full year 2012. So excluding the med device tax impact, we expect to demonstrate about 100 basis points of operating leverage in 2013. In thinking about the progression of non-GAAP operating margin from quarter-to-quarter in 2013, please be mindful of my earlier comments that the degree of operating leverage will ramp over the course of the year. The historical pattern that Q1 non-GAAP operating margin has demonstrated over the last 3 years is generally a good starting point but will need to be further adjusted for the impact of the med device tax.

Non-GAAP operating leverage in 2013 will be driven by improvements in the related R&D and SM&A expense buckets. We expect full year 2013 non-GAAP R&D expense to approximate 5% compared to 5.3% in 2012, as we continue to focus on 510(k) applicable products in lieu of those that require a full PMA. Further, we expect full year 2013 non-GAAP SM&A expense to approximate 55% compared to 55.5% in 2012.

Let me provide a bit more detail on the investments we'll be making this year to support sustainable future growth. Our most significant investment will be the continuation of our efforts to build momentum outside of the U.S., especially in Japan, which is an exciting new market for us. As Alex mentioned, 2012 marked the first year that our international business contributed to NuVasive's overall profitability. We will still be in heavy investment mode, as we transition spending away from Japan regulatory efforts and towards building a strong sales and marketing capability. But we do expect to see significant improvements of o U.S. profit contribution margin off of 2012's positive result. Another major investment in 2013 will be the continued development of an IT infrastructure capable of supporting a $1 billion global business, including improved domestic [indiscernible] system capabilities, mobility platforms that drive sales and operation efficiencies and systems investments that will position our most significant o U.S. geographies to scale rapidly.

Finally, we are aggressively protecting the integrity of our intellectual property, which will drive a substantial increase in legal spending year-over-year. This increase in legal spend on matters, which are totally unrelated to Medtronic, generally, and to the patent infringement trial, specifically, will cost close to 30 point to 40 basis points of operating leverage in 2013 and will need to be absorbed entirely within SM&A.

We are continually working to offset the incremental investments we need to make behind our market share-taking strategy, with initiatives to increase the productivity and the efficiency of our organization more broadly. We have taken numerous steps to improve the impact of our domestic sales and marketing efforts, to increase the profit contribution from our international operations, to expand profitability within our IOM services business in spite of the difficult reimbursement environment and to prioritize R&D spending. All of these efforts are under way with an eye on our evolution towards eventually becoming a $1 billion spine company, with an operating margin in the low 20s. We expect to demonstrate measured progress against those goals in 2013, and we anticipate that the full impact of our efforts to improve operating leverage will materialize over

time.

Continuing with the rest of the P&L, we anticipate full year 2013 other income and expense to be approximately $26.5 million, including roughly $13.7 million in non-cash interest expense. We anticipate a full year 2013 GAAP effective tax rate of approximately 60%, which includes the benefit from the 2012 and 2013 R&D tax credits. In thinking about how the tax rate will progress over the course of the year, you should use a 74% effective tax rate in each quarter. Then in Q1 2013, we expect to recognize the full benefit of the 2012 R&D tax credit of roughly $1 million, which will drive the full effective rate to 60%. The rate is certainly high but reflects the negative impact on the med device tax -- of the med device tax, higher spend on the intellectual property litigation front and the increase in amortization expense, all of which reduce our 2013 pre-tax book income. We expect non-GAAP adjustments to be tax effective at approximately 40% for the full year 2013.

Diluted shares outstanding for the full year of 2013 will be approximately 46.5 million. We expect full year 2013 GAAP EPS will approximate $0.07, and non-GAAP EPS will approximate $1. This contemplates the impact of the med device tax, which is currently expected to lower our 2013 non-GAAP EPS by about $0.13.

Non-GAAP operating margin and EPS guidance for 2013 exclude the full year impacts of non-cash, stock-based compensation of approximately $30 million; certain intellectual property litigation expenses of approximately $5 million; amortization of intangible assets of approximately $21 million; acquisition-related items of approximately $2 million and as-incurred additional items; and non-cash interest expense associated with the 2017 convertible notes of approximately $13.7 million. We feel this non-GAAP EPS measure, generally speaking, most accurately portrays the operating earnings power of NuVasive and should be the basis for measuring our progress.

I am looking forward to what 2013 will bring. We are successfully executing our share-taking strategy, and we are driving operational improvements. I think 2013 is going to be a very exciting year for NuVasive.

Now I'll turn the call back over to Alex for closing comments.

Alexis V. Lukianov

2012 results demonstrate that our market share-taking strategy is intact. We executed well on the plan to rebuild sales momentum in the face of adversity. And as we look into this new year, we hope to not just sustain but further build upon that momentum. Clinical evidence is growing. Our new product launches and pipeline are as healthy as ever. Our surgeon training is expanding and driving adoption of our full offering. Our sales force is re-engaged and fired up, and we are entering new markets outside the United States.

Over the last decade, NuVasive has positively changed the lives of over 100,000 spine patients with XLIF, including my own. That's what drives and motivates us, and we have only just begun to disrupt the global spine industry with better medicine. We are executing to a long-term plan to drive our evolution into a $1 billion company, with steadily increasing profitability each year. Sure, there are going to be challenges to address along the way, but we are committed to and focused on a proven share-taking strategy of superior outcomes, absolute responsiveness and speed of innovation. We believe that focus will sustain our future growth through our next step in the journey, which is the #3 spot within the spine industry. As we like to say, "Onward and Upward!" And as soon as I blow my nose, we will take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Chris Pasquale with JPMorgan.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Alex, maybe we'll just start with the fourth quarter performance, which was obviously a lot better than feared, if you go back to October. So maybe you can just comment about what it was that really drove the upside relative to where you thought you would be when you gave the 3Q pre-announcement.

Alexis V. Lukianov

So obviously, as we work through the impact that the unexpected POD departures had, as we work through the poaching that took place, we undertook accelerated efforts to offset that as well as we possibly could. We were in a worst-case scenario, and that's what we talked about. And we looked at the potential impact of that and thought that it was appropriate to warn the street accordingly. So that was our first call shortly after the third quarter ended. And then, of course, is we gave additional color and guidance shortly thereafter a few weeks later. I think what worked for us is that we basically turned on all the things that were there to be turned on. And we were able to hire at a fast pace. So I think that just stabilized. I think psychologically and emotionally, our sales force was in great shape. And we also had a very strong NASS. I think the NASS gave us some additional momentum. The launch of Precept, the launch of some additional products, the approval of PCM, there was just a lot of positive momentum that came into the fourth quarter and, I think, further buoyed the spirits of our sales force and allowed us to come through with this -- with a very strong number.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Okay. And I think you previously said that you didn't think that the hires made intra-quarter really drove much in the way of sales. Is that still fair?

Alexis V. Lukianov

That's still fair and that's correct. But obviously, replacing those positions has a very positive impact, right? Because you're not avidly recruiting. So the fact that we replaced them, I think, was very important that we did so quickly. And we've actually been adding to that pace in 2013 already.

Christopher T. Pasquale - JP Morgan Chase & Co, Research Division

Okay. And then just one on the 2013 guidance. So 6% reported growth, if I back out the contribution from Japan and PCM, seems like you're talking about maybe 3 to 4 from the base business. I appreciate some of the comments you've made about wanting to be conservative. But you had previously said that you thought this is a business that could get back up in the double-digit growth, or you'll be disappointed if it didn't get back to double-digit growth by 2014. So is that still a fair goal? And help us sort of bridge the near-term outlook for the business and some of the longer-term optimism you have.

Alexis V. Lukianov

Clearly, that's where we want to be. As we move towards 2014, we want to do everything we can to move the company back to double-digit growth. But we need some cooperation from the market. We just can't do it ourselves. And I think despite having a very strong finish to the year and despite being very optimistic about our momentum, we want to be especially prudent, given the changing market conditions. So I think we've taken a realistic view of what the market looks like right now. If that market starts to improve, that's great. That will help us. We're counting on a lot from international as we move into '14, in particular. So I think the help outside of the United States is really great. And of course, if we can keep things steady and moving along in the U.S., then we ought to get to that double-digit growth that we all want to see again. But it's going to take some help from external forces like the market.

Operator

Our next question comes from the line of Matt Miksic with Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

I had follow-up on the market growth. You mentioned, Alex, you're looking for sort of a down U.S. market this year in spine. And it seems over the past several quarters, at different points during the year, we've been kind of bouncing not just in terms of your view based on what we know at any given time but based -- other folks are seen to be bouncing back and forth around 0. More recently, some of the larger players talking about some nominal improvements that they're seeing in any case. Can you talk maybe a little bit about your view of the U.S. market? And how much of that outlook is based on what you saw in Q4? What you're seeing today in the market or hearing from your reps or from surgeons? And how much of that is sort of contemplating some potential pressure from sort of additional pressure from PODs, additional pressure from payor pushback, that may or may not be accelerating today in the market? That will be helpful. And I have one follow-up.

Alexis V. Lukianov

Sure. So everything you just listed is really what we factored into our guidance. Those are all the things that we feel like are holding back the U.S. growth. I think all of us feel a bit more bullish on what the various companies reported in the fourth quarter. As you say, albeit still some losses there with regard to market share, less of a loss for some of the larger companies. So I think that certainly -- that's certainly a positive. I don't think it's -- I think it's premature to turn that positive into here's another forecast for 2013 and 2014. We've got at least 0.5 year. We've got to get 2 quarters into '13 to really see not so much where is NuVasive but where are some of the -- really the other 2 major players, right? I mean, I think that's what we need to see is how they do. So as we get that information, I think we'll be able to potentially look at the market differently if it changes. But otherwise, we've tried to factor in everything as well as we can, and that's our view of 2013 as you see in our guidance. So I don't believe that what we're talking about is a conservative number. I think we're talking again about a prudent view of the market, given the information that we have at hand at this point in time in the year.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Sure. I wouldn't use the word conservative either. But I guess, I just want to be crystal clear before I go to my follow-up here, that what you're seeing is based on -- you don't want a straight line what we saw in Q4. But is what you're describing based on something that you're seeing today in the marketplace? Or it's just based on what happened to the quarters leading up to Q4, and you're thinking, "Okay. Well, let's plan for down. And if we continue to see slightly better than down, then that's great."

Alexis V. Lukianov

Yes. So our view hasn't changed from the end of the year. I guess that's the best way to summarize it. We're now 2 months into the year. Our view is the same as it was at the start of the year as it is right now. I'm not seeing anything differently. None of us are. So I think that's really the short answer to your question.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Great. And then just back to this question of getting back to double-digit growth, understanding that the total market is a factor there. Can you give us a sense of where the market has to be for you to be able to close the gap to double digits? Is it got to be 1% or 2% in the U.S., worldwide? Maybe give us a metric us to where you think the market -- where do you think it needs to be for you to hit, say, 9%, 10%, 11%?

Alexis V. Lukianov

Sure. I think what's really holding things back is obviously the 800-pound gorilla when it comes to the segment, and that's lumbar business. And if the lumbar business starts to move at a faster clip, if that moves at more of a mid-or-so, single-digit level, then we're there. I believe we end up getting there very quickly. Because as you know, cervical's growing very well for us. International is going well. Biologics goes as lumbar goes. So those are the important things. And I think that as the lumbar picks up as the market, that's it. That's the gating item. So it's got to grow from where it's at right now to more like the 5%, 6% range.

Operator

Our next question comes from the line of Bill Plovanic with Canaccord Genuity.

William J. Plovanic - Canaccord Genuity, Research Division

I actually have a bit of a bigger-picture question. So as we look at the profitability, the 15% non-GAAP, kind of break it down if international was barely breaking even for the year. That puts your U.S. business at about 16.5% non-GAAP. And the question is, where can then the U.S. business go? And then how long does it take for the international to catch that?

Michael J. Lambert

So Bill, I'll take a shot at it and then Alex can jump in as needed. The domestic business certainly can -- long term, we think, will get up into the low, possibly even towards the mid-20s. By the time we reach that point, the international business, in effect, will be operating our profit contribution margin level above the domestic business. And the reason I say above is that, at that point, we don't fully allocate all of the cost internationally. Some are absorbed for the international business on behalf of the domestic business. So today, it's -- the international business is below. But as we continue to scale its margin, we'll be above.

Alexis V. Lukianov

And I think the numbers that you did, Bill, you have to add another 200 basis points with regard to the impact of Medtronic royalty to that, right? So that goes away in 2 years simply because those patents expire. So 2 years from now, there's another 200 bps or so coming automatically right into that number.

William J. Plovanic - Canaccord Genuity, Research Division

Okay. And then is there a revenue dollar amount for the firm as a whole that you're hitting those at? Is this -- is the $1 billion revenue level back to when we're hitting these the profitability numbers? Or is this just some indeterminate time in the future that we hit, let's call it, scale?

Alexis V. Lukianov

So as far as getting into the 20s, we've talked about that being at a $1 billion in revenue. We've been focusing on year-over-year improvements in the operating margin. As you know, we'd be up another 150 if it wasn't for med device tax. So I think clearly, we've been making the right improvements. And we feel very good about that. And we will do everything we can. Our focus is to get the company moving to double-digit growth over the next few years and do everything we can to do that and continue to move the operating margin significantly every single year.

Michael J. Lambert

Okay. And then one -- let me just jump on the back end of Alex's comment and make one comment. We have essentially been hit every year or so by something unexpected. The med device tax certainly is the most recent of those things. I mean -- so essentially, when you think about it, our forward view of the world suggests that the med device tax doesn't get any worse, right? That 1 year or 2 down the road, they don't turn around and raise it up to 3.5% or something. Same goes for the Medronic royalty, which was not on our radar 2 or 3 years ago, as we talked about it. So we do look at the business and try and manage it and drive it, excluding those factors to exactly where we're heading. And then eventually, the rest of the business, on average, will catch up with that.

William J. Plovanic - Canaccord Genuity, Research Division

Okay. And then a different topic, just on AttraX. At this point, what do you need to get to the FDA to get this thing over to go line? And that's it for me.

Alexis V. Lukianov

We wish that were a miracle with the U.S. hockey team. You know what? We have been through a lot of different directions, and it's been frustrating for us. So we don't have anything to report other than I would say that, as far as '13 is concerned, it's doubtful whether or not we will get it approved this year. We are doing our best to work through that, and so we remain hopeful. I know that sounds terribly pessimistic. But we remain hopeful in working through what is still a pretty broken FDA process. So if we can get some light through their ceiling panels, then hopefully, this will happen sooner. But right now, it's just -- it's delayed.

Operator

Our next question comes from the line of Matthew O'Brien with William Blair.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Just 2 quick ones, given the length of the call at this point. Alex or Mike, on the lumbar side of things for 2013, given the guidance that you provided, is that assuming that the U.S. lumbar performance is actually down year-over-year? And if that's true, it's a little surprising, given the introduction of MAS TLIF and Precept. Is there something else going on? And I think you talked about it a little bit in the last question. But [indiscernible] on a little bit differently in the market. Are any of your competitors being a bit more aggressive on pricing?

Alexis V. Lukianov

As far as pricing is concerned, that's been pretty neutral for us. I mean, it's certainly out there. As far as what it does to affect the gross margin, it hasn't had a major impact. Now as far as lumbar growth, I think that we certainly would love to see some additional upside to all the things that we're doing and moving further into the posture market. But we really see a market that's flat in the United States to even positively negative. So the best that we can do at this point in time is to project our own growth of around 2% on the lumbar side. And as we've already been discussing through the Q&A, if things change in the marketplace, great. And that pulls up and that's great. But right now, we don't see it being above 2%.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay. And then on the Medronic litigation, if you can just provide us any more color in terms of what the holdup is there in your expectations? Maybe the royalty rate ruling, timing and any other steps from here, that will be helpful.

Alexis V. Lukianov

Sure. So really not much has changed since we've been reporting on this the last few quarters. There was a judge change last year. And since that time, she has not ruled on the royalty rate on whether it stays the same or goes down or whatever happens to it. So we're still waiting to see when that will take place. Right now, as far as our crystal ball, we're not sure that, that's going to happen any time soon. It could be -- again, it could be next quarter. It could be the following quarter. So there's really no further updates on that. It is holding back our ability to keep things moving with regard to the appeal. So we are eager to get it done, to get that through to fruition from the drugs. Because that starts the clock again on the appeal process, and we certainly want to run through that, such that we can come back and appropriately deal with this through the court process post a successful appeal that we anticipate. So I'd say that's probably about it. Hopefully, we'll have some updates on that in the next quarter or 2.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

Okay. Just a real quick follow-up on that. Just given the way that we've seen here today or seeing at this point, should we think about the appeal process potentially finishing sometime next year?

Alexis V. Lukianov

Should think about the what finishing?

Michael J. Lambert

Appeal process.

Matthew O'Brien - William Blair & Company L.L.C., Research Division

The appeal process

Alexis V. Lukianov

The appeal process, once it gets back on -- once it starts again, it's probably a year from that point, give or take.

Operator

Our next question comes from the line of Raj Denhoy with Jefferies.

Raj Denhoy - Jefferies & Company, Inc., Research Division

I wonder if I could ask about the sales force and kind of fluidity you're seeing in your sales force. I know you've had some success in hiring folks back. But in terms of continuing departures, have you seen any slowing in that process or anybody still leaving? Or how is everybody working right now?

Alexis V. Lukianov

No, we've not. Actually, it's been very stable. And so we're very pleased with where we're sitting on the sales force side. In fact, I was just looking at some of the recent hires and the pedigree is just superb, the last several months in particular. They're coming from the major spine companies. So there is actually a very, very good stability. And there's I think a very strong pipeline for us to add the additional representatives that we plan to do in 2013.

Raj Denhoy - Jefferies & Company, Inc., Research Division

You made a comment I think in your prepared remarks about having to pay a higher commission on growth sales. And I'm kind of vague [ph] exactly what does mean. But does that imply that you're having to pay up to get some of these folks to come over or...

Alexis V. Lukianov

Yes. No, when I talked about [indiscernible] assisted, we had altered some of our incentives. I didn't mean to imply, and certainly don't believe I said, that we were increasing our commission rates, because we haven't. So what we've done is we've essentially come up with some added ways to incent the reps to go deeper. So as they go deeper, they have the ability, which is on the bonus basis, to achieve greater upside. And I think that they really have -- we've gotten very positive feedback on that plan, since we rolled that out. So we started to launch it at the end of December, kind of give a glimpse to the sales force of what we're were going to do. And just spent this last weekend with some of the top performers and I would say that the feedback is overwhelmingly positive with regard to the structure, the simplicity of the plan. So we made a number of different changes that I think helps them to be more successful and more focused on going deeper, as well as with some with -- that we're doing through the additional ads with regard to the sales force.

Operator

Our next question comes from the line of Matt Taylor with Barclays Capital.

Matthew Taylor - Barclays Capital, Research Division

I guess I just wanted to ask in terms of the sales force hires. Have you identified what portion of the uptick quarter-over-quarter was from the new folks and just in terms of helping us understand how that helped you improve and how that's going to continue the momentum? And how are you thinking about sales force hires this year?

Alexis V. Lukianov

So as far as Q4 is concerned, close to none of it was from new hires. So that was really execution by the existing sales force. As I mentioned, I think psychologically, it helps our sales force a great deal to have those slots filled, to have stability back in the sales force. Because as -- because we're a public company, obviously, those things are greatly magnified and illuminated when they take place beyond the scope of Wall Street investors and analysts. And so people start looking at those things. So I think what's been very positive for us is that, that hasn't really had much of an impact on Q4, which we didn't anticipate. But that's just consistent with our guidance on this year. That's what's baked into it, the same thing with hiring. And I think we've got another 15 or 20-or-so heads that we're hiring this year as well to increase the size of our sales force.

Matthew Taylor - Barclays Capital, Research Division

Okay. And just on IOM, that was one that we thought might be growing a little bit faster that -- just reimbursement that's holding it back at this stage or...

Alexis V. Lukianov

Yes, yes. It's entirely reimbursement and specifically, even collections. So it's just really working through that process. So we've made some headway. We're looking at really it being a flat year, and we're working through a series of different strategies to see what we can do to improve upon that. As I did mention in my remarks, what's positive is that the volume has been up. And we also are excited about the potential synergies, as we overlap the -- our NuVasive hardware and NeuroVision sales force together with the IOM group.

Operator

Our next question comes from the line of Rich Newitter with Leerink Swann.

Richard Newitter - Leerink Swann LLC, Research Division

Just 2 very quick ones. On AttraX, can you just try to give us a sense of -- characterize what it is that -- that's kind of the holdup with the FDA? Or is it just a little bit of a black box in the agency in general?

Alexis V. Lukianov

It's really a bit of a black-box scenario for us. It's somewhat of a lengthy process to go through. But it's really trying to work through -- really, getting them to work by their own rules is probably the simplest way to put it to. And that's what we're struggling with. So it's the classic moving of the goalposts. It's what we've all talked about as one of the main challenges with regard to FDA, and that's what we -- this is probably one of the best illustrations I've ever seen in my entire career of moving goalposts on their part. So every time they move, we've got to basically reassemble and adjust to that. So that's why I think, as I said earlier, we're somewhat pessimistic with regard to '13. But hopefully, we'll get there in '14.

Richard Newitter - Leerink Swann LLC, Research Division

And Alex, I just want to make sure I'm understanding your comments about kind of what it takes to get to double-digit growth in '14. Is it basically the that markets call it flat to slightly down now? And if the market stays in that range, double-digit growth is likely just not achievable? Or is that the right way to think about it?

Alexis V. Lukianov

I think it becomes much more challenging for us to get to the double-digit level with -- at the same pace that we'd like to. We get the lumbar growth going -- the entire market growing to, let's call it, just 5% for easy math. We'll get to around 5%. And if that starts to happen over the course of the first half of this year as the plan, then I think we can get there. Shy of that, it's going to require us to have much deeper penetration with regard to our lumbar business. So we are certainly working on that. But we won't be able to get that level of penetration done over the course of 2013 without help from the market. I think as we move into '14 and '15 with all of the things that I outlined in our product pipeline, I do believe that we have the ability to grow posture or fixation to be a much bigger part of our minimally invasive platform and our open platform, such that double-digit growth, together with strong performance, obviously, from international and making a bigger contribution to revenue, is in the cards over the next several years.

Operator

Our next question comes from the line of Michael Matson with Mizuho Securities.

Michael Matson - Mizuho Securities USA Inc., Research Division

I guess just with regard to the PODs, I know the OIG was doing an analysis or investigation. And I was wondering if you've heard anything about the timing of this report that they're supposedly going to be publishing about PODs?

Alexis V. Lukianov

There are rumors that they're being soon to later this year. So no, there's no updates that we have at this point.

Michael Matson - Mizuho Securities USA Inc., Research Division

Okay. And then on Precept, you'd mentioned it -- it's one of your fastest-growing products ever. But I would assume that it's mostly cannibalizing one of your older posterior systems. Are you able to get a price premium and mix benefit from that product launch?

Alexis V. Lukianov

Yes. Yes, very much so. It's one of the things that's really exciting I think to the sales force is to have such a superior product and to be able to command a premium.

Michael Matson - Mizuho Securities USA Inc., Research Division

Okay. And then just one final question. The -- on the patent litigation, have you paid out the $100-or-so million to Medtronic yet? And if not, where is that showing up on your balance sheet right now?

Michael J. Lambert

So we have not paid it out yet. It shows up on our balance sheet in the restricted cash section.

Alexis V. Lukianov

And we don't anticipate paying it out, just to be clear. I mean that money has been put aside. And there's nothing that indicate -- shy of going through the entire appeal process and in all likelihood another trial, I mean there's nothing really that would mandate for us to have to make that payment.

Operator

Our next question comes from the line of Jeff Johnson with Robert W. Baird.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Just a few clarifying questions here. Alex, did I hear you correctly that regardless of what performance looks like the next quarter or 2, you wouldn't plan to change 2013 guidance? You're going to take kind of more of a full year view this time?

Alexis V. Lukianov

You got it.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Okay, okay. And then Michael, on the legal -- higher legal cost...

Alexis V. Lukianov

Unless we're the only company -- if every other company is destroyed, and we're the only one to survive, then I'll probably make some adjustments.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Maybe knock it up a point or so, okay.

Alexis V. Lukianov

Absolutely.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Michael, on the higher legal expenses, is that defending IP around certain products or maybe personnel issues? Any insights you can give us there?

Michael J. Lambert

Yes, it's mostly defending IP around some of the stuff that you've already heard about, Globus, Links [ph], Cadwell and others.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Yes, okay. And then the last 2, just clarifying, on the $10 million guidance for Japan, I think when you gave that initially, Alex, you did not have XLIF approval or XLIF product approval there. You're out now selling the full XLIF suite. Is there a reason you didn't change the Japan guidance then? And then on the sales force side, I think you've previously given numbers that you would hire 6 of those reps lost in 3Q back, then it was up to 11. Any updated numbers on just -- of the recaptured sales reps that you've -- or new reps hired?

Alexis V. Lukianov

Yes. So first of all, with regard to Japan, as we gave the guidance on $10 million for 2013 in Japan, that assumed that XLIF would be part of that. XLIF is slightly late. We actually were hoping to start with XLIF in January. Instead, we're starting with it late in February. We still think we're in solid shape with regard to the revenue forecast that we have for Japan. But XLIF has always been a key component to that success. So if you take a look at where we are net for the fourth quarter. And as you know, we don't really like to talk about reps. But I think, in terms of how many do we have, unless everybody tells us exactly what they have. So really, the net increase -- but we'll talk about it only because it's something that was required to discuss last year. So in the fourth quarter, our net add was about 18 reps.

Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division

Okay. And that's 18 relative to where you ended third quarter at?

Alexis V. Lukianov

That's right.

Operator

Our next question comes from the line of David Roman with Goldman Sachs.

David H. Roman - Goldman Sachs Group Inc., Research Division

What, Alex, just to get your perspective from a competitive standpoint. I think one of the things that became fairly evident this quarter is if you look across all the players, it does appear that the spine market improved with the exception of one, and that was really [indiscernible] Synthes. You saw pretty significant declines, both in the Synthes franchise as well as their underlying business. So I'm sort of wondering if this is an inflection point there on sales force disruption and maybe some more ground to pick up here. And if it is the case, why would we see a slowing in your share momentum in 2013?

Alexis V. Lukianov

So we're still going to see an increase of share increase. It just won't be quite as fast as it was last year based upon our guidance. I think what we saw from DePuy incentives certainly didn't surprise anybody in the marketplace, given the challenges they had of putting those organizations together. And as you know, I think we have the same information with regard to the fact that there's going to be reps that are -- have been doubled up because of the consolidation of the 2 spine franchises, that they're going to be doubled up in accounts. And so we anticipate some opportunities. And so we're -- put it this way, we've got our arms open for anybody who wants to come over here and chat with us. And to be honest with you, we've had quite a few people inquiring from both the major players, in particular. So I think I've answered your question. If not, please -- then I'll elaborate the best I can.

David H. Roman - Goldman Sachs Group Inc., Research Division

That's helpful and maybe a follow-up for Michael. As you think about that P&L, it looks a lot came to together fairly well in the fourth quarter. And also, as I look at your guidance as it relates to operating leverage on the SM&A -- largely on the SM&A line, is there something that has been under sort of beneath the kimono[ph] at NuVasive that you've been working on, that now allows you to sort of hit an EBIT margin inflection point as you go through the course of 2013, that gives you confidence that you can realize the -- this magnitude of SM&A leverage?

Michael J. Lambert

Yes. David, to try and address it, I mean it's really a continuation of some of the work we've had under way and that we've talked about for some time. I mean it is all about those hard choices and re-prioritizing in the light of what's going on in the market. That involves all the things you'd expect, scrutinizing all the costs that are "less directly" tied to revenues or as you've seen, unproductively tied to an FDA process. And you've got a whole range of examples of things weren't managed around that over the course of the last 12 to 18 months. It also involves a lot of the things we've been talking about driving productivity via automation, via make/buy choices. And you've got examples like that. We in-sourced the NeuroVision repair. We went to automated charge sheets to free up both sales time and operations team time. It's the sort of the culmination of a bunch of those things. And as you observed, we certainly did start to pull up together in Q4 and made clear progress in 2012. And we do have line of sight to managing to the improvements that we talked about, 80 basis points on OpEx, 50 of which roughly come out of SM&A as we head into 2013.

Alexis V. Lukianov

So I think that's it for time. But I appreciate everybody's patience. It's been a long call. We tried to cover as much as we possibly could. I'm sorry we couldn't get everybody's questions in, but we did our best to accommodate. And we'll talk to you actually real soon, just a couple of months. So thanks for being on. Bye bye.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: NuVasive Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts