RTI Surgical's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: RTI Surgical, (RTIX)

RTI Surgical, Inc. (NASDAQ:RTIX)

Q2 2013 Earnings Conference Call

August 06, 2013 8:30 a.m. ET

Executives

Brian K. Hutchison – President & Chief Executive Officer

Robert P. Jordheim – Chief Financial Officer & Executive Vice President

Thomas F. Rose – Executive Vice President, Administration & Corporate Secretary

Caroline A. Hartill – Executive Vice President & Chief Scientific Officer

Robby Lane – Executive Vice President, Global Commercial

Wendy Crites Wacker – Director, Corporate Communications

Analysts

Kyle Rose – Canaccord Genuity, Inc.

Chris Cooley – Stephens, Inc.

Dylan – Craig-Hallum Capital Group

Jason Bedford - Raymond James

Brian Gagnon - Gagnon securities

Operator

Good day ladies and gentlemen, and welcome to the RTI Surgical Q2 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session with instructions to be given at that time. (Operator Instructions)

I’d now like to turn the conference over to your host for today, Ms. Wendy Crites Wacker. Ma’am, you may begin

Wendy Crites Wacker

Good morning and thank you for joining RTI Biologics for our second quarter 2013 conference call. Today, we will hear from Brian Hutchison, President and Chief Executive Officer; and Rob Jordheim, Executive Vice President and Chief Financial Officer. Also joining us this morning for Q&A are Tom Rose, Executive Vice President of Administration; Carrie Hartill, Executive Vice President and Chief Scientific Officer; and

Before we start, let me make the following disclosure about forward-looking statements. The earnings and other matters we will be discussing on this conference call will involve statements that are forward-looking. These statements are based on your management’s current expectations, but they are subject to various risks and uncertainties associated with our lines of business and with the economic environment in general.

Our actual results may vary from any statements concerning our expectations about future events that are made during the course of this meeting, and we make no guarantees as to the accuracy of these statements. Accordingly, we urge you to consider all information about the company and not to place undue reliance on these forward-looking statements.

Now, I’ll turn the call over to Brian Hutchison.

Brian Hutchison

Good morning, everyone. Thank you for joining us today. Today I’ll start with an overview of the second quarter, then Rob will review financials. Tom will discuss our acquisition of Pioneer Surgical Technology and update guidance for the remainder of the year.

As detailed in our press release issued this morning, we reported second quarter revenues of $42.3 million, in line with our expectation and meeting our second quarter guidance of $42 million to $43 million. Our sports medicine business decreased 13% compared to second quarter 2012, however increased 11% on sequential basis. The sports medicine team continued to face competitive pressure in the second quarter.

As we mentioned on the last call, we anticipated that revenues in the first half of the year would be negatively impacted by as much as $6 million. Our estimated were accurate. As we sit at the midpoint of the year, we believe it will take longer than originally anticipated to recover this component of our business to previous levels.

Our team is focused and committed to turning the tide customer by customer, showcasing our superior safety record and high quality implants. Over the second quarter, we started to see customers returning and we’ve been bringing on new accounts since the beginning of the year. Additionally, we continued to expand our sports medicine business outside of the knee by introducing solutions for foot and ankle as well as shoulder surgery.

At the end of May, we had the successful launch of our new Fenestrated Matrix HD allograft. This implant, along with our non-Fenestrated Matrix HD allograft is subject to the CMS Q code approved last January which will assist in reimbursement. These implants are used primarily in soft tissue repair procedures, including Achilles augmentation, tendon repair and rotator cuff augmentation, among others.

Second quarter spine revenue increased 15% compared to second quarter 2012. The increase was primarily related to a large stocking order from one of our commercial distributors, as well as higher overall demand from all of our customers. As we mentioned on the first quarter conference call, we are experiencing favorable comparables year over year in the first half of 2013. We expect the comparables will normalize over the second half of the year.

Second quarter surgical specialties revenues decreased 19% compared to second quarter 2012. The decrease in revenues is primarily due to declines in hernia revenue from our commercial distributor, and lower than anticipated revenues from our newly created direct distribution force. In March, we launched our direct surgical specialties team and introduced our Cortiva human dermis implant and our Tutomesh and Tutopatch bovine pericardium implants.

Over the second quarter, our teams started to see market demand shift away from allograft towards xenograft, particularly porcine dermis. This market shift has led to lower than anticipated revenues from our allograft dermis implant for the first half and the full year. In June, we had our first human implantation of our Fortiva porcine dermis implant and began commercial distribution in the U.S. We had a number of cases using our Fortiva implants in June and [update] that number in the first month of Q3.

Additionally, we expect to receive CE marks in Europe for Fortiva by the end of Q3. We’re looking for a strong second half for direct surgical specialties, primarily on the strength of our Fortiva porcine dermis product. However, we do not expect the uptake in Fortiva to outpace the lower than anticipated allograft dermis revenues.

Second quarter BGS, General Orthopedic revenues decreased 14% compared to second quarter 2012. The decrease in revenues for the quarter was due to weaker than expected orders from one of our large commercial distributors. Second quarter dental revenues decreased 2% compared to second quarter 2012. An increase in domestic dental revenues was due to timing of orders by our commercial distributor. The decline in their actual dental revenues was primarily due to the challenging economic conditions and regulatory changes.

While we’re still waiting re-inspection by the FDA to receive a close-out of our 2012 warning letter, as you know, we have no control over the timing of that inspection. We have fully addressed all issues related to the warning letter and are looking forward to our re-inspection. Until then, we’ll continue to provide safe, high quality implants to surgeons and patients in need.

Looking ahead, we continue to progress on the path towards commercialization of our MAP3 cellular allogeneic bone graft. We’re excited to announce that the first human implantation of MAP3 is scheduled for this week. We’ll provide more information as it becomes available. We still anticipate that MAP3 will launch in late 2013 and we’re excited about the opportunities for these implants in the marketplace.

Apart from MAP3, we’re also investing over the course of the year in xenograft tendon for ligament reconstruction. For xenograft tendon, we have completed our one year evaluation of implant safety in a large primate study. The results so far are encouraging and we look forward to receiving a final report in coming months. This study supports our progress in the longer PMA regulatory pathway in the United States and the potential to initiate human clinical studies to achieve CE mark in Europe.

At this point, Rob will provide some details of our financials.

Robert Jordheim

Thank you, Brian. Worldwide revenues of $42.3 million for the second quarter of 2013 decreased 6% compared to the second quarter of 2012. Domestic revenues of $37.4 million for the second quarter of 2013 decreased 5% compared to second quarter of 2012, primarily based on weakness in the sports medicine, BGS/GO, dental and surgical specialties businesses and offset by strength in the spine business.

International revenues, which include exports and distribution from our German and French facilities were $4.9 million for the second quarter of 2013, a decrease of 18% compared to the second quarter of 2012. As stated earlier, the decrease was primarily due to challenging European economic and regulatory conditions. On a constant currency basis, international revenues for the second quarter of 2013 decreased 20% as compared to the second quarter of 2012.

Net loss for the second quarter 2013 was $3 million or $0.05 per fully diluted share based on 56.3 million fully diluted shares outstanding. This compares to net income of $1.3 million or $0.02 per share for the second quarter of 2012 based on 56 million fully diluted shares outstanding.

During the second quarter of 2013, the company accrued a pretax litigation settlement charge of $3 million or $0.03 per fully diluted share to settle substantially all of the remaining lawsuits related to the tissue recovery practices of Biomedical Tissue Services. This brings to inclusion any material risk related to BTS.

Also during the second quarter of 2013, the company accrued a pretax expense of $1.5 million for certain fees related to the acquisition of Pioneer. Excluding the $3 million BTS litigation settlement charge and the $1.5 million expense related to the acquisition of Pioneer, the company reported breakeven results.

Gross margin for the second quarter was 45.5%, which was a decrease of approximately 240 basis points from second quarter of 2012. The decrease was primarily due to the mix of implants distributed.

During the quarter, marketing, general and administrative expenses totaled $15.7 million, an increase of $1.4 million or 9.8% higher than the second quarter of 2012. This was primarily due to higher spending related to the build out of our surgical specialties direct distribution organization, offset by lower variable compensation as compared to the second quarter of 2012.

Research and development expenses totaled $3.3 million for the second quarter of 2013 which was comparable to the second quarter of 2012. As mentioned previously, during the second quarter of 2013, we accrued a pretax litigation settlement charge of $3 million relating to the tissue recovery practices of BTS to settle substantially all of the remaining lawsuits relating to these proceedings. In addition, during the second quarter of 2013, we accrued a pretax expense of $1.5 million for certain fees related to the acquisition of Pioneer.

Lastly, our tax rate for the second quarter of 2013 reflects a tax benefit of 30% compared to a tax provision of 24% in the second quarter of 2012.

Turning to the balance sheet, our cash position at the end of the second quarter was $39.4 million compared to $49.7 million at the end of 2012. The decrease was primarily due to increased tissue procurements, lower implant distributions, investment in our direct surgical specialties distribution force and the timing of certain tax payments. For the remainder of 2013, we anticipate being cash flow positive from operation, including the impact of the Pioneer acquisition. We are confident that with current cash balances and available debt, we have adequate liquidity to support our future operations.

Inventories of $79.4 million increased $2.8 million as compared to the second quarter of 2012. More specifically, at the end of the second quarter, unprocessed donor tissue increased $2.8 million to $28.7 million. Tissue in process increased $625,000 to $29 million and implantable donor tissue decreased $448,000 to $19.6 million.

Working capital at the end of the quarter totaled $126.3 million, a decrease of $2.8 million compared to the end of 2012. At the end of the second quarter, we had virtually no debt and approximately $16.6 million available under our revolving credit facilities.

With that, I will turn the call back over to Brian.

Brian Hutchison

Thanks Rob. As you know, on June 12, we announced the acquisition of Pioneer Surgical Technology Inc. for $130 million in a cash transaction. We closed on the acquisition on July 16. Over the past few years, we’ve been clear about our strategic initiative and we believe this acquisition advances our business across all of these strategies, including diversification of our implant portfolio, expansion of our direct distribution, enhancing our current international business and improving margin profile and revenue growth opportunities.

Over the next few months, we’ll be focused on integration of Pioneer’s business. As part of this process, we’ll be making some small changes to our revenue reporting for the remainder of 2013 to accommodate our new lines of business.

Let me review those with you and give you a sense of our current expectations for those revenue reporting lines. Our direct sports medicine business will not experience any material changes. As mentioned earlier, this business line will require focus and commitment to overcome the challenges of the first half. While we do expect a sequential decline in the third quarter to the normal seasonality for this business, we are anticipating that sports medicine will return to growth in the fourth quarter, resulting in a decline of high single digits for the full year of 2013.

Our spine business will expand to include our new direct distribution revenue coming from the Pioneer business. Based on the results for the first half and the addition of the direct revenue from Pioneer, we anticipate that our spine business will double in the second half of this year.

Our surgical specialties business will not materially change and includes revenues from our commercial and direct surgical specialty business. Based on the results for the first half, and lower than expected revenues from our commercial distributor and our direct business, we anticipate that surgical specialties will have low single digit growth for the year and return to growth occurring later in the year. We don’t anticipate any material changes in the dental line of business. Thus we anticipate that revenues will be flat for the year.

Our BGS/GO business will consist of revenues from both commercial and direct BGS/GO implants, as well as BGS/GO products from the Pioneer business, including the next generation synthetic products. Based on the results from the first half, we anticipate low single digit growth for the full year.

Lastly, we’ll also add a revenue category for Ortho-fixation which we’ll begin reporting on in the third quarter. Ortho-fixation will include revenue from our direct cardiothoracic and commercial pharma business we acquired from Pioneer. At this time, we anticipate this business will generate in the mid-teens for the second half of the year.

In our press release this morning, we announced guidance for the third quarter and revised revenue guidance for the full year of 2013. For the third quarter, we expect revenues to be between $59 million and $61 million. This would result in a 35% increase in revenues compared to Q3 last year at the midpoint of our guidance. Net loss after preferred dividends per fully diluted share applicable to common shareholders is expected to be approximately $0.10 based on 56.8 million fully diluted shares outstanding.

Excluding certain acquisition related expenses and certain purchase accounting adjustments, third quarter net income after preferred dividends per fully diluted share applicable to common shareholders is expected to be – to reflect breakeven results. Based on the acquisition of Pioneer and results for the first six months, we are revising our full year revenue guidance for 2013, which was previously set at $179 million to $182 million. We now expect full year revenues to be between $211 million and $215 million.

Full year net loss after preferred dividends is expected to be between $0.13 and $0.11 per fully diluted share, applicable to common shareholders based on 56.7 million shares outstanding. This compares to prior guidance of the full year net income of $0.17 to $0.19 per fully diluted share applicable to common shareholders. Excluding certain acquisition related expenses and certain purchase accounting adjustments, and the BTS litigation settlement charge taken in the second quarter, full year net income after preferred dividends per fully diluted share applicable to common shareholders is expected to be between $0.05 to $0.07.

As mentioned during our conference call announcing the acquisition, we expect to generate some revenue and cost synergies during the back half of 2013. However, the financial impact of these synergies will be minimal in 2013 as the organizations are largely complimentary. Our primary focus for the remainder of 2013 will be to eliminate duplication in the cost structure and to identify areas for cost distribution. As we look ahead, our focus will be on the integration of Pioneer, supporting the launch of new products and expanding our presence in orthopedics and surgical specialties markets. We remain committed to providing safe biologic implants while using our expanded implant portfolio to reach more surgeons and patients worldwide. We are confident our focus strategy will deliver results for the long term growth.

We hope to see some of you this quarter. We will be presenting at the Canaccord Genuity Growth Conference on August 14 in Boston and the Stifel Annual Healthcare Conference on September 11 in Boston.

At this time, let’s open up to questions. Ben?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Bill Plovanic of Canaccord. Your line is open. Please go ahead.

Kyle Rose – Canaccord Genuity, Inc.

This is actually Kyle on for Bill. Just wanted to kick it off here and touch on surgical specialties. Obviously a lot of moving pieces with the new guidance, but wanted to see if you could just touch specifically on expectations for the direct business in the back half of the year. You launched Fortiva midway through the Q2 and it sounds like that’s going to offset some of the market shift in the human dermis side. But wanted to see if you could just talk to us about how we should think about that ramp specifically on the direct business within surgical specialties.

Robert Jordheim

Hey Kyle, this is Rob here. When you think about the surgical specialty business, yes the decline in the market shift from allograft to xenograft is more pronounced than what we originally thought. So that’s what’s driving the decline in the partnered side or the (inaudible) side of the surgical specialty business. On the direct side, it’s actually an opportunity obviously because we had launched our porcine dermis product. We’re experiencing a little bit slower ramp up than anticipated in the back half of the year, partly due to getting the product through the new technology committees and things like that in the hospital. But obviously we’re still very confident in the product for the back half of the year and looking at 2014. But of course it’s not going to be enough to offset the decline in the allograft side.

Kyle Rose – Canaccord Genuity, Inc.

And then shifting over to the sports side, it sounds like it’s taking a little bit longer to ramp back up there. Guidance is obviously adjusted this quarter. How should we think about the impact of that warning letter in some of that direct business on the sports side longer term if we don’t have a clear idea of when the FDA is going to come back into that inspection? I guess how should we be thinking about this exiting 2013 and as we move into ’14 from a growth standpoint?

Brian Hutchison

The way we’re thinking about it is we have no control over the FDA at all. And we just need to run our business as well as we possibly can. We’re ready for that inspection whenever it does occur, but we can’t rely on it nor can we wait for it. So there are certain accounts only in certain pockets of the country where we are blocked based on that letter. So we just have to put those customers aside for now and go focus on where we can and grow business where we can and go back and address them once we have the clearance letter that we need or that they say we need. So my view is shifting to this is really a competitive issue and as such we just need to respond accordingly. And we’re addressing it that way and we will – we’re out visiting (inaudible) and management is going to have to participate, including myself and Roger to do some of these meetings and my own staff is on deck to do that. So we will stay committed but it does force us to be realistic. The ramp will be slower than expected and that’s just the way it’s going to be.

Kyle Rose – Canaccord Genuity, Inc.

And then on the MAP3 side, obviously very exciting to get the update there on the first case this week. Launching in the latter half of 2013, should we expect any contribution in ’13 or is that still the majority of a ’14 event? And then also wanted to touch on, I know you talk a lot about studies there. When can we expect to see any of that data and what should we be looking for in that regard?

Brian Hutchison

So I’ll take the first part of that question and then I’ll let Carrie speak to the data. The contributions from it we’ve said are going to be minimal in 2013 because it’s a controlled launch. It’s not a full-on launch. However, we are excited about this and having the Pioneer sales force really has opened up the door for us to go spine and we fully expect to do that as well. So that path has become very, very clear. So strategically it’s extremely important and it’s a very strong driver for us as we develop and build and improve our selling opportunity in those spine area. And so for us there’s great strength there and that’s what we’re going to be focusing for the next few months. Economically I certainly think 2014 is going to be much more significant than 2013. So I’ll have Carrie talk to the data.

Caroline Hartill

Kyle, this is Carrie. I’m assuming your question about data is related to the xenograft launch primate study. Oh, okay, MAP3 studies. We’re beginning a MAP3 foot and ankle study in the coming months. We’re actually in the ILB process with one site and it will be a single site study. We’ll follow that also with some spine studies.

Operator

Our next question comes from the line of Chris Cooley of Stephens. Your line is open. Please go ahead.

Chris Cooley – Stephens, Inc.

Wanted to ask just briefly about guidance and I understand what we’re seeing in terms of the shift in the marketplace from allograft to xenograft and how it affects surgical specialties as well as the impact of the warning letter. But when I look at the revised revenue guidance of 2.11 to 2.15, is there any degradation in the underlying business from Pioneer as you come forward that you’re trying to imply with that added conservancy? It just looks like if we just think about 2012 (inaudible) anywhere from $15 million, $16 million bucks just assuming that business was flat. And so I’m just trying to get a better understanding of what you’re assuming for Pioneer in the second half of the year. And I have a quick follow up.

Robert Jordheim

Hey Chris, this is Rob. For the Pioneer business, we’re assuming really a steady state through 2013. I think in our last management presentation we said the last 12 months was about $88.2 million or 488.3 million. So we’re modeling that run rate going forward, figuring in a little bit of disruption due to integration, things like that. So there’s no degradation in the business. In fact, we’re finding more opportunities than anything. But like I said we’re looking at really a steady state through 2013.

Chris Cooley – Stephens, Inc.

Okay, that makes sense. And then similarly, could you just talk a little bit more on the sports medicine side, just in terms of as you go into foot and ankle now, help me think about timing, additional reps that may or may not be needed and the (inaudible) opportunity there. Thanks so much.

Brian Hutchison

There’s no additional reps in either foot and ankle. Our folks have been trained and have begun approaching those surgeons with some success and frankly some of the biologic products that are coming along like (inaudible) as well as the second generation products, the synthetic products from Pioneer really allow us to get in there. And then in our prepared remarks we talked about the Fenestrated Matrix HD also for foot and ankle. So we’ve just launched if you will or just given them an expanded opportunity. We have to do some training to our current sales force on the new Pioneer products, but they’ve been trained on the Matrix and they’ve been trained – well some of them have been trained on MAPC. Some will be MAPC.

But I think it’s a big opportunity for us longer term to leverage this direct path that we’ve developed and nurtured for quite a long time. So in terms of market opportunity, it’s a little difficult for me to put numbers on it yet. For our company we think it’s a huge upside because we’ve just begun in that space. So we’re building from a very low base of almost zero. So I feel comfortable that we’ve got a long ramp in front of us for quite some time.

Chris Cooley – Stephens, Inc.

And if I could just squeeze one last in there and I’ll get back in queue just on Fortiva. You kicked that off in 2Q. You mentioned that great first month this quarter. Have your expectations changed there at all in terms of the contribution this year? Do you think it could potentially deliver more based upon what you’re seeing now in terms of the market, in terms of the shift? Just curious about your expectations for contribution from Fortiva for the year.

Brian Hutchison

I think the market opportunity is big, but as Rob said, we’ve been taking a lot longer to get through these committees, to get new products approved in hospitals than anticipated and this is clearly fitting in that category. It’s taking us longer per hospital than we anticipated. So we’ve just got to keep seeing that through. We are having some success, but it’s early days. So we’ll recheck with you in about 90 days. I’m hoping my confidence level on that – on the success ratio continues to go up the way it has been for the first three or four weeks that we’ve been on market because it’s been nice uptick, but I’d like to see a lot more.

Operator

Our next question comes from the line of Matt Hewitt of Craig-Hallum. Your line is open. Please go ahead.

Dylan – Craig-Hallum Capital Group

This is actually Dylan covering for Matt. Just wanted to touch briefly on the international segment. I know you guys have been working pretty extensively to help change the negative perception that has been created from that FDA warning letter and then dating back to some of the stuff from the BTS. Just an update on how that’s going. Is that marketplace similar dynamic to the U.S as where you’re potentially locked out of some accounts? Just wanting any color on international front.

Brian Hutchison

No. we’re not locked out of any accounts based on those things. We’ve seen some regulatory shifts in some markets that we address market by market and category by category. So the market may address dental in France for instance or something else in Italy. So we have to address each one of those when they come up. But I feel comfortable that we’ve turned the corner in Europe in general and I feel like things are going to start to progress quite well. And there again that’s another place of good focus for us in the acquisition of Pioneer. They have a tremendous team of people assembled in Europe and we hope to leverage that in commanding our products and create some selling leverage here later this year. Again it’s going to build through Q3 and into Q4, but we’re very excited about the possibilities to leverage that combined organization and do much better than we have been doing;

Dylan – Craig-Hallum Capital Group

And then just another quick one. Last quarter you’d noted that you’d added 100 new customers and again made some commentary, you keep adding new customers, which is great. Just wondering how the relationships have been building through the quarter and specifically focusing on the ones who were added last quarter, how that dynamic is progressing with the FDA or the warning letter that acted concern with those customers and how is the business ramping to your expectations.

Brian Hutchison

With our current customer base it’s really a non-event. And things continue to improve and our sales force is gaining confidence as they gain these customers and grow with these customers. So those things are good. If there’s a frustrating point it’s just frustrating to be on hold in any account based on any outside action. So that’s always frustrating to the sales force when they’re blocked from any place. So at this stage we have to just continue to work on it and then in many cases wait it out. And in some cases we have to just walk away from certain accounts and right now just focus in those markets on other accounts in the market and that’s been the direction and it is working. Confidence is growing which is nice.

Operator

Our next question comes from the line of Jason Bedford of Raymond James. Your line is open. Please go ahead.

Jason Bedford - Raymond James

Congratulations on closing the Pioneer deal. I have a few questions. I guess just on the EPS guidance and I think I have this right, it looks like the guide is $0.05 to #0.07 which I think compared to the old guidance of $0.17 to $0.19. Is that all dilution from Pioneer or is that a little bit more – the guide down a little more reflective of the base business?

Robert Jordheim

Jason, this is Rob here. It’s really a reflection of the base business. Our assumptions on Pioneer have not changed with respect to what we said in the last call which was that it would be slightly diluted to neutral in 2013 on a non-GAAP basis. What you’re seeing reflected in the guidance is the fact that with sports in the situation that it’s in and being the highest margin product, a fair amount of that drops to the bottom line. So that’s what you’re seeing on the EPS guidance and the fact is we’ve just got to turn that business around in the next six months. So that’s what’s causing the issue.

Jason Bedford - Raymond James

So I think on the last call, you had talked about comfort with the 2014 EPS number out there for consensus. Can we assume it’s probably a little bit lower than that right now?

Robert Jordheim

Yeah. I think that’s probably a good assumption. I don’t want to comment on 2014 yet because we haven’t really given our guidance there. But that’s a fair assumption, yes.

Jason Bedford - Raymond James

In terms of the gross margin in the quarter, a little surprising given the revenue base. You mentioned mix. Is that all it is? Is there a pricing dynamic here that’s also weighing on gross margin or weighed on gross margin in the second quarter?

Robert Jordheim

No, it really is a mix issue. As I’ve just mentioned, the fact that our highest margin business is the one that’s hurting the most due to this warning letter has a dramatic impact on both gross margin and EPS.

Jason Bedford - Raymond James

And what was direct versus distributed revenue in the quarter percent?

Robert Jordheim

I believe direct was in that 35% to 36% range for this quarter.

Jason Bedford - Raymond James

And then on the surgical specialties, especially surgical side, have you thought about adding more resources from a sales force perspective or is that in the cards?

Robert Jordheim

No. we won’t be adding to that, Jason. We’ll be leaving it where it is this year.

Operator

Our next question comes from the line of Brian Gagnon of Gagnon securities. Your line is open. Please go ahead.

Brian Gagnon - Gagnon securities

A few questions for you. So if I look at the guidance of $60 million for Q3 on top of your $42 million and $40 million, that would get me to about $71 million for Q4. Is that in the ballpark, between $69 million and $73 million range?

Robert Jordheim

That is correct.

Brian Gagnon - Gagnon securities

So you’d be annualizing at a $280 million plus rate by the time you exit Q4 and that’s without the MAP3 launch and any real improvements from Pioneer?

Robert Jordheim

That is also correct.

Brian Gagnon - Gagnon securities

So as we go into 2014 and we know Q3 is going to be sloppy. We know Q2 is sloppy because of this. You should have BTS behind you and not have to talk about it anymore. You should have the Fortiva ramp going forward and the MAP3 launch assuming all goes well with the human implants. And then hopefully the FDA issue behind you and an improvement in both the surgical specialties and the sports medicine business.

Brian Hutchison

All correct.

Operator

I’m showing no further questions in queue. I’d like to turn the call back over to Mr. Brian Hutchison for any closing remarks.

Brian Hutchison

Thank you for attending the call everyone ad we look forward to speaking with you over the quarter and then again on this kind of conference call in about 90 days. Bye-bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.

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