Alphatec Holdings' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 6.13 | About: Alphatec Holdings, (ATEC)

Alphatec Holdings, Inc. (NASDAQ:ATEC)

Q2 2013 Earnings Conference Call

August 6, 2013, 5:00 PM ET

Executives

Mark Francois - Senior Director, Investor Relations

Leslie Cross - Chairman of the Board of Directors and Chief Executive Officer

Thomas McLeer - Senior Vice President, U.S. Commercial Operations

Michael O'Neill - Chief Financial Officer, Vice President and Treasurer

Ebun Garner - General Counsel, Senior Vice President and Secretary

Analysts

Josh Jennings - Cowen and Company

Matt Miksic - Piper Jaffray

Mark Landy - Summer Street

Bill Plovanic - Canaccord

Mark Francois

I'm Mark Francois, Senior Director of Investor Relations for Alphatec Spine. Thank you for joining us today for Alphatec Spine's conference call to discuss our second quarter 2013 financial and operating results.

Speaking today will be Les Cross, Alphatec's Chairman and Chief Executive Officer; Tom McLeer, Senior Vice President of U.S. Commercial Operations; and Mike O'Neill, Vice President and Chief Financial Officer. Also on the call today is Ebun Garner, our General Counsel.

During our prepared remarks, you'll be in a listen-only mode, and after our prepared remarks have concluded, we'll open up the call for your questions. As a reminder, this conference call is being recorded today, August 6, 2013. A replay of the event will be available later today on our website and will remain there for next thirty days or so.

Before I turn the call over to Les, I must remind you that today's conference call contains forward-looking statements made under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Such statements include statements related to the company's revenue and adjusted EBITDA expectations for 2013, the success of the company's initiative to drive global sales growth, the ability to achieve surgeon conversions in connection with the Phygen acquisition, contributions for the company's revenue and earnings in 2013 from the introduction of new products and sales and marketing strategies, the timing of U.S. FDA and other foreign and domestic governmental agency decisions that impact commercialization and distribution of our products.

These forward-looking statements are based on the company's current expectations and are subject to a number of risks, uncertainties and assumptions that could cause actual results to materially differ from the forward-looking statements. The company undertakes no obligation to update any forward-looking statements whether a result of new information, future events, or otherwise. Many of these risks, uncertainties, and assumptions are discussed in our 2012 Annual Report on Form 10-K for the year ended December 31, 2012, which we filed on March 4, 2013, with the Securities and Exchange Commission as well as other filings on Form 10-Q and periodic filings on Form 8-K. Our Security documents are readily available on our website at www.alphatecspine.com.

And with that, I'll turn the call over to Les.

Leslie Cross

Thank you, Mark. Good day, everyone, and welcome to Alphatec Spine's conference call to discuss our second quarter financial and operating results. We are very pleased to report another strong quarter for revenue growth for Alphatec Spine. Q2 2013 revenue totaled $51 million and represented nearly 6% growth over the second quarter of 2012 or almost 9% growth on a constant currency basis.

We achieved this result in spite of the second quarter, speaking of second full quarter without the biologic product PureGen, which together with the pull-through products, the other products that were sold with it, had been generating close to $2 million per quarter of the revenue prior to our decision to voluntarily remove the product, so all-in-all pretty good growth.

For the first half of 2013, revenues have totaled $101.5 million on a reported basis, trending well ahead of 2012 by about 5% or almost 8% on a constant currency basis. This puts us solidly on track to achieve our full year 2013 revenue guidance of $204 million to $210 million on a constant currency basis.

While the spine market fundamentals appear to have stabilized somewhat, they still remain challenged by reduced implant pricing, diminished reimbursement for some products. However, in spite of this environment, Alphatec is succeeding and grew its business in the second quarter.

The factors that have driven our success this year are as follows. Our international business continues to achieve strong revenue gains across all geographic channels. This inspired the significant currency headwinds in certain territories. We are achieving solid implant unit sales increase and share gains in our core U.S. hospital channel. We are accelerating surgeon adoption of revenue growth of our new products.

The increased adoption of the innovative new minimally invasive surgery products, in our ILLICO MIS family are gaining traction in the market, and the market is rapidly moving towards MIS-type procedures, and Alphatec is in the midst of a strong innovation cycle that has brought forward by the launch of several key new products, which has already been completed this year in some of the fastest growing areas of the spine market. We expect full market launch of these products in the second half of the year. Tom will cover these new products in much more detail in few moments.

With that as an introduction, I'll briefly cover our geographical businesses, which include our U.S. and international performance in Q2 as well as a few other interesting general topics. Similar to last quarter, our international business drove our second quarter sales growth.

We had exceptional growth in Japan, Europe, Asia-Pacific, Latin America, Middle East, and Africa, in other words everywhere. Our overall international business operation totaled $18.5 million, representing a 21% growth as reported and over a 30% growth on a constant currency basis. In fact, excluding the impact of the foreign currency conversion, our 2013 Q2 revenues represented a record for the company.

Japan continues to represent our largest international business, and this is driven by our ILLICO MIS products, and the recent approval of our new Novel interbody devices that happened late last year. In the second quarter, Japan grew 5.9% on a reported basis and almost 30% on a constant currency basis. This is an incredible result and our hats are off to the entire Japanese team for another excellent quarter.

Overall, we are extremely pleased with our international results, which in the second quarter represented over 36% of our Q2 total revenues. We truly are a global company, and we look forward to this momentum carrying through the second half of the year. We also look forward to receiving key product registrations approval in Brazil, China, and other certain Asian-Pacific geographies in the second half of 2013, and this should further benefit our international revenue growth in 2014.

Our U.S. business has remained flat year-over-year for both the second and third quarters of the year. However, we are encouraged by the continued unit sales gains we are making within our core hospital business, which is benefiting from the increased surgeon adoption of our products and from our new product introductions.

In the second quarter, unit sales to U.S. hospitals grew 10.2% year-over-year and 6.2% over Q1, the first quarter of this year. This suggests we are gaining share in this important channel. Another bright spot in our Q2 U.S. business was the increased adoption by our Phygen members. We continue to believe that Phygen and its network of over 100 leading U.S. spine surgeons represents a significant growth opportunity for Alphatec in 2013 and beyond.

I would now like to provide a quick status update on our PODs distribution. As has been the case for more than a year, sales to PODs have represented a small and shrinking component of Alphatec's revenue, and the second quarter of this year was no different. We continue to manage our internal distribution policies regarding PODs in a manner to remain compliant with all laws.

Currently, we have only distribution relationship with two PODs. These organizations have voluntarily met with the OIG and the Senate Finance Committee to discuss their respective business models. In addition, each of these organizations has agreed to have an independent law firm selected by us, Alphatec, review their business model and practices to ensure that they are in compliance with the applicable laws and regulations. So with that discussion out of the way, it is clear through the first half of the year that we are having success even in the challenging spine market.

On top of this, I am very pleased to report that our U.S. facilities, which include our manufacturing facilities, were inspected by the FDA in the second quarter. After a week-long site inspection, the FDA left without issuing a single observation, a true testament to the sophistication of our manufacturing, R&D, quality, and regulatory compliance teams. I am extremely proud of these groups and all Alphatec employees for delivering another excellent quarter and helping transform Alphatec Spine into a true world-class organization.

At this time, I would like to invite Tom McLeer, our Senior VP of U.S. Commercial Operations, to provide additional color around our U.S. commercial strategy.

Thomas McLeer

Thanks, Les. Technology will continue to be a key driver in our revenue growth. This includes major upgrades to our existing product portfolio as well as new game changing options for our certain customers.

This past June, we conducted a successful and well attended Technology Day in New York City that showcased the depth of our product lineup, including our newest technology and innovations. Our ILLICO MIS system was recently enhanced with the release of our ILLICO Multi-Level instrumentation for longer constructs and it continues to gain market share among the growing community of surgeons who are embracing minimally invasive surgery techniques to improve patient outcomes.

ILLICO MIS products enjoy strong year-over-year increases in both units and dollars as becoming a larger component of our U.S. business. We attribute this to having developed excellent technology and products, in concert with ongoing surgeon training on MIS techniques. MIS will continue to be a core focus of our R&D efforts.

Likewise, our Zodiac DVR Deformity System has enhanced our deformity offering by providing the surgeon with additional options for the correction of spinal deformities. This has allowed us to expand our customer base and become a more attractive option for longer deformity constructs.

We are pleased with surgeon adoption from the beta launch of Alphatec Solus in Q2. Alphatec Solus is the unique and patented, anchored ALIF device that provides four points of fixation and is deployed using a single zero-axis step. Surgeons continue to be impress with Alphatec Solus quick-and-easy implantation, which is intend to be of benefit to patient outcomes and hospital cost.

Recent biomechanical studies that will be released in the near future will show the performance of the product when used in conjunction with our ILLICO, FS and BridgePoint products.

As we mentioned last quarter, our new anchored, anterior cervical fusion device, which is named Pegasus encountered a minor instrument issue, which we believe has been resolved. We feel that Pegasus offer significant advantages over currently available products. Pegasus anchors are designed to be smoothly deployed using the insertion tool, while other products blades are deployed using a hammer to impact them. In addition, we believe Pegasus technology is superior and that surgeons have the ability to retract the anchors interoperability, if needed to reposition the implant. We expect to see full market launches of both Alphatec Solus and Pegasus in the second half of 2013.

Our biologics products continue to support our implant sales and Alphatec NEXoss continues to grow nicely. This product consist of nano-structured HA granules and an open collagen structure that we believe provides the surgeon one of the most advanced synthetic options on the market. With an expanding variety of sizes and delivery options, we believe our biologics offering will continue to grow throughout the year.

ProFuse has also rebounded nicely, after our voluntary withdrawal of PureGen from the marketplace. We have expanded our product offering in conjunction with our proprietary VIP packaging, which allows for enhanced infusion of cells and bone marrow, we continue to gain new customers in the marketplace.

We look forward to continuing to provide advanced technology and innovation to the marketplace. The momentum we are generating with these products should allow us to continue to provide new solutions for our surgeons customers.

With that, I'd now like to turn the call over to Mike for a discussion of our second quarter financial results.

Michael O'Neill

Thank you, Tom. The following remarks are related to our reported operating performance for the second quarter ended June 30, 2013. Considering the ongoing challenges in the spine market revenue growth in the second quarter and the first six months of 2013 has been noteworthy among spine companies.

Gross profit for Q2 2013 was $32.1 million or 62.9% of revenue compared to $30.2 million or 62.6% of revenue in Q2 2012 and was impacted by both price and regional mix. Similar to Q1 this year, Q2 '13 year-over-year declines in the U.S. hospital pricing were higher than the typically low-to-mid-single digit decline that we experienced throughout 2012, rising to mid-single digits. Sequentially, from Q1 '13, however, pricing was flat.

As mentioned, gross margin was also impacted by regional sales mix in the second quarter. With robust growth in our international businesses and with international revenue typically carrying a lower gross margin, our consolidated gross margins declined accordingly.

Additionally, gross profit in the second quarter and first quarters of 2013, where each reduced by about $1 million or 200 basis points for the amortization of a licensed intangible asset as part of the Cross Medical settlement, which we have described in prior results. While we now have parity year-over-year, we will still highlight the quarterly amortization charge and the impact it had on our gross margin expansion. U.S. gross margin was 67.6% in Q2 '13 compared to 68.6% in Q2 of '12, and was primarily driven by price impacts more than offsetting the favorable product mix from reduced biologics revenue.

We believe that the larger part of our business that will be exposed to contract renegotiations in 2013, are now behind us. And as our new product launches, such as Alphatec Solus, Pegasus and ILLICO are now deployed into the market. We expect to be generating higher average selling prices than our current based business. Combined with a focus on increasing the revenue per procedure in general, our expectation is to compensate for some of these pricing impacts.

Our international gross profit improved by $2.5 million in Q2 '13 versus Q2 '12. Our international gross margin improved substantially from 49.6% to 54.6% and was driven by positive regional mix within the group of 120 basis points, and improved cost of goods sold of 380 basis points. The cost improvement reflects continued progress in managing our global supply chain activities and inventory management, as we transition more of the business to the Alphatec product lines. Overall, the combined impacts of U.S. pricing and regional mix have accounted for approximately $1.4 million or 260 basis points of gross profit and gross margin, against our internal expectations for the second quarter.

While perhaps not as visible in the P&L, I would like to highlight some of the operating improvements associated with our ongoing lien initiatives in our Carlsbad facility. Specifically, we have seen multimillion dollar reductions in the inventory levels of our core technology platforms.

In addition, work-in-process has been reduced from $2 million 18 months ago to $600,000 in Q2 of '13. At the same time, backorders at the end of each month have been reduced from 200 individual SKUs to less than 20, with only one or two of that population being our high volume products.

The time it takes to complete a work order within manufacturing has been reduced by a factor of five, by introducing a combined customer demand poll system, in conjunction with dedicated manufacturing work sales. We are systematically improving efficiencies and effectiveness across our manufacturing on quality operations, resulting in greater flexibility and responsiveness. And we hope to see continuing improvements flow into our underlying manufacturing costs. While not world-class yet, we believe we are clearly well on our way.

Total operating expenses for Q2 2013 were $35 million, an increase of $1 million compared to the prior year of $33.9 million. Q2 2013 expenses were impacted by higher legal expenses for ongoing litigation matters. We have also absorbed the entire operating cost of the Phygen business within our existing infrastructure and are working towards delivering against the promise of profitable accretive growth in the P&L.

Adjusted EBITDA, a measure we guide to, was $4.9 million in the second quarter of 2013 or 9.6% of revenues compared to the $2.7 million or 5.7% of revenues reported for the second quarter of 2012. Please note that the adjusted EBITDA was influenced by the gross profit impact indicated earlier, and the currency exchange impact of the Japanese yen on our profitable subsidiary in Japan. Adjusted EBITDA represents net income or loss, excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation and other non-recurring items, such as restructuring expenses, IP R&D and transaction-related expenses.

GAAP net loss for the second quarter of 2013 was $4.7 million or negative $0.05 per share compared to a net loss of $6.4 million or negative $0.08 per share for the second quarter of 2012. Adjusted EPS was negative $0.01 for both Q2 '13 and Q2 '12. Cash and cash equivalents were $12.9 million at June 30, 2013, reflecting payments totaling $4 million to Phygen in Q2 of '13 and $2 million to Cross Medical in the first six months of 2013, a part of the settlement discussed above.

Operating cash flow was positive $2.5 million year-to-date. The company is currently in the process of seeking to increase its debt capacity, to ensure that we can continue to add accretive technologies and businesses to our existing portfolio on top of our normal operating cash needs.

As of June 30, 2013, our net inventory position was $50.6 million, an increase of approximately $800,000 versus Q4 of '12, and the increase being primarily related to our new product launches. Our net account receivable at the end of Q2 '13 was $41 million, which is flat compared to Q4 of '12, and an increase of $300,000 as compared to Q1 of '13. Accounts receivable performance has been a function of our continued diligence with respect to collections. And I want to reinforce that we are not seeing any meaningful deterioration in day sales outstanding on a global basis.

The company continues to expect revenue for 2013 to be in the range of between $204 million and $210 million on a constant currency basis or approximately 4% to 7% growth over 2012. The significant evaluation of the Japanese yen has impacted our first quarter business by over $1 million and our second quarter by our $1.6 million. And with the expectation of the yen's exchange rate were not substantially improve in 2013, the aggregate revenue impact in the reminder of 2013 could potentially be as high as $3 million.

To provide a little more color on the guidance, as we indicated at the end of Q1, we anticipate seeing the contribution from new products in the U.S., as Tom discussed earlier. With continued surgeon in conversions and strong ongoing commercial operations internationally, we believe we can continue to drive our business forward, an offset some of the price and mix effects that we've experienced in the first half of the year.

As a result, we are maintaining our revenue guidance on a constant currency basis. Similarly, we are maintaining our adjusted EBITDA guidance, which should be in the range of $24 million to $27 million or approximately 21% to 36% growth over 2012, and representing approximately 12% to 13% of revenue. As previously stated, this guidance assumes only modest contributions from PureGen that have been realized earlier in the year.

Now, I'd like to turn the call back over to Les.

Leslie Cross

Great. Good job, thank you, Mike. As we entered 2013, our theme was execution and we have certainly accomplished this through the first half of the year and will continue to remain focused on it for the remainder of the year. We expect the global spine markets to remain choppy, with continued price and reimbursement pressure. However, with only a modest market share, our strategy to deliver continuous flow of new products, reduce our costs in working capital, strengthen our global commercial operations. This should enable Alphatec to deliver the planned results that Mike just talked about.

I would like to, again, thank all Alphatec Spine stakeholders, especially our employees who are persevering to make Alphatec Spine a stronger company that delivers greater value to all stakeholders and really delivers world-class experience to our customers.

Finally, I'd like to thank Mark. Mark is leaving us today to seek new career upside. I think he is going to be a real-estate landlord down on the beach or something. Mark, thank you for all your years of help with our Investor Relations, and to everyone on the phone you have our commitment that Alphatec Spine will remain dedicated to conducting our business with a sense of urgency, accountability, and in search of excellence.

Thank you, everyone. Operator, let's open up the call up for questions please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Josh Jennings from Cowen and Company.

Josh Jennings - Cowen and Company

My first question is on the U.S. business. I was wondering if you could just help delineate or define a pathway to incremental growth there. I know that the PureGen issue and the tough comp with that being excluded in the $1 million or so in the revenue in the quarter that's lost out. But can you talk about, kind of, your path to return to stronger growth trends in the U.S. with new products and any other incremental drivers there?

Thomas McLeer

I think a lot of it comes down to the new products we have just launched. So when we talk about Solus and Pegasus, those were launched, and then we had a little modification of Pegasus near the very end of the quarter. So, we're going quite well here in July. We are still seeing some pricing pressures, but that along with the ILLICO MIS and deformity extensions that we have are really helping us a lot. And then as Les mentioned, Phygen is coming along very nicely.

Josh Jennings - Cowen and Company

Can you give any incremental color on Phygen in the U.S. in 2Q versus Q1, and what are your expectations here in the back half of the year for Phygen in terms of picking up?

Leslie Cross

The Phygen, I think we said, we got off to a slow start. We talked about that last quarter. We've now fully integrated the business. That's totally running here out of Carlsbad. The business is accelerating at a good clip, and we expect to be in line with the guidance we originally gave when the year started of around $15 million contribution.

Michael O'Neill

One of the aspects is that now that the business is completely integrated within Alphatec, we are invoicing all institutions the same. So, the complete delineation is actually a bit of a challenge, but to Leslie's point, we are back on track with surgeon adoption. We fully integrated it in the company. And certainly, we feel that we'll be able to get back to the numbers that we originally communicated as part of the transaction.

Josh Jennings - Cowen and Company

And last question, just there had been a number of product approvals in the motion preservation product lines for cervical, do you see that as a threat to your core cervical fusion business going forward and how are you approaching that threat?

Michael O'Neill

I don't see it as a big threat. Now, I think some of it depends on the insurance reimbursement. And there is still significant interest in the motion preservation in the cervical spine. But I think, our product offering right now in the cervical area and given our market share, we have plenty of room to grow without that really impacting us.

Operator

And our next question comes from the line of Matt Miksic from Piper Jaffray.

Matt Miksic - Piper Jaffray

Just one, there's been some questions throughout the quarter, other companies in spine, kind of giving their perspectives on the POD environment out there after the OIG language. I'm sorry if you made a comment on this already. But can you give us a sense as to whether, in your opinion, the sort of progress proliferation of those structures has kind of slowed or stopped or continued at a slower rate or whether it's actually reversing, and you're seeing any meaningful change in the industry yet? I’d just look love to get your perspective, and then I have a couple of quick follow-ups.

Leslie Cross

The answer to that is yes. We're seeing a lot of PODs disappearing, believe it or not, there is still some PODs appearing. But certainly from our perspective, we said in the call, we have been doing less-and-less business with PODs. It's never been a significant part of our business, no matter what anybody says. We're down now to two POD customers only.

The rest have either gone away or transferred to normal distributors. So, we only have two left, both of who have a unique business model that they have actually shared in Washington. And we're also verifying that through an independent law firm. So I think the market definitely is changing. They are going away.

Thomas McLeer

I think, I'd also add, this is Tom, that hospitals now in some cases are no longer having any interest in dealing with PODs. So, that by itself will eliminate a lot of PODs just because they won't have a hospital to sell to anymore, so if that continues to evolve, then you'll see this decrease occur even more rapidly.

Matt Miksic - Piper Jaffray

And then just one, maybe, on what you see as the environment for sales reps, one of the challenges in this industry is finding the right people. With the momentum you're building, are you finding any change in the dynamics in your ability to attract new reps, product pipeline, maybe?

Thomas McLeer

I think actually in our case having the new technology flowing through, which we talked about a little earlier has given us the opportunity to attract better distribution. As you know, we don't use direct reps unless we have a direct-to-hospital situation or something like that. But we're very flexible on our distribution model. So, with the new technology coming up, it's very competitive. We're getting access to some other better quality distributors out there, which in turn means they have a much better sales representation.

Matt Miksic - Piper Jaffray

And then just finally, just a quick one on price, maybe if you could give us an update as to where sort of price and payor pressure have been in your conversations with surgeons, just sort of your view from where you stand in the market. That would be very helpful.

Leslie Cross

I don't know, as far as the surgeons. They are seeing more pressure on the reimbursement side with longer conservative care, a lot of pushback just on fusions in general, particularly for DDD. So, that's what they are concerned about is getting their patients that they feel need surgery in the queue to actually do it. So, that's the pushback they are seeing from that pricing standpoint. Mike do you --?

Michael O'Neill

No. I mean, I think as I've said in some of the earlier commentary, Q1 clearly was a change for us relative to '12. Q2 was a little softer. But we've also gone through a fair number of renegotiations. And so, I think the important thing is we believe a lot of the pricing hits that we took in the first half are going to be moderated as we go into the second half. Obviously, there is no guarantee to that. But I think that the pricing for us, I think the first half of the year was where we took some pretty sizeable lumps.

Operator

And our next question comes from the line of Mark Landy from Summer Street.

Mark Landy - Summer Street

Maybe it's a backhanded question, but the situation with PODs is not now an opportunity. You've brought Phygen in. You're kind of learning your way through that model. How many PODs are out there, do you think that exist, that may be, you know, similar situation with these guys just wanting to give up given what's happening, and is it feasible to go out and look for them and bring them into the fold?

Leslie Cross

Well, that's a definite possibility. I mean, as these PODs are transitioning, which all of the professionally run PODs are looking to transition their business models, one way or another. And certainly, if there is a way for us to take advantage of that at a reasonable price, we would absolutely do so.

Mark Landy - Summer Street

Les, would there be any pure geography there that would make more sense given the litigation or kind of the pressure from government or is it just generally throughout the country?

Leslie Cross

I think it's throughout the country. But PODs are concentrated a lot in the west and the southwest. But no, I think that everyone across the country understands that the day of PODs is numbered in most business models. I think there might be one or two business models that might survive. But I think all professionally run PODs are seriously looking at their business models today.

Mark Landy - Summer Street

And Mike, what was the med device excise tax in the quarter?

Michael O'Neill

So most companies are operating around 2.3%, we're less than 2% at this point basis, how we look at manufacturing versus marketing. It shows up in operating expenses. It doesn't' show up in gross profit. Yes, but it's just based on the U.S. business obviously.

Mark Landy - Summer Street

And then kind of, as you've seen this tremendous growth internationally, is there any opportunity to look at perhaps strategies to offset some of the pressure on gross margins? Perhaps maybe manufacturing OUS, or something along those lines, given that you have good footprints in the international markets. Unfortunately, the pricing in some of those markets is difficult.

Thomas McLeer

We are committed to our manufacturing organization here. They really are turning rapidly into a true world-class operation, but some of the products that we outsource it would make sense, and by that I mean, trays, and instruments and things to really look to partner outside the country, to reduce the cost of those. So I think that's why you can see us focus more, is trying to reduce the cost. We spend about $10 million a year instrument and trays. And so the factory here is doing an excellent job. I would like to cut that by 25% or something. So that's really our focus.

Mark Landy - Summer Street

And I guess just a last one. Mike, through lean and all of the manufacturing programs that you've got ongoing, do you think that you could get to a point where you can handle some of the compression on gross margin, internally caused that or is that too much of an ask?

Thomas McLeer

I think, obviously part of the commentary there was to highlight a lot of the activities that we see internally and to provide some color for you as you think about the opportunity for cost of goods sold. We have plenty of physical space in the facility and we have opportunities to continue to drive lean. Lean is a journey for us and we're still while we're making good progress, we're not fully deployed. So I still believe there is opportunities for us to continue to see benefit for our U.S. sourced products. But actually benefit both U.S. margins as well as international margins as well. And I think there is a fair amount of runway there for the next couple of years.

Mark Landy - Summer Street

I guess if I asked you for what your yields and scrap are right now, and what they would be next year, you'd probably laugh at me?

Leslie Cross

Yes, I probably wouldn't want to get into that level of detail right now.

Operator

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

Bill Plovanic - Canaccord

So couple of questions. Help me do the math on this, Mike. Your unit volume in the U.S. was up 10% and your pricing was down 5%. You've picked up the Phygen, which more than offset the biologics, but you were actually down year-over-year in the U.S. And I'm just trying to figure out, there had to be another headwind in there somewhere and what is it?

Michael O'Neill

So it is very simplistic to start thinking about, taking the math and working through the units and the pricing. The 10.2% unit growth was specific to our hospital metal implant. Pricing was overall hospital pricing, but we're down, as we have planned in terms of our stocking POD business.

And so you going to look at our U.S. business as a function of core hospitals, biologics and stocking, and each ones got its own dynamic. Biologics was down, because we loss PureGen and we also loss some spillover product there. Stocking was down, because we are clearly down now to just a couple of PODs.

And our overall U.S. business, the volume was up principally driven on surgeon adoption, a little bit from new products, and we took a little bit on price as well. For example, we're also up 6% in unit volumes sequentially Q2 over Q1. So if you have to break it down by the components as opposed to say, volumes up 10%, prices down 5%, why aren't you up by 5%. It's not just as simple as that.

Bill Plovanic - Canaccord

And if I remember, did you say that biologics overall was down $1 million year-over-year?

Michael O'Neill

Yes, biologics is down over $1 million year-over-year, but that's because you've got PureGen and the pull-through on PureGen last year that you don't have in Q2 of this year, and assuming that our biologics business is up.

Bill Plovanic - Canaccord

Your POD business, I think at one time, was sometimes some point between like 5% and 10% of revenues. Just to help us understand, because obviously this is a headwind, and this will dissipate and go away, and we'll get to see the organic growth of the U.S. business. Where is that POD business today as a percentage of your U.S. revenues?

Michael O'Neill

It's less than 5% of the U.S., it's less than 3% of our global business. And it's down substantially year-over-year and quarter-over-quarter.

Bill Plovanic - Canaccord

So, that is the delta I'm looking for. I'm just trying to figure out, so as we think about the business going forward, obviously that's no longer going to be in the business. And the two PODs that you have remaining, what are the odds that they remain customers?

Michael O'Neill

I don't really want to handicap that, I think, as Les pointed to in our prepared remarks that both of those have agreed to a review by counsel picked by us. I can't hypothesize on what that would be.

Leslie Cross

And based on the discussions they've had in Washington that their attorneys have represented to us. If that is the case, then I would expect to continue to do business with them.

Bill Plovanic - Canaccord

What I'm trying to get to, Les, as to you maybe have another $1 million at risk that could go away. You probably lost $1 million or $2 million with all the rest of the PODs going away. But it gives us what the base is to move off of, going forward, and with the incremental Phygen. I'm just trying to figure out where the base is?

Leslie Cross

I think that makes sense.

Michael O'Neill

You're not far off.

Bill Plovanic - Canaccord

And then my second question, just on Japan, I think that was up by 30%, including the impact of the yen. Did I catch that correctly?

Michael O'Neill

No. That was the operational increase. It's up 5% as reported. I think that those numbers are right.

Bill Plovanic - Canaccord

So I guess my question there is, I mean 30% operationally is huge. Is that sustainable, or is that stocking, or what is that, because that's a pretty big business for you?

Michael O'Neill

It is a pretty big business for us. Couple of things here, is that ILLICO SE and obviously Japan is a big minimally invasive market. ILLICO SE is doing tremendously well. We have a significant amount of certain training that goes on in there, exclusively interested in minimally invasive. We also have recently received approval and have launched Novel PEEK interbodies in Japan. So we have a good cadence of product approvals in Japan and a pretty rigorous discipline about making the most of the opportunities that are there.

Leslie Cross

Yes, that's true. And then the rest of world, as we highlighted in call, if you remember back, the company acquired Scient'x. And Scient'x, being a French company had a great global footprint. And I will say that the team is really doing an excellent job of leveraging that footprint. It's a massive competitive in my experience, they have a massive global footprint of customers and they're doing very well leveraging them. But some of them in the major markets are still selling old Scient'x products, awaiting approval of our products. And we expect both China and Brazil to make significant progress on getting approvals towards the end of the year.

So I think there is a lot of upside in the international business still. I know it sounds amazing with those numbers. Australia is just getting fired up. As I say, Japan will continue now with the interbody approvals. So we think the international business can continue to remain strong.

Leslie Cross

All right, with that no further questions, operator?

Operator

We have no further questions in the queue at this time.

Leslie Cross

Great. Well, operator, thank you. And thank you for everyone that participated. We look forward to getting back to you all and updating you on our next quarter's results. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may now disconnect. Everyone have a good day.

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