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RTI Surgical Inc. (NASDAQ:RTIX)

Q3 2013 Results Earnings Call

October 29, 2013, 8:30 AM ET


Wendy Crites Wacker - Executive Director, Global Communications

Brian Hutchison - President and CEO

Rob Jordheim - Executive Vice President and CFO

Tom Rose - Executive Vice President, Administration

Carrie Hartill - Executive Vice President and Chief Scientific Officer

Robby Lane - Executive Vice President, Global Commercial


Matt Hewitt - Craig-Hallum Capital Group

Bill Plovanic - Canaccord

Chris Cooley - Stephens

Michael Rich - Raymond James


Good day, ladies and gentlemen. And welcome to RTI Surgical Q3 Earnings Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session, and instructions will be given at that time. As a remainder, this call maybe recorded.

I’d now like to introduce your host for today’s conference, Wendy Crites Wacker, Executive Director of Global Communications. You may begin.

Wendy Crites Wacker

Good morning. And thank you for joining RTI Surgical for our third 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 Robby Lane, Executive Vice President of Global Commercial.

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 our 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, I will start with an overview of the third quarter and then Rob will review our financial results. On October 16th, we issued pre-released third quarter revenues of $54.7 million, a 23% increase over the third quarter of 2012. This includes $16.1 million of Pioneer Surgical Technology revenue from the period July 16, 2013 to September 30, 2013.

Revenue was lower than we expected and the below our third quarter guidance of $59 million to $61 million. There are a variety of factors that impacted our business, all of which we are addressing, I’ll give you color on these as we go through our lines of business.

Third quarter spine revenues increased 73% compared to third quarter of 2012. The increase was primarily related to the addition of revenue from the Pioneer acquisition. If Pioneers revenues had been included for the fully third quarter of both 2012 and 2013, spine revenue would have decreased by 5%. The legacy RTI spine business grew at a rate of 5% on strong orders from our commercial distributors.

However, we experience lower than projected volumes in the legacy Pioneer spine business due to a decline in orders from surgeons who had personally invested in Pioneer and were dissatisfied with the return on their investment and lack of surgeon engagement that they received from pervious Pioneer owners.

Moving forward, we are focused on attracting new customers and growing this business line as we implement surgeon engagement programs and introduce new products. In October, we began cost distribution of some of our allograft implants with our new direct spine channel. We anticipate some early traction on these products in the fourth quarter and more growth next year as our sales force fully engages with extended portfolio

As many of you saw in our October 16th release, we announced that we entered into a new agreement with Medtronic Sofamor Danek to process allograft implants, primarily for use in spinal surgeries. The initial term of this agreement runs until December 31, 2017 and automatically renews for successive five-year period subject to the agreement by the party.

The terms of the agreement are substantially equivalent to the previous agreement between our two companies for allograft processing and distribution. We’ve had a long standing relationship with Medtronic and they contributed 14% of our total revenues in the third quarter. Our previous agreement was set to expire in June of 2014.

Based on results from the first nine months, we anticipate that our legacy RTI Spine business will grow mid single-digit this year and as a legacy Pioneer revenue will add approximately $15 million to the overall spine business for the year.

Our sports medicine business decreased 19% compared to third quarter of 2012. We discussed earlier this year, the sports medicine team has faced competitive pressure and some uncertainty in the marketplace initiated by October 2012 FDA warning letter.

During this time, some surgeon customers began shifting to alternative solutions, including using allograft or patients on tissue, as an alternative to our implant. As we shared with you last month, the FDA did return for re-inspection September 9th and 10th.

The FDA noted the adequacy and effectiveness of the corrective actions we put in play. Upon completion of their inspection, they acknowledged the significant improvement in RTI’s overall environmental monitoring program.

All items in the warning letter were closed and no new items issues or FDA 483 observations were issued. According to FDA operation procedures, they have up to 65 days in which to issue the official close-out letter.

With the re-inspection completed, we’ve seen more customers returning and we’re continuing to bring on new accounts. Our team is focused and personally visiting each accounts to deliver the news of our re-inspection and they are committed to turning the tie customer by customer.

While this work requires diligence and time to get through, we are confident in our ability to gain back our market share overtime. We have superior quality, sterilized non-radiated implants that are needed by surgeons and their patients.

Additional strategies, return to this line of business to growth include a change in leadership and an initiation across this recent opportunity from the legacy Pioneer business.

During the third quarter, Shane Ray previously with Pioneer assumed leadership of our Sports business as Vice President of North America Sports, Extremity and Orthobiologics. We welcome Shane and our confidence that with his leadership and experience he will lead this business in the right direction.

We have taken the initial step to expand distribution of the second-generation synthetic biological line made available to us from the acquisition of Pioneer. In the fourth quarter, we should start realizing some of the cost distribution opportunities through this sports direct channel. With these changes we’re anticipating that sports medicine will grow on a sequential basis in the fourth quarter, resulting in a decline in the mid-teens for the full year 2013.

Third quarter surgical specialties revenues decreased 15% compared to third quarter 2012. The decrease in revenues is due primarily to the declines in hernia revenue from our commercial distributor and lower than anticipated revenues from our newly created direct distribution force.

Over the third quarter, our team has continued to see market demand for hernia procedures shift away from allograft towards xenograft particularly towards porcine dermis. This market shift has led to lower than anticipated revenues from our allograft dermis implant for the full year.

In March, we launched our direct surgical specialties team and introduced our human dermis implant and bovine pericardium implants. We’ve followed with the introduction of Fortiva porcine dermis implant in June.

The hospital acceptance and approval process for our direct portfolio of implant has taken longer than anticipated, which is impacted adoption of these products in the marketplace and hindered traction for our direct distribution force. In hospitals where we gained acceptance and surgeons have used the products, we received very positive feedback. We’re still optimistic for this product line long-term.

Our team is working through the acceptance process at each facility and we have adjusted our expectations accordingly. We’re anticipating some improvement in the fourth quarter from our direct surgical specialties as the portfolio begins to gain traction and acceptance through the value allowances committees in the hospital.

Based on the results from the first nine-month, we anticipate that the surgical specialty business will grow mid-single digits in the fourth quarter, but decline high-single digits for the year.

Third quarter BGS, General Orthopedic revenues decreased 3% compared to third quarter 2012. The decrease in revenues for the quarter was due to weaker than expected orders from one of our large commercial customers.

We plan to offset this decline in part to the newest addition to our direct BGS portfolio, BioAdapt Bridge. BioAdapt Bridge is a DBM-based implant that provides contoured fit to the bony defect. Its open matrix allows for bone ingrowth, as well as the exposure of a full range of proteins known to induce the signal for bone formation.

The implant was launched at the North American Spine Society meeting earlier this month in New Orleans and will be distributed through our direct spine channel. Based on results for the first nine months, we anticipate mid single-digit decline in BGS, Geo revenue for the year.

Third quarter dental revenue decreased 5% compared to the third quarter 2012, an increase in domestic dental revenues was due to timing of orders from our commercial distributor.

The decline in international dental revenues was primarily due to ongoing challenges in the European economic conditions and regulatory challenges in several countries. At this time we anticipate that dental revenues will decline in the mid-single digits for the year.

As we mentioned on our last call, we added revenue category for ortho-fixation as a result of the Pioneer acquisition. This category includes revenue from our direct cardiothoracic and commercial trauma business required from Pioneer.

Third quarter revenues from ortho-fixation were $6.7 million for the third quarter. We officially launched the Tritium Sternal Cable Plating System, our first implant launched after the acquisition of Pioneer.

The Tritium SCP System is design for closing median sternotomies following open heart procedures and enhances the stability and strength of traditional sternal closures techniques by using a unique load-sharing concept.

FDA clearance for the system was received in October of 2012 and the first clinical use occurred in January of 2013. At this time, we anticipate that the ortho-fixation will generate revenues in the mid-teens for 2013.

We continue to progress towards full commercialization of our map3 cellular allogeneic bone graft. In August, we announced the first human implantation of map3 occurred in spin procedure that was followed by the first use in foot and ankle procedure in September.

The response from early adopters has been extremely positive and we are encouraged by the overall anticipation from the market. We’ll continue a limited launch map3 to specific surgeons in the fourth quarter adding more surgeons in early 2014.

We are very excited about the opportunities for this implant, apart from map3 we’re also investing in the xenograft tendon for ligament reconstruction. For xenograft tendon, we’ve completed our one-year evaluation of implant safety in the large primate study.

The result showed that xenograft tendon is safe when compared to the control. 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 additional details on our financial result.

Rob Jordheim

Thank you, Brian. As mentioned at the beginning of the call, our financial results for the third quarter include the results of Pioneer from the period of July 16, 2013, through the end of the third quarter as well as acquisition related purchase accounting adjustment and one-time transaction expenses. I will provide more information on this later in the call.

Worldwide revenues of $55 million for the third quarter of 2013 increased 23% compared to the third quarter of 2012. Our worldwide revenues increased $16 million as a result of the acquisition of Pioneer, which closed on July 16, 2013 and includes Pioneer’s revenues for the period July 16 to September 30, 2013.

Domestic revenues of $49 million for the third quarter of 2013 increased 24% compared to the third quarter of 2012. Our domestic revenues increased $15 million as a result of the Pioneer acquisition.

International revenues, which include exports and distribution from our German, French and Dutch facilities, were $5 million for the third quarter of 2013, an increase of 11% compared to the third quarter of 2012. Our international revenues increased $1 million as a result of the acquisition of Pioneer. On a constant currency basis, international revenues for the third quarter of 2013 increased 6% as compared to the third quarter of 2012.

Net loss applicable to common shares for the third quarter 2013 was $9 million or $0.16 per fully diluted share based on 56 million fully diluted shares outstanding. This compares to net income applicable to common shares of $3 million or $0.05 per share for the third quarter of 2012 based on 56 million fully diluted shares outstanding.

Included in the net loss for the third quarter are number of charges resulting from the Pioneer acquisition. During the quarter, the company recorded a pre-tax inventory purchase accounting adjustment of $7 million or $0.07 per fully diluted share, pre-tax acquisition expenses of $4 million or $0.07 per fully diluted shares and pre-tax integration expenses of $637,000 or $0.01 per fully diluted share.

Excluding these charges related to the Pioneer acquisitions, the company reported $0.01 loss for fully diluted share for the third quarter of 2013. Gross margin for the third quarter was 37%, as compared to 49% for the third quarter 2012. The decrease was primarily due to the accrued pre-tax inventory purchase accounting adjustment of $7 million. Excluding this charge, gross margin for the third quarter was 50%.

During the quarter marketing, general and administrative expenses totaled $25 million, an increase of $10 million or 71% higher than the third quarter of 2012. The increase in expenses was primarily due the Pioneer acquisition and includes MG&A expenses from Pioneer of $9 million. As a result of the Pioneer acquisition, MG&A increased amortization of intangibles of $920,000 and one-time integration costs of $637,000.

Research and development expenses totaled $5 million for the third quarter of 2013, an increase of $2 million or 52% higher than the third quarter of 2012. The increase in expense was primarily due to the Pioneer acquisition and includes research and development expenses of $2 billion.

In addition, during the third quarter of 2013, we accrued a pretax expense of $4 million for certain fees related to Pioneer acquisition. Lastly, our tax rate for the third quarter 2013 reflects the tax benefit of 38% compared to a tax provision of 32% in third quarter of 2012.

Turning to the balance sheet, our cash position at the end of the third quarter was $16 million compared to $50 million at the end of 2012. The decrease was primarily due to the acquisition of Pioneer. On July 16, 2013, we completed our acquisition of Pioneer for $126 million in cash funded to a combination of $18 million of cash on hand and new credit facility of $60 million and a concurrent private placement of convertible preferred equity of $49 million net addition for us.

For the remainder of 2013, we anticipate being cash flow positive from operations 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 $113 million increased $37 million primarily due to the acquisition of Pioneer as compared to the end of 2012. More specifically, at the end of the third quarter on process, similar tissue and raw materials increased $6 million to $32 million, tissue and work in process increased $12 million to $40 million and implantable donor tissue and finished good increased $19 million to $40 million.

Working capital at the end of the quarter totaled $140 million, an increase of $11 million compared to the end of 2012. At the end of third quarter, we had $68 million of debt and approximately $14 million available under our revolving credit facility.

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

Brian Hutchison

Thanks Rob. Based on the acquisition of Pioneer and results year-to-date. we’re revising full year revenue guidance for 2013. We now expect full year revenues for 2013 to be between $196 million and $197 million as compared to prior guidance of $211 million to $215 million.

Full year net loss is expected to be approximately $0.28 for fully diluted common share based on 56.4 million fully diluted shares outstanding. This compares to prior guidance of full year net loss per fully diluted common share of $0.13 to $0.11.

Excluding certain acquisition related expenses, certain purchase accounting adjustments and the Biomedical Tissue Services litigation settlement charge taken in the second quarter, full year earnings per fully diluted common share is expected to be approximately breakeven.

For the fourth quarter, we expect revenues to be between $59 million and $60 million with a net loss per fully diluted common share of approximately $0.09 based on 56 million fully diluted shares outstanding. Excluding certain acquisition related expenses and certain purchase accounting adjustments, fourth quarter net loss per fully diluted common share is expected to be approximately $0.01.

As we look ahead, our focus continuous to be on the integration of Pioneer, capitalizing and cross-distribution opportunities and recovering and expanding our business in sports -- in spine, sports and surgical specialty. We are pleased with the progress we’ve made to date to integrate the Pioneer business and then firmly believe the acquisition of Pioneer advances our business across all of our key strategic initiatives.

RTI remains committed to providing safe biologic implants for using our expanded implant portfolio to reach more surgeons and patients worldwide. We’re confident that we headed in the right direction and our corporate strategy will deliver results for the long term.

We have to see some of you this quarter as we will be presenting at the Stephens Fall Investment Conference on November 12th in New York. Just prior to opening up to question, I just received notice while I’ve been on this call, that we got a fax copy from FDA that our warning letter is officially closed. So we will have the hard copy of that letter in hand today at some point in time. But this will be the last time we discussed that 2012 warning letter, will be today.

So at this time, let’s open up to questions. Turn it over to Mercy.

Question-and-Answer Session


(Operator Instructions) Our first question is from Matt Hewitt from Craig-Hallum Capital Group. Your line is open.

Matt Hewitt - Craig-Hallum Capital Group

Good morning, gentlemen. First question regarding Pioneer, you touched on it briefly, it sounds like there was some distant franchise surgeons that had also been investors just kind of listening to the guidance that you provided for the back half of the year. What -- is it 20% yet, I mean how should we’ve been thinking about the number of surgeons/customers that it sounds like walking away from the products?

Brian Hutchison

Matt, this is Brian. That’s a pretty close testament to the reality of the situation for the surgeons that left immediately after the transaction closed and they were informed as what they were going to get. And we do not anticipate recovering them, we anticipate replacing them.

Matt Hewitt - Craig-Hallum Capital Group

Okay. I mean, I would assume that that’s not going to be an overnight transition that it’s going to take several quarters and years to get that type of -- customer base back, is that a fair assessment?

Brian Hutchison

No. It’s not fair. We were overrun at Nas frankly with competitive distributors coming to see us, because the line we offer which is high quality metal, implants and instruments, second generation synthetics, allograft, xenograft and also stem cell opportunities with our MAP3 programs.

So we -- because we can take the instruments back from the surgeons we lost and redeploy them, we will begin that. We’ve already begun that process and we’ve already converted a couple of surgeons. We will be converting (inaudible) as fast as we can. We had a plan and obviously in place to grow the business. So we will be implementing that plan and we expect to recover this business over the next couple of quarters, not years. This will come relatively fast.

Matt Hewitt - Craig-Hallum Capital Group

Okay. That’s I guess, that’s great news, great development. One last for me, then I’ll jump back in queue. Could you give us -- where does your direct sales for head count sit today versus maybe where you started the year and what are your expectations exiting the fourth quarter?

Rob Jordheim

Matt, this is Rob. The direct sales force right now in sports is approximately 100 folks. And as we talked about in general surgery we’re at about 14 W2 reps for that business and then the spine business, we have a roughly 95 to 100 distributors with more representation with feet on the street, that’s just the contract with the distributor. There maybe more rep selling within that distributor principle.

Matt Hewitt - Craig-Hallum Capital Group

Okay. Any idea -- do you have handy what that was at the beginning of the year? I’m just trying to see what the pick-up were?

Brian Hutchison

They are fairly stable, Matt. This is Brian. They are fairly stable.

Matt Hewitt - Craig-Hallum Capital Group

Okay. All right. Thanks guys. I’ll jump back in the queue.


Our next question is from Bill Plovanic from Canaccord. Your line is open.

Bill Plovanic - Canaccord

Hi. Great. Thanks. Good morning. On that rep question, since the acquisition was announced with Pioneer, what is the rep turnover looked like for that business?

Rob Jordheim

In the spine area, which remembers about, it was less than half of the overall Pioneer business. We may have lost a few rep like less than 10 and we’ve actually been approach trying more than that to come and join. And we’ve added a couple already.

Bill Plovanic - Canaccord

Okay. But -- I mean as for the down 20% that’s where we’re starting and that’s how we should think about Q3, and then as you add reps in MAP3 launches and you bring new reps in the kind of start to built from there. Is that the way to think about the spine business going forward?

Brian Hutchison

It is but just not MAP3. We also have the nanos product line and all those raw materials that we see with Pioneer actually. We are not marketed and offered properly in distribution and there is a lot of excitement building around those as well.

So it’s not just MAP3. It’s really developing a cohesive effort to offer the metals plus the biologics, plus the -- all the allograft and xenograft materials as well. So that’s what being -- that’s what really helping to drive all the attention towards it.

Bill Plovanic - Canaccord

Okay. And then in terms of the sports medicine business, I think one of the comments was, you expected to be up sequentially. Obviously, that business has had some challenges since the warning letter, now that’s obviously been resolved. How do we think about that? How much of that business "turns back on" with the warning letter officially resolved, versus is this more kind of trench warfare in getting those accounts back to using your product?

Brian Hutchison

I would think it’s the latter, Bill. It’s more about going back account-by-account by account, because there only a few accounts left who really needed to see that close-out letter and that they will be seeing it and that may have a slight impact. The bigger issue you have is, this basically took a year and in that time, the bulk of the business that they shifted, they shifted towards allograft and those are -- that’s a challenge that we overcame a long time ago to turn these guys who were allograft users into fans of BioCleanse tendons. They’ve gone back to allograft and they’ve been using it for up to a year. So it’s back to a conversion process which happens, one-by-one by-one and that’s just where it’s going to have to be attacked.

Bill Plovanic - Canaccord

And then the last question. Just surgical specialties, obviously as you shifted to direct model, your partner shifted away from you. At what point does that business to Davol or Bard, be 100% not an impact anymore, basically what is that going to zero or do you expect that go to zero? Or what kind of base level do you expect that component as a business to hit? That’s my question. Thank you.

Brian Hutchison

Bill, we don’t expect it to go to zero at all. In fact, we expect year-to-year, their business to be fairly consistent as they go through but the shift is they are using more and more breast reconstruction and that’s where they are using our materials and that market for them continues to grow. So at this point in time for 2000 -- the rest of this year and next year, I don’t expect it to decline much at all.

Bill Plovanic - Canaccord

The decline, I mean you had the decline year-over-year in Q3. So, I guess what I’m getting at is, when do we hit that base number because, given the numbers you had, it had to be down a bit sequentially if the direct hernia repair business was up then that had to be coming -- the partner had to be coming down? I’m just trying to figure out the cross out point.

Brian Hutchison

We think we’ve crossed it, Bill. We think in the third quarter we hit the bottom of the cross.

Bill Plovanic - Canaccord

Great. Thank you.


Our next question is from Chris Cooley from Stephens. Your line is open.

Chris Cooley - Stephens

Thank you. Good morning. I appreciate you taking the questions. Could you maybe touch back on the point that Bill was making? You’ve competed there in the sports med as you alluded for a year and your primary competitor was also, wonder, a warning letter. I’m just trying to think about either the politics here or just what the difference is kind of punch list items are for these accounts to turn back on versus a competitor in that space? You could just kind of comment broadly.

And then just as a quick follow-up auto -- the ortho-fixation business, now clearly did a lot better than what we were thinking about in the quarter. So, now you’ve mentioned that cardio, the cabling system there is being potentially much better driver than I think all of us who attributed its potential. Help us think about where that can go in the year ahead?

Brian Hutchison

Well, let me address first the warning letter. And the way to think about this properly is in the span of the time that we got our warning letter, to my knowledge there were a total of six warning letters issued for tissue processing companies that it really impacted the entire marketplace and created a confidence issue inside of doctor’s minds and hospitals minds and that drove a lot of people towards autograph. That’s a bigger issue than a competitive issue going against a given competitor because at this point in time, it’s not about us not having a warning letter and somebody else having one, obviously it’s a new initiative, that’s a competitive advantage.

But the playing field right now is such that you’re really going against trying to ensure doctors and hospitals that tissue is safe. That’s really what their main concern is and once they are confident, they’ll continue to use it. They want to know two things that the supply is safe and that we can consistently supply them. We have to go and prove that and unfortunately the best way to do that is account-by-account, whether it’s a competitive account or not, we will -- we have targeted very specific areas we want to go to rebuild our business and we will absolutely attack and try to build it as fast as we possibly can.

The good news is we have tissue supply, that’s the good news. So we’ve continued to work in the donation world to ensure that we do have supply and we’ve continued to do that. We will be in a good position to hopefully grow this business beginning this quarter and continuing on from here and put this in the rearview mirror. It’s going to take some time, but I think it’s going to -- that that part is going to work.

In terms of the ortho-fixation business, it’s a very, very good business. I mean that is actually one of the jewels of Pioneer that frequently gets overlooked, both from the trauma side, where the big customers are Zimmer and Synthes and doing a great job with those product lines and the cardiothoracic business is extremely exciting.

We’ve only been in the marketplace for a short period of time. We’ve built a nice revenue base with very, very small amount of talent there and will be continuing to invest in that area to rapidly grow that space for the company over the next year or two years moving out.

Chris Cooley - Stephens

Appreciate that color. I could squeeze one more and then I will get back in the queue too. Brian, could you just update us on your thoughts for the new products and then specifically Fortiva and map3 in terms of what type of revenue contribution we might see from those products combined in the 2014 period.

Maybe not wanting to give 2014 guidance here, but in the past I think you guys have put together kind of a nominal number out there. Has that changed just based upon the different market dynamics that you are seeing in the integration issues with Pioneer, or do you still think that number is doable or possibly exceedable?

Brian Hutchison

Well, certainly, let me address both of those. First, I will start with Fortiva. While we are very disappointed that the sales didn’t start launching off in the third quarter like we all expected and hoped. I'm extremely pleased with the facilities we are seeing used and the results we are seeing now in the fourth quarter.

We are beginning to see those surgeries happen now on a daily basis. And we are beginning to see more and more and more value add committees begin to approve the product. So we’ve gone from maybe five or ten approvals. We are approaching -- we’ve got 75 in the queue. So as those get approved then you’ve got a license to hunt. You can go in and work with the surgeons to try to find the appropriate case.

The good news is we now have surgeons that are using Fortiva and like it. And they are willing to share that news with their friends. So, I’m very confident that this is going to grow, not to the numbers that we’ve put out at the beginning of the year, but I’m excited that it’s going to happen and it’s going to contribute significantly to us into 2014, 2015, and beyond.

On the Map3 side, a quarter ago we knew we were closing the Pioneer transaction and we knew that gave us access to spine doctors. We did our first case in the spine, which as you’ll recall wasn’t planned. Our first case was actually planned for foot and ankle and actually did happen in September and the doctor there was very excited with the product. But we also implanted in the spine and we’ve gotten a very exciting group of surgeons, if you will, who really want us to go fast.

So this is still -- in our view it’s a controlled launch and will be through to the balance of this year and frankly will be through the first one or two quarters next year as we build enough supply on the shelves to open it up. So it’s a good news, bad news situation. On the good news side, I’ve got far more demand. On the difficult side, I don’t have enough supply to address that demand right now. And from what we have seen that demand is going to be significantly bigger than we anticipated prior to owning a spine business.

So we now are changing our view of what our requirements are for 2014, 2015 and beyond and they are significantly larger. So that’s the good news. Eventually, this is going to contribute in a big, big way. In terms of giving numbers, I don’t think we are prepared to give any numbers right now for these products for ‘14. We’ll try to do that on our call when we do that at the end of January.

Chris Cooley - Stephens

Thank you.


Our next question is from Jayson Bedford from Raymond James. Your line is open.

Michael Rich - Raymond James

All right. This is Michael Rich calling in for Jayson. Can you hear me, okay?

Brian Hutchison


Michael Rich - Raymond James

Great. Thanks. You’ve been talking on your last comments about general surgery, is there anything specific that you’re either actively doing or plan to do as it relates to maybe more clinical data or more sale reps in the rep side that will enable you to gain more attraction in that market, or is it more just a function of timing that you’re comfortable with the ramp so far in 4Q?

Brian Hutchison

We’ll ask, Carrie Hartill, our Chief Science Officer to answer that question.

Carrie Hartill

Hi. I think the question is about are we planning to develop clinical data and the answer is yes, we are, both from full (inaudible), as well as the more informal case studies and retrospective information which will come through much more rapidly. But we don’t believe that success of the uptake of that product contingent on clinical data at this time, initial feedback from surgeons that have handle this products and the loss effect that has product is that they feel that it has some superior characteristics in terms of ease of use, that’s driving them to adopt the product as soon as they are allow to by their hospitals.

Michael Rich - Raymond James

Okay. Great. And then I think I heard correctly, you said you had roughly 14 direct reps in that market right now, was wondering where you planed that number to go over the next year or so?

Brian Hutchison

Yeah, over the next year or so, we plan to double that number as far as direct reps in general surgery and the goal at the end of say three to five years is to have approximately 80 to 85 reps.

Michael Rich - Raymond James

Okay. Great. And last thing, can you give us an idea what the overall percent of sales from direct was in the quarter?

Brian Hutchison

It’s approximately 50% between direct and what we consider the commercial businesses.

Michael Rich - Raymond James


Brian Hutchison

And I think that are global.


Thank you. I’m not showing any further questions in the queue. I will now like to turn the call back to Brian Hutchison, President and CEO for closing remarks.

Brian Hutchison

Thank you, all for joining us. We will see many of you in coming weeks and we will speak with all of you in about 90 days. Thank you.


Ladies and gentlemen, this does conclude today’s call. You may now disconnect. Thank you.

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