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Globus Medical Inc. (NYSE:GMED)

Q4 2013 Earnings Conference Call

February 26, 2014 05:30 PM ET

Executives

Ed Joyce - Director, IR

Dave Demski - President and COO

Rick Baron - SVP and CFO

David Paul - CEO

Analysts

Kyle Rose - Canaccord Genuity

Matt Miksic - Piper Jaffray

Bob Hopkins - Bank of America

Matthew O'Brien - William Blair

David Rollman - Goldman Sachs

Robert Marcus - Leerink Swann

Steven Richman - Oppenheimer & Company

Operator

Welcome to the Globus Medical’s Fourth Quarter and Year-End Earnings Call. At this time all lines will be on mute and a Q&A session will be held after the prepared remarks.

I will now turn the call over to Ed Joyce, Investor Relations Director. Please go ahead.

Ed Joyce

Thank you for being with us today. Joining today’s call from Globus Medical will be David Paul, Chairman and CEO; Dave Demski, President and COO; Richard Baron, Senior Vice President of Finance and CFO. I will now read our required legal disclaimers. During this call certain items may be discussed that are not based entirely on historical facts. These items should be considered forward-looking statements and are subject to many risks, uncertainties, and other factors that are difficult to predict and may affect our businesses and operations. As a result, our actual results may differ materially and adversely from those expressed or implied by our forward-looking statements.

A discussion of some of these risks, uncertainties, and other factors are set forth in our Form’s 10-Q and 10-K on file with the SEC. These documents are available at www.sec.gov. We undertake no obligation and do not intend to update any forward-looking statements as a result of new information or future events or circumstances arising after the date on which it was made. The financial information discussed in connection with this call reflects estimates based on information available at this time and could differ materially from the amount ultimately reported on 2013 Form 10-K.

Our revenue, earnings, operating margins, cash flows and similar items are sometimes expressed on a non-GAAP basis and have been adjusted to exclude certain items, including among other things interest income and expense and other non-operating expenses, provisions for income taxes, depreciation and amortization, stock based compensation, changes in the fair value of contingent consideration in connection with business acquisition, provisions for litigations, loss or income and with respect for the computation of free cash flow, purchases of property and equipment.

The comparable GAAP financial information and a reconciliation of non-GAAP amount to comparable amount can be found in the tables included in today’s earnings release, which is available on the Globus Medical Investor Relations web page at www.globusmedical.com.

Before turning the call over to Dave Demski, I would like to provide a brief update regarding the filing status of our Annual Report on Form 10-K. As noted in our press release we became a large accelerated filer on December 31, of last year, which means that the due date for filing our Form 10-K is Monday, March 3rd. As a result of this change in status, we no longer qualify for certain exemptions provided under the JOBS Act relative to Section 404(b) of the Sarbanes-Oxley Act and we will be required, for the first time, to include in our 2013 10-K a report from KPMG, expressing its opinion as to our internal control over financial reporting.

KPMG has not yet completed its procedures relating to its audit of our internal control over financial reporting. As a result, we intend to file for a 15 day extension to file our Form 10-K. The Company does not however anticipate any changes to the unaudited numbers presented during this call.

I will now turn the call over to Dave Demski, our President and Chief Operating Officer.

Dave Demski

Thank you Ed and welcome to everyone on the call. We finished a strong 2013 with a tremendous fourth quarter. Worldwide sales for the fourth quarter of 2013 were $115.2 million, an increase of 14.6% over the fourth quarter of 2012. On a sequential basis the fourth quarter grew by $8.1 million or 7.5%. Sales in our international operation reaccelerated in the fourth quarter, growing by 28.7% over the fourth quarter of 2012 while U.S. sales were a strong 13.3% growth.

Worldwide sales for the year were $434.5 million, up 12.6% over 2012. International sales for the year grew by 24.5%. U.S. sales increased by 11.5%. 2013 was also a record sales force recruiting year and we added more new territories than at any time in history. Adjusted EBITDA for the full year was an outstanding 34.7%. The impact of the medical device excise tax was about 1.7%. Thus without the device tax, our adjusted EBITDA for 2013 would have been 36.3%. This is approximately a 90 basis point improvement over our 2012 adjusted EBITDA of 35.4%.

Even though our profitability profile is already one of the strongest in orthopedics, we were still able to achieve significant operating leverage in our business due to our strong growth disciplined expense control. Non-GAAP fully diluted earnings per share, adjusted for the impact of litigation loss provision were $0.25 for the fourth quarter and $0.90 for the full year.

We produced free cash flow of $69.8 million in 2013 and ended the year were $275 million in cash, cash equivalent and marketable securities. We remain debt free. Our international team had a very strong fourth quarter. We spent most of 2013 focused on growing sales and improving efficiencies in markets we have already entered and we showed strong improvement on both fronts in the fourth quarter.

The overall spine market continues to show modest and steady improvement. The three Ps, pricing, procedures and PODs remained relatively stable. Pricing pressure remained in the low to mid-single digit in the fourth quarter. Payer pushback continues for selected procedures in certain payers but has not changed materially from earlier this year. The reason was [ph] that were not covered at non-allograft spacers in cervical effusions does not cause a material change in overall performance. Reports from the OIG on POD for this year are beginning to have some impact as we have recently been notified of several hospital systems who have adopted will adopt no-POD policy.

We had a great 2013 capped by an outstanding fourth quarter. We executed well on our strategy of introducing innovative technology and growing our sales both present in the U.S. and abroad, while maintaining discipline in our spending. This produced outstanding results in terms of sales growth, profitability and cash flow.

I will now turn the call over to Rick Baron to provide detail on our financial results and guidance for the year.

Rick Baron

Thank you, Dave. Today. I will review our financial performance for the fourth quarter of 2013 as compared to the fourth quarter of 2012. For key elements of the income statement, balance sheet, and statement of cash flows, I will also highlight certain aspects of the performance of the Company for the full-year 2013 as compared to 2012.

Our worldwide sales for the fourth quarter of 2013 were $115.2 million, a 14.6% increase over the fourth quarter of 2012. Innovative Fusion sales increased this quarter to $67.1 million or by 15.4% from the prior year's quarter, while Disruptive Technology sales increased this quarter to $48.1 million, or by 13.6% from the prior year’s quarter. In past quarters we have seen a much higher growth rate in Disruptive Technology, as compared to the growth rate in Innovative Fusion.

There are two primary reasons that the growth rates are different this quarter. The first reason is consistent with past explanation and relates to the conversion of business associated with Newhard. If we are successful in converting a surgeon’s business, the related sales will generally reflect the overall mix of the surgeon’s procedural breakdown of Disruptive and Innovative. Secondly our recently launched CREO pedicle screw system is categorized as Innovative Fusion, contributing to the growth in that segment this quarter.

Sales in the United States for the fourth quarter of 2013 grew to $104.1 million, or by 13.3% while international sales grew to $11.1 million or by 28.7% from the prior year's quarter. Overall growth in sales was attributed to expansion of both domestic and international territories and a greater penetration in existing territories. During 2013 we expanded our international footprint to a total of 28 countries, served by combination of exclusive direct sales force and exclusive distributor networks.

Gross profit for the fourth quarter of 2013 was $88.5 million or 76.8% of sales for the current year's quarter as compared to $81 million or 80.5% of sales from the prior year's fourth quarter. The medical device tax accounted for $1.9 million or 1.6% of fourth-quarter gross profit. In addition as we’ve indicated in prior calls, gross margins relating to the international, Algea, and Biologics are at lower rates than most products sold in the United States.

Research and development expenses this quarter were $6.4 million or 5.6% of sales as compared to $7.2 million or 7.2% of sales for the same period of 2012. The dollar spend was lower than in prior years due to the timing and process associated with ongoing trials and development of new products.

Selling, general, and administrative expenses were $45.7 million or 39.6% of sales, compared to $44.6 million or 44.4% for sales for the prior year’s fourth quarter. The dollar amount of the spend for SG&A expense was in line with prior quarters. Our goal is to grow or expenses in these areas at a slower rate than our sales growth thus achieving operating leverage. Our continued sales growth particularly the large sequential jump we saw from Q3 to Q4, combined with our disciplined approach to expense control produced the large drop in SG&A as a percentage of revenue in Q4.

Adjusted EBITDA for the fourth quarter of 2013 was 37.3% of sales or $42.9 million, as compared to 34.6% of sales or $34.8 million in the prior year's quarter. The income tax rate for the current quarter was 34.1%. Net income for the fourth quarter of 2013 was $21 million as compared to $20.8 million in the prior year’s quarter. Net income for the current year quarter was impacted by $3 million due to a provision for litigation.

Earnings per fully diluted share were $0.22 for the fourth quarter of 2013 and $0.22 for the prior year’s quarter. Non-GAAP earnings per diluted share which excludes provisions for litigation was $0.25 for the fourth quarter of 2013, compared to $0.22 for the fourth quarter of 2012. Fully diluted share count for the fourth quarter was $94.6 million and $93.5 million as of December 31, 2013 and 2012 respectively.

Worldwide sales for the year ended December 31 2013 were a record $434.5 million, which was $48.5 million or 12.6% greater than in 2012. Innovative Fusion was $254 million in 2013 and grew at a rate of 6.4% compared to the prior year's sales. Disruptive Technologies was a $180.5 million, which grew at a rate of 22.5% over the prior year sale. U.S. sales for 2013 grew to $396.6 million or by 11.5% while in 2013 international sales grew to $37.8 million or by 24.5% from the prior year’s quarter.

Gross profit for the year was $334.1 million or 76.9% of sales as compared to $310.8 million or 80.5% of sales in the prior year. The medical device tax accounted for $7.2 million or about 1.7% of the full year gross profit. The gross profit margin percentage for the year was also affected by sales mix discussed above and the write-off associated with litigation and new product launches discussed in earlier quarterly calls.

Research and development expenses for the year were $26.9 million or 6.2% of sales, as compared to $27.9 million or 7.2% of sales for 2012. The dollar spend was lower than the prior year, due to the timing of cost associated with ongoing trials and development of new product. 2013 selling, general, administrative expenses were $182.5 million or 42% of sales, compared to $168.9 million or 43.7% for sales compared to 2012. The growth in the expenses of $13.7 million for the year was due primarily due to the expansion of the U.S. sales force. The improvement as the percentage of sales of 1.7% was primarily due to operating leverage, particularly in OUS and Algea area.

2013 annual adjusted EBITDA for the year was $150.5 million or 34.7%, as compared to a $136.6 million or 35.4% for the prior year. The income tax rate for 2013 was 32.7%, as compared to 35.6% from the prior year. This is primarily due to the effect of litigation and the R&D tax credit reinstatement in 2013.

Net income for the year was $68.6 million, as compared to $73.8 million for the prior year. Net income for 2013 was impacted by $15.8 million provision for litigation. Fully diluted earnings per share for 2013 were $0.73 for the year compared to $0.80 for the prior year, while non-GAAP earnings per diluted share, which excludes the provisions for litigation was $0.90 in 2013, compared to $0.79 for 2012.

Fully diluted share count for the year was $94.2 million and $92.2 million for the years 2013 and 2012 respectively. Cash and cash equivalents and marketable securities balance was $275.5 million as of December 31, 2013 compared to $212.4 million as of December 31, 2012.

Operating cash flow for the year was $93.5 million and free cash flow, as defined as operating cash flow less capital expenditures was $69.8 million. We remain debt free. Our guidance for the year 2014, as we indicated in January is for sales in the range of $480 million to $486 million, earnings per fully diluted share of $0.90 to $0.92 per share. The anticipated tax rate is 34.5%. Unless Congress enacts the research and development tax credit, this rate will be affected by seven-tenths of a percent for 2014. Also as we indicated in our guidance this year in mid-January and our announcement regarding Excelsius, the earnings per share is net of an anticipated spend of $6 million to $9 million for that project.

I will now turn the call over to David Paul, Chairman and CEO for closing remarks.

David Paul

Thank you, Rick. Good evening everyone. 2013 was an outstanding year for Globus Medical. We grew our sales by 12.6%, reaching $434.5 million while maintaining our strong profitability profile with full year adjusted EBITDA of 34.7% and free cash flow of $69.8 million. We launched 16 new products in 2013 and completed the acquisition of Excelsius Surgical.

We also had a record number of sales force expansion, adding more new territories than any time in our history and believe that Globus continues to be the destination of choice for the best sales talent in the industry. This performance was a result of consistent, sustained execution of our strategy, of combining robust product innovation and continued sales force expansion with disciplined expense control. I am very proud of the performance of our team in 2013 and continue to be confident in our ability to produce industry leading growth and outstanding profitability in 2014 and beyond.

I would like to speak about a few highlights from 2013. First, we launched a total of 16 new products during the year, including several key products such as a next generation CREO pedicle screw platform, the laterally expanding LATIS Spacer, FORTIFY I integrated corpectomy spacer and KINEX Bioactive bone void pillar. We believe these key products provide distinct advantages in the marketplace over current systems, reinforcing our focus on innovative designs that aid the surgeon in achieving better patient outcomes through traditional or Minimally Invasive Surgery techniques.

CREO for example, is a comprehensive universal medical school platform for deformity, degenerative and trauma conditions with top loading, side loading and closed head design for unparalleled versatility of construct building in the operating room. Initial CREO launch began in 2013 and various additions are planned and will continue to be rolled out in 2014.

LATIS is the first unitary interbody fusion device of its kind to offer the benefits of an ALIF footprint with a posterior approach. FORTIFY I incorporates integrated screws into our expandable Globus cage corpectomy platform, and allows for various approach options.

We continue to build our biologics portfolio with the introduction of KINEX Bioactive, the first of a suite of Bioactive products with the osteostimulative properties of bioglass that amplifies cellular activity responsible for bone formation. In addition to bioglass KINEX contains collagen for scalp holding and hyaluronic acid to aid in angiogenesis. Our product development pipeline across all segment continue to remain robust and on track to launch more exciting new products in 2014.

We acquired Excelsius Surgical, a robotics company developing a next generation surgical robotic positioning platform for spine, brain and other therapeutic markets. The Excelsius GPS system is intended to be a robotic surgical aid for navigating and facilitating surgical access, implant sizing, positioning and placement. The system is designed to enable surgeons to perform procedures more quickly and with greater accuracy, safety and reproducibility than is currently available in the marketplace today.

Excelsius GPS will combine robotics, navigation and imaging with a goal of enabling surgeons to perform these robotically assisted minimally invasive surgical procedures that will result in better surgical outcomes for the patients and be more cost effective for healthcare providers with the added benefit of reduced radiation exposure for patient, surgeons and operating room personnel.

Excelsius fits well with our overarching development efforts to focus on products design, to minimize tissue disruption, blood loss and surgical complications and we believe that the use of advanced technology solutions such as the Excelsius GPS system will enable surgeons to consistently achieve better surgical outcomes. Trends in the adoption of navigation technology, as well as advancements in imaging only serve to reinforce our belief that this technology will play an increasingly greater role in all surgery of the future. We’re very excited by the strategic fit and potential of this technology and believe that this acquisition positions Globus to be a leader in this important future growth area.

So in summary we continue to execute on our long-term growth strategy of rapid new product introduction and U.S. and international sales force expansion, while maintaining a continued focus on profitability and cash flow. We remain excited about our prospects in 2014 as we continue to execute on our disciplined strategy of profitable growth.

We are now happy to take any questions.

Question-And-Answer Session

Operator

[Operator Instructions]. And your first question comes from Bill Plovanic with Canaccord.

Kyle Rose - Canaccord Genuity

This is actually Kyle on for Bill. So it sounded like obviously Innovative Fusion had a strong a quarter. It sounded like it was a bit if mix between the new product launch in CREO as well as some of new reps coming onboard. Just wondered if you could break that down and kind of frame that for us, how should we think about that from a product standpoint and then also from the actual sales force contribution?

Rick Baron

Kyle, its Rick. The traditional way we've had this over the course of period of time we've been out there in public has been that, Disruptive has grown clearly at higher double-digit rate whereas Innovative Fusion has grown at a lower percentage. Generally when upticks and one down ticks there is concern from you'll and what we wanted to do is make sure that you understood that some of that is -- some of that growth is naturally due to increases in the number of reps. We said that we had a good year last year. We still haven’t seen the full value of those reps and won't see that until probably later this year and maybe even into sometime next year. So depending upon the [indiscernible] they are over, that rate of growth may fluctuate just a little bit. In addition one new product that we introduced, which is the big one happens to be CREO. So you’re probably going to see Innovative Fusion be little bit higher than it has been historically but we’ll point out reasons why as we go forward.

Kyle Rose - Canaccord Genuity

Great and then just also touching on, obviously the cervical disc market continues to be a focus for investors and you’ve got precariously [ph] not been on the market for 12 months post-approval. Just wondered if you can give your updated thoughts on for that product opportunity and also that market as we enter 2014 and some of the catalysts to expect going forward?

Dave Demski

This is Dave, Kyle. It still continues to be a challenge just in terms of reimbursement. It’s a fight in some cases to get it covered. And then the surgeon reimbursement is also a factor we believe, because of their pay for the surgery is less than they work for a Fusion surgery. So with both of those things, it’s still bit of an uphill battle. We’re happy with the progress but it’s slow.

Rick Baron

And Carl just as a point of addition, that’s also fitting in nicely as one of the close to 30 products that we introduced over this two-year period, that’s one of them.

Operator

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

Matt Miksic - Piper Jaffray

I just wanted to follow up on commentary about the sale force. Just maybe if you could expand on a couple of things about that? The record number of new territories -- maybe why is there a motivating driver this year heading into the cycle of growth that you felt that you were ready to take on or is it just a matter of getting larger? And then secondly, if you could maybe give us an update as to where you stand in terms of direct versus indirect? And then I have one follow-up.

Dave Demski

Matt, this is Dave. I would say that there wasn’t anything special about this year. I do think that our status as a public company and some of the publicity that's brought has enabled us to recruit some of the better reps who maybe -- whereas you got to come over in the past, I think our reputation continues grow. As an innovator, we've got a great comp model for folks that can drive the business. So it’s nothing internal in terms of more emphasis or investing more. We’re recruiting as many qualified candidates as we can and continue to see that as an important part of our strategy. We were just more successful in execution this past year. And I think the second part of your question was on the balance and there is no material changes from where we were but we’re not going disclose that mix on a go forward basis.

Matt Miksic - Piper Jaffray

Okay that’s fair enough and then just one if could on -- on just how you feel about the market? We’ve heard the question come up quite a bit during earnings that -- very strong across finish across the board or for many players anyway and some churn about weather having an impact on the first quarter. Maybe if you could -- if have anything you could share with us and how you think the pacing of the year might look, improvements throughout the year or seasonal just in Q1 or anything like would be very helpful?

Rick Baron

Sure that was a good question. We have definitely been impacted today by the weather. We have a fairly high concentration of business in the southeast through the Carolina and Atlanta. They were hard hit a couple of times. And then up through the northeast we're strong as well. So we think it’s impacted us by about $2.5 million to $3 million to-date. We’re not suggesting our year is going to be any different. We just think that as those patients get back in the flow, that will make that up over the course of the year but it takes a little while at times because surgery schedules are full. Sometimes guys are booked out for six to eight weeks. It’s difficult for a patient to get back in and then that produces a ripple effect. So I think it will take us at least two quarters, if not through the end of the year to make that up.

Operator

Your next question comes from Bob Hopkins with Bank of America.

Bob Hopkins - Bank of America

A couple of things. Just to maybe finish that thought on the weather and the impact in Q1, anything else that you guys would like us to be aware of as far as the pacing of the year goes? Any other things in the first quarter that we should be aware of or is really the out of the ordinary thing that you want to discuss the weather?

Dave Demski

That’s the only thing. That’s been difficult for us to sort of get a handle on the year as well because of the way that how severe the weather has been, but that’s the only thing that we can see at this point.

Bob Hopkins - Bank of America

And then Dave, I was curious about your comments about PODs in a number of hospitals, either no longer doing business with those entities or putting them on notice? And I know I saw something from ACH today that looked like they were one of those hospitals group but I was wondering if you can expand on that a little bit and maybe specifically who are the hospital groups that you’re hearing from and just a little more detail on what’s going on with PODs.

Dave Demski

Sure, that was the one that we were most impressed, with given their stature, given their reach and being a bellwether sort of organization. We thought that was really significant. And it was a very strong policy. It really didn’t leave a lot of wiggle room for PODs to exist. I know it’s not going to be implemented so in the middle part of the year. But that policy is similar to things we’ve seen in other chains. I am really not at a liberty to speak about them from a confidentiality standpoint but very favorable. They have to enforce it, but we were encouraged by how serious they are taking it.

Bob Hopkins - Bank of America

And what's your estimate as to the amount of dollars flowing through PODs in spine now in the United States?

Dave Demski

It’s hard to tell Bob, but I think it's impacted our business from -- the business that we have lost over the years, to probably 10% to 15%. I don’t know if that’s the same ratio that that Medtronic or the [indiscernible] would have but that’s the impact that we have seen.

Bob Hopkins - Bank of America

Okay. And lastly from me, you mentioned litigation a few times and I was wondering if you could just kind of update us on any new developments on the litigation front that you think are relevant?

David Paul

The one thing that we can update here is on the Bianco litigation that we have disclosed in the past. The jury returned the verdict against us and that was what Rick had mentioned earlier on. That was for past sales. It was for trade secret violations. So it is not yet known what if and any future liability will be there. We of course will appeal this decision and nothing else to update on any of the other litigation.

Bob Hopkins - Bank of America

At this point you don’t think that there is an impact on go forward revenues?

David Paul

It is hard to say because it’s still ongoing and the judge has to decide if there is any future liabilities in that.

Operator

Your next question comes from Matthew O'Brien with William Blair.

Matthew O'Brien - William Blair

You touched on Innovative Fusion a little bit in your commentary on Q4 but the Disruptive slowdown Q4 was pretty meaningful, even though you had a pretty difficult comparison. Is that really your existing sales force, that’s been there for a while focusing on more on the CREO roll out, or is there something else out that’s going on right now as far as that business goes?

Rick Baron

I don’t look at it as slowing, [indiscernible] Matt. It's Rick. It’s really ratio of what comes in, and because you had some bolus of new people come in and the new people come in due to the split of traditional business is a 40% pedicle screw which would be Innovative Fusion. So when you get a bolus of that with a new person, you’re going to see that number tick up because it wasn’t in that same-store sales the prior year. So it’s a little bit of math. We don’t view it as having slowed down. The other point to make is that from an overall growth perspective, this is a fairly significant growth from a sequential quarter and a pretty fine uptick for what [indiscernible] $2 million fee. So all of those things add to the way the math is done.

Matthew O'Brien - William Blair

Okay, fair enough.

Rick Baron

I think that was responsive.

Matthew O'Brien - William Blair

No, that’s helpful, just along those lines, so as we start to model out for ’14, specifically between Innovative Fusion and Disruptives, does it make sense for the first half of the year; Innovative Fusion to go faster than Disruptive, and maybe as those newer reps get the curve [ph], then they start pulling through some of the Disruptive Technologies for that; that growth rate that's split in the back half to be stronger in Disruptive versus Innovative Fusion?

Dave Demski

I think we're going to see the same two factors Rick alluded to. Particularly the first half of the year, both CREO is going to continue to -- we hope continue to get some traction and then as we’ve added the new reps even in ’13, they’re going to continue to grow, we hope so. I think you will see the trend more like the fourth quarter as we go into the first half of the year.

Matthew O'Brien - William Blair

Okay just one more, a real quick, and I’ll get out of hair. Algea, I know this was kind of a year for you guys, you’re expecting to see some good growth out of that business. Just any sense on where we stand from a traction perspective and then and an outlook for ‘14 and beyond?

Rick Baron

Again we're not going disclose those numbers individually but we grew significantly this year and we have pretty strong plans for 2014 as well.

Operator

Your next question comes from David Rollman with Goldman Sachs

David Rollman - Goldman Sachs

I wanted just to come back to Excelsius a little bit. You talked about that in your prepared remarks, but maybe you could just give us some sense on the timelines and what are the key milestones you should be watching to assess the development of the technology?

David Paul

Thank you David. As we mentioned in the press release we expect this product to come to the U.S. market sometime in 2016, like our most products -- all products in our development pipeline, we really don’t disclose anything beyond that till we actually get the product out. But we are working to make sure that we can make the timelines fix. So sometime in 2016 is when you can expect the product launch and we won’t be speaking any more about intermediate milestones on that.

David Rollman - Goldman Sachs

And so would that include any clinical data? Should we not expect to see anything until the commercial launch?

David Paul

Yes.

David Rollman - Goldman Sachs

Okay and then maybe just coming back to your cash position, it sounded like you made it very clear a couple of times in the call that you used your debt as a positive attribute. Maybe if you could just help us think about what are the opportunity to deploy that capital in a more efficient way, given where interest rates are and given how fragmented some segments of the supply market look to be. What are your thoughts to sort of start putting that cash to work in a more efficient manner.

Dave Demski

Dave, this is Dave Demski. We’re actively looking at opportunities all the time. We’re not going to chase it over, pay for something just because we have a strong cash position but we’re very interested in opportunities that would add to our technology portfolio or expand our footprint and we’re always looking at them. We’ve already pulled the trigger on a select few at this point.

David Rollman - Goldman Sachs

Okay, and then maybe just one last one for Rick. I wouldn’t want him to feel left out here. On the P&L, this is quarterly delivered, very nice, both operating income and earnings growth in comparison to sales growth. I think what you’ve talked in the past is an intention to be able to grow revenue and earnings roughly at the same pace. But should we look at this quarter as reflective of the type of leverage you can generate over time or should we more be thinking about the business as top line and bottom line pacing at a similar level.

Rick Baron

I think you should go with the latter. This quarter was a really good quarter. We’ll call it out. We have to explain the reasons why it was above [indiscernible] growth in sales. There were some bid events on the ability to hold some cost and timing in R&D and things like that. I think you picked a longer term view. We’ve always suggested and we’ll continue to suggest that you got to take a 12 month view of the business. We have though gotten operating leverage. I do think that that’s something that is very important and sometimes misunderstood.

At the beginning of the year, with the med device tax we indicated that we would regain the leverage associated with that, which was about 1.6% and we’ve come, we’ve been able to pull back on the, not pull back but to increase the growth, the operating margin successfully to do that, which I think is pretty unique out there, especially for a company our size. So embedded with the model is leverage, and then the third element of leverage is that we’ve always felt that we would reinvest into new businesses, additional shots on goal, which is exactly what we’re doing with Exelcius with the additional $6 million to $9 million of R&D. So we’re leveraging and then reinvesting, which creates hopefully an extra shot on goal for it to continue double digit growth.

Operator

Your next question comes from Rich Newitter with Leerink Swann.

Robert Marcus - Leerink Swann

Hi, afternoon, this is Robbie in for Rich. Just another question maybe on Excelsius. I think in the past you guys have mentioned that the device will be platform agnostic but should have some enhancement for Globus products. Can you maybe provide some more color on that, how that would work, would you be designing new products for it or is it going to be designed to work with the existing portfolio right now?

David Paul

Robbie, thanks for your question. A little bit of both. What we said before still holds. It’s going to be designed with an open architecture but it’s going to be especially designed to work with the Globus portfolio. So we are working on several key Globus instruments that interface with the robot. It’s still in development. So it is going to be specifically tailored to work flawlessly with the Globus systems but also somewhat of an open architecture.

Robert Marcus - Leerink Swann

Okay and then maybe if you could provide some more color on maybe some of the new product launches that we can expect in 2014?

David Paul

Like we’ve always said, always our goal is to introduce five to 10 new products every year and I think we’re well on track to do that for 2014 also. I’m not going to disclose any specific products, but like we have all said always it’s going to be singles and doubles, and that’s what we’re focused on, is innovating it with new products.

Operator

Your next question comes from Steven Richman with Oppenheimer & Company.

Steven Richman - Oppenheimer & Company

Just wanted to focus a little bit on the biologic side. Dave, can you talk a little more about the type of contribution you’re seeing, KINEX here in the early days and I think you mentioned additional products. Should we be looking for more rollouts from you in biologics in 2014 and should we be focusing on this as a particular nice ramp area for you over the next couple of years.

David Paul

Biologics is an area where we’re extremely focused on. We think it’s a huge opportunity. So KINEX is just the first of a suite of several products that we have in development and with the FDA. So we are looking forward to launching multiple other products in this space in 2014.

Steven Richman - Oppenheimer & Company

And today biologics is approximately what percent of your total revenue, approximately?

Rick Baron

We don’t disclose that. It's an area we can definitely do better in and I think there's a lot of upside for us there.

Steven Richman - Oppenheimer & Company

And then Rick just on the gross margin, obviously international doing very well. How should we be thinking about gross margin specifically as we look at over the next 12 to 18 months? Can that be held flat or should we be thinking a little bit of downward pressure just on mix?

Rick Baron

We've been pretty consistent throughout the year on the margin. I think that the potential is a little bit downward pressure, just because OUS pricing in some of the products that we talked about have pressure on the margin. That’s kind of the bad news. The good is from an operating margin contribution, you shouldn’t see it. From that perspective you got to think of us as a more mature company, a larger company. We focus more on the operating margin, adjusted EBITDA side that we can get leverage out of.

Operator

Thank you for joining the Globus Medical fourth quarter earnings conference call. You may now disconnect.

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