Wright Medical Group Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.30.14 | About: Wright Medical (WMGI)

Wright Medical Group (NASDAQ:WMGI)

Q1 2014 Earnings Call

April 30, 2014 4:30 pm ET

Executives

Julie D. Tracy - Chief Communications Officer and Senior Vice President

Robert J. Palmisano - Chief Executive Officer, President and Director

Lance A. Berry - Chief Financial Officer and Senior Vice President

Analysts

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Ravi Misra - Leerink Swann LLC, Research Division

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

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

Daniel Sollof - Barclays Capital, Research Division

Jason Wittes - Brean Capital LLC, Research Division

Raj Denhoy - Jefferies LLC, Research Division

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

Michael Matson - Needham & Company, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q1 2014 Wright Medical Group, Inc. Earnings Conference Call [indiscernible]. My name is Whitley, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Julie Tracy. Please proceed.

Julie D. Tracy

Thank you, and good afternoon, everyone. Welcome to Wright Medical Group's First Quarter 2014 Conference Call. We appreciate you joining us. I'm Julie Tracy, Wright's Chief Communications Officer. With me on the call today are Bob Palmisano, Wright's President and Chief Executive Officer; and Lance Berry, Wright's Chief Financial Officer.

We issued a press release this afternoon regarding our first quarter results. A copy of that press release is available on our website at wmt.com. The agenda for this call will include a business update from Bob, a review of our financial results from Lance followed by a question-and-answer session and conclude with closing comments from Bob.

Before we begin, I would like to remind you that this presentation contains forward-looking statements as defined under U.S. federal securities laws. These statements reflect management's current knowledge, assumptions, beliefs, estimates and expectations and express management's current views of future performance, events, results and trends and may be identified by their use of terms such as anticipate, believe, could, estimate, expect, intend, may, plan, predict, project, will and other similar terms. Forward-looking statements are subject to a number of risks and uncertainties that could cause our actual results to materially differ from those described in the forward-looking statements. You should not place undue reliance on forward-looking statements. Such statements are made as of the date of this presentation, and we undertake no obligation to update such statements after this date.

Risks and uncertainties that could cause our actual results to materially differ from those described in forward-looking statements are discussed in our publicly available filings with the Securities and Exchange Commission, including without limitation, our annual report on Form 10-K for the year ended December 31, 2013, as supplemented by our quarterly reports on Form 10-Q. These risks include, by way of example and without limitation, the risk that we will be unsuccessful in obtaining FDA approval for our Augment product and the risk that we will be unable to realize the anticipated benefits from recent acquisitions or from the divestiture of our Ortho Recon business.

Our earnings release includes certain non-GAAP financial measures that may be discussed on this call. Please refer to the reconciliations, which appear in the tables of today's press release, as well as on our website. Note further that our Form 8-K filed today provides a detailed narrative that describes the use of such measures.

With that introduction, it's now my pleasure to turn the call over to Bob Palmisano. Bob?

Robert J. Palmisano

Thanks, Julie, and welcome to everyone joining us today. We delivered a strong start to 2014 with excellent execution on our MicroPort, Solana Surgical and OrthoPro transaction. As anticipated, we did experience some minor short-term dis-synergies in the U.S. due to these transactions and the severe winter weather earlier in the quarter. Even given this, on a global basis, we were slightly ahead of our plan for Q1 with our International business growing at -- growing 63%, and we are -- we exited the quarter on a strong trajectory for the remainder of the year.

The foot and ankle business had a strong constant currency growth of 31% globally, and total ankle replacements grew 38%, extending our leadership position in this market.

Implementation of our new Vital Few initiative is on track. We continue to focus on driving sales productivity gains in our U.S. foot and ankle business and building a fast-growing International business.

In summary, we believe these first quarter results indicated we are on track and poised to have an excellent year.

As we outlined on our last quarter's call, our 3 strategic priorities for this year are to continue to accelerate global revenue growth, improve our gross margins and improve EBITDA. We believe that our Vital Few initiative supporting these strategic priorities will position us for future success and drive growth and shareholder value.

Before I update our progress on these Vital Few, I would like to give a brief update on the status of our appeal for Augment Bone Graft. We submitted the agreed upon amendment to our PreMarket Approval application for Augment Bone Graft yesterday. Although it took us a few weeks longer to file the amendment than we originally anticipated, we believe the extra time allowed us to work collaboratively with the FDA and to gain a more precise understanding of their expectations for the content of this amendment.

As previously communicated, we expect the Office of Device Evaluation to issue a determination on whether the PMA is approvable no later than 180 days after the submission date. It is important to reiterate that there is no guarantee this PMA amendment will result in an approval of Augment Bone Graft. We will continue to keep you informed through normal communication channels.

Moving on to our strategic priorities and Vital Few initiatives. Following the close of the Solana and OrthoPro transactions, we've made significant progress in assimilating these acquisitions, and all activities are on track and proceeding smoothly. One critical activity that we completed is the total combination of the sales forces in the U.S. We are able to -- we were able to bring on a number of Solana and OrthoPro reps as employees. And at this point, our entire sales force has a quota that includes all of our products, including legacy Wright, OrthoPro and Solana.

I am pleased with the -- with how smoothly the combination has gone thus far. Our team and the leaders of both OrthoPro and Solana have done an excellent job assimilating the business. And I am confident that both these acquisitions as well as the Biotech acquisitions are going to be great long-term investments.

Now that the sales force combination is complete, our new -- our near-term priority is ensuring each rep is fully trained on all products and equipped to successfully sell the entire product line. Even though it will take some time to complete training and fully ramp up following the sales force combination, we still expect to achieve our productivity goal of $1 million per rep rate exiting 2014. Given our sustained focus and attention in this area, I also believe that we can reach meaningfully higher level of that -- than that goal over time.

We are also looking forward to the launch of our next advancement in total ankle replacement technology, the INFINITY Total Ankle System. We now have better visibility into the timing of our product launch and have accelerated the launch to late second quarter of this year.

In addition to the many patient-centered attributes of the INFINITY Total Ankle, feedback from our physician preference test surgeons suggest that the INFINITY ankle with PROPHECY is faster and easier to implant than the INBONE ankle and can be on par with fusion procedure times. We believe this can be a win-win for both patients and physicians.

We have already started training physicians and reps on INFINITY, so we will be well prepared to hit the ground running. Once launched, we believe INFINITY will extend our leadership position and our multiyear competitive lead in the total ankle replacement market and will be an important catalyst in the ongoing market conversion from fusion procedures to total ankle replacement.

Shifting now to improving gross margin and inventory. Our gross margins for the first quarter increased to 76.3%, up 40 basis points compared to a year ago. Now we have -- we now have clear visibility to improve gross margins to over 80% over time by increasing equipment utilization, decreasing material usage, leveraging overhead and improving pricing.

On a short-term basis, we expect further margin acceleration in the second half of this year and plan to exit the year at a level meaningfully above last year. We're also -- by further developing and enhancing our supply chain, we also expect to reduce gross inventory days on hand by over 100 days in 2014 and 50% over time.

In summary, we have multiple opportunities to drive growth and improve profitability in our business in several areas. First, market-leading growth. We expect to be in the mid- to high-20% range this year. Second, from a technology perspective, we will launch over 20 new products this year, including the breakthrough INFINITY Total Ankle System, which will extend our technological lead and continue to fuel growth. And third, we will continue to drive gross margins and exit the year at levels meaningfully above last year's 77%, which we believe is one of the highest gross margins in all public med-tech. We also expect to exit the year with positive adjusted EBITDA and be positioned well for growth in 2015 and beyond.

We are looking forward to the resolution of the Augment PMA amendment. While we have no way of knowing the final determination of the FDA, we believe the PMA amendment that we submitted this week has excellent science behind it and supports the safety and efficacy of this breakthrough biologic.

Finally, and very importantly, we will continue to execute requirements of our total -- of our Corporate Integrity Agreement and ensure that our compliance system continues to promote the highest standards of ethical and legal conduct in all the markets that we serve.

Now I'd like to turn the call over to Lance for a discussion of our first quarter financial results. Lance?

Lance A. Berry

Thanks, Bob. As we get started, please note that unless otherwise stated, all of today's discussions regarding our sales growth rates refer to our constant currency growth rates, and our results of operations refer to our as-adjusted results, including stock-based compensation, as described by Julie during the introduction of our call.

As a reminder, as a result of the previously announced acquisition of our hip and knee business by MicroPort Scientific, all current and historical operating results for the Ortho Recon business are reflected in discontinued operations. Unless otherwise noted, today's discussions refer to our results from continuing operations.

Net sales from continuing operations for the first quarter of 2014 totaled $71.1 million, an increase of 26%, both on an as-reported and at constant currency basis. Adjusted net loss from continuing operations for the quarter, including stock-based expense, totaled $16.6 million or $0.34 per diluted share compared to adjusted net loss from continuing operations of $0.08 per diluted share for the quarter ended March 31, 2013. First quarter 2014 adjusted EBITDA from continuing operations was negative $6.2 million compared to positive $1.4 million in the same quarter the prior year.

Looking now at our sales results in detail. Globally, the foot and ankle business grew 31%, driven by U.S. foot and ankle growth of 19% and International foot and ankle growth of 74%.

Global foot and ankle growth was positively impacted by the Q1 close of the Solana Surgical and OrthoPro acquisitions, and the International foot and ankle growth was also positively impacted by the Biotech acquisition completed in November of last year. Excluding the impact of these acquisitions, global foot and ankle revenue growth was 15% in Q1, with 8% growth in the U.S. and 39% internationally.

As stated on our last call, we expected some deceleration in our organic U.S. foot and ankle growth rate this quarter. The combination of 2 acquisitions, the closing of the MicroPort transaction and the difficult winter weather, impacted our U.S. growth rate and disproportionately impacted a small number of territories. Excluding these areas, we saw organic growth in Q1 in line with Q4. These impacts are all temporary, and we believe that those surgeries affected by the weather have already been completed or rescheduled. We also saw much better growth exiting Q1 and beginning Q2.

Despite the headwinds, we grew total ankle 38% with growth significantly higher than that in the territories that were less impacted by the weather and the transactions. Foot and ankle growth is anticipated to accelerate in the U.S. as we execute on our customer conversion and sales force productivity initiatives, launch new products and benefit from the expanded product portfolio and sales force resulting from our recent acquisitions.

Our global Biologics business grew 16% on a constant currency basis in the first quarter due to growth in our International Biologics business driven by sales in China as we open sales channels and continue the growth of Augment Bone Graft in Australia.

In addition, our U.S. Biologics business returned to growth this quarter after several quarters of declines. We are very pleased to see the strong global bio growth this quarter as both the U.S. and International bio benefited from increased sales force focus. Additionally, our PRO-DENSE product line performed very well this quarter as we are now beginning to see benefits from an expanded claim that we received last year for this outstanding product.

Our global Upper Extremities business grew 7% on a constant currency basis. Excluding the effect of the Biotech International acquisition, Upper Extremities declined 11% in Q1. The Upper Extremities business in the U.S. was the line item that was most disrupted due to the MicroPort transition. Although we are taking measures to mitigate the disruption we experienced in the U.S. Upper Extremity business, it is likely that we will continue to see declines in this business throughout 2014. The stronger-than-anticipated Biologics performance is expected to offset the incremental softness that we are now seeing in the Upper Extremity business.

In total, our Q1 sales included approximately $8 million of products acquired from Biotech, Solana and OrthoPro, right in line with our plan.

As we move on to some detail below the sales line, please note that the expenses of the business are not really apples-to-apples to prior year, as the prior year does not reflect any expense dis-synergies associated with the split of the business.

Beginning with our Q1 gross margin, overall we achieved 76.3% for the quarter, which is an increase of 40 basis points over prior year driven primarily by lower inventory reserve requirements. Q1 operating expenses totaled 96.7% of sales compared to 83.7% of sales in prior year.

As for the line items making up our Q1 operating expenses, selling, general and administrative expenses totaled 86% of sales for the quarter compared to 76.1% in the prior year period. The increase as a percent of sales was driven primarily by dis-synergies associated with the split of the business and a full quarter of BioMimetic expenses as opposed to only 1 month in prior year.

R&D expense totaled $5.9 million in Q1 of 2014 and $3.5 million in Q1 of 2013. The increase was driven by increased investments for international regulatory support as we execute our international expansion plans, increased spending on product development and incremental expense due to the BioMimetic and Biotech acquisitions.

In total, operating expenses were lighter than we anticipated, primarily due to timing of spending related to the Augment appeal process. We anticipate that spending now occurring largely in Q2, combined with a full quarter of dis-synergies from the MicroPort transaction and run rate costs from the Solana and OrthoPro acquisitions, will result in a significant sequential increase in operating expenses from Q1 to Q2. We still anticipate spending for the full year to be in line with our previous guidance.

And finally, amortization expense is approximately $1.8 million compared to $800,000 in the prior year.

Below the operating income line, net interest expense and other expense totaled $1.9 million for Q1. Our Q1 effective tax rate, as adjusted, was approximately negative 1.2% expense for the quarter as compared to 46.1% in the prior year period.

As a reminder, we recorded noncash tax valuation allowance in Q4 against our deferred tax assets in U.S. jurisdictions. Due to this, we will not have a tax benefit in 2014, and we will expect our full year tax rate to be roughly 0.

Finally, for share count, our Q1 per-share results, as adjusted, are based on average diluted shares of 48.6 million for Q1 of this year and average diluted shares of 41.4 million for Q1 2013.

This quarter, we started reporting our new business segments, which are U.S., International, BioMimetic, and Corporate-related expenses. This new format aligns with our business post the Recon divestiture and provides additional financial transparency on our financial performance.

Due to the divestiture of the OrthoRecon business, the prior year comparison is not apples-to-apples due to the dis-synergies related to the split of the business. The International business and Corporate segment are the most impacted by the dis-synergies, but there are some dis-synergies in the U.S. segment as well due to certain marketing and R&D functions that shared resources with the OrthoRecon business.

Moving on to the balance sheet and cash flow. Following the close of MicroPort, Solana and OrthoPro transactions, we now carry a combined cash and marketable securities balance totaling $356.6 million as of March 31, 2014.

Before moving on to our discussion on our outlook for the remainder of the year, I wanted to provide you with some additional color on the sales force combination following the Solana and OrthoPro acquisitions. In connection with the acquisitions, we took the opportunity to hire certain Solana and OrthoPro reps as employees. And today, approximately 80% of our foot and ankle revenue is generated from direct employee reps. We have increased the total number of direct employee reps that are selling our total foot and ankle portfolio from approximately 100 to approximately 200 and have increased the direct employee quota-carrying reps from approximately 115 to approximately 140.

We have added acquired revenue from these acquisitions, but keep in mind that the additional foot and ankle reps that we added are not yet fully productive. On the Q2 call, we will have more clarity on where exactly we stand on our sales per rep following the sales force combination, but we still expect to exit the year at $1 million per rep rate.

Overall, we had a good start to the year. Global sales were right in line with our expectations, spending was slightly better than planned and we had excellent execution on the 3 transactions that closed this quarter.

Now I will touch briefly on guidance. Consistent with past practice, please note that our guidance ranges and assumptions for 2014 exclude any consideration for the effect of potential future acquisitions or any other possible material business developments. Additionally, it is important to note that we will be using a number of non-GAAP financial measures to describe our outlook for the business.

In particular, unless stated otherwise, all of today's discussions regarding results of operations refer to our as-adjusted results of continuing operations. Our press release filed today notes those items that are excluded from our as-adjusted results.

As stated in today's press release, we are narrowing our guidance for net sales from continuing operations for 2014 to $308 million to $312 million. In addition, we are reiterating our previously communicated full year 2014 adjusted EBITDA from continuing operations, as described in the GAAP to non-GAAP reconciliations in the press release, of negative $15 million to negative $20 million.

For the first time, we are providing full year 2014 as-adjusted earnings per share outlook, including stock-based expense, which is in the range of negative $1.28 to negative $1.38 per diluted share based on approximately 49.9 million shares outstanding.

Now that we've closed the MicroPort, Solana and OrthoPro transactions, I do want to provide you with our updated outlook for amortization expense. Excluding any future acquisitions, amortization expense is expected to be in the range of approximately $2.5 million per quarter.

While we do not provide quarterly guidance, I do want to remind you of information we provided in our Q4 call on expected cadence to assist you with your quarterly modeling. As previously noted, U.S. revenue was impacted in Q1 due to some minor disruption from the MicroPort, Solana and OrthoPro transactions and some impact from the severe winter weather. For the acquired revenue, as previously noted, we expect the first and second quarters to be the lowest. Combined, we expect the U.S. growth rate, including acquired products, to improve throughout the year as we get the impacts of these non-recurring Q1 events behind us, benefit from an expanded sales force from the recent acquisitions and launch new products, in particular our INFINITY Total Ankle.

For International, we anticipate growth rates generally in line with the full year, except for Q2 when we annualize the $2.1 million China stocking order in Q2 of 2013. Note that following the divestiture of our hip and knee business and with our sales more concentrated in the U.S., we do not anticipate seeing the same degree of seasonality in Q3 as we have historically. This, combined with the stronger contribution of acquired products in the second half of the year and the INFINITY launch, should result in a sequential increase in revenue from Q2 to Q3.

Additionally, we expect to see gross margins below the full year average in the first half of the year due to the impact of dis-synergies from the MicroPort transaction and inventory reserves and gross margins in the second half that are better than our full year average as we begin to realize benefits from our gross margin Vital Few initiative.

In particular, gross margins in Q2 will be negatively impacted by significantly higher inventory reserves than the other quarters based on our normal reserve calculation. We would not be surprised to see gross margins as much as 3 percentage points lower in Q2 than we had in Q1. This is in line with what we anticipated when we provided our full year guidance on our previous earnings call.

Operating expenses will increase sequentially from Q1 to Q2 due to timing in transactions, as we discussed earlier. We then expect operating expenses as a percentage of revenue to be lower than our full year average in the second half of the year. The lower Q2 gross margin and the sequential increase in operating expenses will drive significantly lower EBITDA in Q2 than in Q1. And from that point, we anticipate fairly dramatic improvement in adjusted EBITDA driven by higher gross margins and higher sales levels, driving significant expense leverage as compared to the first half of the year.

One last item I would like to discuss regarding guidance is our previous line item commentary on revenue growth rates. To assist you with modeling our business, on our previous call, we provided you with comments on both organic growth rates and acquired revenue. At this point, with the sales force combination complete, it will be difficult, if not impossible, to provide a true organic growth rate performance. Legacy Wright products will benefit from having an expanded footprint, and acquired products will benefit from our existing large direct sales force. Both legacy and acquired products will be negatively impacted to some degree by cannibalization from the other.

Both legacy and acquired products have excellent gross margins, and we do not have a particular preference as to the mix of the sales between them. We are primarily focused on delivering the total sales number.

We anticipate both U.S. and global foot and ankle growth, including acquisitions, to be in the 30% to 40% range for the full year, and our focus will be on driving these results without any regard to whether that growth comes from legacy Wright products or acquired products.

In closing, we are pleased with our results for the first quarter, the progress we have made on our Vital Few and the opportunity we have to drive significant improvement again this year.

Operator, we would now like to open up the call to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Matt Miksic with Piper Jaffray.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

I'd love to get a sense -- I know it's difficult to sort of -- to parse this out and maybe this is implied in the guidance that you just provided. But understanding that you have these acquisitions coming in and there will be some cannibalization, I guess I'd love to understand if it's possible to speak about your base business and then maybe some sense of what the dis-synergies or cannibalization might be as they come together, just so we can maybe benchmark how much of this growth is upper teens, low-20s, core business and maybe back into what would be the rest. That'd be very helpful and I have one follow-up.

Lance A. Berry

Yes, Matt, this is Lance. I mean, honestly, this is going to be very difficult to do. I mean, we are trying to equip every rep with every product, train them fully on those products and let them drive those products to hit our total number. And trying to parse out what would have been had we not done the acquisitions is really going to be impossible. So obviously, we'll end up -- we'll know exactly what the sales are from each of the different product lines, but I don't think we initially have a view as to how that mix is going to shake out or -- nor do we care.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

Okay. Well, and alternatively, is there any way you can speak about maybe overlap to the 2 businesses, if there's a 5% or 10% overlap that might then result in that kind of crossover cannibalization?

Robert J. Palmisano

Well, there -- this is Bob. There is some overlap, and it's probably perhaps in the area that you talked about. I'm not entirely sure. One -- and the more interesting thing with these acquisitions is they were -- these products and these organizations that we acquired were more heavily invested in the podiatry market than we had typically been. We're more surgeon focused. And so I think that, that minimizes the cannibalization, but there is still that overlap. And then I think that the commercial organization is still sorting through actually which products -- because some of the products are very, very similar, and some -- there are some surgeon or doctor preference related to each of these. So one of the things that we have to do and we're working on is streamlining that product line to get the right products but where we have products that are really, really close together is eliminating one in inventory and eliminating the costs associated with carrying all those products.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

That's helpful. And then just a follow-up just on the margins. You mentioned the progression here. Understanding that you're going to have these sort of write-down or inventory true-ups in the second quarter, is that something -- I'm hoping you'll be able to sort of either give us a sense at this point of -- I guess you must have a sense because you've given us a round number as to how much it could decline sequentially. But give us a sense of the magnitude of that and -- so that we can sort of get some thought as to what -- again, I know it's going to be hard to look at this underlying growth versus organic versus combined, but it'd be very helpful to be able tease that out.

Lance A. Berry

Yes, Matt, on the gross margins, I mean, that sequential decline is driven largely by the inventory reserves. And the inventory reserves, that is a normal ongoing part of our gross margin every single quarter. It is not tied to our sales levels, so you can have some variability from quarter-to-quarter on the amount that you see. And then Q2 of this year is just going to happen to be a particularly heavy quarter for us. We talked about in the past, we frequently try and point people to the full year just because our gross margin can have some variability from quarter-to-quarter. But that sequential decline is largely driven by inventory reserves. We'll get that behind us and start to realize benefits from our gross margin initiative, which is really potentially significant going forward, and I think you'll start to see some benefits show up in the numbers in the second half of the year.

Matthew S. Miksic - Piper Jaffray Companies, Research Division

And just to be clear, on those reserves, and maybe I missed it, but these are integration related or are they just a matter of new product, enrolling the INFINITY versus the INBONE?

Lance A. Berry

It really has to do with internally developed products launched in previous years. And so it's just a -- it's a timing thing. And again, Q2 just happens to be the heaviest quarter of the year this year, disproportionately so.

Operator

Your next question comes from the line of Rich Newitter with Leerink Partners.

Ravi Misra - Leerink Swann LLC, Research Division

This is actually Ravi in for Rich. You said something about gross margins, saying clear visibility over time to 80%-plus. I was looking at some -- I was hoping you'd give some timelines on that. And if not, maybe any short- and near-term drivers that you see there.

Robert J. Palmisano

Yes, we're not going to give out the exact date, but we certainly do feel that we have very clear visibility and very concrete plans in place to get there, and it involves all the kind of normal things. When we were part of the OrthoRecon business, we had -- when we had the businesses combined, the Extremity business was the orphan stepchild of the OrthoRecon business. Now we've been able to have a new facility just for manufacturing of foot and ankle products or extremity products that is designed in a very efficient way. We have been able to get different kinds of material usages, usage down and have had a big emphasis on streamlining our supply chain to reduce costs there as well. So I think that -- and we also do have some pricing that we think is -- that is applicable to us and then in terms of, again, not increasing pricing so dramatically, but decreasing the amount of discounting that has gone on that we're already seeing the benefits of. So we have very, very clear visibility, we feel, to get to 80% or over. We think that the end of this year -- by the end of this year, we should exit this year at a rate that's meaningfully higher than last year's rate, which was 77%. And I think that, that puts us in pretty rarefied air in terms of gross margins in med-tech and certainly in orthopedics. But there's still opportunity and we have an unbelievably strong team that's going after it. And we're-- this is something that I have seen happen in other companies where you really focus on it and concentrate on it and you get it. And we are very confident about our ability to produce here.

Operator

Your next question comes from line of Chris Pasquale with JPMorgan.

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

I just want to start with INFINITY and how we should think about the potential for that product to contribute to revenue this year. Before, it seemed like this year was mostly going to be kind of a set-up year mostly about training. But now that you've accelerated the launch timing a little, does that make it more likely that we'll have a noticeable top line impact in 2014?

Robert J. Palmisano

Well, I think that we have brought it forward some. The -- in our overall guidance, we took into consideration that we may be able to bring it forward and therefore, we gave a range. So we feel -- so we're not ready to raise the upper end of our guidance today, Chris, but nice try. But we do think that INFINITY will grow, help us grow the market and help us in our process of converting fusions into implants. It is, as I noted in my opening remarks in the physician preference testing surgeons, they noted that not only does it offer patient benefits, so you use less bone, et cetera, but it's -- they find it easier and faster to implant. And I think that as people get more experience with it, those benefits will even get greater. So now we have a system that includes INBONE for complex and revision procedures, and now we have a primary ankle product that is really state-of-the-art in every way imaginable. Backed up by strong med ed and sales rep training, I think that this is going to turn into a big event. I hope that we will be able to progress faster than we have in our guidance, but I'm not certainly willing to sign up for that at this point.

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

Okay, fair enough. And then on Augment and the PMA Supplement, I'm just wondering if there is -- are any other milestones or communications we should expect between now and the end of that 180-day window? Or will the decision on approvability be the first we hear? And could that clock stop if the agency comes back with a round of questions and there's some back-and-forth? Or is that 180 days all-inclusive?

Robert J. Palmisano

Yes, I think the 180 days is the time frame to look at. We do have a -- we have ongoing communications with the agency. We have a face-to-face meeting with them scheduled for 45 days from yesterday to make sure that everything is on track. But I don't think any news will come out of that because they're not going to cite any -- we're just going to be -- it's more inside base book kinds of stuff that go on at those kinds of meetings. So I think that the news will be in 180 days. I have -- again, I've said this often, I've no way of handicapping what the agency may or may not do, feel very good about the science behind our submission. I feel good that the extra time that we took, working collaboratively with the FDA to really in a much more precise manner understand what they're looking for and what it would take to be approvable is all beneficial. Having said that, again, I have to give the caveat I have no idea how this is going to turn out.

Operator

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

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

Bob, just wanted to talk to start with you, Bob, maybe on the OrthoPro deal, especially. But it looks like the contribution from the 3 deals that Lance talked about at $8 million was a couple more than we were looking for, a couple million more. And I think the foot and ankle organic growth U.S., a little bit below and I understand weather impacted there to a certain extent, but we've been fully expecting some cannibalization here of the PRO-TOE product with some of the OrthoPro cannulated designs especially, so just wondering if you're starting to see that. And maybe qualitatively, I'd like to get your thoughts on are you going into some of your PRO-TOE accounts and they're happy to see that you maybe have another design here that you can offer? Are you going deeper with some of those accounts? You're going out to new accounts to win accounts? Just qualitatively kind of what's going on in the hammertoe business as you merge these kind of 3 different now hammertoe products together?

Robert J. Palmisano

Yes, sure, Jeff. I think that we have seen some cannibalization. I think I can't comment -- I really don't know how much, but anecdotally, I've heard that there is -- has been some cannibalization, probably not major at this time. One of the interesting things, I think, about podiatry is that these docs like to try a lot of different things. And that having a more robust portfolio of products, even to our existing accounts, they will try different things. And now we have more products to go into accounts that we haven't been calling on too much before. And secondly, was we have more of a sales force. So when we assimilated the OrthoPro sales force, as well as Solana sales force, we added about 50 direct employee reps. And they were primarily reps that had a lot of knowledge and background in podiatry. And some of them had both, but I think that, that was one of the attractive parts for us. And so that we have seen some cannibalization, it hasn't been major, but I do think that having a wide assortment of different kinds of hammertoe products with podiatry is an advantage. Now at some point in time, I think that we have so many products, is that as I mentioned earlier from an inventory point of view, is that we want to kind of like make sure that we're supporting the ones that are most in demand and the ones that are most profitable so we're not carrying higher levels of inventory on things that don't move very much.

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

That's helpful. And then do you feel the need at all to have a Nitinol-based hammertoe? I mean, it's basically, I guess, out of the 4 different designs if you want to think about it that way, or 3 different designs out there, I guess, the only one you don't have at this point, do you feel the need to have something in that category as well?

Robert J. Palmisano

Yes, I think that, that would be helpful, and I think that's under consideration now, yes.

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

Could that be done internally or do you have to go after...

Robert J. Palmisano

Yes, it could be done internally, yes.

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

Okay. Last question, I promise. But just on the ankle market itself. I've seen some of the PearlDiver data, it looks like you guys continued to gain share in 2013, shouldn't be a surprise, I guess, with your growth rates there. But I'd be interested, I guess, with INFINITY coming out and that, do you expect to win -- I'm trying to think about your growth in total ankle in 3 buckets of going out and just winning accounts of guys who have never done ankles before are now willing to do it. Maybe you're taking accounts from products that have been taken off the market, I'm thinking obviously, most of J&J's product, but then also, taking competitive accounts. Any qualitative way you can talk about maybe those 3 areas of where your growth is coming from in entire?

Robert J. Palmisano

Yes. I think that there's growth coming from all 3 areas, but I think that the taking share from other products is probably the lowest part of that is that the biggest part of the growth are -- have to do with converting accounts. We have a big initiative -- if you know our jargon, a Vital Few initiative behind that and a whole process around that. So I think that's the big winner there. And secondly, is that in our -- by launching INFINITY, our existing accounts that, perhaps, used a different ankle or maybe a competitive ankle for plain ordinary primary revisions, now we feel very strongly are going to be using the INFINITY. So I think that, that's how we come to the conclusion that our growth rates will be in this -- in total ankle should be in the 30% to 40% range for the year.

Operator

Your next question comes from the line of Daniel Sollof with Barclays.

Daniel Sollof - Barclays Capital, Research Division

Going back to the comment on the acquired businesses, like given the margin profiles of OrthoPro and Solana, you mentioned that you're agnostic as to whether revenue comes from the base business or from acquired businesses. So my question is if you have the appetite for further M&A, is it fair to say that you would target that similar kind of profile where it would be similar margins, but also potential cannibalization?

Robert J. Palmisano

Well, yes, provided that the cannibalization is not extreme, but I do think that when we talk about future M&A -- and no one knows if there will be future M&A. We're always trying, we have certainly a healthy balance sheet. But we're looking for products, generally, that complement our product line so that we look for minimal amounts of overlap that -- so that we don't have cannibalization. And very much so, we are looking for products that will not decrease, but will hopefully enhance and at a minimum be neutral to our goals in terms of being an 80% gross margin company.

Daniel Sollof - Barclays Capital, Research Division

Helpful. And then just going back to Lance's comments on, and again, thanks for the detail on the number of reps, both direct and also specifically the quota-carrying, so is that the number that you think you're comfortable with to kind of take to the $1 million average and then eventually beyond that or can you see further expansion? Or do you think that number is kind of good and sufficient to kind of support the growth you want to see in that -- the key foot and ankle business?

Robert J. Palmisano

Yes, we think it is sufficient in that the -- we feel confident about the $1 million number even given that we've added reps and, but we've added some revenue, too. So I think that there's -- we don't think -- unless there's some, again, M&A activity that would drive some additional reps, we think that we have a very sufficient number of reps and now, we're focusing on making sure that they're all trained on all products. We have a big initiative over the next couple of weeks, as you may assume, in terms of getting everybody up to speed on INFINITY. And so I think that the sales force is pretty well, well-staffed.

Operator

Your next question comes from the line of Bruce Wong, Brean Capital.

Jason Wittes - Brean Capital LLC, Research Division

Actually, it's Jason for Brean. Bruce dialed in for me. I jumped in, but I just wanted to ask about your foot and ankle growth outlook for the year. That's still significantly, I'd say, significantly above what I think you'd normally suggest the market was growing, which I think is still in the high single-digits, low double-digits range. So I guess, is there evidence that the market is consolidating? Or is there kind of a big expectation for acceleration, thanks to INFINITY for this year?

Robert J. Palmisano

Yes, so we think that the market is, as you said, probably 8% to 10%. If you look at it, we're growing a lot more than that because I think we have the advantage of being very, very focused in this area and have a strong product pipeline to support that. So I think that the -- and what we're seeing is that as we launch new products that are really, really important is that the market is expanding. We think the market is going to grow. We're still only about 10%-ish kind of penetrated in this market, so I think that the opportunity is huge in terms of just getting more penetrated. And so that's what -- when we talk about our initiatives, we're trying to convert people from doing fusions to doing implants. We are -- we have 150 quota-carrying direct reps now, and we have an unbelievably strong product pipeline of new products line. So I think that the -- it's a very strong market. It's, I think, the highest growth market by significant amount in terms of orthopedics. I think we have a leading position in it that from a competitive point of view, I think that we're years ahead and we intend to continue that and actually grow that. So I think that we're in a great spot, but we're not going to get overly confident either. We're trying to keep on moving ahead and building a great business here.

Jason Wittes - Brean Capital LLC, Research Division

Okay. I just -- one thing I've noticed when I've been speaking to some foot and ankle guys, both surgeons and podiatrists, is there's quite a few suppliers out there and they're starting to gravitate towards the larger players such as Wright given that basically, at this point, you're pretty much a one-stop shop. Are you noticing that sort of dynamic shift? Because if you go back a couple of years ago when I'd say this market wasn't getting as much attention besides you guys, there really wasn't that many full-service players stock up.

Robert J. Palmisano

Yes, it's not -- Jason, it's not only being full service, which I think is really important to have this big product portfolio. It's having these physicians, whether surgeons or podiatrists, think of Wright Medical as the company that is leading the pack in terms of technology, medical education, support, those kinds of things that are important to them. And you get a halo effect from that. I never forget when in my last company, ev3, when we were very -- in a very competitive market in neurovascular surgery and we broke out of that with a launch, an acquisition and a launch of a new product, is doctors that used to do business with some of us and some of others thought then of us as the company. And we're moving to a point and I'm not arrogant enough to say that we're there yet, but we're moving to a point where we think that foot and ankle doctors, whether they're podiatrists or surgeons, will think of the foot and ankle market and think of Wright as the company, the leading company in that market and therefore, will come to us because we'll have the leading technologies, the leading training and the leading support systems.

Operator

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

Raj Denhoy - Jefferies LLC, Research Division

Bob, just quickly on Augment. I think you've made -- most of your public commentary has been pretty cautious. I think you've mentioned that you're still pretty far apart from the agency on the product and its approval. But you've also made some comments around the margin about how you've been encouraged by their willingness to sort of reconsider the framework under which they're looking at the product and what the really the questions are that the product is trying to address. And so I guess I'm curious if you have any broader thoughts on where this sits at this point? I mean, is there reason to be optimistic at this point? Or are you truly still very far apart on this?

Robert J. Palmisano

Well, I think that, as I said earlier, I'm not really in a position or -- nor do I want [ph] to handicap what the agency might do. It's a peculiar environment that they're in. What was -- what's interesting is don't forget is that the agency came to us and suggested that instead of a Dispute Resolution Panel, which is an adversarial, time-consuming process, is that they would be willing to entertain an amendment. And that was at their initiative. Then we spent a lot of time interacting with the agency to decide or to frame what exactly that amendment would look like and what it would take for the agency to -- what type of data the agency -- data and science the agency is looking for, for us to be successful with this. And what we were able to gain through that process was really a much more precise understanding and an agreement with them as to what it's going to take. So for that point of view, we feel good and we feel good about the science in our amendment. However, is that -- and then the other part of that is that I don't think that -- when we got this non-approval letter, I got on the phone to talk about this and said I was shocked about it because what -- the questions that they raised in the non-approvable letter really caught us by surprise in that they weren't really part of the study that we actually did. I think we now we have a really good understanding and they -- between them and us, and us and them as to what that data needs to look like and what they're looking for. So we're -- so from that point of view, I would say that I think that's all good is that we have an understanding, we provided them with data, we provided them with science, we think that the data and the science supports the safety and efficacy of the product. Now it's in their hands and they will deal with it and we will interact with them. But I feel good about not being in the DRP, I feel good about being in the amendment process, and I feel good about the cooperation that we've had with the agency to get to this point.

Raj Denhoy - Jefferies LLC, Research Division

Okay. So would it be fair to characterize it as you've sort of come to an agreement in a sense on what you need to give them and you believe that what you're giving them satisfies it, but of course, there are still the vagaries of what the agency is going to do?

Robert J. Palmisano

Yes, I would say that, absolutely yes, that's my point of view.

Operator

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

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

Just a follow-up on the last points you were making there, Bob. The delay that we saw in the filing of the PMA Supplement with the agency, was that more a function of them saying to you, is there a little bit more data here is what we need, a couple more film, a bit more film? Or was it just an administrative change that they were asking for specifically that caused the slight delay?

Robert J. Palmisano

Really, when we agreed to the amendment, there were a couple of items that were "to be negotiated". And that's what we -- and that did take a couple of weeks longer than we thought and that had to do really in kind of 3 areas, Matt. It had to do in terms of an analysis of the existing radiographic films that would demonstrate that the product -- that bone grew through the graft and we were able to provide that. Secondly, it had to do with making sure that we had a statistical validation of the methods so that when the data went in is that we had outside people or statisticians validate the process. And thirdly was the addition of a second reader of the radiographic film. So all 3 of those things took those extra couple of weeks. But all 3 of those things, I think, in my humble opinion and I'm not a doctor or an FDA person, strengthened the submission.

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

Okay. So that was them coming back to you specifically and saying, if you do something along these lines, that's kind of what we'd like to see?

Robert J. Palmisano

Yes, generally, that's right.

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

Okay. And then just a quick follow-up, Bob. And I don't want to tie you down to a date here at all. Your commentary around the revenue per rep exceeding $1 million over time, can you just give us a sense of what that means? I mean, are you thinking that the sales force eventually could do 25% higher than that, 50%, even double above that $1 million target that you have for the end of this year...

Robert J. Palmisano

We're saying it's $1 million exiting this year rate and then we feel very good about that, have good visibility to that. And I think that it can be meaningfully above that. And since I don't have good visibility to the exact amount, I can't be very, very precise. But I think that there's a good chance that we could blow past that number significantly. That's about as best as I can put it.

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

Within the existing markets that you're in right now, you would need your total ankle to go from 10% up to 60% or 70% to get well past that $1 million level.

Lance A. Berry

Yes, Matt, I mean, it's -- they wouldn't necessarily have to have that particular set of criteria to happen to be able to achieve that. I mean, obviously, we'd have to grow our business quite a bit more with the existing reps we have to do that. But I think what we feel comfortable about is the book of business at the level that they can maintain based on the product portfolio we have and the support systems we have for the reps, that they should be able to reach a level of sales on average well above $1 million. So how exactly they get there, we obviously think conversion of total ankle market could be a huge part of that. But those are really kind of 2 separate and distinct things.

Robert J. Palmisano

I'd also add, Matt, is that we don't update every quarter what we are. So I think that at the end of the second quarter, we'll have an update to show the progress we had from the end of last year. I think we finished last year at $820,000 or something like that, maybe, I'm not exactly sure. But I think that we'll show meaningful progress at the end of the second quarter towards that, the initial goal of $1 million. And once we get there, I think at some point in time, we'll revise that and say how far over $1 million or roughly how far out of $1 million that we may be able to get.

Operator

[Operator Instructions] Your next question comes from the line of Mike Matson with Needham & Company.

Michael Matson - Needham & Company, LLC, Research Division

I guess, just wanted to continue the discussion of the $1 million per rep target. So I guess, you obviously expanded your quota-carrying sales force by around 30% with these acquisitions. So I understand it's kind of you're saying you'll exit the year at the $1 million rate. But why wouldn't that translate into more revenue and an increase in guidance given the rep expansion? Was it something that you'd contemplated originally when you gave your guidance?

Lance A. Berry

Mike, this is Lance. I think it really has to come in combined because we've got acquired revenue also, right? So we did have an increase in the number of reps. We also increased some of the revenue through acquired products. So that's why it's not as simple as well you increased the sales force this much and you've had the same productivity target so sales should go up that much. I mean, I guess, sales will go up in that kind of range, but some of it will be through acquired products, which is in our guidance. So when we get to Q2, we should be able to have sorted out that a little better as it relates to was that kind of a net benefit or a setback from how many reps we added versus the amount of revenue we added from the acquisitions. Regardless, we feel good about our ability to produce the level of productivity as we exit the year to get to that $1 million number.

Michael Matson - Needham & Company, LLC, Research Division

Okay, understand. And then just on the INFINITY, when you do launch the INFINITY ankle, what -- how quickly can that product -- can sales ramp? I mean, is this more of your typical joint replacement launch where it's going to take some time to produce the instrument sets and time to train the surgeons? Or can the uptake be faster than that, the typical-type hip and knee launch, I guess?

Robert J. Palmisano

Yes, I think, it's going to be faster than the normal hip and knee launch. I think that at the time of the launch, which will be sometime probably in June, we will have sufficient number of kits to support the business. The gating factor more than anything will be training and we're already starting that. And that so we have 2 groups of people to train, physicians and reps. And I think that is all anticipated to take place so that we can launch this in time. But that won't all be done at the time of the launch. So that will continue for a number of months. There's a queue of doctors that have -- that are wanting to be trained and so -- and there's a good mix in terms of existing physicians, as well as doctors who currently do not do implants. So we're excited about that. But I think that we'll have sufficient supply for the launch. We will have a good number of reps and physicians trained, but that will go on through the remainder of the year.

Operator

There are no further questions in queue.

Robert J. Palmisano

Well, thank you, operator, and to those on the phone. We believe that today, we are the fastest-growing, highest-margin extremity biologics public company in the world. Through the remainder of this year, we intend to build on our lead. I believe that the intense focus that we have in extremities and biologics provides us with a significant competitive advantage and will be an important component in driving sustained growth and shareholder value -- and greater shareholder value.

Let me close by thanking the entire Wright worldwide team for their efforts during the quarter. We are making good progress and I'm confident we will continue to drive our business forward as we work toward fulfilling our vision and achieving our goals. Thank you for being on the call today and your interest in Wright Medical.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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