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LDR Holding Corporation (NASDAQ:LDRH)

Q2 2014 Earnings Conference Call

August 6, 2014 5:00 PM ET

Executives

Bob Yedid - MD, ICR

Christophe Lavigne - President and CEO

Bob McNamara - EVP and CFO

Analysts

Matt Miksic - Piper Jaffray

Kaila Krum - William Blair

Dave Turkaly - JMP Securities

Chris Cooley - Stephens

Josh Jennings - Cowen and Company

Glenn Novarro - RBC Capital Markets

Operator

Good day ladies and gentlemen and welcome to the LDR’s Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I would like to introduce your host for today’s call, Mr. Bob Yedid, Managing Director of ICR. Sir, you may begin.

Bob Yedid

Good. Thank you, Amanda. Good afternoon, everyone. Thank you for joining us today to review LDR Holding Corporation’s financial results for the second quarter ended June 30, 2014.

On the call today representing LDR Holding are Christophe Lavigne, President and Chief Executive Office; and Bob McNamara, Executive Vice President and Chief Financial Officer. Christophe will start the call with a review of key operating and financial achievements for the quarter and will outline the Company’s growth strategies. Then Bob will discuss the second quarter financial performance and our guidance for 2014. Finally, the Company will open the call for your questions.

Before we start, I want to touch on any forward-looking statements made during the call, including management’s belief and expectations about the Company’s future results. Please be aware they are based on the best available information to management and assumptions that management believes are reasonable. Such statements are not intended to be a representation of future results and are subject to risks and uncertainties.

Future results may differ materially from the management’s current expectations. We refer all of you to LDR Holding’s Annual Report and Form 10-K and other filings with the Securities and Exchange Commission for a more detailed information on the risks and uncertainties that have a direct bearing on the Company’s operating results and performance and financial conditions.

On this call today, we are also going to disclose certain non-GAAP financial measures which we use as supplemental measures of performance and believe these measures provide useful information to investors in evaluating our operations period-over-period. For each non-GAAP financial measure that we use on this call, we’ve included a reconciliation of the non-GAAP financial measure to the most directly comparable GAAP financial measure in our press release. Please note the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

With that said, I’d now like to turn the call to Christophe Lavigne, LDR’s President and Chief Executive Officer. Christophe?

Christophe Lavigne

Bonjour, and welcome everyone to our conference call. I am pleased to report that LDR’s total revenue for the second quarter ended June 30, 2014 reached $34.8 million compared to $26.6 million for the second quarter 2013, representing growth of 30.7%. Our revenue from exclusive technology products grew a robust 40.9% to $30.4 million in the second quarter of 2014, led by an impressive 47.3% growth coming from our exclusive cervical technology portfolio. After sizing our differentiated and innovative designs, exclusive technology products represented 87% of LDR’s second quarter 2014 revenues.

Moreover, we are taking market share with our innovative cervical and lumbar products especially in the U.S. where we recorded 40% revenue growth in Q2 2014, compared to Q2 to 2013. Revenue from traditional fusions product were $4.4 million, a decrease from $5 million in Q2 2013. Our exclusive technology products are more and ever the primary focus for our Company. And the first half of 2014 represented a very solid start to the year. As I mentioned, our exclusive cervical technology line grew at an impressive 47% to $21 million in Q2, led by strong growth from Mobi-C, which was approved and launched in the U.S. in August 2013.

Revenues from our exclusive lumbar technology products grew 28.5% to $9.4 million in Q2 2014 compared to the prior year period. Avenue L our lateral VerteBRIDGE product demonstrated strong growth especially in the U.S. In addition ROI-A, our entire lumbar cage continues to perform well. We maintain our belief that product differentiation in the lumbar marketplace is one of the keys to our success and that we will continue to outpace market growth in this space.

Regarding what we see and specifically the U.S. launch, we are very pleased with the number of U.S. surgeons training on Mobi-C in the second quarter of 2014 which have continued to exceed our internal growth till we have clear opportunity for ongoing training with more than 6,000 surgeons performing cervical surgeries in the United States. We believe that an increasing portion of the surgeon population is embracing cervical disc replacement as a beneficial treatment option for indicated patients. In discussions with our customers, we understand that one of the most important reasons in surgeons choosing Mobi-C is the clinical data demonstrating overall superior outcomes of Mobi-C as compared to traditional anterior cervical fusion in the treatment of two-level disease.

In addition, we have implemented a cervical solution strategy as part of our Mobi-C course curriculum which provides us the opportunity to introduce our VerteBRIDGE products for fusion to surgeons which has increased the sales of our cervical and lumbar fusion products in the past quarter. LDR’s high total revenue growth of 30.7% in the second quarter, reflects our solid Mobi-C product launch in the U.S. highlighted by the number of surgeons trained, their rate of adoption and the rate of repeat utilization for both one and two-level indications. We anticipate continued strong growth from Mobi-C’s revenue for the foreseeable future due to its highly differentiated innovative design, the limited competition due to the length and expense management in the PMA process and the overall superiority outcomes data in two-level application out to four years.

However it is important to note that as our revenue base grows, we do not anticipate spending 40% sales growth of our exclusive technology products and we will discuss our revenue guidance later in the call. In terms of the ongoing communication of clinical data collected, there will be five upcoming presentations which will include long-term 60 months data on Mobi-C one and two-level versus fusion. This will be presented in November at the Annual Meeting of North American Spine Society or NASS. NASS is the largest professional spine society and their Annual Meeting is the largest spine meeting and exhibition in the United States. We expect that this five year data will reinforce the clinical advantages of Mobi-C cervical disc replacement and should support strong surgeon adoption, increased patient demand and broader payor coverage.

Turning to reimbursement and coverage for cervical disc replacement. We remain optimistic about many of the positives we discussed on our last conference call with regard to payment codes and reimbursements including the establishment of a CPT code for two-level cervical disc replacement which will be effective January 1, 2015. In addition, the UnitedHealthcare’s revision to its national policy to include coverage for both one and two-level cervical disc replacement was an important step forward. We anticipate both the regional and national payors will review their own coverage policies for cervical disc replacement and expect that additional positive coverage decisions may follow by year-end 2014 and into 2015.

In addition, we are pleased to see that just this past week, the centers for Medicare and Medicaid services issued its hospital in-patient Prospective Payment System Final Rule for the federal fiscal year 2015, beginning October 1, 2014. The final rule includes new MS-DRGs for certain spine procedures and a new MS-DRG assignment for cervical total disc replacement procedures that will result in the significantly higher payment for these procedures. With payment for fusion remaining essentially flat, this increase will reverse the situation existing today, resulting in the payment for cervical disc replacement becoming higher as compared to the payment for cervical fusion.

Recognizing that private payors often use Medicare DRG rates as a baseline for their own procedure payments, we believe this change overtime may broadly impact private payments to hospitals for cervical disc replacement procedures. We continue to see significant opportunity to grow our business. This is especially true in the U.S. where our first half 2014 results reinforced our belief that we are on-track to establish Mobi-C as the new growth standard for indicated one and two-level cervical spine treatments.

We also have been pleased to observe evidence of a Mobi-C pull through effect where surgeons trained on Mobi-C subsequently adopted for the first time our VerteBRIDGE technology. As one further considers a fact that as of today, less than 50% of the U.S. spine surgeons have access to an LDR representative, it contributes to and reinforces our view of the growing opportunity for LDR ahead. As we look forward we believe LDR has a significant market opportunity and a clear competitive advantage with Mobi-C. Management is very optimistic about LDR’s outlook based on several positive events in the past 12 months.

This includes, first, FDA clearance of Mobi-C as the only cervical disc replacement available for both one and two-level disease in the U.S. This gives us a substantial first mover advantage in the market. Second, data from our PMA trial showing the superiority of Mobi-C to cervical fusion, extended out to 48 months for the two-level application and the collection of five year data which will be presented in November. Third, two-level cervical disc replacement has been granted a CPT code that will go into effect on January 1, 2015. Fourth, UnitedHealthcare decision to update its policy to include coverage of both one and two-level disc replacement and specifying the use of cervical disc which are FDA enabled for two-level procedures.

And finally, the strength of our balance sheet with over $60 million of cash net of debt. Based on the substantial opportunity apparent to us, we have decided to accelerate our investments to optimize this unique opportunity. Under our new horizon 2016 plan, we will scale and adapt our organization to the business and competitive opportunity especially as we are seeing an improvement in the reimbursement and coverage landscape and we anticipate an acceleration of the cervical disc market. Over the next 18 months, this investment will be in the area of sales and marketing, surgeon education and training and our reimbursement in corporate organizations.

From an asset perspective, we will invest in more instrument sets and interest inventory levels. We want to ensure there are sufficient instrument set and inventory in the field to serve our customers and accommodate at the higher levels of growth on the per product basis. This is especially true as we want to leverage our exclusive technologies and pull through for both Mobi-C and VerteBRIDGE product sets. The goal of the horizon 2016 plan is to optimize value creation for our shareholders in the long run by laying a proper foundation now. Regarding our U.S. sales structure LDR remains committed to our average sales channel, working with a significant number of independent agencies while also implying direct sales representative where appropriate.

Since our IPO last October, we have expanded our territory coverage by increasing our independent U.S. sales relationships to more than 200 sales agencies while also boosting the number of direct employees in our U.S. sales organization. Even so our surgeon coverage of the U.S. market remains at only about 50%. There are many metropolitan areas where we have the opportunity to add LDR representation. This is one of our priorities and we will continue to invest in this area to expand our sales presence through 2014 and into 2015. In all U.S. markets, we continue to selectively invest in our organization to support our growth. As an example, we have recently opened an office in Hong Kong to oversee and manage our efforts throughout Asia.

With that I would like to turn the call to Bob McNamara, Executive Vice President and Chief Financial Officer.

Bob McNamara

Thank you, Christophe and welcome everybody to our Q2 earnings conference call. Our total revenue for the second quarter ended June 30, 2014 reached $34.8 million compared to $26.6 million for the second quarter of 2013, an increase of 30.7%. This solid growth was primarily driven by strong performance of our exclusive technology products. More specifically revenue from our exclusive cervical and lumbar technology products grew 40.9% to $30.4 million in the second quarter of 2014.

Our traditional fusion product revenues decreased 13.1% to $4.4 million in the second quarter 2014 compared to $5 million in Q2, 2013. In Q2, 2014 cervical revenues from exclusive technology products were up 47.3% year-over-year, reaching $21 million. Key drivers of the cervical product revenue were the strong year-over-year growth of Mobi-C which as you know was not available in the U.S. in the second quarter last year and the continued solid performance of our ROI-C Cervical Cage.

Exclusive lumbar product revenues were $9.4 million in Q2, 2014, up 28.5% over the prior year impart due to the continued success and growth of the Avenue L lateral lumbar interbody fusion device. Exclusive cervical and lumbar products represented 69% and 31% respectively of our total exclusive technology revenue for the second quarter of 2014. By geography, our second quarter 2014 revenue in the U.S. increased 40% to $26.3 million compared to $18.8 million for the prior year period, primarily due to strong performance from our exclusive cervical technology portfolio and Mobi-C in particular.

Second quarter international revenue totaled $8.4 million, representing an 8.3% year-over-year increase. For Q2, 2014 our U.S. and international revenues represented 75.8% and 24.2% of total revenue respectively. In the second quarter 2014, our gross margin was 83.1% compared to 84.3% in the prior year period, as we continue to have outstanding gross margins from our higher mix of exclusive technology products and favorable revenue mix by geography.

Moving to our operating expenses, our research and development expenses were $3.1 million in the second quarter 2014 compared to $2.4 million in the second quarter 2013, primarily due to increased personnel costs and consulting fees. As a percentage of total revenue, R&D expenses decreased to 8.9% for Q2, 2014 compared to 9.1% in last year’s period. We expect R&D spending to increase overtime on an absolute basis as we develop new products, add R&D personnel, strengthen our patent portfolio and support new clinical activities.

Sales and marketing expenses were $20.7 million in Q2, 2014 compared to $15.7 million for the second quarter of 2013. This increase reflects higher sales and marketing expenses for Mobi-C in the U.S. including commissions, investments in our sales organization, hiring of additional sales management and marketing personnel, holding numerous medical workshops and investing in other product initiatives. As a percentage of total revenues, these expenses represented 59.6% of total revenue for the second quarter 2014 compared to 59% in last year’s period. We have several important exclusively technology product opportunities in front of us and we will continue to invest in this area throughout 2014 and 2015, in order to take advantage of these opportunities to grow our revenues and broaden our customer base.

Our general and administrative expenses were $6.9 million in Q2 2014 compared to $4.5 million in Q2 2013. G&A expenses represented 19.8% of total revenue for the second quarter of 2014, compared to 17.1% in the prior year period. We expect our G&A expenses to continue to increase as we hire additional personnel to support growth of our business and incur higher U.S. medical devices taxes as our revenues increased in the U.S.

Total other expense, net expense for Q2 2014 totaled $129,000 consisting primarily of interest expense. Our net loss for the second quarter of 2014 totaled $2.3 million or $0.09 per diluted share. This compares to a net loss of $3 million or $0.62 per diluted share for the second quarter 2013. As a basis for EPS calculations going forward, investors and analysts should use 26 million fully diluted shares for 2014.

Moving to our balance sheet, as of June 30, 2014 we had $84.3 million in cash with $108.2 million in working capital and $23.8 million in debt. As compared to the balance sheet on March 31, 2014, our cash position has increased $34.4 million. This increase was due impart to the sale of approximately $1.5 million shares by the Company in our follow -on offering in May, which generated net proceeds of $34 million. This excludes the sale of approximately 2.7 million shares in the offering by existing shareholders, which increased our flow and should improve our trading volume. In addition, our total debt of $23.8 million at June 30, 2014 was relatively consistent with the debt level at the end of March, 2014.

Now, I would like to provide financial guidance. Based on LDR’s results for the first half of 2014, the Company is increasing its revenue growth guidance for the full year to 20% to 21%, which implies 2014 revenues in a range of approximately $134 million to $135 million. This compares to the previous revenue growth guidance of 15% to 16%, which implied range of approximately $128 million to $129 million in revenues.

Regarding operating expenses and as it relates to our Horizon 2016 plan and our ability to prepare for and capture the revenue opportunity in 2014 and beyond, we expect to increase our second half 2014 spending compared to the first half of 2014 by $7.5 million to $8.5 million, excluding sales commissions. The majority of this spending will be in sales and marketing. In addition, we will be making a larger investment in implant inventory of approximately $4 million to $5 million, which increases our working capital, and an investment in capital assets of $10 million to $11 million, primarily for cervical instrument sets. As Christophe mentioned, we want to ensure there are sufficient instrument sets and inventory in the field to serve our customers and accommodate the higher levels of growth on a per product basis.

And now, I would like to turn the call back to Christophe for closing remarks.

Christophe Lavigne

Thanks Bob. To summarize, our company delivered 40.9% growth in our cervical and lumbar exclusive technology portfolio, representing 87% of our revenue base. As Bob and I mentioned, with our Horizon 2016 plan, we expect to maximize our opportunity by making incremental investments, especially in sales and marketing personnel, inventory levels and instrument sets to continue to take market share with our exclusive technologies and to capitalize on our first mover advantage with Mobi-C.

With that review, Bob and I would like to take your questions, operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Matt Miksic with Piper Jaffray. Your line is open.

Matt Miksic - Piper Jaffray

So I don’t know if I should say this but very impressive growth in the quarter. I’d love to ask just a couple of questions, maybe color around the Mobi-C rollout. One being maybe some of the pace of what you are seeing in terms of surgeon uptake. I know it’s hard to gauge early out of the gate training really just began sort of late last year. But now that you have, I would imagine a pretty good and this team in your training program, can you talk at all about what the conversion rate looks like or any metrics you can share in terms of penetration utilization coming out of that?

Christophe Lavigne

Yes, hi Matt. So as you know we can’t communicate exactly on the conversion rate as we don’t want to give too many information to our competition. What I would like to emphasize is on I think that this will help you. So the first thing is in terms of training and education. We still see a lot of demand and we are seeing a decrease coming from the U.S. surgeons to be trained on Mobi-C and this all for the six months of a year. The second thing is what we emphasize before is we’ve more than 6,000 surgeons performing cervical surgeries every year. Clearly, we still have a lot of opportunity to train more and more surgeon and we are committed to continue these investments and clearly one of our targets is to make sure that these surgeons after being trained will be able to use Mobi-C in their facility. So as we described before, depending on the type of facilities can take some time to be approved and we also worked on that and try to help them. So the question’s do we track our conversion success rate? I would say the answer is yes; and so far we have exceeded our internal target in terms of conversion rate.

Matt Miksic - Piper Jaffray

A couple on the comments you made and the announcements we’ve seen from CMS and the changing coverage. First just on the coverage revisions, you mentioned that you expect to see further revisions other coverage companies, private payors as we head into the end of the year. Any sense you can give us as to what the trigger events of those are as just a matter of them getting through the information that you have, that’s related to trials and is there anything having to do with the rough process or any other catalyst that will move those along or is it just it takes as long as it takes and it will happen when it will happen?

Christophe Lavigne

No I think that more and more clinical evidence will clearly help this process. On our side we are communicating and making sure that they are aware of everything we have. But I think for example Mass will be a great time where a lot of information will be communicated with five years data on Mobi-C but also five years or may be more on over cervical disc. So I believe that this will help. And also we have performed the annual reviews and we provide every new specifies of evidence that we have to them to have help to take that decision.

Matt Miksic - Piper Jaffray

Okay. And then on the final question here just on the change in surgeon payment. That has always been a challenge. It seems like you’ve been doing well despite that challenge in terms of the delta and when a surgeon was getting paid cervical fusion versus the disc in the U.S. How much of that have you felt in terms of resistance in the market as to that being an issue from the distributors to talk to surgeons and how much reluctance is there out there or is this just obviously good news but not really an impediment in the near-term?

Christophe Lavigne

Yes so first of all it is the hospital payment not the surgeon payment because it’s a change on the DRG growth. And currently the cervical disc are paid 16% less than cervical fusion and remember, so this is the Medicare DRG. So recognizing that private payors often use Medicare DRG rates has a baseline for their own procedure payments. This change overtime may clearly impact and probably impact a private payor payments to hospitals for cervical disc. If you think about what has been modified under the 2015 IPPS final rule, artificial disc as we see the new DRG code, which will pay a 63% increase over the current artificial disc DRG while fusion region reimbursements remaining essentially flat. So the increased payment means that cervical disc procedures would be paid 35% more than the payment for the standard cervical fusion. So this increase will reverse the situation today resulting in the payment of cervical disc replacement becoming higher as compared to the payment of cervical fusion. So we clearly see this as a very positive development and it may enforce our assumption of the acceleration of the penetration of disc in the cervical spine surgery market.

Operator

Our next question comes from Mathew O’Brien with William Blair. Your line is open.

Kaila Krum - William Blair

Hi guys, this is Kaila in for Matt congrats on this quarter. As far as cervical disc market development can you just comment on your expectations for market growth in the back half of the year, and just more commentary just on how this market has developed relative to your initial thoughts heading into the year?

Christophe Lavigne

Yes. So we don’t communicate exact number on Mobi-C for obvious reasons. We want to protect the interest of the company and shareholders. What I can emphasize is what we have always said I would say for many years is the two-level indication in our mind is one of the main reason why we are being so successful because not only we are providing new cervical treatment alternatives that we are providing to surgeon a superior treatments for their patients. And we believe that this is one of the most important things. Now relative to Mobi-C clearly so far, it has exceeded our internal expectations in terms of surgeon strength and in terms of revenue. So we do expect this to continue.

Kaila Krum - William Blair

Okay so that’s helpful and then you mentioned that the number of surgeons that you’ve trained continues to be better than expected. And so we’re just trying to get a sense for the ramp that you are seeing amongst your surgeon base and what sort of peak penetration levels you are seeing at those accounts?

Christophe Lavigne

Yes so again we don’t give the specific information. But as I said the trend of the requests from surgeons to be trained on Mobi-C has not decreased. Again I think it’s really due to the fact that we are the only company providing the ability to use, only would use one and two-level cervical disc in the United States, plus the superiority training over the fusion for two-levels indication.

Operator

Our next question comes from Dave Turkaly of JMP Securities. Your line is open.

Dave Turkaly - JMP Securities

Just kind of an ongoing debate about spine/head, one competitor recently write down a disc yet another recently said pricing is an increased headwind. I’d love to get your guys thoughts given that you’ve been kind of public for almost a year now on the U.S disc market opportunity say versus what you thought it was six months or 12 months ago and also the pricing environment versus say what you thought it was hasn’t changed at all, have you seen anything there? Thanks.

Christophe Lavigne

I am a strong believer in cervical disc, but I am a strong believer because we had clinical line evidence. And as based on clinical line evidence, on superiority claim that we found the base of our business from what we have seen in the United States. And I just see this coming more and more obviously to more and more people. I am very happy to see the evolution of the reimbursement landscape, I am very happy to see the DRG codes being modified clearly in favor of cervical disc and also I believe that more and people understand that cervical disc is today a treatment that they have to provide to their patients. And we are commitment at the hour to help them to understand when Mobi-C is indicated for one and two-level indication for that patient and when it’s not indicated because I believe it’s our, it is rate portability.

On the competitor’s experience honesty I cannot comment, I don’t know. You need to ask them the question and see what they have to say about this. In terms of pricing, we decided as a company to not focus on the commodities what we call commodities mostly pedicle screws of cervical plates because our belief was that pricing pressure will continue, and at the opposite, we do believe that when you have innovation on a specialty product like Mobi-C, after a PMA study and with a superiority claim we believe that we would be able to preserve our ASP and I think that we have demonstrated so far but we have been able to preserve our ASP. So pricing pressure is a fact, but I believe that mostly affected the commodity product line.

Dave Turkaly - JMP Securities

So would it be fair to say I have to ask this that your pricing is flat to up, in the last year you can even comment that granular?

Bob McNamara

We wouldn’t give that much detail in terms of pricing but we are satisfied with the pricing that we are getting.

Dave Turkaly - JMP Securities

Okay. And then another one that I have to ask I think you mentioned repeat utilization for one and two-level indications in your prepared comments. So any rates that you could share with us there at all in terms of what that is running at?

Christophe Lavigne

I would prefer to not give rate because I want to avoid to give too many information to our competitors, but what I can say is that when surgeons start to use Mobi-C, if they have had a previous experience with another cervical disc. I would say that most of the time they will continue to use Mobi-C because they already are familiar with the I would say clinical outcomes of cervical disc and they don’t need to wait two few months to validate that it works. And due to the ease of use of Mobi-C in the fit they really like that on most of the time to stick with this. And on the two-level side we have been very pleased by the percentage of two-level cases that we have performed. That’s what I can answer to this question.

Operator

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

Chris Cooley - Stephens

If I may, could you speculate a little bit for us through this afternoon on the cervical market with the upcoming increase in reimbursement on the procedure? Should that potentially drive more multi-level use of Mobi-C absent its own dedicated code I know in our work we’ve consistently seen you all taking nice share within single-level use and I am just kind of curious if you think how this plays out in the short run again absent a dedicated code? Then I just have follow-up. Thanks.

Christophe Lavigne

It’s a good question. Honestly I don’t know, because I still think that still we positioned two-level cervical disc very specific to clinical indication because we want to make sure that surgeons don’t overuse the Mobi-C but use Mobi-C when it’s appropriate, and this will continue to be our message during our training sessions. So I don’t think that it will increase only the two-levels, I think it will increase the use of one and two-level cervical disc, potentially because reimbursement of the hospitals seems to be at least not less than fusion. Because remember today, compared to fusion in foreign hospital, it’s about 16% less and tomorrow after October 1, 2014, it would be 35% more for cervical disc compared to fusion. So we will be in a reverse situation compared to what we have experienced so far. So I do believe that it will increase the use of cervical disc in general but not specifically two-levels, but two-levels being a big part of a cervical disc I think to increase the two-levels.

Chris Cooley - Stephens

And then could you maybe also just talk a little bit you had great success as well in the lumbar region and a number of your competitors have reported mixed results in that segment. Could you maybe elaborate somewhat there in terms of either the types of accounts or alternatively the feature set that you think is really standing out both for VerteBRIDGE but also the ROIC Cage offering as well? Thank you so much.

Christophe Lavigne

I would say two main reasons in my mind. The first thing is the product differentiations that we have in the lumbar area with ROI-A and Avenue L using our VerteBRIDGE platform and Avenue L is clearly differentiated product for the lateral cage markets. And the second reason and so I think is the benefit of the pull through effect that we have described before when surgeons start to use VerteBRIDGE and it can be with ROIC lumbar for cervical application. They are exposed to our VerteBRIDGE technology and it helps us to potentially convert this surgeon to a lumbar case where they will use Avenue L for example. So that’s the two main reasons that what I can see. So strength is in our product and clearly on the differentiation that we bring through the VerteBRIDGE and Avenue L our lateral cage, we are just at the beginning of our experience but clearly a very good start with this product.

Chris Cooley - Stephens

Can I ask please one last one and then I will get back in queue. I hate to ask this but on the traditional technology offering clearly some sequential improvement there but still down year-over-year. When we think about the step up in your guidance, I am assuming that is again primarily fixated in the exclusive technology but should we expect any kind of continued rebound sequentially in the traditional offering or is that an Italy kind of peripheral player relative to obvious progress on the exclusive side?

Bob McNamara

Sure, yes. I think the guidance that we’ve provided it clearly is driven by the exclusive technology that is the focus of the company it is focus of the product development the focus of our sales and marketing our organization. So that is our lead if you will and that will drive the growth. The traditional, we do have that available it is in our bag if you will, but it isn’t where we emphasize our product set to the surgeons. So it could decline and might remain flat, I don’t see it growing at this point certainly not to the point where we would highlight it as driving the growth of the company.

Operator

Our next question comes from Josh Jennings with Cowen and Company. Your line is open.

Josh Jennings - Cowen and Company

I just wanted to start off I know it’s hard to talk about competitor but you are obviously having a different experience in your initial innings of going to Mobi-C and the cervical disk marketing expectations when competitor is taken a right down but can you just talk about yourself you are seeing in the field, who are you matching up competitive against and who are you seeing the most. And what is really driving the shift there from Mobi-C, is it multiple factors, is it the two-level indication and the data on two-levels, just like to get your thoughts there?

Christophe Lavigne

I think that the main competitor that we have is certainly for ProDisc-C. That’s a product what has been approved a long time ago in the United States. Now the reason of the success of Mobi-C there is different reasons in my mind. The first one is clearly to be the only disc available for one and two-levels. Imagine if you are surgeon you can see patients tomorrow for one or two-levels application and having the ability to use a product with a truce of both clearly is a benefit. The second one in my mind is the superiority claim. We are providing not only a product but we are providing a superior treatment alternative to fusion. And I believe that more and more surgeons understand that, and as soon as they have all the information they need to validate the safety and efficacy of Mobi-C for two-levels, they decide to include this in their practice and I think it’s the big reason why we have been so successful in Mobi-C.

And I mean the third is something we do not control but it is the environment. As we are seeing the reimbursement landscape improved a lot for last six to nine months. More products are available it means more clinical evidence. We also have more clinical evidence with now over five years being available and will be communicated at the end of the year. So I think the association of all these things together plus clearly Mobi-C we have clear differentiation in terms of product features, I don’t want to go into the detail during this call but there is a lot of differentiation of Mobi-C compared to our competitors and I think our teams, say the market team did an excellent job to communicate that.

Josh Jennings - Cowen and Company

Thanks for that. And just on your guidance, I know the $6 million uptick is driven by the exclusive technology side. But, Bob, I think you've mentioned in previous calls or your guidance from Mobi-C for the 2014, was $8 million to $10 million. Is the majority of this uptick driven by Mobi-C or is it more broad-based across the exclusive technology platform?

Bob McNamara

So we’ve never actually stated specific guidance on Mobi-C and we look at the total exclusive technology. Now if you think about year-over-year growth and you recognize that in 2013, Mobi-C was really only available in Q4 and clearly that is the big piece of the growth. But we have found when you look at the products that if you look whether it be the ROIC which is now gets some pull through effect with Mobi-C and vice versa, if you look Avenue L, these products are performing very well. So it would not be correct to say that it’s really just only product here that’s contributing to the growth it is spread throughout the entire exclusive portfolio.

Josh Jennings - Cowen and Company

And my last question is, Christophe, is I think on the last earnings call you mentioned some internal development programs and maybe some external business development initiatives. But will we be hearing anything at NASS in terms of any new product rollouts or pipeline products that could contribute in the portfolio in 2015, and beyond? Thanks a lot.

Bob McNamara

Thanks for the question. No, I don’t think so, you may expect to see something next year but the focus will be clearly on Mobi-C, ROI-C and Avenue L because we believe it has scratched the surface with this.

Operator

Our next question comes from Glenn Novarro with RBC Capital Markets. Your line is open.

Glenn Novarro - RBC Capital Markets

I had a question on Horizon 2016. You're going to make a major investment in distribution. You're going to accelerate investing in U.S. distribution. So maybe can you help us or quantify where you are today? I know you have a hybrid model in the U.S. But where you are today in terms of agency, direct reps, and where you expect to be over the next 18 months as you rollout Horizon 2016? And then I had a follow-up.

Bob McNamara

Thank you, Glenn. So today we have about 200 plus sales agencies in the United States, so we have been able to increase our number of sales agencies since our IPO. And as you know we are committed to the hybrid sales organization. We have direct reps but we have a limited number as of today we don’t commented exactly the number but we have small number of direct reps. What we want to do is, to increase our surgeon coverage in the United States because as I said we are covering about 50% of the spine surgeon in the United States as of today. So, one of the part of our horizon 2016 plan is to expand our surgeon coverage in the United States, difficult to give you an exact number because I would love to be accurate but I think it will not be accurate if I was giving a number now. But clearly it’s a priority for LDR. We believe we will be able to add more sales agencies or if we don’t have good sales agencies available, to place more direct reps where it’s needed. So, it will be a part if our investment.

Glenn Novarro - RBC Capital Markets

And then as a follow-up, as you add these agencies, will they be exclusive to LDR? And I guess my question is, if you look at the broad landscape, I mean, how great is the demand from these agencies to want to be exclusive with LDR or just be involved with LDR? And then I just have one more follow-up after that.

Bob McNamara

So, most of our agencies today they are exclusive to at least three of our four exclusive technologies and most of the new agencies joining us, I believe will be same way. So, I do believe that we will increase presentation of agencies, selling no competitive products to our exclusive biotechnologies.

Glenn Novarro - RBC Capital Markets

Okay. And I would imagine the environment to add agencies and reps is still very favorable. And the reason I'm saying that is, for example, Stryker, on their call recently said they were losing reps to distribution. So do you feel like the environment is favorable to add? And then as one last follow-up, once you add these reps or agencies, how quickly do they become productive for you? Does it take 6 to 12 months? Can it be sooner? Thanks.

Bob McNamara

That’s a lot of questions, Glenn. So, first part of your question, so we have not seen that because we don’t have the same organization as the company but to describe. We have seen clearly an attractiveness of LDR for spine specialist and I think it’s based on our technology. I think that some people are just tired to service and pedicle screws, I am trying to explain that because it’s a yellow, pedicle screw is better than the green one. And I think that they like the fact that LDR is based on clinical evidence of technology and that’s what we do. And the last part of your question was?

Glenn Novarro - RBC Capital Markets

When you do bring on a new agent, for example, how quickly do they ramp up? Is it 6 to 12 months, is it sooner in terms of training and being able to really add to your top-line growth?

Bob McNamara

I think one of the benefit is we are the only cervical disc available to these sales agencies, so they can have an immediate impact with Mobi-C if they already have existing relationships with surgeons and we have seen that and I believe that we will continue to see that. And it’s one of the benefits of having differentiated product especially like cervical disc because these independent sales agencies didn’t have the disk before and they are looking for cervical disc and we are providing that to them. And now it gives them a new business opportunity, a new way to increase their business and I believe that they are very sensitive to that.

Operator

I am not showing any further questions at this time. I would like to hand the call back to the Christophe Lavigne, the President and CEO for closing remarks.

Christophe Lavigne

Yes, thank you for participating in today’s call and we look forward to updating you on our progress on the third quarter call in November.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a great day.

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