SeaSpine Holdings Corporation (SPNE) CEO Keith Valentine on Q3 2019 Results - Earnings Call Transcript

Oct. 29, 2019 9:36 PM ETSeaSpine Holdings Corporation (SPNE)
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SeaSpine Holdings Corporation (NASDAQ:SPNE)

Q3 2019 Earnings Conference Call

October 29, 2019, 16:30 PM ET

Company Participants

Keith Valentine - President and CEO

John Bostjancic - SVP and CFO

Leigh Salvo - IR

Conference Call Participants

Matthew O’Brien - Piper Jaffray

Sam Brodovsky - BTIG

Craig Bijou - Cantor Fitzgerald

Jeffrey Cohen - Ladenburg Thalmann

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 SeaSpine Holdings Corp. Earnings Conference Call. At this time, all participant lines are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions].

I would now like to hand the conference over to Leigh Salvo. Please go ahead, ma’am.

Leigh Salvo

Thank you. And thank you all for participating in today’s call. Joining me from SeaSpine is CEO, Keith Valentine; and CFO, John Bostjancic. Earlier today, SeaSpine released full financial results for the third quarter ended September 30, 2019.

During this conference call, we will make forward-looking statements within the meaning of federal securities laws in regard to our business strategy, expectations and plans, our objectives for future operations and our future financial results and conditions. All statements other than statements of historical fact are forward-looking statements. Such statements may include words such as believe, could, would, will, plan, intend and similar expressions. You are cautioned not to place undue reliance on forward-looking statements, which are only predictions, and reflect our beliefs based on current information and speak only as of today, October 29, 2019.

For a description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward-looking statements, please see our news releases and periodic filings with the SEC, which are available on our corporate Web site, www.seaspine.com and at www.sec.gov.

I’ll now turn the call over to Keith Valentine. Keith?

Keith Valentine

Thank you, Leigh. Good afternoon and thank you all for joining us. We are extremely pleased with our performance this year and in particular our third quarter. This quarter marked a pivot we have been signaling to sustain and accelerating double-digit revenue growth.

Growth generated by a larger and increasingly committed and exclusive distribution network that is armed with a very comprehensive and differentiated portfolio of spinal implants and complementary orthobiologics products that allows us to access new market segments where we were previously unable to compete.

I’m confident the results we achieved in third quarter are just the beginning and we believe our signal for even greater progress to come, progress in the form of even higher revenue growth in 2020 and beyond as we continue our aggressive investment in new product launches and start to gain a foothold in new geographic markets in the United States where we previously had little to no distribution representation.

For those of you following along with the slide deck, Slide 3 provides a summary of our financial and operational highlights in the third quarter. We delivered the highest quarterly revenue in the history of SeaSpine, as a standalone company, with total revenue of 39.9 million, an increase of 11% versus the year-ago period.

In the U.S., growth was once again led by higher sales of recently launched products and line extensions that were increasingly driven by our core distributors which I’ll highlight in more detail momentarily.

I'm especially proud of the 16% growth we posted for U.S. spinal implants which is by far the highest growth in that portfolio to date. New and recently launched products contributed more than 53% of U.S. spinal implant revenue in the third quarter and grew 45% over the prior year.

As we continue to launch new products, we are able to capture more of the procedure by addressing new market segments, such as the midline cortical approach, MIS and more complex deformity surgeries and is illustrated in the progression on slides 4 and 5 with how those recent line extensions for our foundational mariner platform can able us to take additional market share in the $2.8 billion fixation market segment. For this reason, we anticipate that our U.S. spinal implants revenue will continue to grow faster relative to our U.S. orthobiologics revenue.

Turning to Slide 6. From a distribution perspective, we continue to add more committed and increasingly exclusive distributors in the U.S. market. These distributors, which we refer to as core distributors, are a select group that with some exceptions to both our spinal implants and orthobiologics products are expected to be the most meaningful contributors to our future revenue growth by virtue of the degree of their exclusivity and commitment to SeaSpine’s products.

For the third quarter, our core distributors collectively generated nearly 60% of our total U.S. revenue and grew 19% year-over-year. As you can see with the scale they have achieved, our core distributors’ revenue percentage breakdown by portfolio was nearly 60% spinal implants and just over 40% orthobiologics is starting to more closely resemble the average revenue breakdown per procedure for spinal implants versus orthobiologics.

From a product development perspective, SeaSpine is in the midst of our most ambitious launch schedule in our history. We launched four new products during the third quarter, including alpha launch line extensions of our foundational, modular, Mariner Pedicle Screw platform for MIS and revision surgery, and of our modular Shoreline standalone Cervical Interbody that incorporates the innovative new Reef Topography.

Reef Topography describes machined microstructures and undercut features designed to act as an integrated fusion scaffolding that enhances our proprietary NanoMetalene surface technology. We are investing in the scientific work to evidence the value of Reef Topography as we finalize the data from an animal study that we expect to present at a future scientific conference, and that we believe will demonstrate the in vivo benefits of Reef.

As described in prior earnings calls, we currently have a very robust development pipeline with more than 20 projects underway, including a procedure-specific retractor system, a next-generation cervical cleaning system, a new posterior cervical fixation system and new interbody designs including parallel and lordotic expandable interbody devices and a suite of 3D-printed interbody devices for a wide range of surgical approaches in collaboration with restor3d.

I want to take a moment to highlight the restor3d development agreement. The partnership provides us with an entry into, and an opportunity to differentiate within, the 3D-printed interbody space, one of the fastest-growing segments in spine. We partnered with Ken Gall, Professor of Mechanical Engineering at Duke University and his team that specializes in developing 3D-printed implants with enhanced anatomical fit and superior integrated properties.

restore3d proprietary three-dimensional structure was developed through years of scientific research and development in 3D metal printing, and the well researched architecture provides the foundation for novel 3D interbody designs that thoughtfully balance structural integrity with the biological requirements for bony integration and fusion.

We expect to commercialize our first 3D-printed interbody devices to be developed under this agreement in the second half of 2020. The launch of these 3D-printed interbody devices coupled with the anticipated launch of our expandable interbody devices in the first half of 2020 will fundamentally change the way we address the interbody market segment.

Turning to Slide 7. We show the estimated market breakdown of the 1.6 billion interbody segment where we currently compete only in the PEEK and composite space via our proprietary NanoMetalene surface technology. Given the ongoing and anticipated acceleration of the decline of the PEEK as more biologically-friendly implants are adopted by the market, we expect a significant shift to composite and 3D-printed implants in the near term as depicted upon Slide 8.

However, by 2020 we plan to be able to address the entire 1.6 billion interbody market through a greater representation across the U.S., as shown on Slide 9. This ability to penetrate deeper interbody space is expected to be a major driver of our ability to take market share and thus contribute to even greater revenue growth in 2020 and beyond.

Shifting to our orthobiologics portfolio, at the recent NASS meeting, we presented data from a study conducted in collaboration with Jeff Wang, MD, and the current President of NASS and his research team in USC, along with Scott Boden, MD, at Emory University demonstrating that there was no benefit to the viable cell component of cellular bone matrices in the well-accepted athymic rat posterolateral fusion model.

The results of the study, which are summarized on Slide 10, indicates superior fusion with OsteoStrand Plus demineralized bone matrix product, which does not contain any cell component relative to two market leading cellular bone matrices products, or CBMs, with or without the cellular component.

Slide 11 shows representative CT images of the study, which indicates more robust and mature bone formation with the OsteoStrand Plus product. As the body of evidence grows confirming that cells do not confer any benefit, we are exceptionally well-positioned to transition hospitals from high-priced cell-based therapies to our best-in-class and most cost-effective DBM products.

Additionally, we believe that we are now the number two player in the U.S. DBM market heading past Jane Ja diPierro [ph] as they continue to focus their sales and marketing efforts more on cellular bone grafts.

Finally, turning to Slide 12, I wanted to highlight some recent additions and changes to our U.S. sales management team and structure. We have added more experienced leadership with Dave Decker joining us to oversee sales management in the northeast and central United States.

And we are adding additional sales managers to the southeastern United States, which is led by Rhett Clark. These regions all represent significant future growth opportunities for us, and we are relatively underpenetrated in those markets. Mike Lytle will continue to lead the western area where we have generated mid-teens sales growth the past two years.

And perhaps just as significant, we have now fully integrated sales leadership for both spinal implants and orthobiologics under one leadership team. We expect this fundamental change in sales leadership strategy under John Winge and his team to drive more efficient and effective collaboration to lead more cross-selling growth opportunities for spinal implants and orthobiologics portfolios.

With this in mind, we are raising our guidance for full year 2019 total revenue to a range of 157 million to 158 million, reflecting growth of 9% to 10% compared to the prior year. With the momentum we have gained in 2019, coupled with the growing confidence we have as an organization and our ability to quickly develop and commercialize cost-effective clinical solutions to meet our surgeon customers needs, we believe that we are poised to deliver more robust revenue growth in 2020 and beyond with U.S. spinal implants growth accelerating into the mid to high teens.

I'll now turn the call over to John to provide more detail on our financials and our financial outlook. Then I will wrap up. John?

John Bostjancic

Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, total revenue for the third quarter of 2019 was $39.9 million, an increase of 11% compared to the prior year and represents a meaningful acceleration in growth compared to the two previous quarters.

U.S. revenue increased 12% to $35.5 million and international revenue grew 6% to $4.4 million, largely on the strength of spinal implant replenishment orders. U.S. orthobiologics revenue in the third quarter increased 9% year-over-year to $18.2 million driven by growth in recently launched DBM products, led by the OsteoStrand Plus product.

As we continue to ramp up production capacity of the fibers-based DBM products and broaden our sales and marketing efforts, we are starting to see more of the expected and desired cannibalization of our legacy particulate DBM products. This controlled cannibalization will have a beneficial impact on cash flow management as we scale down production of our legacy products inventory over time.

Sales of our Mozaik collagen matrix product line increased in the third quarter and with the addition of the OsteoCurrent product, we expect to generate continued growth in our synthetic bone graft substitute franchise going forward.

U.S. spinal implant revenue in the third quarter increased 16% year-over-year to $17.4 million and was once again driven by growth of the recently launched products, led primarily by the Shoreline and Mariner systems and by our expanded NanoMetalene portfolio and higher revenue dollars per procedure due to mix.

Spinal implant surgery case volumes increased more than 10%, but were somewhat offset by continued low single-digit price declines. Despite the third quarter typically being one of the weakest quarters of the year due to seasonality, it was very encouraging to see third quarter spinal implant revenue increase sequentially versus the second quarter which reaps the benefit of summer scoli season.

Gross margin for the third quarter was 63.9% compared to 60.2% for the same period in 2018. The improvement in gross margin was due to a favorable shift in geographic and product mix, with higher margin and U.S. revenue growing faster than international revenue and higher gross margin spinal implant product revenue growing faster than orthobiologics product revenue.

Additionally, manufacturing scrap rates, inventory losses and excess and obsolete inventory provisions were lower in the current period compared to the prior year. We continue to see the sustained benefits of our focused efforts to reduce the raw material and manufacturing costs of our orthobiologics products.

Operating expenses for the third quarter of 2019 was $34.8 million, a $3.8 million increase compared to $31 million for the same period of the prior year. This increase was driven by a $3.1 million increase in selling, general and administrative expenses and a $700,000 increase in research and development expenses.

The increase in SG&A expenses was mainly driven by higher sales commission expense due to increased revenue and higher salaries and wages and increased legal fees, freight and other logistics expenses. Net loss was $9.7 million compared to a net loss of $9.6 million for the third quarter of 2018.

Cash, cash equivalents and investments at September 30, 2019 totaled $27.3 million and we had no amounts outstanding under our credit facility. Our free cash flow burn, which excludes financing inflows and outflows and purchases, sales and maturities of marketable securities, was $8.8 million for the third quarter of 2019 and $25.5 million year-to-date. This compares to a year-to-date $15.2 million free cash flow burn for the prior year period.

The increase in 2019 was driven primarily by higher purchases of inventory and instruments to support recent and upcoming product launches and to maintain full inventory levels for both the newer fibers-based DBM and legacy particulate DBM portfolios, and for investments in the spinal implants that we expect to sell to international stock distributors later in the fourth quarter, particularly as we begin to sell our spinal implants systems into Mexico through an expanded relationship with our long-standing orthobiologics distributor.

We remain focused on expanding our gross margin and continuing to reduce cash-based G&A expenses as a percentage of revenue. However, in the short term, we plan to continue to redeploy much of that operating leverage towards the sales, marketing and R&D initiatives as well as the increased investments in spinal implant set builds in inventory that are critical to building a scale and driving a sustained and accelerating revenue growth that are needed to achieve sustained positive free cash flow.

We now expect our free cash flow burn for full year 2019 to be in the range of $30 million to $32 million. This increase in spend reflects the confidence we have to more aggressively invest in spinal implants inventory, instruments in the sets that are needed to achieve the higher 2020 revenue growth rates that Keith discussed earlier, and also reflects lower cash collections in 2019 than previously expected because of a late fourth quarter timing of spinal implant set sales to our international distributors which is a few months later than originally anticipated.

We expect to see a corresponding benefit to cash collections in the first half of 2020, as a result of the timing shift for international set sales and we expect to reduce our free cash flow burn for full year 2020.

For the full year 2019, we continue to expect to spend in excess of $10 million of capital expenditures to support new spinal implant system launches and to fund the deployment of additional sets of our flagship Mariner and Shoreline systems. That represents more than a 50% increase compared to 2018 and translates into meaningfully higher, but much harder to quantify spend this year compared to last year on the implant inventory that will go into those additional sets and for replenishment of the warehouse stock.

I want to offer more color on this anticipated spend because of its impact on anticipated 2019 free cash flow burn and because it is an important factor in our decision to once again increase our full year 2019 revenue guidance. Based on the strong correlation we’ve identified between spinal implant set additions and increased revenue growth, as measured by revenue generated per set, we continue to believe there is meaningful unmet demand for our key systems; Mariner, Shoreline and the recently alpha launched line extensions of those systems in particular that is being generated by our core distributor partners.

Year-to-date in 2019, we did not sell any shares of common stock under our ATM program and we recently announced our decision to terminate this $50 million facility. Despite our ambitious product development plans, we believe that our strong balance sheet and liquidity position enables us to execute these plans successfully in the near term.

Turning to our financial outlook for 2019, as Keith mentioned earlier, we raised the bottom and top end of our revenue expectations. We now expect full year 2019 revenue to be in the range of $157 million to $158 million, reflecting growth of 9% to 10% over full year 2018 revenue and 10% to 12% higher than fourth quarter of 2018. This compares to previous revenue guidance of $155 million to $157 million.

Moving down the P&L, we now expect gross margin for 2019 to increase to within a range of 63% to 64%, as we continue to realize the benefits of the process and yield improvements we've implemented in Irvine; and SG&A, excluding non-cash stock-based compensation charges and any non-cash gains or losses related to changes in the fair value of NLT-contingent consideration liabilities to approximate 68% to 69% of revenue. We continue to expect R&D to approximate 9% to 10% of revenue.

At this point, I’d like to turn the call back over to Keith for closing comments.

Keith Valentine

Thank you, John. SeaSpine is now one of the fastest-growing pure-play spine companies. With our pivot to sustained and accelerating double-digit revenue growth, we are an even more confident organization that is poised to take even more market share in the future.

We are led by the very experienced and focused leadership team that collectively has more than 230 years of experience in spine and orthopedics, and perhaps most importantly the almost 400 employees of SeaSpine are more motivated and capable than ever to deliver clinically relevant, cost-effective procedural solutions that differentiate us with both surgeons and distributors in this competitive market.

We are energized yet humbled by our recent successes, and we are committed to continuing to grow at a rate that is at least five to six times faster than the overall spinal implants market. I am proud of the solid foundation for accelerating growth we have established and we remain dedicated to providing high-quality, differentiated and complementary technologies that leverage our core competencies in orthobiologics, interbody devices and modular spinal instrumentation systems.

With that, we will now open it up to questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Matthew O’Brien with Piper Jaffray. Your line is open.

Matthew O’Brien

Good afternoon. Thanks for taking my questions. I guess --

Keith Valentine

Good afternoon.

Matthew O’Brien

Afternoon. First few questions are actually for John, Keith no offense. But, John, first is just a housekeeping one. Can you give us a split between hardware and biologics on a global basis?

John Bostjancic

Yes. The global breakdown for third quarter?

Matthew O’Brien

Yes.

John Bostjancic

Global spinal impacts was 19.8 million and global orthobiologics was 20.1 million.

Matthew O’Brien

Got it, okay. You mentioned your cash balance being around $27 million. Can you remind us what the level of your credit facility is?

John Bostjancic

Yes. It’s a $30 million facility. We currently have over $25 million of borrowing capacity today and that continues to increase each quarter. And then we also have that $10 million accordion that we executed when we extended and amended it in July 2018. So we can increase it to a $40 million total facility as we continue to grow into that borrowing base.

Matthew O’Brien

Got it. So in total, you’re more like close to $70 million in cash and credit available today, not necessarily the 27. Is that fair?

John Bostjancic

Correct.

Matthew O’Brien

Okay. And the reason I’m asking you is the cash burn definitely gets the attention of investors. When you talk about all this growth that you’re going to see next year, that’s great to hear, but the cash burn is going to come down. So, is it fair to think that just today you probably have two or three years worth of cash on hand or cash and credit available?

John Bostjancic

When you look at from the cash on hand and investments on hand and that potential borrowed capacity maximum under the credit facility, which like I said we expect to continue to grow into that and be able to expand into the $10 million accordion, that would based on expectations for future cash flow burn get us to two years of liquidity based on the cash and that potential borrowing capacity at the facility.

Matthew O’Brien

Got it, very helpful. Okay, let me flip over to Keith. The commentary on mid to high-teens growth domestically in implants was rather eye popping. So can you just provide a little bit more color as far as where that growth comes from? I know you have two new heads on the eastern seaboard that are showing things up there. But is it that instrument sets, products, existing accounts going deeper, just more detail on where all that growth comes from?

Keith Valentine

Yes. So we’re really excited about how the alpha launches have gone for extension into MIS for our Mariner system as well as getting into the ability to do revision surgery in more complexity. And so we feel very good how the alphas have gone. We feel very comfortable how we’re going to be pushing those into full launch. And we know from how the alphas have gone that we have been able to better penetrate procedures and we’ve been able to grab more of the entire procedure, including orthobiologics and interbody devices, not to mention that these constructs can sometimes be longer, especially the ones that are revision in nature. So we feel very good that the Mariner has become such a great foundation and that this is really important building blocks onto that foundational system, especially when you look at how the market’s growing, the MIS section of the market is a faster growing than the traditional degenerative overall. So, we feel good that we’ll be able to capitalize on that and we also feel very good with how the alphas have gone that we’ll be able to transition nicely in the full launch.

Matthew O’Brien

Okay, that’s helpful. And then just along those lines, Keith, at your former company I remember early days grabbing a percentage of total case opportunity was a big focus. Can you just share with us maybe – just anecdotally or just generally speaking where you’re at in that process of existing accounts in terms of the amount of procedures that you’re grabbing that you could including them in and how many or what kind of revenue per case you’re seeing and where that potentially could go over time?

Keith Valentine

I don’t think we’re going to share a few of the percentages, but generally speaking we’re seeing a nice increase in procedural growth, right, but price per procedure is growing faster. And so that gives us the comfort of how we’re seeing the spinal implant line kind of take on a new growth curve, if you will, as we get into the end of this year and then into next year.

Matthew O’Brien

Got it. And last one from me and I’ll hop off, I think you talked a little bit about the NLT timing with the expandable. I know you’re making an adjustment there. It sounds like that’s all buttoned up. Can you talk a little bit about what that adjustment was that you made there and kind of what’s the differentiating features really going to be about expandable? I know that’s a really good growthy [ph] market.

Keith Valentine

First, we got into – also I think we pretty quickly realized we needed to have more sizes and the sizes also required downsizing in a sense the implant. And so when you did that, it became challenging for the existing design. So we’re keeping, as we mentioned on the last call, the existing design for the lordotic, but the parallel distraction is an in-house design that we’re going to. We feel like it has a better ability to complement the size needs of the surgeon as well as easier for instrumentation to attach and decouple and be used for it. So that was all kind of learnings from our early alphas.

Matthew O’Brien

All right, very helpful. Thanks so much.

John Bostjancic

Thanks, Matt.

Keith Valentine

Thanks, Matt.

Operator

Our next question comes from Ryan Zimmerman of BTIG. Your line is open.

Sam Brodovsky

Hi. It’s actually Sam on for Ryan. Congrats on a great quarter first of all.

Keith Valentine

Hi, Sam. Thanks.

Sam Brodovsky

So looking with all the capital deployment expected into FY '20, can you just remind investors where your revenue to capital ratio is on set deployments and how do you look at that going into FY '20?

John Bostjancic

Yes, we look at the – we focus more on are we generating more revenue per set as we deploy sets. And if you think about the ASP per procedure, it’s highly variable. So it’s really difficult to put out a meaningful revue per set metric because it’s all over the board from a simple cervical procedure to a more complex deformity procedure. So we don’t necessarily want to talk about ASP because mix can heavily impact the revenue per case. But what we do focus on as we continue to deploy more sets every quarter, we’re generating more revenue per set and it kind of goes along the line with what Keith is talking about is capturing more of the procedure. So we know that when we deploy more sets, we’re getting a resulting increase of revenue per set. But we’re also – as we have deployed Mariner MIS and Mariner Revision, for example, we’re able to capture more of the procedure. So you get the pull through not just from the revenue per set but also additional sets that are being brought into the case because we couldn’t address that market segment in the past and that’s a lot of what Keith’s comments was, the new markets segments we can address with the recent product introductions.

Sam Brodovsky

Okay, great. That’s helpful. And then can you mention your share position in the DBM market and what you’re seeing from players above you, namely Metronic and Johnson & Johnson? Has there been any investment in this area that have been keeping up with you there? And it seems just like Metronic in particular is redoubling efforts to [indiscernible] as opposed to going for a lower priced biologic option?

Keith Valentine

Yes. So if you take a look at it now and as we mentioned in the call, we feel like we’re now in the number two position and a lot of that has to do with the fact that I think it’s just been refocusing of priorities. J&J was number two previously. It certainly appears that they have taken a leadership stance on the sell-side of their product offering and I think it’s really just a matter of focus. They’re focusing more on that than they are on their DBM alternatives. Metronic has always had a very good DBM portfolio and they continue to have I think a balanced sales force approach to their DBM selling. So that’s what we’re gutting for. We feel like we have been the lone investors in this space over the past few years not only in how we invested in our manufacturing of our new stranded DBM products, how we’ve done the science behind them and now that we’re continuing to show additional clinical work on that side as well. So we feel like we’re the ones making the investment and we feel strongly that it’s the right time to double down in this space. It’s the only product I know of in spine that has a zero reimbursement pushback from payers. They have all been very accepting of the use of DBM as an orthobiologic for much greater than a decade, almost two decades now. And I think this is an area that we can continue to show that we’re at the right price point and continue to deliver as good if not better clinical efficacy than the competition.

Sam Brodovsky

Great. I appreciate you taking the questions.

Operator

Our next question comes from Craig Bijou of Cantor Fitzgerald. Your line is open.

Craig Bijou

Good afternoon, guys. Thanks for taking my questions.

Keith Valentine

Hi, Craig.

Craig Bijou

Hi, Keith. Congrats on a very strong quarter. I wanted to start with the biologics and maybe a little bit of a follow up on the previous question, but obviously you guys talked about the data that you presented at NASS and I know it’s only about a month, but I wanted to get maybe some surgeon feedback or reaction that you guys received following that data? And then I know you mentioned J&J and they’re investing on the cellular side. So maybe just anything you guys are seeing with respect to the higher ASP biologics if J&J is focusing on the cellular side, why, if they’re seeing a little bit more pushback on the higher price?

Keith Valentine

Yes. I think that a lot of the pushback that suppliers are seeing are really generated – there is of course some hospital pushback on any expensive orthobiologic of course, but the bigger pushback I think you’re seeing on the cell side is there’s still a number of large payers that exclude that from kind of their formula. And I think that has been problematic. It depends on the area of the country. It depends on a particular private insurer. But there certainly is pushback on the private insurance side for cell-based technologies. And I think on top of that there has been more and more conversation over the past year or so about the role that cells play and what is that role? It’s not a question as if to whether they’re living or not. The question is what is their role to be played? And I think a lot of surgeons continue to debate that question and they continue to want to understand it more. And so the study was largely just trying to show what the impact is with and without cells and finding a good way to neutralize those cells through an authorization [ph], which doesn’t harm the DBM component that’s within that entire composition. So it’s been great conversations since NASS and I think that debate will continue. But we just want to be insured that the debate is continuing with science behind it as well.

Craig Bijou

Got it, that’s helpful. And maybe just thinking about the entire business in 2020 and I know you guys probably won’t provide guidance, but you grew 11% plus this quarter and you’re forecasting 11% at the midpoint in Q4 both on pretty tough year-over-year comps. So from an overall business perspective, how should we think about the growth rate in 2020? Can you accelerate from the strong second half growth that you’ve seen thus far in '19?

John Bostjancic

Yes, I think for all the reason, Craig, that Keith talked about with continuing to grow the distributor network and get more exclusivity from that group and what attracts those distributors is continuing to rollout the cadence of products and being able to address new market segments, large parts of our market segments that we haven’t been able to address in the past through the 3D-printed interbody, the MIS and revision surgery moving into deformity surgery with Mariner, that gives us the confidence, as Keith said in the call. Exiting the second half of the year, it’s sort of 11% to midpoint, we think we can do a little bit better than that in 2020. But as we also called out in the scripted comments, spinal implants is going to be what drives that growth and our expectation there is to get to – sustain the mid-teens growth that we delivered in the third quarter and just continue to grow from there.

Craig Bijou

That’s helpful. And not to ask you a bit of a – not a negative question necessarily, but what do you see as potential risks to get into those levels that you guys expect to see in '20?

Keith Valentine

Yes. I think that obviously we’re very bullish on the new products that we’re pushing out for spinal implants. And so we feel very good about how they can grab more of the procedure, right. But I think speaking candidly, we also have to be very aware of the fact that growing orthobiologics is a harder segment of growth. It’s especially hard with the market share penetration that we continue to get and in addition it often falls under pricing pressure. And so there’s a balance there of how we have to continue to make sure we’re expanding the right areas, finding the right partners and getting onto the right contracts which we have been very successful in doing with our orthobiologics franchise. So I would say those are risk factors. The risk factors are, are we able to continue leveraging those larger accounts and those contracts and maintain our pricing, especially now that we have a nice range of products from our particular DBM all the way into our high-performing stranded DBM. So we have to maintain that purse differentiation, if you will.

Craig Bijou

Great. Thanks for taking the questions, guys.

John Bostjancic

Thank you.

Operator

Our next question comes from Jeffrey Cohen of Ladenburg Thalmann. Your line is open.

Jeffrey Cohen

Hi, Keith and John. Nice quarter. Thanks for taking the questions.

Keith Valentine

Hi, Jeff.

John Bostjancic

Hi, Jeff.

Jeffrey Cohen

So I guess just one probably for John. Can you talk about some of the 3D interbodies that you’re anticipating to rollout next year and the general effect on your margins and general effect on the cost for cases and the number of products that you expect to have in the field, you expect to have more SKUs available with short lead times to be shipped or do you expect to fully embed them within cases better out there?

Keith Valentine

Yes. So first, let’s back up a little bit. One of the nice things about how we have been able to work with the team at Duke is the intent and the focus is that it’s up to the surgeon what material they want. If they want a composite material, obviously NanoMetalene is a choice. If they want a 3D-printed material, then we’re going to have options for them. But the great news is you can use the same set of instruments, which is important because it leverages us to have a more efficient ability to get trays out, it creates one learning curve on your system, meaning that instrument tray ends up being learned for both the NanoMetalene product line and the 3D product line. So we feel like we’re going to stepwise launch products that are very similar to one another as far as instrumentation but are certainly very different from a material perspective and even a design perspective, right. There’s a little bit difference in the designs. Of course, to the open architecture of NanoMetalene and what the architecture will be of a 3D implant. But I think that’s a very important distinguishing fact of how we can cater into one account and still provide two very different material choices. And I’ll let John talk about the second part of that question, Jeff.

John Bostjancic

The gross margins, Jeff, we expect based on our analysis to be positive contributors to gross margin much like the NanoMetalene interbody portfolio contributes to gross margins overall. It’s favorable to the portfolio. And as Keith highlighted, the efficiency of being able to use the existing instrumentation sets is great from a capital perspective because we don’t have to buy as many instrument sets as we would to support those implant sets if in case you’re bringing both the NanoMetalene and the 3D into the procedure, you’ve got one set of instruments that can manage that case. So it’s efficient from a cash flow perspective as well.

Jeffrey Cohen

So you’ll be able to handle the implant trays differently than the actual implants as far as logistics go?

Keith Valentine

Yes. Typically, the implants are – like on the NanoMetalene side and they just paid similar for the 3D-printed sterile pack in a tote, so you can bring in different totes with different product ranges configured to whatever the surgeon needs and then you’ve got your standard trays of instruments that go in with a sterile implant tote.

Jeffrey Cohen

Okay, got it. You talked a little bit earlier about the cost out there in the marketplace, you’re getting pushed lower, your case volumes are up 10%. So is it safe to assume then that your revenues per case are driving a lot of the growth? It sounds like revenues per case must be up 5% to 10%.

John Bostjancic

Yes. That’s exactly what it was. It was 5% in the third quarter. So you’re getting the case volume increase, the ASP per procedure increasing 5% and then the continued low single digit pricing declines. And a lot of that’s the procedural mix we talked about in the scripted comments as more access to deformity cases, multilevel fusions, more complex surgeries with the Mariner Revision. And as we move Mariner into the deformity set, I think it’s positive from a revenue per procedure perspective, which certainly was a contributor to the growth in the third quarter as well.

Jeffrey Cohen

Okay. And then lastly from me, can you talk a little bit about the sales force as more of the alphas continue to pull through specifically to sellers and docs? Could you talk about the number of doctors at centers, number of centers that have come on board and where you’re seeing the growth more specifically? Is it increased usage per physician, more physicians per practice or more new centers or all the above?

Keith Valentine

Yes. It’s a combination of both, Jeff. Obviously, each of the projects that we have alpha surgeons on, a number of them are new surgeons. They’re new designers. They’re newly involved with the organization. And then we have also a number that are closer to our distribution channel and closer to us that are also trialing it now and giving us feedback. So both are going on. As we get to full launch though, we’ll be opening it up to the entire country. Alpha is a little bit different in that you are really focused on being part of the surgery and making sure you’re getting all the feedback not just for how the implantation went but even more importantly how the instrumentation performed, right. And so as we get to full launch, it will be a much more open process where distributors are getting ready. They know when our launch date is and they’re getting ready for those first few cases as we get to full launch. A little bit different strategy between alpha and full.

Jeffrey Cohen

Great. Okay. Thanks. That’s it for me. Great quarter.

Keith Valentine

Thank you, Jeff.

John Bostjancic

Thanks, Jeff.

Operator

There are no further questions. I’d like to turn the call back over to Keith Valentine for any further remarks.

Keith Valentine

Thanks everyone for joining us for this Q3 call and we look forward to updating you just past the end of the year. Thanks.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.

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