OrthoPediatrics Corp. (NASDAQ:KIDS) Q4 2022 Earnings Call Transcript

OrthoPediatrics Corp. (NASDAQ:KIDS) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good morning and welcome to OrthoPediatrics Corporation Fourth Quarter and Full-Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Trip Taylor from the Gilmartin Group for a few introductory comments.

Philip Taylor: Thank you for joining today’s call. With me from the company are David Bailey, President and Chief Executive Officer, and Fred Hite, Chief Operating and Financial Officer. Before we begin today, let me remind you that the company’s remarks include forward-looking statements within the meaning of federal securities laws, including the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous risks and uncertainties, and the company’s actual results may differ materially. For a discussion of risk factors, I encourage you to review the company’s most recent annual report on Form 10-K as updated and supplemented by our other SEC reports filed from time to time.

During the call today, management will also discuss certain non-GAAP financial measures, which are supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period-over-period. For each non-GAAP financial measure referenced on this call, the company has included a reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures in its earnings release. Please note that the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for OrthoPediatrics’ financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast today, March 1, 2023.

Except as required by law, the company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call. With that, I would like to turn the call over to David Bailey, President and Chief Executive Officer.

David Bailey: Thanks, Trip. Good morning, everyone. And thank you for joining us on our fourth quarter and full-year 2022 conference call. As we start all earnings calls, I’d like to begin by highlighting that we helped nearly 17,000 children in the fourth quarter and approximately 70,000 for the full-year 2022. Since inception, and with the additions of MD Orthopaedics and Pega Medical, we have now helped over 630,000 children. Doing the right thing for children remains our top priority. Consistent with our pre-announcement on January 9, we generated quarterly revenue of $31 million, representing growth 25% compared to the fourth quarter of 2021. For the full year of 2022, we generated $122.3 million, representing growth of 25% compared to 2021.

Despite the negative impacts from COVID in Q1 2022, record high rates of RSV and flu in the back half of the year, and ongoing hospital staff shortages, we once again produced record revenue and growth in excess of 20%, a trend that has been ongoing since our founding, excluding the pandemic ridden year of 2020. In addition to growing the top line in excess of 20%, we continue to grow revenue faster than expenses, which resulted in our first year of profitability. The headwinds we experienced in Q4 reduced our potential adjusted EBITDA. However, we are pleased to have generated our first full year of positive adjusted EBITDA in 2022. Our successful top and bottom line growth was driven by continued strong share gains resulting from increasing surging product adoption as a result of executing our account conversion strategies, increasing set deployment, launching new products, sales synergies from our two acquisitions, and our ongoing commitment to train the next generation of pediatric orthopedic surgeons.

Overall, we are extremely proud of our performance and believe OrthoPediatrics is in its strongest strategic position of all time. With continued momentum from those growth drivers, we expect to deliver total revenue just over $146 million to $149 million for the full year 2023, while also continuing to improve our profitability. Additionally, with a strengthened balance sheet following our capital raise in August 2022, we believe that we have a solid line of sight to cash flow breakeven in the next five years. Moving to our revenue categories. In the fourth quarter of 2022, we generated total Trauma & Deformity revenue of $22.1 million, representing growth of 34% compared to the prior-year period. This included combined global revenue of approximately $4.1 million for MD Orthopaedics and Pega Medical.

Organic Trauma & Deformity revenue was $17.9 million, representing growth of 9% compared to the same period prior year. Organic revenue growth in the quarter was driven by market share gains with PNP | Femur, cannulated screws and our Orthex external fixation system, in addition to growth of legacy implant system. We were also benefited from the sales synergies achieved with both of our 2022 acquisitions, MD Orthopaedics and Pega Medical, which has meaningfully expanded our Trauma & Deformity portfolio. As a reminder, in April 2022, we acquired Iowa-based MD Orthopaedics, a leader in the non-surgical treatment of clubfoot, and in July we acquired Pega Medical and their gold standard Fassier-Duval telescopic iron nailing system used to treat rare bone diseases.

I am pleased to report that OP continues to positively impact the growth trajectories of both new franchises. And as we continue to execute, our strategic rationale is further validated. Turning to MDO, in 2022, we achieved strong initial sales with the existing portfolio of specialty clubfoot bracing products from strong European distributor reorders, new market expansion and improved brand visibility in the US as a result of its association with OrthoPediatrics. Going forward, we believe the momentum we are generating in our non-surgical franchise ensures it will be a material contributor to our growth rate going forward. The acquisition of Pega Medical positions us at the forefront of the pediatric rare bone disease market by means of the Fassier-Duval telescopic iron nailing system.

In two quarters, we have fully integrated the Pega Medical product portfolio into our US sales channel. This integration has produced an immediate positive revenue uplift. Our customer surgeons feedback is extremely positive, the product synergies are obvious, and the cultural integration of the business is exactly what we had hoped for. Both acquisitions bolster our market leading positions in their respective categories, while expanding our total addressable market. And we are very pleased with the performance of each thus far. Looking ahead, we are excited by the multiple opportunities to further expand our leadership position within pediatric trauma and deformity. Further deployments of new PNP | Femur, Orthex, cannulated screw and legacy implant sets are a core component of our growth.

Additionally, we expect both Pega Medical and MDO to outpace our organic corporate growth rate in 2023. With Pega, there are multiple levers for growth, including plans to dramatically improve surgeon access to key Pega Medical products, deploying more instrument sets to meet the increasing demand, fully training our global sales representatives and launching of new products. These opportunities position this business to be a key contributor to our growth for several years. With MDO, we expect to accelerate growth as we train new customers in the Ponseti technique, open new international markets and introduce several new non-surgical specialty bracing products throughout 2023. Now we’ll move to the Scoliosis business. In the fourth quarter, we generated Scoliosis revenue of $8 million, representing organic growth of 12% compared to the prior year period.

Similar to T&D, our revenue growth was primarily a factor of taking market share with key products such as RESPONSE and ApiFix, which is accelerating with additional 7D placements. During the quarter, we gained market share and added new surgeon customers in prominent accounts that will lead to material growth in 2023. We also onboarded several new ApiFix users and added additional commercial sites. We continue to see RESPONSE pull through in accounts where ApiFix and/or 7D is being adopted. We expect our Scoliosis business to be a significant growth driver for OP for many years to come as more surgeons adopt our RESPONSE fusion system, we complete the placement of additional 7D units and expand the user base for ApiFix as we report two-year clinical outcomes data to our customers.

Moving on to international. In the fourth quarter of 2022, we generated quarterly international revenue of $8.3 million compared to $5 million the prior-year period, primarily driven by new set sales to our stocking distributors, as well as the addition of MDO and Pega international revenue. In January, we announced the formation of our direct sales organization in Germany, which is one of the largest orthopedic markets in Europe. OrthoPediatrics GmbH marks our first direct international organization and reflects our expanding commitment to helping children across the globe. With this new direct sales organization, we will be able to establish deeper connections with the German pediatric orthopedic community and provide a deeper level of service that we believe will ultimately lead to better patient outcomes.

This, along with the integration of Pega products in our European sales agencies, additional international product launches in key markets, new market expansion within the MDO franchise, and increasing willingness for set purchases from our international stocking distributors, gives us confidence that our international business is well positioned to generate strong growth in 2023. Turning to new product development, in 2022, we launched several new products, including Drive Rail, bone support, and 3D-Side along with the MDO and Pega product portfolio. Altogether, this brings our total product offering to 46 systems. We are pleased with the initial contributions and expect our recent product launches to be a source of growth in 2023. We have also advanced R&D projects across our entire business.

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This includes progressing the late stage development projects from Pega and MDO that made these business incrementally more attractive. In Scoliosis, we remain on track to launch our new RESPONSE derotation instrumentation, RESPONSE cannulated screws and a number of RESPONSE instrument set upgrades. Additionally, we finalized the development of our RESPONSE power system that will assist surgeons when placing both pedicle and set screws, and we look forward to launching this system in the second quarter of 2023. In Trauma & Deformity, we continue to advance several organic development initiatives such as PNP Tibia, the DF2 , and the Orthex pre-planning software, which just received FDA 510(k) approval, and we expect an initial launch of each in 2023.

Within the Pega Medical product family, we continue to invest in the development of several limb deformity correction products, with at least two slated for launch in 2023. Lastly, we continue working on introducing several new non-surgical products through MDO where we’re building a robust cadence of new product introductions starting in 2023. In all, we are pleased with our ability to advance the development of the next generation of pediatric orthopedic solutions while remaining on path towards improved profitability, and we believe the constant introduction of new products in 2023 and beyond is another source of revenue growth and competitive advantage. Moving on to surgeon training and education. As a leader in pediatric orthopedics, we believe it is our responsibility to help advance the entire field of pediatric orthopedics.

And we see no greater contribution than our commitment to help train the next generation of pediatric orthopedic surgeons. Clinical education and training is at the core of everything we do. With that said, we are pleased with another year of extremely prolific clinical education and training. Again, in 2022, we were proud to continue our leadership in sponsoring the major pediatric orthopedic surgical societies such as POSNA, EPOS, and IPOS. In 2022, we conduct more than 280 training events for healthcare professionals covering more than 700 product specialists. Additionally, we held seven ApiFix user group meetings and around 15 Orthex training courses throughout the year. In the fourth quarter, we attended and were the lead supporter of the IPOS meeting in Orlando, and saw strong attendance at the specialty day and several of our hands-on workshops.

Finally, I want to call out our efforts and substantial progress on our ESG initiatives. As a company that lives our cause every day, we are committed to effecting lasting and meaningful change in the organizations with whom we engage. In early February 2023, we released our ESG report highlighting several key accomplishments in 2022, including our diverse employee representation and strong environmental and business ethics. We are proud to stand behind our dedication to fostering an environment that is respectful, compassionate, and inclusive of everyone in our community. With that, I’ll turn the call over to Fred to provide more detail on our financial results. Fred?

Fred Hite: Thanks, Dave. Our fourth quarter 2022 worldwide revenue of $31.0 million increased 25% compared to the fourth quarter of 2021. Growth in the quarter was driven primarily by continued surgeon adoption. MDO and Pega Medical contributed $4.1 million of combined revenue. For the full year of 2022, our worldwide revenue of $122.3 million increased 25% when compared to 2021. Growth in the year was primarily driven by set deployments, increasing surgeon adoption of key new products and sales synergies from our two new acquisitions. In the fourth quarter of 2022, US revenue was $22.7 million, a 15% increase from the fourth quarter of 2021. For the full year of 2022, our US revenue of $92.4 million increased 19% compared to 2021.

Growth in the quarter and the year was primarily driven by organic growth in Trauma & Deformity and Scoliosis products as we continue to deploy more sets and increase surgeon adoption, as well as the addition of MDO and Pega Medical. In the fourth quarter of 2022, we generated total international revenue of $8.3 million, representing growth of 67% compared to the prior-year period. For the full year 2022, our international revenue of $29.9 million increased 47% compared to 2021. Growth in the quarter and the year was driven primarily by increased procedure volumes, increased set sales to our international stocking distributors, as well as the addition of MDO and Pega. Medical. In the fourth quarter, Trauma & Deformity revenue of $22.1 million increased 34% compared to the prior-year period.

For the full year of 2022, Trauma & Deformity revenue of $85.1 million increased 29% compared to 2021. Growth in the quarter and the year was driven primarily by the organic growth from cannulated screws, PNP | Femur, Orthex systems, as well as the non-organic growth from MDO and Pega Medical. In the fourth quarter of 2022, Scoliosis’ organic revenue of $8.0 million increased 12% compared to the prior-year period. For the full year of 2022, Scoliosis organic revenue of $33.4 million increased 19% compared to 2021. Growth was primarily driven by increased sales of our RESPONSE fusion system, ApiFix non-fusion system, and 7D sales, as well as pull through and increased set sales to our international stocking distributors as they look to respond to increased backlog.

Finally, Sports Medicine/Other revenue in the fourth quarter of 2022 was $0.9 million, which decreased 22% compared to the prior-year period. For the full year of 2022, Sports Medicine/Other revenue of $3.8 million decreased 9% compared to 2021. Turning to set deployment. $6.3 million of sets were consigned in the fourth quarter of 2022 compared to $2.4 million in the fourth quarter of 2021. For the full year of 2022, we deployed $20.1 million, up 48% compared to 2021. We continue to experience strong demand from more and more sets and would expect to see increased deployments in 2023. Touching briefly on a few key metrics. For the fourth quarter of 2022, gross profit margin was 68.5% compared to 72.9% in the fourth quarter of 2021. The decrease in gross margin was driven primarily by higher set sales sold at cost to our international stocking distributors, as well as a minimum purchase obligation fee on the FIREFLY licensing agreement, which resulted from unfavorable impacts of respiratory illnesses in the quarter.

For the full year of 2022, gross profit margin was 74.1% compared to 74.9% in 2021. The slight decrease was primarily driven by the fourth quarter performance. Total operating expenses increased $5.9 million or 25% from $23.6 million in the fourth quarter of 2021 to $29.5 million in the fourth quarter of 2022. Total operating expenses increased $24.6 million or 27% from $91.4 million in 2021 to $116.1 million in 2022. The increase was driven by the addition of MDO and Pega Medical as well as incremental personnel required to support the ongoing growth of the company. Sales and marketing expenses increased $1.0 million or 10% to $10.9 million in the fourth quarter of 2022. For the full year 2022, sales and marketing expenses increased $5.4 million or 14% to $45.1 million.

The increase was primarily driven by increased sales commission expense, coupled with the addition of our recent acquisitions. General and administrative expenses increased $4.5 million or 37% to $16.6 million in the fourth quarter of 2022. For the full year of 2022, general and administrative expenses increased $13.3 million or 29% to $59.4 million. The increase was driven primarily by the addition of MDO and Pega Medical, as well as the personnel and resources to support the ongoing expansion of business and an increase in legal expenses associated with our recent acquisitions. Research and development expenses increased $0.4 million or 26% to $2.0 million in the fourth quarter of 2022. For the full year of 2022, research and development expenses increased $2.5 million or 45% to $8.0 million.

The increase was driven primarily by incremental product development, including research and development associated with our recent acquisitions. Total other income was $0.4 million for the fourth quarter of 2022 compared to $5.4 million for the same period last year, and with $21.7 million for 2022 compared to 0.6 million for 2021. In the fourth quarter of 2022, we realized a $0.5 million fair value adjustment benefit compared to a $5.5 million benefit for the fourth quarter of 2021. For 2022, fair value adjustment of contingent consideration was a benefit of $25.9 million compared to a $1.8 million benefit in 2021. We reported an adjusted EBITDA loss of $2.2 million in the fourth quarter of 2022 compared to a loss of $0.6 million for the fourth quarter of 2021.

For the full year 2022, we generated a positive $0.2 million of adjusted EBITDA compared to a negative $0.2 million in 2021. We ended the fourth quarter with $120 million in cash, short term investments and restricted cash. We maintain a strong cash position and $50 million available on our line of credit. In the current economic environment, our strong balance sheet, positive adjusted EBITDA and line of sight to cash flow breakeven positions us favorably to execute on our current business strategy. For 2023, we expect an operating environment similar to 2022 with hospital staffing and capacity constraints, along with the outside respiratory illness rates. In 2023, revenue is expected to be in the range between just over $146 million to $149 million, representing year-over-year annual growth between 20% and 22%.

The guidance assumes roughly $5 million of revenue contribution from MDO and Pega Medical before the acquisitions become organic on their anniversaries. We expect organic growth of 15% to 18%. Lastly, we plan to deploy around $25 million of new sets in 2023, representing a year-over-year annual growth of 24%. Additionally, moving down the P&L, we now expect to generate between $3 million to $4 million of adjusted EBITDA in 2023. At this point, I’ll turn the call back to Dave for closing comments.

David Bailey: Thanks, Fred. Unlike many businesses our size, our growth doesn’t rely on one or two major products or a few key initiatives. We are a company with an amazing cause, supported by an amazing culture, dedicated to changing the world by meeting unmet needs in pediatric healthcare. Our ability to surround surgeons with the most comprehensive portfolio of pediatric orthopedic solutions has truly differentiated us. The focus and specialization of our products expands surgeons opportunities to help kids and enables improved clinical outcomes. As we think about 2023 and beyond, we believe our capacity to help even more kids has never been greater. We have several growth drivers in place across the business, such as set deployments and key account conversion, continued share gains in T&D with the leading products such as PNP | Femur, outsize growth in our new non-surgical specialty bracing business, accelerating growth of the Pega Medical franchise, continued share gains in our Scoliosis fusion and ApiFix non-fusion segments, and the opportunity for further international sales growth as markets stabilize.

These opportunities give us every reason to be confident that our growth story will continue. Clearly, I believe OrthoPediatrics is in a position of tremendous strength. And we are confident we can continue to make share gains, grow revenue and improve profitability, and most importantly, positively impact the lives of children and their families. With that said, I’d like to turn the call back over to the operator and open the line for questions. Thank you.

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Q&A Session

Operator: . Our first question comes from Rick Wise from Stifel.

Rick Wise: Thank you for all the excellent perspective on the year ahead. Sounds like another terrific year on tap. I think it’s best if I start with the guidance. You basically reiterated your range, the $146 million to $149 million and the 20%, 22%. And thank you for calling out the $5 million related to MDO and Pega. Help me think to maybe break it down a little further. If the organic is 15% to 18%, and I’m a simple guy, I say myself, they’ve grown 20% or much better since inception, I think the CEO just said. Help me better understand why we can’t expect even stronger performance from the organic portfolio, particularly when I think about more docs trained, more products launched, going direct in Germany, getting the sales synergies, it just seems like this is an incredibly conservative setup, but maybe I’m not appreciating your perspectives on RSV or some other factors.

Operator: Mr. Wise, you may want to repeat your question.

Philip Taylor: We were not muted, but for some reason we lost the sound coming through. So, Dave, will answer the question at this time. Sorry about that.

David Bailey: Rick, I think it’s a good question. We have, obviously, historically didn’t grow organically greater than 20%. And you can imagine that internally we’re not planning to move off that aspiration. And I think we have the opportunity here to do that. But I think Fred and I have seen enough disruption over the course of the last 12 to 18 months, certainly since the pandemic, but maybe even more recently, that our thought here was to guide based on the fact that we don’t know what the future holds necessarily in terms of respiratory illness, COVID, staffing, and so we basically have guided with the expectation that those things that we saw in 2022 occur again in 2023. That may be very conservative, but that’s the way we’ve guided.

And so, we hope that that isn’t the case, but I think that is the basis of a guide that would be slightly lower than 20% organic. But again, I think, internally, we certainly have the aspiration to continue our long string of growth in excess of 20%.

Rick Wise: We’re two-thirds of the way through the first quarter. Obviously, it’s hard not to ask, is RSV lessening, getting worse, exactly the same, just maybe help us some of the headwinds assumptions? Is it just like the fourth quarter? What’s going on on that side?

David Bailey: Yeah, I think we’re seeing, and you’ve probably seen this, the news cycle has certainly slowed down with respect to RSV, flu, some of the things that impacted us in the fourth quarter, like we had never seen. And so, I think that was still impacted, obviously, early in January. Numbers were still very high. But I think what we’re seeing here is that a general trend in the right direction, and hopefully, we continue to see that through the summer. And hopefully, we continue to see this through the balance of the year.

Rick Wise: I’m going to sneak in one more, apologies. On gross margin, Fred, you highlighted higher set sales, the FIREFLY licensing and RSV. Can you help us understand the relative impact of each on the fourth quarter? Would your gross margins €“ I don’t know how you would exclude it, especially the RSV side. But if we exclude that, would we imagine gross margins would have been 74%? And help us think about the first quarter relative to all that.