SI-BONE, Inc. (NASDAQ:SIBN) Q4 2022 Earnings Call Transcript

SI-BONE, Inc. (NASDAQ:SIBN) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good afternoon, and welcome to SI-BONE’s Fourth Quarter 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 Saqib Iqbal, Director of Investor Relations at SI-BONE’s introductory comments. Sir, you may begin.

Saqib Iqbal: Thank you for participating in today’s call. Joining me are Laura Francis, Chief Executive Officer; and Anshul Maheshwari, Chief Financial Officer. Earlier today, SI-BONE released financial results for the quarter ended December 31, 2022. A copy of the press release is available on the company’s website. Before we begin, I’d like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements.

These forward-looking statements are based on the company’s current expectations and inherently involve risks and uncertainties. These risks include the duration of secondary impact of the COVID-19 pandemic such as facility staffing shortages, whether the COVID-19 pandemic will recur in the future and our ability to effectively commercialize new products going forward. Other forward-looking statements include our examination of operating trends and our future financial expectations such as expectations for hiring, surgeon training and adoption, active surgeons, new products, clinical trial enrollment and reimbursement decisions and are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements.

Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. SI-BONE disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, February 27, 2022. With that, I’ll turn the call over to Laura.

Laura Francis: Thanks, Saqib. Good afternoon and thank you for joining us. For today’s call, I’ll provide a business update and Anshul will provide additional detail regarding our financial results. I’m pleased with our strong finish in 2022 as we effectively navigated some macro challenges, drove steady reacceleration of the business and delivered record performance. As you may recall, our worldwide year-over-year revenue growth in 2022 went from 10% in Q1 to 15% in Q2 to 19% in Q3 and finally 27% in Q4. Our growth was driven by both our core SI-Joint fusion business, as well as new products targeted toward adult deformity and trauma applications. 2022 was a milestone year for the company as we extended our market leadership, expanded our addressable market with the launch of iFuse Bedrock Granite a breakthrough product and received expanded FDA clearance for applications of iFuse’s torque and fragility fractures and spino-pelvic fixation.

Our comprehensive portfolio allowed us to achieve record U.S. Active Surgeon growth, which we believe is crucial to deliver strong sustainable growth in 2023 and beyond. As we progressed through 2022, we delivered substantial operating leverage and significantly reduced our adjusted EBITDA loss and cash usage, while investing in our long-term growth initiatives. Before I discuss the details of our performance, I’d like to thank our employees for their dedication and focus to achieve these major milestones. You supported over 1,300 U.S. Surgeons, who performed a procedure using our solutions in 2022. Most importantly, you helped improve the quality of life for over 13,000 patients worldwide. Now moving to our performance. For the fourth quarter of 2022, our worldwide revenue was $32 million, reflecting 27% growth compared to the fourth quarter of 2021 and 21% growth compared to the third quarter of 2022.

Our U.S. revenue in the fourth quarter grew 28%, compared to the prior-year period to a record $30 million, driven by 33% procedure volume growth in the quarter. For the full-year 2022, we generated worldwide revenue of $106.4 million, reflecting 18% growth, compared to the full-year 2021. Our U.S. revenue grew over 19%, compared to full-year 2021 to $98.8 million. The sequential acceleration in our U.S. revenue growth in each quarter of 2022 reaffirmed strong demand for our solutions in a normalizing operating environment. Now let me provide some details on our key initiatives as we look to expand our leadership position and drive strong long-term growth. Starting with sales infrastructure. Our dedicated direct sales force and agent partners are an important driver of growth as we develop our core markets and grow our presence in trauma and adult deformity.

We ended 2022 with 88 territory managers and 73 clinical support specialists. In 2022, the average annual revenue per territory manager increased to $1.2 million, reflecting double-digit percentage growth, compared to 2021. We believe there is significant opportunity for operating leverage in 2023, given the potential for average territory productivity to be in the range of $1.5 million to $2 million over time. With our expanded portfolio, we’re leveraging our growing network of agents for case coverage and selectively evaluating consignment strategies at high-volume hospitals. We’re confident that this hybrid approach will help the territory manager drive surgeon engagement, ensure high-quality support for a surgeon and deliver strong productive top line growth.

Moving on to surgeon engagement. Surgeon adoption is one of the best leading indicators of long-term procedure demand. We exited the fourth quarter with a record 920 active surgeons. This equates to over 33% growth in our active surgeon base over the fourth quarter of 2021 and approximately 15% sequential growth, compared to the third quarter of 2022. This is the eighth consecutive quarter of double-digit year-over-year growth in our active surgeon base and the highest growth rate in active surgeon base since we’ve been a public company. This growth enacted surgeon base is a testament to our focus on surgeon engagement, education and outreach over the last several years. The increase in surgeons in the fourth quarter came from those who performed a minimally invasive SI joint fusion procedure, as well as adult deformity or trauma procedures.

Additionally, it’s exciting to see a growing surgeon overlap across our various procedures. In 2022, over half of our active surgeons, who performed an adult deformity procedure also performed a minimally invasive SI joint fusion procedure using our solutions. We believe our complementary portfolio provides a significant opportunity to drive deeper engagement with their active surgeon base and increase the procedures per surgeon. With the trauma indication expansions for iFuse-TORQ, the launch of iFuse Bedrock Granite and the growing interest in spino-pelvic fixation and fusion, surgeon education is crucial to drive engagement and activation. Additionally, we’re experiencing great success with our academic programs that are focused on residents and fellows.

Since the inception of the program, we’ve held training events in over 200 academic facilities in the United States and trained approximately 1,300 surgical residents as fellows. We’re encouraged by the steady adoption of our procedures by these previously trained fellows and residents when they began practicing. In 2022, the number of fellows and residents who did their first case increased nearly threefold, compared to 2021, while their procedure volumes increased fourfold. Turning to products and solutions. The key tenet of our strategy has been to expand our platform of sacropelvic solutions to a direct SI joint pain, adult deformity and trauma. With iFuse-3D, iFuse-TORQ and now iFuse Bedrock Granite, we believe it’s the value of our innovative, versatile and complementary product portfolio provides surgeons with a comprehensive set of alternatives and positions us as the top choice for surgeons for sacropelvic solutions.

iFuse-TORQ continues its strong growth and has become an important addition to the portfolio. TORQ provides an alternative to iFuse-3D for our existing surgeons and has allowed us to convert users of competitive screw systems as well as engage new surgeons performing minimally invasive SI joint fusion. Following the FDA clearance for iFuse-TORQ to include fusion in conjunction with spino-pelvic fixation, we’re seeing a steady uptake in the use of the product to complement iFuse Bedrock Granite as a second point of fixation as a joint. From a biomechanical perspective, having 2 points of fixations is important to attain fusion. In trauma, we’re in the early stages of market development and are encouraged by the progress in the use of iFuse-TORQ for sacral insufficiency fracture.

Based on our market analysis, many of our spine surgeons routinely see fragility fracture patients, providing us an opportunity to leverage existing relationships as we build this market. With approximately 120,000 of these injuries per year in the U.S., most of which are currently not treated surgically, the fragility fracture market is a recognized unmet clinical need. The trauma opportunity is of strategic importance to us as the sacropelvic solutions leader and will be an important avenue for growth over the long term. Moving to iFuse Bedrock Granite, the reception of iFuse Bedrock Granite has been exceptional, driven by strong surgeon and hospital interest in adopting the product. Based on our early interest, we believe that Granite may become a standard of care for stabilizing the base long construct in adult deformity procedures and in certain degenerative spinal fusion cases.

As I indicated earlier, we’re seeing several surgeons using some combination of our products to achieve 2 points of fixation across the SI joint on either side, resulting in a significant pull-through opportunity for the overall portfolio and higher procedure average selling price. This launch, nearly 2,500 hospitals across the U.S. have added iFuse Bedrock Granite to their approved products list. Additionally, with the recent FDA clearance to allow the use of iFuse Bedrock Granite with a variety of pedicle spring rod systems, surgeons can now have confidence using their preferred system with iFuse Bedrock Granite as the foundation for the construct. We believe both these milestones will be additional catalysts to drive future growth. Given the positive experience with iFuse Bedrock Granite, we’re seeing surgeons expand the use of the product to stabilize the base of shorter multilevel constructs as part of their treatment for degenerates spinal conditions.

Approximately one-third of our iFuse Bedrock Granite cases have been in these degenerative procedures. There are over 100,000 short multilevel spinal fusion procedures per year in the U.S. While still early, the expanded use of iFuse Bedrock Granite in the shorter multilevel spinal fusion procedures for fixation could be an exciting opportunity for us and could expand our total addressable market beyond our initially estimated $250 million. Before I hand it over to Anshul, I’d like to provide a reminder on the CMS rule for hospital outpatient and ASC payments that went effective January 1. In 2023, Medicare facility fees and minimally invasive procedures performed using CPT code 27279 and hospital outpatient or ASC settings increased by 33% to approximately $22,000 and 26% to approximately $17,000, respectively.

Today, 80% of our minimally invasive SI joint procedures are performed in an outpatient setting or at surgery centers. We expect more of our minimally invasive procedures to move to ASCs over time. While it is too early to assess the business impact of this significant increase in facility fees, we believe it could be a tailwind for demand and ASP stabilization at these sites serve. I’ll now turn the call over to Anshul to provide more detail on our financial results.

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Anshul Maheshwari: Thanks, Laura. Good afternoon, everyone. My comments today will be focused on fourth quarter revenue growth, operating leverage and liquidity. Starting with revenue growth. Our fourth quarter total revenue was $32 million, representing growth of approximately 27%, compared to the prior year period and 21% sequentially. U.S. revenue was $30 million, increasing 28%, compared to the prior year period. Growth in the U.S. was driven by strong demand for our solutions, which resulted in approximately 33% procedure volume growth versus the prior-year period and 23% growth sequentially. ASC procedure volumes were in the low-20% range, consistent with the prior year period. International revenue was $2 million, reflecting growth of approximately 3% in U.S. dollars, compared to the prior year period.

Across Europe, France maintained strong performance offset by underperformance in Germany and the U.K. Gross margins for the fourth quarter of 2022 was 84%, in line with our third quarter gross margin. The fourth quarter gross margin reflects a low single-digit percentage impact from lower average selling price, increase in freight cost and higher cost of new products, as well as the increase in depreciation from the ongoing deployment of instrument trades to support strong new product demand. Moving to operating leverage. Operating expenses increased 7% to $38.2 million in the fourth quarter of 2022, as compared to $35.8 million in the prior-year period. The increase was driven by higher commissions associated with the revenue growth, increased travel and freight costs and higher investments in R&D.

On a sequential basis, operating expenses increased approximately 6%, driven by higher commissions associated with the higher revenue in the quarter. We’re pleased with the acceleration in operating leverage as our revenue growth rate was 4 times the operating expense growth rate in the fourth quarter. The operating leverage was driven by strong top line performance and across the board productivity gains from investments we have made to scale our platform over the last few years. Our net loss was $11.2 million or $0.32 per diluted share for the fourth quarter of 2022, as compared to a net loss of $14.5 million or $0.43 per diluted share in the prior-year period. Our adjusted EBITDA loss improved significantly in the second-half of 2022 with fourth quarter adjusted EBITDA loss of negative $4.2 million, an improvement of over 50% over the prior-year period.

Turning to liquidity. We exited 2022 with $97.3 million in cash and marketable securities. Our cash outflow steadily declined as we progressed through 2022. Our total cash outflow in the fourth quarter was $7 million, an improvement of approximately 51%, compared to the prior year period and an improvement of over 34%, compared to the third quarter of 2022. While we plan to make additional investments in instrument trades and implants to support our growth, we expect continued progress in operating leverage to moderate cash usage in 2023. In January of 2023, we refinanced the outstanding $35 million term loan with a new $51 million credit facility with Silicon Valley Bank, including a $36 million term loan and a $15 million revolving line of credit.

The new credit facility includes a $15 million accordion that is available to the company subject to the credit approval of the bank. The refinancing allows us to lower our borrowing costs, delay amortization by nearly two years and have access to additional liquidity, if needed. Finally, moving to our outlook for 2023. We continue to experience demand momentum for our comprehensive portfolio of solutions, as well as elevated surgeon engagement. However, we are being thoughtful in our approach to annual guidance given the early phase of reacceleration of the U.S. business and the pace of recovery in our international business. Considering these factors, we expect 2023 worldwide revenue of approximately $124 million to $127 million, implying year-over-year growth of approximately 17% to 19%.

In 2023, we expect gross margin to stabilize at approximately 80%. Our gross margin assumptions incorporate low single-digit ASP degradation, as well as additional depreciation expense from the deployment of iFuse Bedrock Granite and iFuse-TORQ trades in the back half of 2022 and throughout 2023. Turning to operating expenses. We anticipate operating expenses will grow at a mid-single-digit percentage rate in 2023. We foresee a reduction in adjusted EBITDA loss compared to the full year 2022 based on the strong top line growth and continued operating leverage. With that, I will turn the call over for questions. Operator?

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Q&A Session

Operator: Thank you. Our first question comes from the line of Kyle Rose with Canaccord. Your line is open.

Kyle Rose: Hi, good afternoon, everybody. And thank you for taking the question. I just want to kind of dig in just on the gross margin guidance for a second here. 80%, I appreciate the commentary about the ASP decline and some higher depreciation costs. Maybe just talk a little bit more about the ASP stabilization that you’re seeing there? And just how we should interpret that from a long-term perspective when we think about the gross margin profile of the company?

Anshul Maheshwari: Kyle, this is Anshul. From a gross margin perspective, as you’ve seen over the last couple of years since we’ve introduced two new products, we have been putting a lot of investment in instrument trays to support what we see as strong demand for both TORQ and for Granite. And if you look at the PP&E line in our balance sheet, you will see that have gone up from about, say, $4 million-ish at the end of 2020 to north of $15 million at the end of 2022. Now these trays get depreciated over a three-year period. They obviously have a much longer lifespan that they are used for. But that’s about $4 million to $5 million of depreciation that goes to your gross margin line, which will equate to about 3 points to 4 points of gross margin deterioration.

A lot of the Granite investment came about in the second-half of 2022. We expect to continue to roll out additional Granite trays throughout 2023. So we took that into account as well. So I’d say a lot of the gross margin impact is driven by the depreciation of those instrument trays. Now on the ASP side, Kyle, we tend to make assumptions around based on what we’ve seen historically and sort of in the low-to-mid single-digit range ASP decline is what we always look at to sort of the 3% to 5%. And it’s still early days in the year, but we are seeing sort of be on the lower side of that ASP trend than we have historically been. So that’s how we’ve sort of framed our gross margin guidance.

Kyle Rose: Okay. Very helpful. And I appreciate the commentary about the new product launches. And I have to put the cart before the horse, so to speak, given you’re still early in the Granite and the TORQ launch. But what should we be expecting from a new product development perspective as the company focuses on being a larger pelvic reconstruction or pelvic ring focused company? What are the other areas that you think are underserved in the market that you think would be worth allocating R&D resources moving forward?

Laura Francis: Yes, Kyle, thanks for the question. And when we went public, we were a single product company focused on SI joint fusion. We’re the pioneer in that market. We’ve built that market, and we are, by far, the market leader in the space. And — but what we’ve been doing over the last few years is capturing the broader opportunity in sacropelvic solutions. And so we have launched products that provide us with opportunities in adult deformity as well as in trauma as well. So we’re seeing that strategy play out very well for us, and we do certainly have an additional pipeline of products that we’ll be speaking to at future dates. But right now, what we’re really focused on is market development of our core market and SI joint fusion, and we’re really pleased about the reacceleration that we’ve seen in our core market.

Also, we do believe that we have a near-term opportunity to capture our opportunity with granite in adult deformity with spino-pelvic fixation infusion. And then the trauma market is really more of that longer term opportunity because this is an identified unmet clinical need, but it is an area where these patients typically are not surgically treated. So in a lot of ways, it reminds us of our core market in primary SI joint fusion. And as we’ve always done, we’re focused on using clinical data, education and reimbursement support in order to develop that particular market. So more on new products coming in the future, I would say that the message that we really have today is we have an extraordinary opportunity in our core and adjacent markets, and we’re focused on market development in those areas.

Kyle Rose: Great. Thank you for taking the questions.

Laura Francis: Thanks, Kyle.

Operator: Thank you. Our next question comes from the line of David Rescott with Truist. Your line is open.

David Rescott: Hey, guys. Congrats on the quarter and thanks for taking the questions. Maybe just starting off better then on the fourth quarter. It seems like the quarter came in essentially ahead of where the guidance essentially was prior to lower end in Q3. So just wondering maybe what went right in the second part of the quarter to essentially beat the guidance you set out there and then how we should be thinking about the way you’re thinking about the guidance for 2023?

Laura Francis: Yes. Thanks, David for the question and your questions are spot on. We are really pleased with what we saw in the fourth quarter, 27% growth year-over-year that was 21% sequential growth and to just see the continued acceleration throughout the year, it shows the normalization of the operating environment. It shows the reacceleration of our primary SI joint fusion business and then it shows the adoption curve with our Granite product in pelvic fixation. So pleased with everything that we saw there. In terms of getting into a little more detail for you, October results were solid. But what we saw is this very nice acceleration in November and December. So taking us back into that original range of what we had anticipated for the year of $106 million to $108 million in sales.

And what we’ve seen actually is that has continued into the first quarter as well. So just continued indicators that the business is continuing to accelerate. And so our expectations for the first quarter from a revenue perspective is growth of approximately 30% in the first quarter based upon the continued acceleration of the business. And I probably would say that the last point I would focus on here is the active surgeon numbers were ecstatic about those numbers at this point, 33% increase year-over-year, up to 920 surgeons, who did at least one case in the fourth quarter of 2022. That’s 15% sequential growth in that metric. And for us, it’s a great forward-looking indicator for that future demand.

Anshul Maheshwari: And then, David, on your question around the guidance for the year, I sort of break it down into a few different tranches from a guidance perspective. Laura just highlighted our expectations for where 1Q would be at the 30% year-over-year growth. We’ve got a couple of months behind us now. And as you know, our visibility is pretty strong, and we look out in the next 30 days or so. So we feel good about how the business is set up in the near-term. And then as we think about — and even on the 30% growth, right by COVID, but when you think about it, even sequentially, you’re looking at high single-digit Q4 to Q1 decline, which if you look at the last four years, it’s been low-double-digits. So again, you’re seeing a nice acceleration in the business coming into Q1.

And then when we think about annual guidance, we thought it was appropriate to take a prudent stance here and sort of look at a risk-adjusted view of all the tailwinds that Laura highlighted in the preliminary remarks around procedure ASP trends, the pace of Granite adoption, how we think about OUS recovery from a business coming back perspective. And some of these factors could play out better than we anticipate. But given that we’re this early in the year and several of the tailwinds are in the nascent stages, like Granite is still being rolled out and the facility fees that went into effect in January, right, it’s too early to see what the potential impact of that could be. So we thought our guidance appropriately bracketed some of the risks and opportunities there.

And then the other aspect of our guidance was just a continuous focus on operating leverage that we expect to see as we progress through the year into 2023. Kyle asked the question around the gross margin. And look, our gross margin is at sort of that stabilizing at about 80% are still industry-leading and really dear to us, and we will continue to make sure we stay at pretty elevated gross margin levels. But we are increasingly focused on seeing that adjusted EBITDA leverage as well and feel good about that to go up coming into this year.

David Rescott: Okay. Great, thanks. So that just leads to the next question then. So I’m wondering, one, if the 80% gross margin in 2023 assumes that there is stabilization of gross margins brought on by that improved reimbursement rate or perhaps there may be is upside just as you progress through the year? And then the second part of that, just based on kind of our initial estimates, gross margins, a little bit lower than we were anticipating, but still expecting improving EBITDA through the year. So just wondering what the biggest driver of that improving profitability is and maybe how we should think about the cadence of that coming on through the rest of the year, especially since Q1 seems to be maybe a higher top line growth rate than the rest of the year? Thank you.

Anshul Maheshwari: Yes. David, that’s a great question. So let me just take the question on what’s going to drive operating leverage and EBITDA acceleration first and then go back to the gross margin side. So as we came into last year, David, we had talked about the business being at a natural inflection point to harvest all the investments that we made since going public and throughout the pandemic. And now we’ve had three consecutive quarters where revenue growth has exceeded operating expenses. And we’re really pleased with that trajectory. And it’s been pretty linear to revenue growth, right? So as our revenue growth accelerated, you sort of saw the leverage accelerate as well because we’ve got the foundational infrastructure in place.

And as we get into 2023, we do not think that, that trend is going to change. We are still going to make investments in R&D. We’re still going to make investments in trades, which will go as depreciation on the P&L. And we are going to selectively grow our sales force, but the foundational infrastructure is there to support a much higher level of revenue, right. So when you think about the year, as the revenue accelerates or as we progress through the year, you will see the leverage accelerate, and we expect year-over-year adjusted EBITDA to continue to improve. You might have some seasonality sequentially, but year-over-year, we should see an improvement.

David Rescott: Okay, thanks again.

Operator: Thank you. Our next question comes from the line of Craig Bijou with Bank of America.

Craig Bijou: Good afternoon, guys. Thanks for taking the questions and congrats on the strong quarter. So I wanted to start with the active surgeon increase, and I appreciate Laurie, your comments on the acceleration of the core procedure. So I wanted to see what — if any, information you’d be willing to share on the mix of surgeons of those active surgeons doing SI joint fusions and those doing adult deformity procedures. Is it evenly split? And then kind of in the same line of questioning, how much of — or how much of the increase in active surgeons from SI joint fusions were new to you guys versus previously trained, but inactive surgeons?

Laura Francis: Yes. Craig, I think you are highlighting a really important metric that we have here, given how rapidly we’re seeing an increase in the active surgeon base. If you look at all of 2021, I believe that we had 1,000 surgeons in total that did procedures for us in 2021, whereas in the fourth quarter alone, we had 920 surgeons doing procedures. So it really is pretty extraordinary progress that we’ve seen just in a 12-month period. So a 33% increase year-over-year and then even a 15% increase, if you look sequentially quarter-over-quarter. And quite frankly, it’s the highest that I’ve seen since we’ve been a public company. So it’s really exciting from my perspective. We usually don’t give out a lot of information about the different parts of our business in terms of the product differentiation, because we really do see this as one segment of our business, we’re a sacropelvic solutions company and all of these different areas, be it the primary market or adult deformity or trauma really fall into the same category.

With that said, we recognize that there is a need to at least provide some information. And just — we want to be clear that the core market is reaccelerating. It’s not just the new markets. It’s not just the adjacent markets that are driving the growth of our business. And if you look at the surgeon adds, it’s interesting that you made that comment, it is nearly even if you look at those just doing minimally invasive SI joint fusion versus those that are in our adjacent markets of adult deformity and trauma, if you look at the adds, it’s around 50-50 between the core market versus the new products. And so we’re seeing it come from all different ends. And what we’re also pleased with is that we’re seeing this growing overlap where surgeons are performing procedures across these different areas of SI joint fusion, adult deformity and trauma.

So in summary, it’s really a testament to how focused we’ve been on execution and education outreach over the last few years. And we really think that we have a terrific portfolio of products. We are the leader in the safer pelvic space. We have this favorable reimbursement tailwind in 2023 in our core market. And we think that surgeon engagement and density is going to accelerate this year.

Craig Bijou: Got it. That’s helpful. Thank you, Laura, you’ve mentioned it a couple of times you’ve had a couple of reimbursement positives over the last six months, call it. So one, I wanted to see — get a little bit of color from you on the NTAP for Granite and how much of that is — are hospitals realizing or getting the payment that they expected that you guys had kind of outlined, how much of that is driving that growth in Q4 and then how to think about it in €˜23? And then also on the actual SI joint fusion procedure, I know it’s early, but any anecdotal feedback on the reimbursement win there?

Laura Francis: Yes. On the NTAP, very good question on that. And as you recall, the NTAP went into effect on October 1, 2022. So we really have just a little over a quarter of experience on that NTAP, but we think that this is a really important factor for Granite and the adoption of our product here in adult deformity. I was recently at a conference with adult deformity surgeons. And one of the questions that was asked on a panel was how our companies in our industry thinking about these issues of additional cost without additional reimbursement. And so something like the new technology add-on payment is definitely critical to making sure that a disruptive technology like Granite is adopted. And we are seeing that play out at this point.

We are starting to see cases where the NTAP has been paid, and this is going to be important, obviously, to the surgeons and as importantly, to the hospitals as well. So we think that while the additional economics are meaningful, we believe the strong surgeon interest in the product is also due to Granite’s unique design. It seamlessly fits into the surgeon workflow and it actually allows them to drive fusion and fixation to address this major unmet clinical need, and that is the securing of a long construct. So that’s the NTAP. In terms of the increase in the facility fee for procedures that are quoted to 27279 minimally invasive SI joint fusion, we talked a little bit about how things are going in terms of the first quarter and what we’re anticipating.

It’s not clear whether the reimbursement is driving some of the continued acceleration or if it’s really just entering into a normalized environment at this point, but we are certainly pleased with what we’re seeing how to begin it in the first quarter.

Craig Bijou: Great. Thanks for taking the questions.

Laura Francis: Thank you.

Operator: Thank you. Our next question comes from the line of Ross Osborn with Cantor. Your line is open.

Ross Osborn: Hi. Congrats on the quarter and thanks for taking our questions. Just starting off, has there been any progress in turning around your business in Germany and the U.K., following the new leadership team there? And as a follow-up, do you plan to have more resources to the U.S. business this year?

Laura Francis: Ross, thanks for the question. We certainly are pleased with how Neville is stabilizing that business. He is focusing very specifically on the businesses in Germany and the U.K., while helping to support the growth that we’re seeing in France and in the rest of Europe. So I think given that Neville is in the U.K., it gives him a very specific opportunity to get his arms very much around that business. There was also a kickoff meeting in January with the senior leadership team, plus the entire EMEA team. And a lot of this is just very basic blocking and tackling in these countries. It is focusing on the sales force and training of surgeons, getting the surgeons the first case and regularly diagnosing and treating patients.

So that takes time with us. On average, it usually takes 12 months to see the impact of those sorts of moves. And so those things were considered as we were giving information on guidance, but we think the right things are happening there under new leadership.

Anshul Maheshwari: Yes. What I would say, Ross, is our expectation is any improvement that we see OUS will be at best back half loaded.

Ross Osborn: Okay. Got it. And then one more from me. Would you be able to share the latest enrollment numbers from your SAFFRON study?

Laura Francis: I don’t think we’re actually giving out enrollment numbers. I think our plan is to actually provide information at key points in time. And I think that it actually probably will be 2024 before we give a detailed report out on SAFFRON.

Ross Osborn: Okay, got it. Thanks for the questions and congrats another quarter.

Laura Francis: Thanks, Ross.

Operator: Thank you. Our next question comes from the line of Dave Turkaly with JMP Securities. Your line is open.

Dave Turkaly: Great, thanks. Laura, given the numbers that you saw in the fourth quarter, the 30% plus procedure volume growth, I’m just trying to reconcile with what we’ve heard from some of the, let’s say, some of the other competitors in the ortho spine world, but in terms of where you think we are coming out or the rebound from COVID, I mean it seems like your U.S. might be all the way back and maybe you still have some lingering OUS things to tackle, but I heard you mentioned freight, but I didn’t hear you say anything about staffing shortages. I know you said depreciation as well, but I’d just like to get your thoughts on domestically, do you feel like we’re back?

Laura Francis: You know, it’s an interesting question. We’re looking at this as a normalized operating environment. And if anything, I was frustrated at the fact that it took four quarters in order to really see it. But we’re pretty excited about where we’re at. I do think that if I think about our procedures, Dave, our procedure is a relatively straightforward procedure in the operating room. For the most part, it’s done outpatient or in a surgery center. And I think that even with a squeeze on labor in some cases, the sites of service and the surgeons are able to squeeze in these procedures. I do think that some of these improvements that we’ve seen in reimbursement will have an impact on the procedure being prioritized as well. And so I think all of those things are working in our favor.

Dave Turkaly: Got it. And then maybe a quick follow-up just on the M&A landscape. We’ve seen some things start to happen again, which is nice, but it’s been a little bit of a delay there. I guess I’d sort of like to hear your thoughts on where you’re getting some of the new reps and where you plan to bring that force to this year? And if you think any of the transactions might help you gain some competitive folks?

Laura Francis: It’s definitely interesting to watch what’s going on at this point. It does seem like the M&A environment has come back to life, because 2022 was pretty quiet at least in our particular space. So we’re actually happy to see it. We — there’s a couple of things from a rep perspective. We’ve done a very good job of retaining our key reps within SI-BONE. And then we’ve also done a good job of growing our reps, too. So hiring these more junior clinical support specialists in 50% of cases when we do split a territory, we actually promote a clinical support specialist into a territory manager. So we try and promote from within wherever we can does it provide additional opportunity for us to hire new. Our focus is more on getting leverage of the sales force in 2023.

So growing that $1.2 million of productivity up to the $1.5 million to $2 million range depending upon whether there’s a junior rep in the territory or not. And so I would say that our thoughts are more on productivity increases and growing our own sales force versus trying to pull from other places given some of these changes in the M&A landscape.

Dave Turkaly: Thank you.

Laura Francis: Thanks, Dave.

Operator: Thank you. Our next question comes from the line of Drew Ranieri with Morgan Stanley. Your line is open.

Drew Ranieri: Thanks for taking the questions, Laura Anshul. Maybe just on the overall environment. I mean, a few companies have talked about softness in the fourth quarter. This may go back to a question that was already asked. But as you are seeing about rolling out Granite through €˜23, can you just maybe talk about any factors that you are seeing in terms of growth rate and adoption? Are you seeing these incremental headwinds affecting the Granite launch? And then just from a set perspective, do you think — or at this point, do you have adequate supply to meet all demand in the marketplace right now? And I have a follow-up.

Laura Francis: Yes. Great, thanks, Drew, in terms of the environment, as you can see, we weren’t necessarily seeing an impact or any softness in any particular part of the market in the fourth quarter. And as I also shared for Q1, our expectation is to see even further acceleration of our year-over-year growth in Q1. And I do think, though, that the last part of your question is the right question. Our opportunity with Granite is quite unique, at least for us here at SI-BONE. With our core market and SI joint fusion and also the opportunity in trauma with fragility fracture, those are really markets that take time to develop versus in the case of Granite and adult deformity, it’s really more — is very surgeon that’s going to perform a long construct procedure and are they looking to use Granite for spino-pelvic fixation and fusion.

So there’s a much more potential opportunity for rapid uptake in our Granite product than there have been in our previous products. But the — what’s important here is that we have enough implants in the field. We have enough instrument trays in the field. And then also that we’re on the approved list at the various hospitals where these procedures are going to be performed. And I can tell you, we’ve made extraordinary progress just in the last few months when we spoke in November, that was a rate-limiting factor for us. But we started to — so even towards the middle of Q4, we were bringing in more implants, more trays and it’s giving us the ability to try and keep up with some of this demand. And so I’m feeling pretty confident that we can meet the demand for both implants and trade for our Granite product, but it’s definitely the — probably the primary point of focus on fully recognizing the opportunity that we have in front of us with Granite.

In addition, we’ve made great progress on making sure that Granite is on the approved list at these various hospitals. So we have approximately 2,500 hospitals now that have Granite on their approved list and we continue to tick through a few of them that are remaining at this point. But overall, we’re in a good spot there. So I think that, hopefully, that answers your question.

Drew Ranieri: Yes. Great color. Thank you. And maybe for Anshul, we’ve talked about guidance a few times tonight, but can you help us maybe frame volume growth, your expectations for volume growth in 2023, just coming off the strong fourth quarter and just help us kind of better contextualize what acceleration means in terms of volume growth? And then second, just any framework you can provide on CapEx for €˜23? Thanks for taking the questions.

Anshul Maheshwari: Yes. So in terms of our breakdown between volume and volume growth from a revenue growth perspective, Drew, our ASP assumptions are sort of having an ASP degradation that’s similar to what we’ve had sort of last 12 months, which is between that 4% to 5% ASP degradation is what’s put in there. So if you do the math of 17 to 19, that will give you an estimate of where the volume growth should be to be able to hit the low-end or the high -end of the range. And even within the U.S. and OUS, our expectation is that growth is going to be faster in the U.S., the OUS growth, like I said previously to an earlier question, would be a lot more muted and more back-half loaded as well. So that’s sort of on the volume side.

Now in terms of the trend and acceleration, that’s something that we’ve talked about internally a lot on how should the sequencing be as you progress through the year and unfortunately, when you look at the first-half of the last three years, it’s been significantly disported by COVID. So it’s really difficult to say what a normal sequential trend would look like going from Q1 to Q2. And then you layer on some of the new products that we’ve launched in the last two years, that makes it even a little bit more difficult to say what the trending would look like. But like Laura said, we expect Q1 to be at about 30% growth year-over-year. Seasonally, you think Q2 is a little bit higher than that. Q3, we think will be more flattish and then you have sort of that Q4 ramp again.

And we think that’s the same trajectory you’ll see now.

Drew Ranieri: Got it. And then CapEx for the year?

Anshul Maheshwari: I would say from a CapEx perspective, the trend should be very similar to what you saw last year from a CapEx spend perspective because we’ll still continue to introduce more TORQ trays, but the focus on continuing to put out more Granite trays is going to be key for us to be able to capture the opportunity Laura talked about.

Drew Ranieri: Thanks for taking the questions.

Operator: Thank you. Our next question comes from the line of David Saxon with Needham & Company. Your line is open.

David Saxon: Hi, good afternoon and thanks for taking the questions. Maybe I’ll start on active surgeons, really strong into the year. Obviously, maybe I was wondering what your expectations are for 2023 in terms of active surgeon count? And then I think you said in the past, the quarterly average procedures per doc is in the 3 to 4 range. So I would love to hear where you think that could go over the next 12 to 24 months as you see some pull-through across the portfolio?

Anshul Maheshwari: Yes, David, happy to take that question. In terms of active surgeon growth, again, we’ve had eight quarters of double-digit growth. So I feel really good about it. Coming into this year, our expectation is growth in the mid-teens range at the end of Q4 2023 when you compare it to Q4 of 2022. Just to give you points of reference there. And if you think about the guidance range of 17 to 19, the delta of the guidance range versus that surgeon base would come from increase in productivity. We have better control on making sure we are reaching out to surgeons, creating them and getting them to first case. And then the sales team works really closely with the surgeons to get them to do repeat cases. But that’s why we focus more on how many surgeons can retrain and get the first case.

But with the broader portfolio, we expect that the number of procedures where we think about adult the 4 million SI joint fusion, because even the limited time period that we’ve been doing adult deformity as an example for 2022 of the surgeons that did an adult deformity procedure, also then an SI joint fusion procedure. So there is low-hanging fruit there that we can go after with this existing surgeon base and stop having them diagnose patients and postpone SI fusion procedures as well. But we want to be conservative on sort of that density per surgeon at this point.

David Saxon: Okay. That’s super helpful. And then maybe I just wanted to follow up on the gross margin guidance. Anshul, I think in the script, you said gross margin stabilized at that 80%. So does that mean you’re exiting the year at 80%? Or is that a full-year guide kind of implying you’re exiting slightly below that? And thanks so much for taking the questions.

Anshul Maheshwari: I’m glad you caught that word stabilized, right. So our expectation is similar to what you saw in 2022, the gross margin will end the year at around that 80% mark, because we will continue to roll trays out. And then we expect it to stabilize at that 80% level, which, again, look, they’re industry-leading, gross margins is a huge competitive differentiator for us. So we will continue to work hard to maintain those gross margins going forward. And there are a couple of things that will play out as you get beyond 2023 from a gross margin perspective. One is, when you launch a product, you see the market with significant capacity to be able to capitalize on the demand, and we’ve done that with TORQ starting in 2021.

We’re starting to do that with Granite in 2022. And what you have is a roll-off effect, right? So some of the older trays roll off, the newer trees that come on are more replacement capacity. So you have some stabilization on gross margin there. That’s number one. Number two is as these products gain scale in the market, you start seeing the cost per implant potentially also improving over time, right? So we haven’t taken that into account yet because it’s still early for both those products.

David Saxon: Okay, super helpful. Thanks for taking the questions.

Operator: Thank you. I’m showing no further questions in the queue. I would now like to turn the call back over to Laura Francis for closing remarks.

Laura Francis: Thanks, Towanda, and thank all of you for joining the call today. As I’m sure you’ve heard in our voices, we’re bullish about the opportunity ahead of us in 2023. Based on the demand momentum, we’re seeing growing surgeon interest and also a favorable health economic environment, I’m optimistic that we’re entering a period of strong and sustained procedure growth in the U.S. Just also wanted to say that we’re going to be attending the upcoming AAOS meeting in Las Vegas, and I hope to see some of you there as well as at upcoming investor events. Thank you. Goodbye.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.