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8-K - FORM 8-K - BAXANO SURGICAL, INC. | g22269e8vk.htm |
EX-99.1 - EX-99.1 - BAXANO SURGICAL, INC. | g22269exv99w1.htm |
EX-10.1 - EX-10.1 - BAXANO SURGICAL, INC. | g22269exv10w1.htm |
EX-99.3 - EX-99.3 - BAXANO SURGICAL, INC. | g22269exv99w3.htm |
Exhibit
99.2
Q4 2009 Earnings Call TranS1, Inc. [TSON] 02/23/2010 16:30 (ET)
Operator: Good day, ladies and gentlemen and welcome to the TranS1 Incorporated Fourth Quarter 2009
Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later
we will conduct a question-and-answer session and instructions will follow at that time. [Operator
Instructions] As a reminder, this conference call is being recorded.
I would now like to introduce your host for todays conference, Mr. Mark Klausner.
Mark R. Klausner, Managing Partner, Westwicke Partners, LLC
Thanks, operator. Joining us on todays call are TranS1s Chief Executive Officer, Rick Randall;
President and Chief Operating Officer, Ken Reali; and Chief Financial Officer, Mike Luetkemeyer.
Before we begin, I would like to caution listeners that certain information discussed by management
during this conference call will include forward-looking statements covered under the Safe Harbor
Provisions of the Private Securities Litigation Reform Act of 1995.
Actual results could differ materially from those stated or implied by our forward-looking
statements, due to risks and uncertainties associated with the companys business. The company
undertakes no obligation to update information provided on this call. For a discussion of risks and
uncertainties associated with TranS1 business, I encourage you to review the companys filings with
the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended
December 31, 2008.
With that, its my pleasure to turn the call over to TranS1s CEO, Rick Randall.
Rick Randall, President and Chief Executive Officer
Thanks, Mark. Good afternoon and thank you for joining us today to discuss TranS1s fourth quarter
and full-year 2009 results. On todays call, I will discuss the key highlights of the quarter along
with some recent developments and Mike will provide you with the details of our financial results.
I then would like to share with you some additional perspective on the key developments in our
business after which Ken, Mike and I will take your questions.
Worldwide, 674 TranS1 procedures were performed and we generated 6.3 million in revenue during the
fourth quarter. Before I talk about some of our recent operational accomplishments, I would like to
detail some recent actions that we have undertaken to focus the business in light of the current
environment and also discuss our announcement today that Mike has decided to step down as CFO.
Mike recently informed us that effective March 31 he will be leaving the company to pursue other
opportunities. We have a search underway for a new CFO and currently expect to have someone in
place by the end of the second quarter. Mike has agreed to serve in a consulting capacity until we
have found a full time replacement and will make himself available to assist the new CFO during the
transition as needed.
Also as part of our 2010 strategic planning process, we have made a number of decisions to focus
our investment while maintaining our ability to grow the business. First, as we have discussed in
the past, we have continually adapted the size of our sales force to best address our current
market opportunity.
In light of the current environment, we have reduced the number of direct reps in the field to 45.
In this process, we have embraced our most successful reps by giving them more territory to grow
while ensuring that all territories are appropriately covered. Our overriding goal is to make each
of our reps profitable as quickly as possible. The sales management structure remains unchanged.
Additionally, we have re-prioritized our R&D efforts. Due to an uncertain regulatory pathway, we
have decided to put the PNR project on hold in the U.S. While we remain focused on R&D, we are
pursuing products that have a shorter pathway to regulatory clearance and commercialization. This
decision has allowed us to downsize our regulatory management and staff.
Before I turn the call over to Mike, Id like to highlight some recent operational developments,
which I will detail after Mike discusses our financial performance. Reimbursement continues to be a
challenge for the business although we are making progress at the local level, as our reimbursement
personnel become better at educating our surgeons and their office staff on the proper use of
available codes to match up against the patients they are treating and the treatment they are
providing.
We have recently been informed of two additional peer review papers that have been accepted for
publication, which will build upon the strong clinical evidence behind our procedure. We continue
to have early success in the complex spine market and recently held a very successful Association
of Pre-Sacral Spine Surgeons, or APSS, meeting focused on deformity surgeons.
On the product front, we have commenced the limited market release of both the Avatar Pedicle Screw
System along with our next generation Vectre facet screw system and early cases have gone well.
Also we recently received 510(k) clearance for the AxiaLIF 2L plus, our next generation 2-Level
product. This product is also in limited market release and going well.
I would now like to turn the call over to Mike to review our financial results. Mike?
Mike Luetkemeyer, Chief Financial Officer
Thanks, Rick, and good afternoon everyone. In the fourth quarter of 2009, we generated revenue of
$6.3 million. As we previously announced, this was lower than our fourth quarter guidance of 6.7 to
$7.2 million, it was also down sequentially by $600,000 from the $6.9 million generated in the
third quarter of 2009 and down $1.1 million from $7.4 million generated in the fourth quarter of
2008. For the total year 2009, we generated revenue of $29.8 million. This represents an increase
of 18% over the $25.3 million of revenue generated in 2008.
For the fourth quarter of 2009, we generated 95% of our revenue, or $5.9 million, in the United
States. In the comparable period in 2008, we generated 97%, or $7.1 million, of our revenue in the
United States. For the total year 2009, we generated 94% of our revenue or $28 million in the
United States. In fiscal 2008, we generated 92% or $23.3 million of our revenue in the United
States. The primary factor
driving the increase in revenue in the United States was an increase in the number of 2-Level
procedures performed during the first full year of commercialization.
During the fourth quarter of 2009, 550 procedures were performed in the United States utilizing
TranS1 products. This represents a decrease of 101 procedures from the 651 procedures performed in
the fourth quarter of 2008 and a sequential decrease of 56 procedures from the 606 procedures
performed in the third quarter of 2009. For the total year 2009, 2,578 procedures were performed in
the United States utilizing TranS1 products. This represents an increase of 298 procedures from the
2,280 procedures performed during 2008.
Our average selling price in the United States for the fourth quarter of 2009 excluding stand-alone
sales of our percutaneous facet screw system was $10,300. This represents a decrease of $300 from
the comparable quarter of last year and a decrease of $100 from the third quarter of 2009, as a
result of the changing product mix. For the total year 2009, our average selling price in the
United States including excluding stand-alone sales of our percutaneous facet screw system was
$10,500. This represents an increase of $650 over 2008.
The increase in average selling price for the full year is primarily driven by the adoption of our
2-Level procedure. For the fourth quarter of 2009, 151 of the 550 AxiaLIF procedures performed in
the United States, or about 27%, were AxiaLIF 360° procedures and a 115 or about 21% were AxiaLIF
2-Level procedures.
For the total year 2009, 780 of the 2578 AxiaLIF procedures performed in the United States or about
30% were AxiaLIF 360° procedures and 596 or about 23% were AxiaLIF 2-Level procedures. For the
fourth quarter of 2009, we generated revenue of $254,000 from the stand-alone sales of our
percutaneous facet screw system compared with $224,000 for the fourth quarter of 2008.
For the total year 2009, we generated revenue of $953,000 from the stand-alone sales of our
percutaneous facet screw system compared with 868,000 for 2008. Gross margin was 79.9% in the
fourth quarter of 2009 compared with 84.6% in the fourth quarter of 2008. Gross margin for the
total year 2009 was 80.9% compared with 82.9% for all of 2008.
The decrease in gross margin for the fourth quarter was driven by the under-absorption of
manufacturing overhead, as we reduced inventory purchases in response to lower business volume. The
decrease in gross margin for the year was primarily driven by specific inventory reserves for
excess inventory and the under-absorption of manufacturing overhead mentioned above.
Turning to expenses, total operating expenses for the fourth quarter of 2009 were $10.7 million, a
decrease of $348,000 from 11.1 million for the fourth quarter of 2008. The decrease in operating
expenses for the quarter were primarily the result of lower sales and marketing cost of $818, 000,
primarily as a result of lower commissions on lower revenue and lower training and travel expenses.
This was partially offset by higher project-related costs in research and development. Total
operating expenses for the year 2009 were $47.7 million, an increase of $7.1 million from 40.6
million in 2008.
The increase in operating expenses for the year were primarily the result of higher sales and
marketing costs of $4.7 million, primarily due to the expansion of our direct sales force and
reimbursement support staff, increased commissions as a result of increased sales and higher
surgeon consulting and promotional costs related to our APSS programs. Additionally,
project-related research and development costs increased by $2.4 million.
Other and interest income, which primarily consist of interest income was $23,000 in the fourth
quarter of 2009. This compares to $331,000 in the fourth quarter of 2008. For all of 2009, other
and interest income was $405,000 compared with $2.5 million in 2008. The significant decrease in
both the fourth quarter and total year other and interest income was primarily the result of
historically low interest rates, the conservative and very liquid nature of our investment
portfolio and lower investment balances as our business continues to be a net cash user.
Our GAAP net loss for the fourth quarter was $5.7 million or $0.28 per share. On a non-GAAP basis,
adjusting for non-cash stock compensation charges of $600,000 in the quarter, our net loss was $5.1
million or $0.25 per share. This compares to our previously issued guidance for the fourth quarter
on a GAAP basis of a loss of 0.34 to $0.36 per share and on a non-GAAP basis of a loss of 0.31 to
$0.33 per share.
Our GAAP net loss for the year 2009 was $23.2 million or $1.13 per share. And on a non-GAAP basis
adjusting for non-cash stock compensation of $2.8 million for the year, our net loss was $20.4
million or $0.99 per share. This compares to our previously issued guidance for the year on a GAAP
basis of a loss of $1.19 to $1.21 per share and on a non-GAAP basis of a loss of $1.05 to $1.07 per
share.
At the end of the year, we had $55.3 million in cash, cash equivalents and short-term investments
with no debt. Our operating cash burn for the fourth quarter defined as cash used in operating
activities and investment in fixed assets was $6 million and our operating cash burn for the year
2009 was $22.1 million.
With regard to guidance for 2010, weve decided that until the business stabilizes and becomes more
predictable, we will refrain from providing annual guidance. With respect to the first quarter of
2010, directionally we expect the business to be flat to down 10% compared with the fourth quarter
of 2009.
Before I turn the call back to Rick, I want to take a minute to thank Rick for the opportunity to
have been part of the TranS1 team. Ive thoroughly enjoyed working with Rick and the entire TranS1
team and I want to wish all of my colleagues at TranS1 the best as they continue to build the
leading spine company.
Rick, back to you.
Rick Randall, President and Chief Executive Officer
Thanks, Mike. Before we open the call up for questions, Id like to add some color on our
operations and recent developments. Turning first to reimbursement, as we continue to incorporate
feedback from payers and from the field, were becoming more proactive in managing reimbursement.
We have
developed specific initiatives that our field sales force and reimbursement team are undertaking to
educate surgeons on the most appropriate coding for our procedure and if necessary assisting with
pre-authorization denials or non-coverage decisions as they arise.
We continue to see good success on appeal and the small victories are important as each positive
coverage decision makes it easier to seek your payment for the next case. Additionally, we now have
two peer reviewed clinical papers that have been accepted for publication, the first of which is
scheduled to be published in neurosurgery focused in March.
We expect that these papers will continue to build upon our strong base of clinical evidence and
will be helpful as we continue to work through reimbursement at both the local and national level.
Separately, we continue to observe increasing interest in utilizing our procedure in complex
multilevel spine cases like scoliosis and adult deformity, where our product is unique, clinical
benefits and reimbursement is favorable. We view recent adoption and rising interest among thought
leaders in complex spine as encouraging incremental evidence of the companys unique approach and
effective technology.
We have educated our sales force on this unmet clinical need and continue to direct them to
increase their focus on the surgeons who perform these multilevel procedures. To this end, in
mid-January, we hosted our first deformity-focused Association of Pre-Sacral Spine Surgeons or APSS
Meeting in New York City. We had 75 total surgeons in attendance, including 10 faculty members of
which 55 were deformity surgeons and 25 were members of the Scoliosis Research Society or SRS.
Approximately 50 of the surgeons attending had never previously completed an AxiaLIF procedure. The
focus of the day was how to achieve the best lumbosacral fixation in deformity cases and how the
unique design of our implant provides significant biomechanical advantages relative to the other
fusion procedures for lower levels of the spine.
We did significant model-based training at the APSS. And as a follow-up, weve been providing
focused training for surgeons in attendance who have recently held cadaver labs in New York and St.
Louis.
On the sales front, we had a successful national sales meeting in January, despite a difficult
2009; we had a number of reps who had a strong year. We focused on identifying the best practices
employed by our most successful reps and use the national salesmen to educate our refocus sales
force on specific practices that they will incorporate into their territories in the coming year.
We also had a number of surgeons on hand to report on their clinical experience in a variety of
indications, including 2-Level and deformity. We had one of our most successful 2-Level surgeons
report the one-year clinical results on his first 19 2-Level cases in which he demonstrated
excellent symptom relief and fusion results at each level treated.
In addition, we had two surgeons who treat deformity patients, who cited their experience in using
the AxiaLIF procedure in complex spine cases and in particular the benefits of using our 2-Level
procedure at the base of a long construct. We also spend a good deal of time on new product
education. We
introduced our new Avatar Pedicle Screw System more broadly; additionally we introduced the Vectre,
our next generation percutaneous facet screw system.
Turning to the product front, as we mentioned in January, we recently signed a distribution
agreement with Life Spine to distribute their Avatar minimally invasive pedicle screw system. The
product is FDA cleared, and currently being sold by Life Spine to its network of independent
distributors. While we are enthusiastic about this technology, we are also taking a measured
approach to introducing the device through our sales force.
Our limited market release has gone well so far and based on the continued feedback that we receive
from our surgeons and sales people, we expect to launch the product more broadly in the second half
of 2010. Additionally, we began the limited market release of our next generation Vectre facet
screw system. The Vectre is easier and more efficient to use than our original percutaneous facet
screw system, and also has some added tools that facilitate additional posterior fusion.
Finally, we recently received 510(k) clearance for the AxiaLIF 2L plus, our refined 2-Level device.
The 2L plus is a two-piece modular design of our AxiaLIF 2-Level device that provides surgeons more
control during the operation and allows them to dial in the amount of distraction between levels.
Additionally, the shape and dimensions of the devices have been modified to provide a more robust
and stable implant construct. The AxiaLIF 2L plus is also a limited market release and we look
forward to updating you on all of these products as we get additional feedback from the field.
With that, I would like to open the call up to take your questions.
QUESTION AND ANSWER SECTION
Operator: Thank you. [Operator Instructions] Our first question comes from Matt Miksic of Piper
Jaffray.
Q Matt Miksic
Hi, Rick, Mike.
A Rick Randall
Hi, Matt.
Q Matt Miksic
Thanks for taking the question. First, Mike, thanks for all your hard work and we wish you lots of
luck in the future wherever you wind up?
A Mike Luetkemeyer
Thanks, Matt.
Q Matt Miksic
Sure, thing. Rick, one question on the sales force, if you could talk maybe a little bit about is
that is this the level where you think you ought to be or I know its not an easy question to
answer on a conference call, but is it possible we could see further contraction from here over the
next couple of quarters or is that contingent on anything any color there would be helpful? And
then I have one follow-up.
A Rick Randall
Sure, Matt. When we made this decision, we took a careful look at the users that we have in place
in the United States, the reps who were most successful and experienced in selling the product. And
Matt, as you know, weve had a distinct productivity curve associated with this technology, where
it typically takes a new rep in a de novo territory quite some time, up to nine months to a year to
really become productive.
Given the fact that we want to conserve our cash, most of the folks that we eliminated from the
sales force were folks who had not gotten up that productivity curve. So with an eye toward
productivity and then eye toward a geographical coverage, we came up with what we think is the
right number, the 45 reps that are remaining in the field in addition to some of the independents
that we currently have in the field and feel that this is the right size.
Now, I would never say never. And obviously if conditions were to worsen, which I dont think is
the case, we could have a further reduction. But we feel pretty comfortable with this group and
actually look forward to, with success, expanding beyond this number as needed based on growth in
certain markets.
Q Matt Miksic
Okay. And then a follow-up just on, I guess, maybe this is a two-part question, the first is just
any kind of update if you could maybe review for where is the results and safety profile of the
procedure? Where are your numbers coming in now? What are you doing to sort of help improve the
efficacy and safety of the procedure? Does occasionally come up as a question. Id love to hear
how...
A Rick Randall
Yeah, I think we lost you, Matt, but I will address the question as I heard it. The safety profile
remains, I think its the safest fusion procedure in the market. We have for several months now,
maybe beyond months, we have stabilized at an overall complication rate of about slightly over 1%.
Still the most egregious complication that we have is a bowel injury and that is stabilized at the
roughly one half of 1% level.
I think in future calls, we have an active program aimed at developing tools that will, we believe,
even lower that complication or hopefully eliminate the need for a diverting, temporary diverting
colostomy, which is typically what happens to patients who have a bowel injury if its not detected
at the time of the surgery.
Were encouraged by some of the labs we performed with some new devices and Im hoping in the next
couple of calls you will hear more about that device. But actually, were getting more bullish on
the potential for us to make a huge impact on reducing an already very low complication rate.
Operator: Matt, can you hear us?
A Rick Randall
I think, we go to the next question.
Operator: Thank you. We will. Well move to the next question, Michael Matson of Wells Fargo.
Q Michael Matson
Hi. Did you say whether or not there were any sales of the pedicle screw system in the fourth
quarter or was that announced really too late in the quarter to have an impact?
A Rick Randall
Right, Michael, we announced the pedicle screw partnership in January.
Q Michael Matson
Oh, okay. And with that product, are the salespeople going to be really just trying to sell that as
an add-on to the existing AxiaLIF procedures or are they going to be going after any other type of
I guess you dont really have any interbody spacers right, so it can only really be used with
your lumbar AxiaLIF procedures, right?
A Rick Randall
Right, Michael. One of the obvious concerns we had in bringing on products like this is we dont
want to defocus our sales force from what makes us unique and novel and the most exciting product
we have, which is AxiaLIF. So youre right.
The focus is so many of our cases, especially now as weve broadened the indications of use for
this technology well beyond the single L5-S1 degenerative disc patient, as weve broadened the
indications so many of our patients are backed up with pedicle screws. Almost all of our 2L cases
are backed up with pedicle screws. So it just made obvious sense for us that we could in many cases
add-on that product and the revenue generated from the product. In the same case that were already
committed to in attending and the reason for that case being is really the AxiaLIF procedure. So
initially, our sales force will completely focus on adding the pedicle screw to the existing
AxiaLIF.
Now, I feel comfortable in saying that there will be some surgeons where we have strong
relationships, who like the product and they probably will utilize the product even beyond in cases
that dont include L5-S1, where they may be doing a TLIF or some other type of procedure and we
could pick up some of that business. But thats not going to be the focus of our efforts.
Q Michael Matson
Okay. And would you consider any similar distribution agreements with other products, maybe, like a
biologic or something like that, just try to get some additional revenue per case?
A Rick Randall
Yes, those are in the works. Were looking at everything thats utilized in our case. We would like
to own the case. Wed like to create no reason to have another vendor in that particular surgery
and so we wont stop with pedicle screws. There is more activity behind that. Well talk about that
shortly.
Q Michael Matson
Okay. And then can you give us the number of surgeons that you trained in active surgeons?
A Rick Randall
Ill hand that one to Mike.
A Mike Luetkemeyer
Yeah, Mike, the active surgeon base was actually flat from Q3 to Q4, 382, didnt change at all. And
the new docs trained in the U.S., which is the metric that we track and report on, for the total
year was 251, 43 in the fourth quarter.
Q Michael Matson
Okay. And just, can you give us an update on where things stand with regard to kind of lobbying the
specialty societies in getting a category I code, is there still a potential for that to happen or
is there any potential for that to happen next year?
A Rick Randall
I dont want to say theres no potential for that to happen, but I think we need to be very careful
in what we do in that regard. Getting a category I code in this environment may not be the most
appropriate strategy. We havent ruled it out yet, but it may not be the most appropriate strategy.
We are lobbying the various societies, because obviously as AxiaLIF continues to grow and more
importantly as the indications continue to expand and it becomes a more valuable tool in a broader
array of lumbar surgical patients. We need to make all of those folks aware of the efficacy,
the safety in the work thats embossed with using AxiaLIF.
So thats where we are really focusing our efforts on making sure all of our users truly understand
all the codes available. The patients that they are now treating and how those patients patients
match up against the variety of codes that exist in for lumbar fusion, including the ALIF code or
the miscellaneous code and and in some cases the category III code. The category III code does
not necessary perfectly fit all of these patients.
So thats where our real effort is, we think that at the local level both with the surgeon, their
coder, their office staff, and the local payer, weve got our best opportunity to manage
effectively through this. And obviously, we wont stop on getting universal coverage for this, but
I think our efforts will be in more locally and then at the payer level, as opposed to any
near-term strategy regarding CMS.
Q Michael Matson
Okay, thats all I have. Thank you.
Operator: Our next question comes from Doug Schenkel of Cowen and Company.
Q Doug Schenkel
Hey, good afternoon, guys.
A Rick Randall
Hi.
A Mike Luetkemeyer
Hey, Doug.
Q Doug Schenkel
I guess before throwing a couple of questions at you, Mike, I did want to first echo Matts earlier
comments and I thank you for all your hard work and be sure to wish you the best in all of your
future endeavors and I know well be seeing you soon.
A Mike Luetkemeyer
Thanks, Doug. I appreciate it.
Q Doug Schenkel
So, Rick, I want to just may be start by building off of some of those last comments. You talked
about going for level 1 a level 1 reimbursement code and indicated that that may not necessarily
be the most appropriate strategy. And I appreciate the reasons why and appreciate you guys
providing a little bit more detail on why you think that may be the case.
With that being said, without a level 1 code, can you talk about over one year, two years, three
years, what the revenue growth potential here is? I mean weve gone for obviously a couple of
quarters where sequentially things have continued to get weaker, hopefully that starts to level off
in the near-term, but ultimately to stop burning cash youre going to have to get that topline up.
I mean, is it possible without a level 1 code to get to the point where youre not burning cash
over the next, call it, four to eight quarters?
A Rick Randall
Yes, Doug, I believe it is. And let me explain why we believe it is and why we are starting, early
on, to see evidence that that could be the case. The category III code, and remember, Doug, when we
started all this back in 2005, what we knew about the technology and where our surgeons took the
technology early on was for these patients who had pretty much L5-S1 degenerative disc disease.
Back then, we had little to no evidence that we could actually decompress the exiting nerve roots
and reduce or eliminate leg pain. So that the thought at the time was if a patient has
concomitant leg pain, we need to do a surgical decompression. If Im going to do a surgical
decompression, Ive got a lot of other fusion surgeries I can use. So when you look at the category
III code that we have, its very descriptive of that type of patient. Kind of a single-level low
back pain only patient, maybe some tears in the annulus, and when you open up the code and dissect
it thats the patient that is and the associated work that was contemplated.
Now, those patients are the patients we predominately treated from 2005 maybe all the way, and we
still treat many of them today with our AxiaLIF 360. But whats happened over the last two to three
years is as the clinical evidence has continued to mount, weve learned that this is an excellent
operation for low back pain and leg pain. Its even a better operation for spondylolisthesis or
instability, concomitant with leg pain and back pain. And now most recently were treating patients
who have deformity and using it as a solid construct at the base and backing it up with pedicular
fixation, were straightening the spine with pedicular fixation.
So both the type of patients were treating, the way the patients are being treated and the amount
of work involved with utilizing this technology with other techniques to treat those patients very
dramatically from that category III code. So proper coding is that you match up the way you treat
the patient, the patient that youre treating, how many surgeons are involved with the treatment,
and you match that up against all available codes, including other miscellaneous code.
And so as time just moved forward and we have taken on many of these denials for payment and we
fought through these denials for payment, weve learned something actually from the payers and that
is that the right proper coding is to match all of those things appropriately. And theyve given us
some guidance and weve learned a lot from our payer meetings and weve gone back and learned from
some other surgeons who continue to use this operation.
And now what were providing is a full education of all the codes and how the patients are
contemplated and the operation is contemplated within those codes. And with that education,
surgeons can more appropriately and accurately match the patient, the operation against the variety
of codes. And so what happens is as our indications expand, we sell more 2-Level product, get
involved with complex spine, get involved with spondylolisthesis or instability, and low back pain
could concomitant with leg pain, it diminishes the impact of the category III code and gives us an
opportunity as we saw in 2008 and early 2009 to continue to get back on a growth trajectory.
Now, weve got to execute to that. And so thats the probably the best way I can explain it why we
believe going forward with all of these all the hard work and the education and having these
reimbursement people in the field doing their job with the backroom coders, we can turn this around
and grow the business. So its obviously a reimbursement strategy, but its also an expansion of
clinical indication strategy combined with a product strategy.
Whats interesting, I cited our top performers. Our top performers last year and some of them
increased sales dramatically in their territories. They had a couple things in common. They really
handled reimbursement better and I think they sold the 2-Level product in more complex indications
better than the bulk of our sales force.
So those are the best practices we recently focused on with our at our National Sales Meeting
and the metrics that we placed in managing our sales force going forward. Is that helpful?
Q Doug Schenkel
Yeah, thats helpful. And I mean I guess if I were to take the liberty of maybe lumping the two
strategies into two categories and you can just tell me if this is incorrect, but essentially
theres thoroughly an approach to essentially use existing codes in a more educated and more
appropriate way as you expand indications. And then the other part is to continue to be aggressive
in getting authorization on a pair-by-pair basis, separate of arguing that you should be able to
use existing category I codes because of extenuating indications, is that fair?
A Rick Randall
If I would have said that we would have saved about 30 seconds.
Q Doug Schenkel
No, no, no.
A Rick Randall
Thats very fair.
Q Doug Schenkel
So with that in mind, one of those is going after the pairs specifically. It sounds like youve had
more success in certain regions than others. As you cut back on the sales force to rationalize for
the challenges that you are working for right now, was there any thought given to the fact that
there are regions where youve been more successful in proactively getting payers to come on board
and maybe trying to build
the business more aggressively in those regions while maybe pulling back in the interim, I mean,
some of the regions where youve been less successful?
A Rick Randall
I think some of that is exactly what we did. When we made our adjustments, there were certain
regions in the country, Pacific Northwest for instance comes to mind in particular, where weve had
less success and weve had more reimbursement headwind than at probably any other area and there
has been other regions of the country. And so, yeah, we did back off there. We still have a
strategy there and were going to work that area hard, but weve really kept our core distribution
assets focused in the areas where weve had less resistance and we seem to be managing through
better with our surgeons, the payers, and the coders.
Q Doug Schenkel
Okay. And then on the other part of the strategy, recognizing that for a lot of the indications
youre going after the category III code really doesnt fit. The reality, the practical challenge
that in some part you face is that there are some major payers that have deemed AxiaLIF as being
experimental and investigational. I mean, can you overcome those classifications when you even
trying to use these codes that seem more appropriate for these indications, can you overcome those
blanket classifications from some of the major payers?
A Rick Randall
Yes and we have. Weve done that more at the local level. We have payers who have a non-coverage
decision and weve been able to, through the appeals process actually rework those cases and get
them paid. And once you establish what patient is best suited to the technology and why its
different from the category III code, maybe often using the miscellaneous code, which seems to be a
good vehicle to do that, which is what we did in 2008. Weve been able to, at the local level,
established a pipeline with certain patients where were getting paid.
So I think we can continue to do that and obviously as the data continues to roll in and our the
number of our peer reviewed papers increase and we have a few more in the pipeline, well be more
aggressive at the I dont want to say national level, but its a larger level with the payers as
well.
Q Doug Schenkel
Okay. Thats helpful, just a couple of clean ups. Mike, guidance for Q1, did you say its down, you
guys said flat to down 10%?
A Mike Luetkemeyer
Yeah.
Q Doug Schenkel
Sequentially or year-over-year?
A Mike Luetkemeyer
Sequentially, we said flat to down 10%, sequentially, comparing Q4 09 to Q1 2010.
Q Doug Schenkel
Okay. And recognizing you are not giving full-year revenue guidance, any chance, you give us some
indication about what your burn target is for the year?
A Mike Luetkemeyer
Well, what I would tell you is that the all else being equal, the actions that we have so far
taken would tend to decrease the burn rate from what it was in 2009. As far as giving you a
specific number, no, Im not prepared to do that today.
Q Doug Schenkel
Okay. I mean, if I look at your fourth quarter numbers, it is about, what is that three you guys
burn just under, I think, thats $11 million. Any chance, you could, not burn, actually thats your
operating expense, is it right to assume that your operating spend, the other combination of R&D as
sales and marketing and G&A should go down from there, given the changes that youve announced
today?
A Mike Luetkemeyer
Yes, on an annualized basis, they should go down.
Q Doug Schenkel
They should go down. Okay.
A Mike Luetkemeyer
Yeah.
Q Doug Schenkel
And...
A Mike Luetkemeyer
And the reason I say on an annualized basis is, you know, there are certain one-time charges that
you take severance and other costs. So let me take a little while for that to wash through, but all
else being equal, the operating expense line should decline based on the actions that weve taken.
Q Doug Schenkel
Okay. Last question, if my model is correct, which I definitely could be off, but assuming Im not
and you can tell me otherwise, it looks like 2-Level procedures may have declined by 30 or maybe 29
sequentially, am I wrong or is that correct? And if I am correct, any reason why this might have
occurred during the quarter?
A Rick Randall
You are correct, 2-Level procedures actually declined from 138 in Q3 to 115 in Q4.
Q Doug Schenkel
Okay.
A Rick Randall
And you know the 2-Level procedures starting last fourth quarter when we had full market launch of
the 2-Level increased to 168 in Q1. They went up again to 175 in Q2, and then they started to
decline when we hit the reimbursement headwind, they went down to 138 and then down to 115.
Now our reimbursement is the lions share of the issue, but we also had some product issues in the
market that we think we have addressed with the 2-Level plus thats now in limited market release.
So we would hope that that trend would reverse itself as we put the 2-Level plus into full market
release later in the year.
Q Doug Schenkel
All right. I guess I got to ask another one as a follow-up then. Could you talk a little bit about
the specific product issues in the field that have been addressed with the 2L plus?
A Rick Randall
Yeah, Im going to let, Ken, talk about the 2L plus. But just to go back historically, when we
released the 2L product and we talked about this on a couple of calls, we saw a little more
subsidence than we had seen ever seen with the single-level product. And we also saw some cases
where the L5-S1 rod backed out a little bit.
Now we were very concerned about that early on, because we just dont have much room for error with
this product that we wanted to be right and tight. As we work through it, we indicated the use of
pedicle screws to backup the device as opposed to facet screws and the subsidence issue
dramatically decreased. And then we found it with appropriate technique, we were able to manage the
L5-S1 rod.
So over the entirety of 2009, we felt actually pretty good about the device, but we had already put
in place and designed the next generation, which Ken is going to talk about. We however and this
is where I think we can have better execution and we did have a number of sales reps who
adjusted to the technique, had surgeons who worked through this and had great success with the 2L.
And those reps converted more surgeons to the 2L.
And then we had others that I think got a little spooked by what happened and backed off. They were
fearful that any 2L failure could affect their single-level product. And frankly, I think a lot of
our focus at the sales force or at the sales meeting is to eliminate that disparity that we saw
from region-to-region or rep-to-rep. And priority A is going to be to, even with the old product,
to get those reps back on board converting surgeons to the 2L product because its a great
operation and weve had great results.
Now having said that, we were a little fortuitous because right in the middle of our sales meeting
we learned from the FDA that about a month in advance of what was expected, we got the clearance to
market the 2L plus. So Ill let Ken talk about the 2L plus and how that should even give our reps
more confidence that the 2L is one way to prosperity in 2010.
A Ken Reali
Hello, Doug, its Ken Reali. As Rick mentioned, the 2L plus was approved 510(k) cleared back in
January, late January, and we started a limited market release. As Rick mentioned, this product was
designed specifically to address some of the early concerns we saw with the 2L product, issues of
subsidence, and patients of poor bone quality. We had a couple issues of separation where facet
fixation was not completely appropriate.
The 2L plus is a two piece design like the 2L, but the difference is there is a locking pin that
links the two implants together, the L4-L5 implant and the L5-S1 implant. That also has a
distraction capability at both levels. So we feel the combination of the ability to modulate and
distract at both levels with the locking pin, and also has a tapered design at L4-L5 for improved
fixation into that bone, that vertebral body, will be a large improvement. Thus far in the limited
market release, albeit its very early, the feedback has been very strong. And we look forward to
continuing to track the limited market release carefully and we plan on a full market release later
in 2010.
Q Doug Schenkel
Okay. Well, thanks for that Ken, and Rick, and Mike, to all you guys, I really appreciate you
taking all the questions.
A Rick Randall
Thank you.
A Mike Luetkemeyer
Thanks, Doug.
Operator: Your final question comes from Matt Miksic of Piper Jaffray.
Q Roshni Sacks
Hi, this is Roshni for Matt. Matts traveling. Sorry for dropping off earlier. The follow-up that
we wanted to ask is on adverse events, before the long-run cumulative rate had been around 0.5%,
just wanted to see whether thats stayed the same. Have you seen any change in that?
A Rick Randall
No, Roshni, its pretty much stabilized. We measure it monthly. And our field sales force has
monthly numbers. And so the 0.5% I think you are referring to the bowel injury is stabilized at
that number and we talked about some initiatives we have to further reduce it that well go into in
a future call.
Q Roshni Sacks
Okay. And then just one quick follow-up on deformity, I know that its still early, but could you
give us a sense about how big deformity could be as a percentage of your total business over the
next four to eight quarters?
A Rick Randall
We havent really measured how big it could be. I would say that its the fastest growing
minimally invasive spine is the fastest growing subset of spine, and within that deformity I think
is the fastest growing subset of minimally invasive spine. So were very excited about it.
Obviously, theres other approaches that are allowing more and more of patients who are older than
65 who have this condition to be operated on and operated on successfully. And they all need a
stable construct at the base that will withstand the forces of the lever arm thats created with
the fusion. So its a large opportunity for us and we are just getting started so Im not going to
provide any numbers. But as we move forward, well provide on future calls more detail as to the
market size considering the utilization of our technology.
Q Roshni Sacks
Okay. Just to push a little bit on that, do you think it could be just sort of ballpark number
10, 20? I guess some color, not necessarily quantifying, but just some qualitative color would
be nice.
A Rick Randall
Well, its a large market.
Q Roshni Sacks
Right.
A Rick Randall
And as you follow some of the other companies that are doing well in that market theres some big
numbers attached to it. There is another 40 to 50,000 patients out there that are of that ilk. So
the available market you look at a 2-Level product at 10, $12,000 of revenue and you lay that over
that size of an opportunity in this country alone, it can be fairly large. But its early on in the
development of this technique for that application. So we havent even given out publicly numbers
that we would anticipate in sales over the next two or three years.
Q Roshni Sacks
Fair enough. Thank you for taking the questions.
A Rick Randall
Thank you.
Q Roshni Sacks
And sorry about Matt dropping off.
A Rick Randall
No problem.
Operator: Im not showing any further questions. Would you like to continue with any further
remarks?
Rick Randall, President and Chief Executive Officer
No, I think were all set. It there are no other questions Id like to close by thanking you, all
of you for taking the time to join us on the call today. I want to express my appreciation to Mike
for the three years of service that hes given this company, the partnership that hes given me,
and the mentorship hes provided to the people in the finance department here at the company. Its
meant a lot to all of us and well miss Mike dearly.
I appreciate your interest in TranS1 and look forward to updating you on our continued progress in
future calls. Thank you.
Operator: Ladies and gentlemen, thank you for your participation in todays conference. This
concludes the program, you may all disconnect. Everyone have a great evening.