SeaSpine Holdings Corporation (NASDAQ:SPNE) Q2 2020 Earnings Conference Call August 4, 2020 4:30 PM ET

Company Participants

Leigh Salvo – Investor Relations

Keith Valentine – Chief Executive Officer

John Bostjancic – Chief Financial Officer

Conference Call Participants

Matthew O’Brien – Piper Sandler

Ryan Zimmerman – BTIG

Kyle Rose – Canaccord Genuity

Kaila Krum – SunTrust Robinson Humphrey

Jeffrey Cohen – Ladenburg Thalmann & Co.

Shagun Singh – Wells Fargo Securities

Brandon Folkes – Cantor Fitzgerald & Co.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 SeaSpine Holdings Corp. Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Leigh Salvo. Thank you. Please go ahead.

Leigh Salvo

Thank you for participating in today’s call. Joining me from SeaSpine is CEO, Keith Valentine; and CFO, John Bostjancic. Earlier today, SeaSpine released financial results for the quarter ended June 30, 2020. During this conference call, we will make forward-looking statements within the meaning of our federal securities laws in regard to our business strategy, expectations and plans, our objectives for future operations and our future financial results and condition. All statements other than statements of historical fact are forward-looking statements. Such statements may include words such as believe, could, would, will, plan, intend and similar expressions.

You are cautioned not to place undue reliance on forward-looking statements, which are only predictions and reflect our beliefs based on current information and speak only as of today, August 4, 2020. For a description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward-looking statements, please see our news releases and periodic filings with the SEC, which are available on our corporate website, www.seaspine.com and at www.sec.gov.

I will now turn the call over to Keith Valentine. Keith?

Keith Valentine

Thank you, Leigh. Good afternoon, and thank you all for joining us. First, I want to thank the SeaSpine family for their continued commitment to our vital mission of improving patients’ lives and for their flexibility in these extraordinary times. I’m inspired by the dedication and commitment of everyone in this organization as they tirelessly balance professional and personal responsibilities during the COVID-19 pandemic.

We continue to maintain full organizational capacity through a combination of work-from-home capabilities wherever possible, daily on-site operations for those groups that must work from our facilities and the use of virtual online tools to facilitate group projects and to provide clinical support to our surgeon customer and sales training to our distributor partners.

We are also conducting essential activities such as on-site clinical support in the OR and for cadaveric product development labs as needed. We have implemented through guidelines for safe and physically distant interactions to ensure the safety of our employees and others required to be present at our facilities. Our teams have adapted well to the new environment, and we are fully able to support our operations and our customers while keeping everyone safe.

The spine market continued to be impacted by the COVID-19 pandemic throughout the second quarter. Consistent with many other medical device companies, our revenue reflected an initially significant year-over-year decline, followed by gradual improvement throughout the quarter. As the quarter progressed, we experienced a return of previously deferred spine surgeries as more and more hospitals throughout the country loosen restrictions on surgical procedures.

Many of our surgeon customers have communicated to us they’ve begun to work through their substantial backlog of spine surgeries, which we are increasingly better able to support with recently launched products and the deployment of more of our spinal implant sets.

As previously communicated, April revenues declined by more than 60% compared to the prior year as state and national governments mandated a broad-based halt to elective and non-urgent procedures. May revenue began to show some improvement, declining by 24% year-over-year on a sales per day basis, with U.S. sales declining just over 21%. In June, our total revenues as measured on a sales per day basis showed meaningful improvement, and we were essentially flat compared to the prior year, with U.S. sales increasing just over 1%.

We attribute our resilient performance to the significant investments we’ve made in expanding both our product portfolio and our increasingly committed and exclusive core distributor network, our adaptability in continuing to provide robust surgeon and distributor training and education programs as well as the dedication and hard work of the outstanding SeaSpine team.

The recovery in second quarter revenues exceeded our initial expectations at the time of our earnings call in early May, and we are encouraged by the positive trends that have emerged in July, particularly in the U.S., where revenues are up high single digits quarter to date. Our surgeon customers continue to report a significant backlog of deferred procedures, and we are seeing the immediate benefits of recently launched products in newly on-boarded core distributors.

However, we are keenly aware of the ongoing risks and potential for further business disruption due to the resurgence of COVID-19, particularly as it relates to elective and deferrable procedures in states like Texas, California and Florida. With our recent distributor additions and those targeted for the second half of 2020, we are making progress towards further diversification of our geographic revenue footprint to mitigate those risks.

We are cautiously optimistic on our business outlook for the second half of 2020 and beyond, and we believe SeaSpine has never been better positioned to participate in the upside benefit when the market returns to pre-pandemic surgery volumes. We remain steadfast in our belief that most spine surgeries are not elective surgeries but rather are deferrable for only limited periods of time as many patients will continue to degenerate and experience increasingly debilitating pain and seek surgical treatment. That belief will continue to guide our strategy and our priorities.

Accordingly, we remain focused on the goals we set out to achieve at the beginning of this year to innovate and to drive accelerated revenue growth through aggressive commercialization of that innovation and to take market share through outstanding customer service. To that end, I would like to take the next few minutes to highlight our recent operational progress and product development and launch milestones and to provide an update on the initiatives we are driving in the second half of the year.

In May, we resumed operations at our Irvine orthobiologics manufacturing facility, which is now operating at full capacity to ensure an uninterrupted supply of essential orthobiologics products to our customers. We continue to place and manage orders with our spinal implant suppliers. And through close and constant collaboration and dialogue with them, we have been able to maintain sufficient inventories to support the recent rebound in spine procedures and to increase inventory levels to support potential revenue growth in the second half of the year.

Additionally, we worked very effectively with our third-party suppliers to procure and deploy more sets of higher-volume spinal implant systems and to launch many of our new systems, all of which we expect to be critical components of future revenue growth.

Earlier this year, we hired Ray McDonagh, previously with Zimmer Biomet, as Vice President of Global Spinal Implant Supply Chain. Ray’s leading renewed efforts to build even more effective and collaborative partnerships with our suppliers. In short, our supply chain remains healthy.

Turning to product innovation and commercialization. We prioritized our investment dollars and supplier capacity toward the most critical new product introductions and additional set builds of existing spinal implant systems needed to satisfy expected procedural mix later this year and early 2021. While we did experience a few delays in new product introductions due primarily to COVID-19, we remain firmly committed to the robust launch cadence we committed to for 2020, as evidenced by some of our more recent notable achievements.

We also launched a number of new systems, including the NorthStar OCT and Cervical Facet Fusion Systems, which significantly expand procedural offerings for posterior cervical fusion. We are particularly energized by the NorthStar launch as it addressed the last big product gap in our cervical franchise and will ultimately replace two aging systems that were launched almost 10 years ago.

We also just recently initiated the alpha launch of a suite of lordotic and parallel expanding implants under the Explorer brand name, which allows us to more effectively address the estimated $400 million market opportunity of expandable interbody devices.

Finally, we also launched a hinged TLIF interbody featuring NanoMetalene with Reef Topography that enables larger implants to be placed and articulated within the anterior column of the disk space. This is the third interbody device to feature our proprietary Reef Topography, which has been shown in preclinical sheep model to increase potential strength of early bone integration by 3x.

We also executed the full commercial launches of both the Mariner MIS and Mariner Outrigger Systems, the latest expansion of a proven technology platform in both minimally invasive and complex pathologies. Additionally, we recently expanded the alpha launch of our minimally invasive pedicle-based TLIF retractor that is compatible with our Mariner system. Lastly, we also launched a line extension of our Daytona Small Stature Deformity System that provides us with additional opportunities during the summer deformity season.

Looking forward, we are focused on executing the many new product launches scheduled for the second half of 2020. We have resumed development and launch activities on most of the new product introductions that we had deferred at the time of our first quarter earnings call in early May.

Our current expectations for some of the more significant upcoming new product introductions include the following: for the interbody franchise, we expect to alpha launch before the end of the year the first of a series of 3D-printed devices that we are developing with restor3D. The first alpha launch is expected to be a 3D print version of our foundational Shoreline Anterior Cervical System.

Our 3D print implant portfolio, which will ultimately span cervical, TLIF, anterior and lateral approaches, allows us to be more efficient with capital expenditures because they are designed to utilize the existing instrumentation from their NanoMetalene counterpart systems. That value proposition is perhaps more important than ever as we carefully manage costs during the pandemic.

Continuing with the interbody franchise, we expect to launch during the fourth quarter a line extension of our NanoMetalene Regatta Lateral implant to include a modular locking plate and to further extend the application of Reef Topography with the alpha launch of a new, no-profile, anterior lumbar implant that includes both a screw and an optional modular locking plate.

In the cervical franchise, we expect to alpha launch during the fourth quarter a next-generation anterior cervical plating system designed to complement our highly successful Shoreline system. We believe the plate’s ease of use, robust instrumentation and differentiated driver engagement will help us take additional market share. We also expect to complete the full commercial launch of Shoreline ACS system with Reef Topography before the end of August.

In the thoracolumbar franchise, we continued development efforts to extend our foundational Mariner modular pedicle screw technology to include a deformity-specific application that will give us a complete procedural solution to address these and other complex cases. We have been able to complete a number of in-person and virtual surgeon development labs, and we expect to alpha launch this new application of the Mariner technology within the next 6 months.

We are also progressing on the many viable leads we’ve received for the sale or placement of the Machine-Vision Image Guided Surgery platform that we are co-marketing with 7D Surgical. Recognizing the relatively long sales cycle for this type of capital equipment, we are optimistic that we will close one or more of these opportunities in the second half of this year.

Our ability to place units of this enabling technology in a capital-efficient manner will be particularly valuable in the current environment as hospitals are likely to continue restricting their capital purchasing budgets due to the financial impacts of COVID-19.

Before I turn the call over to John, I want to reiterate our growing confidence in SeaSpine’s position as a leader in surgical solutions for the treatment of spinal disorders by providing products and systems that are engineered for fusion. We will continue to stay in close contact with our distributor partners and surgeon customers and with additional insight from our Surgeon Advisory Board, product course for innovation, clinical responsiveness and superior customer experience that we expect will lead to sustained and long-term accelerated revenue growth as surgeons work through the backlog of pent-up spinal surgery demand and as they bring on new patients when we ultimately emerge from the disruptive impacts of COVID-19.

With that, I will turn the call over to John for a recap of Q2 financial results. John?

John Bostjancic

Thanks, Keith, and good afternoon, everyone. Total revenue for the second quarter of 2020 was $28.6 million, a decline of 27% compared to the prior year period. U.S. revenue was $25.9 million, reflecting a 26% year-over-year decrease. And international revenue was $2.7 million, reflecting a 36% year-over-year decrease.

U.S spinal implant revenue in the second quarter was $13.2 million, reflecting a 22% year-over-year decline. This decrease was driven by low single-digit unit price declines and a more than 20% decline in procedure volumes, particularly in April and May when procedures were down an estimated 36% compared to the same 2 months in the prior year. The percentage of U.S. spinal implant revenue, comprised of new and recently launched products, increased to 65% in the second quarter of 2020.

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U.S. orthobiologics revenue in the second quarter was $12.7 million, reflecting a 30% decline. This decrease was driven by low single-digit unit price declines and a significant decline in procedure volumes, particularly in April and May. The percentage of U.S. orthobiologics revenue, comprised of new and recently launched products, increased to more than 30% in the second quarter of 2020.

We will continue our focus on clinical data as health care systems increasingly appreciate the value proposition of our advanced DBM portfolio, and we expect that behavior to drive our future market share growth in orthobiologics.

From a distribution perspective, our core distributors collectively generated 60% of our total U.S. revenue in the second quarter of 2020, up from 53% in the second quarter of 2019. We continue to recruit for more of these committed and increasingly exclusive distributors in the U.S. and have identified additional near-term opportunities that we expect to capitalize on in the second half of 2020.

Gross margin for the second quarter of 2020 was 59.2% compared to 63.6% for the same period in 2019. The decrease was due to idle plant costs associated with our nearly 2-month shutdown of Irvine orthobiologics manufacturing operations. Recall that in the prior year’s quarter earnings call, we guided for gross margins to be in the 40% to 50% range. We exceeded those expectations as we resumed production in Irvine sooner than anticipated to keep a steady supply of inventory to meet the better-than-expected revenue demand we saw in late May and June.

Operating expenses for the second quarter of 2020 totaled $30.6 million, a $6.4 million decrease compared to $37 million for the same period of the prior year. The decrease was driven largely by a $5 million noncash intangible asset impairment charge recorded in the second quarter of the prior year and by lower selling commissions and travel expenses in the current year quarter.

As we noted on our last earnings call, in response to the revenue disruption caused by COVID-19, we identified a broad range of opportunities to reduce operating expenses, including a temporary 25% reduction in base salary for the senior leadership team. Largely as a result of these initiatives, we reduced our budgeted operating expenses excluding selling commissions by more than $2.2 million in the second quarter, in line with expectations.

We are also utilizing applicable relief available to us under the CARES Act via the Employer Payroll Tax Deferral programs. If we experience further revenue disruptions from another widespread halt to spine surgeries due to COVID-19, we will once again evaluate and implement additional cost-saving measures as necessary to preserve liquidity until we see a recovery.

Net loss for the second quarter of 2020 was $13.7 million compared to a net loss of $12 million for the second quarter of 2019. Cash, cash equivalents and investments at June 30, 2020, totaled $100.5 million. We had no amounts outstanding under our credit facility, which we amended to extend through July 2021 the time to exercise our option to expand the facility by $10 million to $40 million. We had $6.2 million of loans outstanding under the Paycheck Protection Program Act, which we expect will be forgiven in accordance with the requirements of that program.

Our free cash flow burn, which includes operating cash flows and purchases of property and equipment was $11.5 million for the second quarter of 2020, a $2.2 million increase compared to $9.3 million for the second quarter of 2019. The net change in our cash for the second quarter of 2020 was a $4.7 million use of cash, which reflects the benefits of the $6.2 million PPP loan, which is classified as a financing activity in the statement of cash flows.

Due to the potential negative impact on spinal surgeries of the recent resurgence of COVID-19-related hospitalizations and the risk of a second wave of COVID-19 infections, we cannot rely on the recent and still ongoing recovery of spinal surgeries as a dependable long-term indicator of our likely performance in the second half of 2020 nor can we confidently estimate the magnitude or duration that COVID-19 presents as a risk to our business. As a result, we cannot provide reliable guidance on revenue or free cash flow burn expectations for 2020.

While we are excited by the relatively strong start to the third quarter that Keith shared earlier, we want to temper expectations that we can maintain that revenue growth for the full quarter. We understand that many surgeons have devoted much of their time catching up on the surgery backlog of existing patients and less time on the pre-surgical consults that typically translate into new surgery candidates.

Additionally, the outlook for new patient demand for surgery is also unclear due to potential patients’ concerns about contracting COVID-19 in the health care setting. As a result of these uncertainties, there’s elevated risk that we experience a slowdown in revenue growth in the second half of the year.

Knowing these risks, we will continue to manage the business with a two to three year liquidity runway, but with a bias towards investing responsibly for long-term growth and innovation so that we are best positioned to continue to meet the needs of our surgeon customers and their patients when spine surgery volumes recover to pre-pandemic levels.

We will, however, quickly shift to preserving cash through appropriate cost-cutting measures, such as those we implemented in the second quarter of this year, if future circumstances so warrant.

I will now turn the call back over to Keith to wrap up. Keith?

Keith Valentine

Thank you, John. We continue to believe that the vast majority of patients in continual back pain will eventually seek and receive the necessary treatment. That is the critical underlying assumption that is driving our current decision making with respect to managing the business and costs.

Our priorities remain the health and safety of our employees and their ability to protect and provide for their families, our distributor partners and our surgeon customers and their patients. We have strengthened our culture and maintained our operational readiness, and I believe that we will emerge from the COVID-19 crisis stronger than ever to address the needs of the market.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Matthew O’Brien from Piper Sandler. Your line is now open.

Matthew O’Brien

Afternoon. Thanks so much for taking my question. Keith, can we start off with the performance in June and the commentary about July? Looking at all of your competitors, first of all, you did better than everybody in Q2. And I know it’s all relative because you contracted, but you did better than everybody else. The June commentary is better than everybody else. July commentary is better as well. So where is that coming from between new distributors, new products, all these new instrument sets? And what could really derail you as we move through the year, understanding that COVID could flare up again?

Keith Valentine

Yes. Hey, Matt. It’s really a combination of things that I think hit nicely as this pent-up demand started freeing up in later May and then, of course, into June and even portions now — or even as we get into the third quarter in July. And I think it’s a combination of really three things. One, you have the pent-up demand. You have an opening for elective and more emergent cases. Secondly, we’ve done — we just spent a lot of time even pre-COVID and then as COVID time started still recruiting distributors and still bringing aboard new folks. And — or at least ensuring the ones that were already aboard and just getting started before COVID hit that we took extra time to do training for them and get them ready for what we felt was inevitably going to happen, which was the opening up of surgery. And so that’s a significant influence.

And then on top of that, we have alpha launches moving to full launches and some new products going into preliminary alpha launch. And so all of that came together very nicely as we started exiting May, getting into June and now into July. So I think it is an influence of all three of those factors. And keep in mind, we have a robust July that went on that we talked about, and there’s still a number of significant markets that we feel like we participate well in, in California, Texas and Florida that have intermittent spots where surgery has been slowed down. So we feel very good about the pent-up demand despite the fact that some of our larger markets are still under some stress.

Matthew O’Brien

Okay. That’s helpful. And then as we think about the back half of the year, what are the extra instruments that’s allowing you to do as far as adding new clinician customers? Can you give us any metrics as far as how that’s gone even through COVID? And then what about adding distributors? Are they a little bit more cautious about potentially making a switch right now given what’s going on from a macro perspective, or are they — every bit is engaged in terms of coming over given all the new product flow?

John Bostjancic

Yes. Hey, Matt, it’s John. The addition of additional spinal implant sets of the high runners systems like Shoreline, Mariner, the full launch of Mariner MIS and Revision, it’s really providing a great tool to continue attracting new distributors and having those sets, being able to have them proactively deployed, right? Earlier in our history, we would recruit new distributors and try to understand what their set needs are and try to figure out how do we make the most use of the sets we have for the timing they’ll need them as they bring on board surgeons. And we’re just in a better position today with the deployment of more of those sets to hit the ground running and understanding what surgeon conversion opportunities they have and being able to move faster in terms of climbing that revenue growth curve. Just because we have that many more sets available, we are putting more internal emphasis and resources on tracking set utilization, understanding which distributors are using them most efficiently, pulling back the ones that aren’t redeploying to those distributors who are using them more efficiently.

So it’s a great opportunity to recruit distributors and providing a source of growth as — the newer products are what historically has been driving the growth, and they performed very well even throughout the second quarter, particularly as we exited June to see the growth rate in new sets. So it just — it provides us a great recruiting opportunity to bring on board more distributors and frankly, hit the ground running in terms of revenue growth faster than we could have before when we were allocating sets because we just didn’t have as many deployed in the field.

Matthew O’Brien

Got it. Last quick one for me. Just, John, I know SG&A came down relative to your expectations, but it’s not down as much as elsewhere across orthopedics, and then the R&D spend is still up nicely year-over-year off of a pretty tough comp. So clearly, you’re still on the offensive here. Can you talk about those investments and what you’re thinking they’ll lead to? Especially on the SG&A side, are there some smaller companies that are really struggling now? Are you able to capture some share, bigger companies maybe spending less time focused on spine given the performance here in Q2 and the outlook for the rest of the year? I mean those are, to me, aggressive investments again on a relative basis. So how do we think about how that should play out over the next year or so?

John Bostjancic

Yes. The continued focus on selling and marketing expense, obviously, with the commission dip in the second quarter from the decline in revenues, is what drove that to be lower. But we’re continuing to play offense in terms of marketing, hiring the product managers who can help manage the deployment of the sets, the launch of the new products because, as Keith outlined on the call, we’ve launched a lot this year, and we still have a lot more to launch. So this is still going to be our most robust year for product launches and making sure we’ve got the right sales management team, which we’ve expanded and integrated the orthobiologics and the spinal implants under one sales management team, make sure we have the right marketing product managers, the right supply chain folks.

As Keith talked about, we’re making big investments on the supply chain side because it’s such a complex supply chain on the spinal implant side that we want to make sure we have the right resources to stay ahead of the curve and continue to invest in building up more inventory and launching more of the high runner sets and launching more of the new products. So we continue to play offense because we think, yes, there is opportunities from the robust portfolio we have today, our ability to take market share in the past, where we see some potential less well-financed competitors, particularly smaller private companies, that may not be able to come out of this as strong or continue to invest for growth. We’ve had a lot of success prior to COVID hitting in terms of taking market share. And our portfolio and our distributor network, frankly, has only gotten better, so we’re really looking forward to when things return to normal. And that’s why we’re continuing to play offense, which speaks to the confidence Keith talked about in his closing remarks.

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Matthew O’Brien

Okay. Very helpful. Thank you so much.

Keith Valentine

Thank you, Matt.

Operator

Thank you. And our next question comes from Ryan Zimmerman from BTIG. Your line is now open.

Ryan Zimmerman

Hey, thanks guys. Thanks for taking the question. Let me echo Matt’s sentiments, certainly doing better than your peers. So Keith, you mentioned the 7D commentary — or you made some commentary around 7D and the expectation to have some placements potentially later this year. Can you just help us understand kind of what happens for you guys in terms of hardware benefit that you may pick up as a result of that placement? And then I have a follow-up.

Keith Valentine

Yes. It really just depends. We are going into it being flexible, Ryan, meaning that every hospital has kind of a different situation. We fully anticipate that hospitals will have somewhat of challenge with capital equipment for a period of time, right? And so if we can help with that capital equipment delay or that capital equipment challenge, we can do it with a clear agreement of how our implants will participate and could help earn out that 7D system. And so we’ve a couple of different ways we can deploy that, and we can assist the hospital in those decisions. It’s really not a very different model than others have employed with even larger capital equipment purchases in our space. And so we feel like it’s an advantage for us just because the price point for 7D is so attractive that it really leads to a very easy earn-out kind of proposal for the hospital. And so we’re excited because we think we’re going to have a couple, as we mentioned, in the second half of the year. And we really feel like it brings great value and system integration for the hospital in a seamless way to participate in the OR.

Ryan Zimmerman

Got it. And then just some commentary would be great along the DBM space and really also biologics business in general. There’s been less discussion, I think, amongst all the spine players about the biologics space. When I think about their performance, again, you guys continue to do, I think, better than peers here. And so it would be helpful to understand just what you’re seeing the way that you feel like you’re in an offensive position, particularly within DBM just because it gets less attention. You’ve got so much going on in hardware. I feel like people may be forgetting how big you are in DBM.

Keith Valentine

Yes, the DBM space is robust as we saw in the second quarter and moving into the third quarter, and I think a couple of things have hit to our favor. One, in particular, is the clinical work that we’ve been committed to and talking about over the past couple of years has started to produce some, I think, very compelling data. As you know, we had a great conversation last year at NASS. We will have four different conversations. This year, NASS will be done remotely, but I think it certainly is a testament to Frank and his team and Shaeffer and his team about how they’ve combined our ability and our investment in the science of fusion, right? And that science of fusion is not just about the orthobiologic. It’s also about the material choices you make in your implant systems and the synergy that can be created by that combination. And so I think for a company our size to have four talks planned at NASS in and around this technology and the clinical work that’s been done and the preclinical work that’s been done is certainly a testament to that team and a testament, I think, to how we’re seeing our DBMs accelerate. And I see that continuing, especially because we’re continuing to invest in that science, and we also have some new things that will be launched and brought forward. So again, I think we’ve made the right investment in doubling down, if you will, in that space and we’re now starting to see those rewards. And we’re seeing those rewards in a cost-effective way, and I think that’s really an additional focus that hospitals are having in making their clinicians responsible to not only results, but cost effectiveness in those results.

Ryan Zimmerman

Thanks. Thanks for taking the questions.

Keith Valentine

You bet. Thanks Ryan.

Operator

Thank you. And our next question comes from Kyle Rose with Canaccord. Your line is now open.

Kyle Rose

Great. Thank you for taking the questions. And congrats on a strong quarter here in the backdrop. So I just wanted to talk — you did a thorough job talking about all the puts and takes as far as on boarding new distributors, bringing people to speed and then also just the overall throughput from an R&D perspective. But maybe help us understand what kind of trends you’ve seen emerge from the hospital or the surgery center standpoint from a contracting and just hospital access perspective, and you’re clearly taking share with this revenue growth level. But how do you see the sales process kind of evolving as you’re putting new products in the field and as you’re bringing these new distributors on board? What are you contemplating as far as getting in front of physicians, getting on contracts? Just how that process might change or lengthen from a time standpoint relative to historical execution.

Keith Valentine

Yes. It’s an interesting question. I think there’s a couple contract opportunities that actually we were able to be successful with and are now on board and will add to an additional opportunity for market share in those areas that we got accepted. So I still see it going on. There was maybe a delay on one of them, and that delay certainly had to do with the hospital having other priorities to move through their COVID process. But I’ll tell you, I still think the process will continue on, the conversations that we’ve had, and we know which contracts are coming up and what areas we still need to get on contract. They’re still running their process. Now the question, of course, will become, will it become a longer decision period of time? But right now, they’re still running their processes and we’re still participating in them. So I don’t really have a line of sight of saying, for sure, it’s going to be delayed. All I know is that we’ve been successful in securing during this time and that’s reassuring because I was concerned that they would just push it off until a later date. And fortunately, they did not.

Kyle Rose

And then just with respect to the overall case mix that you’ve seen, maybe just comment as far as how the trends looked over the course of April, May and then into June and July with respect to simple one level fusions versus more complex cases and just how the overall revenue on a per case basis has trended over that time period.

John Bostjancic

Yes. It’s a good question because we saw very simple 1-level, 2-level cervical procedures seem to be the majority of the procedures in April. And as we talked about on the call, that was — the trough seems to be consistent for many companies in the spine space. April was the trough in terms of the drop off in procedures. Those that were being done were typically lower ASP, more simple procedures. And then as we saw the quarter progress, mid May was kind of the line of demarcation, where we started seeing more complex procedures come on board beyond cervical that timed well with the launch of Mariner MIS and Mariner Revision that we could participate in some of those surgeries as they came back. But the deformity season seems like it may extend beyond what traditionally is June and July just because of the procedures were deferred earlier in the quarter. But we have seen a return because we’re looking at systems used per procedure, ASP per procedure in addition to tracking procedure volumes, and we exited the second quarter and saw in July much more typical mix of procedures and ASPs that we would typically see in a July time frame. So it was certainly more on the simpler procedures early on and then kind of migrated back to what I’d consider more of a normal pattern as we exited the quarter and saw that stay consistent in — throughout the month of July.

Kyle Rose

Great. Thank you very much for taking questions.

Keith Valentine

Sure. Thanks.

John Bostjancic

Thank you.

Operator

Thank you. And our next question comes from Kaila Krum from SunTrust. Your line is now open.

Kaila Krum

Hey, guys. Thanks for taking our questions. So I guess, just as a starting point, I would love to understand what specifically you’re seeing in terms of rescheduled procedures and how you’re thinking about the backlog from here. Are we through most of the patients who have been canceled and rescheduled at this point, or — just would love to get a little bit more color on that.

Keith Valentine

Yes. It’s a good question. We haven’t talked to every single surgeon. But certainly, we have been busy, not only on Zoom calls or like Webex calls, but also busy with some cadaveric work in our development efforts, and there have been surgeon opportunities through our offices. And to a tee, everyone feels like the backlog is still there. We have not heard anyone that had any concerns about the backlog. Specifically, there are still some states that are not moving through the backlog, as we know, in certain areas of Florida and certainly the largest populations of Texas. So we still feel like there’s a backlog that continues to be worked through. We know from our checks up in the Pacific Northwest they also still have a good deal of backlog that they continue to work through. We know locally in Southern California there’s backlog that’s being worked through. So, I still think it’s there, and I still think that you’re going to see that probably as you go into the fourth quarter because the fourth quarter naturally has a lift anyway and so you’ll have the combination of backlog and new patients. Now the question remains is, are all the areas able to — be able to see patients, either — whether it’s remotely or whether it’s physically, and I think that continues to be one of caution as we move forward. If things get worse, I think you will see less and less patients going to physicians’ offices to meet. But right now, I still feel good that we are not through the backlog from earlier in the year.

Kaila Krum

Got it. No. That makes sense. And then it sounds like you guys are seeing strong performance into July despite having exposure to geographies that have seen more recent COVID flare-ups. So I would love to understand what you’re seeing specific to those geographies that had second wave. What has been sort of the impact specific to those areas and how you’re managing through that? Thanks, guys.

Keith Valentine

Yes. There’s still surgery. For example, in Texas, there’s still surgery being done in areas that do not have elective mandates, if you will, associated to that. So there’s still surgery being done in the area, but the largest cities are under some sort of restriction. And so we feel like those will be areas that, as they recover, we are fully ready to support as that backlog starts getting back on the list. And we also feel that the lift you saw in July is really about some robust areas that are really back at it and may be back at it, not only throughout the work week but also working on some weekends. And we feel good about the fact that, that backlog coming off and our new products coming out and our investment in new sets makes for a perfect timing that we are able to support those surgeries.

Kaila Krum

Thank you, guys.

Keith Valentine

Yes. Thank you.

John Bostjancic

Thanks.

Operator

Thank you. And our next question comes from Jeffrey Cohen from Ladenburg Thalmann. Your line is now open.

Jeffrey Cohen

Hi, Keith and John. How are you?

Keith Valentine

Good. How are you, Jeff?

John Bostjancic

Good. How are you?

Jeffrey Cohen

Just fine. So, John, you had some commentary. A couple of questions I think just call about the mix and the complexity of some of the cases as you went through the summer months. But could you talk a little bit about the mix as far as ASCs and hospitals during that time throughout Q2 and current?

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Keith Valentine

Yes. We still see support — we still see — there are cases that are going on in ASCs, but it really varies across the country. Our commentary on this really hasn’t shifted as we got through the second quarter, and that is there are some ASCs out there that are able to do more advanced procedures, if you will, because they’ve the appropriate backup and the appropriate safety in place in case to manage any kind of complications. But majority of what we are seeing is just simple cases out of ASCs. And whether those are the decompressive sort of procedures or whether it’s the one-level cervicales or simple straightforward lumbars, we are not seeing those more complex and multi-levels as much. And so we don’t have a huge footprint in ASCs, but we are also not seeing — or at least we didn’t see from our perspective a huge shift in the second quarter as I know some other procedures that are out there have seen from ASC support.

Jeffrey Cohen

Okay, got it. And then as far as the inventory build in Irvine and the two months being down, what’s the status now? Inventory has come down specific to the facility. It doesn’t seem like you had any issue as far as the amount of inventory you had on hand, but are things at kind of double time now to catch up with demand to build, or what’s the status currently?

Keith Valentine

Yes. It’s not really double time. I would garner that I think we did a good job that as COVID first hit, we were specific in making sure we had enough inventory and even purposely and intentionally went to a larger inventory base than we usually carry, right? And then we did close down the facility for a period of time. And then as things recovered in May and then we had some nice robust process for orthobiologics in June and July, we have been back at it for a while now. And so we are at normal, I would say, production processes right now. And we feel very good that the decision we made in March to keep manufacturing open for a couple of weeks to ensure supply was the right thing to do, and then we were able to appropriately bring it down for a period of time to ensure all our employees are safe. And we’ve been really happy with the efforts in Irvine, specifically I think the safety and processes that have been put into place and the teams working on it. And certainly, all of the great employees that are back at it and are very proud of the fact that they’re providing orthobiologics in — to many, many patients. In fact, we had an opportunity to visit and do a really wonderful walk through that celebrated our spin anniversary, if you will. And folks are still pleased to be not only back at the office and gracious for how we navigated through it, but super excited that they’re part of the front lines of helping patients. It was a very motivating week last week being able to visit with them.

Jeffrey Cohen

Okay. And then lastly for me, one more, if I may. Some commentary as far as restor3D that you talked about. That was the technology licensed out of Duke. Is that titanium? And where you are — you mentioned some interior systems, or is it still early days as far as number of users out there? Thanks.

Keith Valentine

Yes. We are just starting and getting through the 510(k) process and are excited that there will be a few of those options as we exit the year. I mean that’s one that I think we had some nervous energy that as COVID hit, would it fall to delays? And instead, I think the development team and our partnership with the Duke team has shown that even COVID can’t slow us down, and we are going to be able to launch those effectively this year. We are excited. They’re going to be using, as I said, the similar instrumentation as our — or the same instrumentation as our NanoMetalene product lines and we feel like that efficiency and to have choices, it is — a titanium 3D implant will be strong in the marketplace.

Jeffrey Cohen

Okay, perfect. That does it for me. Thanks for taking the questions and nice period on the quarter.

John Bostjancic

Hey, thank you.

Keith Valentine

Thanks, Jeff.

Operator

Thank you. And our next question comes from Shagun Singh from Wells Fargo. Your line is now open.

Shagun Singh

Thank you so much for taking the questions. Keith, I was wondering if you could discuss the trends within your two key businesses from June to July. I don’t know if you already touched on this. And then I was curious to get your thoughts on the deferred procedures. Are you willing to share what percentage of deferred procedures have been performed or scheduled to be performed? I think what we are hearing is that about — the backlog is about 40% to 50%. So just wondering if you’re willing to comment on that? And then, I guess, I will just squeeze in the third part of my question for you, which is new patients entering the funnel. Could you discuss in a little bit detail how that has evolved during the course of the quarter and into July? Thank you.

Keith Valentine

Yes. I will let John answer the first question, if you don’t mind, Shagun, and then I can give you some granularity to questions number two and three.

John Bostjancic

Yes. Sorry, Shagun. The first part of the question was results through July? You were asking about what?

Shagun Singh

Well, you talked about trends. You got talked about intra-quarter trends and growth in June as well as you provided some color on July. I’m wondering if you can break it down between the two business divisions, so what you might have seen for spinal implants versus orthobiologics.

John Bostjancic

Yes. Orthobiologics is growing a little bit faster than spinal implants, but the good news is that both of the portfolios grew. And as Keith had said, it’s high single digits for the quarter-to-date results, and it’s really driven by the new product launches and the new distribution. So both of those cylinders are firing, and we are seeing good acceptance of the new products that we recently launched, whether it’s alpha launches or the full commercial launches of those foundational Mariner systems for Revision and for MIS. So both are growing at a nice clip. In the month of July, as I said, high single digits. And as Keith talked about, we’ve seen some pockets in Texas, California and Florida, where we know surgeries have slowed down, so it’s encouraging that we are still able to grow despite the fact that the three states where we generate the largest proportion of our revenue are still seeing surgery slowdowns. And I think it’s most pronounced in Texas, where I think 100 counties have a halt on surgery. So it’s encouraging to see that we are getting that diversification of our geographic revenue footprint so that we still can grow in the face of those halts in those three big states. And it’s exciting to see what we can do once those states come back online fully and they’re not experiencing any delays. But the good news is the growth was there for the month of July, and both portfolios were growing.

Keith Valentine

So the second — on the second question, Shagun, on percent deferral, I know there’s been some, and I saw writings about it probably over the past 24 hours that the hip market, perhaps, it was — it had a pretty big commentary about how much was deferral. We don’t have those sort of details, but I would say your 40% to 50% falls in line with the surgeons that we have talked to and how they feel things are evolving, which also marries directly into your last question, which is about new patients. Every — that’s one thing consistently that we’ve heard from surgeons. It all depends on how much activity they had during the COVID times. There was certain practices that did really well with telemedicine and staying connected with the patients and staying connected with kind of better, if you will, ensuring the pipeline or the communication within that pipeline of patients is still full. And then I think there’s others that did not have that telemedicine. So I do think that it’s kind of spotty right now to look at how the new patient opportunities are coming because it depends on the area. It depends on the state of that area, where they’re as far as the outbreak. And it depends on the comfort of those offices to be bringing in patients and doing it in a — effective distance way, right? And so, that I would say it is more spotty across the country as we talk to clinicians on how well they’ve been able to kind of keep that new patient flow. But I feel good about the fact that fourth quarter, again, as I mentioned earlier, is always a busy time, especially in spine surgery and fusion surgery. So I do think that we will continue to see that as long as there’s work going on right now in the third quarter and early fourth quarter to bring those patients in.

Shagun Singh

I got it. And Keith, I was wondering if you could share your thoughts on M&A and spine just given the current environment. Do you think COVID-19 could actually drive consolidation among smaller players? Thank you for taking the questions.

Keith Valentine

Yes. It’s a good question. It’s one that we ask each other as well on what — obviously, there’s a number of interesting commentary rumors that are out in the marketplace. But is this a good time to be thinking about consolidation? Is it a good time, especially with how sales forces can be more efficient, perhaps some organizations may view by combining them and combining in some technologies. I think it’s a fair question. I just feel we are all in a similar spot, and that is one of wanting to make sure that the resources and the cash on hand is one that helps us weather the storm and weather it effectively for our own organic growth, let alone how we are looking at M&A. And so I do think it’s an interesting question. And probably the larger players have a different perspective on it than the smaller players who want to make sure that we can continue to fund our organic engine.

Shagun Singh

Thank you.

Operator

Thank you. And our next question comes from Brandon Folkes from Cantor Fitzgerald. Your line is now open.

Brandon Folkes

Hi. Thanks so much.

Keith Valentine

Hey, Brandon.

Brandon Folkes

Hey. How are you doing? Yes. So congratulations on all the progress in the quarter. Maybe could you just elaborate — sort of following on from what you’re just saying there, but could you elaborate on some of the opportunities you think COVID-19 had actually presented the company in terms of stuff like virtual trainings or any other initiatives that have been implemented during this time that you believe will likely be a tailwind in a post-COVID world? Thank you.

Keith Valentine

Yes. You bet. I think there’s been some new practices that a lot of us have embraced and figured out how to be more efficient. I do think in a post-COVID world, we’re going to be a little bit smarter on travel. We are going to be a little bit smarter on when we’ve to deploy resources to actually go to different areas when we found ways to be very productive and effective through proper teleconferencing and good preparation beforehand for trainings and what have you. Obviously, there’s still a very important part of our business that we continue to recognize and support, and that is the use of our cadaveric training lab, the need to be face-to-face to do certain things for development and development milestones and trialing of new implants and prototypes and instruments, all those things. Some of it can be done remotely. But often, they need to have some sort of hands on experience to make sure that everything is working before they’re first surgically implanted. So there is a balance. I also think that the COVID time will demonstrate those organizations that have continued to invest, that have continued to innovate and been successful with launching new products, which will give the right kind of fuel and opportunity post-COVID to really see additional market share gains.

Brandon Folkes

Great. Thank you very much.

Operator

Thank you. And I am showing no further questions. I would now like to turn the call back over to Keith Valentine for closing remarks.

Keith Valentine

Yes. Certainly. Appreciate everyone for joining us today and wish you a very pleasant evening, and we will talk soon. Cheers.

Operator

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



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