OrthoPediatrics Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to OrthoPediatrics Corporation's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Tripp Taylor from the Gilmartin Group for a few introductory comments.

Speaker 1

Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer And Fred Hite, Chief Operating and Financial Officer. Before we begin today, let me remind you that the company's remarks include forward looking statements within the meaning Federal Securities Laws, including the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to numerous risks and uncertainties and the company's actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's most recent annual report on Form 10 ks, which was filed with the SEC on March 1, 2023.

Speaker 1

During the call today, management will also discuss certain non GAAP financial measures, which are supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period over period. For each non GAAP financial measure referenced on this call, The company has included a reconciliation of the non GAAP financial measure to the most directly comparable GAAP financial measures in its earnings release. Please note that the non GAAP financial measures have limitations of analytical tools and should not be considered in isolation or as a substitute for OrthoPediatrics' financial results prepared in accordance with GAAP. In addition, the content of this conference call contains time sensitive information That is accurate only as of the date of this live broadcast today, May 2, 2023.

Speaker 1

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

Speaker 2

Thanks, Trif. Good morning, everyone, and thank you for joining us on our Q1 2023 conference call. As we start all earnings calls, I'd like to begin by highlighting that we helped over 19,000 children in the Q1 of 2023. Since inception And with the addition of MD Orthopaedics and Pega Medical, we have now helped almost 650,000 kids. Doing the right thing for children remains our top priority.

Speaker 2

In the Q1 of 2023, we generated revenues of $31,600,000 representing growth of 35% We're encouraged by the better than expected revenue growth and a strong start to the year. As we've discussed, the record high levels of RSV cases in the back half of twenty twenty two remained a headwind early in Q1, But eased as the quarter progressed. Staffing shortages also continued to negatively impact children's hospitals throughput And we continue to expect some staffing headwinds throughout the year. Despite the challenging environment, we continue to execute our strategy and deliver strong results Across both the trauma and deformity and scoliosis businesses. The main drivers in the quarter included elective limb deformity correction and scoliosis procedures, Combined with very strong contributions from MD Orthopaedics and Pega Medical.

Speaker 2

Organically, domestic growth outpaced international growth, Which underperformed slightly due to timing of set purchases by stocking distributors and ongoing FX impact. However, We expect the international business to improve in Q2 and throughout the year as underlying demand remains strong. Overall, We are extremely pleased with the start of the year and believe we are well positioned strategically to continue our successful growth story. Therefore, we are increasing our revenue guidance for the full year to $148,000,000 to $151,000,000 representing growth of 21% to 23% compared to 2022. Despite our Q1 success, We remain cautiously optimistic heading into the Q2.

Speaker 2

The staffing dynamics remain unpredictable and could impact our hospital's ability To meet the rising summer demand and typical seasonality usually experienced late in Q2 and throughout the summer. Given the difficult comparison to the Q2 of 2022 and until we see tangible evidence of structural improvements within the pediatric market, We will remain conservative with our outlook. Moving to our revenue segment. In the Q1 of 2020 We generated total trauma and deformity revenue of $23,400,000 representing growth of 42% compared to the prior year period. This included combined global revenue of approximately $4,800,000 for MDO and Pega Medical.

Speaker 2

Revenue growth in the quarter was driven by strong performance from MDO and PEGOT and the return of elective limb deformity correction procedures, Offset by trauma softness that we saw rebound in March. Trauma and deformity correction products, particularly defose, PediPlate, PNP Femur and cannulated screw sales were strong in the quarter. Demand for our products remains high As we continue the pace of market share gains across the entire trauma and deformity portfolio. Now that MDO and Pega have been fully integrated, We continue to be pleased with our ability to accelerate growth in each franchise and their contributions to overall growth. With respect to MDO, the addition of new products in existing markets and expansion into new markets is bolstering the organic growth.

Speaker 2

We are excited to launch new products and expand the MDO portfolio. The pipeline of new products and launch cadence within our non surgical franchise represent which I'll provide more detail on shortly. As for the Pega Medical product portfolio, Pega product sales grew at a very rapid pace in the Q1, exceeding our initial expectations. The growth of the products Has come almost entirely due to expanded surgeon access as the existing sets are now supported by a higher percentage of our sales force that is fully trained. We have yet to see a major impact from new sets in the U.

Speaker 2

S. However, in the Q2, we plan to launch several new Pega sets Alongside a significant deployment of OP legacy products such as PNC Femur, cannulated screws and drive rail. NDEON Pega have advanced our leading strategic position in pediatric trauma and deformity by allowing us to further surround our customers With a comprehensive portfolio of products that meet all their patient needs. The OP team has done a tremendous job ramping up growth in these franchises As we leverage our global commercial footprint, we continue to expect each of these franchises will drive revenue growth in excess of our normal 20 percent organic corporate growth rate in 2023. Moving to the scoliosis business.

Speaker 2

In the Q1 of 2023, we generated revenue of $7,100,000 representing growth of 18% compared to the prior year period, Highlighted by very strong domestic revenue growth of 23%. This performance reflects a steady improvement in the elective surgical environment And continued share gain with Response and Apotix. International revenue blunted overall growth by a few points Due to a tough comparison and timing of certain international set orders, however, we expect this to be temporary and to become a tailwind for growth for the remainder of the year. We're pleased to see the value proposition of the combination of Apophix, 7d and Response comprehensively addressing surgeon needs And driving market share gains. Total users in Q1 increased meaningfully compared to the prior year period.

Speaker 2

We continue to see strong incremental response fusion growth in new accounts where we've either deployed 70 units or surgeons have started using apafix. Apafix grew in the 1st quarter Despite clinic visits negatively affecting scheduling early in the quarter. As a result of scheduling challenges, many Apofix have been pushed into the 2nd quarter. Additionally, we continue to make progress on the development of Apophix's clinical data, which will lead to stronger KOL support and podium presence. Specifically, at the recent POSNA meeting, positive 1 year follow-up data from 54 patients was presented highlighting the early U.

Speaker 2

S. Experience. We continue to expect more surgeons will become increasingly comfortable with where Apofix fits into their practices as the U. S. Data matures and is presented at Scientific Society Meetings.

Speaker 2

Late in Q1, we received FDA approval for the response cannulated screws And performed our first case in March. Surgeon feedback was very positive and we expect this system to improve outcomes for patients with neuromuscular scoliosis Requiring COVID fixation. Additionally, the early deployment of response power and disposable torque limiters is underway. We believe these line extensions will continue to support share gain momentum within the scoliosis fusion portfolio. Overall, Surgeons and Children's Hospitals are increasingly attracted to our scoliosis portfolio as we continue to advance our response fusion system, Deploy 70 intraoperative navigation systems and add new users of Apifix.

Speaker 2

All of this is leading to share gain and we expect that to continue as we execute. Moving on to international. In the Q1 of 2023, we generated international revenue of $7,800,000 compared to $5,200,000 the prior year period, primarily driven by MDO and Pega contributions in the trauma and deformity business. The timing of legacy set purchases, Large scoliosis orders by stocking distributors and the ongoing FX dynamics negatively impacted our international sales. Demand for our products remains strong and we expect the international performance to improve in the Q2 and throughout the remainder of the year.

Speaker 2

Turning to new product development. The first the Q1 proved to be a very successful quarter for R and D and new product development. We received FDA approvals, advanced full scale product deployments, launched new products and made meaningful progress on several long term product development We believe each of these accomplishments represent incremental opportunities to drive market penetration and share gains as their launches expand. Within the Trauma and Deformity business, we initiated the full scale deployment of our new external fixation product DriveRail. It includes a unique integrated lengthening mechanism, hinge options to span a mobile joint and is designed to integrate with the Orthex system.

Speaker 2

We expect a large volume of sets of driver ale to be deployed in the Q2. Additionally, we received 510 FDA approval For our Orthex preplanning software and are in the process of a full scale domestic launch. This technology will assist surgeons in efficiently And precisely planning their Ortex cases based on prior case data and advanced imaging. Finally, the R and D team made solid strides The development of PMP Tibia and an entirely new pediatric specific plating system. Inside the Pega franchise, We received our 1st FDA 510 approval since the acquisition last July for a new product in the guided growth area called Gyro.

Speaker 2

We expect to begin the beta launch of gyro in the next several weeks. Beyond gyro, we're busy introducing the entire product portfolio to surgeons around the world We're treating these introductions as new launches because we found many customers are being educated about the Pega products for their first time. With the heavy deployment of inventory on the way, we are excited about all of their growth prospects. On the non surgical specialty braking side, Our MDO team executed the beta launch of the Mitchell Ponseti Move Bar in March, and we expect the full launch to take place in the Q2. The MP Move Bar further expands our market leading position in non surgical clubfoot treatment and expands the use profile The gold standard Mitchell Ponseti clubfoot brace.

Speaker 2

This is particularly meaningful as it also represents the 1st major new product introduction in several years for the MDO franchise and is the first of several to come. Also within the non surgical bracing franchise, We've completed the development of the DF2 femur fracture brace and we'll be conducting a beta launch in the Q2. On the scoliosis front, as mentioned, we received 510 FDA approval for the response cannulated screws and performed our first case in March. We expect this system will expand the use of our first of its kind response neuromuscular system that was launched in 2021. In addition, we kicked off the early rollout of response power and disposable torque, which will make both screw placement And final tightening much easier for our customers.

Speaker 2

Beyond all of this, we continued great progress on our longer term development within our early onset scoliosis initiative, Such as Guided Growth, Ribbon Pelvic and our growing rod. Finally, I want to briefly discuss a bolt on acquisition we closed yesterday. We've acquired an enabling technology platform called Medtech Concepts. Medtech Concepts is an early stage, Free commercial platform designed to increase efficiency in the perioperative environment. The solution combines hardware, software and data analytics To help streamline operative care and support better decision making in the operating room.

Speaker 2

In the future, we believe this platform will provide valuable intraoperative resources While we don't expect material revenue contributions from the platform in 2023, we view this as an opportunity, much like 70 and Firefly, To continue to support market share gains for our implant systems in the years to come, we are excited to welcome to our team the MedTech Concepts' Founder, Kevin Unger, Who was previously a 10 year member of the OP Board of Directors. Kevin has stepped down from the Board and has joined us full time as an OrthoPediatrics employee. On behalf of the entire Board of Directors, I'd like to thank Kevin for all his contributions. We look forward to working with him to drive our enabling technology strategy. That brings us to surgeon training and education.

Speaker 2

Critical to our success is an unwavering commitment to support pediatric orthopedic clinical education and training and to help train the next generation of pediatric orthopedic surgeons. In the Q1, we grew the number of hands on training sessions conducted for healthcare providers From 70 in the prior year period to over 85. We also conducted nearly 250 product sessions. Combined, we reached over 9 50 individuals on a global basis. Furthermore, we were a leading supporter of the I MAST course in Dublin, Ireland, where discussions took place about the most complex pathology facing pediatric scoliosis surgeons.

Speaker 2

Also during the Q1, we were once again the largest contributor To the European Pediatric Orthopedic Society or EPOS course held in Krakow, Poland. That course was attended by nearly 800 pediatric orthopedic surgeons. We held a symposium on Osteogenesis Imperfecta, or OI, moderated by our own Medical Director and Pediatric Orthopedic Surgeon, Doctor. Scott Hoffinger. OI is one of the most challenging surgical problems pediatric orthopedic surgeons face.

Speaker 2

The presentation highlights case studies and engage ePost attendees in discussion of their experiences and best practices. Just last week, We attended our largest industry meeting, Posner, which was attended by over 1,000 pediatric orthopedic surgeons. We are very excited to have unveiled a new larger And longer term commitment to this prestigious society and its membership. This new multi year commitment is one is of the highest level continues to establish OrthoPediatrics as the clear leader in supporting pediatric orthopedic clinical education training. To conclude, we believe it is our responsibility as the market leader to do everything we can to support our surgeon partners In the collective effort of advancing the entire field of pediatric orthopedics, in a way this may be our greatest contribution of all.

Speaker 2

With that, I'll turn the call over to Fred to provide more detail on our financial results. Fred? Thanks, Dave. Our Q1 2023 worldwide revenue of $31,600,000 increased 35% compared to the Q1 of 2022. Growth in the quarter was driven primarily by continued share gains across our legacy portfolio as well as contribution from MDO and Pega Medical of $4,800,000 In the Q1 of 2023, U.

Speaker 2

S. Revenue was $23,800,000 a 31% increase from the Q1 of 2022. Growth in the quarter was primarily driven by organic growth in trauma and deformity and scoliosis products as we continue to deploy more sets and increased surgeon adoption as well as the addition of MTO and Pega Medical. In the Q1 of 2023, we generated total international revenue of $7,800,000 Representing growth of 49% compared to the prior year period. Growth in the quarter was driven primarily by the addition of MDO Empega Medical as well as increased procedure volume across the majority of our OUS regions.

Speaker 2

This growth Was partially offset by the ongoing negative impact of FX on our international sales. In the Q1, trauma and deformity revenue of $3,400,000 increased 42% compared to the prior year period. Growth in the quarter was driven primarily by a gradual normal In the Q1 of 2023, scoliosis revenue of $7,100,000 increased 18% compared to the prior year period. Growth was primarily driven by increased sales in the U. S, offset by lower year over year set sales to our international stocking distributors as they temporarily manage their cash positions.

Speaker 2

We expect this OUS trend to reverse for the remainder of the year. Finally, sports medicine other revenue in the Q1 of 2023 was $1,100,000,000 which increased 22% compared to the prior year period. Turning to sets deployment, dollars 3,000,000 of sets were consigned in the Q1 of 2023 compared to $3,900,000 In the Q1 of 2022, touching briefly on a few key metrics. For the Q1 of 2023, gross margin With 74.6 percent compared to 79.3% in the Q1 of 2022. The slight decline in gross margin was primarily driven by favorable purchase price variances in the Q1 of 2022, which did not repeat in the Q1 of 2023.

Speaker 2

Total operating expenses increased $7,200,000 or 29 percent From $25,000,000 in the Q1 of 2022 to $32,200,000 in the Q1 of 2023. The increase was driven by the addition of MVO and Pega Medical as well as incremental personnel required to support the ongoing growth of the company. Sales and marketing expenses increased $2,500,000 or 25 percent to $12,200,000 in the Q1 of 2023. The increase was driven primarily by increased sales commission expense coupled with the addition of our recent acquisitions. General and administrative expenses increased $4,500,000 or 34 percent to $17,700,000 in the Q1 of 2023.

Speaker 2

The increase was driven primarily by the addition of MDO and PEGS Medical as well as the personnel and resources to support the continued expansion of the business And an increase in non cash G and A expenses, including depreciation, amortization and stock based compensation. Research and development expenses increased $200,000 or 12 percent to $2,300,000 in the Q1 of 2023. Total other income was $1,200,000 for the Q1 of 2023 compared to a $3,000,000 expense For the same period last year, in the Q1 of 2023, we recognized a gain on the fair value adjustment of contingent consideration as compared to a charge in the Q1 of 2022. We reported an adjusted EBITDA loss of $2,100,000 in the Q1 of 2023 Compared to a loss of $1,600,000 for the Q1 of 2022, we ended the Q1 with $109,200,000 in cash, Short term investments and restricted cash. We maintained a strong cash position and $50,000,000 available on our line of credit.

Speaker 2

Turning to guidance. We now expect full year 20 23 revenue to be in the range of $148,000,000 to $151,000,000 representing year over year growth of 21 to 23% compared to our prior expectations of $146,000,000 to $149,000,000 The guidance assumes roughly $7,000,000 of revenue contribution from MDO and Pega Medical Before the acquisitions became organic on their anniversaries, we expect organic growth of 15% to 18%. Lastly, we plan to deploy around $25,000,000 of new sets in 2023, representing a year over year annual growth 24%. Additionally, we continue to expect to generate between $3,000,000 to $4,000,000 of adjusted EBITDA in 2023. I'll now turn the call back over to Dave for some closing remarks.

Speaker 2

Thanks, Fred. Following our successful Q1, Kicking off our 17th year as a company, I want to remind everyone that a culture and cause dedicated to impacting the lives of children is attracting the best and brightest And still underpins all of our success. Our shared cause and commitment to improving the lives of children with orthopedic conditions has fostered a culture that has again been recognized and awarded as a top 100 employer in the state of Indiana, A distinction unique to Warfel Based Medical Technology Company. We are proud OP has received this recognition for the 7th time. And as shareholders, you should be proud of your continued support of a company that not only does so many great things for children, but continues its commitment to corporate social responsibility.

Speaker 2

With that, I'll turn the call back to the operator to open the line for any questions. Thank

Operator

If your question has been answered and you'd like to remove yourself from the queue. Please press star 1 1 and again. Our first question comes from Rick Wise with Stifel. Your line is open.

Speaker 3

Good morning, gentlemen, and great to see the solid recovery And rebound. Maybe just starting in from that perspective, Dave, maybe talk to us about or Fred, talk us through the quarterly flow, maybe Just at a high level, talking about the U. S. And the international separately, talk about the quarterly flow of recovery And maybe how the second quarter starting off, are we do you feel like At a high level, are we back? Are volumes where they need to be?

Speaker 3

Your confidence in looking ahead to the rest of the year And maybe most particularly this international, why feel confident on the international rebound? I know there's a lot there, but thank you.

Speaker 2

Hey, Rick. Thanks. Yes, so I think as we think about the flow of the quarter, What we saw during the quarter and I think what we'll probably see continuously here for a while until things at a macro level get completely normalized, there's still a bit of chop, Kind of month to month, a little bit of choppiness, obviously, producing really great growth in the end, but it's not it hasn't been What I would call super stable from day to day from month to month, certainly affected by the waning portion of RSV in the 1st part of the quarter, Followed by, I would say, a much, much more normalized environment when it comes to respiratory illness. I think that's out of the news as we're all seeing. But we have not seen the improvement that I think some other companies are reporting on the adult side in hospital children's hospital throughput.

Speaker 2

We still remain hampered throughout the quarter with surgeons' capacity to be able to get a long time and get particularly elective procedures through Despite the elective procedures really driving strong performance for us. And so, I think our guide still anticipates that We will have staffing challenges throughout the year. And like I said earlier, I think until we see really structural change that's We want to remain pretty conservative with respect to what we see, particularly as we enter into a second quarter We had a pretty tough comp. If you remember last year, we did very, very well. We left Q2 thinking everything was completely normal.

Speaker 2

And obviously, it wasn't in the back half of the year with RSV and staffing. So until we see staffing situations change, I think fairly consistently. We just remain optimistic, but a bit cautious about our hospital's capacity to move a lot of the elective cases through in the really busy summer months of June, July August. Last thing I would comment on related to the international. International obviously grew very substantially, but primarily because of MDO and Pega.

Speaker 2

But the demand for products, particularly on the SCOLI is really high. I would say, we were a little disappointed That international wasn't better, but it was, I think, entirely due to some timing, not just of set orders, but even Big restock orders, particularly on the SCOLE side, and that's not demand that's going away. We've got a pretty good look at what Q2 looks like. And Yes, I think we feel really confident about how international could impact the business positively through the last three quarters of the year.

Speaker 3

That's great color. And maybe just keeping it high level, Fred, you've always been great about helping us think through The quarterly seasonal flow here, you start off better than expected. You have a nice Beat and raise, etcetera. How do we think about the how would you have us think about the Q2, particularly from a revenue perspective And how it plays out for the rest of the year?

Speaker 2

Yes, absolutely, Rick. We're still anticipating the 3rd quarter Being our largest quarter of the year, followed by the Q2 just below that and then the Q4 is lower than the Q2. That's all assuming the summer kind of season plays out the way we anticipate it to be. So we'll see. But right now, there's no indication that it shouldn't Play out that way.

Speaker 2

In June or July actually is the largest month followed by June and then August when the kids are out of school really drives The SCOLE business as well as the severe deformity correction surgeries and we would anticipate that happening again this year.

Speaker 3

Right. And just sorry to sneak in one more here. Just to make sure I understand, your comment about the Q2, I totally get what you're saying. Obviously, you have MDO and Pega this year, you didn't. Can the business ex that Those additions grow year over year or should we expect you're still going to report positive growth?

Speaker 3

How do we think about the second quarter Number from a dollar perspective, Fred.

Speaker 2

Yes. I think to Dave's point, so Q1 of last COVID negatively impacted the Q1. That kind of went away and the second quarter Strong back to what we thought was a normalized or very aggressive number. We had great growth on the domestic side as well as the international side And we kind of thought everything was back to normal. And then, growth slowed in the 3rd Q4 as RSV started filling up the children's hospitals.

Speaker 2

So I think Dave is just calling out a tougher comp because the Q2 was so strong, but we'll stop growth on the organic side, Excluding MDO and Pega, which are obviously going to add tremendous growth to the business, just a tougher comp than the 3rd and 4th quarters.

Speaker 3

Got you. Thank you so much.

Speaker 2

Thanks, Rick. Thanks, Rick.

Operator

Thank you. Our next question comes from Ryan Zimmerman with BTIG. Your line is open.

Speaker 4

Hey, guys. Thanks for taking our questions and nice to see the growth bounce back here. A couple of questions for me, If I may, the first is just MDO and Pega had a really nice quarter, the highest we've seen, I think, since You started reporting those out and they were inorganic. Is it kind of fair to assume that they can run at, call it, dollars 20,000,000 combined on an basis. Or would that be viewed as a disappointment given the set investment and deployments you're expecting Through the balance of the year.

Speaker 2

No, listen, we're very pleased with both MDO and Pega, tremendous year over year growth from their organic numbers, and we anticipate that will continue. As we stated earlier last The growth is not going to be explosive like 50%, but it's going to be very strong and higher than the 20% range. And I think you're pretty close on what we would anticipate for the year here in 2023. And as we continue to get sets deployed throughout the year, I feel very good about growth continuing very aggressively into next year, both of those businesses. Yes, Ryan, I think what I was most enthused by, particularly on the Pega side, is to see the way the growth came in, particularly domestic.

Speaker 2

And really just That's the impact of the U. S. Selling organization. And we don't have a ton of sets in the field at this stage. Obviously, we're launching month week to week, month to month, we're getting more sets out, but kind of a big bolus has not been out there.

Speaker 2

So it's not sets I know it's necessarily driving this. It's pure surgeon demand and kudos to the commercial team, particularly in the U. S. Because I think surgeons instantly Started calling that group and feel much more confident with that group and just really proud of how the domestic sales force has performed here And get them some inventory. And I think the next 3 quarters really be strong, really the next several years could be really strong for the Pega products.

Speaker 4

Okay, got it. And then the other thing, you had this impact of RSV In the Q4, I think if I look back at my notes, maybe a $2,000,000 to $3,000,000 impact. When you look at underlying T and D growth, it's similar to prior quarters. So I'm wondering kind of what your thoughts are, Dave, about what you may or may not have made up from those RSV impacts. And I know there were some in January, What you may or may not have made up in the Q1 and kind of how you're thinking about the recoupment, if you will, Of those procedures or of that potential sale through the balance of the next few quarters?

Speaker 4

Thanks.

Speaker 2

Yes. It is our hope that we make up what we saw backlog in, let's say, in late Q3, Q4 throughout the balance of 20 I think that, again, our guide is fairly conservative on this point. We just got back from POSNA. We just got back from EPOS. It's pretty consistent what we're seeing hearing from customers.

Speaker 2

It's just as I pointed out earlier, tough to get the appropriate The volume of OR time required to get through a normal case log, much less backlog. And so it's tough for us to forecast that. I think what we saw in quarter in Q1 is certain products, and for example, the deformity correction side of our trauma deformity business performed really well. And that was a bit of a turnaround from what we've seen in the 1st few quarters, but it was offset by some softness and trauma that didn't make much sense, But then rebounded really aggressively in March. So I said to Rick earlier, it's overall everything's directionally going well.

Speaker 2

But I think the chop from month to month on in the elective and even for a couple of months there, the trauma environment Makes it difficult for us to say that we know this is all going to come back in Q2. I'd say it's over the next year where we'll probably pick up that additional volume.

Speaker 4

All right. I'll hop back in queue. Thanks for taking the questions, guys. Congrats on the quarter.

Speaker 2

Thanks, Ryan.

Operator

Thank you. Our next question comes from Matthew O'Brien with Piper Sandler. Your line is open.

Speaker 5

Hey, this is Phil on for Matt. Congrats on the quarter and thanks for taking our questions. Just for starters on guidance, raised by $2,000,000 here, which You know, amounted to the beat and seemingly coming from MDO and Pega. So the organic guide remains the same. And I think Historically, you've indicated your desire to be a 20% organic grower in, call it, normal market conditions.

Speaker 5

Can you walk us through the structural differences here between adult and children's hospitals? Results from your adult counterparts indicate that At least volumes on the adult side are coming back in a big way. And when might the children's hospitals see something similar to that?

Speaker 2

Yes. I think I'll address the structural. Fred, maybe if you want to talk about the way that we see the 3 quarters going from a revenue standpoint. But I think there is a difference between the staffing situations that we see in children's And adult hospitals, particularly on some of the more common procedures performed. We lost a lot of staff in children's hospitals That were very specialized, that were extremely well trained and many of that had been in the OR for a long time.

Speaker 2

And so for example, if you're going to do a multi hour Scoliosis fusion procedure on a neuromuscular scoliosis patient that is about as complicated as the surgical procedures you're going to have. And when you lose staffing there, it's pretty difficult to plug even a traveling nurse or staff member into that environment and maintain the same level of efficiency. So we have monitored this quite aggressively in accounts where we have extremely high share And looked at a pre COVID level versus where we're at now, and we're just not the throughput is just not there yet. Now, obviously, we're getting reports that healthcare providers are coming back into the workforce. I know our hospitals are working hard to train up their staff.

Speaker 2

But if you do a ton of total knees, ton of total hips, it's easy to get that easier to get that kind of repetition Going for staff members and bringing people up to speed, but the procedures we do involve specialized care. It's a specialized care team. When you lose even one person, much less several people from that team, the efficiencies change. And so I think that's why our commentary on this is definitely different than what we Are hearing from our adult counterparts. Yes.

Speaker 2

I would just add that it feels like the second half of last year was really the COVID For the children's hospitals, if you think back on what created the staffing issue to start with, it was really COVID several years ago in the adult hospitals And those nurses being completely overwhelmed, not just nurses, but overall staffing being completely overwhelmed, I think that was for us in the second half of last year. The Q4, the volume was just crazy. Nurses were working crazy hours and there was, From what we're hearing, a lot of vacation and kind of catching your breath here in the Q1, for a lot of the staffing support And they're just not getting the same throughput as they're dealing with some of that, which is definitely different, I think, than the hospitals on the adult side.

Speaker 5

No, that's extremely helpful. Thanks for the color. And I guess just shifting gears here really quickly on the Medtech Concepts acquisition. I like the fact you brought it in an enabling tech company early. Can you talk can you walk us through the differentiation That you guys might try to employ here between, let's say, your vision for the product that will fit in children's hospitals and A similar product that might currently exist in an adult hospital for this enabling tech piece?

Speaker 2

Yes, great question. So yes, we are very pleased to have an opportunity here to take on this digital asset playbook. Certainly pleased to have Kevin join the team, who is a very seasoned veteran in digital health as well as On the implant side, so rare to find the combination of those things. I think what we see and it's a Similar phenomenon that we see with our partnership with SeaSpine on the 7 d side that there are really no companies Aggressively addressing the unique digital needs of children's hospitals. Certainly, just like we talked about staffing, I mean, the needs in terms of workflow, The complexity of these surgical procedures and frankly the data capture to help drive better decision making, Particularly about procedures that aren't as high volume, let's say, as total knee or total hip where there's gold standards applied.

Speaker 2

I think long term, that's where we see Playbooks Having a lot of value for our customers. Our goal here is to be able to take preoperative data, infuse that preoperative data in an intraoperative a suite of intraoperative solutions to help our customers make better decisions and then ultimately to be able to capture data such that our customers Can use that and correlate that against their preoperative outcomes and ensure that they get better they're making better decisions and driving better outcomes for kids. We don't see anybody doing that At all, anywhere. And so the opportunity to develop software and hardware that meets Kind of the unique needs of pediatric orthopedics versus where we see these technologies so frequently being used in adult hospitals Where it's repetitious surgery, hips, knees, those types of things, we think there's a huge value add for us. Again, it's not going to be overnight.

Speaker 2

This is a long term Play for us, but we like the entry point and we think this could have a big impact in terms of long term share gain for the business.

Speaker 5

Great. I'll hop back in queue. Thanks so much.

Speaker 2

Thanks, Phil.

Operator

Thank you. Our next Question comes from Mike Matson with Needham and Company. Your line is open.

Speaker 5

Yes, thanks for taking my questions. Congrats on the quarter. I guess, Just starting with the set placements, it looks like the numbers were down a bit Q1 of last year, just want to gauge your confidence in the ability to hit the guidance for the year there?

Speaker 2

Yes. We absolutely have plans in place to deploy that full $25,000,000 this year. As we've said in the past, Strong demand from the field continues and so we're swapping out priorities to get stuff to the right places. As we had last year some Slight delays in getting that one last instrument into the case, so we can get it deployed. But we're highly confident in the suppliers Getting us what we need yet this year and getting that deployed.

Speaker 5

Okay, thanks. And then just one product Related question in scoliosis, the response powered disposable torque, just Want to learn a little bit more about that. I assume you're not selling the actual power tools, but just the attachments or something. Maybe you could just provide some more detail on that.

Speaker 2

Yes, that's exactly right. Mike, you got it just right. We Truly, and we have our customers have always patent always placed our screws manually as well as set screws manually. And It's it can be a painful process, particularly when you've got 24 screws and you're providing the torque Required manually. And so this is something we've been working on for a number of years.

Speaker 2

We've had a number of our for a few years, we have a number of our customers that Getting to a spot where there's a recognition that the strain that's on their elbows, strain on shoulders pretty tough. And so this makes The implantation of our response system, much, much more efficient, easier on our physicians. And you're right, it's a Kit of instrumentation that allows surgeons to more clearly power screws in as well as set screws that applies to band lock As well as our small and standard stature response fusion systems.

Speaker 5

Okay. Got it. Thank you.

Operator

Thank you. Our next question comes from Sam Brudofsky With Truist, your line is open.

Speaker 6

Hey, thanks for taking the questions. First one, I'll just Stick with Pega and NNdio. Should we think about sequential growth through the year there or should we expect those business Is to mirror the seasonality of the core business for this year?

Speaker 2

Yes. I would expect that the Pega would most likely nearly mirror The seasonality of our business, although, again, we'll see, we haven't gone through a full summer with Pega before. It may not be As seasonal, just because you're born with osteogenesis imperfecta. So it's not a condition that Yes, as elective maybe as our scoliosis franchise. And I think MDO probably has less seasonality overall.

Speaker 2

I mean, obviously, it's applied shortly after birth. So maybe some seasonality there, but maybe a little less

Speaker 6

And then you mentioned some OUS set timing Items in the quarter and that potentially driving accelerated growth through the next three quarters of that. Should we think about this sort of being a low bar In terms of growth OUS for the year or is there other things to contemplate there? Thank you.

Speaker 2

Yes. No, I would agree that this would be the low bar for the growth rate for the Q1 on an organic basis. Still had a little bit of negative FX impacting us here in the Q1. We would anticipate that negative impact in the second quarter And then we're assuming it's a neutral impact in the 3rd Q4, but we see the growth rate organically internationally picking up In the second, 3rd and 4th quarter as compared to the 1st quarter rate for sure.

Speaker 6

Great. Thanks for taking the questions.

Speaker 2

Thanks, Sam. Thanks, Sam.

Operator

Thank you. Our next Question comes from Dave Turkaly with JMP Securities. Your line is open. There are no further questions at this time. I'd like to turn the call back over to David Bailey for closing remarks.

Speaker 2

Great. Well, as always, thank you for your great questions from our group and really appreciate you joining us on our call And look forward to seeing you all at upcoming conferences and discussions in the future. So thank you. Have a great day.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect. Everyone, have a great day.

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Earnings Conference Call
OrthoPediatrics Q1 2023
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