Jul 30, 2013
Executives
Quentin Blackford - Senior Vice President of Finance & Treasury Alexis V. Lukianov - Chairman and Chief Executive Officer Michael J.
Lambert - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Keith C. Valentine - President and Chief Operating Officer
Analysts
William J. Plovanic - Canaccord Genuity, Research Division Matthew S.
Miksic - Piper Jaffray Companies, Research Division Kaila Krum Robert A. Hopkins - BofA Merrill Lynch, Research Division Christopher T.
Pasquale - JP Morgan Chase & Co, Research Division Daniel Sollof - Barclays Capital, Research Division Richard Newitter - Leerink Swann LLC, Research Division David H. Roman - Goldman Sachs Group Inc., Research Division Glenn J.
Novarro - RBC Capital Markets, LLC, Research Division Joshua T. Jennings - Cowen and Company, LLC, Research Division Jeffrey D.
Johnson - Robert W. Baird & Co.
Incorporated, Research Division Craig W. Bijou - Wells Fargo Securities, LLC, Research Division Jason Wittes - Brean Capital LLC, Research Division
Operator
Greetings, and welcome to the NuVasive Incorporated Second Quarter 2013 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Quentin Blackford, Senior Vice President, Finance and Treasury for NuVasive. Thank you.
Mr. Blackford, you may begin.
Quentin Blackford
Thanks, operator. Welcome to NuVasive's Second Quarter 2013 Earnings Conference Call.
NuVasive's senior management on the call today will be Alex Lukianov, Chairman and Chief Executive Officer; Keith Valentine, President and Chief Operating Officer; and Michael Lambert, Executive Vice President and Chief Financial Officer. During our management comments and responses to your questions, certain items may be discussed, which are not based entirely on historical facts.
Any such items should be considered forward-looking statements that involve risks, uncertainties, assumptions and other factors, which if they do not materialize or prove correct, could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements. These and other risks and uncertainties are more completely described in today's press release and NuVasive's most recent 10-Q and 10-K forms filed with the Securities and Exchange Commission.
With that, I would like to turn the call over to Alex.
Alexis V. Lukianov
Nuva continues to solidly execute our full year strategy to take market share. Revenue in the second quarter of 2013 exceeded our expectations, growing over 7% to nearly $166 million.
Our U.S. lumbar and U.S.
cervical businesses outperformed in the quarter, more than offsetting somewhat slower growth internationally. Importantly, our first full year in Japan, the second biggest market, is performing to expectations.
Operating profit translation was also strong. We generated a non-GAAP operating margin of approximately 14%.
Solid execution thus far in 2013 leaves us increasingly optimistic about the second half of this year. That said, we are laser-focused on executing to a full year plan.
As a result, our full year revenue expectations remain unchanged, contemplating the market challenges that surfaced late last year and a still-recovering U.S. spine market.
We also continue to expect a non-GAAP operating margin of approximately 14% this year, with a non-GAAP EPS of around $1. Today, I will run through a high-level midyear progress report of the top drivers of our strategy for sustained growth with increasing profitability.
Then I'll provide a legal update and turn the call over to Michael to cover financial results and detailed guidance. So let's begin with an update on NuVasive's top future growth drivers, which we believe will drive industry-leading growth toward and well beyond $1 billion in revenue.
We are truly differentiated in our 100% focus on changing spine surgery with sharp execution of a proven market share taking strategy. The top drivers of our future earnings growth are: one, the spine market shift toward MIS solutions; two, expanding the body of focus clinical evidence; three, broadening surgeon adoption; four, launching innovative new solutions and cultivating an exciting pipeline; five, capitalizing on the massive potential outside of the United States; and six, exploiting numerous operating leverage opportunities.
First, we believe the global shift toward minimally-invasive spine surgery will continue to unfold, providing a healthy backdrop of growth for innovative spine companies like NuVasive. Midway through 2013, we estimate that minimally-invasive solutions represent close to 25% of the spine market, up from about 20% only a few years ago.
Within the next decade, we believe that continued superior patient outcomes and clinical evidence will drive surgeon adoption and that minimally-invasive solutions will become the standard of care, representing closer to 80% of the spine market. Another top future growth driver will be expanding the body of NuVasive's specific clinical evidence.
For XLIF specifically, our decade of experience in lateral has afforded us a wealth of evidence that continues to grow rapidly. We are using clinical evidence to differentiate XLIF not just from traditional fusion procedures, but also from other lateral fusion products.
And we are clinically differentiating XLIF not just in terms of outcomes but also in terms of economics. To date, there have been 126 articles published in peer-reviewed literature on the XLIF procedure.
20 of those scientific articles were published in the first half of 2013 and another 7 submitted for publication. As well, the second edition of the XLIF textbook, a compilation of contributions from 74 authors on 33 chapters, has just been published.
And with 5 additional years of XLIF experience since then, version 2 is 50% bigger. NuVasive pioneered and continues to advance lateral procedures.
And thanks to many contributions from SOLAS, the Society of Lateral Access Surgeons, spine surgeons and their patients can benefit from our years of experience. And the clinical support doesn't stop with XLIF.
Research and data are differentiating our entire portfolio. That strategy was palpable just a few weeks ago in Vancouver at the Annual International Meeting on Advanced Spine Techniques or IMAST, where Dr.
Philips [ph] presented select 5-year results from the clinical trial of our PCM Cervical Disc. The trial compared PCM to anterior cervical discectomy and fusion or ACDF.
At 5 years, the patients who had received the PCM device achieved statistically greater improvement in their level of neck disability or NDI, and mean NDI was significantly improved. The PCM group and the control group were comparable in terms of safety profiles.
Dr. Philips’ [ph] paper joins approximately 30 other articles in print that referenced PCM.
NuVasive is changing spine surgery, and science is proving it. The third growth driver for NuVasive will be increased surgeon adoption of our comprehensive offering, which numbers over 80 innovative products today.
Our state-of-the-art surgeon training facilities and programs introduce surgeons to NuVasive, provide unrivaled clinical education, and help surgeons appreciate the comprehensiveness of our portfolio to meet their patient needs. In 2013, we expect to train a record number of surgeons from all over the world.
Our combination with Impulse Monitoring is another driver of surgeon adoption. Midway through 2013, Impulse now has contracts with close to 290 hospitals, up about 20% from this point last year.
And the volume of Impulse cases continues to set new records, introducing NuVasive to new surgeons and expanding the penetration of XLIF and NeuroVision. Our sales force is also crucial to broadening adoption of our procedural solutions.
In 2013, we are opportunistically expanding the size of our sales team globally, and we have an increasingly qualified pipeline of candidates to support steady progress toward the 500-member team that we envision as a $1 billion company. NuVasive is changing spine surgery by driving increased adoption of better medicine through deeper market penetration of our entire offering.
Our fourth top growth driver will be new solutions, and so far in 2013, new product momentum is excellent. We are rolling out several new products globally, all of which were recently featured in our IMAST booth.
We highlighted Precept, a differentiated offering in the massive market for posterior fixation; MAS PLIF, a less disruptive approach for a conventional surgery; and PCM, our motion preserving cervical disc. We also featured the new VuePoint II, a complete occipital to thoracic solution that addresses tumor trauma and degenerative posterior cervical conditions.
Surgeon proctors at our IMAST booth also hosted a workshop to formally introduce XLIF for anterior column realignment, a minimally invasive technique that addresses adult deformity by restoring sagittal balance to any level of the spine. This will be a key component of our new product growth strategy over the coming years.
And looking forward, we are gearing up for another big NASS conference this October to showcase our new offering. We will introduce Bandini, a proprietary minimally invasive technology, driven by NeuroVision software for deformity correction, which enables surgeons to precisely customize rods to the specific needs of each patient.
We will also introduce a new lateral plate called Decade, which facilitates single position lateral surgery. With this year's product launches and our deep pipeline, we are changing spine surgery through speed of innovation, improving patient outcomes, while increasing the momentum shift toward minimally invasive approaches and techniques.
Our expansion outside of the U.S. is another top future growth driver.
Midway through 2013, we are exceptionally proud to be improving patient outcomes in over 25 countries. International revenue has grown 30% year-to-date.
One of our key international initiatives is in Japan, where we are making excellent progress introducing surgeons to the patient outcomes that our comprehensive portfolio of solutions can achieve. The solid leadership that we have in place, coupled with a team of prominent visiting surgeon proctors, including Dr.
Plamenta [ph], who developed the XLIF procedure with our engineers, is aligning NuVasive with the opinion-leading surgeons and hospitals in Japan -- We announced the first Japanese patients treated with XLIF in February. By the end of Q3, we expect over 100 Japanese patients who have already been treated with XLIF.
The momentum is building and we look forward to changing spine surgery in the world's second largest spine market. The final top driver of our future growth will be exploiting the substantial operating margin expansion opportunities in front of us.
As we approach $1 billion in revenue, we anticipate a non-GAAP operating margin in the low 20s, which compares to the 14% that we expect in 2013. We expect the improvement to be driven by increased international scale; expiration of the patent behind the majority of our royalty expense accruals in February of 2015; improved scale and profitability within our IOM offering; and increased in-house manufacturing.
In May, we completed our first strategic step to manufacture in-house. Through an acquisition, we expanded a 3-year relationship with an implant supplier of 10% of our source products.
We tend to gradually double and then triple the amount of product that we now manufacture without significant additional investment. Additional expansion of our manufacturing strategy is in the works as we scale to $1 billion and beyond.
The prospects for long-term sustainable growth at NuVasive are widespread, and we are making excellent strides in 2013 to cultivate them. Before I turn the call over to Michael, as outlined in today's 10-Q, we received a subpoena from the Office of the Inspector General of the U.S.
Department of Health and Human Services or OIG in connection with an investigation into possible false or otherwise improper claims submitted to Medicare and Medicaid. The subpoena seeks documents for the period January 2007 through April 2013.
We are working with the OIG to understand the scope of the subpoena, but we do not expect to have greater clarity regarding the request for several months. We certainly intend to fully cooperate and provide all requested information.
As you know, OIG subpoenas have been fairly common in med tech and in our industry. Audits and investigations have been increasingly common, as demonstrated by recent press related to investigations of physician-owned distributorships or PODs increase into potential off-label marketing of devices and many other topics.
We had an exceptionally strong internal compliance team who have built, managed and overseen all of our compliance programs. We expect to work through this process over the coming quarters.
With regard to our ongoing patent litigation with Medtronic, we expect the appellate process related to Phase 1 of the litigation to formally restart shortly. Now that the issue of ongoing royalty accrual rates has been resolved, the appeal can clearly move forward.
We expect the appellate process to take 18 to 24 months. With that, I will turn the call over to Michael.
Michael J. Lambert
Thank you, Alex, and good afternoon, everyone. Before we get started, let me mention that for your reference and especially for those building models, we have posted a file with supplementary financial information on our website in the Investor Relations section.
It contains all of the detail that I will cover on today's call. Revenue for the second quarter 2013 was $165.7 million, a 7.3% increase over second quarter 2012.
As Alex mentioned, we continue to expect full year revenue of approximately $655 million. While our revenue expectations for the full year 2013 are unchanged, our expectations for some of the drivers of revenue growth have shifted slightly.
Let me cover the performance of each of our product categories in the quarter and provide an updated full year outlook for each. Year-over-year revenue growth for U.S.
lumbar was about 7%, exceeding our expectations on solid contribution from new solutions like MAS PLIF and Precept; strong pull-through of disposables, thanks to our U.S. monitoring offering and the continued execution of our share taking strategy also contributed to U.S.
lumbar outperformance in the quarter. We expect that these positive dynamics will continue into the second half.
As a result, we now expect full year 2013 U.S. lumbar growth of about 4%, in line with our U.S.
lumbar growth year-to-date and up from the roughly 2% growth we previously expected. That expectation continues to contemplate impacts from the market challenges that surfaced late last year.
U.S. Biologics growth was close to 1% in the quarter.
Osteocel Plus, our primary biologics offering, is a very successful solution for us and has penetrated the majority of our customer base. As solutions like Precept capture increased share of hardware opportunities in our procedures, U.S.
lumbar growth will decouple somewhat from U.S. Biologics growth.
Our results midway through 2013 suggest U.S. Biologics growth will be about flat for the full year 2013 compared to the approximate 2% growth we previously expected.
U.S. cervical revenue grew over 24% in the quarter, exceeding our expectations, as the energy we've put into innovation is paying dividends across the entire cervical portfolio.
In consideration of the Q2 outperformance and the continued market penetration of our offering, we now anticipate full year 2013 U.S. cervical revenue growth of about 20% compared to about 14% previously.
Surgeon interest and demand for training on our PCM device continues to suggest a strong, long-term outlook. However, the current reimbursement environment is more challenging than we anticipated.
As a result, our increased expectation for U.S. cervical revenue growth in 2013 contemplates only a $2 million to $3 million contribution from PCM, down from our previous expectations.
The services revenue from our U.S. monitoring business decreased about 10% in the second quarter.
Solid volume growth continues to be offset to a large extent by reimbursement challenges. In addition, as the penetration of NeuroVision and XLIF is increasing in monitoring cases, the average case time and the corresponding hours we can bill for that time are decreasing.
As a result, we now expect full year U.S. monitoring service growth will be down about 2% compared to about flat previously.
Importantly, the pull-through benefits driven by our monitoring solution are driving outperformance within other revenue lines, like U.S. lumbar, even as we work to increasingly monetize the services offerings with modified billing models.
For the full year, we expect our monitoring solution will contribute positively to revenues overall. Finally, international revenue, which includes Puerto Rico and the biologics component of our international business, grew approximately 18% in the quarter.
Growth was below our expectations due to economic turmoil in certain geographies in Latin America and to a disruption related to a leadership transition that we affected in Europe. The underperformance in the quarter, coupled with continued negative foreign currency impact, suggests full year 2013 international revenue growth of about 25% compared to the roughly 35% that we previously expected.
Before I walk through the remainder of the P&L, let me remind you that our results this quarter and our updated guidance reflect the legal ruling announced last month. The ruling determined royalty rates for the products involved in our ongoing legal dispute with Medtronic.
For the full year 2013, we now anticipate a total litigation royalty expense of approximately $22.5 million in our GAAP cost of goods sold. Included in that $22.5 million is approximately $7.9 million related to a true-up for periods prior to Q2 2013 split between $6.7 million related to Q3 2011 through Q4 2012, and the remaining $1.2 million related to Q1 2013.
The $7.9 million true-up charge has been included for non-GAAP -- has been excluded for non-GAAP reporting purposes. The remaining roughly $14.6 million within that $22.5 million GAAP litigation royalty expense is the expense accrual that relates to the full year 2013, of which approximately $2 million and $3.8 million were recognized in Q1 and Q2 2013 respectively.
The litigation royalty expense will impact full year 2013 gross and operating margin by about 210 basis points, up about 50 basis points from our prior expectations. Gross margin adjusted to exclude the one-time prior period charge was 75.4% in Q2 2013, compared to 76.3% in Q2 2012, and 75.5% in Q1 2013.
Year-over-year gross margin was pressured by the med device tax and the incremental royalty expense. Regarding the med device tax, we completed some advisory and internal work in the quarter that enabled a more refined approach of how to apply the IRS interim tax rules.
As a result of that work, for the full year of 2013, we now expect to pay roughly $5 million related to the med device tax, down from the approximately $9.5 million we previously expected. We expect our improved view of the med device tax impact, coupled with operational improvements, to more than offset the negative margin impact of the recent legal ruling.
As a result, we now anticipate a full year 2013 non-GAAP gross margin of approximately 75% compared to about 74% previously. Research and development or R&D expenses adjusted to exclude stock-based compensation and acquisition-related items totaled $7.3 million in Q2 2013 compared to $8.4 million in Q2 2012 and up slightly from $7 million in Q1 2013.
R&D expense, as adjusted, was 4.4% of revenue for Q2 2013 versus 5.4% in Q2 2012 and 4.4% in Q1 2013. Relative to last year, the decrease in R&D was caused by lower spending on clinical trials and the completion of several projects.
We continue to expect non-GAAP R&D expense as a percent of sales to ramp in the second half, approaching 5% for the full year of 2013. Sales, marketing, administrative or SM&A expenses, adjusted to exclude stock-based compensation, certain intellectual property litigation expenses and acquisition-related items, totaled $94.5 million in Q2 2013, compared to $84.4 million in Q2 2012 and $92 million in Q1 2013.
SM&A expense as a percent of revenue was 57% in Q2 2013 versus 54.6% in Q2 2012 and 57.7% in Q1 of 2013. Relative to last year, SM&A expense increased as a percent of revenue due to investments made to support international expansion, higher legal costs and spending incurred to improve our med device tax burden.
These investments were partly offset by gains from efficiencies within SM&A. Put differently, excluding the unanticipated legal spending and the spending to improve our med device tax burden, our U.S.
business levered SM&A expense significantly in the quarter. In consideration of the higher mix of revenue, we now anticipate from our higher variable cost U.S.
business, the increased spend to comply with the OIG's document request and the spend to improve our Med Device Tax burden, we now expect full year 2013 non-GAAP SM&A expense as a percent of revenue to approximate 56%, up slightly from the approximately 55% that we've previously expected. Second quarter non-GAAP operating margin was 14% compared to 16.3% in Q2 2012 and 13.5% in Q1 2013.
We expect the shifts in our full year 2013 gross margin and SM&A guidance that I just walked through to neutralize each other, and as a result, we continue to anticipate a non-GAAP operating margin of approximately 14% for the full year. We booked a GAAP tax benefit in the second quarter of $76,000, driven by the roughly $7.9 million royalty true-up charge and its impact on our full year tax rate expectations.
Based on our revised projections for GAAP pretax book income, we now anticipate a roughly $2 million tax credit for the full year 2013. Year-to-date, we have booked approximately $840,000 in tax credits, so we expect to book an additional tax credit on a net basis over the course of the second half.
Please refer to the supplementary financial file on our website for assistance, modeling our tax rate for the remainder of the year. We continue to expect non-GAAP adjustments to be tax affected at approximately 40% for the full year 2013.
Our Q2 2013 GAAP net loss was approximately $6.8 million or a loss per share of $0.15. Given the P&L guidance updates I have mentioned today, we now expect the full year 2013 GAAP loss per share of about $0.09 compared to earnings of about $0.02 previously.
Excluding an aggregate adjustment of approximately $15.9 million, net of tax for the adjustments detailed in today's press release, second quarter non-GAAP earnings were approximately $9.4 million or $0.20 per share. We continue to expect full year 2013 non-GAAP earnings per share of approximately $1, which contemplates the adjustments in our press release.
We feel this non-GAAP EPS measure, generally speaking, most accurately portrays the operating earnings power of NuVasive and should be the basis for measuring our progress. Year-to-date, cash flow from operating activities totaled just over $32 million, down from last year's adjusted number, which was just over $54 million.
Free cash flow year-to-date totaled just over $6 million versus last year's adjusted total, which was just over $30 million. 2013 year-to-date results were negatively impacted by several items, including a roughly $8 million payment to settle the cervical patent litigation and approximately $7 million to $8 million of cash investment hung up on the balance sheet in accounts receivable and in inventory.
We expect to work through many of these working capital items over the next few quarters. Our cash and investments balance at the end of the second quarter was approximately $273 million, down about $73 million from $346 million at the end of 2012 due to the repayment of our March 2013 convertible debt.
The second quarter was a testament to the continued successful execution of our share taking strategy. Further, our ability to absorb unanticipated incremental costs that have surfaced during the first half without needing to adjust non-GAAP operating margin guidance is a demonstration of our commitment to driving operational improvements and delivering operating leverage.
I look forward to what the rest of 2013 will bring. Now I'll turn the call back over to Alex for closing comments.
Alexis V. Lukianov
Thanks, Michael. Results in the first half of the year demonstrate solid execution against our full year 2013 plan.
And as I discussed in today's midyear progress report, we are cultivating the pillars of NuVasive's foundation that will facilitate earnings growth well into the future. We are changing spine surgery with a proven share taking strategy of Superior Outcomes, Absolute Responsiveness and Speed of Innovation.
Execution will drive our evolution toward $1 billion in revenue and an improved profitability profile. On a personal note, 14 years ago today, I became CEO of a startup with a vision to change spine surgery.
I'm exceptionally proud of NuVasive's ascent to the fourth-largest spine company in the world, driven by our people's dedication to outstanding standards and improving patient's lives. As I said back then, this will be big, big, really big and onto #3.
We will now take your questions?
Operator
[Operator Instructions] Our first question comes from Bill Plovanic with Canaccord.
William J. Plovanic - Canaccord Genuity, Research Division
I think the question a lot of us are obviously interested in is the OIG. I'm just curious, is there any particular part of the business that the document request was geared toward, i.e.
the monitoring business or the internet -- the implant business? I mean, my guess is the monitoring, but I just wanted to ask that.
Alexis V. Lukianov
Yes. Bill, the OIG subpoena is a very broad document request.
It was very focused on interbody quant and biologics osteocel and thermograph, but very, very broad beyond those as well. And again, it's a request for information.
It's not litigation. And this will be going on for a few months, I'm sure, as we sort it out with OIG in terms of the specific information that they would like to see.
William J. Plovanic - Canaccord Genuity, Research Division
Great, that's helpful. And then just as we think about the margin expansion story and the investments that you've made in Japan in the vertical manufacturing, when do you expect the international margins to start turning more positive and we start seeing that contribution?
And then the same question for the vertical manufacturing, like when do you really see the benefits? And that's all I have.
Michael J. Lambert
Yes. Bill, so for the international question, if you remember, our international business was significantly negative over the last couple of years.
It's been coming back to breakeven to slightly positive. We do expect it, even with some of the incremental investment, to be positive in terms of contribution margin this year.
You'll start to see the real leverage points on it that we've been talking about from a margin expansion standpoint out in the 2014, 2015 period. Relative to the in-house manufacturing and the acquisition of ANC now, NuVasive Manufacturing Incorporated, we're seeing savings already, in essence, in the purchase of those products.
They take a while to play through to the income statement because they come to the income statement over our inventory turn cycle. But we'll start to see -- we're already seeing some of those benefits, and those will accelerate as you head out into next year and 2015.
Today, they do about 10% or so of our volume. And as I think Alex mentioned, there's an opportunity to ramp that considerably over the course of the next couple of years.
So the leverage is -- the bigger leverage items will be out in '14, '15 and beyond.
William J. Plovanic - Canaccord Genuity, Research Division
And for clarification on the international, when is kind of the bulk of the investment made in Japan? When do you have the full infrastructure in place, where the incremental spend will ratchet down in Japan?
Alexis V. Lukianov
It's essentially this year, Bill. And we're working through all of that now, completing the ramping of our sales force and management team.
But most of it's already in place. So really, that takes effect in '14.
Operator
Our next question comes from Matt Miksic with Piper Jaffray.
Matthew S. Miksic - Piper Jaffray Companies, Research Division
Just one clarification follow-up on the subpoena. Sorry to ask after that, but just to be clear, this has kind of the earmarks of false claims or whistleblower-type action, at least initial investigative action from the OIG.
Is that your sense? Do you know enough to say that at this point?
Alexis V. Lukianov
We can't say that. It's just a very broad request for information.
And there's no way for us to conclude what it's about. Until and if the government takes any action, this is just a request for information.
Matthew S. Miksic - Piper Jaffray Companies, Research Division
Got it. Okay.
And then one on some of the comments dynamics you've mentioned, Alex, in terms of the good OIG comments earlier in the year related to PODs. I'm wondering if you can talk about any examples you've seen so far, either of regional rollback or maybe picking up some share or noticeable changes in the market as a result of the comments earlier in the year on PODs.
Alexis V. Lukianov
Sure. What we are seeing is a lot more attention being paid to PODs and we're starting to see more pushback from the hospitals and from the networks.
We've seen a series of letters coming from some of the major networks. Actually, we even received one ourselves, making sure that we are not a POD, making clear that we will -- that they will not work with PODs.
So I think the word is still slowly getting out to the surgeons, but it's definitely having an impact. I wouldn't go so far as to say that there’s now market shifting taking place.
We don't really see signs of that. Hopefully, we will later in the year and into next year, as I think this thing continues to gain additional scrutiny and pushback from the hospitals.
Operator
Our next question comes from Matt O'Brien with William Blair.
Kaila Krum
This is Kaila in for Matt. Just a couple of questions for you.
So you raised cervical guidance despite the lower-than-expected sales contribution from PCM and then increased expectations in lumbar. Can you just give us a bit of color on what you're seeing in the market that gives you confidence in increasing expectations in those areas?
Alexis V. Lukianov
Yes. So our lumbar business has performed very well.
I think we're seeing a lot of pull-through with regard to posterior fixation, the success of Precept, the success of MAS PLIF. So I think that overall, we're just seeing a lot of really good pull-through into that space.
Cervical has done very well, I think, in part, because of the new product launches. PCM has contributed not as much.
I think PCM, if you take PCM out, it's maybe around 14% or so is what we're looking at on the year. But in general, we expect to see some very strong pull-through on cervical.
And I think that speaks to the comments that I made in my prepared remarks about the fact that our comprehensive portfolio is being utilized more and more so throughout all of our accounts. And that's really what we're starting to see is an across-the-board strength.
Kaila Krum
Okay. And then just a follow-up on that.
You said that early uptake of Precept seems to be pretty solid. How should we think about that contribution from the system this year and next?
Alexis V. Lukianov
The contribution of Precept? Well it's laid out in our guidance for this year?
And so I think essentially, we already have that baked in, and we'll talk about next year as we get closer to next year.
Operator
Our next question comes from Bob Hopkins with Bank of America.
Robert A. Hopkins - BofA Merrill Lynch, Research Division
Alex, so just one more on the subpoena. I was just wondering, you rattled off a couple of products there that the subpoena mentioned.
So I was wondering if you could kind of run through that again, just be specific in terms of what they're asking about. And does it involve monitoring at all, or is this entirely on the biologic and spine side?
Alexis V. Lukianov
So as I said, it's very broad. It's not specific to monitoring.
It's focus -- very focused, as we've termed it, on interbody with regard to Quadrant and biologics, both Osteocel and FormaGraft, but it's very broad.
Robert A. Hopkins - BofA Merrill Lynch, Research Division
Okay. But it doesn't specifically talk about the monitoring business?
Alexis V. Lukianov
No, it does not.
Robert A. Hopkins - BofA Merrill Lynch, Research Division
Okay. And do you have any sense as to whether or not this is part of a broader request that's out there or do you think this is really NuVasive-specific?
Alexis V. Lukianov
We have really no way of ascertaining what it is other than just a very broad request for information. And as I've said over the course of my remarks, there's a lot of investigations taking place in general.
So there seems to be heightened scrutiny. We're certainly not inferring anything, though, this is specific to NuVasive and a very broad request.
Robert A. Hopkins - BofA Merrill Lynch, Research Division
And it was -- you received it sometime during the quarter. Can you be any more specific?
Alexis V. Lukianov
Just came in during the quarter.
Robert A. Hopkins - BofA Merrill Lynch, Research Division
Okay. And then lastly, just on your core business.
Obviously, good performance in lumbar and cervical. You talked about that a little bit, but I was wondering if, Alex, if you can just kind of give your view on the state of the market in Q2.
We've got a lot of companies reporting except for Medtronic. And just in light of your good results, how much do you -- of this do you think is maybe market getting a little better versus share and other issues?
Alexis V. Lukianov
Sure. The market is still just feels stable.
I wouldn't say that the market is dramatically improving. It feels stable.
For us, it's really market share gains, I think as a result of all the segments that we've done well in. Obviously, especially lumbar and cervical.
So it's -- I wouldn't really say that there's a huge difference in the marketplace. As we've talked with regard to reimbursement, there is less negative buzz on reimbursement.
I think that it's been appropriately consumed by the surgeons. Not to say that there isn't ongoing pressure, there is, but it seems to be less a topic of conversation with the surgeons of late.
Operator
Our next question comes from Chris Pasquale with JPMorgan.
Christopher T. Pasquale - JP Morgan Chase & Co, Research Division
Alex, I want to start with the IOM piece of the business. Is there any way to quantify the pull-through impact that you're seeing there?
The absolute sales numbers have been disappointing, but your comments suggest that you feel -- still feel like you're getting some value from that segment.
Alexis V. Lukianov
There's no question. I think what we see is, overall, it's a very positive impact in those specific accounts and hospitals where we have both the monitoring business and we have the typical, let's call it, implant sales force of NuVasive.
We see our business growing faster in those accounts. Again, we don't have a national footprint so this is largely limited to mostly the eastern part of the country or actually I should say, the eastern seaboard and then spots around the U.S.
But overall, we feel like it's having a positive impact without question.
Christopher T. Pasquale - JP Morgan Chase & Co, Research Division
When you first did that deal, you had talked about a pretty aggressive ramp in terms of going out and hiring and making that a national platform, is that still in the cards and do you still see a pathway to returning the business itself on a standalone basis to growth?
Alexis V. Lukianov
Yes, so the aggressive growth that we're talking about was predicated upon an inorganic strategy. And as such, I think as we started to look further in that space, we were concerned about the valuations, at least, that were still out there for additional tuck-ins for that strategy.
And so we backed off a bit and decided that we'd be better served growing the business organically, albeit a little bit more slowly, but grow it organically and start to get the benefits of the pull-through. As far as how it's performing overall, I think that the operating margin has been improving so we're pleased with that.
So it's slow and steady, and we anticipate being able to leverage that even further in '14 and '15 and again get a nice pull-through into our implant business.
Christopher T. Pasquale - JP Morgan Chase & Co, Research Division
Okay. And maybe just one quick one for Michael.
Could you just talk about what drove the reduction in the full year expected impact from medical device tax? And whether the $5 million impact this year is a good barometer of what to expect in '14 or beyond or it's being reduced this year by the timing of inventory turns and things like that?
Michael J. Lambert
Yes, so our original beginning of year guidance in our Q1 2013 actuals essentially used the IRS' interim guidance. We did some advisory work externally and quite a bit of internal work during the quarter.
And as I mentioned, we spent some money on that. But the idea was to develop an approach to really support a more appropriate estimated manufacturing sales price, which is what's required under the IRS rules to do better than their standard haircut or safe harbor or whatever you'd describe it as.
And so, I do think the Q2 result is a good barometer in the overall scheme of things for what an annualized view of it will and should be.
Operator
And our next question comes from Matthew Taylor with Barclays.
Daniel Sollof - Barclays Capital, Research Division
It's Danny on for Matt. Just first, a quick clarification on guidance.
So the uptick to non-GAAP operating expense, I want to make sure I'm understanding that correctly. So there's some incremental SM&A there associated with the cost to lower the burden associated with the med tech tax.
But Michael, I think you mentioned the OIG subpoena there also, so is there any costs associated with that currently in guidance or did I misunderstand that comment?
Michael J. Lambert
No, there is costs associated with the legal OIG reflected in guidance both Q2 actual as well as Q3, Q4 best as we can estimate and it's at best a rough estimation. We definitely had spending in Q2.
That was significant on the med device tax side, a little bit in Q1 but that was essentially to get through the analytics, to get where we are today. There's nothing go-forward anticipated in terms of OpEx spending on that.
One clarification also to the last call, that $5 million or so that we expect for the year we think is a good rough estimate for what we'd carry forward.
Daniel Sollof - Barclays Capital, Research Division
That's helpful. And then just one quick follow-up.
And while it's some tricky math, and I know you've walked through in prior quarters, can you discuss or quantify just the selling impact in 2Q '13?
Alexis V. Lukianov
Selling days?
Daniel Sollof - Barclays Capital, Research Division
Yes. Billing days, yes.
Alexis V. Lukianov
No, your question about selling days. Yes, okay.
Michael J. Lambert
So we can, we certainly can talk through it. Our own view of it really is that it's driven by hospital operating days, that's the primary driver.
And in the overall scheme of things, we know that even when we're on a holiday, we have many hospitals that are actually conducting surgeries, and as a result of that, we've got reps in those rooms conducting that business. If you essentially try to normalize for the 1-day impact associated with Q2, our revenue growth rate would show up as about 7.3%.
If you take out that one extra day would be in mid to high 5s so call it 170 basis points. And that while it doesn't reflect exactly across every product line, it's roughly that impact across the product lines for the quarter.
Operator
Our next question comes from Richard Newitter with Leerink Swann.
Richard Newitter - Leerink Swann LLC, Research Division
Alex, I'm not sure if you mentioned it in your opening remarks. I jumped in kind of a bit late.
Did you give us an update on AttraX at all? Is there an update there where you are with the FDA?
And then just lastly, does the subpoena in any way have any impact on your plans there one way or the other? I know FDA is totally different from the OIG, I was just curious.
Alexis V. Lukianov
Yes, no effect and no connection with regard to FDA, OIG and AttraX. No, I did not provide any updates because there really wasn't one to give.
We're still waiting to get further clarity from FDA on when we believe we can bring that product to market. Obviously, we don't expect it to happen this year.
And it will be sometime, hopefully, in '14. And we're working through that and we'll give you an update as soon as we have one.
Richard Newitter - Leerink Swann LLC, Research Division
Great. And then, Michael, just a follow-up here.
There are a lot of puts and takes in the gross margin and operating margin lines. And can you just very quickly review the key kind of unanticipated cost headwinds, and then what the actual underlying leverage drivers were that helps you more than offset those unanticipated headwinds for the remainder of the year?
Michael J. Lambert
Sure. So things that were not on the horizon at the beginning of the quarter were certainly the spending associated with the OIG request and the advisory work we did on med device.
We did not have that planned necessarily or baked into where we were headed at the beginning of the quarter. There was -- what was the other part of your question?
Richard Newitter - Leerink Swann LLC, Research Division
Just any quantification of what wasn't embedded or anticipated, and then what enables you to have confidence for the remainder of the year? Where is the underlying operating leverage improvement coming from particularly?
Michael J. Lambert
Yes, yes. All right.
I got it. So if you think about and if you focus on just Q2, as an example for that, we talked about spending being up about 230, 240 basis points or so, and essentially, all of that increase was driven by OUS.
And what that means is that from our internal point of view, you've got 2 other things happening. You have the increase is about 100 basis points or so from the items that I just mentioned, and then you've got real leverage being driven out of sales force productivity and efficiency gains, set depreciation and marketing spend, things like that, where we're able to show and drive some leverage certainly in Q2.
And that was well over -- a bit over 100 basis points in its own right.
Richard Newitter - Leerink Swann LLC, Research Division
Okay. And on the gross margin line?
Michael J. Lambert
On the gross margin line, you've got a lot of moving parts there. The med device tax went from 150 basis points of prior expectation now to new expectations of 80 basis points impact for the year, this is full year.
So 70 basis points of incremental improvement in that line over the course of the year. The Medtronic royalty rates, if you think about it from a full year basis, 150 basis points was prior expectations, up 60 now to about 210 basis points on the new expectation.
And then we got about 40 basis points of improvements operationally to various things we have done, scrap, damage things like that, so 40 basis points as an offset, positive.
Richard Newitter - Leerink Swann LLC, Research Division
Okay. So 40 basis points underlying improvement in the gross margin?
Michael J. Lambert
Yes. And again that's full year.
Operator
Our next question comes from David Roman with Goldman Sachs.
David H. Roman - Goldman Sachs Group Inc., Research Division
Alex, I was hoping you could just talk a little bit about the U.S. business.
You've obviously seen a very significant recovery from what occurred in the third quarter of last year. To what extent would you say -- and how do you sort of parse out whether what we've seen so far is a normalization/correction from what happened in the second half of last year versus what is the new sustained trajectory here.
Alexis V. Lukianov
I'm not sure I totally understand your question so...
David H. Roman - Goldman Sachs Group Inc., Research Division
I mean, is -- I guess what I'm asking is, is your first half performance just a bounce-back from a weak second half of 2012 or is first half performance reflective of what your sustaining growth rate can be?
Alexis V. Lukianov
Yes, so I think what we've talked about and we talked about this really following the fourth quarter, is we feel that largely what took place last year in the third quarter was more of a one-off event. Now there are -- there's certainly churn that takes place in the sales force, and we are in no way suggesting that we're immune to churn but we believe that the churn that we have is more consistent with what we have seen over years prior and what we anticipate going forward.
So it's sort of a long way of saying we think that we have normalized relative to our performance and we don't believe that's a factor. But again, we do consider churn with regard to our guidance.
So some of that is certainly included because that's part of the normal process of gaining share in the U.S.
David H. Roman - Goldman Sachs Group Inc., Research Division
Okay, and then maybe for Michael. I appreciate the comments regarding operating leverage and the adjusted earnings being the more appropriate way to look at the earnings power here.
But the adjustment year-over-year continue to grow. I mean I think that the year-over-year change in the adjustments probably added 150 basis points to the non-GAAP operating margin.
When do you think we'd start to see that normalized value? Stock-based comp, I understand, goes up every year as the stock goes up.
But in that -- those are -- the adjustments are still contributing fairly meaningfully to the margin improvement. When do you think that sort of normalizes?
Michael J. Lambert
Yes, the biggest part of the adjustments is the Medtronic royalty impacts, right? And we knew there was certainly risk associated with it to either go up or down.
It went up not nearly what Medtronic wanted from their point of view. And so, David, predicting that and predicting those types of moves, we can't really predict them.
What we can do and what we are doing is trying to stay focused on driving leverage and efficiency and productivity improvements out of the base business, which is what I've talked to a little bit earlier, talking about sales productivity, sales efficiency improvements and set depreciation and the marketing spend essentially contributing over 100 basis points in Q2. The other big offset from an off-margin standpoint, which was the royalty stuff, legal's dealing with it.
They do their best to manage and control it and we'll drive the business to -- and work with the business owners to drive the efficiencies we need to continue to drive operational -- operating margin gains like we have attempted to do last several years. We can't predict or always cover all the external or exogenous things.
David H. Roman - Goldman Sachs Group Inc., Research Division
Okay, understood. And I guess the last question will be, I think it's now 14 or 15 months or so since the J&J Synthes transaction closed.
And I would assume that means either the non-competes are starting to roll off or sales reps who were repotted to other territories might start to be having a more significant impact. Is there any reason why that dynamic would contribute to an acceleration in your growth in the back half of the year and into 2014?
Alexis V. Lukianov
I don't think it's going to contribute to an acceleration. I think what we've seen is we've certainly hired several people from there in the last few months, and we anticipate more coming from there both in the U.S.
and internationally, but we're also seeing people from Medtronic and Stryker. So I think there's a general benefit.
I don't see it translating into the numbers. There's just a general benefit to our being able to hire a sales force with experience and that helps us in the outer years.
Operator
Our next question comes from Glenn Novarro with RBC Capital Markets.
Glenn J. Novarro - RBC Capital Markets, LLC, Research Division
Two questions. First on international, which came in light.
Alex, you highlighted a change in leadership in Europe, and I'm a little surprised because I thought Europe was trending better for you. So can you provide a little bit more color on the leadership change?
And was Europe the extent of the 2Q international mix? And then I have a follow-up.
Alexis V. Lukianov
Sure. So Europe has been generally trending better, and that's because the change was effected at the start of this year, so we're now halfway through the year with that change.
Then as a result, we had some additional pressure with regard to getting the kind of numbers we wanted out of Germany. So really, that's the only place that we are really light in Europe.
We have now stabilized the German market and are in the process now of scaling that back up again. So performance has been strong for us in the U.K., in Italy and then the other key areas of Europe.
But outside of that, really the biggest challenge for us was Latin America. And as Michael mentioned, a lot of that having to do more with economic turmoil versus anything else.
But we do feel that we're definitely through the leadership changes. We have a new head of EMEA who's been on board now for, I guess, about 3 months, maybe 4 months now, 4 months.
Paul Kosters who's just excellent. So we're very pleased with where we are and we're building the business in Germany.
Glenn J. Novarro - RBC Capital Markets, LLC, Research Division
Okay. Just because when I look at your international revenues for the last couple of quarters, they've been stuck in the $16 million, $16.5 million range.
So should that start to tick up in the back end of the year as Europe recovers?
Alexis V. Lukianov
Well, we certainly hope so. We're not sure how fast it will grow, so we're comfortable with really what we're projecting with regard to our guidance for the second half and really for the year in total with regard to international.
So at the moment, we're not expecting a huge uptick but we do expect it to bode well for '14.
Michael J. Lambert
And Glenn, Michael just jumping in. The international side is probably a lot more unpredictable in terms of visibility than it was 12 or 18 months ago.
With what's happened with the yen and the Aussie dollar, currency has become very, very challenging. Venezuela, which is a top 10 international -- Latin America market for us, had its currency devalued 50% at the beginning of the year, and they're at a point as a country where they're very short now on U.S.
dollars and so business has slowed down. In a world where Latin America had been making an incredibly strong and growing contribution, it's going to be tough, I think, in Latin America through-- certainly through the rest of the year.
Glenn J. Novarro - RBC Capital Markets, LLC, Research Division
And can I just ask a quick question here on PCM and the slower uptake. I thought I was seeing more payors late last year into this year starting to sign up for reimbursement on cervical discs.
So that's why I'm a little surprised that revenues are coming in slow. So could there be something else just like surgeons just not -- maybe aren't aware that reimbursement is in place?
Is there training going on? Any additional color would be helpful.
Alexis V. Lukianov
Yes. So what we did see is an increase in the number of payors and so it's about 50% still so it's not the full market.
I think that the biggest challenge that we see for the surgeons is that they still kind of get hassled to put on the case. And so I think for a surgeon, it's challenging.
I mean, it's a lot easier to put on an ACDF than it is to put on a PCM or any other cervical device for that matter so motion preserving device. That's really what we're seeing.
And I think as a result, that's why the trend is going pretty slowly. The feedback on the product has been excellent.
But the overall uptake from the number of surgeons that have been exposed to it is generally very positive. But we just don't see the proliferation and the large number of cases that we hopefully we would start to see scale from some of these docs, it's just not been coming through.
Keith C. Valentine
I think you need to realize, too -- this is Keith, that some of the guidelines, there are a number of insurance providers that have positive guidelines but how those get interpreted at the local level still has to be filtered through as well. And so I think that, that's been some of the work that surgeons have to do at the local level to make sure that they're getting the right indications for the procedure.
And obviously, an ACDF is a heck of a lot easier to get that kind of clarity on because the local level is so used to that procedure. And this is quite new to some areas and some insurance providers at the local level.
Glenn J. Novarro - RBC Capital Markets, LLC, Research Division
Keith, are the companies, including NuVasive, that have served this -- are you working with the surgeons to get through this process?
Keith C. Valentine
We are, we are. And we're working to help provide that clarity as well because we appreciate the guideline that's being placed at the national level and we're trying to help make sure it's articulated well at the local level and it's also in the patient notes and all the things that go along with making sure you provide a very clear file as you put the surgery forward.
Operator
Our next question comes from Josh Jennings with Cowen and Company.
Joshua T. Jennings - Cowen and Company, LLC, Research Division
Just a follow-up to Glenn's question on cervical disc and the PCM product. Can you talk a little bit about what could get this -- those 50% of payors, to make positive decisions -- positive reimbursement decisions?
And whether or not any of the incremental data that was recently published on PCM can be helpful there? And I just have one follow-up.
Alexis V. Lukianov
Well, there's quite a bit of information out there, very solid peer review clinical information, obviously the various FDA trials, so there's no lack of information when it comes to supporting motion preservation in the cervical spine. I think Keith hit on the major problem, which is really the local conversion or the local process of translation from the insurance companies to the surgeons being able to actually do the cases.
So until that shifts, until they start to realize that it's really better for their patients and that's what the data seems to be showing and that's the sentiment we hear from the surgeons. We just have to wait for the shift to take place.
Keith C. Valentine
But yes, I think the 5-year paper at IMAST and I think they're -- we anticipate there will be companies that will have papers that will be submitted at longer time points as well as MAS approaches and certainly into early next year. So I think you're going to start seeing more and more further long-term follow-up that's being presented, and that's going to have a positive influence on the process as well.
Alexis V. Lukianov
One of the -- just one point of, I think kind of sums this up for me is that one of the biggest insurance carriers actually had on its website a quotation of the New York Times as its source with regard to the fact that total disc replacement is more expensive and not as effective. And I think that, that sort of sums up the fact that there's just a pushback, that's a blind pushback.
And of course, that precipitated a very strong reaction from spine surgeons and so forth, and they subsequently took that off versus really looking at all the 5 major publications that are out there and then some. So we're still at the point of trying to turn this thing around and waiting for good medicine to prevail, and it will ultimately.
Joshua T. Jennings - Cowen and Company, LLC, Research Division
My understanding of the hold-up for positive reimbursement decision was just the multi-year data, especially on adjacent level deterioration. And that's why some of the carriers were deeming motion preservation as still experimental.
And I guess, my follow-up question is with some 5-year data out there, can you piggyback on that 5-year data with the PCM or are these going to be a general reimbursement decisions? Or do you need to secure longer-term data yourselves in order to get that significant traction?
Alexis V. Lukianov
We're don't need more data. We're not planning to get more data per se.
We think there's plenty out there, so it's just a matter of working it through the insurance companies.
Operator
Our next question comes from Jeff Johnson with Robert W. Baird.
Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division
Alex, maybe just 2 quick ones for you and then a modeling question for Michael. But 2 things for you, Alex.
IOM down 10% this quarter. You're guiding to down 2% for the year.
What gives you the confidence that we see the year-over-year trend improve in the back half? And then it does look like you passed on the acquisition rights to Progentix, the 10-year distribution agreement with them at this point.
Does that tell us anything about your expectations for AttraX or how should we think about that?
Alexis V. Lukianov
So as far us IOM is concerned, what we've seen is an increase in the number of cases being done, so we're very pleased with how that's going, as I mentioned, the big increase in the number of hospitals. What we're seeing is really a reimbursement issue that's been out there for a while.
And that's really what's tied into the change in the numbers. But the business itself is actually growing very nicely.
We're just trying to get now the revenue to go along with it. But needless to say, as we have talked about at length earlier today in our call, we've seen a lot of very positive pull-through with regard to our implant business and the overall footprint we've been able to gain at the hospitals where we have both monitoring, as well as implants.
With regard to Progentix, that's part of an overall strategy and a legal strategy of how we're going about that. So that doesn't necessarily connect in any way to AttraX.
So I would just say simply that, that's not directly connected. And once we do have AttraX approved, then we'll resolve what makes the most sense for us as far as the structure.
Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division
All right. And just to push on -- sorry, on the IOM answer.
You're down 10% this quarter. I guess I'm just trying to understand what's the inflection that gets you back to kind of flattish so you can make your guidance in that segment over the next couple of quarters?
Michael J. Lambert
Yes, sorry. Ask the question again?
Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division
You were down 10% this quarter on the IOM business. Your guidance for the year, Michael, is down 2% so it implies, I think, somewhere in the neighborhood of down 1% or 2% in the back half of the year.
I'm just trying to figure out how you go from down 10% this quarter to the next couple of quarters, getting back to more of just kind of a flattish level?
Michael J. Lambert
Got it. Q2, if you look at the history on it, Q2 was the toughest comp on that.
And so that's really what gives us confidence that as the rest of the year goes by, we can demonstrate better results.
Jeffrey D. Johnson - Robert W. Baird & Co. Incorporated, Research Division
Got it. And then just on the modeling side, my last question here, Michael, for you.
Just 3Q is typically stable sequentially from a revenue standpoint, and I don't think I heard any kind of at least roundabout guidance for third quarter on the revenue. I know you don't give quarterly guidance, but any thoughts on the sequential progression.
And then two, could you quantify at all what FX had an impact in the quarter and maybe how that FX impact alone might be impacting your international revenues for the balance of the year relative to what you prior -- previously were thinking?
Michael J. Lambert
So to the first question, all I'll say really is we're managing to the full year, not really any given quarter and we've said that and stuck to it since, really, the beginning of the year. I think in many respects, you guys have what you need to interpret off of the seasonality, the churn and the other patterns to figure out the spreads across Q3 and Q4 so we'll leave that to you guys.
On the FX side, we were negative $400,000 FX on top line this quarter, although remember we have a natural offset on the expense side of the business hovering from a contribution margin around breakeven. So about $400k came negative on the top line for the quarter.
Operator
Our next question comes from Larry Biegelsen with Wells Fargo.
Craig W. Bijou - Wells Fargo Securities, LLC, Research Division
It's actually Craig Bijou on for Larry. Just one quick one, Alex.
Given the spine market stabilization, the positive news -- recent news on PODs and the creation of a formidable #2 player in J&J Synthes, just wanted to see what your thoughts were on consolidation of the spine market?
Alexis V. Lukianov
We're not looking to buy Synthes or Nemer [ph], I don't know. We'll reconsider it if -- I guess, if it's proposed to us by one of the banks.
But you know what, I think it's probably -- I think as far as consolidation is concerned, I'm not sure what the other companies are thinking about. I know what we're thinking about, which is to continue to build a standalone company and build it the best way we can for the next decade or so.
And that's really what we're focused on. So there's nothing in particular that we are looking to acquire or that strikes us as a great fit at this point in time.
So relative to our own acquisition strategy, we don't have anything that we're working on at the moment of consequence.
Operator
Our next question comes from Jason Wittes with Brean Capital.
Jason Wittes - Brean Capital LLC, Research Division
Just 2 quick follow-ups. One, I mean, there's a question earlier about PODs.
You seem to imply that, I think, eventually most of that share's going to go back to the market. I'm just curious on 2 points of that.
One, have you picked up any previous POD business thus far? And secondly, what's your outlook for that industry in terms of how long it's going to stay afloat, given all the OIG, et cetera, pressures?
Alexis V. Lukianov
Yes, that's a tough one. So as far as PODs are concerned, you don't really pick up a POD business, right, because that's a -- a POD implies a cluster of surgeons working together.
So the question is more, are we going to start to see individual surgeons move out of PODs and back to working with mainstream companies? And I believe the answer to that is yes.
We have seen a little bit of that. Certainly, no major accounts or anything of that sort that would drive our expectations for more revenue.
But I think that's the trend that we're going to see more and more of as we move into '14 and '15. As far as OIG, we don't know what else OIG is going to do with regard to PODs.
They put out some very strong statements in terms of their fraud alert, as we know. And I think that, that's really ruffled the hospitals and got them riled up and taken a very positive stance with regard to not working with PODs.
So I don't think it's going to make a big impact until probably '14 or '15.
Jason Wittes - Brean Capital LLC, Research Division
Okay, fair enough. And then just on clinical data, I mean, you've mentioned on this call and even on previous calls this year, sort of the preponderance of evidence that's being built on the clinical side from various trials and analysis that have been published.
But at the same time, when you look at cervical discs, it seems like the data is there but the insurance companies are kind of ignoring it. So I mean, how does this work in terms of interfacing with insurance companies, especially when it comes to all the pushback that you've seen in the spine industry?
Is there a strategy that's going to work or is it just going to have to be continually exhibiting this data and wearing them down?
Alexis V. Lukianov
So I think a lot of the data that we talk about has to do with clinical outcomes as well as economic outcomes. That's mostly for the lumbar and for the thoracic spine.
And I think that's very consistent with what the hospitals want, that's very consistent with where health care is going. It's kind of a faster, better, cheaper, right, is what everybody is looking for.
And I think we're demonstrating that with our technology. I think what you're seeing a little bit with cervical is you have a technology that may cost a little bit more with regard to the implants and certainly in terms of the surgeons, they have a lesser reimbursement with regard to that.
But it's still a technology that's largely predicated upon eliminating or lessening adjacent level disease. And I think that's just taking a little bit of time to work through.
So all the data is there. I think the devices are terrific.
We've seen that with our own in terms of the 5-year outcomes that Dr. Phillips just recently reported.
So I think it's going -- it's coming around and it's moving in that general direction. But as Keith made some remarks as did I, it's just going to take a little while.
It is very good medicine, and it's going to make its way into the system but it's just not doing it anywhere nearly as quickly as we thought it might.
Operator
Thank you. This concludes today's teleconference.
You may disconnect your lines at this time, and thank you for your participation.
Alexis V. Lukianov
Thanks, everybody. Talk to you next quarter.