Oct 20, 2009
Executives
Alex Lukianov - Chairman & Chief Executive Officer Keith Valentine - President & Chief Operating Officer Kevin O’Boyle - Executive Vice President & Chief Financial Officer. Patrick Williams - Vice President of Finance and Investor Relations
Analysts
Taylor Harris - JP Morgan Ben Andrew -William Blair Bill Plovanic - Cannacord Adams David Roman - Goldman Sachs Matt Miksic - Piper Jaffrey Rick Wise - Leerink Swann Michael Matson - Wells Fargo Securities Joanne Wuensch - BMO Capital Markets Glenn Novarro - RBC Capital Markets John Putnam - Capstone Investments Samir Harish - Needham & Co Steve Lichman - JMP Securities Douglas Tsao - Barclays Capital Doug Schenkel - Cowen & Co. Taylor Harris - JP Morgan
Operator
Greetings and welcome to the NuVasive Inc. third quarter 2009 earnings conference call.
At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.
(Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host Patrick Williams, Vice President of Finance and Investor Relations.
Thank you, you may begin.
Patrick Williams
Thanks, operator. Welcome to NuVasive third quarter 2009 earnings conference call.
NuVasive Senior Management on the call today would be Alex Lukianov, Chairman and Chief Executive Officer; Keith Valentine, President and Chief Operating Officer; and Kevin O’Boyle, Executive Vice President and Chief Financial Officer. During our management comments and our responses to your questions, certain items maybe 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.
Finally, we would be limiting each person a two question during the Q-and-A session, so that we can accommodate the large number of request and as a courtesy to all in order to keep the conference call up to one hour. With that, I’d like to turn the call over to Alex.
Alex Lukianov
Our third quarter results confirm that NuVasive’s exclude approach to spine fusion has gaining market share by improving the safety and reproducibility of spine surgery. Our sales force continues to educate the spine surgeon community on the benefits of excellent in all of our unique products, which cover the lumbar and thoracic, and cervical spine, as well as biologics and motion preservation.
This complete and innovative product offering give us an unparalleled advantage and drives our strategy to become the number of four global spine company. As we advance adoption of the XLIF procedure and improve the utilization of our entire product offerings, we continue to anticipate generating increasing levels of profitability.
Revenue in the second quarter increased 42% to $95 million. We achieved earnings per share on a GAAP basis of $0.13.
To reflect third quarter results in our 2009 outlook, we are raising annual revenue guidance to $365 million to $367 million, EPS guidance to $0.11 to $0.14. Additionally, cash should be over $200 million at year-end.
We continue to receive positive feedback on the spine market in both new and existing spine surgeon customers we are weekly MVP training program. The surgeons had healthy queues for surgeries with visibility to three to six months out in the vast majorities, our experience in surgical volumes better than or equal to surgical volumes last year.
The underlying strength of the market and positive surgeon feedback give us confidence that overall spine market growth will continue to exceed 10% creating the foundation for our share taking strategies to generate revenue growth in the 30% to 35% range in 2010. Our gross strategy continues to be driven by the comparative advantages of the XLIF procedures and our MaXcess platform, which was developed internally several years ago.
The driving technology of that platform is our NeuroVision application, which provides surgeons the ability to avoid nerves as they navigate through the soleus muscle to approach the spine laterally. NeuroVision uses a patented hunting algorithm, unique to invasive, which monitor nerves on the real time basis and enable surgeons to make adjustments to their surgical path in order to avoid neural damage and complications.
This real time feedback is absolutely essential to the safety and reproducibility of the XLIF procedure. As competing lateral approaches raise the awareness of and further validate the lateral technique, we believe the shift towards the adoption of XLIF will accelerate and we welcome the competitive comparison.
We are well positioned with our patented real time monitoring capabilities in the years of know-how afforded by our pioneering results and we encourage you to join us at the upcoming North American Spine Society Annual Meeting in San Francisco for a better understanding of the debt of our market making technology. Investments into research and development continue to be the source of our technological competitive advantage.
These investments led to the development of the XLIF approach, provided the foundation for expanded XLIF indications and feel the establishment of our comprehensive suite of creative spine surgery products. This commitment to research and development and the speed, at which our projects come to market, has positioned us as the premier innovator in spine.
Our development efforts will be on full display at Nash, where we plan to launch several new products to expand the reach of XLIF to new areas of the spine and to treat more pathology. These launches include a host of new products that represents comprehensive solutions for the thoracic spine and are designed to be performed through our minimally disruptive lateral approach.
The XLIF thoracic technique is performed through a small incision on the patient side and eliminates the conventional need for the removal of a rib and the deflation of the lung. The disruptive steps commonly employed in traditional approaches to the thoracic spine plus significant collateral damage and make the recovery process long and difficult, which can now be dramatically mitigated via XLIF Thoracic.
Next, a new internally developed deformity and scoliosis fixation system, which we expect will further drive the adoption of XLIF and expand NuVasive’s addressable market. Traditionally, adult degenerative scoliosis has been a relatively untreatable pathology.
We feel that we have greatly improve the technique to treat scoliosis and that our unique lateral approach will enable surgeons to accommodate scoliosis patients, previously considered untreatable. Also we plan to introduce our expandable for vertebral body replacement solution, which enables a customize approach when a vertebral body is being completely removed in connection with the treatment of tumors or traumatic injury.
We will be introducing several other products at NAS, including a new helix translational anterior cervical plate as well as the next generation of our XLP lateral plate. We are very excited about the host of new products we have lined up for the convention this year.
Surgeons have to expect great advances from NuVasive and we think that our selling at Nash this year will fulfill those expectations. I encourage you to join us for an investor lunch, which will be in conjunction with Nash at the St.
Regis Hotel in San Francisco on November 11, at which I’ll provide a brief corporate update and moderate a panel comprising some of the nation’s leading spine surgeons. We will also offer the opportunity to view product demos at NuVasive tool.
Please refer Investor Relations segment of our website for more information. We’ve remain on track to finish the year with 275 to 300 NuVasive sales representatives worldwide.
Hiring decisions continued to be made on a market-by-market basis as we deepen our presence in under penetrated geographies and add new territories in the U.S. and internationally.
Over half of our sales force has been with NuVasive for less than two years. As these new reps build surgeon relationships and establish themselves in their markets, we are confident that productivity will continue to improve at a healthy pace going forward and we continued to expect to end the year with average annualized sales program of approximately $1.5 million, up from $1.3 million last year.
Importantly, today’s results continued to demonstrate the improvements in profitability from continued leveraging of our operating expenses. We continue to work on establishing a footprint internationally, where we believe there is a 1.5 billion opportunity.
Our approach is a measured one in that we enter a new market with strategic, experienced local hires and build infrastructure platforms in each. During the quarter, we named [Kaki Tenaka], Executive Vice President of Asia Pacific.
Mr. Tenaka joins NuVasive with an exceptional track record as former leader of the Medtronics Spinal, Biologics and Navigation division in the Asia Pacific region.
We also named [Stefan Siemers] as the Executive Vice President of Europe. Mr.
Siemers, spent over 15 years with DePuy Spine International responsible for Europe and other regions outside the United States. We also have added offices in Germany, U.K., Australia and Singapore and we plan to add an office in Tokyo soon.
We continued to expect sales outside the United States to be about 2% to 3% of total revenues this year. Now, an update on some of our clinical projects, our lateral XL TDR clinical IDE study began enrollment during the third quarter and we continue to expect to complete enrollment in late 2010.
Studies for our Osteocel Plus biologic in both the lumbar and cervical spine are also underway with data expected to come in late 2010 through 2011. Additionally, we are on track to file for PMA submission for the PCM cervical disc replacement device in early 2010 as planned.
Now I’d like to turn briefly to healthcare reform. Though the messages out of Washington vary the one constant for us is our strong belief that the market will reward innovation and solutions that reduce healthcare costs and improve patient outcomes.
Regardless of what happens with healthcare reform the overwhelming benefits of minimally invasive approaches like XLIF will continue to drive market growth, because surgeons are increasingly shifting toward less disruptive techniques we have confidence in the future for NuVasive. We also have the financial stability to maintain our market share taking strategy and we will make the necessary adjustments to sustain our growth trajectory despite shifts in the healthcare system.
Lastly as you know, we have several studies underway designed to substantiate the comparative effectiveness of our technologies both clinically and economically. We continue to expect that we will be able to share data from these studies in late 2010 and based on what we’ve seen so far we feel NuVasive is very well positioned.
Before I turn it over to Kevin for a detailed review of the financial results and guidance, I will provide a brief update on the Medtronic litigation. Year-to-date we have spent $3.4 million and we continue to expect $5 million in litigation expenses for the full year.
As I’ve repeatedly stated we will not seek a settlement in the litigation and plan to aggressively use all defensive and offensive measures available to us. We have asserted our own patents against Medtronic and look forward to the opportunity to demonstrate the strength of our innovation.
We are very pleased with our intellectual property position overall, not only for all of the individual components of our broad product portfolio, but more importantly for the integration of those components to assure the safe and reproducible execution of an XLIF procedure. Now I’d like to turn it over to Kevin O’Boyle.
Kevin O’Boyle
Thank you, Alex and good afternoon everyone. Our revenue for the third quarter 2009 was $94.9 million.
This represents a 41.8% increase over Q3, 2008 and a 7.3% increase over Q2, 2009. Our strong revenue results this quarter demonstrates the companies continued ability to take market share.
Gross margin in the third quarter was 80.6% compared to 81.8% in Q3, 2008 and 81.1% in Q2, 2009. Gross margin was impacted by increased revenue contributions from both biologics and international.
Our Q3, 2009 GAAP net earnings were $5.1 million or earnings per share of $0.13. Excluding an aggregate favorable adjustment of approximately $600,000 for intellectual property litigation expenses, acquisition related expenses and the benefit of the reversal of a leasehold termination charge.
Our third quarter adjusted earnings were approximately $4.5 million or $0.11 on a per share basis. Please reference the table in today’s press release for more details.
The strong earnings result in the third quarter is related to higher revenue and operating expense leverage and timing. Operating expenses for Q3, 2009 totaled $70.4 million compared to $77.7 million in Q3, 2008 and $67.3 million in Q2, 2009.
The increase in operating expenses in Q3, 2009 from Q2, 2009 is primarily due to costs associated with generating higher revenue. R&D expenses excluding stock based compensation and intellectual property litigation totaled $9 million for Q3, 2009.
Research and Development excluding stock based compensation and intellectual property litigation as a percentage of revenues for Q3, 2009 was 9.5% versus Q2, 2009 at 8.1%. Investments continue into several clinical data studies designed to further establish our technology and support of new product development.
Sales, Marketing and Administrative expenses for the third quarter excluding stock based compensation, amortization of intangible assets, acquisition related costs and reversal of leasehold termination charges totaled $55.5 million versus $51 million in Q2, 2009. A leasehold termination charge was originally recognized in Q3, 2008 and apportion of that charge is now being reversed as a result of our decision to reoccupy our former building in order to better accommodate our expansion.
The increase in sales Marketing and Administrative expenses was commensurate with commissions on higher revenues as well as increased spending to support our international expansion and upcoming product launches. Excluding stock based compensation and the adjustments mentioned earlier, the percent of revenue was 58.5% versus Q2, 2009 at 57.6%.
Our legal expense related to the Medtronic lawsuit in the third quarter was $780,000. We remain on track with our previous guidance to incur approximately $5million in intellectual property related expenses for the full year and we currently expect to incur the same amount in 2010.
Stock based compensation expense for the third quarter of $5.2 million was recorded in our operating expenses and allocated as $4.3 million in sales, Marketing and Administrative with the balance in Research and Development expenses. The interest and other expense for the quarter was $1 million.
This reflects a continued trend of low yield on our cash investments. As a reminder included in other expense total is an item titled net loss attributable to non-controlling interest.
As a result of our investment in Progentix we are consolidating the entire expense in Research and Development. However the net loss representing the 60% we do not own is backed out in the line titled net loss attributable to non-controlling interest.
Cash generated from operations was strong in the third quarter coming in at more than $25 million due to our success in effectively managing receivables and inventory. On a year-to-date basis, operating cash flow was $33 million.
Our cash and investments balance at the end of the third quarter was $200 million. Our primary investment focus has been and will continue to be safety of principle.
As a result the majority of our invested cash is in securities backed by the U.S. Government.
At the end of the third quarter 2009, our inventory position was $85.9 million or 22.6% of annualized third quarter revenue, down from 24.6% last quarter. We continue to expect to end the year with our targeted range of 20% to 25%.
Day Sales Outstanding or DSOs were 51 days in the quarter down from 53 days in Q2, 2009 and from 63 days at year-end 2008. Turning to guidance, for the full year 2009, we are increasing our revenue guidance range from $365 million to $367 million from $360 million to $365 million.
We’re also increasing our full year GAAP earnings per share guidance to $0.11 to $0.14 from our previous guidance for earnings per share of $0.06 to $0.08. Excluding intellectual property litigation expenses, acquisition related costs and the benefit of the leasehold termination reversal.
We are raising our earnings per share guidance to $0.27 to $0.30 from $0.25 to $-0.27. Please refer to the guidance reconciliation table in today’s press release for more detail.
Gross margin guidance for the full year remains unchanged at approximately 81% given the revenue contributions from both biologics and our international markets. We now expect Research and Development expenses excluding stock based compensation and intellectual property expense to be slightly lower at approximately 10% to 11% of revenue for the full year.
Sales, Marketing and Administrative expenses excluding stock based comp, amortization of intangible assets, acquisition related costs and the reversal of the leasehold termination charge remains unchanged at 57% to 58% of revenue for the full year. We continue to expect stock based compensation for the full year to be $25 million.
The allocation remains at approximately 20% to R&D and 80% to sales Marketing and Administrative. Our expectations for both the amortization of intangible assets and interest and other expense remain unchanged at $5 million each.
We will continue to drive to become the number four global spine company with $1 billion in revenues. Our excellent results in the third quarter 2009 coupled with increased guidance for both revenue and profitability demonstrates our improving ability to execute our market share taking strategy and lever our operating expense structure.
I would now like to turn the call back over to Alex for closing commentary.
Alex Lukianov
Thank you, Kevin. We are extremely pleased with our financial performance in the third quarter of 2009 in terms of revenue, earnings, and our strong cash position.
With today’s results, we have consistently met or exceeded expectations in all 22 quarters as a public company. We have developed a comprehensive suite of products, capable of addressing the entire spine based on an innovative and minimally disruptive approach to spine surgery.
This complete solution has expanded our relevance to our spine surgeon customers and positioned us to partner with them on an increasing share of their business. Our growth is driven primarily by having the safest and most reproducible, minimally disruptive solution in a market, that is shifting away from open procedures.
As that shift continues, we are fortifying our growth with new solutions for the cervical and thoracic spine, new solutions for deformity tumor and trauma and a comprehensive portfolio of biologics in a developing international presence. As most of you know, the search for NuVasive’s next CFO has been ongoing.
We have made a final decision and are pleased to announce that, Michael Lambert will be joining the NuVasive family, as our new Chief Financial Officer. Michael was most recently the CFO of American Medical Optics, a publicly traded medical device company with over $1 billion in revenue.
His track record of guiding the finance and accounting functions at larger companies and generating operating leverage will provide in valuable to us as we continue to grow. We are grateful to Kevin, for his countless contributions and for his continued effort to insure a seamless transition with Michael.
We anticipate that Michael start, they will co-inside with NASS in a few weeks and that both Senior Executives will attend our investor lunch. As we execute upon our financial growth goals, we remain focused on cultravating the dynamic culture that differentiates NuVasive and grants us the speed and innovation to remain years ahead of the competition.
We are committed to hiring eight players with outstanding performance standards that will facilitate the achievement of our objectives. We have our sights set on becoming the number four global spine company by adhering to our core values of Absolute Responsiveness, outstanding customer service and Cheetah Speed, as we like to say, at NUVA onward and upward.
We will now take your questions.
Operator
(Operator Instructions) Your first question comes from Taylor Harris - JP Morgan.
Taylor Harris - JP Morgan
Kevin, I’ll start with you. So first of all congratulations on your time at NuVasive and I want to ask you about cash flow in the quarter, because you’d had negative cash flow year-to-date through the first six months, but you had a really good cash flow quarter this quarter.
I think you mentioned $25 million of operating cash flow, I’m calculating about $16 million of free cash flow. Was there something unique in the quarter from a cash generation perspective or do you see this as in some way an inflection point in the businesses ability to generate positive cash flow?
Kevin O’Boyle
The dynamics that play in the third quarter, Taylor, were better management of our DSOs going from 53 days down to 51 and also management of our inventory as it relates to the amount of money that we purchased for that category in the quarter. Obviously, the third quarter number being very large is not to be taken as a place for which to trend from, because that’s more about balance sheet management there.
So going forward, we will continue to have very positive cash flow in particular as we move into 2010. So it is indicative of where the business is going in terms of its ability to generate cash.
It was that concept together with some management of DSOs and inventory that really allowed us to maximize our cash flow.
Taylor Harris - JP Morgan
Alex, my question for you is this. When I look at the fourth quarter guidance, at least on the top line, it looks like about a 7% to 9% sequential increase, you did I think 7.5% sequentially in the third quarter.
So you continue to guide pretty aggressively particularly on the top line and especially, when I think about 30% to 35% next year, that doesn’t seem conservative in my view. So I’d love that if you could first of all tell us is there a key of the business that you actually see accelerating right now and then maybe more broadly, how you’re thinking about the guidance that you’re giving, because it does seem fairly aggressive and I want to make sure that we understand, how you’re thinking about that top line guidance in particular?
Kevin O’Boyle
Well our guidance is really tied to our ability to take market share and we feel very comfortable in guiding towards 30% to 35% top line next year which is what we’ve been talking about for a couple of quarters so, I think it’s just the strength of XLIF, it’s the fact that we now have more indications with which to move forward and the fact that we have several new products launching at NASS. NASS happens to be late this time of the year so, typically as you know it’s been earlier in October, so we’re not going to get as much out of some of these launches as we normally would.
It’s going to come more in December so we expect that to pull over into 2010 and so that’s in part why we feel especially strong about our guidance into next year.
Operator
Your next question comes from Ben Andrew -William Blair.
Ben Andrew -William Blair
First, Alex maybe talk a bit about the plans for sales force expansion, obviously the productivity is going up, maybe talk about growth plans and they consistent with where you’ve been and you talked about productivity, but kind of the ability of the reps to sell all five product lines, are you seeing patented trajectory you want there?
Alex Lukianov
Yes, we are and Ben that’s also been very consistent with tenure and that’s what we see is our sales force starts to cross to about the 18 month to two year mark, that’s where we see the greater productivity relative to mix. So, as far as overall growth, we plan to get our sales force to 500 as we move into 2011 so, that’s the number that we’re targeting and we will be as always very opportunistic relative to pulling the trigger on specific markets as we’re able to do so.
We are somewhat constrained by obvious competitive arrangements with various reps so, we can only move as fast as those opportunities present themselves.
Ben Andrew -William Blair
Then briefly can you comment on kind of market dynamics, volume, price, mix, any moving pieces this quarter relative to your thoughts, obviously you’ve been consistent throughout the year, but just maybe the updated thoughts on what you see going into Q4 as well as on the R&D side I guess to squeeze in a third question why that keeps coming in below and are we going to see that trending backup maybe next year to get to the coming growth expectation sequentially you’ve targeted?
Alex Lukianov
So I can only answer your second question because of our rules, so what we’re seeing really in terms of the market is as we’ve been talking about, the queue with surgeons that are doing XLIF is very strong, so we’re very bullish on the market relative to that in particular, so 10% we think is a reasonable number as we forecast that and it’s mostly coming from the surgeons. Overall as far as price is concerned, I would say that it’s flat it’s not much different than the downward pressure that we’ve seen now for years in metropolitan markets.
We continue to see that as we’ve also talked about that I think NuVasive is uniquely positioned to take advantage of getting larger accounts. We’re putting together an aggressive program in that area for 2010 and going after national accounts with a lot more fervor, so those are the things that are coming together for us, but the market has been very consistent and along the general lines of what we have prognostic over the course of this year.
We’ll answer your R&D question. I don’t remember what it was, are you asking what percentage we’re going to spend at?
Was that the question, sorry. Go ahead.
Keith Valentine
Ben, a lot of it has to do with the timing of queue of the clinical trial as started so as Alex mentioned on the previous commentary that the clinical trial is starting with LCDR and as that trial continues to ramp up you will see those expenses flow through as well.
Operator
Your next question comes from Bill Plovanic - Cannacord Adams.
Bill Plovanic - Cannacord Adams
My two questions are first on the Progentix is that product still queued up for early in the second half of 2010 and then just clarity on the sales rep question, you said 275 to 300 worldwide. What’s that mix look like domestic versus US at this point?
Alex Lukianov
As far as Progentix, what we’ve talked about, Bill is that we would have some visibility relative to how our development progress is coming along in 2010. We do not have an update on that as of yet.
I’m sure we’ll have some more to say on our fourth quarter call in February, so we are very optimistic about its chances, but that’s still Rd, so not much to add on that particular front. In terms of the sales force, of course the vast majority is on the U.S.
side and outside of the United States, it’s a very small percent. It’s in the range of about 10% of that number, it’s not much more than that.
Operator
Your next question comes from David Roman - Goldman Sachs.
David Roman - Goldman Sachs
Kevin, can you just walk through maybe some of the components of revenue give us some sense where core fusion growth was and also what contribution biologics international had?
Kevin O’Boyle
The ongoing core business continues to carry really good momentum into the quarter and through the quarter, as Alex was talking about selling mix into the five different product categories really is a way that we conduct ourselves in the field in the way that our sales reps effectively maximize their compensation and the companies overall goals to make sure all of our products are represented well in the surgeons practices. In terms of the biologics, we’re talking about $45 million $50 million in total biologic contribution for 2009 and we’re very comfortable in that range and in fact in the top end of that range.
So that’s working out very well and international has been kind of a 2% to 3% range and we can expect that to be the same throughout the balance of this year. So international has got a lot of upside potential, but this year and certainly in next will be a lot of seeding of that market, if you will, to effectively really have a material impact on the company’s financial statements in 2011.
David Roman - Goldman Sachs
So the core fusion sales in the quarter are higher or lower than $80 million?
Kevin O’Boyle
The core fusion higher or lower, I believe it’s higher than $80 million.
David Roman - Goldman Sachs
So that would suggest that growth was sort of in line with where it was last quarter?
Kevin O’Boyle
Yes.
David Roman - Goldman Sachs
Then lastly, I know I violated the rules here, but could you give us maybe some sense, Alex I think you recently have opened a New York sales office or maybe opening it shortly, sort of progress in that region from a new account perspective?
Kevin O’Boyle
We haven’t opened it yet. Our plan is to open it mid-year of 2010 and that’s going to be more than the sales office.
It’s going to be a place for us to be able to train surgeons on cadaver techniques so it will have a full operating room and it will help us with Europe as well as the East Coast. So that’s on track for mid-year.
We have isolated a particular location and are wrapping that up.
Operator
Your next question comes from Matt Miksic - Piper Jaffrey.
Matt Miksic - Piper Jaffrey
So one of the things looking at the bottom line, it came in better than expected in the quarter, but the raise kind of in the back half of the year or I guess the fourth quarter of the year here looks a little bit on the conservative side, not that we want you to be aggressive, but can you give us any color as to what’s changing in Q4? If there’s anything changing or maybe where you’re investing, what looks like upside from the third quarter as we look at the full year?
Kevin O’Boyle
What you’ll see in the fourth quarter, to Keith’s point when he was asked about R&D from Ben Andrew that the cost of the enrolment will be greater in the fourth quarter than the third, because as we continued to build on momentum of enrollment in that trial, we are looking at a higher R&D amount in absolute dollars and as a percentage in the fourth quarter that you’ll see moving from Q3 to Q4, so that’s the principal reason for that.
Keith Valentine
Matt, I just want to pipe in and say that it’s very aggressive profitability and it’s a 13% operating margin of which is what we’ve talked about consistently all year long. So it’s very much on track with what we’ve guided towards and it’s very consistent with where we plan to be in terms of the 20% operating margin as we have our $500 million run rate.
Matt Miksic - Piper Jaffrey
If I could just clarify on this last question, is it fair to look at this as understanding that you’re hitting the target, understanding that these are aggressive and this is a growth a year and leveraged year in terms of earnings in the back half of the year, but are we accelerating something that you might have been spending or budgeting for 2010? Is that part of what’s going on?
Alex Lukianov
No. Not in the least.
Matt Miksic - Piper Jaffrey
So second question on Osteocel, I hate to sound like I’m raining on the parade here on both my questions, but we were looking for Osteocel data a little earlier than the back end of 2010 and maybe my expectations were out of wreck, but if there’s been a change there, if you’ve expanded your efforts there, if it’s taking a little longer to get to the data that you want, any color or clarification you could give us on your progress on that front?
Kevin O’Boyle
The expectation is no different than what we’ve talked about. It’s been the end of 2010.
As you know we’ve just acquired the product and only introduced it to our sales force at the start of this year. So we intended to take most of this year to run through enrollment of the various applications that we’re focused on and it’s going to take us well into 2010 to get that data.
What we’ve been talking about over the course of this year is that we will see data at the end of 2010 and some of that will come as late as 2011, and that is very consistent with our overall forecast for revenue as we believe that we can grow Osteocel Plus to a certain level without that kind of data, but we feel it’s critical for us and what we’ve talked about is in order for us to hit the 2011 kind of numbers that’s when we need to have stronger clinical data, so all of that is consistent.
Operator
Your next question comes from Rick Wise - Leerink Swann.
Rick Wise - Leerink Swann
I guess my two questions. First maybe Alex, you could give us a little more color on the international sales build out.
Obviously, you’ve hired a couple of key Senior Executives in Japan, Europe, but maybe talk about the infrastructure build and is this moving along as expected, faster than expected and you still targeting 2011, when we should start to see meaningful revenue generation there?
Alex Lukianov
Correct with regard to 2011 and it has been going a little bit slower than we would have liked. It took us time to get the Senior Executives a little longer than we thought to get the Senior Executives that I announced today.
So overall, in terms of the build we’re getting the right people in place. Things are moving along very well, but we won’t see really meaningful leveraging until 2011.
Rick Wise - Leerink Swann
Turning back to NASS, you sort of obliquely referred to the possibility of other competing products in various aspects of the business. I think many of us have heard about the possibility that it seems like almost the likelihood that J&J is going to be launching their lateral device at NASS, but in a very limited way.
Do you think this is likely to be disruptive in anyway? I appreciate that it’s certainly a vote of respect for what you all have achieved, but what’s the risk that it’s disruptive in some sort of short term, near term kind of basis?
Alex Lukianov
I think the risk is close to zero, and I’ll tell you why that is, because we welcome the competition. The fact that the major players are now all talking about lateral and trying to come up with a lateral solution is terrific.
What they are solving though is the same thing that we solve some five years ago, which is trying to put together a one level technique with XLIF. So that’s fine and dandy that’s what they’re trying to do.
They going to learn a lot about the need for NeuroVision, as they continue to move forward and the fact it can’t be done without it. So they will be limited and no differently than what we’ve seen with DLIF.
DLIF has been out there for as long as NuVasive has been public and they’ve not been able to get the kind of uptake. I think that they were hoping for.
I don’t see anything from our sources that indicates that anybody else has solved this any differently than we have and in fact, what we talk about at NASS is the robustness of all of the other offerings that we have and so people think about this as more of a single implant episode or particular approach and that’s all there is to it. It’s much more complicated and I think our competitors start to appreciate that as they get into this space to realize that they can’t do deformity, they can’t move into the thoracic spine and they can’t even address all of the things they would like to in the lumbar spine so, the more that they enter and the more that they push in to the space that easier it is for us to differentiate how NuVasive is different so I truly welcome it I see if anything this helps us to grow our business.
Operator
Your next question comes from Michael Matson - Wells Fargo Securities.
Michael Matson - Wells Fargo Securities
I was wondering if you could give us a quick overview of the deformity system they can be launching at NASS and how is it really differentiated from the competitive systems and is it compatible with your XLIF technique?
Keith Valentine
As has been the premise for our lumbar strategy it’s the same for the thoracic strategy and that is the combination of how you’re approaching the spine laterally with customized implants for easiest insertion is then married to how you will posteriorly fixate or you can also fixate it laterally so there will be a variety of product opportunities that can offer lateral fixation in addition to the traditional partial vertebral body placement or interbody style grafting or you can also have a posterior fixation opportunity so it is a comprehensive suite that will support the thoracic fixation opportunity.
Michael Matson - Wells Fargo Securities
Then just wondering how your progress has been, deformity aside I guess in the thoracic area and how big of a deal is this your tracker, they’re going to launching for the thoracic region?
Keith Valentine
I think as with all of the areas that you go laterally whether it’s lower lumbar, it’s mid lumbar or even into thoracic, you have to customize how you’re going to achieve that access and so the retraction platform will have customized additions to the blades that will make it easier to dot on to the spine and make it easier to security so that you can quickly do the procedure. No different again as I said as we’ve done with the lumbar spine and customizing at different levels or customizing for different applications and pathologies.
Operator
Your next question comes from Joanne Wuensch - BMO Capital Markets.
Joanne Wuensch - BMO Capital Markets
While I have to ask some sort of maintenance questions here hit them off one-by-one; product pricing, health of spine, market and reimbursement?
Alex Lukianov
Well let’s talk about product pricing and I said that it was flat, as far as reimbursement, nothing has changed. It’s the same as you know the CMS increase has gone through for 2010.
So, everything is very stable and very straightforward.
Joanne Wuensch - BMO Capital Markets
Health and spine market?
Alex Lukianov
I talked about that a little bit as well. I said that we continue to see it growing at 10% and I think we really talked more about what’s happening with XLIF surgeons.
It’s easier first to talk about that but they have a very strong queue it’s the same or stronger than it was in prior years so, I think what we see is the continued adoption of XLIF and what we continue to hear from surgeons is that things are looking very positive overall in terms of their practices.
Joanne Wuensch - BMO Capital Markets
What kind of training backlog do you have at your facility?
Alex Lukianov
It’s the same as it has been it runs somewhere between three and six months on an ongoing basis. In part that going the New York facility will help us with that next year, and especially when it comes to additional training that surgeons want to take in terms of advanced techniques, thoracic and so on and so on.
Operator
Your next question comes from Glenn Novarro - RBC Capital Markets
Glenn Novarro - RBC Capital Markets
One, this morning I was on a call where I heard the CEO Boston Scientific discuss this Med Tech tax and Med Tech fee is being very negative on the industry and for his company and I’m just curious of your insights in terms of the tax fee on NuVasive is question one.
Alex Lukianov
Let me go ahead and answer that one Glenn. So, as far as Med Tech tax is concerned as you know it, it has not gone through and is still bouncing around Congress, we think it’s a very bad idea.
We think it can curtail innovation. Clearly it can lead to less jobs and it attacks profitability on the part of company so, the future of healthcare is about both innovation and reducing costs.
We believe we can do both with our technology. What I alluded to in my comments though is that we certainly do not welcome a tax and we don’t think it’s a good idea.
We don’t know where it’s going to end up. There’s various negotiations taking place to reduce the amount of that tax.
However as a company, we believe that we can ride out any storm that comes in our direction, as you know our cash position is very strong. Balance Sheet is particularly strong, so if need be, we’ll adjust to that and I think we’ll continue to take market share and drive forward with our technology.
So I think overall if that’s the way that it goes, we’re going to be dealing with it just like everybody else, but we think it’s a terrible idea.
Glenn Novarro - RBC Capital Markets
Then the second question, because you mentioned your cash and your cash position continues to grow. Can you talk to us a little bit about kind of the deal pipeline, you know, are there significant opportunities still out there for NuVasive and maybe any type of opportunities or segments of the market that you’re more interested than others?
Keith Valentine
I think that we’ve completed the key acquisitions that we wanted to get done over the last couple of years. That’s given us a strong position in biologics.
That’s given us a strong position in cervical. If Progentix comes along the way we, hope it will and we’ll find that out over the next couple of years, then there’s an opportunity for us to put more money to work at Progentix and give us a very strong return on that investment.
We continued to look at ways to increase our overall global footprint, if there’s thing as that we can do outside United States, that’s what we’re looking for. I think you dropped your phone in the water.
We’re continuing to see what we can do in that overall direction, so we are looking out for different things to be able to pull into the company, but there’s nothing of a technological nature right now that we’re especially looking at. There is always smaller things, that we might do, but nothing that would be anything less than accretive.
Operator
Your next question comes from John Putnam - Capstone Investments.
John Putnam - Capstone Investments
I was wondering Kevin, if you could give us a little more color on the gross margin of biologics in international and how much of an impact that really has on the overall gross margin?
Kevin O’Boyle
The gross margin on the biologic front is in the mid-60s as we’ve talked about before, so a little bit dilutive on our overall corporate margins and in the international margins are in around 70%. So when you combine all of that is the reason why we’ve had the margins pull back towards current level.
John Putnam - Capstone Investments
Is there any update on the NeoDisc, is anything new on that front?
Kevin O’Boyle
No. That’s no different than in what we’ve talked about, so we really won’t have anything meaningful to share for another year or so, we’ll give a full update on our fourth quarter call on all of the IDE projects and everything else, but no change in overall guidance on any of our IDE projects.
Operator
Your next question comes from Samir Harish - Needham & Co.
Samir Harish - Needham & Co.
Two quick ones for you, in terms of guidance, how do you think about growth relative to new accounts verse expanding into use in existing accounts and should we assume that new account growth will be tied closely to the new rep hires or could it be at a higher rate?
Kevin O’Boyle
It’s the same strategy that we’ve been employing now for some time, so new account growth for us is about 25% of our focus, 75% of our business is coming from going deeper.
Samir Harish - Needham & Co.
Appreciate your comments earlier on the competitive effectiveness reserves. Can you talk about the types of studies that you could be involved in herein, possibly with these respective studies, would you be doing comparisons to single products or open to different types of surgeries, maybe just any details there?
Kevin O’Boyle
We’re doing a number of different things. We’re doing retrospective studies, we’re starting a series of prospective studies and what we’re doing is, we’re looking at the overall economic benefits of XLIF versus more traditional means.
So we’re doing those in various geographic areas of the United States.
Samir Harish - Needham & Co.
So you’re not going to be targeting against any specific company?
Kevin O’Boyle
No, that would be unfair.
Operator
Your next question comes from Steve Lichman - JMP Securities.
Steve Lichman - JMP Securities
The question I have is related to actually following up on the last point on the comparative effectiveness trial that you’re putting together. You mentioned Alex during the commentary that based on what you’ve seen so far you’ve seen encouraging results so, is there any potential to get a Sneak Peak of that during the earlier part of 2010 and what did you mean by that in terms of sort of encouraged by what you’ve seen so far?
Alex Lukianov
One of the centers that are retrospective analysis and the data was incredibly strong in terms of reduced complications, positive outcomes and an overall reduction in the healthcare spending associated with those particular patients, so we don’t have anything in particular to show until that is accepted for publications, it has to go through the entire process and it cannot be discussed until that takes place.
Steve Lichman - JMP Securities
So, is that something that you’re saying, would be the second half of 10 or could that even be a little earlier?
Alex Lukianov
That could be earlier it just depends, it’s written up and submitted and we’re waiting to hear back from when the author gets it accepted. What we’re doing as far as other centers are concerned that won’t be until the latter part of 10 before we have any clear data that we can kind of rest or had on.
Operator
Your next question comes from Douglas Tsao - Barclays Capital.
Douglas Tsao - Barclays Capital
I was hoping you could walk through some of the drivers of why it is the gross margin in the international business is lower than in the US, and is that something that you’d expect to sort of be able to recapture as the volumes grows ex-US?
Alex Lukianov
Yes, on the gross margins for OUS is pretty traditional to have a lower gross margin OUS, reimbursement levels and things of that nature are different than here in the US, so when you combine all of that, you effectively come out with lower gross margin which I think you’ll find traditional.
Douglas Tsao - Barclays Capital
Then in terms of moving into the thoracic spine, this is something the company has talked about for a couple of years. I believe you sort of had the first sort of product introductions in the third quarter of ‘07 at NASS, and I was just curious as to do you think that the product mix at first wasn’t right or sort of why is it now that you’re more constructive without opportunity than sort of what we’ve seen in the past?
Keith Valentine
The deformity application is pretty comprehensive and what we talked about earlier Ron as you mentioned was really the propagation of more experienced surgeons going themselves in the thoracic spine and us providing simply just the implantation to deliver some sort of partial vertebral body replacement and the body device what’s changed dramatically is the desire to have a comprehensive 360 suite if you will and that means to very a complete posterior system, which was ground up designed at the organization at NuVasive and that takes time. It takes time to develop a comprehensive deformity system and takes time to develop supplemental fixation systems that also back up that interbody or partial vertebral body replacement so, this really has been a strategy all along.
The good news was we started earlier in 2007 and learned a lot and we learned a lot to be able to put together a posterior system that is integrated nicely with the lateral system.
Alex Lukianov
Yes, just to add to Keith’s comment I think is the 2007 for us was kind of the Eureka point where we realized that we could move into the thoracic spine. We hadn’t really planned to go there and it wasn’t until a few surgeons lead us in that direction that we started to discuss it so that was very early on as Keith outlined and now since that time we’ve been really backfilling applications, indications, expanding portfolios, but I want to make something really clear about thoracic.
Thoracic is for XLIF surgeons that are consistently doing XLIF for the lumbar spine. This is not away to kick-off into the XLIF space.
So it’s really our user group that is moving slowly into the thoracic spine. This is not a missionary selling process.
You still have to get into XLIF first and that’s again why we are the only game in town relative to a surgeon working with us.
Operator
Your next question comes from Doug Schenkel - Cowen & Co.
Doug Schenkel - Cowen & Co.
Following up on your earlier comments regarding competitive dynamics I want to make sure that you guys aren’t hearing anything from a competitive standpoint regarding DePue or anyone else who might be trying to market a nerve avoidance technology that’s at all similar to NeuroVision. It sounds like competitors are still going to have to use external neuro monitoring and presumably if that weren’t the case it would probably trigger legal actions on your part?
Alex Lukianov
There’s no question about that. You are exactly right about our strategy.
We would take legal action in a heartbeat. What you’re hearing though with regard to other competitors is they’re doing a form of third party monitoring that’s nothing new, that’s been going on for quite sometime, it’s very limited in terms of it’s reach and it’s not real time like NeuroVision is.
So that’s why I think as we talk about our competitors we do not have concerns in that arena whatsoever.
Doug Schenkel - Cowen & Co.
Another follow-up, again this quarter you mentioned earlier that you’re planning to open a series of new facilities over the next call it year or so including the New Jersey facility.
Alex Lukianov
New York.
Doug Schenkel - Cowen & Co.
How quickly would you expect to drive revenue benefits and would you expect the benefits at these facilities to be more about increasing revenue per surgeon rather than converting new surgeons to adopt given that I think you’ve said you still want first timers to head out to San Diego?
Alex Lukianov
Yes, that’s right. We don’t know exactly what that number is.
We’ve talked about that through our budgeting process, but we think that it can probably have a positive impact of 10% in terms of our ability to drive revenue with the larger group of surgeons. So we’re still trying to sort that out, but I think as that facility gets lags and people get used to using it.
I think it’s going to have a very big impact on our pull through business with subsequent training with surgeons starting in 11.
Operator
Your next question comes from Taylor Harris - JP Morgan.
Taylor Harris - JP Morgan
If I just get one, then can I push you to give us the biologics revenue number this quarter?
Kevin O’Boyle
Sure. The overall number, I think where is it here?
It’s about $13 million in total. Full year, we expect $50 million.
Operator
Your next question comes from David Roman - Goldman Sachs.
David Roman - Goldman Sachs
One quick question following up, if I look at the year-to-date GAAP earnings of being $0.09, but the full year only being $0.11 to $0.14 of the guidance, is there anything specific from a spending perspective happening in the fourth quarter, why sequentially the earnings would be on a GAAP basis much lower?
Kevin O’Boyle
It’s a shift of R&D money out of three into four.
Operator
Your next question comes from Ben Andrew - William Blair.
Ben Andrew - William Blair
The follow-up train, I was just calling to ask about the old facility and what purpose you’re using that for, how long you think you’ll be there, when you might build a new facility at the existing campus and kind of what the approach is?
Alex Lukianov
We’re approximately two years out from our new facility. We’re going to add a building to our existing campus.
So we’re planning to use the old facility, for overflow we’ve already started to use it for our sales training purposes and we’ll continue to move more of our new folks and some of the expanded departments into that office until we can move them back to the Lusk Boulevard facility.
Operator
Your next question comes from Steve Lichtman - JMP Securities.
Steve Lichtman - JMP Securities
So I just wanted a quick question relative to the SG&A guidance on the non-GAAP basis for the year, you guys are maintaining at a 57% to 58%. What is that number year-to-date, that non-GAAP SG&A year-to-date?
Kevin O’Boyle
I believe it’s about 59%.
Steve Lichtman - JMP Securities
So you guys are implying pretty nice leverage in the fourth quarter on SG&A?
Kevin O’Boyle
Yes. You got it.
Steve Lichtman - JMP Securities
Now on the 20% guidance relative to Op margin, when you hit the $500 million run rate, what does that imply on the SG&A basis or where can you get that on the non-GAAP basis?
Kevin O’Boyle
What we talk about an 80% margin and R&D about 10%, right. So you can kind of fill in the blanks effectively to get there.
So it will show increased leverage in the SMA line as we continue to grow the revenues.
Operator
Your next question comes from Matt Miksic - Piper Jaffray.
Matt Miksic - Piper Jaffray
So sort of housekeeping question here on, we’ve picked at biologics I guess U.S. core fusion.
So looking at international is this sort of down sequentially seasonally? Is that where we are on the international side?
Alex Lukianov
No, we’re not. We’re up slightly sequentially.
Operator
Your final question comes from Douglas Tsao - Barclays Capital.
Douglas Tsao - Barclays Capital
Just a quick housekeeping question, in terms of did the leasehold reversal that charge came out of the SG&A line?
Kevin O’Boyle
Yes.
Operator
There are no further questions in queue. I’d like to turn the call back to management for closing remarks.
Alex Lukianov
Okay, well. Thank you everybody.
We appreciate you being on and obviously if you have additional questions you can contact Patrick Williams, he’ll be happy to address them for you. We’ll talk to you in another quarter.
Kevin O’Boyle
Thank you.
Operator
This concludes today’s teleconference. You may disconnect your lines.
Thank you for your participation.