RTIX

RTI Surgical, Inc. (RTIX)

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RTI Surgical Inc. (RTIX)

Q3 2013 Results Earnings Call

October 29, 2013, 8:30 AM ET

Executives

Wendy Crites Wacker - Executive Director, Global Communications

Brian Hutchison - President and CEO

Rob Jordheim - Executive Vice President and CFO

Tom Rose - Executive Vice President, Administration

Carrie Hartill - Executive Vice President and Chief Scientific Officer

Robby Lane - Executive Vice President, Global Commercial

Analysts

Matt Hewitt - Craig-Hallum Capital Group

Bill Plovanic - Canaccord

Chris Cooley - Stephens

Michael Rich - Raymond James

Presentation

Operator

Good day, ladies and gentlemen. And welcome to RTI Surgical Q3 Earnings Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session, and instructions will be given at that time. As a remainder, this call maybe recorded.

I’d now like to introduce your host for today’s conference, Wendy Crites Wacker, Executive Director of Global Communications. You may begin.

Wendy Crites Wacker

Good morning. And thank you for joining RTI Surgical for our third quarter 2013 conference call. Today, we will hear from Brian Hutchison, President and Chief Executive Officer; and Rob Jordheim, Executive Vice President and Chief Financial Officer. Also joining us this morning for Q&A are Tom Rose, Executive Vice President of Administration; Carrie Hartill, Executive Vice President and Chief Scientific Officer; and Robby Lane, Executive Vice President of Global Commercial.

Before we start, let me make the following disclosure about forward-looking statements. The earnings and other matters we will be discussing on this conference call will involve statements that are forward-looking.

These statements are based on our management’s current expectations, but they are subject to various risks and uncertainties associated with our lines of business and with the economic environment in general.

Our actual results may vary from any statements concerning our expectations about future events that are made during the course of this meeting and we make no guarantees as to the accuracy of these statements. Accordingly, we urge you to consider all information about the company and not to place undue reliance on these forward-looking statements.

Now, I’ll turn the call over to Brian Hutchison.

Brian Hutchison

Good morning, everyone. Thank you for joining us. Today, I will start with an overview of the third quarter and then Rob will review our financial results. On October 16th, we issued pre-released third quarter revenues of $54.7 million, a 23% increase over the third quarter of 2012. This includes $16.1 million of Pioneer Surgical Technology revenue from the period July 16, 2013 to September 30, 2013.

Revenue was lower than we expected and the below our third quarter guidance of $59 million to $61 million. There are a variety of factors that impacted our business, all of which we are addressing, I’ll give you color on these as we go through our lines of business.

Third quarter spine revenues increased 73% compared to third quarter of 2012. The increase was primarily related to the addition of revenue from the Pioneer acquisition. If Pioneers revenues had been included for the fully third quarter of both 2012 and 2013, spine revenue would have decreased by 5%. The legacy RTI spine business grew at a rate of 5% on strong orders from our commercial distributors.

However, we experience lower than projected volumes in the legacy Pioneer spine business due to a decline in orders from surgeons who had personally invested in Pioneer and were dissatisfied with the return on their investment and lack of surgeon engagement that they received from pervious Pioneer owners.

Moving forward, we are focused on attracting new customers and growing this business line as we implement surgeon engagement programs and introduce new products. In October, we began cost distribution of some of our allograft implants with our new direct spine channel. We anticipate some early traction on these products in the fourth quarter and more growth next year as our sales force fully engages with extended portfolio

As many of you saw in our October 16th release, we announced that we entered into a new agreement with Medtronic Sofamor Danek to process allograft implants, primarily for use in spinal surgeries. The initial term of this agreement runs until December 31, 2017 and automatically renews for successive five-year period subject to the agreement by the party.

The terms of the agreement are substantially equivalent to the previous agreement between our two companies for allograft processing and distribution. We’ve had a long standing relationship with Medtronic and they contributed 14% of our total revenues in the third quarter. Our previous agreement was set to expire in June of 2014.

Based on results from the first nine months, we anticipate that our legacy RTI Spine business will grow mid single-digit this year and as a legacy Pioneer revenue will add approximately $15 million to the overall spine business for the year.

Our sports medicine business decreased 19% compared to third quarter of 2012. We discussed earlier this year, the sports medicine team has faced competitive pressure and some uncertainty in the marketplace initiated by October 2012 FDA warning letter.

During this time, some surgeon customers began shifting to alternative solutions, including using allograft or patients on tissue, as an alternative to our implant. As we shared with you last month, the FDA did return for re-inspection September 9th and 10th.

The FDA noted the adequacy and effectiveness of the corrective actions we put in play. Upon completion of their inspection, they acknowledged the significant improvement in RTI’s overall environmental monitoring program.

All items in the warning letter were closed and no new items issues or FDA 483 observations were issued. According to FDA operation procedures, they have up to 65 days in which to issue the official close-out letter.

Read the rest of this transcript for free on seekingalpha.com