Carlsmed - Earnings Call - Q2 2025

Transcript

Speaker 4

Ladies and gentlemen, thank you for standing by and welcome to the Carlsmed second quarter 2025 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star one-one on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star one-one again. As a reminder, today's program is being recorded. Now I'd like to turn the conference over to your first speaker for today, Caroline Corner, Investor Relations. Please go ahead, Caroline.

Speaker 1

Thank you, operator. Welcome to Carlsmed's second quarter 2025 earnings call. Joining me on today's call are Mike Cordonnier, Chief Executive Officer and Chairman, and Leo Greenstein, Chief Financial Officer. Before we begin, I would like to caution that comments made during this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding the market in which Carlsmed operates, trends, expectations, and demand for Carlsmed's products, and Carlsmed's expected financial performance and position in the market. Any forward-looking statement provided during this call, including projections for future performance, is based on management's expectations as of today. Carlsmed undertakes no obligation to update these statements except as required by applicable law.

These statements are neither promises nor guarantees and are subject to known and unknown risks and uncertainties that could cause actual results, performance, or achievements to differ materially from those expressed or implied by the forward-looking statement. For more detailed information, please review the cautionary notes on the earnings material accompanying today's presentation, as well as Carlsmed's filings with the SEC, particularly the risk factors described in Carlsmed's Form S-1 and in Carlsmed's quarterly report on Form 10-Q for the second quarter ended June 30, 2025. I encourage you to review all Carlsmed's filings with the SEC concerning these and other matters. These filings, along with Carlsmed's press release for the second quarter 2025 results, are available on Carlsmed's website at www.carlsmed.com under the investors section and include additional information about Carlsmed's financial results. A recording of today's call will be available on Carlsmed's website by 5:00 P.M.

Pacific Time today. Now I'd like to turn the call over to Mike to go over the Carlsmed second quarter 2025 business highlights.

Speaker 3

Thank you, Caroline, and welcome everyone to Carlsmed's first earnings call as a public company. Following our initial public offering where we successfully raised more than $100 million in growth capital, I would like to thank our entire team at Carlsmed, our board, our surgeon partners, and our stockholders for joining us in our mission to improve patient outcomes and reduce the cost of healthcare for spine surgery and beyond. We're aiming to establish the new architecture of surgery where patient outcomes are not only more predictable but consistently excellent for every surgeon, hospital, clinic, and patient. Now I'm pleased to report that we delivered a very strong quarter with $12.1 million in revenue in the second quarter, representing year-over-year growth of 99%. With this strong momentum exiting the first half of the year, we're on track to deliver between $45.5 million and $47.5 million in revenue full year 2025.

Over the past year, we've seen a consistent increase in surgeon adoption, with 199 surgeon users that have completed more than one procedure using the aprevo technology platform by the end of the quarter, which is an increase of approximately 72% over the prior year. With nearly 4,000 spine surgeons in the U.S. and an estimated total addressable market for aprevo lumbar spine fusions of more than $13 billion, we believe that we have a long runway ahead of us. Our aprevo technology platform is the first available solution to provide personalized digital surgical plans and the accompanying aprevo interbody implants that are specifically tailored to each patient's pathology and vertebral bone topography. With the predictability of the personalized surgical plan and the 3D-printed aprevo interbody implants that are personalized to deliver anatomical alignment to the patient, evidence shows a meaningful improvement in patient outcomes.

For example, a recent study published by the International Journal of Spine Surgery comparing aprevo to non-aprevo procedures showed an 82.6% reduction in reoperation rate after just one year for aprevo. With the leading cause of revision surgery being misalignment of the spine, we believe the Carlsmed aprevo technology is uniquely tailored to address this much-needed patient population. To further support adoption of the aprevo technology platform, CMS issued three new MSDRGs that became effective October 1, 2024, for enhanced hospital reimbursement for the aprevo custom-made anatomically designed fusion devices, which provide enhanced reimbursement for many single-level and multi-level qualifying aprevo procedures at the higher paying MCC level. This translates to an incremental reimbursement for most procedures from $20,000 to $50,000, depending on the complexity of the procedure and the hospital's MSDRG payment schedule.

This past July, CMS approved an NTAP, or a new technology add-on payment, for aprevo cervical spine fusion that goes into effect on October 1 of this year. This NTAP is expected to provide up to $21,125 of additional reimbursement to hospitals that utilize aprevo cervical for patients. We believe that we've made great strides in the past year in our innovation strategy with our proprietary digital production system. This manages both the upstream and downstream process involved in producing our aprevo interbody implant system and enables us to design, produce, and deliver the system typically within 10 business days of surgical plan approval or less. This represents a decreased turnaround time from more than four weeks to 10 business days or less in just the past year. With our capital-light business model, we can manufacture our personalized aprevo interbody implants on demand and just in time for surgery.

With no surgical trays or stock implants, our highly differentiated business allows us to deploy capital directly towards patient-centric innovation and commercial growth. We're not slowing down. We're continuing to innovate the aprevo technology platform for patients needing cervical spine fusion surgery. We recently completed the first personalized cervical fusion with the aprevo technology platform and are planning a commercial launch in 2026. With an estimated 370,000 cervical spine fusion procedures to be performed in the U.S. in 2025, our rapid adoption of the aprevo technology platform, compelling clinical data, and superior reimbursement, we remain optimistic about our growth for the years to come. With that, I'd like to turn things over to Leo to review our financial performance. Leo?

Speaker 5

Thank you, Mike, and good afternoon, everyone. Revenue for the second quarter of 2025 was $12.1 million, compared with revenue of $6.1 million in the second quarter of 2024. Our 99% year-on-year quarterly revenue growth was primarily driven by increased volume procedures performed by our new and existing surgeons, with our average revenue per procedure substantially constant between these periods. Gross margin was 73.4% for the second quarter of 2025, compared with 75% in the second quarter of 2024. This modest decrease was primarily driven by expedite production fees charged by our contract manufacturer in the current quarter to meet customer timing requirements and other material costs. Operating expenses were $15.4 million in the second quarter of 2025, compared with $10.9 million in the second quarter of 2024. R&D expense was $4.2 million this quarter, compared with $4 million in Q2 of 2024.

This slight increase was primarily driven by higher personnel costs to support product development and artificial intelligence initiatives, partially offset by lower prototype and materials costs and reduced compass registry costs following enrollment completion in the second half of 2024. Sales and marketing expense was $7.9 million this quarter, compared with $4.9 million in the second quarter of 2024. The $3 million increase in sales and marketing was primarily driven by additional sales personnel added this quarter and the variable commissions associated with our revenue growth, as well as an increase in trade show and other marketing expenses for increased aprevo awareness with spine surgeons. General and administrative expense was $3.3 million this quarter, compared with $2.1 million in the second quarter of 2024.

The $1.2 million increase was primarily due to personnel additions to support our business growth, as well as legal, accounting, and professional service fees related to our transition to becoming a public company. Our GAAP net loss was $6.8 million this quarter and was $6.3 million net loss in the second quarter of 2024. EBITDA adjusted for stock-based compensation was a negative $6.2 million this quarter and was the same amount in the second quarter of 2024. With our planned business growth, we expect improvements to these measures over the next few years as we gain further operating leverage through our make-on-demand and digital-first business model. Moving to our balance sheet, our cash at June 30, 2025, was $33.5 million. In July, we raised $100.5 million of gross proceeds from our IPO.

We believe this provides us with sufficient capital to confidently execute our business strategy and maintain strategic optionality over the next several years. For the first six months of 2025, our cash use in operating activities was $15.2 million, representing a monthly average cash burn from operations of $2.5 million this year. This compares to $13.7 million of cash use in operating activities for the first six months of 2024. Our total liabilities at June 30, 2025, were $27.6 million, of which $15.6 million corresponds to our debt facility that matures in October of 2029, with interest-only payments until August of 2027. With our July IPO proceeds, we believe our balance sheet is in excellent position to drive durable revenue growth through execution of our commercial strategy, while we invest in relentless operational excellence, robust clinical data collection, and patient-centric innovation.

I'd now like to turn to our guidance for the remainder of 2025. With our $22.3 million sales performance in the first half of 2025, we are providing full-year 2025 revenue guidance of $45.5 million to $47.5 million, representing an annual growth range of 67% to 75% over the full year 2024. With average revenue per procedure of $30,000 expected to remain constant, we expect that increased procedure volume in aprevo lumbar will drive our revenue performance. With that, I'll turn it back to Mike.

Speaker 3

Thank you, Leo. We had a very strong quarter as we continue to build the leading next-generation med tech company, and we're excited about now being a publicly traded company. We will stay hyper-vigilant to our mission to improve outcomes and decrease the cost of healthcare for spine surgery and beyond. Thank you, and with that, I'll turn the call over to the operator for more questions.

Speaker 4

Certainly, ladies and gentlemen, our first question for today comes from the line of Travis Deed from B of A Securities. Your question, please.

Speaker 0

Hi, this is Gracia Mahoney on for Travis. Thanks for taking the question and congrats on the first earnings call. I wanted to ask my first question on utilization. How did you see utilization trend in the quarter as you drive penetration in existing accounts but also had strong new surge in adoption? What's the difference in utilization between those two? How should we think about utilization trends for the rest of the year and also into next year? I'll unfollow that.

Speaker 3

Thanks for the question. We had, as you can see, a very strong quarter. We outpaced our plan in new surgeon adds, as well as utilization. As we look at our ongoing trends, we're seeing a strong uptake as we continue to roll out our commercial strategy.

Speaker 0

Okay, great. Maybe a follow-up on guidance. Any kind of color you want to give as a new public company on how you give guidance and how you're thinking about the key drivers of those assumptions from here to year end? Thank you.

Speaker 3

I think as we look at our strong performance in Q2 and our bullish guidance going forward, it's really driven by our key growth drivers that we put in place. Our recent CMS decision in getting the enhanced reimbursement, our continued acceleration in our innovation with the digital production system, shortening our delivery times. As we continue to expand the platform, we have some recent announcement on cervical, and we believe that this will drive ongoing growth, durable in 2026 and beyond.

Speaker 0

Great, thanks. Congrats again.

Speaker 4

Thank you. Our next question comes from the line of David Roman from Goldman Sachs. Your question, please.

Speaker 2

Thank you. Good afternoon, everybody. Mike, I was hoping you could go into a little bit more detail and help us understand the type of procedures where you're seeing the most common adoption for aprevo. Is there a subsegmentation that your customers are doing across patient types? Maybe just help us unpack some of the growth a little bit from a procedure categorization standpoint.

Speaker 3

Thanks, David. Appreciate the question. If we give a little bit of a historical perspective, you know, we initially launched and targeted our technology in specifically the adult deformity complex procedures at teaching institutions. As we've expanded and advanced the platform, we've gotten expanded indications to degenerative disc disease. We're seeing a lot of the growth really in the short construct fusion, blended anterior-lateral, posterior access. As we look at our prior quarter and the continued growth trend, we're seeing a procedure volume mix between short construct and long construct that more closely matches the market and the patient population more broadly.

Speaker 2

Appreciate the additional perspective. Maybe just a follow-up here on the guidance. I know you've provided a full-year outlook here, but maybe you could help us think through any parameters that we need to consider with respect to seasonality. Are you willing to make any comments on the $11 million number that's sitting in consensus for Q3?

Speaker 3

Yeah, we're not at this time giving guidance to Q3. However, as we've seen in the industry, there is a seasonality procedure volume for Q3 because it is a busy season for the surgeons in the industry. I appreciate the question.

Speaker 4

Thank you. Our next question comes from the line of Richard Neuletter from True Securities. Your question, please.

Speaker 2

Hi, thanks for taking the question. Maybe just to piggyback off David's seasonality question, I guess maybe ask a different way. Are there any characteristics of your business, given the nature of the just-in-time delivery, the customer base, or anything about how you guys are doing things differently that we should be thinking about that would lead to more or less pronounced seasonality relative to the industry? Normally, we think of 4Q as kind of the biggest step up. Is that the right way to think of it as we kind of parse out the back half, implied guidance, 3Q versus 4Q, or is it potentially going to be a little bit more evenly spread for you guys for some reason?

Speaker 3

Yeah, I appreciate the question, Rich. Good to talk to you. This is really early days in the commercialization of our technology. We've had really good early traction. When we think about the procedures themselves, the patient population that we treat is the same patient population for spine surgery. We would anticipate the macro trends of spine surgery procedure to be generally applicable to Carlsmed.

Speaker 2

Great. I think you said that your surgeon training was ahead of your internal plan, as was the utilization per surgeon. Can you just benchmark us? What's your surgeon installed base or the number of new surgeons that you've either trained in the first half of 2025, however you want to convey that? How should we think about the number of docs you plan to train for 2025? Anything you want to say going forward.

Speaker 3

Thanks, Rich. We did outpace our plan internally through the first half. We had 47 new surgeons added, which got us to 199 exiting the first half. As we continue to make further investments in our education program, actually really excited to talk about some of the education initiatives that we're doing. We talk about the surgeon population that is really excited about this technology and has given a really great retention rate to us. We've launched our fellows training program, which has been very successful in really training the next generation of future surgeons, as well as we'll soon announce our center of excellence that we've launched with the program in conjunction with UCSD, which will include now live surgery observation that we can bring surgeons through for the training program.

Speaker 2

Okay, thanks. I'll jump back in.

Speaker 4

Thank you. Our next question comes from the line of Ryan Zimmerman from BTIG. Your question, please.

Speaker 2

Good afternoon, and congrats on your first quarter here as a public company. If I could ask a little bit more on guidance, Leo, you know, pricing came in a little bit better, I think, than maybe we expected, and that, you know, some combination of multi-level lumbar fusions you're seeing. I appreciate your color on pricing, but maybe what's underpinning kind of the high and the low end of, or what's the swing factor in that low and high end of guidance there?

Speaker 5

Yeah, thank you, Ryan. This is Leo. When you think about our average revenue per procedure, it's underpinned by a fixed pricing schedule. What really ends up driving the average revenue per procedure are the levels treated in the patient and from time to time some ancillary items like screws that are part of our overall revenue per procedure. On a blended basis, as we've mentioned, it's a relatively constant amount, quarter over quarter. Historically, it's been averaging around $30,000 of average revenue per procedure. We expect that to roughly be the same as we think about future growth of the business in aprevo lumbar.

Speaker 3

Okay. That's very helpful. Two other quick ones from me. Mike, as you prepare for this launch in cervical, how are you de-risking that? What are you doing? What should investors know as you prepare for that launch in 2026 that you've learned from maybe, say, the lumbar launch of aprevo? Just one quick follow-up. Yeah. Appreciate the question, Ryan. Lots of things to talk about on cervical. As we previously reported, we have 510(k) clearance now on the interbody, both interfixated and non-interfixated. We recently, just last week, submitted 510(k) for the personalized cervical plate, which will be available in both a segmental and multi-level plate configuration. We anticipate clearance and full launch of the platform in the first half of 2026.

With the recent announcement from Medicare that we are receiving a New Technology Add-on Payment for the cervical platform that goes into effect Q4, we also have preliminary feedback from Medicare with a transitional pass-through payment that would go into effect in Q1. Having the product, the technology, the advancements we've done in the digital production system, and the Salesforce training all in place, we will be well suited for a successful launch in the first half of 2026. Yeah. Very helpful. Just the last quick one for me, I'll sneak it in. Leo, you mentioned something about artificial intelligence costs and NVIDIA is so topical. I'm just curious, is that something you guys have? I'm curious if you have a sense of what the cost would be, if that's additive or anything like that in your P&L, just because I know those things are not cheap.

Just curious if those artificial intelligence costs are going higher, maybe a little more than we contemplated.

Speaker 5

No, we don't expect there to be an investment that disproportionately affects our P&L. Any investment we make in artificial intelligence ultimately translates to the scalability of our business as we think about the increased procedure volume over time and the ability to use our current label for use of artificial intelligence in case design in greater proportion to the number of cases that deploy that technology. Any investment in AI we see an equal or better offset, of course, in the long-term human labor costs for case design.

Speaker 3

Yeah, okay. Appreciate taking the questions. Thank you.

Speaker 4

Thank you. As a reminder, ladies and gentlemen, if you do have a question at this time, please press star one-one on your telephone. Our next question comes from the line of Matthew O'Brien from Piper Sandler. Your question, please.

Speaker 0

Hi there. This is Ana on for Matt. Thanks for taking our questions. Just two from us. I hate to ask another guidance question, but if you look at the back half of the guide, even the high end of the range implies a sequential deceleration in your revenue growth rate. I was just wondering if you could sort of speak to what's driving the guide there as it relates to your performance in the first half and what you've seen historically. I have a follow-up.

Speaker 5

Yeah. This is Leo. The law of larger numbers in terms of absolute percentage performance definitely becomes a little higher bar to achieve. From a nominal dollar perspective, obviously, the growth is quite substantial compared to the second half of 2024. At the high end of the guidance, of course, 75% growth over 2024 with that $47.5 million top end of the range. We see ongoing demand for our business within aprevo lumbar and, of course, the cervical opportunity in 2026 combining for yet a larger TAM than the massive one that we currently have within lumbar of over $13 billion. As you recall, we have over 4,000 active spine surgeons doing lumbar fusion procedures, of which, with our recent additions, we've reported 199 active surgeons as of June 30th using aprevo lumbar.

We have a great opportunity ahead of us to further capture the market share and ultimately a proportion of that TAM that will translate to long-term growth in our business.

Speaker 0

Got it. Thank you. That's super helpful. I guess just switching to reps, I know you've mentioned in the past maybe roughly doubling the sales force over the next couple of years. I was just wondering how long it takes for a rep to reach full productivity and how you see, sort of new rep additions as you try to go after more surgeons.

Speaker 3

Yeah, I think that's a great question. We have a very effective commercial channel. We really think about it in the three pillars of our business: pre-op, intra-op, and post-op. That's how we've aligned our commercial channel. As we've discussed in the past, we do have a hybrid sales force where we have sales agents that are contracted that are in every procedure. That gives us leverage and a broad footprint to be able to service the entire continuity of the procedure. We're able to digitally work with all surgeons in the planning phase and have a very effective sales force that supports the surgeons before they go into the operating room. In the operating room, we're able to leverage our sales agents to support the cases.

What that does is give us broad coverage to be able to go both deeper into current surgeons' accounts by giving them support through the entire patient cycle, as well as the opportunity to scale with our independent sales agent force.

Speaker 0

Great. Thanks, and congrats on the quarter.

Speaker 3

Thank you.

Speaker 4

Thank you. Our next question is a follow-up from the line of David Roman from Goldman Sachs. Your question, please.

Speaker 2

Thank you. I appreciate you taking the follow-up. Just one for me. Maybe just to take a step back and contextualize the outlook for the rest of the year in the business model here. Maybe it's helpful to reflect on how you tie surgeon adds to future revenue performance. Is the right way to think about the revenue for the back half of the year? I appreciate that there's a seasonality component to it. As we think longer term or the time it takes to get a physician up and running, is Q3 revenue effectively the result of the surgeons you had at really March 31 and the ones you gain over between in the second quarter really become productive in Q4? Can you help us think about that kind of ramp-up period for physician or how to tie physician adds to forward revenue?

Speaker 3

Thanks, David. I think that's a good question. We do have a surgeon-based revenue forecast. As we continue to accelerate our surgeon adds, it does drive the forward quarter revenues. As we really think about the time that it takes to onboard, train a surgeon, and then ultimately get to productivity, I think you're thinking about this the right way. New surgeon adds in a current quarter drives continued revenue scale in forward quarters.

Speaker 2

Great. Thank you.

Speaker 4

Thank you. This does conclude the question and answer session, as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.