OrthoPediatrics - Q1 2023

Transcript

Operator (participant)

Good morning, and welcome to OrthoPediatrics Corp.'s first quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. We'll be facilitating a question-and-answer session towards the end of today's call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Trip Taylor from the Gilmartin Group for a few introductory comments.

Trip Taylor (Investor Relations)

Thank you for joining today's call. With me from the company are David Bailey, President and Chief Executive Officer, and Fred Hite, Chief Operating and Financial Officer. Before we begin today, let me remind you that the company's remarks include forward-looking statements within the meaning of federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous risks and uncertainties, and the company's actual results may differ materially. For a discussion of risk factors, I encourage you to review the company's most recent annual report on Form 10-K, which was filed with the SEC on March 1st, 2023. During the call today, management will also discuss certain Non-GAAP financial measures, which are supplemental measures of performance. The company believes these measures provide useful information for investors in evaluating its operations period over period.

For each Non-GAAP financial measure referenced on this call, the company has included a reconciliation of the Non-GAAP financial measure to the most directly comparable GAAP financial measures in its earnings release. Please note that the Non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for OrthoPediatrics' financial results prepared in accordance with GAAP. The content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast today, May 2nd, 2023 Except as required by law, the company undertakes no obligation to revise or update any statements to reflect events or circumstances taking place after the date of this call. I would like to turn the call over to David Bailey, President and Chief Executive Officer.

David Bailey (President and CEO)

Thanks, Trip. Good morning, everyone, and thank you for joining us on our first quarter 2023 conference call. As we start all earnings calls, I'd like to begin by highlighting that we helped over 19,000 children in the first quarter of 2023. Since inception, and with the additions of MD Orthopaedics and Pega Medical, we have now helped almost 650,000 kids. Doing the right thing for children remains our top priority. In the first quarter of 2023, we generated revenues of $31.6 million, representing growth of 35% compared to the first quarter of 2022. We're encouraged by the better-than-expected revenue growth and a strong start to the year. As we've discussed, the record high levels of RSV cases in the back half of 2022 remained a headwind early in Q1, but eased as the quarter progressed.

Staffing shortages also continued to negatively impact children's hospitals throughput. We continue to expect some staffing headwinds throughout the year. Despite the challenging environment, we continue to execute our strategy and deliver strong results across both the trauma and deformity and scoliosis businesses. The main drivers in the quarter included elective limb deformity correction and scoliosis procedures, combined with very strong contributions from MD Orthopaedics and Pega Medical. Organically, domestic growth outpaced international growth, which underperformed slightly due to timing of set purchases by stocking distributors and ongoing FX impacts. We expect the international business to improve in Q2 and throughout the year as underlying demand remains strong. We are extremely pleased with the start of the year and believe we are well-positioned strategically to continue our successful growth story.

We are increasing our revenue guidance for the full year to $148 million-$151 million, representing growth of 21%-23% compared to 2022. Despite our Q1 success, we remain cautiously optimistic heading into the second quarter as staffing dynamics remain unpredictable and could impact our hospitals' ability to meet the rising summer demand and typical seasonality usually experienced late in the second quarter and throughout the summer. Given the difficult comparison to the second quarter of 2022, until we see tangible evidence of structural improvements within the pediatric market, we will remain conservative with our outlook. Moving to our revenue segment. In the first quarter of 2023, we generated total trauma and deformity revenue of $23.4 million, representing growth of 42% compared to the prior year period.

This included combined global revenue of approximately $4.8 million for MDO and Pega Medical. Revenue growth in the quarter was driven by strong performance from MDO and Pega and the return of elective limb deformity correction procedures offset by trauma softness that we saw rebound in March. Trauma and deformity correction products, particularly Defoce, PediPlates, PNP Femur, and cannulated screw sales were strong in the quarter. Demand for our products remains high as we continue the pace of market share gains across the entire trauma and deformity portfolio. Now that MDO and Pega have been fully integrated, we continue to be pleased with our ability to accelerate growth in each franchise and their contributions to overall growth. With respect to MDO, the addition of new products in existing markets and expansion into new markets is bolstering the organic growth.

We are excited to launch new products and expand the MDO portfolio. The pipeline of new products and launch cadence within our nonsurgical franchise represent a compelling opportunity, which I'll provide more detail on shortly. For the Pega Medical product portfolio, Pega product sales grew at a very rapid pace in the first quarter, exceeding our initial expectations. The growth of the products has come almost entirely due to expanded surgeon access, as the existing sets are now supported by a higher percentage of our sales force that is fully trained. We have yet to see a major impact from new sets in the U.S., however, in the second quarter, we plan to launch several new Pega sets alongside a significant deployment of OP legacy products such as PMP Femur, cannulated screws, and DRIVE Rail.

MDO and Pega have advanced our leading strategic position in pediatric trauma and deformity by allowing us to further surround our customers with a comprehensive portfolio of products that meet all their patient needs. The OP team has done a tremendous job ramping up growth in these franchises as we leverage our global commercial footprint. We continue to expect each of these franchises will drive revenue growth in excess of our normal 20% organic corporate growth rate in 2023. Moving to the scoliosis business. In the first quarter of 2023, we generated revenue of $7.1 million, representing growth of 18% compared to the prior year period, highlighted by very strong domestic revenue growth of 23%. This performance reflects a steady improvement in the elective surgical environment and continued share gain with RESPONSE and ApiFix.

International revenue blunted overall growth by a few points due to a tough comparison and timing of certain international set orders. We expect this to be temporary and to become a tailwind for growth for the remainder of the year. We're pleased to see the value proposition of the combination of ApiFix, 7D, and RESPONSE comprehensively addressing surgeon needs and driving market share gains. Total users in Q1 increased meaningfully compared to the prior year period. We continue to see strong incremental RESPONSE fusion growth in new accounts where we've either deployed 7D units or where surgeons have started using ApiFix. ApiFix grew in the first quarter despite clinic visits negatively affecting scheduling early in the quarter. As a result of scheduling challenges, many ApiFix have been pushed into the second quarter.

We continue to make progress on the development of ApiFix's clinical data, which will lead to stronger KOL support and podium presence. At the recent POSNA meeting, positive one year follow-up data from 54 patients was presented, highlighting the early U.S. experience. We continue to expect more surgeons will become increasingly comfortable with where ApiFix fits into their practices as the U.S. data matures and is presented at scientific society meetings. Late in Q1, we received FDA approval for the RESPONSE cannulated screws and performed our first case in March. Surgeon feedback was very positive. We expect this system to improve outcomes for patients with neuromuscular scoliosis requiring pelvic fixation. The early deployment of RESPONSE Power and disposable torque limiters is underway. We believe these line extensions will continue to support share gain momentum within the scoliosis fusion portfolio.

Overall, surgeons and children's hospitals are increasingly attracted to our RESPONSE Fusion system, deploy 7D intraoperative navigation system, and add new users of ApiFix. All of this is leading to share gain. We expect that to continue as we execute. Moving on to international. In the first quarter of 2023, we generated international revenue of $7.8 million compared to $5.2 million the prior year period, primarily driven by MDO and Pega contributions in the trauma and deformity business. The timing of legacy set purchases, large scoliosis orders by stocking distributors, and the ongoing FX dynamics negatively impacted our international sales. Demand for our products remains strong. We expect the international performance to improve in the second quarter and throughout the remainder of the year. Turning to new product development.

The first quarter proved to be a very successful quarter for R&D and new product development. We received FDA approvals, advanced full-scale product deployments, launched new products, and made meaningful progress on several long-term product development initiatives. We believe each of these accomplishments represent incremental opportunities to drive market penetration and share gains as their launches expand. Within the trauma and deformity business, we initiated the full-scale deployment of our new external fixation product, Drive Rail. It includes a unique integrated lengthening mechanism, hinge options to span a mobile joint, and is designed to integrate with the ORTHEX system. We expect a large volume of sets of Drive Rail to be deployed in the second quarter. Additionally, we received 510K FDA approval for our ORTHEX pre-planning software and are in the process of a full-scale domestic launch.

This technology will assist surgeons in efficiently and precisely planning their ORTHEX cases based on prior case data and advanced imaging. Finally, the R&D team made solid strides in the development of PMP Tibia and an entirely new pediatric-specific plating system. Inside the Pega franchise, we received our first FDA 510K approval since the acquisition last July for a new product in the guided growth area called GIRO. We expect to begin the beta launch of GIRO in the next several weeks. Beyond GIRO, we're busy introducing the entire product portfolio to surgeons around the world through our global sales organization. We're treating these introductions as new launches because we found many customers are being educated about the Pega products for their first time.

With a heavy deployment of inventory on the way, we are excited about all their growth prospects. On the nonsurgical specialty bracing side, our MDO team executed the beta launch of the Mitchell Ponseti Move Bar in March, and we expect the full launch to take place in the second quarter. The MP Move Bar further expands our market-leading position in nonsurgical clubfoot treatment and expands the use profile of the gold standard Mitchell Ponseti clubfoot brace. This is particularly meaningful as it also represents the first major new product introduction in several years for the MDO franchise and is the first of several to come. Also within the nonsurgical bracing franchise, we've completed the development of the DF2 femur fracture brace and will be conducting a beta launch in the second quarter.

On the scoliosis front, as mentioned, we received 510(k) FDA approval for the RESPONSE cannulated screws and performed our first case in March. We expect this system will expand the use of our first of its kind RESPONSE Neuromuscular System that was launched in 2021. In addition, we kicked off the early rollout of RESPONSE Power and disposable torque, which will make both screw placement and final tightening much easier for our customers. Beyond all of this, we continued great progress on our longer-term development within our early onset scoliosis initiative, such as guided growth, ribbon pelvic, and our growing rod. Finally, I want to briefly discuss a bolt-on acquisition we closed yesterday. We've acquired an enabling technology platform called Medtech Concepts. Medtech Concepts is an early-stage pre-commercial platform designed to increase efficiency in the perioperative environment.

The solution combines hardware, software, and data analytics to help streamline operative care and support better decision making in the operating room. In the future, we believe this platform will provide valuable intraoperative resources for surgeons that will improve decision making, drive OR efficiency, and ultimately improve healthcare for kids. We don't expect material revenue contributions from the platform in 2023, we view this as an opportunity, much like 7D and FIREFLY, to continue to support market share gains for our implant systems in the years to come. We are excited to welcome to our team the Medtech Concepts founder, Kevin Unger, who was previously a 10-year member of the OP board of directors. Kevin has stepped down from the board and has joined us full-time as an OrthoPediatrics employee. On behalf of the entire board of directors, I'd like to thank Kevin for all his contributions.

We look forward to working with him to drive our enabling technology strategy. That brings us to surgeon training and education. Critical to our success is an unwavering commitment to support pediatric orthopedic clinical education and training and to help train the next generation of pediatric orthopedic surgeons. In the first quarter, we grew the number of hands-on training sessions conducted for healthcare providers from 70 in the prior year period to over 85. We also conducted nearly 250 product sessions. Combined, we reached over 950 individuals on a global basis. Furthermore, we were a leading supporter of the IMASS course in Dublin, Ireland, where discussions took place about the most complex pathology facing pediatric scoliosis surgeons. Also during the first quarter, we were once again the largest contributors to the European Paediatric Orthopaedic Society, or EPOS course, held in Kraków, Poland.

That course was attended by nearly 800 pediatric orthopedic surgeons. We held a symposium on osteogenesis imperfecta, or OI, moderated by our own medical director and pediatric orthopedic surgeon, Dr. Scott Hoffinger. OI is one of the most challenging surgical problems pediatric orthopedic surgeons face. The presentation highlighted case studies and engaged EPOS attendees in discussion of their experiences and best practices. Just last week, we attended our largest industry meeting, POSNA, which was attended by over 1,000 pediatric orthopedic surgeons. We are very excited to have unveiled a new, larger, and longer-term commitment to this prestigious society and its membership. This new multiyear commitment is of the highest level and continues to establish OrthoPediatrics as the clear leader in supporting pediatric orthopedic clinical education and training.

We believe it is our responsibility as the market leader to do everything we can to support our surgeon partners in the collective effort of advancing the entire field of pediatric orthopedics. In a way, this may be our greatest contribution of all. With that, I'll turn the call over to Fred to provide more detail on our financial results. Fred?

Fred Hite (Chief Operating and Financial Officer)

Thanks, Dave. Our first quarter 2023 worldwide revenue of $31.6 million increased 35% compared to the first quarter of 2022. Growth in the quarter was driven primarily by continued share gains across our legacy portfolio as well as contributions from MDO and Pega Medical of $4.8 million. In the first quarter of 2023, U.S. revenue was $23.8 million, a 31% increase from the first quarter of 2022. Growth in the quarter was primarily driven by organic growth in trauma and deformity and scoliosis products as we continue to deploy more sets and increase surgeon adoption, as well as the addition of MDO and Pega Medical. In the first quarter of 2023, we generated total international revenue of $7.8 million, representing growth of 49% compared to the prior year period.

Growth in the quarter was driven primarily by the addition of MDO and Pega Medical, as well as increased procedure volume across the majority of our OUS regions. This growth was partially offset by the ongoing negative impact of FX on our international sales. In the first quarter, trauma and deformity revenue of $23.4 million increased 42% compared to the prior year period. Growth in the quarter was driven primarily by a gradual norm selective surgical environment, as well as the addition of MDO and Pega Medical. In the first quarter of 2023, scoliosis revenue of $7.1 million increased 18% compared to the prior year period. Growth was primarily driven by increased sales in the U.S., offset by lower year-over-year set sales to our international stocking distributors as they temporarily manage their cash positions.

We expect this OUS trend to reverse for the remainder of the year. Sports medicine other revenue in the first quarter of 2023 was $1.1 million, which increased 22% compared to the prior year period. Turning to set deployment, $3.0 million of sets were consigned in the first quarter of 2023, compared to $3.9 million in the first quarter of 2022. Touching briefly on a few key metrics. For the first quarter of 2023, gross margin was 74.6%, compared to 79.3% in the first quarter of 2022. The slight decline in gross margin was primarily driven by favorable purchase price variances in the first quarter of 2022, which did not repeat in the first quarter of 2023.

Total operating expenses increased $7.2 million or 29% from $25.0 million in the first quarter of 2022 to $32.2 million in the first quarter of 2023. The increase was driven by the addition of MDO and Pega Medical, as well as incremental personnel required to support the ongoing growth of the company. Sales and marketing expenses increased $2.5 million, or 25% to $12.2 million in the first quarter of 2023. The increase was driven primarily by increased sales commission expense, coupled with the addition of our recent acquisitions. General and administrative expenses increased $4.5 million, or 34% to $17.7 million in the first quarter of 2023.

The increase was driven primarily by the addition of MDO and Pega Medical, as well as the personnel and resources to support the continued expansion of the business and an increase in non-cash G&A expenses, including depreciation, amortization, and stock-based compensation. Research and development expenses increased $0.2 million or 12% to $2.3 million in the first quarter of 2023. Total other income was $1.2 million for the first quarter of 2023, compared to a $3.0 million expense for the same period last year. In the first quarter of 2023, we recognized a gain on the fair value adjustment of contingent consideration as compared to a charge in the first quarter of 2022.

We reported an adjusted EBITDA loss of $2.1 million in the first quarter of 2023, compared to a loss of $1.6 million for the first quarter of 2022. We ended the first quarter with $109.2 million in cash, short-term investments, and restricted cash. We maintained a strong cash position and $50 million available on our line of credit. Turning to guidance, we now expect full year 2023 revenue to be in the range of $148 million-$151 million, representing year-over-year growth of 21%-23% compared to our prior expectations of $146 million-$149 million.

The guidance assumes roughly $7.0 million of revenue contribution from MDO and Pega Medical before the acquisitions became organic on their anniversaries. We expect organic growth of 15%-18%. Lastly, we plan to deploy around $25 million of new sets in 2023, representing a year-over-year annual growth of 24%. Additionally, we continue to expect to generate between $3 million-$4 million of adjusted EBITDA in 2023. I'll now turn the call back over to Dave for some closing remarks.

David Bailey (President and CEO)

Thanks, Fred. Following our successful first quarter, kicking off our 17th year as a company, I want to remind everyone that a culture and cause dedicated to impacting the lives of children is attracting the best and brightest and still underpins all of our success. Our shared cause and commitment to improving the lives of children with orthopedic conditions has fostered a culture that has again been recognized and awarded as a top 100 employer in the state of Indiana, a distinction unique to Warsaw-based medical technology companies. We are proud OP has received this recognition for the 7th time. As shareholders, you should be proud of your continued support of a company that not only does so many great things for children, but continues its commitment to corporate social responsibility. With that, I'll turn the call back to the operator to open the line for any questions.

Thank you.

Operator (participant)

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

Rick Wise (Managing Director)

Good morning, gentlemen, and great to see the solid recovery and rebound. Maybe just starting from that perspective, Dave, maybe talk to us about or Fred, talk us through the quarterly flow, maybe just at a high level, talking about the U.S. and the international separately, talk about the quarterly flow of recovery, and maybe how the second quarter is starting off. Do you feel like at a high level, are we back? Are volumes where you, they need to be? Your confidence in the, you know, looking ahead to the rest of the year, and maybe most particularly this international, why so confident on the international rebound? I know there's a lot there, but thank you.

David Bailey (President and CEO)

Hey, Rick. Thanks. Yeah. I think as we think about the flow of the quarter, what we saw during the quarter, and I think what we'll probably see continuously here for a while until things at a macro level get completely normalized, there's still a bit of chop, kind of month to month, a little bit of choppiness, obviously producing really great growth in the end. But it hasn't been what I would call super stable from day to day, from month to month. Certainly affected by the waning portion of RSV in the first part of the quarter, followed by, I would say, a much, much more normalized environment when it comes to, you know, respiratory illness. I think that's out of the news as we're all seeing.

We have not seen the improvement that I think some other companies are reporting on the adult side in children's hospital throughput. We still remain hampered throughout the quarter with surgeons' capacity to be able to get OR time and get particularly elective procedures through, despite, you know, the elective procedures really driving strong performance for us. I think our guide still anticipates that we will have, you know, staffing challenges throughout the year. Like I said earlier, I think until we see really structural change that's sustainable, we wanna remain pretty conservative with respect to what we see, particularly as we enter here into a second quarter where, you know, we have a pretty tough comp. If you remember last year, we did very, very well.

We left Q2 thinking everything was completely normal. Obviously it wasn't in the back half of the year with RSV and staffing. You know, until we see staffing situations change, I think fairly consistently, you know, we just remain optimistic but a bit cautious about our hospital's capacity to move a lot of the elective cases through in the really busy summer months of June, July, and August. Last thing I would comment on related to the international. International, you know, obviously grew very substantially and but primarily because of MDO and Pega. But the demand for products, particularly on the Skulli, really high.

I would say, you know, we were a little disappointed that international wasn't better, but it was, I think, entirely due to some timing, not just of set orders, but even a couple big restock orders, particularly on the Skulli side. That's not demand that's going away. We've got a pretty good look at what Q2 looks like. You know, I think we feel really confident about how international could impact the business positively through the last 3 quarters of the year.

Rick Wise (Managing Director)

That's great color. Maybe just keeping it high level, Fred, you've always been great about helping us think through the quarterly seasonal flow here. You've started off better than expected. Your, you know, you have a nice beat and raise, et cetera. How would you have us think about the second quarter, particularly from a revenue perspective and how it plays out for the rest of the year?

Fred Hite (Chief Operating and Financial Officer)

Absolutely, Rick. We're still anticipating the third quarter being our largest quarter of the year, followed by the second quarter just below that, the fourth quarter is lower than the second quarter. That's all assuming the summer kind of season plays out the way we anticipate it to be. We'll see. Right now, there's no indication that it shouldn't play out that way. You know, in June or July actually is the largest month, followed by June and then August when the kids are out of school, really drives the Skulli business as well as the severe deformity correction surgeries, we would anticipate that happening again this year.

Rick Wise (Managing Director)

Right. Just sorry to sneak in one more here, just to make sure I understand. Your comment about the second quarter, I totally get what you're saying. Obviously, you have MDO and Pega this year, you didn't. Can the business ex that, those additions grow year-over-year? Or, should we expect you're still gonna report positive growth? How do we think about the second quarter, you know, number from a dollar perspective, Fred?

Fred Hite (Chief Operating and Financial Officer)

I think to Dave's point, first quarter of last year, COVID negatively impacted the first quarter. That kind of went away. The second quarter sprung back to what we thought was a normalized or very aggressive number. We had great growth on the domestic side as well as the international side. We kind of thought everything was back to normal. Growth slowed in the third and fourth quarter as RSV started filling up the children's hospitals. I think Dave's just calling out, you know, a tougher comp because the second quarter was so strong. We'll still have growth on the organic side, excluding MDO and Pega, which are obviously gonna add tremendous growth to the business, just a tougher comp than the third and fourth quarters.

Rick Wise (Managing Director)

Gotcha. Thank you so much.

Fred Hite (Chief Operating and Financial Officer)

Thanks, Rick.

David Bailey (President and CEO)

Thanks, Rick.

Operator (participant)

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

Ryan Zimmerman (Managing Director)

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

Fred Hite (Chief Operating and Financial Officer)

No, listen, we're very pleased with both MDO and Pega. Tremendous year-over-year growth from their organic numbers. We anticipate that will continue. As we stated earlier, last year that the growth is not gonna be explosive like 50%, but it's gonna be very strong in higher than the 20% range. I think you're pretty close on what we would anticipate for the year here in 2023. As we continue to get sets deployed throughout the year, feel very good about growth continuing very aggressively into next year, both of those businesses.

David Bailey (President and CEO)

Yeah, Ryan, I think what I was most enthused by, particularly on the Pega side, is to see the way the growth came in, particularly domestic, and really just that's the impact of the U.S. selling organization. You know, we don't have a ton of sets in the field at this stage. Obviously we're launching, you know, week to week, month to month, we're getting more sets out, but kind of a big bolus has not been out there, so it's not sets that is necessarily driving this. It's pure surgeon demand.

Kudos to, you know, the commercial team, particularly in the U.S., because I think surgeons instantly started calling that group and feel much more confident with that group and, yeah, I'm just really proud of how the domestic sales force has performed here and, you know, get them some inventory. You know, I think the next three quarters really be strong. Really, the next several years could be really strong for the PEGA products.

Ryan Zimmerman (Managing Director)

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

David Bailey (President and CEO)

Yeah. It is our hope that we make up what we saw backlogged in, let's say, in late Q3, Q4, throughout the balance of 2023. I think that, you know, again, our guide is fairly conservative on this point. You know, we just got back from POSNA, we just got back from EPOS. It's pretty consistent what we're hearing from customers is just, as I pointed out earlier, tough to get the appropriate volume of OR time required to get through a normal case log, much less backlog. It's tough for us to forecast that.

I think what we saw in Q1 is certain products, and, you know, for example, the deformity correction side of our trauma deformity business performed really well, and that was a bit of a turnaround from what we'd seen in the first few quarters. It was offset by some softness and trauma that didn't make much sense, but then rebounded really aggressively in March. Like I said to Rick earlier, it's overall, you know, everything's directionally going well, but I think the chop from month to month on, in the elective and even, for a couple months there, the trauma environment makes it difficult for us to say that we know this is all gonna come back in Q2. I'd say, you know, it's over the next year where we'll probably pick up that additional volume.

Ryan Zimmerman (Managing Director)

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

Fred Hite (Chief Operating and Financial Officer)

Thanks, Ryan.

Operator (participant)

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

Speaker 8

Hey, this is Phil on for Matt. Congrats on the quarter and thanks for taking our questions. Just for starters on guidance, raised by $2 million here, which, you know, amounted to the beat and is seemingly coming from MDO and PEGA. The organic guide remains the same. I think historically you've indicated your desire to be a 20% organic grower in, call it, normal market conditions. Can you walk us through the structural differences here between adult and children's hospitals? You know, results from your adult counterparts indicate that, you know, at least volumes on the adult side are coming back in a big way, and one might the children's hospitals see something similar to that.

David Bailey (President and CEO)

Yeah, I think I'll address the structural. Fred, maybe if you wanna talk about the way that we see the next 3 quarters going from a revenue standpoint. I think there is a difference between the staffing situations that we see in children's hospitals and adult hospitals, particularly on some of the more common procedures performed. You know, we lost a lot of staff in children's hospitals that were very specialized, that were extremely well-trained, and many that had been in the OR for a long time. For example, if you're gonna do a multi-hour scoliosis fusion procedure on a neuromuscular scoliosis patient, that is about as complicated as a surgical procedure as you're gonna have.

When you lose staffing there, it's pretty difficult to plug even a traveling nurse or staff member into that environment and maintain the same level of efficiency. We've monitored this quite aggressively in accounts where we have extremely high share and looked at a pre-COVID level versus where we're at now, and we're just not the throughput is just not there yet. Obviously, we're getting reports that, you know, healthcare providers are coming back into the workforce. I know our hospitals are working hard to train up their staff. You know, if you do a ton of total knees, a ton of total hips, it's easier to get that kind of repetition going for staff members and bring people up to speed.

The procedures we do involve specialized care. It's a specialized care team. When you lose even one person, much less several people from that team, the efficiencies change. I think that's why our commentary on this is definitely different than what we are hearing from our adult counterparts.

Fred Hite (Chief Operating and Financial Officer)

Yeah. I would just add that, you know, it feels like the second half of last year was really the COVID for the children's hospitals. If you think back on what created the staffing issue to start with, it was really COVID several years ago in the adult hospitals and those nurses being completely overwhelmed, not just nurses, but overall staffing being completely overwhelmed. I think that was, for us, the second half of last year. The fourth quarter, the volume was just crazy. Nurses, you know, were working crazy hours and there was, from what we're hearing, a lot of vacation and kind of catching your breath here in the first quarter, for a lot of the staffing support.

They're just not getting the same throughput, as they're dealing with some of that, which is definitely different, I think, than the hospitals, on the adult side.

Speaker 8

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

David Bailey (President and CEO)

Yeah, great question. Yeah, we are very pleased to have an opportunity here to take on this digital asset Playbook. Certainly pleased to have Kevin join the team, who's a very seasoned veteran in digital health as well as on the implant side. Rare to find a combination of those things. You know, I think what we see, and it's a similar phenomenon that we see with our partnership with SeaSpine on the 7D side, that there are really no companies aggressively addressing the unique digital needs of children's hospitals.

Certainly just like we talked about staffing, I mean, the needs in terms of workflow, the complexity of these surgical procedures and frankly, the data capture, to help drive better decision-making, particularly about procedures that, you know, aren't as high volume, let's say, as total knee or total hip, where there's gold standards applied. I think long-term, that's where we see Playbook having a lot of value for our customers. You know, our goal here is to be able to take preoperative data, infuse that preoperative data in an intraoperative a suite of intraoperative solutions to help our customers make better decisions.

Ultimately, to be able to capture data such that our customers can use that and correlate that against their preoperative outcomes and ensure that they get better, they're making better decisions and driving better outcomes for kids. We don't see anybody doing that at all anywhere. The opportunity to develop software and a hardware that meets kind of the unique needs of pediatric orthopedics versus where we see these technologies so frequently being used in adult hospitals, where it's repetitions, repetition surgery, hips, knees, those types of things. We think there's a huge value add for us. Again, it's not gonna be overnight. This is a long-term play for us, but we like the entry point, and we think this could have a big impact in terms of long-term share gain for the business.

Speaker 8

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

David Bailey (President and CEO)

Thanks, Phil.

Operator (participant)

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

Mike Matson (Senior Equity Research Analyst)

Thanks. Thanks for taking my questions. Congrats on the quarter. I guess, you know, just starting with the set placements, you know, the looks like the numbers were down a bit from the 1st quarter of last year. Just wanna gauge your confidence in the ability to hit the guidance for the year there.

Fred Hite (Chief Operating and Financial Officer)

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

Mike Matson (Senior Equity Research Analyst)

Okay, thanks. Just one product related question in scoliosis. The RESPONSE Power disposable torque, you know, just want to learn a little bit more about that. I assume you're not selling the actual powered tools, but just the attachments or something. Maybe you could just provide some more detail on that.

David Bailey (President and CEO)

Yeah, that's exactly right, Mike. You've got it just right. We have our customers have always placed our screws manually as well as set screws manually. It's a painful process, particularly when you've got 24 screws and you're providing the torque required manually. This is something we've been working on for a number of years. We've had a number of our for a few years. We have a number of our customers that, you know, get into a spot where there's a recognition that the strain that's on their elbows, strain on shoulders, pretty tough. This makes the implantation of our response system much more efficient, easier on our physicians.

You're right, it's a kit of instrumentation that allows surgeons to more clearly power screws in as well as set screws. It applies to BandLoc as well as our small and standard stature response fusion systems.

Fred Hite (Chief Operating and Financial Officer)

Okay, got it. Thank you.

Operator (participant)

Thank you. Our next question comes from Samuel Brodovsky with Truist. Your line is open.

Samuel Brodovsky (VP, Equity Research)

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

David Bailey (President and CEO)

Yeah, I would expect that, the Pega would most likely, nearly mirror the seasonality of our business. Although again, we'll see. We haven't gone through a full summer with Pega before. It may not be as seasonal just because, you know, you're born with osteogenesis imperfecta, so it's not, it's not a condition that, you know, as is as elective maybe as our scoliosis franchise. I think MDO probably has less seasonality overall. I mean, obviously it's applied shortly after birth. Maybe some seasonality there, but maybe a little less seasonality than we've seen with our, particularly our scoliosis franchise.

Samuel Brodovsky (VP, Equity Research)

Yeah, that's helpful. Then you mentioned some OUS set timing items in the quarter and that potentially driving accelerated growth through the next 3 quarters of that. Should we think about this sort of being a low bar in terms of growth OUS for the year, or is there other things to contemplate there? Thank you.

Fred Hite (Chief Operating and Financial Officer)

Yeah, no, I would agree that this would be the low bar for the growth rate for the first quarter on an organic basis. Still had a little bit of negative FX impacting us here in the first quarter. We would anticipate that negative impact in the second quarter, and then we're assuming it's a neutral impact in the third and fourth quarter. We see the growth rate organically, internationally picking up in the second, third and fourth quarter as compared to the first quarter rates for sure.

Samuel Brodovsky (VP, Equity Research)

All right. Thanks for taking the questions.

Fred Hite (Chief Operating and Financial Officer)

Thanks, Sam.

David Bailey (President and CEO)

Thanks, Sam.

Operator (participant)

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

David Bailey (President and CEO)

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

Operator (participant)

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