NuVasive - Earnings Call - Q2 2016

Transcript

Operator (participant)

As a reminder, this conference is being recorded. I now turn the conference over to your host, Carol Cox, Executive Vice President, Internal Affairs and Corporate Marketing. Please go ahead.

Carol Cox (EVP of Internal Affairs and Corporate Marketing)

Okay, great. Thank you, Shane. Welcome, everyone, to today's Second Quarter of 2016 Earnings Call. I want to apologize for the technical difficulties that we had. I appreciate everyone's patience, and we'll try to get through this as quickly as we can. Today's earnings release, which we issued earlier this afternoon, is posted on our website as an investor presentation, both of which have been filed on Form 8-K with the SEC. We've also posted supplemental financial information on the IR website to accompany our discussion. On today's call, we will be covering information that is included in the investor presentation, and I encourage you to access these materials so that you can follow along.

Before we begin today, we'd like to remind you that the discussions during today's call will include forward-looking statements, which are based on current expectations and involve risks and 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. Additional risks and uncertainties that may affect future results are described in NuVasive's news releases and periodic filings with the SEC. We assume no obligation to update any forward-looking statements or information which speak as of their respective dates. This call will also include a discussion of several financial measures that are not calculated in accordance with generally accepted accounting principles or GAAP. We generally refer to these as non-GAAP financial measures.

These measures include our cost of goods, gross margin, sales margin and administrative expenses, research and development expenses, operating margin, non-GAAP rates per share, free cash flow, and EBITDA. Reconciliations to the most directly comparable GAAP financial measures can be found in the news release and the supplementary financial information, which are accessible from the investor relations section of the NuVasive website. Joining me on today's call are Greg Lucier, our Chairman and Chief Executive Officer, Pat Miles, our President and Chief Operating Officer, and Quentin Blackford, our Chief Financial Officer. With that, I'll turn the call over to Greg.

Greg Lucier (Chairman and CEO)

Thank you, Carol. Good afternoon, everyone. I'm pleased to report results for the second quarter of 2016 that reflect continued strong execution against our commitments to take market share, expand our operating profitability, and deliver earnings growth as we continue to invest in the business today for future growth. Earlier this afternoon, we reported second quarter year-over-year revenue growth of approximately 16%. During the quarter, we continued to outperform the spine market, delivering double-digit top-line growth for the second quarter in a row. On an organic basis, our revenue grew approximately 9%, in line with our commitment to drive mid to high single-digit growth in our core business and reflecting strength across business lines and geographies.

This strong revenue performance, coupled with year-over-year improvements in our gross margins and continued improvements in our core SM&A spend, drove our non-GAAP operating profit margin higher than our internal expectations, with 60 basis points of expansion to 15.9%, and resulted in a 28% increase in non-GAAP EPS to $0.40 a share. Now, let me elaborate on our Q2 results. Total revenue exceeded our expectations, coming in at $236.2 million. Momentum with our integrated global alignment system, or IGA, continued during Q2, marking the one-year anniversary of the successful launch of our game-changing surgical planning technology. We continue to see strong acceptance of the platform across the core product areas within IGA's strategy. Our results continue to outpace our expectations, with strength across all demographics. The strength of IGA is also driving the pull-through of spinal hardware.

As a result, we had another standout performance in NuVasive's core U.S. spinal hardware business, largely driven by our thoracolumbar business, which was up again double digits year-over-year, as well as continued strength across all procedural categories: posterior lumbar, anterior, lateral, and cervical. We continue to get favorable feedback from prominent surgeons who are adopting IGA. I want to share the feedback I recently received from Dr. Ivan Cheng, who is Associate Professor of Orthopedic Surgery and Neurosurgery up in the Bay Area at Stanford University. Dr. Cheng was an early adopter of our IGA technology, and he praised the benefits the platform is having on his practice. Let me share a recent observation Dr. Cheng passed on to me. He said that, "The utility of IGA has allowed me to minimize the morbidity to patients who have traditionally required significantly more recommendations.

This has had both the clinical and economic benefits to my patients and the hospital." Dr. Cheng's comments echo those of other surgeons who are realizing the benefits of NuVasive's procedurally integrated solutions. Additionally, in the quarter, we benefited from the inclusion of the results from our NuVasive Specialized Orthopedics business, or NSO, for the full quarter, which reflected continued strong growth from our MAGEC and PRECICE products. Over the course of the quarter, we have made significant progress in integrating NSO into NuVasive to capture commercial and operational synergies. During the quarter, we completed the transitioning of the U.S. MAGEC distributors to our own NuVasive Salesforce, allowing us to further integrate the NSO offerings and capitalize on opportunities that the NSO surgeon network is providing.

Based on the progress so far, we remain on track with the integration and expect to achieve the milestones we laid out at the time of the acquisition. In Q2, international revenues grew 33% on a constant currency basis to $37.8 million, or 35.8% as reported, including the contribution of NSO during the quarter. Excluding the contribution from NSO, our core international revenues grew 18.5% on a reported basis. As further evidence that our strategy to concentrate and go deep in each country is taking hold, we also delivered significant sequential acceleration in our core international revenue, with revenue growing 24% sequentially from Q1. With the ramp-up we have seen in growth from Q1 to Q2 and our expectations for the second half of the year, we remain on track to grow our core international revenue by more than 20% for the full year 2016.

In Q2, we successfully drove year-over-year growth in our core direct markets, including Japan, Australia, New Zealand, the U.K., Italy, and Germany. In June, I spent time in several of the European markets meeting with the local management teams alongside Jason Hannon, who took over the international leadership role a year ago. Jason and his team are very impressive and passionate about the business they are building, and they're making great progress in executing against their stated plans. As a result of this work, we saw revitalization in our core NuVasive EMEA markets in Q2, fueled by strong sales in Germany, Italy, and the U.K. Importantly, we're also seeing meaningful initial contributions of thoughtful investments we made in smaller markets such as Belgium, Spain, and South Africa.

We are pleased the localized business plans we put in place in the second half of last year are driving these nice improved results in the European theater. As you recall, our share of the international spine market sits at 4.5%. What this means is that we have a ton of runway ahead of us. Over the coming years, I'm confident we can get bigger in these markets and more than double our market share. As we've been communicating to you this past year, margin expansion is a key element of our efforts to deliver value creation for our shareholders. During the second quarter of 2016, we delivered a 60 basis point year-over-year improvement in our non-GAAP operating profit margin to 15.9%, even as we absorbed approximately 30 basis points of headwinds from the NSO acquisition and approximately 70 basis points from non-cash stock-based compensation expenses versus the prior year.

As we've communicated the last year, we are committed to delivering a nearly 1,000 basis point increase in profitability in the medium term. Clearly, there's a tremendous amount of opportunity in front of us, and the good news is that it's all within our control. The company is in an incredibly unique position today as we create value over the next several years. It's not as if we're working on one particular level. There are multiple levers available to us: Salesforce efficiencies, international scalability, in-house manufacturing, and asset efficiencies. These are all opportunities we can execute on ourselves, and the majority of these are not even dependent on revenue growth. For example, our efforts to achieve 100% in-house manufacturing remain on track with a tremendous amount of work going on at our West Carrollton, Ohio, manufacturing facility.

The phase one build-out of the facility is nearly complete, with initial production expected to start in August. I'm heading there in mid-August to welcome our new members of our workforce and hold our first town hall at the new facility. Today, I'm pleased to be updating several components of our full-year guidance based on a combination of strength we have seen in the first half of 2016 and the inclusion of the Biotronic acquisition, which was closed on July 1, and will be in our results starting now in Q3. We are increasing our full-year 2016 revenue guidance from $928 million to $962 million, representing an approximately 19% increase over 2015 revenue of $811 million, getting us closer to that $1 billion mark sooner than we expected.

At the same time, we are confident with the progress we are making to increase our operating efficiencies, and as a result, we are also increasing our expectation for non-GAAP operating margin to 16%, resulting in approximately 60 basis points of operating margin expansion for the full year, up from our previous expectation of a 40 basis point improvement. With our increased revenue and expanded profitability expectations, combined with an improvement in our full-year non-GAAP effective tax rate, which Quentin will cover in his remarks, we are increasing our full-year 2016 expectations for non-GAAP EPS to be approximately $1.64 versus our prior guidance of $1.48. This new guidance represents a 25% year-over-year versus 2015 non-GAAP EPS of $1.31. Quentin will provide more details in his remarks.

Now, during the quarter, we made progress in several strategic initiatives that allow us to continue to build out our procedural offerings and operate freely as we move the business forward. In June, we announced plans to augment our internal growth and enhance our spine service line partnership offerings for health system customers with the acquisition of Biotronic NeuroNetwork. With the acquisition of Biotronic completed in July, we doubled the footprint of our service business across the U.S. and have grown coverage and capabilities in key complementary markets. We've combined the service offerings of Biotronic with our impulse monitoring business to create NuVasive Clinical Services, which will support more than 75,000 cases annually in the U.S., making it the nation's largest intraoperative neuromonitoring service provider.

With our increased capabilities to support clinical fulfillment through enhanced surgical monitoring and oversight capabilities, NuVasive is uniquely positioned to deliver a consistently high standard of care and increase the breadth of differentiated products and services offered to health systems as they seek to build out their spine service line. Additionally, we reached a definitive agreement with Medtronic to settle over eight years of ongoing patent litigation between the two companies, removing the associated expense of the legal proceedings and providing a clear protocol for resolution of potential patent disputes in the future. Let me be clear: this is a positive resolution for NuVasive and our shareholders, both strategically and financially. First, it removes the overhang of the litigation and allows NuVasive to operate freely in the marketplace, covering our current portfolio and providing for a standstill for future potential products.

Secondly, we were able to settle the litigation for a one-time payment of $45 million, which is significantly lower than our reserve of $88.3 million that we had on our books. The final result is that we can put this behind us, free up some cash, and further focus on what NuVasive does best: bring game-changing innovation to the spine surgery marketplace. As we look to build out the strong momentum from the first half of 2016, we remain focused on three core initiatives: drive innovation that addresses unmet clinical needs and improves the clinical and economic outcomes to our customers; two, drive organic growth in the U.S. and internationally while also pursuing strategic M&A that strengthens our leadership in spine; three, increase profitability through operational excellence. We remain laser-focused on these initiatives and additional opportunities that will allow us to improve our financial profile.

We have very clear pathways to improve our operating profitability, accelerate a meaningful reduction in our effective tax rate, and better convert our increased earnings to free cash flow over the next couple of years. With our recent acquisitions well into the integration phase and tracking to our financial metrics, these opportunities support and enhance our long-term goals for revenue growth, increased profitability, and significant earnings growth. In combination with our increased focus on disciplined spending and improved efficiencies, including a reduction in our CapEx burn rate and targeted increases in our inventory turns, we are confident we can become an even more profitable business with an even more attractive financial profile. Turning to the bigger picture, we continue to see tailwinds for NuVasive: a macroeconomic environment that has stabilized, strong procedural volume, and pricing pressures that can be largely offset with the introduction of innovative products and procedures.

We continue to take market share from the bigger spine players who remain complacent and the small spine players who are getting squeezed out. We are doubling down on our investments to expand our Salesforce, hiring feet on the street and providing our sales reps with world-class spine training, and we remain committed to investing in the R&D necessary to further build out our portfolio to meet the needs of our customers. When we can't do it internally, we will continue to look for strategic tuck-in opportunities that will help us fill out our pipeline and extend our own reach to every aspect along the spine care continuum. We have a very active pipeline that includes opportunities to complement our technology leadership position in spine, targeted geographic expansion, and technologies that make procedures even safer for surgeons and patients, such as imaging and navigation.

As we have already demonstrated, we will remain thoughtful and prudent in our approach to acquisitions and will ensure they meet our stringent financial criteria for investment. In closing, I continue to be encouraged by our results for the first half of 2016, and we are very excited about the remainder of the year. We continue to take share in the U.S. and internationally and are well-positioned to support our ongoing business initiatives and execute against our short and long-term financial goals. We have a clear vision of the future and are incredibly confident in our ability to drive both top-line growth and expand profitability. No other spine company of our size and scale is doing that today. For more details on how we're doing it, I'd like to turn it over to Quentin. Quentin?

Quentin Blackford (CFO)

Thanks, Greg. Good afternoon, everyone.

Before we get started with the financials, let me remind you that many of the financial measures covered in today's call are on a non-GAAP basis unless noted otherwise. Please refer to today's earnings release as well as the supplemental financial information on nuvasive.com for further information regarding our non-GAAP reconciliations. As Greg noted, we are very pleased with the strength we are continuing to experience in the business. Our results for the second quarter of 2016 reflected this momentum with year-over-year double-digit top-line growth, continued expansion in our non-GAAP operating margin, and nearly 30% growth in our non-GAAP earnings per share. Turning to the results for the second quarter of 2016, revenue came in at $236.2 million, or 16.4% growth year-over-year, including a $700,000 benefit from currency. On a constant currency basis, revenue for the quarter was $235.5 million, or 16.1% growth year-over-year.

NSO generated $15.1 million in revenue for the quarter, which contributed approximately 7 percentage points to our overall growth rate on both the reported and constant currency basis. NuVasive's core business, excluding the impact of NSO during the quarter, grew approximately 9% on a reported basis. On a pro forma basis, NuVasive and NSO combined to grow nearly 10% in the quarter, in line with our commitment to deliver high single-digit growth as a combined company. Our U.S. spinal hardware business, which includes MAGEC and PRECICE, performed well for the quarter, coming in at $137.8 million, an increase of 18.3% year-over-year, including roughly 9 percentage points of growth from the acquisition of NSO. Excluding the benefit of NSO, our core U.S. spinal hardware revenue grew 9.5% year-over-year to $127.5 million, demonstrating the continued momentum of our IGA product platform.

Notably, in the quarter, our core U.S. lumbar business again delivered double-digit growth, growing more than 10%. Revenue from U.S. surgical support came in at $60.7 million, up 3.5% compared to the same period last year, primarily driven by growth in our NVM5 neuromonitoring disposables business. For the quarter, while nominal, we saw an improvement for our biologics portfolio, which returned a slight growth after several quarters of year-over-year declines. Our international business came in at $37.8 million, up 35.8% on a reported basis, or 33.3% on a constant currency basis. NSO contributed 17 percentage points of growth for the quarter on both the reported and constant currency basis.

Notably, on a sequential basis, our core NuVasive business grew nearly 24% from the first quarter as the momentum in our European business, where our revitalization strategy of focusing on the value of our differentiated procedural solutions is taking hold, and the benefits of going direct in our Latin America business are beginning to pay off. At the same time, Asia-Pacific, which has been fueled by the strength of Japan, continued to grow very well in the quarter. In summary, we are very pleased with our overall revenue results for the second quarter. Based on the strength we saw in the first half of 2016 and the impact of the Biotronic acquisition, we are now expecting revenue of approximately $962 million for 2016, which now includes a $1 million benefit from currency. For the full year, this represents approximately 19% growth year-over-year on both the reported and constant currency basis.

The Biotronic acquisition closed on the first day of our third quarter, and going forward, we will report the results from Biotronic and US surgical support as part of NuVasive Clinical Services. While we do not normally provide quarterly guidance, we have a number of moving pieces that are impacting the cadence of growth, including the recent acquisition of Biotronic and the expectations of more pronounced seasonality in the back half of the year as a result of one less selling day from the second quarter to third quarter than normally experienced. As a result, we are guiding to revenues of approximately $243 million for Q3, which includes roughly $13 million from Biotronic. Turning to the rest of the P&L, non-GAAP gross margin for the second quarter was up 170 basis points year-over-year to 77.8%, improving from 76.1% in the same period last year.

This improvement was primarily driven by the suspension of the medical device tax, which provided a benefit of approximately 80 basis points and a favorable contribution from NSO of 90 basis points. Pricing pressure remained in the very low single digits at negative 1% and had a negligible impact on gross margin. As a reminder, we did not realize any contribution from our in-house manufacturing initiatives in the quarter, as those benefits are expected beginning in 2017. As a result of the recent acquisition of Biotronic, which has a lower gross margin profile, we now expect full-year non-GAAP gross margins to approximate 76.4% versus prior guidance of 77.4%. Non-GAAP estimated expense as a percent of revenue increased 40 basis points year-over-year to 56.9%, up from 56.5% in the same period last year due to the addition of NSO in the current year period, which contributed 40 basis points of headwinds.

In addition, increased non-cash share-based compensation expenses created incremental headwinds of approximately 70 basis points compared to the prior year as a result of the higher share price. Increased performance expectations and a prior-year benefit did not repeat as it was related to departing executives. Normalizing for those items, our focused efforts to drive asset efficiencies continued to drive meaningful improvements in our underlying estimated expense profile versus the prior year. To reflect the impact of the recently acquired Biotronic, we now expect full-year non-GAAP estimated expense as a percent of revenue to approximate 55.4%, down from a prior expectation of 56%. We increased non-GAAP R&D investment during Q2, with spending up 70 basis points to 5% of revenue, compared to 4.3% in the same quarter last year. This was primarily attributable to the continued investments into the game-changing technology of NSO and our core NuVasive platform.

We now expect full-year non-GAAP R&D expense as a percent of revenue to approximate 5.1% versus the prior expectation of 5.6%. The lower R&D expense as a percent of revenue is reflective of the lower R&D spend profile associated with the recently acquired Biotronic NeuroNetwork. In all, we are making great progress in our efforts to drive profitability improvements, with non-GAAP operating profit margins up 60 basis points year-over-year to 15.9% in the second quarter, compared to 15.3% in the same period last year. The 60 basis point improvement was meaningful when considering the fact that at the same time we increased our R&D spending by 70 basis points as we continue to invest in opportunities to drive future growth and absorbed another 70 basis points of headwinds related to non-cash share-based compensation.

Adjusting for those items, the underlying business realized an improvement of approximately 200 basis points in its operating margin profile. The underlying improvement is meaningful and coming from the areas that present the greatest opportunities, both cost of goods sold and selling, marketing, and administrative expenses. Most importantly, we are making this progress on the profitability front while at the same time accelerating the growth profile of the overall business and investing in research and development initiatives. We are pleased with our performance for the first half of 2016, and to that end, we are increasing our profitability guidance and now expect a non-GAAP operating margin of approximately 16% for the year, which includes the impact of the recently acquired Biotronic NeuroNetwork business, an improvement of 20 basis points from our previous estimate of 15.8% for the year and 60 basis points of improvement compared to 2015.

Given the seasonality of revenue mentioned earlier and the impact of integrating the recently acquired Biotronic, we expect a non-GAAP operating margin in the third quarter of 15.5%. Moving further down the P&L, interest and other expense net on a non-GAAP basis was $5.6 million in Q2, up from $3.3 million in the same period last year. This increase is primarily a result of the new interest expense associated with the 2021 convertible notes we issued late last quarter as it impacted all of Q2. We expect full-year interest and other expense net on a non-GAAP basis to be approximately $21 million unchanged from prior guidance. Now, turning to tax, our non-GAAP tax expense in the quarter was $11.6 million, resulting in a non-GAAP effective tax rate of 36.6%.

Included in the quarterly results was the impact of the early adoption of the new FASB accounting standards update, ASU 2016-9, which relates to stock-based compensation and is mandatory for all U.S. public companies to adopt January 2017. The ASU early adoption requires treatment as if it were implemented from the beginning of the year and therefore requires a recap of first quarter results and impacts both second quarter results and full-year expectations. On a non-GAAP basis, the impact was a benefit of $0.02 for the first quarter and a benefit of $0.05 for the second quarter. For the remainder of the year, we expect the adoption of ASU 2016-9 to favorably impact non-GAAP earnings per share by roughly $0.04 in each of the third and fourth quarters, resulting in a benefit of $0.15 for the year.

We now expect a full-year non-GAAP effective tax rate of approximately 37%, an improvement from the prior guidance of 41%. I'm extremely pleased by the work of our tax and accounting teams who have been hard at work to address our abnormally high tax rate. They have been making tremendous strides, and based upon the recent work of the team, including the early adoption of the previously discussed accounting standard, we now expect the future progress of our tax rate reduction efforts to materialize much faster than anticipated. While we expect our 2016 non-GAAP effective tax rate to be approximately 37%, we anticipate that our rate in 2017 will move below 35% and will now be sub-30% and approaching the mid to high 20s by 2020.

The improvement is being driven by underlying operational improvements, as the benefit we realized from the adoption of ASU 2016-9 will diminish significantly in 2017 and future years due to the fact that the majority of all outstanding stock options that have been issued have now been exercised. To help you better understand the progress that has been made, we have included a slide explaining our future expectations in the slide that we filed today on Form 8K and posted with our supplemental information file on the NuVasive website. Second quarter non-GAAP net income was $20.6 million, or non-GAAP EPS of $0.40, compared to non-GAAP net income of $15.7 million, or non-GAAP EPS of $0.31 in the same period last year.

Based on our overall performance for the first half of 2016, the addition of Biotronic NeuroNetwork and the early adoption of ASU 2016-9, we are increasing our full-year non-GAAP earnings per share guidance to $1.64, up from our previous guidance of $1.48. Included in this increased outlook for non-GAAP earnings per share is the expectation that diluted weighted average shares outstanding will be 52 million shares for the year. Turning to our GAAP results, GAAP net earnings for the second quarter of 2016 were $30.2 million, or $0.57 per share, an increase of 186% compared to $10.3 million, or $0.20 per share in the same period last year. On a full-year basis, we now expect GAAP earnings per share to be approximately $0.84.

Please refer to our earnings press release for the supplemental financial information file posted on nuvasive.com for further information related to our GAAP versus non-GAAP adjustments for both our second quarter performance and full-year expectations. Adjusted EBITDA margin, which excludes the impact of non-cash share-based compensation, was 25.3% for Q2, a 40 basis point improvement compared to the 24.9% in the same period last year. Our cash and investment balance at the end of the second quarter was $331 million, and for the quarter, free cash flow was $9 million due to planned higher capital expenditures totaling approximately $34 million in the quarter to support new product launches and an anticipated ramp-up in volumes in the back half of the year. As Greg mentioned earlier on the call, in June, we reached agreement on terms to settle all ongoing patent litigation matters with Medtronic.

This multi-year overhang is now removed, and let me discuss how this impacts our financials. First, we have more than sufficient liquidity to cover the one-time $45 million payment to Medtronic. As you may recall, when the original verdict in the litigation was issued back in 2011, the court ruled in favor of Medtronic with damages calculated at $101.2 million plus royalties. Over time, as the company grew, the company accrued a litigation liability reserve of approximately $144 million, and based on favorable court decisions in the first quarter of last year, the company reduced the reserve and recognized the litigation gain at the time, and as of our most recent quarter end, the reserve was at $88.3 million. The final settlement amount of $45 million is significantly lower than our current reserve and the cash that we had set aside to manage through this matter.

This removed the risk of ongoing litigation as well as the incurred cost of this type of patent litigation into the future. In closing, we executed very well during the quarter. We are certainly making strong progress towards our year-end financial goals, giving us the ability to raise our full-year guidance for several key P&L items. We are doing exactly what we said we were going to do. We're investing wisely in the business organically and through acquisitions that meet our laid-out criteria. We're integrating them quickly and efficiently and continuing to take market share through our differentiated spine procedural portfolio. Based on this solid execution, we're confident about our ability to execute in the back half of the year. Thank you, and I will take the call to Q&A.

Operator (participant)

Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please also note that we ask that participants limit their remarks to one question during today's Q&A session. One moment, please, while we pull up our questions. Our first question comes from Matthew O'Brien from Piper Jaffray. Mr. O'Brien, your line is live.

Carol Cox (EVP of Internal Affairs and Corporate Marketing)

Yeah. Sure, let's go to the next one. We may be losing people with the technical difficulties.

Operator (participant)

Our next question comes from Richard Nuit from V-Rank Partners.

Carol Cox (EVP of Internal Affairs and Corporate Marketing)

Go to the next one.

Operator (participant)

Our next question comes from Kayla Crumb from William Blair. Our next question comes from Josh Jennings from Cowen. Our next question comes from Matt Taylor from Barclays.

Yong Li Yang (Director and Global Head of Structured Products Technology)

Hi, this is Yong Li Yang from Matt. Can you hear me?

Greg Lucier (Chairman and CEO)

Yes.

Yong Li Yang (Director and Global Head of Structured Products Technology)

Okay, great. Sorry about the technical difficulties, but I guess thanks for taking our questions. Just to start, I guess, so some of the other spine companies reported their results with strong results in the U.S., but weak results outside. There were some distributor inventory drawdowns, and that's expected to persist through 2016. I guess, can you just talk about broadly the strength in the U.S. that you're seeing, as well as what you're seeing in the international markets developed and emerging?

Greg Lucier (Chairman and CEO)

Certainly. As Quentin and I said in our prepared remarks, the U.S. saw continued strength. We think it's being driven by the integrated global alignment technology that then pulls through the hardware, and it's reflective of innovation that I think NuVasive has come to be recognized for. Internationally, we're making good progress across a number of geographies: Europe, Asia. We're starting to get our Latin America business cooking. We didn't, and we would not be reporting any distributor drawdowns or anything else like that. The business is just good and strong.

Yong Li Yang (Director and Global Head of Structured Products Technology)

All right, great. Thanks. I guess, can you also maybe talk about your competitive position in complex spine with products like IGA and MAGEC now in your portfolio? Just wondering how competitive you think your portfolio is and are there other products or areas you would like to add?

Greg Lucier (Chairman and CEO)

Yeah, certainly. Let me have Pat Miles, our President, answer that one. Pat?

Pat Miles (President and COO)

Thanks, Greg. The whole complex, there's nothing more complex than fixed spine. When a spine is fixed, controlling the alignment of the spine is probably the hardest thing that spine surgeons do. I would tell you that our growth profile is reflective of progress in that arena. We couldn't be more excited. Really, kind of a found market for us is going to be on the early onset and idiopathic side. We are in the process of running after the proceduralization of solutions in both of those markets. Our perspective is hugely bullish with regard to what we consider complex spine, which is fixed adult deformity. From an idiopathic and early onset standpoint, I think with the addition of MAGEC, I think we're in great shape to kind of stay the course and build meaningful portfolios in the other two areas.

Yong Li Yang (Director and Global Head of Structured Products Technology)

All right, great. Thank you. Maybe I can squeeze in one more. One of the other competitors recently bought a robotics company. Another competitor will be launching one as well. You mentioned in your prepared remarks investments in imaging and navigation, but just curious, what's your view on robotics? Is it an area you're interested in investing in as well?

Greg Lucier (Chairman and CEO)

Most certainly. Let me have Pat follow up my comments. I would simply say that for us, we believe that surgeons need to drive the innovation, that the procedure needs to have a set of requirements, and not the other way around, that a robotics engineer has innovated an arm that could be applied to spine. That is why we are approaching it in a very thoughtful way in terms of the needs around imaging for minimally invasive surgery, navigation that allows true navigation into the procedure, and then ultimately some level of automation. We think the cart is before the horse a little bit with some of these systems that are expensive, do not really automate the right things, and in the end, will not give the payback to the customers. Pat, please, why do you not say a few words about where we are going?

Pat Miles (President and COO)

Yeah. I guess foundationally, you can't have great navigation unless you have good imaging, and you can't have a cannula or an arm holding a cannula in space without good navigation. The things that Greg talked about are really foundational to ever doing or ever really automating anything. As you look at the history of navigation and even imaging, and you look at StealthStation, which is the navigation for Medtronic, it's been out there for close to 20 years, and it really hasn't been a hurdle from a market perspective. I would say the adoption of those technologies has been less than what we've seen with something like neurophysiology, with what Greg talks about as completely integrated into a procedure.

What we're trying to do is really proceduralize technologies that minimize radiation and enable people to get things done in a more rote way. We do not feel like robotics is quite there from a market perspective. We are watching it closely, but more enthusiastic on the imaging and navigation end.

Operator (participant)

Thank you. Once again, if you do have a question, please press star one, and we ask that you keep your questions to one question. Our next question comes from Matthew O'Brien.

Matthew O'Brien (Senior Research Analyst)

Okay. Can you hear me now?

Greg Lucier (Chairman and CEO)

We can.

Carol Cox (EVP of Internal Affairs and Corporate Marketing)

Here we go.

Matthew O'Brien (Senior Research Analyst)

Outstanding. Okay. Just one question, maybe a couple of parts to it, but the performance in the U.S. lumbar business has been fantastic the last several quarters. You've been tripling to quadrupling the market growth rate recently, and that performance, as we think about it going forward, I'm just wondering how we gain comfort that that level of performance can continue. Specifically, and maybe Pat can address this, but IGA, are you seeing an acceleration in the number of those, that software that's being placed and the corresponding pull-through revenue accelerate for you guys right now? Is that the real area of strength we should expect and the reason you can put up this type of market share taking within the U.S. business going forward?

Greg Lucier (Chairman and CEO)

Yeah, good question. Let me first just make sure we're grounded on the answer that our financial guidance around revenues is mid to high single-digit growth. We're really feeling good about where we are right now, which is at the high end of that. We're grounded. That's our long-term financial guidance, and it's just important that we stay kind of sober-minded around all of that. With that, let me have Pat talk about IGA and how it's getting us new surgeons.

Pat Miles (President and COO)

Yeah. One of the things that I recall is stating from one of the publications is the most correlative element to a durable long-term outcome is alignment. The surgeons have published on it and have accepted it. What we're seeing is the ability to measure intraoperatively from a pre-op plan has really become a fluid part of a lot of these guys' procedure. There is a quote in Greg's remarks that talked about a comment that Dr. Ivan Cheng made. When you can avoid the morbidity of an osteotomy in replace of an interbody implant and a measured realignment, it's a very, very big deal. Those big deals end up perpetuating amongst surgeons. We're seeing very sound acceptance of our IGA portfolio through the very things that I just described.

Matthew O'Brien (Senior Research Analyst)

Okay. I know we're supposed to keep it to one, but let me just slip in one more real quickly. This one's for Quentin. I apologize with all the confusion with the call today, maybe miscalculating this, but was the tax change that you made in the quarter, was that a 5% tailwind to your adjusted EPS number? The reason I ask is you did $0.40, and I think the consensus was $0.36.

Greg Lucier (Chairman and CEO)

Yeah. No, that's the way to.

Matthew O'Brien (Senior Research Analyst)

Hey, Matt. You would have been a penny below where the consensus was at?

Greg Lucier (Chairman and CEO)

You're right. It was a $0.05 impact in the quarter. The ASU adoption was. So $0.40 would have been $0.35. Now, obviously, we don't give quarterly earnings guidance. We were well ahead of where we expected to be internally and feel very good about where we're at. Yeah, it was a $0.05 impact on the quarter.

Operator (participant)

Thank you. Our next question comes from Jonathan Demcheck from Morgan Stanley. Mr. Demcheck, your line is live. Our next question comes from Andrew Hanover from JP Morgan. Mr. Hanover, your line is live. If you can please unmute your phone line. Our next question comes from Kyle Rose from Canaccord.

Kyle Rose (VP of Investor Relations)

Greg, can you hear me all right?

Greg Lucier (Chairman and CEO)

Yep.

Kyle Rose (VP of Investor Relations)

Great. I appreciate you taking the question. Just wanted to touch on the Biotronic acquisition a bit here and then circle back on U.S. Biologic. First on Biotronic, really recommitting to the services line here. Just wondered what you could give us when you think about the acquisition and then thinking out in a couple of years. I mean, what's your view for the services and solutions business? Obviously, that's becoming more of a key selling point as that integrates into the integrated global alignment. Just wondering how we should think about this being a value driver over the mid to long term.

Greg Lucier (Chairman and CEO)

We like this business for a number of reasons. One, it integrates in our neuromonitoring capabilities in a way that we think is unique to NuVasive in terms of being able to extract value. Second, we like it because it broadens the conversation with hospitals as they build out their spine service line. Not only are we about hardware, in time we'll be about imaging, navigation, automation. With Biotronic merged now with IMI, we have a very big service footprint to be in the operating room with them on tens of thousands of spine cases. It makes us just that much more strategic. Lastly, we like it financially because there are economies of scale in this business.

As we merge those two entities and we continue to acquire more, we can really drive up the financial profile to meet or exceed the core NuVasive profile that we have laid out for all of you. We like it for those three reasons. We think it's a great part of the franchise, and you'll see us do more.

Kyle Rose (VP of Investor Relations)

It sounded like you've seen a ton of improvement this quarter in the U.S. Biologics. Just wondering if you could give us some of the puts and takes there. What's been the turnaround from that perspective? Also, with the sales forces integrated, the distribution integrated on the ellipse side, just wondering if you could give us your thoughts with the first quarter here, but also some of the longer-term pipeline products and what we should expect from that type of development cadence.

Greg Lucier (Chairman and CEO)

Yeah. On the Biologics side, as I mentioned, we saw that return from what had been a drag on growth. It was down 3-4% for the last couple of quarters. Sure, it was up slightly, a bit over a point in the quarter. We are seeing that turn or start to turn. So far, it's been OptiCell PRO that continues to lead the results there as that's the majority of the overall portfolio. I think what you have, you've had a lot of new product introductions into this space over the course of the last 12 to 18 months. Anytime you have that, you typically see some trialing, and ultimately, I think you see surgeons come back to the product that they like the best. I think that's what you're seeing happen with OptiCell PRO at this point in time.

Now, in the back half of the year, we have some exciting things coming out with the AttraX that we will have fully launched in the back half of the year. You really have not seen that play into the results just yet. Repeat the question on the Ellipse side.

Operator (participant)

Thank you. Our next question comes from Andrew Hanover from JP Morgan. Mr. Hanover, your line is live. If you can please unmute your phone line on your end. We'll go to our next question. Our next question comes from Jeff Johnson from Baird.

Jeff Johnson (Senior Research Analyst)

Thanks. Can you hear me, guys?

Greg Lucier (Chairman and CEO)

Yep.

Jeff Johnson (Senior Research Analyst)

Yes. Great. Good evening. I hate to burn my question on guidance, but Quentin, I'm going to just ask a question on guidance. Primarily, I just want to crosswalk maybe from prior guidance to current guidance at both revenue and the EPS side. When I look at your prior revenue guidance of $928 million, I think now you've got $4 million of less of a currency tailwind this year, and then you're adding $27 million for Biotronic. It looks like to me maybe raising core revenue expectations for the year by about $11 million. Just want to cross-check that math. More importantly, on the EPS side, raising guidance by $0.16, $0.15 of it from the FASB change. I would think a couple pennies maybe for Medtronic, lower litigation expense throughout the year, and then maybe a penny or two from Biotronic.

Just help me understand how guidance is kind of getting helped by those three factors, and they all kind of add up maybe more than the $0.16 that you're raising guidance by.

Greg Lucier (Chairman and CEO)

Sure. From a revenue perspective, you're pretty close. Think about it as the core business up 10 with about $3 million of incremental headwinds from currency, and that gets you to that same kind of net 7 that you were talking about when you mentioned 11 and 4. Core business up 7 basis points on a net basis, and then you add the $27 million from Biotronic, you get right into the $962 million. From an EPS perspective, there's going to be about a $0.15 impact coming from the adoption of the ASU benefit, and then you're going to get about $0.04 from Biotronic coming in. You mentioned that the litigation cost, most of that litigation has been incurred in the first half of the year, so there wasn't a lot of litigation to take out in the back half of the year.

You'll start to see those benefits in future years, so you're not going to get as much of that in the current year. Offsetting those tailwinds that I mentioned was just the increase in the share count. Given where the share price has moved up into the $60s, obviously still have a bit of the old convert, the 2017 converts that still remain out there. They trade further into the money and create some incremental dilution on EPS. We have the opportunity either to take those out of there back half of the year at some point, or as they get exchanged next year, you'll see that dilutive impact be addressed as well. For the time being, we're reflecting the higher share price. That's about $0.02-$0.03

You do the math on those items there, and you're going to get right into the number.

Jeff Johnson (Senior Research Analyst)

All right. That's helpful. Greg, maybe if I could squeeze one more in here. You guys have done a great job on kind of bundling, doing these bundled procedural solutions with NVM5 and IGA and then the services side in that. I think that helped you win some contracts late in 2015. I guess as we're halfway through the year now in 2016, any update there on how that's playing out at some of the larger hospital systems and any incremental updates you can give on kind of your account status? Thanks.

Greg Lucier (Chairman and CEO)

We continue to make good progress in 2016, getting national contracts, big healthcare systems to adopt that very set of procedure pricing, service integration as you describe. We fundamentally believe the industry is moving past the pieces and parts that you could buy from these smaller entities that are losing relevance, and they really want to partner with a company that can do this integration that we just described. It drives their economics. It makes our economics better too, and I think it explains some of the growth we're seeing.

Operator (participant)

Thank you. Our next question comes from Larry Biegelsen from Wells Fargo. Mr. Biegelsen, your line is live. Our next question comes from Matt Miksic from UBS. Our next question comes from Raj Denhoy from Jefferies. Our next question comes from Mike Matson from Needham & Company.

Carol Cox (EVP of Internal Affairs and Corporate Marketing)

Shane, I think we might hold. I think I'm hearing from a lot of people that they're calling in, and you're not able to hear them, and they're not on mute. I think we're probably with the technical difficulties. We'll just go ahead and conclude the call and try to catch up with people separately.

Operator (participant)

Okay.

Carol Cox (EVP of Internal Affairs and Corporate Marketing)

Again, apologize for the technical difficulties. I know it was a real unpleasant experience. We will get out the transcripts too and probably post those up on our website so you have access to that sooner rather than later.

Operator (participant)

Thank you. This does conclude today's.