Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Orthofix Fourth Quarter 2018 Earnings Results. At this time, all participants are in a listen-only mode to prevent background noise. [Operator Instructions] Later, we will have a question-and-answer session. And as a reminder, this conference is being recorded.

Now, it's my pleasure to turn the call to our Senior Director of Business Development and Investor Relations, Mr. Mark Quick..

Thank you, operator, and good afternoon, everyone. Welcome to the Orthofix fourth quarter and full-year 2018 earnings call. Joining me on the call today are President and Chief Executive Officer, Brad Mason; Chief Financial Officer, Doug Rice; and President of Spine, Brad Niemann.

I’ll start with our Safe Harbor statements, and then pass it over to Brad. During this call, we’ll be making forward-looking statements that involve risks and uncertainties.

All statements other than those of historical fact are forward-looking statements, including any earnings guidance we provide and any statements about our plans, beliefs, strategies, expectations, goals or objectives.

Investors are cautioned not to place undue reliance on such forward-looking statements as there’s no assurance that the matters contained in such statements will occur. The forward-looking statements we make on today’s call are based on our beliefs and expectations as of today, February 25, 2018.

We do not undertake any obligation to revise or update such forward-looking statements.

Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risks disclosed under the heading Risk Factors in our Form 10-K for the year-ended December 31, 2018, as well as additional SEC filings we make in the future.

If you need copies of these documents, please contact my office at Orthofix in Lewisville, Texas. In addition, on today’s call, we’ll refer to various non-GAAP financial measures.

We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to financial measures determined in accordance with U.S. GAAP.

Please refer to today's press release announcing our fourth quarter and fiscal 2018 results for the reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results. At this point, I'll turn the call over to Brad Mason..

Thanks, Mark, and good afternoon, everyone. As usual, I'll start by giving you a summary of our fourth quarter and full-year 2018 performance; after which, Doug will discuss the financial results more in-depth; I will then follow up with our outlook for 2019 and a few comments about my decision to retire before taking questions.

In the fourth quarter, we recorded net sales of $121.1 million, representing a year-over-year increase of 3.6% or 4.4% in constant currency. Reported net sales for the full-year was $453 million, which was an increase of 4.4% year-over-year and a 3.9% increase in constant currency.

As a reminder, revenue recognition accounting standards changed at the beginning of 2018, which impacted the year-over-year comparison to sales. When recasting Q4 2017 and the full year 2018 to the new accounting standards, net sales would've increased by 9.5% in Q4 and 5% for the full year in constant currency.

Orthofix Spine, which includes our Bone Growth Therapies, spinal implants, Biologics, and Spinal Kinetics product lines generated $93.8 million in sales in the fourth quarter, which represents a 6.9% increase over prior year. Orthofix Spine produced $346.6 million in reported sales for the full year, a 4.8% increase over prior year.

Beginning with Bone Growth Therapies reporting segment, this business continued its multi-year run of outstanding performance by delivering a net sales increase of 6.1% in the fourth quarter versus prior year.

Despite our market-leading share, we continued to significantly outgrow the spinal fusion procedure growth rate, primarily through the continued adoption of our therapy by both existing and new customer physicians.

In spinal implants, we reported a fourth quarter net sales increase of 17.9% compared to prior year, which reflects an increase in sales of 1.4% in spine fixation for the quarter and $3.59 million contribution from Spinal Kinetics. In spine fixation, U.S.

sales returned to modest growth and sales from Spinal Kinetics were in line with our expectations for the quarter. For our Biologics business unit, reported sales decreased by 4.8% in the fourth quarter compared to prior year.

The sales in this business continued to be negatively impacted by the contractual reduction in the marketing service fee Orthofix receives from MTF Biologics, which occurred in March of 2018.

When normalizing for this change, sales increased 2.7% in the quarter, driven by increase of 4.7% in Trinity volumes, partially offset by a low single-digit ASP decline. Lastly, in our Orthofix Extremities, reported and constant currency net sales decreased 6.4% and 3.6%, respectively, in the fourth quarter over the prior year.

When recasting Q4 2017 to the new accounting standard, reported net sales increased in the quarter by 13.2% and 16.6% in constant currency.

Given this significant quarterly variability, we believe the best way to assess this business is to look at the constant currency year-over-year growth for the full year using the same accounting standard for both years. On this basis, Orthofix Extremities business grew 4.7% for the full year 2018.

Moving on to non-sales metrics, our results reflect continued performance improvement in nearly every aspect of our business. For the fourth quarter, adjusted EBITDA as a percentage of net sales, excluding the impact from Spinal Kinetics, was 22% compared to 20.8% in the prior year period, a 125 basis-point increase.

Adjusted earnings per share was $0.55, compared to $0.52 in Q4 2017. Excluding the dilution of Spinal Kinetics, adjusted EPS increased 19.2% over prior year. Free cash flow was $16.6 million for the fourth quarter, a $9.6 million decrease over prior year. This year-over-year decrease was primarily due to a favorable insurance settlement in Q4 2017.

Adjusted trailing 12-month ROIC was 11.7% compared to 12.5% in 2017. When excluding Spinal Kinetics, adjusted ROIC was 15.5%. And lastly, we had a total cash balance of $72.2 million as of December 31, 2018.

And for the full year, adjusted EBITDA as a percentage of net sales excluding Spinal Kinetics was 20.5% compared to 18.8% in the prior year period, a 170 basis-point improvement. Adjusted earnings per share was $1.79, compared to a $1.62 for 2017. Excluding the dilution of Spinal Kinetics, adjusted EPS increased 21% over prior year.

And finally, free cash flow was $34.7 million for the full year which is a $12.6 million increase over prior year. Looking beyond the numbers, 2018 proved to be an important year for Orthofix. We moved our corporate domicile from Curaçao to Delaware, and reduced our long-term projected tax rate from 38% in 2017 to 27% in 2019.

We also realigned our spine business segments to accelerate growth. And in our business development activities, in addition to acquiring Spinal Kinetics, we remained active yet disciplined. Regarding Spinal Kinetics, we’re very excited about our recent FDA premarket approval or PMA of the M6-C artificial cervical disc.

If I think back over the history of Orthofix, few if any milestones were strategically important to the Company's future as the Spinal Kinetics acquisition last year and this approval. The M6-C artificial cervical disc is a next-generation artificial disc developed to replace an intervertebral disc damaged by cervical disc degeneration.

Designed to restore physiologic motion to the spine, the M6-C disc is indicated as an alternative to cervical fusion. It preserves motion by restoring biomechanical function at the treated level after native disc removal and potentially reduces subsequent degeneration of adjacent vertebral segments.

The M6-C device is the only artificial cervical disc that mimics the anatomic structure of a natural disc by incorporating an artificial visco-elastic nucleus and fiber annulus into its design.

Like a natural disc, this unique construct allows for shock absorption at the implant level, as well as provides a controlled range of motion when the spine transitions in its combined complex movements. In fact, the M6-C disc is the only disc being marketed in the U.S with shock absorption capability and FDA approved labeling as such.

As a reminder, the M6-C device received CE Mark approval for distribution in the European Union and other international geographies in 2006. And to-date, there have been more than 45,000 implants of the disc outside of the U.S.

In addition to a full line of anterior, posterior and interbody fusion cervical implants, Orthofix offers the CervicalStim device, the only FDA-approved cervical bone growth stimulation therapy, and Trinity ELITE allograft, a market-leading stem cell allograft developed in partnership with MTF Biologics.

With these products and now the M6-C disc, Orthofix has industry's most comprehensive and differentiated portfolio of cervical spine solutions. Regarding our launch plans, we expect some cases beginning in March performed by a few of our principal investigators followed by a controlled market launch late in the second quarter in the U.S.

This plan includes an extensive training and education curriculum for surgeons and our sales representatives. The most important aspect of the launch is not how fast we go to market but how well we go to market. The M6-C disc will be a flagship product for Orthofix for many years to come.

So, expect that we will do everything possible to assure that our surgeon customers and their patients have a great experience and outcome with every implant. In summary, 2018 was a year dedicated to position the Company for its next chapter.

The FDA approval of M6-C disc marks the start of that chapter, a chapter that I believe will be the most exciting and rewarding since the Company's inception. With that, I’ll hand it over to Doug to give you more detailed financial results for the quarter and full year..

Thanks, Brad, and good afternoon, everyone. Our financial results had many highlights this quarter including solid top-line growth and continued margin expansion within our organic business. I’ll start by providing some additional details into our net sales and earnings results and then discuss some of our other financial measures.

As Brad noted, total net sales in the quarter were $121.1 million, up 3.6% on a reported basis and 4.4% on a constant currency basis when compared to the fourth quarter of 2017. When adjusting for Spinal Kinetics sales and the MTF Biologics contractual fee change, organic growth was 2.4% over prior year in constant currency.

The growth in the quarter was primarily driven by continued strong performance in our Bone Growth Therapies business.

As a reminder, the new ASC 606 revenue recognition standard that we were required to adopt at the beginning of 2018, we generally recognized revenue at time of invoice and no longer on receipt of cash for certain of our OUS net sales to stocking distributors.

When comparing our Q4 2018 growth to the prior year period using the newly adopted revenue recognition methodology for both periods, our constant currency growth rate was 9.5%. When comparing the full year 2018 on the same basis, our constant currency growth was 5% compared to our reported constant currency growth of 3.9% in 2017.

Please refer to today's earnings release and the footnotes in the 10-K for further analysis. Gross margin in the fourth quarter 2018 was 78.8% compared to 79.8% in the prior year period. The decrease was primarily to sales mix, including the effect from the Spinal Kinetics acquisition.

Gross margins also continued to be impacted by non-cash purchase accounting related inventory fair market value adjustments.

For the full year 2019, we expect gross margins to be generally consistent with 2018 between 78% and 79%, which reflects better margins from continued operational improvements offset by the full year impact of Spinal Kinetics sales and increased capacity to support the U.S. launch of the M6 disc.

Sales and marketing expenses were 44.5% of net sales in the fourth quarter of 2018, roughly flat with the fourth quarter of 2017. As we have historically experienced, sales and marketing expenses trended down throughout the year with the fourth quarter being the lowest as a percent of sales.

We expect sales and marketing expense in 2019 to tick up approximately 100 basis points over 2018, which reflects investments associated with the U.S. launch of the M6-C artificial cervical disc and the expansion of our sales force to support our sales growth.

To a lesser extent, the increase also reflects non-cash amortization charges from our recent investments in our distribution network. Non-GAAP net margin in the quarter was 34.4% of net sales, which was down from 35.5% of net sales from the fourth quarter of 2017. This decrease was due to the lower gross margin that I just mentioned.

G&A expenses were 16.6% of net sales in the fourth quarter of 2018, which were up from 13% in the prior period. As a reminder, a favorable $6 million legal settlement in Q4 2017 created a difficult comparison and was the primary driver of this increase.

In line with our expectations, R&D expenses were 7.3% of net sales from the fourth quarter, which rose slightly from the prior year, driven primarily by additional spending from the successful M6-C artificial cervical disc FDA approval process.

For 2019, we expect R&D spending to increase modestly between 7.5% and 8.5%, primarily due to the increased investment in new product development and other growth and innovation investments. Adjusted EBITDA increased slightly to $24.4 million, a decrease as a percent of sales to 20.2% from 20.8% in the prior year.

This decrease was primarily driven by the expected dilution from Spinal Kinetics, which affected gross margin and R&D. When you exclude the impact from Spinal Kinetics, our adjusted EBITDA margin was 22% and reflects a 125 basis point improvement over Q4 in the prior year.

This increase was driven by broad-based improvements in organic gross margin, G&A and R&D spending. A quick note to let everyone know that due to the recent realignment of our spine businesses, in 2019, we expect to report only spine, extremities and corporate segments.

We will continue to provide topline visibility of our four traditional product categories in our quarterly reporting. Also, as a part of this change, we expect to report adjusted EBITDA for each of these segments. Now, turning to tax.

We had income tax expense for the quarter of $2.7 million or 23% of income before income taxes as compared to income tax expense of $15.1 million or 91% of income before income taxes in the same period of 2017.

This year-over-year decrease in our quarter tax provision was driven by several factors, including the recognition of significant non-cash tax expense related to U.S. tax reform in the prior year as well as benefit from our recent redomicile and the lower U.S tax rate in the current year.

Based largely on the expected benefits of our redomicile effective in 2019, we are lowering our non-GAAP adjusted long-term effective tax rate from 29% to 27%. For the fourth quarter 2018, we reported GAAP net income from continuing operations of $0.46 per diluted share compared to net income of $0.08 per share for the fourth quarter 2017.

After adjusting for certain amounts and when normalizing for tax, using the non- GAAP long-term effective tax rate, adjusted EPS for the fourth quarter 2018 was $0.55, compared to $0.52 in the fourth quarter of 2017.

The impact of our lower tax rate in the quarter was partially offset by higher share-based compensation and the dilutive impact of Spinal Kinetics. Moving on to the balance sheet highlights. Day sales outstanding or DSOs were 59 days at the end of the fourth quarter 2018, up from 50 days at the fourth quarter 2017.

As noted on previous calls, this increase was due primarily to the increased receivables from our adoption of the new revenue recognition standard at the beginning of 2018.

Our inventory turns at the end of the fourth quarter 2018 were 1.3 times, up from 1.1 times at the end of the fourth quarter 2017, as the inventory management improvements were partially offset by an $8 million increase in inventory related to the acquisition of Spinal Kinetics.

Cash, cash equivalents and restricted cash at the end of the fourth quarter totaled $72.2 million compared to $81.2 million at the end of 2017. We are pleased to see our cash balance return back to these levels after the $45 million upfront payment for the acquisition of Spinal Kinetics in Q2.

Earlier this month, we also paid a prescribed $15 million milestone payment following the recent FDA approval of the M6-C artificial cervical disc. Cash flow from operations for the quarter was $21.1 million, down from $29.9 million in the fourth quarter 2017.

This decrease was due to the previously mentioned legal settlement in Q4 2017 and the dilutive impact of the Spinal Kinetics acquisition offset partially by lower inventory spending. Capital expenditures were up slightly in the quarter to $4.5 million from $3.7 million in the prior year due primarily to higher IT investments.

Full year 2018 capital expenditures were $15.2 million versus $16.9 million for the prior year. We expect 2019 capital expenditures of $24 million to $26 million. This increase primarily reflects equipment and instrument investments to support sales growth from the M6 artificial cervical disc.

Free cash flow, defined as cash flow from operations minus capital expenditures, was $16.6 million during the quarter compared to $26.2 million in the prior year. This decrease primarily reflects the lower operating cash flow that I just noted. With that I will now turn it back to Brad..

Thanks, Doug. Regarding guidance for the full-year 2019, the Company expects reported net sales to be in the range of $472 million to $477 million, which represents a year-over-year increase of 4.2% to 5.3%.

This guidance is based on current foreign exchange rate and includes both and expected $4 million currency headwind and $3 million to $4 million in sales of M6-C disc in the U.S, the majority of which we expect in the fourth quarter.

Additionally, we expect the sales gains for the year to be heavily weighted toward the last third of the year, starting with approximately flat reported net sales in the first quarter, primarily due to extremities currency headwinds and the tough Q1 comp, low single digit sales growth in Q2 ramping to mid single digits for Q3 and high single digits in the fourth quarter.

As we exit the year, we expect this momentum and trajectory to set us up very well for 2020.

Regarding the 2019 full year sales contribution from each business, we expect overall Orthofix Spine sales to grow low single digits at the beginning of the year, ramping to high single digits by the end of the industry, and we anticipate Orthofix extremities reported net sales will grow low single digits for the full year, which includes the expected currency headwind.

Before our acquisition of Spinal Kinetics, I committed to at least 100 basis-point adjusted EBITDA margin improvement in 2018, 2019 and 2020.

As I mentioned, we’re very pleased with the 170 basis-point increase that we achieve in 2018 toward our overall 300-point target, and bigger picture, the 650 basis-point improvement we’ve made to adjusted EBITDA margins over the last five years.

With the addition of Spinal Kinetics as a catalyst, 2019 is a transition year to drive Orthofix to accelerated, sustainable growth in 2020 and beyond. To achieve this, 2019 is now a year in which we need to make investments. These investments will primarily be related to the launch of the M6-C disc and associated sales force investments.

The net effect is that we now expect adjusted EBITDA including Spinal Kinetics for the full year 2019 to stay approximately flat year-over-year with 2018, in the range of $86 million to $89 million, and adjusted earnings per share to be flat or decrease modestly to a $1.75 to $1.82, using a non-GAAP long-term tax rate of 27%.

Before closing the call, I wanted to share some perspective on my decision to retire from Orthofix. Thanks to many years of hard work and dedication of a talented team at Orthofix, the Company has completed a long period of recovery and rebuilding.

I could not be prouder what this team has accomplished, everything more than I expected, every cultural, financial, commercial and operational, aspect of Orthofix has been overhauled, including new leadership, strategy, infrastructure, controls, products and processes.

With this and the culture of integrity and patient focus that we have engrained, the challenges of our past are behind us. And I believe that everything necessary to transform the Company has been put in place and the course has been set to create an amazing future Orthofix and all of our stakeholders.

What I’ve always done best and enjoyed the most in my career is starting and fixing companies. I love the challenges and actions associated with these phases in the business’s supply cycle. When I rejoined Orthofix in 2013, I anticipated that I would be here for three or five years.

As I now finish my sixth year and step back to look at where we are today with the recent FDA approval of the M6-C disc as an inflection point in the transition of Orthofix from its recovery and rebuilding phases to a multiyear growth phase, I finished what I came do and what I do best.

Therefore, I believe it is the right time for both the Company and for me to pass the baton to a new leader who'll take the Orthofix to the next leg of the race and capitalize on this enormous potential. I will remain in my current role until a successor is found and then as a consultant for one year to help the new CEO and Company in any way I can.

I am fully committed to continuing my efforts on behalf of all Orthofix stakeholders and assuring a seamless and very successful transition.

A search process has been initiated but until we identify the right individual whether an internal or external candidate, we will not be commenting further about our search activities, but rest assured that Board and I remain completely aligned on the future direction and strategy of the Company and that we will find an exceptional leader to execute this strategy.

With that, operator, we're now ready to open up the lines for questions..

Thank you. [Operator Instructions] And our first question is from Bruce Nudell with SunTrust. Please go ahead. Your line is now open..

Hi. This is Stan Fediuk on the line for Bruce. Thank you for taking my question. Brad, you mentioned in January at our conference about 10% organic growth in 2020 or about double digits.

How much of that would be driven by the M6?.

A significant portion, I’d say about half of that growth -- our organic growth rate other than the M6, I think in the mid-single digits or maybe the 5% range, I think the rest of it will be as a result of the M6 disc whether directly or indirectly. It could be pull through; it could be disc sales as directly.

But the M6 disc is really the driver of the difference between our normal growth rate in the mid-single digits to that 10%ish rate..

Okay.

And then, just can you comment on what criteria or characteristics the Board would be looking for in the search for CEO?.

Actually probably not -- I will let that kind of unfold as it does. But what I will say and probably the most important takeaway, and I'll reiterate what I just said in my prepared remarks, the Board and I and management are absolutely aligned on the future direction of this Company.

And we have spent a lot of time collectively positioning the Company for this next phase. So, I can tell you we will be looking for somebody who is aligned with that thinking and with our thinking, and we'll carry out and execute everything that we've already put in place..

Great. Thank you for taking my questions. And Brad, best of luck..

Thank you so much. I really appreciate it..

Thank you. And our next question is from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead. Your line is open..

Thanks for taking the questions. Brad, you will be sorely missed, and thanks for all the good work..

Thank you, Jeff. I appreciate that. Just a reminder, I'm not going anywhere right now. So, I'm going to save the thank you and goodbyes and things for many months down the road when we find a replacement. But thank you, Jeff. I appreciate the sentiments very much. .

Okay. So, just a few issues, I wanted to target a little bit. So, could you talk about Biologics a little bit? So, there is the 5% change from MTF was from last March. So, the comps this year-over-year should turn positive.

Is that what I heard?.

So, the comps should actually turn comparable rather than positive. So, March 13th of last year is when the MTF split change occurred. It went from 65% to 60%, which actually, if you calculate is a 7% reduction in what we recognize as revenue.

So, that will that will sunset, at least the comp will sunset March 13th of this year, so that from that day forward, we will have apples to apples in terms of when you look at the growth rate of our Biologics business, it'll be apples to apples..

Okay.

And you expect that to be -- what did I hear earlier, mid single digits?.

In Biologics -- we didn't say specifically for Biologics, but I would say with the impact of the $1 million in Q1 from the split change, it will be in the low single digits..

Okay, got it. Okay, perfect. And then, can you talk about M6? You talked about the ex-U.S.

contribution in the first quarter earlier in the call, was that -- could you remind me what the number was, $3.5 million?.

In the fourth quarter, it was $3.5 million. That's correct..

In the fourth quarter, it was $3.5 million. Okay. So, I'm just trying to get a handle on looking at the implant market for you going forward for ‘19 versus ‘18.

And I think we're probably a little bit earlier in kind of tracking up some of these numbers relative to the long-term that you said as far as really hitting for the back half of the year more importantly. So, the front half of year for Q1, you expect little contribution, at least in the U.S. in Q2 some U.S. contribution or virtually no U.S.

contribution?.

I would say immaterial contribution in Q2, none in Q1, immaterial and Q2 as we really, in fact let me have Brad Niemann talk about it a little bit. He can explain things better than I can. .

Hi, Jeff.

How are you doing?.

Just great.

How are you?.

Yes. So, all the activities are quickly ramping inventory build, training, education, everything that aligns with the FDA approval. Our first cases will be done in March with some key IDE sites.

And then from there, we're going to build out to the rest of the IDE sites remaining, which there's a total of 23 and that all contributed either to fusion or implants in the PMA approval. So, that ramp will take place the rest of 2019.

We’ll be really focused on building those out as our centers of excellence really to ensure good adoption, training, education and successful patient outcomes..

Perfect. Okay, I got it. And then, lastly, could you give us a little further color on your commentary for the sales and marketing,100 basis-point for 2019? As far as that expense goes, give us little color as far distributors, clinical reps, folks involved with the launch..

Yes. So, Jeff, I’d kind of put it into two buckets. The one bucket is just the cost associated -- the marketing costs and the preparation, the training education costs associated with the launch. The second bucket is -- has to do with sales force expansion.

And in a lot of cases, we -- as an example, we can subsidize or distribute [ph] add sales reps specifically for our different products. And in some cases, there will be expenses like that; in some cases, it would be other, could be commission, it could be a number of things.

Kind of think of that bucket as that 100 basis points, maybe half a bit for sales and marketing and half for it distribution expansion..

Okay, got it. And then, as far as M&A goes, sorry, my last question, I promise.

As far as M&A goes, you appetite now is more or less do you feel like with the addition of SK that you don’t need anything more that you really can build out, you can what you have now or is there kind of the remaining appetite for more?.

So, I mean, we couldn’t be more pleased with the Spinal Kinetics acquisition and think of that as an extraordinary event. But that has not reduced our appetite for other properties that meet our criteria, criteria being within our core businesses, in faster growing segments than we already play.

And we are active, have been active and will remain active going forward..

Thank you. Our next question is from Craig Bijou with Cantor Fitzgerald. Please go ahead..

I’ll just start with Brad. I know, you’re not leaving right now, but congrats on the retirement. And let me start with a follow-up to the investments in the sales force.

So, I guess, I just want to see, those -- is that spending -- spending is obviously incremental, but I guess, was there anything maybe market-related or opportunistic about the investments that you're making maybe from certain acquisitions that were made in the space that there might be some reps available.

Just want to see how I guess maybe the rationale, it was solely based on where you guys see everything going or if there were some opportunistic opportunities for you..

Craig, first of all, thank you. I appreciate the good sentiment. And the answer to your question, to both parts is yes. It's a combination of both.

Certainly, the excitement around the M6 disc has created opportunities that we would not have otherwise had, and additionally, has gotten the attention and excitement of some of our existing distributors who would now like to expand their relationship with Orthofix, can be even beyond just the M6 disc.

So, it's a combination of a lot of things but certainly the disc is what has generated the enthusiasm by the sales force, whether it's ones that we currently have or ones that we now have available to us that we would not have otherwise had. .

Great. That’s helpful. The second question I had is on payer coverage, specifically private payer coverage for the M6. Obviously, coverage in the cervical disc space over the last several years has been interesting with coverage being given just on a disc by disc basis.

So, I guess, I just want to kind see want you guys have heard thus far in your discussions with payers and how quickly do you think you guys could get on their coverage list?.

Yes. I’ll let Brad Niemann answer that for you, Craig..

Adoption at the payer level on the private side has been improving greatly last several years. Most payers, especially the national, larger payer level, all have language on which patient profile they will reimburse and approve for implant. Those are typically generic in nature.

And so, right now, against our IDE sites in 2019 as part of our due diligence team, we look very closely at the payer coverage against those areas, those regions and those national payers. And we're very comfortable with where coverage is today.

And we -- there's a lot of surge in activity, I will just say, generally speaking, in the market behind improving payer adoption. And that seems over the last couple of years to taking effect. So, we feel we're in a very favorable position with pair coverage..

Thank you. Our next question comes from Ryan Zimmerman with BTIG. Please go ahead..

Thank you. Brad, congrats. I know you're still going to be around, but opportunistic and glad to see retirement. Can I start with a follow-up question on the FY20 discussion around double-digit organic growth? You commented that about half of this is going to be coming from the M6.

And so, I'm curious if you could speak to the other half of your expected double-digit organic growth in 2020? How do we think about that? I recognize, you've commented about pull-through, but help me understand amongst their business segments, kind of where you see the most growth coming from whether it be spinal fixation, Biologics or BioStim, and then I have a follow-up question..

Sure. So, I think my expectation is as we exit 2019 and get set up for 2020 is that let's start with Bone Growth Therapies, we expect, probably -- thinking the 3% to 4% range for this year, we obviously had another great year last year, we hope to keep that up.

But, I think realistically that 3% to 4% range will kind of give you the number that we're thinking today. And as we go into 2020, I think we can sustain that number, again, partially because of even that can have -- it can be a cocktail effect from the M6 with some of our distribution in a number of ways.

So, I think we could probably -- that's what I would expect in 2020, just generally. Now, I don't want to get too deep into 2020, however. So, with spinal implants growth, that will definitely benefit from the disc and the new distribution, and the reenergized distribution.

We're also spending, as you saw in R&D, we're spending more money on R&D to crank out new products to support, as an example, if we have a large distributor, who is used to selling some products that we don't have, we need to get those products ready. We need to fill out the bag wherever we need to, to make sure they have what they need.

That's an example. So, the R&D expenses, that's why those are increasing a little bit, but that will also help drive sales in 2020 and beyond, plus a pull-through. In the Biologics business, we expect to have pull through there as well.

Again, the more share of mind we have at these distributors, the more the more opportunity we have to create relationships with them that are more exclusive to us, that where we have more their business and or hopefully down the road exclusivity is really, really important. I'm not worried about whether they’re direct or whether they’re independent.

What I want to work toward is exclusivity. And all of these levers that we have to cervical line as an example, nobody has what we have in cervical. That is really good incentive for distribution. So, those are all the things that make me believe that we have every opportunity to get to double digit growth in 2020. Now that -- it's not an automatic.

We have to execute well. We have to do a lot of things well to get there. But you know what, this team has done that, will do that and will continue to execute well. If there's some things that are unforeseen, then, we'll talk about that at the time. But right now, I still feel very good about that..

Okay. And then, my final question is around the M6 disc. When you talk about the commercialization of the disc.

How do you see it interacting with say the general disc market? What I mean by that is, do you see new doctors as part of your education process coming into using motion preservation as a treatment form or do you see yourselves maybe at least early on and maybe you could speak this a little bit, taking share from existing discs on the market? Thank you..

Yes. Good question, Ryan. So, first of all, the market is growing double digits, which is good news to begin with. So, the market’s already growing.

Initially, I think, particularly since, we'll be going to centers of excellence where we've had physicians with experience, for whatever sales that brings that will be cannibalize -- that will excuse me will be taking business from some of our competitors. These doctors are used to using discs.

As far as certainly toward the beginning of the rollout, it'll be more of that. As time goes on, I think this whole market will grow. And I think, we will be a driver of that growth to where we do get new and expanded adoption from physicians who are not using the technology today. I think, there is a demand for it from patients.

I think that demand is going to increase, and I think the overall market will grow and we will be a significant contributor to the overall market growth..

Thank you. And our next question is from Jim Sidoti with Sidoti & Company. Please go ahead..

Good afternoon.

Can you hear me?.

I can, Jim.

How are you?.

Brad, you've been hanging around for 15 years, you said you were going to leave once before. And I’ve kind of heard this song.

I mean, are you really going this time?.

Well, you never know. My plan is, but I failed once, maybe -- you never know. So, right now, this is the right plan, the right thing for the Company. And then, we'll just see how things go over time..

Well, best of luck to you whatever -- however it works out. But, I know you're hanging around for a while. So, we'll put that off.

The guidance you gave, I'm sorry if I missed it, but could you give gross margin guidance for 2019?.

We did 78% to 79%..

78 to 79? Okay.

And then, in terms of sales and marketing, can you just remind me how many feet on the street you have now, and how many feet on the street you think you’ll have by the end of ‘19?.

So, we don't give that number, Jim, for a lot of reasons. The primary reason is, how do you count a feet on the street. I mean, we may -- at one distributorship, we may have [indiscernible] and they have eight people versus another distributor that’s exclusive to us or direct sales rep. So, we don't look it at that way. We don't give that information.

But, I would say overall, we will expand our sales force. Not, I think there is going to be a difference over what you’ve seen in the last several years. Over the last several years, I'm speaking in generalities, we were focused on quantity of new sales people in the field.

Now, our focus, because we have the luxury of being somewhat the belle of the ball here, looking for the quality of distributors. So, again, feet on the street is probably not a good measurement, it’s not a good measurement.

The quality of distribution -- the relationships they have and how they can impact our business is much more of our focus right now. And that's all due to the position that we are in now with the M6 disc and the other things that we've done.

So, we’re very excited about the opportunities we’re seeing with distribution but really can't give you a number on feet on the street..

In terms of M6, how long do you think it will take to get a surgeon up to speed, is that weeks long or….

I will let Brad answer that one..

The training requirement from the FDA are didactic. So, basically from a technique standpoint that small bone related [indiscernible] office training, so it’s not endeavor. However, we want to ensure that, to what level of experience they have in implementing disc, our disc is different from a surgical technique.

And point, so one ensure patient outcomes. That’s going to be anywhere in the range from if you have a dozen cases or even potentially beyond before their confidence level is there. So, it really kind of all depends on the sufficient experience with disc carts [ph] or plastic. .

So, if you have somebody who has done other disc implants, I assume it would be half a dozen but if you have someone who’s just typically done fusion in the past, it might be more like a dozen, is that one of your….

Just half a dozen probably in the mid range for both groups. So, I mean somebody with great experience could be less than half a dozen. So, that’s a pretty quick ramp, somebody with less experience might be a little bit longer than that..

And then, just the last minor thing. On the outlook for ‘19, you have about $2 million for legal settlement.

Can you just remind me what that is?.

I could if I remembered.

Doug?.

I think, that’s probably the continued ramp of -- there is a couple of cases going on that are related to some old historical cases that we expect to spend on..

Thank you. Ladies and gentlemen, this concludes our Q&A session. I would like to turn the call back to Brad Mason for any final remarks..

Thank you, operator. I appreciate the help today. And thanks for everybody who joined us on the call. And I look forward to talking to you in the near future. Have a nice evening..

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day..