Brian Kearns - Globus Medical, Inc. David C. Paul - Globus Medical, Inc. Daniel T. Scavilla - Globus Medical, Inc. Anthony L. Williams - Globus Medical, Inc..

Jonathan Demchick - Morgan Stanley & Co. LLC Matt Miksic - UBS Securities LLC Matthew O'Brien - Piper Jaffray & Co. Kaila P. Krum - William Blair & Co. LLC Craig William Bijou - Wells Fargo Securities LLC Bob Hopkins - Bank of America Merrill lynch Richard Newitter - Leerink Partners LLC Kyle William Rose - Canaccord Genuity, Inc..

Good evening. My name is Crystal and I will be your conference operator today. At this time, I would like to welcome everyone to the Globus Medical Third Quarter 2016 Earning Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Mr.

Brian Kearns, you may begin your conference..

Thank you, Crystal, and thank you, everyone for being with us today. Joining today's call from Globus Medical will be David Paul, Chairman and CEO; Dan Scavilla, Senior Vice President and CFO; Anthony Williams, President; and Dave Demski, Group President of Emerging Technologies.

This review is being made available via webcast, accessible through the Investor Relations section of the Globus Medical website at www.globusmedical.com. Before we begin, let me remind you that some of the statements made during this review are or may be considered forward-looking statements.

Our Form 10-K for the 2015 fiscal year and our subsequent filings with the Securities and Exchange Commission identify certain factors that could cause our actual results to differ materially from those projected in any forward-looking statements made today. Our SEC filings, including the 10-K, are available on our website.

We do not undertake to update any forward-looking statements as a result of new information or future events or developments. Our discussion today will also include certain financial measures that are not calculated in accordance with Generally Accepted Accounting Principles or GAAP.

We believe these non-GAAP financial measures provide additional information pertinent to our business performance. These non-GAAP financial measures should not be considered replacements for, and should be read together with, the most directly comparable GAAP financial measures.

Reconciliations to the most directly comparable GAAP measures are available in the schedules accompanying the press release and on the Investor Relations section of the Globus Medical website. With that, I'll now turn the call over to David Paul, our Chairman and CEO..

INDEPENDENCE MIS and QUARTEX. First we launched INDEPENDENCE MIS and integrated ALIF plate spacer system, designed to simplify implant insertion and fixation to solve a common challenge inherent in the ALIF procedure.

Most integrated ALIF systems either use only screws which tend to require a much larger surgical access to insert due to the orientation or wide blades impacted into the bone that can be hard to retrieve.

The INDEPENDENCE MIS system features advanced instruments that deploy three preloaded anchors through a small protected corridor no larger than the implant itself. Initial surgeons' feedback has been positive and we look forward to seeing this product grow our ALIF business.

The second significant new product is QUARTEX, a posterior cervical system that offers a variety of solutions to the challenges associated with posterior OCT fusion while delivering reliability and ease of use.

QUARTEX screw heads offer 90 degrees of conical angulation and accept 3.5 millimeter or 4-millimeter rods in either titanium or cobalt chrome alloy. QUARTEX allows surgeons to take full advantage of the thoracic anatomy through the use of large diameter screws up to 5.5 millimeters.

Refined instruments facilitate construct assembly with efficient reduction options and intuitive screwdrivers. The early positive feedback from our surgeon customers and the rapid adoption of the technology has created more demand, generating the need for more sets in the field.

Ongoing innovative product launches have been the lifeblood or our growth since inception. We intend to continue that trend in the rest of 2016 and 2017, as we have several products that are on deck for launch.

Further advancements to our best-in-class posterior stabilization systems, as well as lumbar and cervical stand-alone interbody offerings are expected to launch in 2017. To date, the CREO platform has been used in approximately 25,000 surgeries worldwide.

Our lumbar and cervical stand-alone interbody devices have been used in approximately 80,000 levels and our expandable cases have been used in over 70,000 levels. Surgeon feedback has been exceptional and we see many opportunities for gaining market share in these major spine segments.

I will now give you an update on the integration efforts of Alphatec international. We have begun to integrate IT and business processes with the direct entities and expect this to be completed within the next few months.

We have began negotiating new agreements with the various distributors, and our goal is to execute final agreements by the end of 2017. Our new sales structure has been created to better align our resources to exploit the opportunities presented by 19 new countries.

Further investments in sets and replenishment inventory are anticipated as we transition the customer base to Globus products. Immediate access to the Japanese market and organizational structure enables us to accelerate the introduction of Globus technology and quickly become a significant player in this important strategic market.

This acquisition demonstrates our commitment to using our balance sheet to address key strategic needs in a responsible and profitable manner. Emerging technologies, we recently showcase the Excelsius GPS system at the EUROSPINE and NASS conferences and continue to make steady progress on the robotics platform.

The excitement we have been hearing from surgeons on our product and how it integrates well into spine procedures, make us bullish on future applications and synergies. We intend to file with FDA in the fourth quarter and expect to launch this product in the U.S. pending FDA clearance.

Recent announcements and acquisitions by some of our competitors continue to confirm our view of the potential for this technology to improve patient outcomes. Ours is the only product designed with optimized workflow for the operating surgeon and staff and fully integrate with our implant technologies.

On the trauma side, we have begun filing with FDA and expect to begin launching these products in 2017. We have begun building out the commercial organization and we'll accelerate this effort into next year.

These emerging technology opportunities will enable us to further strengthen our business and create a larger footprint within customer, hospitals, and institutions, while contributing to increasing sales growth rates to reach $1 billion in sales over the next few years.

In summary, as we invest and build towards our long-term goal of creating a diversified musculoskeletal growth company, we remain highly focused on the opportunity to grow our spine business worldwide.

We're excited about our prospects as we continue to execute on our growth strategy of rapid new product introductions and worldwide sales force expansion, while maintaining our focus on profitability and cash flow.

Over the next few months, we're looking forward to getting our sales force expansion back on track, launching innovative new spine products, integrating the Alphatec international Business, and taking our first steps into the robotics and trauma markets. I will now turn the call over to Dan..

Thanks, David, and good evening, everyone. As David mentioned, Q3 sales were $135.7 million, down 1% as reported versus Q3 2015.

We are pleased with the continued financial strength of our business, where gross profit increased to 76.8%, net income margin was 19.3%, adjusted EBITDA margin improved to 37%, and non-GAAP diluted EPS was $0.29 per share, consistent with prior year and prior quarter, while continuing investment in our long-term growth initiatives such as emerging technology.

U.S. sales for Q3 were $120.5 million, a 4.1% decrease versus Q3 2015, driven by slower sales force expansion, territory attrition, and increased pricing pressure. International sales were $15.2 million, a 34.1% increase as reported, or 38% in constant currency, driven by Alphatec international acquisition, which added $4.8 million.

Disruptive technology sales increased to $67.2 million, or 4.1% due to continued strength in our expandable technology, CREO MIS, and biologics. Innovative fusion sales for Q3 were $68.5 million, or a 5.5% decline, driven primarily by U.S. territory attrition and pricing pressure.

Turning to the rest of the P&L, Q3 gross profit was 76.8% versus 76% in Q3 2015. Improvements are from the med device tax suspension, continued Branch Medical benefits, and cost improvement programs and logistics.

This is partially offset by the continued shift in product mix driven by biologics, expansion of international markets, inclusion of acquisition related costs, and single digit pricing pressure.

The Branch Medical benefit was $1.1 million in Q3 2016 and will continue to contribute as a strong counter lever to pricing and mix challenges as it continues to increase production capacity. Research and development expenses for the third quarter were $10.3 million, or 7.6% of sales as compared to $9.2 million, or 6.8% in Q3 2015.

The increase is driven by continued investment in robotics, trauma, product development and research capabilities. Investments in emerging technologies impacted Q3 EPS by approximately $0.03. SG&A expenses for the third quarter were $54.2 million, or 40% as compared to $52.2 million, or 38.1% in Q3 2015.

The increase is driven by the inclusion of Alphatec international costs in our P&L. Other income expense for the third quarter was a favorable $1.2 million versus $254,000 in Q3 2015, resulting from notes receivable and investment interest income, plus favorable transactional currency versus prior year.

The income tax rate for Q3 was 32.5%, a 280-basis point reduction compared to 35.3% in Q3 2015. The change in the effective tax rate is primarily due to the reorganization of our domestic legal structure and the research and experimentation credit which is now included earlier in the year due to the change in tax regulations.

The full year tax rate is projected to be approximately 34%, reflecting the ongoing benefit of the new U.S. structure. GAAP third quarter net income was $26.2 million and non-GAAP net income was $27.8 million adjusting for acquisition-related cost. Q3 GAAP diluted earnings per share were $0.27 and non-GAAP diluted earnings per share were $0.29.

Adjusted EBITDA for the third quarter was 37% compared to 36.9% in Q3 2015. We ended the quarter with $322 million of cash, cash equivalents and marketable securities. Net cash provided by operating activities in Q3 was $41.9 million and free cash flow is $24.6 million. The company remains debt-free.

The company today issued new guidance for full-year 2016 sales of approximately $560 million, including the Alphatec international acquisition with GAAP diluted earnings per share of approximately $1.13. Guidance for non-GAAP diluted EPS remains unchanged with $1.20 per share.

The 2017 full year sales projection is $625 million, including $40 million from the acquisition. We will provide updated 2017 guidance during the fourth quarter call. We will now open up the call for questions..

Your first question comes from Jonathan Demchick..

Hello. Thanks for taking the questions. I wanted to start off on the top line. When we talked about sales force expansion issues during the first two quarters. It appeared that it was maybe a little more isolated and that it looked to impact both the first and second quarters at similar levels.

However, when we look into 3Q, there's a pretty noticeable step-down.

Has anything incremental happened here, or is competition doing anything different in terms of retaining reps that has made recruiting a little more challenging going forward?.

Thank you for the question, Jonathan. As we have said in the last two quarters, we were not happy with our performance on the pace and productivity of our growth with the sales force. In Q4 of last year and even into Q1, we had some attrition that was more than normal.

But since then, we have not had attrition different from our normal rates of attrition, but we haven't been able to continue to grow as fast or recover as fast as we would like to. We've analyzed the situation now and we feel like we have our finger on exactly how to move forward with these changes and I identified them in my prepared remarks.

One, we want to be much more aggressive on hiring competitive reps. We've also accelerated the non-competitive rep hires along with this. So nothing different has happened since Q2 or Q3. It's just that we haven't been able to get back on track as quickly as we would have liked to..

Thank you. That's helpful.

And I guess as I look at the trajectory of the deceleration and even I guess the declines in the third quarter, is there nothing else that's – why, what would you attribute the step down, I guess in the third quarter to? And do you think we've kind of reached the bottom? Is there any visibility there?.

Hey, Jon. It's Dan. I would tell you a couple of things. I think we see the continued impact of those reps as David called out. I think Q3 probably is right around the bottom from everything we're looking at.

Listen, there's certainly other things that we talked about before, the rate of recruitment taking a little bit longer as we look to go after some more seasoned folks and some bigger hits. But different items like that will continue that way.

We're not looking at anything that seems unusual, whether that'd be a shift in attrition or any other impacts that way that we're looking at. We really do think this is a continuation, something that's taken longer than we had anticipated and we're just being transparent with our approach to go close that gap..

Thanks.

And then as I think about guidance updated for 2016 and into 2017, backing out Alphatec and any sort of emerging technology contribution, should we be thinking about some sort of an underlying growth of around (21:10) business? Is that what looks to be a read (21:11) in there?.

You actually cut out, but I would tell you that very similar to past years, especially this early on, we tend to look at 2x or 2.5x to category growth. And when you look at our core, that's what we're putting out for next year, so, pretty consistent of what we've done in the past..

Understood. Thank you..

Your next question comes from Matt Taylor..

Hi. Thanks for taking my question..

Thank you, Matt..

Thanks. I wanted to see if you could expound a little bit more on these three initiatives that you talked about in terms of stabilizing the sales force. When you say you're going to be more aggressive.

Does that just mean changing the comp plans or just putting more focus on it? Maybe you could give us some insights into your initiatives around those three things that you think could help stabilize?.

Thanks for the question, Matt. So, on the three initiatives we have taken on hiring competitive reps, we definitely want to be more aggressive whether it comes to comp plans or geographies, we want to be more aggressive in bringing those folks in. We've also accelerated the noncompetitive rep hires.

We have talked about it in past calls that we've not had a lot of success with those hires, but we have new training programs in place. And we have a program in place that will help bring that into our system and then be mentored under senior reps, and then go on to have their own territory. So, we put that in place.

We've already hired more than a dozen folks into that program. So, we are doing many things different to get the incoming pipeline larger. Secondly, we are trying to realign the goals of our sales management team with really primary emphasis on sales growth and new territory development. In the past, we've had goals that are a little bit more diffused.

We are trying to really focus in our sales management folks to get their attention to really focus in on those two items.

And lastly, when we speak about rep retention, the attrition rates we have normally had our folks in our system based on our comp plan when someone really doesn't make it to straight commission at some point, they tend to leave and it's a self-selecting process. So, that's one type of attrition.

And the other attrition we have been calling out in the past few calls in Q4 of last year and even to Q1 are some more successful reps who had success in our systems that we have lost. And for that, we've analyzed the issue. We have done exit interviews. We've got lots of rep feedback.

We have made some changes in our internal processes, and we've put a lot more management focus to eliminate both those types of attrition. Now, we are going to have some normal rate of attrition over time. But our goal is to really put the focus in on it and minimize this attrition.

So, when you look at it in a wholesome manner, with the recruitment and then with the focus of our sales management team and then stopping attrition, we think that we'll have a long-term path of, what I'd call, fixing this problem..

Okay. Thanks for the detailed answer. And just one follow-up. One of the good news stories here is you've kept on track with launching some of your trauma and robotics products (24:57). And you talked last year's at the analyst meeting about how to think about the contributions from emerging technologies longer term.

If you could offer some updated thoughts on that or maybe how we should you think about contributions next year from those two areas?.

Matt, this is Dan. Yeah, we haven't filed through everything nor have we received approval. So, of course we're going to be tentative as to what we can or want to commit for with those things. Not that we anticipate any issue, just a matter of conservatism. So, we have a modest placeholder put into next year that we would do.

And really what we think is that we would expect to see some strong uptake within robotics and then later on with trauma as we get through penetration, and back to our initial strat plan looking for those things to be as large as 15% of our overall sales probably towards 2020 or so.

So, upwards of $150 million out of our $1 billion that we would see going forward..

Great. Thank you..

Your next question comes from Matt Miksic with USB (sic) [UBS]..

Okay. Thanks for taking the question. So, again I'm going to have to follow up on the sales question because I think that is a little bit hard for folks to get their mind around what's happened. And first, Dan, if I could understand the back half guide, when we reduce the guidance in the second quarter for the full year.

I guess what kind of assumptions were baked into that in terms of hiring? And I guess how has that changed? Maybe you could explain that a little bit there, and one follow-up..

Yeah, as we looked at what that was going to be, Matt, it really looked like it was going to be closer to about a 4% growth in the second half of the year. And that would have assumed that you have locked in recruiting into Q3 and Q4 and driven that forward is one of the main things.

So, as you look at it now, and we just see where we're tracking through Q3, there's current adjustment, just as a more realistic reflection of where we think we would exit the year, and therefore, start the base for next year. It is really based on the timing of recruitment more than anything as the main driver.

And that's the real shift between the assumptions of Q2 versus Q3 in our guidance..

And is it the right way to think about this – I remember you had mentioned a couple of times in different settings that you felt like you had some folks lined up. There were folks that were taking a little longer to get in the door and the impression I think we got and others I think got what that these were seasoned reps, competitive reps.

And is it fair to say that those just didn't come in and that didn't – we're unable to close that and that's why we're where we are?.

Matt, some of that observation is partially true. Our pipeline is filled with a lot of seasoned reps that we've been recruiting. And they just haven't come onboard as quickly as we would have liked. We're still in the process of trying to close this down. We've got some, but we still have more to go, and that is partially the reason.

And like I said earlier on and some of the other attrition also adds up. And then, as Dan alluded to in his prepared remarks, we did see a slight uptick in pricing pressure in Q3 with some of our contracts anniversarying and also some of our new products having a little bit more pricing pressure than in the past.

So, you carve a lot of those things together and that's what ended up with our results in Q3..

Okay. And last one the sales question for me is, at what point – if we were to just – because I understand it's – I don't want to get too aggressive, can't fit every new rep in – I'm sure it's not an easy process to wrangle this book in and make – it was a deal that works.

But at what point do we get to a quarter where we start to annualize the impact of the reps that did depart in 2016 or early 2015? Is that in Q4, we get partial impact Q1.

Do we annualize just to get us sort of back to core growth and then whatever you can add on the sales reps side?.

Yeah. So Matt, I would say it's closer to Q1 and the Q2. Just kind of what we did even this year where we walked out and said there was a partial impact, Q1, a little bit more fuller in the Q2. I think the way I'm modeling it now and based on how we're moving forward with recruitment, I would look towards seeing more stabilization as we exit Q1..

Great. Thanks for taking the question..

Thank you, Matt..

Your next question comes from Matthew O'Brien with Piper Jaffray..

Thanks for taking the question. Just a couple here. Just keep following up on the sales force issue. It just seems a little odd to me that it's taking longer for you guys to add these reps, just given that you have one of the broadest portfolios of hardware in the space.

So are there things that you're missing from a technology perspective – 3D printing, some kind of integrated navigation, et cetera, that you think you need to add in to potentially get back to taking some share here? Or is there something more fundamental going on? Are you losing some of the premium and some of your expendables or other areas?.

Good questions, Matt. This is David. I don't think from a portfolio and from a bag perspective, I think we have the best bag in industry and I don't think that is any way detrimental to our bringing on new folks.

But as I mentioned before, we are making some fundamental changes in how we are approaching this in a wholesome manner, and I think that will change how we are able to wrestle some of these guys down. We do need to get a little bit more aggressive on some of the competitive folks and we are doing that.

We've always been focused on having aggressive growth but aggressive profitability also. And as we balance those things out, we feel like we need to be a little bit more aggressive in our recruitment now..

Okay. Fair enough. And then a question for Dan. As everybody's going to be focused on the top line on this call, as you think about next year, the buffering factor for your stock tomorrow is going to be on the profitability side.

So, it sounds like – and I think you're saying that you're probably going to pay up a little bit more for these sales reps going forward to change the comp plan with a bit of increases. But you're also launching – and correct me if I'm wrong on that, but you're also launching trauma and robotics.

So, there's going to be more and more expense coming next year.

So, as we think about earnings into or EBITDA into 2017, can EPS still grow in 2017, or can it even approach the reported revenue growth target that you guys are putting out this evening?.

Yeah, Matt, it's a great question, and I think so. I wouldn't come off of what we've been saying before which is we're going to manage the company into that mid-30s% EBITDA. We always have that range of 33% to 37%.

We certainly think that as we've talked about openly, we start doing the pre-commercialization recruitment of our commercial teams for both trauma and robotics. There'll be a continued impact for us. But that is reflected in everything we're putting out. And again, I think we can still come through with that mid-30s% EBITDA even into next year.

We would look at some level of EPS growth but at no point would we attempt to outstrip that versus sales growth. We're going to look to do the right investments, get these out, get these things launched, still deliver strong bottom line and not necessarily dilute our earnings in EPS or EBITDA..

Got it. Thank you..

Your next question comes for Kaila Krum with William Blair..

Hey, guys. Thanks for taking my questions. So, I'll start on 2017.

Can you just help us understand your visibility at this point into the sales number, at this point in time? And what specifically has changed really over the last three months or so that would prompt you to lower that $640 million number to $625 million?.

Hey, Kaila, it's Dan. Really simple, it's just the exit points. We're adjusting down our guidance $15 million here for 2016 and just rolling that into 2017 at this point, just to be realistic. That's the real driver and the only difference is what we're seeing coming out of our anticipation of Q4 plus our actual Q3 results coming in..

Okay.

So, no change as far as kind of Alphatec contribution and contribution from trauma and robotics?.

No..

Okay.

And then I guess just even looking at the fourth quarter guidance, excluding Alphatec, is it fair to say you're still expecting a $5 million to $8 million sequential increase in the core spine business? And what gives you confidence in that expectation?.

So, in the core business, I would say just the natural hockey stick that would occur at the end of the year that we normally see as people want to use up their high deductibles in their medicals would be the main driver of that, very similar to what we've seen in last year since we monitor them out.

It was just anticipation of the natural curve that goes on plus the continued recouping as we do get folks off guard and leave and into contributions coming out..

Okay. Thanks, guys..

Thank you..

Your next question comes from Craig Bijou with Wells Fargo..

Hi, guys. Thanks for taking the questions. I want to start with 2017. And Dan, maybe your comments that you made before about 2X or 3X the market growth rate. And I appreciate your comments on being more aggressive on sales force and training your new reps or getting noncompetitive reps, but just given the ramp for noncompetitive reps to get productive.

And then potentially, some non-competes with competitive reps.

What are some of the specifics that are really going to drive that acceleration? If some of the sales force that you're going to train may have to sit on the sidelines for a little while?.

Craig, I think it's a decent question. A couple of things, right, I think certainly even this year when you annualize where we are and when we certainly going to exit, we're in a growth position here for the year. And all we're saying is we're going to improve from that.

I'm calling out two times the category growth for us once we stabilize sales force. Given our history and our product portfolio, it doesn't seem that unreasonable. We have been recruiting through the year. We have candidates who will be coming off guard, leave and coming in and having contributions going forward.

You do have the continued momentum of products. And especially even the two that David just called out tonight with INDEPENDENCE MIS or even QUARTEX. There's a lot of things that are going to move that momentum forward that I think is going to allow us to get to where we think we are at this estimate..

Okay. Thanks. That's helpful. And then if I can switch over to Alphatec in Japan. And just wanted to get – obviously, it's uncertain and you guys don't know definitively.

But how are you – how should we think about the timing of you getting Globus products approved in Japan? Is that a 2017 event? And would that provide upside to your $40 million estimate for Alphatec in 2017, or is there some cannibalization that will go on there?.

Hey, Craig. It's Anthony. Thanks. That's a good question. So, we have started the process of Globus product registration. But as you're probably aware in Japan, that's a lengthy process. We do think it will get a significant number of products registered in 2017 but probably not until around the middle of the year or maybe early in the third quarter.

So, probably not a ton of upside in 2017 from those sales given that much of it will be more likely cannibalization of the existing sales to Alphatec customers..

Okay. Thanks for taking the questions..

Your next question comes from Bob Hopkins with Bank of America..

Okay. Hello..

Hello. Bob, we hear you..

Hey. Okay. Great. Sorry about that. So, a couple of questions, if okay. First, I just want to make sure on the guidance, excluding Alphatec, the guidance for Q4 on kind of core underlying spine growth, it sounds like that's pretty similar to what you experienced in Q3.

And then for 2017, I guess you're saying somewhere in the neighborhood of 4% to 5% organic. I just want to make sure I heard the guidance right..

Yeah, you did. Bob, this is Dan. You heard it right, so I think you would see something similar to Q3 as you did to Q4 this year. And then as you come out into next year, you would look at a core that's probably with an exit point as closer to between 5% and 6%..

Okay.

And then how much worse is pricing? I'm just curious, relative to your comments, where was pricing and where is it now?.

Pricing has always, as we've been calling out since I've been here in that mid single digit range and it still remains in that range. We had a slight uptick for a couple of reasons. We're actually renewing some fairly critical contracts. We're making sure we're competitive.

We also had an anniversarying of a contract that was favorable to us when we exited it in the prior year and that's kind of come back. Really, those two factors have had a slight lift into it. But again, as you see with that, we're still delivering close to a 77% GP. We're hitting the 30%/70% EBITDA.

It's things that we're able to work through with the different counter levers that we have in place..

Okay. And then just the last question is for David and it's a big picture question. So you listen to this call, and all of the questions around the sales force and you guys have really focused people on the sales force as the primary issue that has affected growth of the company.

And I'm just kind of curious, you only have single digit market share in spine right now and you have a very capable sales organization. I'm just curious why can't you grow the business without adding sales people? You have a very small market share today.

You have a good suite of products and just the emphasis on the sales force, I get that at one level. But at another level, it seems like you should be able to grow this business without adding sales people.

So I'm just curious if you could address that?.

Sure. Thank you, Bob. That's a good question. If you look at our competitors, and you look at Medtronic, they outnumber us still about five to one in number of sales territories in the U.S. alone. And at some level, there's a bandwidth issue with having a salesman have more than about between $1.2 million and $1.5 million of sales.

And after that, it becomes pretty hot for one salesman to cover that much of business. And so that's really why – at some point, you can only grow so much organically with your current number of salesmen.

And we need to be able to at least get on a trajectory to go head to head with Medtronic and our larger competitors with the number of sales territories. And that's why we believe that's key to our growth is growing our sales force. Now, we also have where we have a full penetration of salesmen in different geographies.

We have market share either comparable to Medtronic, or we're number two in several places. And then we have green space, open space, where we don't have much coverage. So, that's why we want to keep focusing on making sure we can compete on an even-playing field when we have that type of volume of salesmen..

So, in the U.S., how many sales people, roughly, do you have then if Medtronic is five times the size? I'm just curious..

See, we don't share that number, Bob, but we have pretty good market intelligence on where we think Medtronic is. And that's kind of how we based our – when I say the ratio of 5:1, and if you look at our U.S. sales and our estimation of Medtronic sales, and they also are about 5:1 with us in our U.S. sales..

Okay. Thanks, guys..

Thank you, Bob..

Your next question comes from Richard Newitter with Leerink Partners..

Hi. Thank you for taking the questions. I wanted to just follow up on the pricing comment. I know that sometimes we all get confused because different companies refer to pricing in different ways, sometimes it's pure pricing for like-for-like products, year-over-year, sometimes it's net of mix.

I think you said pricing was kind of more trending in that mid-single-digit negative range, maybe a slight uptick from prior.

Is that net of mix, or with the positive mix shift from new products you're able to get that down, and what would that number be?.

Hey, Rich. Thanks for asking and clarifying. It's actually an important point to call out, and I apologize for not having done that earlier. So, keep in mind the way we're doing this is we actually do this by SKU. And if we had had a product last year, and it's active this year, we look at that change of price.

There are other competitors who may look per procedure and in that build in mix as well as new products and different things like that. This is really a pure look at just our products over there last year. What is the price impact going forward and we calculate them out.

So, seems to be a little bit starker but it's a very different methodology than what I know other people use..

Okay. And just to follow up on that. You have a slew of new products launching at NASS, you called two out on the call.

Should we be thinking of the mix shift potential as maybe helping to alleviate that incremental price burden moving at 2017, or is that – should we just think of this as the new norm?.

No. I think you're spot on with that. That's one of the secrets and one of the benefits in the past couple of years as when we're launching out these products to start out with a premium, that helps with the mix to negate some of the stuff. Keep in mind as well what we've always called out the power of the Branch Medical acquisition.

That's a counter lever that will continue forward and certainly if needed, the benefit of med device tax. So, while we look at this, and certainly we'd expect to be competitive where it makes sense on price and launch new products.

We're still committed to having that strong mid-70s% GP and that mid-30s% EBITDA even with us adjusting price as appropriate..

Okay. That's helpful. And then, Dan. I just want to follow up, you mentioned that you think for 2017, you're talking to have, I think, what you say about a 6% or 5% to 6% organic growth rate for the year. But that you think you should be able to see growth stabilize in the first quarter of 2017.

I'm just trying to figure out what does stabilize mean? Does that mean that it stops decelerating and getting worse but we're still see a negative organic rate maybe in the first quarter and it just give you that much deeper into the back half of next year, or are you saying more stable in line with market growth rates.

What was that comment supposed to guide us to?.

Thanks, Rich. So, really, a couple of things. I do not think that suddenly January 1, we come out and launch out at a plus 6% growth. I think it's something that you work into as you get through the year and that's what I'm just trying to signal. So I really don't have the splits clearly laid out as to what Q1, Q2 or Q3 would look like just yet.

I'm just saying I think what we see and I'm signaling down 3-plus percent in Q4. I think we could have something in that range or neutral as you get into Q1 and then start seeing growth in Q2.

I will tell all of you that as we launch trauma and robotics and stabilize core, I expect out a heavier second half of the year than probably what we've historically seen for those reasons..

Okay. Thank you..

And your last question comes from Kyle Rose with Canaccord..

Great. Thank you very much for fitting me in.

Can you hear me all right?.

We can hear you, Kyle..

Yes. So, a lot has been asked. A couple of questions quickly. Coming out of NASS, we saw a lot of focus on 3D printing technology and 3D printed products, specifically in the spine area.

I just wanted if you could, David, give us your thoughts there? And then also from a longer-term perspective, from a tax rate, you've got the Alphatec acquisition which should drive higher OUS mix. I just wonder if you guys could provide some updated medium- to longer-term thoughts from a tax perspective there..

Thank you, Kyle. I'll just take the 3D printing piece and pass the tax piece to Dan. On the 3D printing, we have investigated this over the years. We think that there's a place for 3D printing in spine. Primarily, I look at that for custom implants customized to either scoliosis in very young children or people with abnormal anatomy.

I still don't see the benefit of having 3D printed implants for the vast majority of the procedures just because the cages that we have and everyone else has, has a space for bone growth. And the benefits of 3D printing is that you can have porosity through the cage.

Now us and a couple of other companies already have surface coating that you have bony on growth. Having thin spicules of bone growing through the cage really doesn't add any stability. So, when we've looked at it, we really felt that this doesn't make a whole lot of sense for our entire cage portfolio.

And that being said we're investing in 3D printing equipment. We want to keep looking at places where we can make parts that are more customizable to patients but we still don't see that as being a really big clinical need yet. And let me pass the tax question to Dan..

Thanks, David. So, Kyle, we have on the acquisition with tax optimization in mind. Of course, we're one month into it. We have many things to do before we can throw the switch, but certainly it's part of our long-term strategy. As we said this year, we've optimized the U.S., we're getting those benefits as we mentioned.

We should be able to have further benefits, not yet quantified that we would see just through this acquisition, the sourcing strategy. And again longer term, as we stabilize that, would even potentially migrate into manufacturing if that were the right move for us.

So, as we go through our strategic planning horizon into 2020, we're looking into really affect that tax rate. And you're correct that there could be a potential for next year. It's just too early to call right now. So we'll look at that and factor that in as we give 2017 guidance after fourth quarter call..

Okay, great. And then just one last question on the sales force. On the last call, you talked about higher net adds in the Q2 than you had all of 2015.

Just can you remind us historically what the type of productivity curve has been for whether it's a competitive rep that's sitting on the bench for a year before they come on versus a new rep that you guys are training internally? Just how does that – is it 12 months, 24 months? How should we think about with the hiring we've seen to-date and when we should see that contribution in 2017? Thank you very much for taking my question..

Sure. First, keep in mind that we already have competitive reps who are on their non-competes or just rolling off their non-competes already in our system. And on those competitive reps, just the fact that they leave their territory, we tend to get some business, and not always, but sometimes we get some business from them.

But we really don't start hitting on full cylinder till they're back in their territory meeting with their customers. So, on average, I'd say we can get about 20% to 30% of their business in the first year, and then after they come back, you can get growth from there to back to their normal levels.

On the non-competitive reps, we feel like we're not yet at a position, at a point where we can repeatedly predict this. We are hoping that we can get them all productive and on straight commission within three to four years. And that's the current thinking with the training programs that we have in place. So, they are more of a longer-term play.

And as I alluded to earlier with Bob Hopkins' question is, that's the second piece of the puzzle, is how can we keep growing our sales force at rates much higher than our competition so we can get to that level of sales coverage throughout the U.S..

With no further questions, we will now conclude the Globus Medical third quarter 2016 earnings release conference call. Thank you, all, for joining us. You may now disconnect..