NuVasive Inc

F:NK8

Earnings Call Transcript 2021-Q1

[Operator]

Greetings, and welcome to the NuVasive Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow our prepared remarks today. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference call over to your host, Matt Harbaugh, Chief Financial Officer. Thank you. You may begin.

[Matt Harbaugh, Chief Financial Officer]

Thank you. Welcome to NuVasive's first quarter 2021 earnings call. Joining me on the call is NuVasive's CEO, Chris Barry. Chris will provide opening remarks, and then I will share additional details on our financial results before we open it up for Q&A.

The company's earnings release, which we issued earlier this afternoon, has been filed on Form 8-K with the Securities and Exchange Commission. We have also posted supplemental financial slides on our website in the Investor Relations section to accompany our discussion today.

I would like to remind you that 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 to be correct could cause NuVasive's results to differ materially from those expressed or implied by such forward-looking statements.

In particular, there is significant uncertainty about the duration and impact of the COVID-19 pandemic on the company's business, operations and financials. The COVID-19 pandemic continues to evolve, and it is important to note that our commentary reflects our best estimates as of today.

Additional risks and uncertainties that may affect future results are described in NuVasive's news releases and periodic filings with the Securities and Exchange Commission. NuVasive assumes 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. Many of the financial measures covered in today's call are on a non-GAAP basis, unless noted otherwise. These measures include non-GAAP gross margin, selling, general and administrative expenses, research and development expenses, operating margin, other income and expense, tax expense, net income, diluted earnings per share, free cash flow and net sales reported on a constant currency basis. Reconciliation to the most directly comparable GAAP financial measures may be found in today's earnings release and the supplement financial slides posted on our website, which are accessible on www.nuvasive.com in the Investor Relations section.

With that, I'd like to turn the call over to Chris.

[Chris Barry, Chief Executive Officer]

Thank you, Matt, and good afternoon, everyone. I hope you're well. Let me begin by thanking the incredible researchers, scientists and health care workers for their tireless work on the COVID-19 vaccines and distribution. It's a true testament to the strength of our health care system, and I'm encouraged by the progress and its eventual impact on returning to normal business operations and daily life.

Earlier today, we reported first quarter 2021 financial results. On today's call, I will provide an overview of our first quarter 2021 performance, a review of our key innovation highlights and thoughts on how our culture will support our continued success. After that, Matt will provide additional details on the quarter and his thoughts on the remainder of the year.

NuVasive delivered first quarter 2021 net sales of $271.2 million, an increase of 4.4% on a reported basis or 3.1% on a constant currency basis compared to prior year. Throughout the quarter, there were continued signs of recovery in the global market, as the impact of COVID-19 on elective surgeries lessens, specifically within our core spine business across Europe and Asia Pacific.

This was evident in our overall results with strong international performance and US procedural volumes improving month-to-month. I'm confident in the deliberate investments we're making in the right people, innovation and organizational processes to globalize the business.

In particular, US Spinal Hardware delivered year-over-year growth led by adoption of new product introductions in the anterior portfolio, surgeon demand for the NuVasive anterior cervical plate and growth in pediatric fixation with Reline 3D.

These results were offset by a decline in our US Surgical Support business line, where we experienced pressure for procedural mix on our biologics and intraoperative neuromonitoring products.

I'm proud of our continued success in our global markets. In Q1 2021, we delivered low-double-digit growth on a reported basis with the core spine business growing across all key regions. In particular, Asia Pacific continues to execute and delivered double-digit growth across all major geographies.

Especially in Japan, we saw further adoption of cervical and anterior products tailored for the surgeons and patients in the market. While we are still managing through the pandemic, the signs of recovery we're seeing in elective surgical volumes and patient sentiment in pockets around the globe are promising.

In order to fulfill our vision to change a patient's life every minute, we remain committed to investing in new innovation. Our year-over-year increase in R&D investment further supports our long-held position as the innovation leader in spine. This will result in new market-leading technologies across all procedural segments, unlocking further opportunities for multiple vectors of growth across the business.

As we shared on our last earnings call, we closed the Simplify Medical acquisition in February, advancing our cervical portfolio with the most clinically effective technology in cervical total disc replacement. We received great response from our surgeon partners with this latest addition to our C360 portfolio, which now includes a comprehensive offering for both anterior and posterior cervical surgery.

The Simplify Cervical Artificial Disc is designed to offer surgeons best-in-class capabilities, including: radiologic design, which allows for enhanced visualization through MRI post-operatively compared to competitive devices; various anatomic disc height, including the lowest available disc height in the market; and physiological motion, designed to balance mobility and stability.

Recently, the Simplify Disc received US FDA approval for two-level cervical total disc replacement, making it only one of three devices approved for this procedure. In a tube level FDA, investigational device exemption study, the Simplify Disc demonstrated clinical superiority at 24 months compared to ACDF. The device achieved the highest overall clinical success rate at both 1 and 2 levels compared to any other approved cervical disc.

This is a milestone achievement. It demonstrates the value of our disciplined investment strategy and better positions us to take share in cervical spine surgery, which represents an approximately $2.6 billion global opportunity. We're working through integration efforts and commercialization of the Simplify Disc as we invest in sales training, surgeon training and manufacturing to bring this product to more surgeons and patients around the world.

Anterior spine surgery is roughly a $900 million global opportunity. We are the leader in lateral and single-position surgery and are well-positioned to become number one in ALIF. The Modulus ALIF implant is the latest addition to our advanced materials science portfolio which features our Modulus 3D-printed porous titanium technology and Cohere Porous PEEK technology.

This is designed for both Supine ALIF and the NuVasive XALIF procedure and rounds out our Modulus offering across all procedures. Throughout last quarter, we continue to see success with clinical evaluation of Modulus ALIF, as we prepare for a full global commercial launch this summer. Surgeon feedback has been extremely positive from the various implant sizes to the personal instrumentation, and we look forward to bringing this technology to more patients.

Posterior spine surgery is another important growth driver for our business, representing an estimated global opportunity of $1.6 billion. We see tremendous runway in the posterior segment with the comprehensive reliant fixation system, further adoption of our mass ALIF and MAS Midline procedural offerings and our advanced materials science implant portfolio.

In enabling technology, the launch preparations for the Pulse platform continued, as we await FDA 510(k) clearance and CE Mark approval prior to our anticipated summer release. We continue to build the commercial pipeline and have developed labs for surgeons to engage with our R&D teams on this differentiated platform.

These labs give surgeons a hands-on opportunity to experience the power of Pulse's enhanced workflow in a simulated case. We are preparing to start clinical evaluations with surgeons and hospitals that specialize in broad surgical approaches, as we bring the platform to market.

Enabling technology remains a cornerstone of our long-term strategy, as we continue to enhance the Pulse platform in future enabling technologies. There remains a substantial opportunity to integrate enabling technology with spine surgical procedures.

With its ability to utilize in 100% of spine cases, we believe Pulse can play a pivotal role in accelerating the procedural shift to less invasive surgery with navigation. Research and development continues on Pulse Robotics, which is one of many future applications supported by the Pulse platform to help drive better clinical outcomes in spine surgery.

We had an increase in surgeons trained both virtually and at our state-of-the-art West Coast Experience Center in San Diego compared to Q1 of 2020, from courses on X360, XLIF and MAS ALIF. We provide opportunities for seasoned surgeons, along with residents and fellows to learn the clinical and technical skills behind NuVasive's procedures.

Construction on our East Coast Experience Center is ahead of schedule, and we look forward to the opening of this facility in Q3 2021. This new center will further our ability to train surgeons in the U.S. as well as other key global markets, on our less invasive surgical approaches, integrated with enabling technology.

It is our goal through our clinical professional development program, coupled with the premier training facilities at our experience centers, to educate surgeons on new techniques to improve clinical, operational and financial outcomes.

Finally, I'm excited to see our employees rallying around our vision. The culture we're building requires a shared mindset, where we collectively leverage our differences to best serve our surgeon and patients around the world. We continue to advance our diversity and inclusion initiatives, embed our core values and improve organizational alignment, which will further our success. Recently, we received recognition from Forbes as one of America's best midsized employers, a reflection on the people and passion here at NuVasive.

I'm encouraged by the current global market recovery and the momentum we are seeing in our business. The company's continued commitment to R&D investment furthers our ability to deliver the strongest innovation pipeline in spine. Our long-term strategy provides opportunities for multiple vectors of growth, and we will continue to operate with discipline, further globalize the business and proceduralize each spine segment with market-leading technology as we work to become the largest spine technology company in the world.

I'll now turn the call over to Matt to discuss the company's financial results in more detail.

[Matt Harbaugh, Chief Financial Officer]

Thanks, Chris, and good afternoon, everyone. Net sales for the first quarter 2021 were $271.2 million, up 4.4% compared to prior year on a reported basis, 3.1% on a constant currency basis. Throughout the quarter, we saw overall surgical volumes improved month-to-month, with March being above our previous expectations.

However, similar to the past year, we continue to see variability each week and around the globe. Although not back to pre-COVID levels in Q1, the signs of recovery demonstrated in the quarter are encouraging and support our view that in 2021 on a full year basis, we can deliver growth above pre-COVID results seen in 2019.

US Spinal Hardware net sales were $145.2 million in the quarter, up year-over-year by 4.9% or 6.5% when adjusted for one fewer billing day. Notably, pricing was a 1.2% headwind. The US business saw growth from pockets of the thoracolumbar portfolio, driven primarily by strong results for Modulus ALIF, the latest implant in our advanced materials science portfolio and Reline 3D in our pediatric fixation portfolio.

Cervical reached growth over the prior year period as we continue to see solid adoption of our ACP system and nominal net sales from the introduction of the Simplify Disc. The strength from our innovation in these procedural approaches was partially offset by an expected slower recovery in our XLIF franchise due to the impact COVID-19 has had on surgeon training and more complex surgeries.

Turning to US surgical support. Net sales were $61.2 million in the quarter, down from $64.3 million in the prior year period, representing a 4.7% decline. Biologics and interoperative neuromonitoring product lines primarily drove these results as they continue to experience pressure due to COVID-19 recovery rates in certain procedures, including XLIF.

International net sales in the quarter grew 13.4% as reported over the prior year period or 7.8% on a constant currency basis to $64.8 million. In particular, these results were driven by strength in our Asia Pacific region, which grew double-digits within the quarter, with continued product adoption across all procedural segments. We saw our European region stabilize from the pandemic within our core spine business.

Non-GAAP gross margin for the quarter was 73.6%, up 130 basis points from the prior year period. Within the quarter, we continued to see solid benefits from our in-source manufacturing efforts and supply chain efficiencies. The improvement over prior year was driven by better management of inventory controls and increased absorption from our manufacturing facility, which was partially offset by normal pricing pressures.

Moving down the income statement. Non-GAAP SG&A expense was $143.5 million for the quarter, representing a 13.3% increase compared to the prior year period and 52.9% of net sales. The primary driver of the increase is compensation expense for variable income related to the increase in net sales during Q1 2021, as well as a reversal of compensation expense that occurred in Q1 2020 related to certain equity awards. Within the quarter, we also started to reinvest in many of the initiatives that were put on hold due to COVID-19 in 2020.

Non-GAAP research and development or R&D expenses increased to $20.8 million in the quarter. This was an 18.9% or $3.3 million increase over the prior year period. The increase was primarily driven by continued investment in our technologies, including, but not limited to the Pulse platform and further build-out of our advanced materials science portfolio as well as the Simplify Medical acquisition. Our goal is to deliver the strongest innovation pipeline in spine, and we have consistently increased R&D spend to do so.

First quarter non-GAAP operating margin came in at 13%, which was a decrease of 390 basis points when compared to the first quarter of 2020. Non-GAAP other income and expense for the quarter was $10.6 million of expense, down from $11.1 million of expense in Q1 2020. The reduction for the quarter was driven by lower unrealized foreign currency losses, offset by higher cash interest expense associated with the convertible debt issued in 2020.

Non-GAAP tax expense in the quarter was $5.6 million, resulting in effective tax rate of 22.8% versus a tax rate of 22.5% in the same quarter last year. In the first quarter, the company reported non-GAAP net income of $19 million or diluted earnings per share of $0.37. This is compared to non-GAAP net income of $25.4 million or diluted earnings per share of $0.48 in the same period last year.

Turning to GAAP results. GAAP net loss was $7.5 million or diluted loss per share of $0.15 compared to GAAP net income of $5.3 million or diluted earnings per share of $0.10 in the same period last year. GAAP results are inclusive of an approximate $0.14 negative impact due to unrealized foreign currency losses associated with intercompany balances and contingent consideration liabilities for regulatory and net sales milestones in connection with the Simplify Medical acquisition.

Free cash flow for the first quarter was positive $6.6 million versus negative $22.9 million last year. I want to remind you that the first quarter is historically the lowest free cash flow quarter of the year and typically has negative cash flow. The increase in free cash flow was a result of improved operating cash from better working capital management as well as reduced inventory purchases when compared to prior year.

We ended the quarter with cash and cash equivalents of $233.9 million. Within the quarter, we acquired Simplify Medical and used $150 million of cash to fund the upfront payment. In addition, we paid off the $650 million principal amount of convertible debt that matured in March of 2021. This reduced the principal amount of debt outstanding from $1.55 billion to $900 million. The company also ended the quarter with an undrawn revolving credit facility of $550 million.

Now shifting gears and looking forward, I want to provide some insight as to how we think the rest of the year will play out. We continue to operate in a dynamic environment around elective surgeries. And although monthly volumes increased throughout the quarter, there are still signs of volatility as COVID-19 resurgences occur. With this in mind, we anticipate surgical volumes to remain relatively stable throughout the second quarter of 2021 as vaccine distribution continues and patient sentiment improves, with the potential for even further improvement in the second half of the year.

Accordingly, our outlook for 2021 remains consistent with what we shared on our last earnings call in February. We continue to believe that top line consensus plus or minus $1.2 billion is a good number to use for full year net sales, and the quarterly cadence of consensus is in line with our own internal expectations. This includes our most recent assumptions about foreign currency, which we expect to be an approximate $9 million additional headwind compared to prior internal modeling.

Before I hand the call back over to the operator for questions, I do want to briefly comment on the progress we are making on the Simplify Medical integration. As Chris mentioned, we were very pleased with the recent FDA 2-level approval for the Simplify Disc. However, this does not change our full year 2021 expectations of roughly $5 million of contribution in net sales. The limiting factor on the net sales ramp remains implant and set supply, and we continue to execute on our original time line of integrating the supply chain into our Ohio and Memphis locations. We are excited about the long-term prospects of the Simplify Disc as part of our C360 portfolio to help change the lives of more patients around the globe.

With that, thank you for your time today. I'd like to turn the call back over to the operator to start the Q&A session.

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Robbie Marcus with JP Morgan. Please proceed with your question.

[Lily Lozada, JP Morgan]

Hi. This is actually Lily on for Robbie. Thanks for taking the question. So I was hoping you could dive a little bit deeper into what you're seeing in the US versus internationally. You obviously had a pretty good international quarter and you guys sound a little bit more optimistic on international and Europe specifically than some of your peers maybe do. So any color you'd be willing to share there would be helpful? Thanks.

[Chris Barry, Chief Executive Officer]

Yes. Thanks for the question. Yes, look, I'll kind of break it down. Our US business, we saw some choppiness over the course of the quarter. The good news is, we saw a stronger-than-expected recovery late in the quarter. So we've seen the trends in the US continually get better, and that's also extended now into April. On the international side, we've been -- just been extraordinarily happy and pleased with what we've seen in Asia/Pac through the course of the pandemic and into Q1 of this year, really strong growth. We've done a lot of work to provide countries like Japan specific technologies to support unique needs of their surgeons, so I think that's paying dividends for us as a company.

As we move into the European market, it's been a bit choppy. You had kind of the tale of 2 countries. At times, the UK and Germany have started to recover, but it's been starts and stops across the board. So Europe collectively is getting better, but there's still some geographic hotspots that are popping up from time to time. Asia Pac continues to perform very well. And as I said, with the US, we continue to see positive signs of recovery, still some hotspots, but in general, recovery we think is happening on a global level. We're very pleased with what we're seeing internationally.

[Operator]

Thank you. Our next question comes from the line of Kaila Krum with Truist Securities. Please proceed with your question. [Operator Instructions] Our next question comes from the line of Anthony Petrone with Jefferies. [Operator Instructions] Please proceed with your question. Mr. Petrone, is your line unmated? Our next question comes from the line of Richard Newitter with SVB Leerink. Please proceed with your question.

[Richard Newitter, SVB Leerink]

Hi, thanks for taking the question. I trust you can hear me?

[Chris Barry, Chief Executive Officer]

We can. Thank goodness.

[Richard Newitter, SVB Leerink]

So maybe just start off and perhaps, I'm seeing some of the progress here, I'm sure that's very encouraging for the team and the organization. But I was wondering, Matt, maybe could you give us a little bit of color around, how to think about the profitability outlook margins?

In the past, the 1Q margin has historically been the low point relative to the fourth quarter. It's usually on average over the last few years, anywhere from a 300 to 400 basis point delta between 1Q and 4Q with 3Q below 2Q. I mean is that a reasonable range and way to be thinking about the cadence of margin through the year? And anything else you could provide would be helpful there.

[Matt Harbaugh, Chief Financial Officer]

You bet, Rich. Let me try and unpack that question. So the first thing I would say is, I want to reiterate, what I said in the prepared remarks, which is, from a top line perspective, we feel good that consensus is in the right spot both for the second quarter as well as from a full year perspective. And obviously, it remains to be seen COVID impact. If COVID impact is lessened even further this quarter then obviously, we might do better than that, but still want to play that ball down the field.

With regard to your question around margins in general, I'd say gross profit as a percent of sales came in at a really nice place for us, and we foresee that kind of staying in that 72% to 73% gross profit as a percent of sales range throughout the year. I would say from an SG&A perspective, the second quarter is going to have pressure, and a lot of it has to do with the exciting product launches we have and obviously, we're already selling Simplify, but the bulk of that $5 million is going to be in the back half of the year. We've got C360 that we're in the middle of launching. We also have Pulse coming out here as well. And so the second quarter is going to be from an SG&A perspective, a quarter of investment, but it's the right kind of investment. It's the fun kind of investments you want to be making right now.

R&D, that's going to continue to be very strong. We've been messaging for some time that we were continuing to keep our foot on the pedal, and you saw that in the quarter coming in at $20.8 million. That kind of gets us above that $80 million number, whereas historically, we've been kind of below that place. So all-in-all, expectations out there are pretty much in line with how we're thinking about the year.

[Operator]

Thank you. Our next question comes from the line of Matt Miksic with Credit Suisse. Please proceed with your question.

[Matt Miksic, Credit Suisse]

Hi. Thanks for taking my questions. So one on a comment you made, Chris, I think, in your prepared remarks, on Pulse and the robotic application being one of many applications for the Pulse platform going forward. And I'm just -- not to get ahead of ourselves, but I'd love to hear sort of what's next on that front? And then I have one follow-up on Simplify, if I could.

[Chris Barry, Chief Executive Officer]

Thanks, Matt. I appreciate it. Yes, we talked a lot. We're happy with the progress we're making. We've submitted regulatory approval both in the US and in Europe for regulatory approval that we expect this year with launch as we communicated in the summer months and hopefully generating solid revenue by the end of the year.

We've also talked a lot about extensibility of Pulse. We view the Pulse as the true platform that we can launch future technologies off of, Robotic being one in our near future, but not at all intended to be the final piece of the puzzle.

So we think about our proceduralization strategy and having robust instrumentation, robust implantables, adding and extending our line posterior fixation system and now adding in things like navigation or robotics, but there are other technologies out there that we believe continue to accentuate and complement our proceduralization strategy.

So when I talk about beyond robotics, it's simply just extending our proceduralization strategy to new and novel technologies that further complement that strategy. So we've got a healthy pipeline of ideas, both organic and inorganic that we think could potentially fit in. We'll talk about those as they become real for us, but we very much intend to create a system within Pulse that is a living breathing system that continues to grow with the needs of our customers.

[Matt Harbaugh, Chief Financial Officer]

Yes. And I would just say from a net sales perspective, nothing has really changed from a couple of months ago when we did our last earnings call. We still feel really good about the $5 million, in net sales, that is.

[Operator]

Thank you. Our next question comes from the line of Kaila Krum with Truist Securities. Please proceed with your question.

[Kaila Krum, Truist Securities]

Hi, guys. Sorry about that. We're balancing a few calls tonight, and I -- this far into quarantine, still can't figure out the unmute button. Thank you for taking our questions. So Spine Robotics has been on fire in recent quarters, and so I'd love to just know what conversations you're having with your customers about robotics in general and if they're comfortable waiting a year to have a true robotic solution in-house. And just to be clear, on the timeline, I mean what additional steps do you need to take to get the robotic system to market?

[Chris Barry, Chief Executive Officer]

Yes. Thanks, Kaila. Appreciate it. Listen, we speak, obviously, to our customers about our pipeline. And honestly, we're encouraged by the market's response to enabling technology, specifically robotics. And I say that because of -- if you think about where we play today and I think the transition we've taken on as a company moving from -- which additionally been that XLIF company to filling out the broader portfolio on anterior, leading now and with the focus to lead on leading ALIF, building out the cervical portfolio.

If you think about where today's robotics are primarily in posterior, we don't play heavily there, but now we've got coming in the next several months and quarters, a full system that's a multitude of different technologies integrated into a platform followed by robotic launch. So we feel that the timing of our launch around -- technology is -- really fits in well with our broader segment strategy within the space.

We're working through the development process. We're in the process of hardening the system now. We're on track. We'll move into a verification validation process across the software and hardware and at a system level in the coming months and quarters. And as we've talked about and communicated before, look to be in cases in 2022. As we near some of the near-term milestones within the hardening process and near into the verification validation aspect of the development timelines, we'll further communicate.

But we feel, in general, and I think our customers feel in general with us that, we need to be in the game, no question, but where we're focused today and where we think robotics plays today, we're in a good position. Clearly, we want to apply enabling technologies across the entire gamut of procedures. We've talked about that before. We want Pulse to be used in 100% of spine cases.

To that end, it's a very important part of our suite of technology to build better procedural solutions for our customers. And I think they understand that. But to be very clear, we're working with a sense of urgency to get the product into the market.

[Operator]

Thank you. Our next question comes from the line of Josh Jennings with Cowen & Company. Please proceed with your question.

[Josh Jennings, Cowen & Company]

Hi. Good afternoon. Thanks for taking my question. Just a question on Pulse navigation and just our check suggests that there's some buzz evolving, particularly in NuVasive well as surgeon community. I was just wondering, you have 510(k) approval for the original system. And are you able to market? And are you seeing the sales funnel building for Pulse nav in front of the upcoming 510(k) approval for the integrated solutions are based into that system?

And then just a quick follow-up on Kaila's question on the products, is there a -- I don't get it yet, but I was just wondering on the robotics side, what do you think of the potential clinical requirements are in terms of what you need will need to show the FDA to get the robotics module approved? Thanks for taking my questions. Sorry about that.

[Chris Barry, Chief Executive Officer]

Yes. Thanks, Josh. On -- trying to think here on the Pulse piece, a couple of things there. We've continued along through the pandemic to have multitudes of surgeons come in and test-drive the system. And through that, we believe and the surgeons have commented and validated that, that we believe have categorically advanced navigation capability in Pulse. We also have improved hardware and software with superior accuracy and stability and overall performance. We think we have superior visualization and, as we've talked a lot about an adaptable, intuitive, multifunctional instrumentation set.

So we, in light of that and then obviously, in response to that, we have seen demand build. We feel like we've got a very healthy pipeline of opportunities. I would tell you that during the course of this year and into next, the limiting factor for us will be supply, not demand. I think it's -- I'm confident in saying that. Now clearly, we're looking to ramp up our capability, not only to build our systems, but support those systems into all those systems. But clearly, we're seeing an interest and a demand, both US and internationally on the interest in Pulse.

Your robotic question was, let me make sure I understand it, potential clinical requirements to get to the FDA. I'm not going to comment on that today. I believe it's going to be because there's other predicates in the market. We're going to have to show comparative clinical capability versus those systems. We'll obviously have to show the integration and the connectivity between the robotics and our Pulse system, all things that are well in our development pathway that we feel very confident on.

So, overall, we don't feel there's a ton of surprises. We don't feel there's a lot of ambiguity. There's others that have gone before us. That's actually one of the positive, you're going to be late to market, then you've got some predicates that you can build against and understand what performance characteristics are, and we've done that work. So, we feel pretty confident providing we can get through a hardening our variation validation, go to design freeze, then we believe the regulatory pathway should be fairly straightforward. And I want to say a slam dunk, but fairly straightforward compared to what we've seen with others.

[Operator]

Thank you. Our next question comes from the line of David Saxon with Needham & Company. Please proceed with your question.

[David Saxon, Needham & Company]

Yes. Thanks. Good afternoon. Question just on C360, just with that ongoing launch. Just wondering when you'll have a full portfolio for cervical? And then you've talked about cervical being a $2.6 billion market and new basis, I think you've said is kind of in the low single-digit market position.

So, once you do have a full portfolio with C360 and Simplify now having a two-level indication, can you just talk about your share expectations over the next three or five years? Is that point of share annually doable? Thanks so much.

[Chris Barry, Chief Executive Officer]

Thanks David. I'll try to hit on as much of your question as I can. First question is, we should have a -- what we consider to be a full and an advantaged portfolio by the end of this year, we've -- we're in the process of fully launching C360. We have the anterior cervical plate going through that launch as well. We've extended our posterior fixation through LIC. That's now in the process of being launched. We then obviously have acquired Simplify Medical, acquired the Disc, and it got two-level approval, checks that box off. We've got a couple of other things that we're working through.

But in general, we're confident that we'll have the most competitive cervical portfolio in the market by the end of the year. We believe we have it now, a couple of things we're still doing. It's a great opportunity for us.

As I mentioned earlier, it's a $2.6 billion segment where we have a low single-digit share position. Our goal is to be the leader, hands down to be the leader in cervical. That's going to take some time. I think the rate of uptick is still something we're working through, but we've got aspirational expectations of how to grow this business. I think our commercial teams globally are extremely excited about this.

So, all in all, we believe we've got a growth engine in cervical for the foreseeable future. So, that's all I'll say for now, but clearly, got a lot of work to do to get ourselves prepared to truly deliver that aspirational growth. We need to get our manufacturing up on Simplify, continue to build the sets required to really grow the C360 portfolio. We continue to train, we continue to educate.

As I mentioned in my prepared remarks, we're opening up an East Coast facility to further our reach in training and education. So, we've got our work to do, but I believe, as I said before, we've got the most competitive portfolio in cervical hands down, and we expect to lead in the space.

[Operator]

Thank you. Our next question comes from the line of Kyle Rose with Canaccord Genuity. Please proceed with your question.

[Kyle Rose, Canaccord Genuity]

Great. Thank you very much for taking the question. I just wanted to circle back to the US spine business, and specifically some of the commentary around the thoracolumbar side of the business and XLIF into Q1. Can you -- I think you talked about that being a little bit slower than the cervical side of the business, so maybe just help us understand how that has -- and what the trajectory and maybe the exit velocity of the XLIF business was for the Q1 and kind of how that's trending into the Q2, just maybe the puts and takes of getting that back in line with the broader spine business?

[Chris Barry, Chief Executive Officer]

You bet, Kyle, and thanks for the question. Yes, we -- if we talked in the last quarter, you probably heard me talk a little bit about -- coming out of 2019, we were poised to continue to deliver really strong organic growth based on our X360 focus, and that was really driving a lot of growth throughout 2019 and into the first half, or first couple of months of 2020 before the pandemic really hit us. The pandemic really did disrupt our growth trajectory in our X360, because we ran out of the capability, or couldn't train new surgeons. So we had a -- we were a deficit over the course of 2020 in surgeon training.

Having said that, we're now back to pre-COVID levels and training and the good news is, even with some stronger comps, we saw a continually better performance in our XLIF franchise throughout the quarter, as I said before, with a stronger-than-expected recovery late in the quarter. And I can just say, it's too early to comment on Q2, but the April trends have been very promising, some of the strongest weeks we've seen since late 2019 where we saw some really strong mid to high single-digit growth in our XLIF franchise.

So, we feel very good about the momentum that we're coming out of the quarter with. We faced some tough comps on a monthly basis from the previous year before the pandemic hit, and we faced some challenges with our training capability. We've resolved those things. And I think we're back to where we feel very bullish about continuing to drive our X360 portfolio and continue our growth in XLIF.

[Matt Harbaugh, Chief Financial Officer]

Yes. And I would just add, as part of some of the comments made previously, about how the back half of the year is going to be particularly strong for us. If you think about it, you got C360, you got Simplify, you got Pulse and then you've got XLIF coming together for you. So that's why we're really excited on the year, and that's why we reconfirmed that, that $1.2 billion range is a good one to use right now, which is growth above 2019 and 2020.

[Operator]

Thank you. Our next question comes from the line of Joanne Wuensch with Citi. Please proceed with your question.

[Matt Henriksson, Citi]

Yes. Hi. This is Matt Henriksson in for Joanne. Just kind of continuing with Pulse. Moving to kind of the sales force side, the commercial strategy side, are there additional investments that you need to make or hire more sales reps between now and the launch? And thanks for taking the question.

[Chris Barry, Chief Executive Officer]

Thanks, Matt. Appreciate the question. The simple answer is yes. We're continuing to ramp up capital specialists. We're continuing to ramp up service personnel. So, we'll continue to add as we near and as we build out our internal capability from a manufacturing perspective. But I would say that, we've also done a lot of hiring. We're poised. We brought in a lot of very strong commercial leaders. We brought in a very specific person to lead our capital sales process. He's done a phenomenal job of building a robust pipeline.

We'll still add and complement, and we've got a hiring plan that's in parallel to our overall product growth plan. So the simple answer is yes, we'll hire as we need to, but it's more of a scaling than it is a capability. I think we've got core capability. We'll scale those capabilities in relation to our product growth.

[Matt Harbaugh, Chief Financial Officer]

Yes. And Matt, the only thing I would add is it informs kind of in my comments earlier about SG&A being pressured in the second quarter. If you think about it, whether it's C360, Simplify, Pulse, we're going to see the benefit of those net sales in the back half of the year. We've got to invest now and get those resources in because we think these products really have great outlooks over a strat plan period, and we want to make sure we invest to win during this period prelaunch.

Obviously, we did book some revenue for Simplify. It was much higher than what we were expecting. Much like what Chris said earlier around Pulse, which is getting units built, the limiter for us is actually supply. We know the demand is far greater than that $5 million, and we're doing everything we can to do those transfers into Ohio and Memphis, but it's just going to take some time.

[Operator]

Thank you. Our next question comes from the line of Matt Taylor with UBS. Please proceed with your question.

[Young Li, UBS]

This is Young Li in for Matt. Thanks for taking the question. I guess maybe just on the sources of upside or downside for the year, I'm just wondering, excluding COVID impact as much as possible, what do you think are some of the bigger sources of upside or downside risk? Is it Simplify Pulse on the upside or biologic on the downside? Any color would be appreciated.

[Chris Barry, Chief Executive Officer]

Yes. Thank you. And you sort of answered my question for me. Listen, we continue to see building strength in the areas we've just discussed. We continue to see building strength in anterior. We've got key launches. We've talked a lot about Pulse. We talked about C360. We talked about Simplify. On the cervical side, Mod ALIF and new product introduction entering in the expandable portion of the market towards the end of the year, more introductions on the posterior space.

So we've got a lot of things that we believe create upside draft for us. I would mention a lot of, in the past; we've got the strongest innovation pipeline and have increased our R&D investment year-over-year. So we feel very good about the innovation pipeline that we're currently in the process of launching and what we've got coming in the coming months and quarters. That's driving a lot of the dimensions of growth that we've talked about, and not just mentioned, our ability to now grow our anterior business and specific our cervical business and in an enabling technology space, which we think is a catalyst to further grow our posterior business as well. Geographic expansion is also an area that we continue to be very bullish on.

As far as downside, listen, we've seen drag in volume in our surgical support business. We're ramping that back up, but it's been slower. So we need to see that really come back to life on the biologics side and on our NCS business. We believe it will. As volumes increase, we believe that comes back, but it will be -- and it has proven to be a little slower. But all in all, if you look at the sum of the parts, we're net bullish on our opportunities in the back half.

[Operator]

Thank you. Our next question comes from the line of Jason Wittes with Northland Securities. Please proceed with your question.

[Jason Wittes, Northland Securities.]

Hi, thanks for taking the question. It sounds like you're somewhat locked and loaded this year in terms of there's a lot of things that you're kind of working on. You've got a pretty impressive pipeline, but your supply constraint on at least two of the big breakouts which might be Simplify and Pulse. But if I look at into next year, some of us actually look further beyond the next quarter, you've got anterior, you've got cervical and you've got Pulse all very well set up. Is that your view that this is a transition year in 2022, you really -- obviously, assuming COVID is completely behind us, really set to break out and see some outsized market growth?

[Chris Barry, Chief Executive Officer]

Yes, Jason, I think you characterized it well. This is really a year where we're setting up our strategic plan. When people ask me, how are you going to get to your operating income targets that you put out there? We're going to deliver on those targets with successful launches and couldn't be any more excited with Simplify already ahead of schedule. We're working as fast and furious as we can to get as much supply, but it's not going to be -- we're not going to be able to get it to be a huge needle mover this year, but we do think we will have worked our way through that transition as we're coming out of this year and moving into next year.

I said earlier on the call that I feel very good about the $5 million for Pulse. Again, it's going to be getting them produced after approval and such is going to be really important for us. So it is a bit of a transition year. It's a very exciting year for the company. And we've got a lot on our plate, but I think we've got a great team to deliver on it.

[Matt Harbaugh, Chief Financial Officer]

I'd also just say, Jason, 1 thing, I've been now coming up on my third year anniversary here in a few months. But we worked really hard on redefining our strategy, increasing the ways we can grow the business, building that innovation pipeline, increasing our R&D investment. One of the other things that we've done a lot of work on is just building the right cadence of new product introduction.

So not to feel good about what we're launching now. We've got a steady cadence over the next several quarters, not just this quarter, not just this year, but into 2022. We're filling in the blanks of 2023, 2024 and 2025. So we've got a lot of longitudinal launch activities put in place. We're building organizational capability to deliver on those. Some of those are enabling tech solutions that are new for us, so we're building as we go. But overall, we feel we've got -- we're set up well to deliver on the innovation pipeline going forward.

[Operator]

Thank you. Our next question comes from the line of Craig Bijou with Cantor Fitzgerald. Please proceed with your question.

[Craig Bijou, Cantor Fitzgerald]

Hey guys, thanks for taking the questions. Maybe a follow-up on the last one, and you guys are obviously doing a lot of investing for the future. Maybe a little bit more specifically on the cadence of getting to those longer-term operating margin goals that you have put out there, any way or any color that you can provide on how we should think about margin improvement in 2022 and then beyond? Is it more towards the 2023, 2024 range when you guys actually launch the Pulse Robotics and maybe some more pieces of the Pulse system?

[Matt Harbaugh, Chief Financial Officer]

Yes. Let me -- this is Matt. Let me try and walk you through the P&L a bit. The gross margin, we feel good about it, and it will improve in future years. We said when we acquired Simplify that that actually was accretive to our gross profit as a percent of sales. So we'll see an improvement. This stuff does take time though. You just don't do it overnight.

A really successful launches here are really going to help us deliver on those goals, really driving the net sales for Simplify and Pulse and C360 continuing this international growth. That's going to give us hopefully some SG&A leverage not this year, but in future years down the road.

We do think we have about $10 million in underlying savings from learning and living through COVID last year. So if you kind of look at our SG&A in the first quarter that we posted today, it's actually just marginally above what we did in 2019. And so yes, we had some COVID activity going on. Yes, we're going to have pressure on that line item in the second quarter. But, we feel pretty good that those savings have been realized in kind of the underlying base. But again, we want to invest to win.

And then from an R&D perspective, you should expect to see it continue to stay very strong. We had a really large uptick about 19% in our R&D spend. And as I mentioned earlier, we've been messaging that, that's an area where we're going to continue to invest.

[Operator]

Thank you. Our final question comes from the line of Anthony Petrone with Jefferies. Please proceed with your question.

[Anthony Petrone, Jefferies]

Hi. Great. Thanks for fitting me in here. One question would be on just the general underlying spine market and enabling technologies. And then I'll have one quick follow-up on cervical.

Can you give us a sense of just how underlying spine sort of trends in the next two years, just given that we may still have some backlog in the pandemic is coming in? And then on the Zimmer call, they talked about enabling technologies, potentially bending the growth curve for large recon implants. And so, I'm just wondering, when you think of enabling technologies in spine, what is the potential to bend that growth core upward?

The last one, just on cervical, when we think of cervical motion preservation versus fusion, how big could cervical motion preservation be over time? And is that mostly Level 2 surgeries? Thank you again.

[Chris Barry, Chief Executive Officer]

Thank you. Appreciate the questions. I'll take a shot. I may have Matt come in as well. Listen, the underlying spine market and enabling technology, I guess, to kind of address your first question, it's still early days. It's a little bit hard to portray that you'll bend the overall growth curve. I think the future of enablement technologies does potentially allow more consistent, more reproducible, more predictable spine surgery, and that's what we're pursuing.

But kind of bringing this back to where we are today, you've got less than -- roughly 25% of spine surgeries today are being navigated. We say plus or minus 15% of operating rooms have a robotic system installed today. And in that subgroup of operating rooms, utilization is still relatively low.

So I think it's going to take some time. I don't necessarily know what's going to happen over the next two years. I do believe that the pursuit of enabling technology and the promise of advanced technology in spine surgery provides the opportunity to, like I said provide more predictability, more consistency, more reproducibility. And if we can do that, then you potentially attract more patients and you actually increase the growth market. But I think that's down the road.

Cervical, most of preservation, listen, this is -- it's the highest sub-segment growth in cervical, and that's a fairly large, as I mentioned, $2.6 billion market. It continues to grow. I think as more enter this market and we continue to see positive clinical outcomes, as we talked about in our prepared remarks and we actually saw the most preferred or the best places versus the other two-level disc on the market, we think we see a strong growth opportunity against ACDF. I think its cannibalistic today. How big it could be, I think it's still a question, but the rate of growth continues to be strong. The interest continues to be very, very strong.

Our demand on this product, since we've purchased Simplify Medical, our demand has continually increased, as Matt would probably stop me here. Our ability to supply that demand is still something we're working through, but the interest in our cervical portfolio is politically simplified, and motion preservation is very high. So, I hesitate to put a number on it today, but I'll just say that it continues to show strong growth in the market, strong demand in the market. And we believe it continues to be a very strong growth for us in cervical over time.

[Operator]

Mr. Barry, there are no further questions at this time. I'd like to turn the call back over to you for any closing remarks.

[Chris Barry, Chief Executive Officer]

Thank you, and thanks for all of you participating in our earnings call today. We will continue to focus on our executing our long-term strategy to deliver outcome-driven innovation across all procedural segments in spine. I look very much forward to speaking with all of you again next quarter.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.