NuVasive Inc

F:NK8

Earnings Call Transcript 2021-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to the NuVasive Fourth Quarter and Full Year 2021 Earnings Conference Call. I would now like to introduce your host for today's call, Ms. Juliet Cunningham, Vice President of Investor Relations at NuVasive. Please go ahead, Ms. Cunningham. You may begin.

[Juliet Cunningham, VP of IR]

Thank you. Good afternoon, everyone. Joining me today are Chris Barry, Chief Executive Officer; and Matt Harbaugh, Chief Financial Officer. Chris will provide an overview of NuVasive's fourth quarter and full year 2021 business results and trends and Matt will review our detailed financial results and our 2022 financial guidance. Then we'll host a question-and-answer session. The earnings release, which we issued earlier this afternoon, is posted on the IR section of our website and has been filed on Form 8-K with the SEC. We have also posted supplemental financial information on our IR website. As a reminder, this call is being recorded and an archive will be available on our IR website later today. Before we get started, I'd like to remind you that our comments during this 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 materialize or prove to be correct, could cause actual results to differ materially from those expressed or implied by such forward looking statements. The factors that could cause actual results to differ materially are described in new NuVasive news release and periodic filings with the SEC. Except as required by law. We assume no obligation to update any forward looking statements or information which speak as of their respective date. In addition, this call will include certain non GAAP financial measures, reconciliations of these measures to the most directly comparable GAAP financial measures are included in today's earnings release and in the supplemental information both of which are accessible from the IR section of NuVasive website. And now I'd like to introduce Chris Barry.

[Chris Barry, Chief Executive Officer]

Thank you, Julie, and good afternoon, everyone. Earlier today, we reported our fourth quarter and full year 2021 financial results. On today's call, I'll provide an overview of 2021 and why I'm excited about 2022, including product innovation updates and our commercial progress to deliver growth and shareholder value. Matt will share additional details on the fourth quarter and full year 2021 performance as well as 2022 financial guidance. Our progress during the fourth quarter and in 2021 reflects how our market-leading product portfolio and new product introductions are advancing the company strategy. I'm excited about how our investments over the past three years have positioned us to accelerate growth in 2022 and beyond. For the full year, our 2021 net sales came in at $1.139 billion, an increase of 8.4% on a reported basis or 8.1% on a constant currency basis compared to the prior year. In a challenging environment, we grew our U.S. Spinal Hardware and U.S. surgical support business lines and delivered strong performance in our international business. Specifically, our core spine business in Asia-Pacific, Europe and Latin America delivered double-digit growth for the year, which reflects our progress to globalize our business in key strategic markets. As I've shared before, we have multiple vectors to drive growth. And during the fourth quarter, you saw us make progress on our strategy to extend our leadership position in less invasive surgery, take share in subsegments where we historically had underrepresented market share, deliver differentiated innovation in enabling technology and grow our international business. In less invasive spine surgery, we have continued to invest into comprehensive procedurally integrated solutions that provide surgeons the flexibility to treat any patient pathology with any procedural offering, all from NuVasive. Our clinically validated solutions help address the interior and posterior column from a lateral or prone position. And we are well positioned to extend our market leadership in the $900 million anterior and $1.6 billion posterior spine subsegments. In support of XLIF, the industry's only lateral procedure proven with 15 years of clinical evidence, we're excited about MODX XLIF, our next-generation expandable interbody for lateral spine surgery. This expandable interbody is manufactured with the latest technology from advanced materials science, research and development team, and we'll begin clinical evaluations in 2022. A key focus area within our X360 portfolio for single position lateral surgery is our X ALIF procedure. We've seen continued growth from X ALIF through increased access surgeon training and new product introductions, including Modulus ALIF, and we are now the market leader in ALIF. We also expect growth from our portfolio, and we're expanding our offerings in 2022 to feature new technologies. MOD XPL, our next-generation expandable interbody for posterior lumbar procedures, will begin clinical evaluations in 2022. The NuVasive tube system, a tubular retractor system designed to support less invasive posterior decompression infusion procedures, is scheduled to launch in the second half of 2022. These technologies help extend our market-leading TLIF portfolio. Our investments to deliver growth in the $2.6 billion cervical subsegment paid off in 2021. Our C360 portfolio delivered double-digit growth in both the fourth quarter and full year 2021, led by the NuVasive Simplify cervical disc and NuVasive anterior column plating system. The Simplify Disc has been well received by our surgeon partners, and I'm pleased to announce we exceeded our initial expectations for net sales in 2021. With the Simplify Disc now integrated into our supply chain, we've expanded capacity and expect future growth for this highly differentiated technology. Our investments to create a world-class manufacturing facility have provided a unique capability to integrate current and future technologies into our global operations. We received initial FDA PMA approval to move simplify manufacturing to our, and we have additional PMA approvals needed for assembly and packaging, which we expect in late 2022. To further extend our cervical portfolio, we expect to launch Reline Cervical, our next-generation posterior cervical fixation system in the third quarter of 2022. Reliant Cervical builds up the Reliant fixation system, one of spine's most comprehensive fixation systems on the market, offering procedural versatility and compatibility with the Pulse platform. With our ACP system, Simplify Disc and Reliant Cervical, we anticipate continued strong performance from the industry's most innovative cervical portfolio. Moving to enabling technology. The Pulse platform continues to achieve key milestones following its commercial launch in the third quarter of 2021. With customer sites up and running across the United States and our first European commercial contracts received in the first quarter of 2022, hospitals and surgeon partners see the unique value of Pulse's software ecosystem that integrates multiple hardware technologies into a single platform. Pulse's seamless workflow provides surgeons the ability to utilize multiple technologies in a single procedure, providing utility and 100% of spine surgery cases and helping to deliver improved operational, financial and clinical outcomes. Operationally, the Pulse platform is a single unit of capital equipment with 2 fixed screens, wireless device connectivity and multiple integrated software technologies. The reduced footprint in the operating room provides increased efficiency for the surgeon and staff. Financially, Pulse's extensible nature maximizes the hospital's investment. Through an initial purchase, providers can add future surgical applications from NuVasive and third-party partners that will integrate with the platform. And clinically, our internal testing shows navigation accuracy error rates are significantly lower than other lean navigation systems on the market. Our R&D teams are completing the next system level software release for the Pulse platform, launching in the second quarter of 2022. The upcoming software release will include further integration with Siemens Healthineers CEO Spin 3D mobile C-arm and additional capabilities to improve remote system upgrades in support of customer go-live efforts. Pulse increases the procedural value across our entire spine portfolio. The value proposition of the platform is reflected in the growing global commercial pipeline in the United States, Europe and Asia-Pacific. As the XLIF procedure define much of our past success, the Pulse platform will help redefine who we are today and has the potential to change the future of spine care. International continues to be a significant growth contributor for the company through disciplined commercial operations and execution. We expect to see continued growth from our international core spine business in 2022, led by our teams in Europe, Japan and Asia-Pacific as well as from our NuVasive Specialized Orthopedics portfolio, which we are continuing to return to market in key geographies. And as we grow globally, we know that we must be mindful of the impact we have on the world around us. To support our social responsibility efforts, we recently published the company's first environmental, social and governance report, which outlines our commitment to make a difference around the world. In our ESG report, we discuss our mission to manage our business ethically and responsibly and the many actions we've taken to keep our employees safe and healthy, minimize our environmental impact and give back to our communities. We recognize we have more work to do, and we will continue to lay the foundation to advance our sustainability efforts. In closing, I believe we are well positioned to win. When I joined the company three years ago, we were primarily focused on a single subsegment of spine. We are now set up with multiple vectors of growth and possess the industry's most comprehensive portfolio of procedurally integrated solutions. We've evolved as a company and our evolution will continue in 2022 and beyond as we help define the future of spine surgery. We have made purposeful investments to ensure that our portfolio is highly differentiated in anterior, posterior and cervical spine surgery and further complemented by enabling technology. Our R&D, marketing and commercial efforts are in line to target subsegments where we have historically been underrepresented. Our R&D pipeline reflects an increasing shift towards software-related and breakthrough innovation. And our commercial organization has the leadership and infrastructure in place to increase customer density. I'm proud of our company's response through another challenging year. While we can't control the macro environment, as the potential future impact of COVID-19 continues to be unknown, we can control how we lead our organization through these critical times. To that end, I believe our strategic plan and investments are paying off through the successful market response to the C360 portfolio, growing utilization and commercial pipeline of the Pulse platform and best-in-class product introductions in 2022 across each spine subsegment. We remain focused on executing on our strategic plan to deliver growth and shareholder value in 2022 and for years to come. Now I'll turn the call over to Matt.

[Matt Harbaugh, Chief Financial Officer]

Thanks, Chris, and good afternoon, everyone. Today, I will focus my comments on our fourth quarter and full year 2021 financial results and drivers, beginning with a high-level overview and commentary of our major product lines. I will also walk you through our 2022 financial guidance. Our detailed financial results have been provided in today's press release. During my remarks, I will be discussing both GAAP and non-GAAP measures and refer you to our press release for non-GAAP reconciliations. Total fourth quarter net sales were $302.1 million, an increase of 3.5% as reported and 4.5% on a constant currency basis compared to the prior year period. Full year 2021 net sales were $1.139 billion, an increase of 8.4% as reported and 8.1% on a constant currency basis compared to $1.51 billion in the prior year. Both fourth quarter and full year 2021 net sales reflected the continued impact of COVID-19 on elective procedures and hospital staffing shortages in particular. Despite these headwinds, we saw continued positive momentum for our new product introductions, including the Pulse platform and our cervical portfolio, led by the Simplify cervical disc. I will provide additional color on the performance of these innovative products a bit later. International net sales of $71.9 million in the fourth quarter of 2021 grew 3.9% as reported and 7.9% on a constant currency basis compared to the prior year period. These results were driven by Asia-Pacific, primarily Japan and Latin America posting double-digit growth. Europe declined slightly during the fourth quarter of 2021 compared to the prior year period due to COVID-related restrictions on elective surgeries. International net sales for the full year 2021 were $269.2 million, an increase of 15.3% as reported and 13.7% on a constant currency basis compared to $233.6 million in the prior year. Notably, due to our continued growth outside the United States, our international business is now nearly one-fourth of our total company net sales. During our third quarter earnings call, we discussed how NuVasive specialized Orthopedics product availability negatively impacted our net sales for the quarter, particularly outside of the United States. During the fourth quarter, we began returning precise titanium products to market. And I'm pleased to report that we are now back in the majority of our key geographies. Now I'd like to share some key highlights from our U.S. product lines. U.S. Spinal Hardware net sales were $160.5 million in the fourth quarter of 2021, representing a 3.4% increase compared to the prior year period. Full year net sales were $610.8 million, an increase of 7.4% compared to the prior year. Within U.S. spinal hardware, our cervical franchise was a continued bright spot with net sales growth of 30% in the fourth quarter compared to the prior year period. For the full year, cervical net sales grew 23.7%, and we are very pleased to report we exceeded our original full year net sales expectations for the Simplify Cervical Disc. U.S. Surgical Support net sales were $69.7 million in the fourth quarter, which represented growth of 3.4% compared to the prior year period, primarily due to sales of the Pulse platform. Notably, the fourth quarter was the first full quarter since we commercialized the Pulse platform. Pulse performed well during Q4 and exceeded our full year expectations for net sales. Importantly, we are building a strong global net sales pipeline for future growth, as Chris mentioned previously. Turning now to operating highlights. Non-GAAP gross profit in the fourth quarter was $219.1 million compared to $208.9 million in the prior year period. For the full year, non-GAAP gross profit was $832.8 million, an increase of approximately 14% compared to $730.7 million in the prior year. Non-GAAP gross margin for the fourth quarter of 2021 was 72.5%, an increase of 90 basis points compared to 71.6% in the prior year period. The year-over-year improvement was primarily driven by a decrease in inventory charges. Fourth quarter 2021 non-GAAP operating expenses were $180.3 million, an increase of 10.7% compared to $162.8 million in the prior year period. The year-over-year increase was primarily driven by investments in our commercial channel, higher labor costs and increased freight and travel expenses. Non-GAAP R&D expenses in the fourth quarter of 2021 increased to $23.1 million as we continue to invest in the Pulse platform, Pulse robotics and our core spine portfolio. This compared to $20.3 million in the prior year period. On a full year basis, non-GAAP operating expenses were $687.3 million compared to $614.1 million in the prior year. On a GAAP basis, for the fourth quarter of 2021, we reported operating margin of negative 9.4% compared to positive 6.9% operating margin in the prior year period. During the fourth quarter of 2021, we recorded a charge of $46.6 million associated with an increase in the contingent consideration liabilities for the Simplify Medical acquisition, which, in turn, had a negative impact on our GAAP operating expenses and GAAP operating margin. Our acquisition of Simplify Medical included upfront consideration as well as future milestone payments. The remaining milestone payments are based on net sales from products incorporating the Simplify Medical technology and are payable in each of the years 2023, 2024 and 2025. As Chris indicated, we are very pleased with the commercial performance and sales prospects for the Simplify cervical disc, and we updated our future sales forecast for this innovative technology accordingly. On a full year basis, GAAP operating margin declined by 480 basis points to negative 1.1% compared to positive 3.6% in the prior year. Fourth quarter 2021 non-GAAP operating margin was 12.9%, a decrease of 290 basis points from 15.8% in the prior year period. This year-over-year decline was primarily driven by cost from the addition of Simplify medical as well as continued investments in infrastructure, R&D and commercial, which were partially offset by supply chain efficiency gains. On a full year basis, non-GAAP operating margin increased by 170 basis points to 12.8% compared to 11.1% in the prior year. Non-GAAP other income and expense increased in the fourth quarter to $8.8 million of expense compared to $6.3 million of expense in the prior year period. The year-over-year increase was primarily attributable to higher unrealized foreign currency losses, primarily in Latin American currencies. For the full year 2021, non-GAAP other income and expense was $28.2 million of expense. Non-GAAP tax expense in the fourth quarter of 2021 was $9.3 million compared to $9.4 million in the prior year period, resulting in an effective tax rate of 31% versus the prior year tax rate of 23.6%, primarily due to losses in jurisdictions without associated tax benefits. For the full year 2021, our effective tax rate was 25.1%. On a GAAP basis, we reported a fourth quarter net loss of $36.7 million or diluted net loss per share of $0.71 compared to net income of $1.7 million or diluted earnings per share of $0.03 in the prior year period. This was largely driven by the increase in the contingent consideration liabilities for the Simplify Medical acquisition as discussed earlier. On a non-GAAP basis, we reported fourth quarter net income of $20.7 million or diluted earnings per share of $0.40 compared to net income of $30.4 million or diluted earnings per share of $0.59 in the prior year period. For the full year 2021, we reported a GAAP net loss of $64.1 million or diluted loss per share of $1.24 compared to a net loss of $37.2 million or diluted net loss per share of $0.72 in the prior year. The 2021 GAAP net loss was largely driven by the Simplify contingent consideration liability increase as well as inventory charges associated with NSO product withdrawals as discussed on our third quarter earnings call. On a non-GAAP basis, we reported full year 2021 net income of $87.8 million or diluted earnings per share of $1.68 compared to net income of $63.8 million or diluted earnings per share of $1.23 in the prior year. Turning to cash flow. Our free cash flow for the fourth quarter of 2021 was $11.9 million versus $44.8 million in the prior year period. The decrease was primarily driven by lower net income and working capital timing. For the full year 2021, we generated free cash flow of $71.1 million compared to $80.2 million in the prior year. Our balance sheet remains strong in 2021, with cash and cash equivalents of $246.1 million as of December 31, 2021. Our $550 million revolving credit facility remains undrawn. Turning to our full year 2022 financial guidance. I'm pleased to say we have great confidence in our business and expect the investments we have made over the past three years to come to fruition. At the same time, we recognize the volatile environment in which we're operating with COVID and related health care staffing issues as well as increasing inflationary pressure. Given those factors, we are guiding for worldwide net sales growth of between 5% to 8% compared to the full year 2021 on a reported basis. We currently expect negative foreign currency impact of approximately 100 basis points for the full year. On a constant currency basis, we expect 6% to 9% growth in 2022. Drilling down a bit further, from a phasing perspective, we expect the year to be more back half weighted due to typical first quarter seasonality, which historically has been 5% to 10% sequentially lower than fourth quarter levels. This is inclusive of Pulse and Simplify net sales ramping throughout 2022 after their product launches last year. We expect solid growth in our international business and to realize the benefit of NSO products returning to market, especially in the seasonally strong third quarter. Also, we will continue to invest in R&D to drive innovation, competitive differentiation in top line growth in 2022 and beyond. Turning to non-GAAP operating margin, which we expect in the range of 13% to 14.5%, reflects a return to a normalized level of spending, particularly in travel and surgeon training as well as inflation-related impacts. Finally, we expect non-GAAP earnings per share in the range of $2.05 to $2.35. We believe our guidance is appropriately conservative as it assumes that COVID and related health care staffing shortages will remain with us in 2022, but gradually improve throughout the year. The high end of our guidance range assumes a modest impact to our supply chain from inflation and normalized operating costs. We remain focused on improving our operating margins to return to pre-COVID levels. Beyond that, we intend to grow our operating margins over time and we'll provide updated targets at our 2022 Analyst Day. To conclude, despite macro conditions, we believe we have positioned the company for growth in 2022 with our full-line spine portfolio including innovations such as the Pulse platform and C360. We are excited about the market opportunities in front of us, and we appreciate the continued dedication and contribution from the NuVasive team to help us achieve our mission to change a patient's life every minute. Operator, we're ready to begin the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from the line of Josh Jennings with Cowen. You may proceed with your question.

[Josh Jennings, Cowen]

I appreciate the detailed download and guidance for 2022. I had two questions on Pulse. Chris, I wanted to just -- I know you mentioned some of the software upgrades that were on TAP. And I wanted to just better understand any other kind of upgrades to the system in front of the robotics module, including procedural integration, such as X360 and how that kind of road map shapes up this year? And then I have one follow-up.

[Chris Barry, Chief Executive Officer]

Yes. Thanks, Josh. Excited about the progress we made on Pulse and obviously some of the early feedback. From the get-go, we were in a series of software upgrades that will go on in somewhat in perpetuity as we move forward as we look to add value to the system. Ahead of us are more instrumentation or more navigated instrumentation, potentially then integrating as your point, more procedural road map within the software upgrade. So we'll likely to upgrade on an annual basis and add a lot of new functionality into the system. First one will happen later this year. We'll talk more about it at that time. And then from there, we'll continue to add in software and hardware-related applications as we move forward.

[Josh Jennings, Cowen]

Great. And then just a follow-up on Pulse. Just thinking about the pipeline and the early success you've had in the very early days of the launch. Can you help us understand the mix of -- are you placing these systems? Or is the pipeline filling up with, I guess, loyalist NuVasive surgeons? Or are you -- is Pulse attracting new surgeon customers? And just on top of that, how should we be thinking about kind of the hardware pull-through effect that Pulse could deliver in 2022? I mean our assumption is that the low-hanging fruit is surgeons and still going to be in early launch days and the halo effect or pull-through effect will really occur in 2023 and beyond? Just curious how you guys are thinking about that in 2022 with the guidance that was set here today?

[Chris Barry, Chief Executive Officer]

Yes. Thanks, Josh. Early days, I said all along, we want to be as flexible as possible to create an opportunity for our customers to access this technology. That being said, the majority of what we've seen so far primarily been sales. It's a little early to really calculate pull-through. So to that end, we're trying to get a better sense. We're clearly measuring and monitoring every system placed and seeing what the halo effect will look like. We know it's there, but it's a little early to comment on. I don't know if Matt , you have anything else on?

[Matt Harbaugh, Chief Financial Officer]

Yes, Josh, we are going to track it internally saying the obvious. But just so everyone's clear out there, in the U.S. support that repulse is going. Any pull-through that we're going to get though is going to go through U.S. spinal hardware. So we're tracking both of those numbers. And at least for Q4 and last year, it's not enough for a conversation, but we hope that changes as we get throughout this year.

[Josh Jennings, Cowen]

Great. And then any details on just the mix of surgeons that are either ordered or in the other oil?

[Chris Barry, Chief Executive Officer]

Yes. It's primarily been on the front side. There's been a lot of folks that have been involved with us in the past. So it has been some. I would say the pipeline though, reflects a little bit different story. We're introducing the technology to new users. We're looking to bring in new users to experience the Pulse center labs. So early adopters and early folks that were familiar with the project have been some of our first customers or first users for a good reason because we want to really test the is as we've done over the last couple of months. But as we go forward, there is -- it's more of a mix of both existing and new customers. So it will evolve as we move forward in the next couple of quarters, but that's what we see today.

[Operator]

Our next question comes from the line of Matt O'Brien with Piper Sandler.

[Unidentified Analyst]

This is Drew on for Matt. Just looking at the guidance you're providing today, you're providing a pretty wide range on both the top line and the bottom line. So I'm assuming you have a couple of different scenarios baked into each part of the range there. I know you touched on it a little bit as far as the bottom line goes, but maybe you could walk us through how you're thinking about each end of that range and maybe the base case assumptions around COVID and staffing shortages and all that kind of stuff that you've assumed in that range?

[Chris Barry, Chief Executive Officer]

Thanks, Drew. I'll take it, and I'll turn it over to Matt to give more specifics. But we came out of the last quarter were the solid -- we believe a very solid '21 performance. We continue to make a lot of progress against our strategic plan with as we talked a lot about developing multiple vectors of growth, now we're ready to execute on those things. We continue to progress against our international runway, made significant progress there over the last couple of years. And I think our guidance reflects those growth opportunities that we've developed but it also reflects the reality, which is we haven't had a non-COVID impacted quarter since Q4 of 2019. And although I see the infection rates somewhat subsided, I really look at the durability in the volumes, and that's a function of staffing shortages, inflationary pressures, things that -- I can see the infection rate drop, but I don't know these other -- how these other situations that have been sort of a by product of COVID play out over the next couple of quarters. So I think our guidance sort of reflects the positives of what we've developed, but the reality of what we're still facing in the environment. So a little uncertainty. But Matt, do you have any?

[Matt Harbaugh, Chief Financial Officer]

Yes, I would just add that the guidance we gave of 6% to 9% on a constant currency basis, which is really how we look at the numbers internally. Plus or minus, I'd say we're expecting about half of the growth in that 6% to 9% to come from new product introductions, and that would include, obviously, Simplify and Pulse. But Chris talked about it in the prepared remarks, Modulus ALIF, Cohere XLIF, TLIF. He also talked about a number of other new products that we're launching this year, small net sales this year, but we hope to grow those in future years. So about half from new product introductions and then the other half is from continued international execution, some growth in U.S. Core Spine and then the NSO return, which really is a third quarter event. So that's kind of how we're thinking about the guidance. The one thing I do want to highlight, though, is that for Q1 specifically, we did say in the prepared remarks that we think we'll be down 5% to 10% sequentially. We had a tough like a lot of other issuing companies did. And so we were not immune to that, but we will see pickups in future quarters, particularly in the back half of the year.

[Operator]

Our next question comes from the line of Matthew Blackman with Stifel. You may proceed with your question.

[Matthew Blackman, Stifel]

Maybe one to start, Matt, on the operating margin guide. Is there any way to quantify how much of a drag the supply chain and inflation is baked into the guide? And any sort of directional color on how to think about you expect to get the year-over-year leverage? Is it balanced across gross margin and SG&A? Or is it more concentrated in one of those line items more so than others? And I've got one follow-up.

[Matt Harbaugh, Chief Financial Officer]

Sure. So Matt, what we saw last year, we talked about this in previous calls, was we did see an uptick in freight cost. And we've accounted for that in the guidance that we've given here. But the key here is that we were able to absorb that through efficiencies in our supply chain. So you really didn't see it if you were looking at our gross profit or gross margin as a percent of sales throughout last year, as you know, we came in for this quarter at 73%, which was notable. So as I'm kind of running through the P&L, Matt, I would say we're still anticipating a bit of a gross margin improvement. Obviously, we're keeping close watch on inflationary pressures, but we still think we're going to be able to offset some of those costs. From an SG&A perspective, remember, we're still on a lot of product launches. We still have the lingering COVID uncertainty, and we see that manifest itself in our SG&A profile. And then we are certainly seeing inflationary pressure as it relates to compensation for our employees. And so all of those we think we've accounted for in the guidance we've given, but that's the reason why we gave a large range because we want to make sure we give ourselves some room here since it's early on in the year. The final line item you're probably curious about is R&D. It's not going to be growing to the same degree that it has in past years, but it will still be higher. You can probably take the $23 million we did in the first quarter here and multiply it by 4, and you're in the zone.

[Matthew Blackman, Stifel]

I appreciate that. And then my follow-up, Chris, we spent a lot of time talking about Simplify for obvious reasons. I was hoping to get a little bit more color on the performance of the broader C360 portfolio. So any way to talk to what growth in the portfolio is excluding Simplify? Or even if just generally how the portfolio is performing, is it tracking to where you thought it'd be at this point? Just any color on the rest of the C360 portfolio would be helpful?

[Chris Barry, Chief Executive Officer]

I don't exclude it, but I would just say that the sum is greater than the parts. We're seeing now good doors open to Simplify to the broader C360 portfolio. And as we talked about, we'll be introducing cervical later this year. So all in all, we think we've got a durable growth perspective that we talked about in some of the prepared remarks. We're looking forward to executing against that over the course of this year. Simplify specifically has been a highlight. It's been well received by our customers. We've now, as I've talked about earlier, completed some of the supply chain integration that we plan to do from the get-go, and we're ahead of schedule. So at the end of the day, we feel very good about the cervical portfolio. We've got a lot of opportunity we got to execute, but the broad portfolio, we think plays very well, and we believe it's the most competitive cervical portfolio in the market.

[Matt Harbaugh, Chief Financial Officer]

Yes, Matt, the only other thing I would add to that is it's quite amazing how a year can change the landscape. On the fourth quarter earnings call last year, we were being asked by the analysts about why is cervical struggling? And as we said in the prepared remarks, but worth repeating, on a full year year-over-year basis for the cervical portfolio, we were up 23.7%. But for the fourth quarter alone, we were up 30%. And part of that is all of these coming in tandem together to deliver those results. And yes, Simplify is in there, but 30% for that portfolio is absolutely fantastic and I would not have predicted 30% in 1 quarter back a year ago.

[Operator]

Our next question comes from the line of Matt Miksic with Crédit Suisse. You may proceed with your question.

[Matt Miksic, Crédit Suisse]

Congrats on a really pretty impressive quarter on a bunch of different drivers. So just one question, if I could, on your comments, Chris, on ALIF and then I had a follow-up on Pulse. So on ALIF, I mean it is notable your leadership there, what's been happening, I guess, driven in part by X360. Could you talk about what else is driving that? And what kind of runway you have to expand on that? I guess, pun intended, but what sort of runway that part of your business has? And I mentioned one follow-up.

[Chris Barry, Chief Executive Officer]

Yes. Thanks, Matt. We're -- as we've been talking about, the evolution of the company has been from sort of that early stage disruptor with XLIF to broadening our portfolio to be much more of a comprehensive spine player. The most near adjacency to our exit procedure was ALIF. Obviously, we kind of house that all in the anterior space, $900 million subsegment. So really, I think a lot of familiarity with certain surgeons that had used us on XLIF, now moved over to the ALIF procedure. Obviously, played a very pronounced part. Our education dealing with access surgeons, I think, played an impressive part in our growth. And as I look forward. We've got more launches coming on this year. XLIF, I think, will be a key invigorated to the XLIF procedure as well as launching the prone lateral approach over the course of the year. So we've got a lot coming in the anterior space. We are, by no means, and to make sure everybody understands this, by no means, are we moving away from our leadership perspective in anterior. We're complementing that with posterior and cervical and obviously introducing enabling tech to complement our broader portfolio. But we're very bullish on our ability to continue to lead and take share in the anterior space.

[Matt Miksic, Crédit Suisse]

That's great. And then just a follow-up on Pulse. A couple of things about the launch that we talked about a few times, and you got a lot of questions on ahead of the launch were things like what will be the preferred sort of economic pricing, contracting model for this purchase or contracting and then the other being what is the lead driver here? There's lots of folks with navigation, not many maybe -- not any other companies out there with navigation and technology to reduce x-ray exposure. And I'd just love to get a sense of how the -- what you think the key pull is around -- in addition to obviously being integrated navigation system?

[Chris Barry, Chief Executive Officer]

Yes. So I don't know that we have enough to say we have a preferred model. Clearly, someone wants to buy from us, we'll definitely take the outright purchase. And we're clearly looking at -- it kind of came from the earlier question from Josh around what's the pull-through scenario, that will help us better understand the financial models that we think are most beneficial to our company. But so it's early days. Again, our goal is to get Pulse still to be used in 100% of spine cases. So we want to make it easy for people to access this technology. We'll know more over the next couple of quarters of sort of the financial models that are probably most beneficial to us and over a period of time. As far as the driver I've had a chance to talk to several surgeons over the last week, and it really comes down to workflow and the synergies and the accessibility of the technology. Navigation, Lessray Bandini, all incorporated into a single user interface, as we described, has resonated with our customers. We still have more work to do and more applications that we can add on which I think is further exciting and actually starts to -- as we talk about extensible, extend the value proposition of what this technology represents. That's been the main driver. I mean clearly, you have certain surgeons that they love Lessray, certain surgeons that really love the Bendini aspect of it. So there's different different voices coming from different components, but almost universally, the integration of technology seems to resonate with the customers, and we continue to hear that from our customers.

[Operator]

Our next question comes from the line of Shagun Singh with RBC Capital Markets. You may proceed with your question.

[Shagun Singh, RBC Capital Markets]

So guys, just curious what the Pulse and Simplify sales were in Q4? What are you assuming in your guidance? I think you mentioned half of it is new product introductions, but it includes other items as well. And then I'm curious about the backlog. By our math, NuVasive had one of the largest backlog or lost sales coming out of 2020 and '21 relative to other companies that we track. So what are you assuming in your guidance for that? And just lastly, on inflation, I didn't hear you quantify the impact of inflation on margins. If you could do that, that would be helpful?

[Matt Harbaugh, Chief Financial Officer]

Sure. So I'll take a shot here and then Chris, feel free to jump in. With regard to Pulse and Simplify, early last year, we were clear to say that the goal that we put out externally was to achieve $5 million in net sales for each of those products. We exceeded that on both of those. For Pulse, really, if you look at U.S. Surgical that's where you're going to see Pulse for the fourth quarter and the coming years. That's where that growth is manifesting itself. With Simplify rather than talk about Simplify because what we know is that if you're only modeling Simplify or missing the whole point of C360 and ACP and things like that, you're not going to really fully appreciate the growth rates that we're hosting in cervical. And so that's how I would encourage you to think about it because buried in that 30% was a lot more than just Simplify. And so you need to be thinking about that as you're modeling it. With regard to backlog, our forecast does not include a huge bolus of surgeries coming back. It is very hard to predict. Therefore, we have some modest recovery in there, but some of that's muted with hospital staffing shortages and COVID. And then we didn't put a specific number out there, Shagun, on inflation impact on margins. But what we did do is give ourselves a very wide range, as I said earlier, to make sure we can navigate inflationary pressure. But we certainly are seeing it on compensation costs. We saw it in freight last year, and we expect that trend to continue. But it's a dynamic environment. That's why we went with wide ranges.

[Chris Barry, Chief Executive Officer]

Yes. I don't think add just on the backlog. We've seen quarter-to-quarter, Q3 as an example, last year, we saw volumes we thought were down roughly 10%. It's hard to tell, and the mix is a little different in some of the non-acute care, the ASC type of procedures may have gotten done. Some of the more complex cases or trauma, obviously, may have gotten done. Some of the DGEN cases that were more elective in nature, maybe the impact was on us. We see the -- we start to see those come back, but it's been, to Matt's point, more gradual. And with some of the constraints now with some of the staffing shortages and hospital clinical staff, I don't see the opportunity, at least not yet, for an acceleration or a catch-up, if you will. I think it will happen gradually over the next several quarters. If that changes, we'll obviously see it and feel it and talk about it. But at this point, that's sort of the prediction.

[Matt Harbaugh, Chief Financial Officer]

Yes. And Shagun, just to be crystal clear, my comment around Pulse units we placed last year were in the U.S. So the math is clear there. We are -- we do have one European commercial contract that we've received in Q1. So more to come on that, but just to be clear.

[Operator]

Our next question comes from the line of Jason Wittes with Loop Capital. You may proceed with your question.

[Jason Wittes, Loop Capital]

I just want to know if there's any -- on Surgical Solutions, maybe a discussion of the -- what's going on outside of Pulse? I mean, you sort of answered it. It seems like most of the growth within that business, if you're saying Pulse exceeded $5 million was from Pulse. So just curious to know just kind of what the broader implications is for the remainder of the Surgical Solutions business?

[Chris Barry, Chief Executive Officer]

Yes. I mean, Surgical Solutions has been roughly flat for us over the last several. We have in the NCS business house there as well as our biologics business. NCS was clearly a reflection of the volume, and it's very much volume related on the NCS biologics has been a little choppy for us. We feel like we're in a stable position. But generally speaking, we sort of consider the U.S. surge support as with the market. And right now, the market is still flattish in our -- at least from what we see today. So the implication is that -- and that's what Matt said is that the Pulse success or the units that we're selling more reflect into the U.S. Surgical business. So that's kind of how we're -- we'll set a barometer on it.

[Jason Wittes, Loop Capital]

Okay. And just a quick follow-up. Is there an update on the robotic arm timing?

[Chris Barry, Chief Executive Officer]

Yes. There is actually, well, maybe not a big update but some update. So I've gone through this before in the robotic world and like goes into the robotic program, not just the ARM but software instrumentation, in-card electronics, the end-effector work you do. And the good news is we made progress in each of these areas over the last several quarters or the last couple of years. And there's no -- and while there's no change to our previously commented time line, I will say we've continued to invest in our new resources. We've completed significant number of labs internally over the last several quarters and made progress against our design development process. And we do have a key milestone in Q2 that we believe will give us very good insights to our clinical readiness. So stay tuned. We are starting to really track in now the anticipated first man. We've got a critical milestone that will be coming up in Q2, and we'll inform you in that time frame kind of where we are.

[Operator]

Our next question comes from the line of Craig Bijou with Bank of America. You may proceed with your question.

[Craig Bijou, Bank of America]

Let me start with Simplify and I wanted to see if you guys could provide maybe a little bit more color on how you see it being used. Is it -- I know it's early days, but is it 1 level, 2 level? And then just the surgeons that are using it? Are they maybe Nuvo loyalists or surgeons that are using other products of yours? Or are they more competitive surgeons that were disguise and were prior -- were previously using other types of disc?

[Chris Barry, Chief Executive Officer]

Thanks, Craig. We are excited about the Simplify technology, obviously, a broader cervical, as Matt's talked about. Is it 1 level or 2 level? It's both. It's been early days. Demand has clearly outstripped our supply, but we're catching up and we talked about we'll be in a better supply position over the course of this year. It's a mix of surgeons both current and competitive surgeons, but I would say that it's attracting new surgeons to our company. Many surgeons will do both thoracal lumbar and new cervical, but some surgeons are more specialized. When those surgeons that are more specialized maybe haven't seen our cervical portfolio. So it's definitely a door opener for us. It's differentiated technology. We've got the unique 4-millimeter option. We're the only 4-millimeter in the market. We've had folks comment on actual individual employees on ours that have had this procedure done that had the 4-millimeter option in their surgical procedures. So we've -- we're seeing both current and competitive surgeons, but I would say I'm excited about how this attracts new surgeons to NuVasive. It's the cervical space, as we talked about. We've been underrepresented there, less than 5% share. So we're excited about going after introducing new services to NuVasive and potentially, as I said in my prepared remarks, driving more density and more customer adoption at the hospital level.

[Craig Bijou, Bank of America]

Got it. That's helpful. And maybe a second question on the NSO business, you've talked a lot about it today. You haven't necessarily talked a lot about it historically. So just wanted to maybe see if you guys could provide a little bit of color on the size of that business, maybe the impact or the growth impact that it could have in '22? And then even the prospects for that going forward, given that you are coming out of pulling it off the market and then getting it back on?

[Chris Barry, Chief Executive Officer]

Yes. We haven't talked a lot about it. It hasn't been overly material to us looking back, but I can tell you, I'm excited about the highly differentiated technology. It's taking the magic extenuating rods and applying them to new applications. And we've done a lot of work on the portfolio. Clearly, we've done a lot of work over the last year to get it back to market. But we are continuing to really look at ways to accelerate this business. So we haven't talked a lot about it because it hasn't been over material and it's been something that we've sort of grown in the background, really complementary to the magic technology but something you'll probably hear us talk more about. I'll turn over to Matt to talk about the immediate NSO impact this year.

[Matt Harbaugh, Chief Financial Officer]

Yes. So we mentioned in the prepared remarks that we're happy to be back on the market. We still have a few more markets we're working through. But the reality is, the reason we wanted to bring it up is you guys are putting your models together, is that Q3, there was a significant impact last year. We believe well $10 million to $15 million in net sales back this year with about two-thirds of that being international and one-third being domestic. So as you're thinking about it, that's how we're thinking about NSO.

[Operator]

Our next question comes from the line of Allen Gong with JPMorgan. You may proceed with your question.

[Unidentified Analyst]

This is actually Rohan on for Allen. I just wanted to get a better sense of the COVID situation in the quarter and into Q1. So at the JPMorgan conference, you had to distinguish between the Omicron wave and prior ones. And that many patients were kind of forced to quarantine if members of their household tests positive, if this is causing an abnormal amount of delays in procedures for the quarter. So given this dynamic and, I guess, a pretty robust recovery over the last several weeks since the commentary, can you give your outlook on procedures for Q1 and quantify maybe how many of those deferred procedures were ultimately scheduled? And how this recovery is also contemplated in guidance?

[Chris Barry, Chief Executive Officer]

Yes. It's still a little tough to do. I would just say that coming out of Q3 into Q4, we saw a better Q4 than Q3. And clearly, Q3 is where you had the delta variant really hit heavily in September. You also started hearing staffing shortages hit around that time. Improvement through Q4 with the Omicron coming in, in the late, late November, early December and accelerating into January, where we saw another real depression in our volumes in January. Good news is February has improved, and we continue to see improvement. Now we don't know what the staffing shortages will have on if there's a ceiling, if you will, of what the hospitals and the settings can take on. And that's reflected in our guidance. It's a bit of uncertainty. We are, as I said before, bullish on what we've developed and the investments we made and how that plays out over the year, we're still a little bit uncertain on the underlying base business and how quickly we get back to pre-COVID volumes. That will play out. We hope through margin into April where we get more durability. My hope is to get a durable quarter where we can truly say we didn't have a COVID impact. I don't know when that is. It doesn't -- it's not this quarter, and it may not be next quarter, but we hope it is over the end of the year.

[Operator]

Our next question comes from the line of Samuel Berdowski with Truist. You may proceed with your question.

[Samuel Berdowski, Truist]

So I'll just do one on Simplify and thanks for the color you gave earlier on the call around the manufacturing shift to Ohio. Just kind of trying to get a better idea if we can get a little more granular on how that transition is going and how long we should think about simplify the supply constraint through this year? You talked about the assembly in packaging getting approved late in the year. Is that -- should we think about it more not being supply constrained into 2023? Or can it still sequentially grow through 2022?

[Chris Barry, Chief Executive Officer]

Thanks for the question, Sam. Let me make sure I clarify. We took sort of 2 pathways. We optimize the existing supply chain that we took upon the acquisition of Simplify Medical that yields a significant higher level of supply through the first few quarters of this year. We've also taken the path that I mentioned in my prepared remarks around moving manufacturing to Ohio. It also requires us to the assembly and packaging PMA approvals to fully complete the process. But the good news is we have increasing supply through Q1, Q2, Q3 and within a second phase of supply increase by moving into West Carrollton. The complete story here is we don't believe we'll be in a supply-constrained environment. We think demand will ramp over the course of the year as our supply ramps, and we feel like we'll be in a good supply state through the course of 2022.

[Operator]

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Chris Barry for closing remarks.

[Chris Barry, Chief Executive Officer]

Thank you, and thank you all for joining us for our earnings call today. We'll continue to focus on executing our strategic plan to deliver growth and shareholder value in 2022 and beyond and can likely work together to help transform surgery, advanced care and change lives. I look forward to speaking with you all after the first quarter. Thank you.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and the rest of your day.