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Globus Medical (NYSE: GMED)
Q3 2024 Earnings Call
Nov 05, 2024, 4:30 p.m. ET
Key Highlights from Globus Medical’s Q3 2024 Earnings
- Prepared Remarks by Management
- Questions and Answers Session
- Participants on the Call
Management’s Opening Statements
Operator
Welcome to Globus Medical’s third quarter 2024 earnings call. All lines will be muted and a Q&A session will follow the initial remarks. Now, I will turn the call over to Brian Kearns, Senior Vice President of Business Development and Investor Relations.
Brian Kearns — Senior Vice President, Business Development and Investor Relations
Thank you, Victor, and thank you to everyone on the call. Today, we are joined by Dan Scavilla, President and CEO, and Keith Pfeil, COO and CFO. This call is being recorded and can be accessed via the investor relations section on the Globus Medical website at www.globusmedical.com. Before we start, I want to remind everyone that some statements during this call will be considered forward-looking. Our Form 10-K for the 2023 fiscal year and other SEC filings outline factors that may cause actual results to differ from our expectations. These documents can be found on our website. Please note that our discussion will include certain financial measures that are not in accordance with generally accepted accounting principles (GAAP).
Financial Performance Overview
We believe that these non-GAAP measures provide important insights into our business performance and should be viewed alongside GAAP metrics. Reconciliations to the most comparable GAAP measures are available in our press release and on our investor relations website. Now, I will hand the call over to Dan Scavilla.
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Thanks, Brian, and good afternoon, everyone. September 1st marked one year since the merger with NuVasive, and this quarter represents our fourth combined earnings report, showcasing strong sales growth and innovative product launches. Globus achieved sales of $626 million in Q3, a significant 63% increase or $242 million from the prior year. Our non-GAAP earnings per share reached a record $0.83, up 45% year-over-year, despite a 20% rise in diluted shares.
Additionally, free cash flow hit a record $162 million, matching our total for the full year of 2023. These results reflect our commitment to market penetration and sustaining profitable growth. I want to commend our team for their efforts in what has been a transformative merger in the spine industry.
Looking ahead, we recognize there is more work to do, but I’m excited to build upon this solid foundation. We launched four new products in Q3, bringing our total to 13 for the year and there are more launches expected soon. These innovations are proudly brought to you by our dedicated team working diligently to integrate operations and enhance the solutions we provide to medical professionals.
In the U.S. spine market, sales grew 55% this quarter due to our broad and effective product lineup. This growth can be attributed to several factors: a high retention rate among our sales team, successful transitions from distributor to direct sales, and an increased focus on cross-selling our product lines. The pipeline for competitive recruiting remains strong, and we are optimistic about 2024 as we continue to attract experienced representatives who recognize the opportunities we present.
As for our product innovations, Q3 saw the launch of the Excelsius Navigation hub, which enhances surgical precision and patient safety. It is unique in the market, offering multiple imaging workflows to streamline procedures. Our suite of navigated instruments has been developed to support various surgeries and enhance operational efficiency.
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Globus Medical Reports Strong Q3 Growth Post-NuVasive Merger
The company’s latest earnings reveal impressive sales and a solid outlook moving forward.
Globus Medical remains committed to its innovation strategy, as evidenced by the introduction of angle navigation arrays designed to minimize the need for camera adjustments. This development enhances workflows while ensuring compatibility with existing Excelsius GPS Navigation instruments. Additionally, the ACTIFY 3D Total Knee System marks a significant advancement in total knee solutions. It combines cementless reconstruction with operational efficiency and a precise anatomical fit, making it suitable for both manual and robotic-assisted procedures. This new system received FDA clearance for total knee arthroplasty (TKA) in late Q2.
With the implementation of EFlex, surgeons can achieve anatomically accurate cuts without sacrificing flexibility or tactile feel. The system accommodates various preferences by offering imageless and CT-based workflows, ergonomic designs, and jig-less resections, enhancing surgeon control during procedures. The full launch of the EFlex system is set for Q4.
In the trauma segment, the CAPTIVATE SOLA Headless compression screw system offers a rapid and efficient solution for various orthopedic procedures, including fracture repairs and joint fusions. Its intuitive design helps optimize efficiency and reduces operational space. Globus has launched 13 products this year, signaling a robust period for innovation, which is essential for long-term growth and navigating any merger-related challenges.
Significant investments are being made to unify product development processes across AUTOBAHN in San Diego and Methuen. This strategy aims to strengthen their competitive edge in intellectual property and product development. Notably, enabling technology sales reached $38 million, a 39% increase compared to the previous year. Q3 recorded the highest number of unit placements since launch, reflecting a 50% growth from the same quarter last year. Revenue from rental programs is recognized over the contract term, differentiating this success from direct unit sales.
Robotic surgeries continue to grow at a remarkable pace, with a 34% increase year-over-year, totaling over 84,000 robotic procedures performed since the platform’s launch. The recent launch of ExcelsiusHub marks a significant entry into the freehand navigation market, promising growth for Globus. Together with the E3D imaging system, this combination delivers a comprehensive navigation solution. Plans are in motion to further advance navigation technology with an XR augmented reality headset, which is expected to gain FDA clearance in Q4.
The DuraPro and Verzera power tool systems, introduced in Q1, showcase unique benefits, including enhanced safety features that protect soft tissue structures during procedures. There is strong market interest in the Excelsius3D imaging system, which has garnered recognition from surgeons for its superior capabilities compared to existing systems.
Globus is focused on creating an integrated enabling tech ecosystem, enhancing imaging, navigation, and robotics functionality. International spinal implant sales hit record highs in Q3, growing 86% on a constant-currency basis year-over-year, with substantial contributions from markets in Japan, Germany, the U.K., Italy, Brazil, and Colombia. The potential of the combined Globus and NuVasive product offerings on a global scale remains largely untapped, but it could drive significant growth as we look towards 2025.
The trauma and Neuro-Surgery Orthopedics (NSO) businesses grew by 99% in Q3, bolstered by strong market performance and the successful integration of NuVasive’s specialty orthopedic offerings. This merger is a strategic advantage, providing a diverse range of products and innovative solutions to the market. Integration efforts continue, with initiatives underway to cross-train staff and implement unified global systems.
Financial synergies are beginning to take effect, with targeted efforts to control spending and align investments with future growth strategies. The establishment of in-house organizational structures is progressing, aiming to achieve steady operations by year-end. Looking forward, the leadership at Globus recognizes an unprecedented opportunity for growth and influence in the market.
Thanks to the dedication of the Globus team, the company achieved an impressive quarter, fortifying its position as a leader in musculoskeletal technology. Now, Keith W. Pfeil, the Chief Operating Officer and Chief Financial Officer, will provide an overview of the financial results.
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
Thank you, Dan, and greetings to everyone. This third quarter marks one year since the closing of the NuVasive merger, a significant milestone. We have made noteworthy progress in aligning operations; however, we recognize that much work lies ahead.
Looking at our third-quarter results, I am thrilled with our performance across sales, profitability, balance sheet health, and cash flow. Revenue for this quarter reached $625.7 million, a 63.1% increase year-over-year.
On an adjusted basis, sales growth was 60.8%, slightly boosted by an additional selling day in the U.S. compared to Q3 2023. Our GAAP net income for Q3 was $51.8 million, translating into $0.38 per fully diluted share. This shows a marked improvement from last year’s GAAP net income of $1 million, or $0.01 per share.
Non-GAAP net income for Q3 was $114 million, reflecting a 73.9% increase year-over-year, resulting in $0.83 per fully diluted share. Third-quarter non-GAAP earnings per share rose by 45%, despite a 20% increase in diluted shares due to the merger. Our adjusted EBITDA stood at 31%, with free cash flow reaching a record $161.7 million. Musculoskeletal revenue for Q3 totaled $587.4 million, up 65% compared to last year, primarily driven by the contributions from the NuVasive merger.
Pro forma analyses indicate that if NuVasive had been included in prior results, musculoskeletal revenue would have increased by 5.4% compared to Q3 of 2023. The growth trend continued to be driven by U.S. spine and international spine divisions, showcasing the strength of our merged entity.
Globus Medical Reports Robust Q3 Growth and Strong Cash Performance
Globus Medical’s revenue reached $38.3 million in the third quarter, marking a significant 38.5% increase from the same period last year.
Driving Factors Behind Growth
The growth stemmed from rising sales in the U.S. market, particularly within our EGPS and E3D products. Notably, we successfully sold and shipped our inaugural EHub units, contributing to an all-time high for total Excelsius units placed in a single quarter.
U.S. Revenue Performance
U.S. revenue during the third quarter totaled $495.8 million, reflecting a dramatic growth of 60.3% compared to the prior-year quarter. On a pro forma basis, U.S. revenue increased by 7.3%, primarily driven by our spine and enabling technologies divisions. Over the past year since the merger’s completion, every quarter has shown growth in our U.S. operations, mainly owing to our spine and enabling technologies businesses.
International Growth and Challenges
International revenue reached $129.9 million in the third quarter, up 74.8% year-over-year. However, on a pro forma basis, international sales only grew by 5.1%, largely due to strong implant growth in our EMEA countries, though this was somewhat offset by weaker capital sales. The gross profit margin for Q3 was 53%, down from 62.2% in the same quarter last year, largely influenced by product-related intangible amortization stemming from the NuVasive merger.
Future Expectations for Profitability
The decrease in gross profit is mainly attributed to step-up amortization from the merger, which we expect to conclude in our upcoming fiscal fourth quarter. Non-GAAP gross profit showed a figure of 66.5%, down from 69.7% in the previous year. We anticipate the 2024 adjusted gross profit margin to land between 67% to 68%, gradually moving towards a mid-70s target as synergies are realized in manufacturing and operations.
Research, Development, and Operating Expenses
Research and development costs rose to $35.4 million, representing 5.7% of sales, compared to $29.3 million or 7.6% last year. The increase is due to including NuVasive in our consolidated results, although some offset was provided by synergy initiatives. We forecast R&D expenses to range between 6.5% and 7% for the entire year of 2024. Additionally, selling, general, and administrative costs totaled $240.7 million, accounting for 38.5% of sales, down from 40.7% in Q3 last year. These increases reflect the merger with NuVasive but have been somewhat mitigated by cost-saving actions and improved spending leverage.
Interest Expense and Tax Rate Insights
Net interest expense for the third quarter came to $0.8 million, drastically reduced compared to net interest income of $7.8 million in the prior-year quarter. This $8.6 million unfavorable impact is attributed to cash utilized for settling the NuVasive line of credit and share repurchases. The GAAP tax rate was 9.1%, a drop from the previous year’s 60.7%, due in part to a nonrecurring benefit this quarter that influenced our tax rate positively. Our anticipated non-GAAP tax rate for the year is expected to fall between 24% and 25% in 2024.
Record Cash Flow Performance
Our cash flow for the third quarter was exceptional, marked by record operating cash flow of $203.7 million and free cash flow amounting to $161.7 million. This performance mirrored nearly our entire cash flow from the entirety of fiscal 2023, which totaled $165.2 million. Key drivers included synergy capture improvements and resolution of previous accounts receivable impact. We expect cash flow conditions to continue improving into early 2025.
Capital Allocation Plans
The company’s capital allocation strategy remains steady, focused on maintaining minimal debt levels, investment in growth opportunities, and shareholder returns through share repurchases. Since the merger’s conclusion, we have repurchased shares amounting to $310.3 million. Looking forward, we aim to utilize our cash reserves to pay off $450 million in senior convertible notes maturing in March 2025.
Integration Efforts and Synergy Capture
We are currently prioritizing integrations to enhance U.S. operations, including eliminating redundancies and improving system efficiency. In the second year, our focus will shift to optimizing international systems and enhancing manufacturing capabilities. We anticipate achieving $170 million in synergies over three years, with initial gains already realized.
Globus Medical Reports Strong Q3 Results and Adjusts Future Projections
In a recent update, Globus Medical disclosed changes to its projected savings timeline. The company anticipates achieving 55% of its savings, approximately $94 million, in the first year, followed by 30% or $51 million in the second year, and finally 15% or $25 million by the end of the third year. This expedited approach aligns with Globus’s culture of urgency, as employees strive to transform patient care. More information on these projections will be shared as developments arise.
Increased Guidance Following Positive Q3 Performance
After reviewing third-quarter performance and expectations for the remainder of 2023, Globus Medical has raised its net sales guidance for 2024. The new projection anticipates net sales between $2.49 billion and $2.5 billion, indicating growth of 3.9% to 4.3% compared to the 2023 pro forma revenue of $2.396 billion. The company is achieving this sales growth during a year marked by significant integration efforts.
Changes to Non-GAAP Reporting Process
Before detailing the revised non-GAAP earnings per share (EPS) guidance, the company addressed a shift in its financial reporting. Globus Medical will no longer adjust for the impact of in-process research and development (IP R&D) acquisitions in its non-GAAP figures. This change will negatively affect the 2024 non-GAAP EPS guidance by $0.09 due to the Q1 ’24 IP R&D acquisition. As a result, the revised fully diluted non-GAAP EPS is now forecasted to be between $2.90 and $3.00 per share.
Factoring in a $0.19 increase from operational performance—partially offset by the $0.09 adjustment for IP R&D—the company’s new guidance reflects its expectations for improved profitability and aligns non-GAAP reporting more closely with GAAP standards. Notably, Globus Medical’s Q3 performance showcased the business’s underlying strength, with notable sales growth, enhanced profitability, and record free cash flow, all while continuing investments for future growth.
Closing Reflections and Future Outlook
The CEO expressed satisfaction with the company’s results and expressed optimism for future developments. He reiterated gratitude to the employees for their dedication amid changes, emphasizing the ongoing commitment to operational excellence and cost discipline. This commitment ensures that the right products are delivered at the right price and time.
Questions & Answers Session
Operator
Thank you. We will now proceed with a question-and-answer session. [Operator instructions] Please hold while we compile the Q&A list. One moment for our first question.
Our first question comes from Matt Miksic from Barclays. Your line is open.
Matt Miksic — Analyst
Good evening, and congratulations on a strong quarter. Thank you.
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Thanks, Matt.
Matt Miksic — Analyst
Could you provide insights on your EBITDA margins? You mentioned a notable increase. What factors contributed to this quicker growth than anticipated?
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
Absolutely. Throughout the year, we focused heavily on eliminating cost redundancies and consolidating facilities. As the year progressed, we identified various areas for potential savings. Our primary goal has been to enhance cash savings rather than pursuing noncash options, concentrating on essential spending to drive profitability.
Matt Miksic — Analyst
Thank you. I’d like to ask about the integration of robots into your sales force. Can you provide an update on NuVasive’s progress and future outlook?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Sure, Matt. The integration is progressing well. Our representatives are receiving training on the new systems, ensuring they are equipped with the necessary knowledge. We’ve also been working to incorporate popular NuVasive products into our software, pending approvals. Collaborating with surgeons and preparing for the necessary product approvals will be crucial for advancement in 2025.
Operator
Thank you. One moment for our next question. The next inquiry comes from Vik Chopra from Wells Fargo. Your line is open.
Unknown speaker — Analyst
Hi, congratulations on the quarter. This is Dino on behalf of Vik. Can you provide an update on the FDA warning letter recently received?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Thanks, Dino. To clarify, the warning letter addressed our internal processes for handling complaints and did not raise concerns about the robot or patient safety. We are working closely with the FDA to improve our processes and are ready for reinspection, aiming to resolve this matter promptly.
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Understanding Customer Concerns Amid Market Shifts
We’re assessing whether we can expedite our processes beyond the usual growth curve. Some customers have expressed concerns, but our outreach has calmed those fears. We’ve reassured them that this isn’t a product-related issue. While there may be some minor impact, it hasn’t been significant thus far.
Insights on the Capital Equipment Landscape
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
This is Keith. As we approach Q4, we have a positive outlook on the capital equipment environment. Our pipeline is robust with numerous inquiries and quotes being processed. Looking ahead to 2025, we recognize that competition is intensifying, particularly following FDA approvals for spine robots by two of our competitors. However, we remain confident in promoting our robot, which we still believe is best-in-class.
Strategic Focus Post-Merger
Daniel T. Scavilla — President, Chief Executive Officer, and Director
To reiterate the merger’s intention, we aim to double our total available market and reach more surgeons, particularly through NuVasive. Our strategy remains centered on taking advantage of our existing relationships with surgeons to expand unit placements next year while actively competing with other market players.
Competitive Landscape and Workforce Dynamics
Young Li — Jefferies — Analyst
Thanks for the insights. I’d like to follow up on the sales representatives. It’s been over a year since the merger; can you clarify how many of your reps have expiring guarantees? Is this number substantial? I’ve heard positive retention rates, but are any competitors responding to this in the market?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Thanks, Young Li. There’s been a misconception regarding the number of our representatives who are on contracts. Historically, that number has been low and remains manageable post-merger. We actively identify and recruit talent from competitors, and this dynamic has not changed because of the merger. It’s important to note that we don’t rely on guarantees to motivate our talent; our innovative products facilitate their success.
International Profitability and Future Outlook
Young Li — Jefferies — Analyst
I appreciate the clarification. Turning to your international operations, can you share your thoughts on the profitability of the international spine business? Given the revenue growth opportunities, how does U.S. EBITDA compare?
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
This is Keith. International profitability can differ by region, but generally, favorable pricing and increased volume growth on U.S. products contribute positively. As we expand internationally, we can enhance profitability, impacting our broader operations positively.
Future Prospects and M&A Strategies
Shagun Singh — RBC Capital Markets — Analyst
Thanks for the insights, and congratulations on a strong quarter. I have two questions. First, regarding the upcoming robotic launch, could you elaborate on what differentiates it and your commercial strategy? Second, concerning capital allocation, what is your appetite for M&A given your progress with NuVasive?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Sure, I’m excited about our new robot; it’s built from the ground up with exceptional technology. The arm’s movement and accuracy, along with various workflows that require minimal pre-planning, greatly enhance efficiency and flexibility for surgeons. These features will be crucial in our strategy moving forward.
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
As for our M&A strategy, our goal is to enhance our offerings for musculoskeletal disorders. We are eyeing opportunities to expand our product lines, such as shoulder and joint enhancements while also considering complementary technologies that can expedite our market presence. However, I can’t comment on specific sizes or types of prospective deals at this time.
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Globus Medical Q3 Earnings: Optimistic Outlook amid Challenges
Current Integration Efforts and Future Opportunities
As we continue to integrate our operations with NuVasive, we emphasize the importance of proceeding thoughtfully. There is still more work ahead, but as time progresses, we are eager to explore promising opportunities that align with our growth strategy.
Shagun Singh — RBC Capital Markets — Analyst
Thank you.
Operator
Thank you. Please hold for the next question. Our next inquiry comes from Matthew O’Brien at Piper Sandler. Your line is open.
Unknown speaker — — Analyst
This is Joe standing in for Matt. Congratulations on a successful quarter. I appreciate you taking our questions. Could you share more about the guidance update for Q3? The results exceeded Street expectations by over $20 million, with a $15 million raise. Does this suggest Q4 revenue growth of about 2% to 3%? Also, could you break down the growth between musculoskeletal and enabling technologies?
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
Certainly, this is Keith. Our guidance focuses on the full year. While we had a solid quarter, we are maintaining a cautious outlook for Q4. Nevertheless, we remain very optimistic about our progress.
We typically do not share specifics between enabling technologies and musculoskeletal, but I can say our musculoskeletal division has experienced growth this year, particularly in U.S. and international spine. Our pipeline for enabling technologies also appears strong as we head into Q4.
Unknown speaker — — Analyst
That’s insightful. In relation to your comments, you’ve described the revamped Globus as a potential mid- to high single-digit growth business. Could you offer any insights regarding next year’s projections? The Street is estimating around 7%. Any guidance on expected performance between this year and next?
Thank you.
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
Thanks for your second question. At this time, we aren’t making predictions for 2025. Our primary focus is on the close of this year. We believe that Globus will maintain mid- to high single-digit growth moving forward.
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Part of our confidence stems from effective competitive recruitment and successful product launches, which together lay a strong foundation for future growth.
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
Thank you.
Operator
Please hold for the next question. Our next question comes from David Saxon at Needham and Company. Your line is open.
David Saxon — Analyst
Good afternoon, Dan and Keith. Congratulations on the quarter. I’d like to follow up on the guidance issues. The implied sequential growth seems modestly low compared to historical high single digits. You mentioned conservatism in the guidance; are you observing any market risks? Additionally, does your guidance still incorporate about $150 million in dis-synergies this year?
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
Yes, we are quite positive about our performance and outlook. Regarding the $150 million in dis-synergies, I didn’t highlight it in my opening remarks, but the longer we progress, the more confident we become. There are inherent risks, but they are often part of operating a business. Cautious optimism remains as we prepare for Q4 and 2025. We have faced a minor drag from factors like hurricanes and shortages related to IV bags, but that’s the primary concern I would note as we head into Q4.
David Saxon — Analyst
That’s very helpful. To delve into the trauma portfolio, I heard that combined NSO and Trauma is performing at nearly 99%. Historically, trauma accounts for about 40% to 50% of your revenue. Is that distribution still accurate, and could you share an estimate of the revenue contribution?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Currently, we do not provide a breakdown of that data. Both segments are seeing strong uptake, with growth rates in super high double digits. However, we are unable to disclose the precise dollar figures at this moment.
Operator
Thank you. Please hold for the next question. Our next inquiry comes from Steve Lichtman at Oppenheimer. Your line is open.
Steven Lichtman — Analyst
Evening, everyone, and congratulations. Dan, could you elaborate on how the conversion from distributors to direct sales has influenced your quarter? Where do you currently stand in this transition?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Sure, Steve. We initiated direct conversions several years ago and are now applying that model to former NUVA distributors. This approach allows for improved investment in those markets, enabling us to hire the right personnel and generate faster growth. While some distributors opt not to convert, we are capitalizing on all available opportunities to leverage Globus’s strengths for enhanced growth.
Steven Lichtman — Analyst
So, would you say that you’re nearing the completion of this conversion process?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Not quite at the end. As we approach year-end, we’ve made significant progress, but there are still several conversions ahead. We want to ensure that everyone feels comfortable with the transition as we continue to work toward our goals.
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Strategic Vision for Future Growth: Insights from Leadership
In a recent discussion, company leaders emphasized the significance of adopting new approaches to control the sales force more effectively. This shift aims to enhance investment opportunities within the organization.
Steven Lichtman — Analyst
With your primary focus on total primary knees in orthopedics, which aligns with your robotics, how will you compete against larger players who offer a wider range of products? Are you planning to accelerate the development of products like Unicondylar knees or others?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
You raise a great point. Progress on our product development is ongoing, and I always feel it could be faster. We are excited about what we have in the pipeline. The Unicondylar knee is fully developed and close to release, while our hip products are either approved or in final stages. As we advance in our robotics development for hips, I anticipate a stronger position by this time next year. Though changes will unfold gradually, I believe 2025 will mark a pivotal year for us in this area.
Steven Lichtman — Analyst
Thanks for the clarification, Dan.
Operator
Please hold for our next question. Our following question comes from Matthew Blackman with Stifel. Your line is now open.
Mathew Blackman — Stifel Financial Corp. — Analyst
Good afternoon, and thank you for taking my question. I understand that you may not want to disclose too much about 2025. However, could you outline the main factors that could influence your financial performance next year? Considering your impressive growth this quarter and robust margins of over 31%, I find the current consensus estimate of around $333 million on the low side. I want to ensure my thought process aligns with yours as we project for 2025.
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
Thank you for your question. Looking ahead to year two of our operations, we expect increased cross-selling opportunities as our teams integrate further, both in the U.S. and internationally. We anticipate growing demand for our robotic systems due to interest from legacy NuVasive clients. This positive trend will likely boost our revenue. On the expense side, we will capture some of the synergies achieved this year and enhance operational efficiencies. However, benefits from in-sourcing are expected to peak in the latter half of 2025 and into 2026. Our focus will continue to be on managing operational costs, particularly consulting and external expenditures, as we aim to bring more processes in-house. This strategy aligns with Globus’s mission moving forward.
Operator
Thank you. Please hold for the next question. Our next question will come from Ryan Zimmerman of BTIG. Your line is now open.
Ryan Zimmerman — Analyst
Good evening. I concur with previous comments; we are witnessing one of the strongest spine market conditions in years, as echoed by management teams. Dan, could you share your insights on the sustainability of this spine market growth and what you believe is driving it?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Thank you, Ryan. Yes, this year has shown robust performance, surpassing historical growth rates. However, attributing this solely to pent-up demand from the pandemic may be misleading. Based on historical data, the market has typically grown around 3% to 3.5%. Looking ahead, I expect sustained growth in that range, with potential factors such as demographic changes and improved access to healthcare contributing to the growth. However, I don’t foresee shifts leading to a jump of 5% to 7%. Instead, I anticipate a return to normalcy, settling between 3% to 4% growth over time.
Ryan Zimmerman — Analyst
If I may extend my questions to Keith, regarding the in-house manufacturing initiative, while I understand you’re not ready to provide specific figures, could you clarify what we might expect in terms of margins from these efforts next year? Additionally, with your expansion into new markets such as large joint reconstruction, it seems likely that Research and Development expenditures will need to increase as well. Is my understanding accurate?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Ryan, I appreciate your insights. Our commitment to R&D remains strong. Currently, we are confident that our spending aligns with our strategic goals and encompasses all necessary projects. We are not awaiting breakthroughs to invest further; all planned developments are already integrated into our budget.
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NuVasive Reports Strong Quarter Amid Strategic Changes
Increased Spending Goals and Manufacturing Strategies
NuVasive is planning a significant increase in spending, targeting around 7% of sales. Keith W. Pfeil, the Chief Operating Officer and Chief Financial Officer, emphasized that the company’s portfolio is dynamic and continuously evolving.
When looking at the in-sourcing strategy, Pfeil noted the importance of equipping all locations with necessary machinery. The primary objective remains to reduce the cost per unit. He added that efficiencies gained will leverage fixed costs across their facilities, aiding in the production of both Globus and legacy NuVasive products. This strategy not only lowers operational risks but also streamlines product development.
Long-Term Vision with Inventory Management
CEO Daniel T. Scavilla acknowledged that transitioning through existing inventory will take time. The focus will shift to long-term growth rather than immediate results, with expectations for some positive cash impacts next year.
Future Growth Potential and Cross-Selling Opportunities
Craig Bijou from Bank of America Securities asked about potential synergies from the NUVA deal and growth projections for next year. Pfeil responded optimistically, indicating growth rates could begin to accelerate soon as the company enhances cross-selling strategies in musculoskeletal enabling tech.
Scavilla added that all elements required for growth, such as manufacturing and product launches, are being implemented. While the company is confident in its progress, specific commitments for 2025 have yet to be finalized internally.
Updates on Product Launches and Market Response
Bijou inquired about the recent launch of power tools and their contribution to revenue. Scavilla expressed satisfaction with the initial feedback from surgeons, noting strong indications of adoption and usage. He highlighted that the tools are part of a larger procedural solution, which enhances their overall utility in surgeries.
Competitive Advantages of the Ortho Robot
Caitlin Cronin from Canaccord posed questions regarding the new orthopedic robot’s advantages over competitors. Scavilla highlighted its compact design, which is especially useful in Ambulatory Surgery Centers (ASCs). He discussed the robot’s advanced technology, providing surgeons with flexible options for operation without needing extensive pre-planning.
NuVasive continues to adapt and innovate, setting the stage for growth while remaining mindful of market dynamics and internal efficiencies.
Globus Medical Sees Promising Future for Robotic Surgery Initiatives
Q4 Launch and Early Customer Insights
Daniel T. Scavilla — President, Chief Executive Officer, and Director
We are in the process of refining our approach for the Q4 launch. Overall, the foundation I have shared with you lays out our strategy, which will be polished further before roll-out.
Caitlin Cronin — Canaccord Genuity — Analyst
Can you tell me who your early customers for the free hand navigation technology are? Also, where do you foresee this technology being most widely adopted—hospitals, outpatient facilities, or Ambulatory Surgery Centers (ASCs)?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
That’s an excellent question. The answer is that we see interest in all those sectors. We are excited about the early results from our procedures, which have been strong. There is considerable enthusiasm among surgeons, as our navigation system opens up new opportunities for us. In addition to our focus on robotics, we acknowledge that various methods exist for surgeons to care for patients. Our goal is to support them in both robotic and free hand approaches. Based on the positive activities we witnessed late in the third quarter, we believe this could significantly contribute to our objectives for 2025 and beyond.
Looking Ahead to 2025 and Revenue Growth
Richard Newitter — Analyst
Thank you for your insights. Shifting gears, Dan, you mentioned that you expect meaningful contributions from your ortho robotic initiatives by 2025. Is this a change in your previous expectations about how quickly these initiatives will ramp up?
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Certainly, you interpreted my comments correctly, Rich. This segment has not significantly contributed to our bottom line yet, but we see it as a potential growth engine. It’s important to note that the ortho market is currently about double the size of the spine market—approximately $20 million versus $10 million. We are in the process of designing and aligning our implants with our robotic capabilities, and I believe this will contribute positively to our financial outcomes. While it may not be the leading growth driver in 2025, I anticipate a noticeable increase in its revenue contribution as we establish a solid foundation for future years.
Evaluating Market Estimates for Profitability
Richard Newitter — Analyst
Got it, that’s helpful. Regarding the projections for 2025, could you clarify where you feel you have the most room to exceed the market’s average estimates: on the revenue side or through cost efficiencies?
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
Rich, this is Keith answering. If I were to pinpoint a key area for potential acceleration, it would be in managing the Cost of Goods Sold (COGS). Our ability to reduce spending or improve inventory turnover could have a significant impact on profitability in 2025.
Closing Remarks
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Thank you for your question.
Operator
Thank you. [Operator instructions] Please hold for our next question. Our next inquiry comes from Richard Newitter at Truist Securities. Your line is open.
Duration: 0 minutes
Participants on the Call
Brian Kearns — Senior Vice President, Business Development and Investor Relations
Daniel T. Scavilla — President, Chief Executive Officer, and Director
Keith W. Pfeil — Chief Operating Officer and Chief Financial Officer
Matt Miksic — Analyst
Young Li — Jefferies — Analyst
Shagun Singh — RBC Capital Markets — Analyst
Mathew Blackman — Stifel Financial Corp. — Analyst
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