Good morning, everybody. Thanks so much for joining us. My name is Matt O'Brien. I'm one of the med tech analysts here at Piper Sandler. Very excited to have Carlsmed here with us, you know, all the way across the country. Thanks for coming. From the company, we have Mike, who is the CEO. Leo, CFO, is back in the audience. Mike, thanks again for coming. Really do appreciate it.
Yeah, appreciate you having us here, Matt.
Of course, so you know, what I always do with the newer public companies is just maybe have you go through a little bit of a background on the business, what you do, and where you're at today.
Yeah, you know, really appreciate the opportunity. I started the business 2018, so just seven years ago, along with my co-founder, who's a patent attorney, biomedical engineer, really to build a next-generation med tech company. And focused on a very specific problem initially, which was with complex spine deformity surgery. And so we invented this technology platform, actually the first breakthrough technology in spine, to actually take patient imaging, surgeon data, create a digital surgical plan for that patient, and then 3D print all of the devices needed for that patient surgery, collect data intraoperatively, collect data postoperatively, continuously train the algorithms to improve patient care. And so 2021, we initially launched the lumbar platform, you know, as a breakthrough technology, and also received a new technology add-on payment from Medicare, which provided enhanced reimbursement for this technology.
We recently published our two-year outcome data showing that with this technology platform, we've reduced reoperation rate at the two-year time point by 74% over the standard of care, and just in October of last year, in our third year of launch, Medicare issued new DRG codes for the new classification of devices we made, which are custom-made, anatomically designed fusion devices, and as you saw the press release, we're just announced today, we're now expanding the platform for cervical spine fusion, which we're really excited to talk about.
Got it. Got it. I want to get into that in a second, but the 74% reduction in revision rates is eye-popping. Can you just talk about what the technology does to reduce the need for revision procedures?
Yeah, so the biggest problem that there was, particularly in adult spinal deformity, which are long fusion constructs, and so those not familiar with the procedure, what typically happens is a patient has a three-dimensional deformity that's driven by degenerative disc disease, and a spine fusion procedure takes place, and that's where the surgeon removes the disc for the impacted levels and replaces it with a device called an interbody fusion device. This is packed with bone, and the purpose of the device is to provide alignment to the spine and hold it in place until it fuses, and then the surgeon will typically put screws and rods posteriorly to maintain that alignment until fusion.
The most complicated challenge of this procedure is to actually get the proper alignment in the disc space, because prior to our technology, the only thing that was available were predetermined sizes of interbody fusion devices. So the surgeon would do the best what they have in the operating room to trial and error the best size, and ultimately use the posterior rod correction to get the alignment. And what happens, you know, nearly a quarter of patients is, you know, over a period of two years, the biomechanical alignment isn't perfect, and it moves the stress to the posterior and causes mechanical failure. So with our technology, what we've been able to do is to essentially do the surgery digitally first.
It's all done through our technology platform, and then model exactly what the disc space needs to be, and create the interbody fusion device that's going to provide the three-dimensional alignment to put the spine into alignment, so it removes the posterior stress. And that's ultimately what the data has proved out in lumbar. And as we started with really very specific indications, adult spinal deformity, when we launched in 2021, we since got expanded indications to degenerative disc disease. And so now all lumbar spine fusion procedures are on label. And, you know, we see this as, you know, 400,000 plus annual procedures addressable for us today.
Got it. So you got a massive lumbar opportunity, but it's hot off the presses. You got this cervical, you've launched this whole cervical platform. So let's talk there, and thanks for doing that before our conference. I appreciate that. You know, I mean, it's early, so why have you decided to go ahead and launch early?
Yeah. So, you know, as we previously reported, we started our clinical evaluations in Q3. You know, we had more than a dozen sites involved doing the early clinical work on our FDA-cleared technology. In October, Medicare also granted a New Technology Add-on Payment that gives enhanced reimbursement for all inpatient procedures that utilize this technology. And right ahead of the Cervical Spine Research Society meeting, which starts tomorrow, you know, where our surgeons are presenting the early clinical data, you know, we decided to accelerate our launch because of really the compelling feedback that we've had from our surgeons with their early experience, and, you know, accelerate giving this new technology to hospitals and surgeons that have been requesting it.
Got it. Okay. And so, similar question to the first one on, you know, why this is unique. You know, cervical cases versus lumbar, generally a little more straightforward, you know, generally get pretty good outcomes on the ACDF side of things. Lumbar is a lot harder.
Yeah.
Why are you guys unique on the cervical side? What's going to resonate with docs?
Yeah. Yeah, it's a great question, and with cervical, some is the same, but some is different. First of all, alignment's really important, and kind of the art of cervical alignment is still in its nascent stages. We've worked with, you know, some of the leading surgeons to really develop the new paradigms for cervical alignment, because much like with our lumbar technology, we can deliver very predictable three-dimensional alignment in the disc space for an ACDF procedure. That's the part that's the same. What's really unique to cervical and to patients that undergo typically ACDF procedure is there's a very high incidence of osteoporotic bone in the cervical spine, and so soft bone. For soft bone, it's typically difficult in an ACDF procedure to put in an interbody fusion device without it subsiding into the soft bone.
So with our really novel devices, you know, for those that are familiar with spine, they very much look like an ALIF. So they are wide devices, and they map to the anatomy of the cervical spine. So very large surface area coverage, which is a really great solution for patients with soft bone. And, you know, according to our data, you know, what we've seen is, you know, more than a third, at least, of the Medicare-age patient population, you know, does have soft bone that goes into ACDF procedures, which are, you know, typically inpatient procedures for that patient population. And so that's where we see this really unique application of this technology, and that's where we've had the really strong enthusiasm as part of our clinical evaluation.
Got it. Got it. Okay. So you're going earlier. You've already got 220 docs. You know, how many cervical cases do those doctors do annually?
Yeah, so what we look at for, you know, the total addressable procedures, it's about balance between lumbar and cervical, so when we look at, you know, approximately 400,000 addressable lumbar spine fusion procedures, we see about that same amount, and, you know, with north of 4,000 procedures, 4,000 surgeons in the U.S. doing procedures, you know, we anticipate that, yeah, just like lumbar has become the standard of care, that for cervical, this will also become the standard of care, and, you know, with the early experience, you know, we had more than a dozen surgeons involved in the clinical evaluation, and, you know, they're really excited to, you know, continue to lead training of the next generation of surgeons to adopt this technology.
Okay. I'm going to push a little bit. So again, 220 surgeons, if they do 20 cervical cases a year, that's 4,000 cases. I mean, could you get 5% of those next year? Could it be 10?
Yeah. You know, we've not provided specific guidance to that, but really the way we see it is, you know, this is the way all cervical procedures will be done. And as we get through training, onboarding, you know, in some cases having to go through VAC process with the new product, even in an existing account, you know, we do see this being material market share in the long term.
Got it. Okay. And the ASP here is about $15,000 per case? Well, per level, sorry.
Yeah. I don't know that we've specifically guided to that, but there is, the ASP is going to be a slight discount to lumbar as it is a lower-cost procedure. You know, again, as we look at the New Technology Add-on Payment that went into effect, you know, that provides an enhanced reimbursement of up to $21,250 to the hospitals. That really gives them the economic value to get this one contract and provide this to their surgeons.
Got it. Okay. And then something else that just came out was you didn't get the TPT for cervical, but you have an NTAP for cervical. You know, I think there was a little concern, "Oh, they didn't get the TPT here. That's bad. That's going to affect their cervical business." Can you just frame up, you know, what impact that has on the business?
Yeah. You know, kind of as we see this going forward, our business is 100% in hospital today, so if we remember, you know, we also had a TPT for lumbar, but really the procedures and what we see is where surgeons use the technology is in the hospital, inpatient, and so, you know, we don't see this being material to, you know, our business in the short term, but as we see evolution of the technology and the procedure, you know, perhaps moving from inpatient to outpatient, you know, we'll continue to work on strategies, you know, that can provide this technology to all centers of care.
Okay. Okay. Understood. I think it's fairly small, if I remember, as far as the potential patient population that would be impacted here.
Yeah. I mean, the most recent data that we've seen is about 10% of ACDF procedures in the Medicare patient population are done on an outpatient basis. So, you know, still massive market, addressable patient population for us to treat.
Understood. Okay. All right. So let's maybe flip over from cervical to lumbar where you're selling now very successfully. That Q3 result was really good. You don't typically see, and I know you're earlier stage, but you still don't typically see people go up sequentially in Q3 versus Q2. What was the biggest driver there? Was it some of the newer surgeons you're adding on or the existing ones just really ramping?
Yeah. You know what, and it's a great observation, you know. I think what's typically seen both in spine and orthopedics is Q3 is a lower volume, lower procedure volume quarter. You know, we actually saw an increase in procedure volumes both with existing surgeons as well as, you know, as we discussed on our Q3 results, acceleration of new trained surgeons added. So, you know, that's what really drove our 98% year-on-year growth, you know, last quarter in Q3. And I think one of the interesting metrics that we look at is while we had 98% year-on-year top-line growth, you know, we grew our surgeon user base by 70%. So year-on-year, which is great surgeon adds, but it also shows, you know, the continued adoption of the technology as, you know, penetrations increasing inside of surgeon accounts.
What are you seeing from those surgeon customers that you have in terms of adoption? Do they kind of earmark the more challenging cases for Carlsmed and, you know, the more straightforward ones for others? How do you get them to kind of, you know, move over to adopting you for pretty much every case they can?
Yeah. Yeah. It's another really great question. So as we think about when we initially launched, and as I talked about the origin of the company, we were exclusively complex deformity in academic teaching centers. So that is our foundation. You know, there is no better procedure for that patient population. And as we got expanded indications of degenerative disc disease, we really found that the busy teaching centers that do deformity surgery were bringing in, you know, both their patient population that are more simple one and two levels because they want to use this workflow across their entire patient population. So 2021, when we first launched, we were 80% complex spine deformity. Now we see it's really flipped. 70% is DGEN, one and two level simpler cases.
We'll see, you know, the younger early career surgeons really start with the simple cases, particularly as they take this out, you know, into the community setting. That's where we see the biggest growth. You know, just as we've talked about, you know, one of our key strategic initiatives, expanding our medical education program at the teaching institutions with the residents and fellows programs, because now we're seeing with now four years of clinical experience, a lot of the residents and fellows that have been trained in their program taking this now to private practice or to another academic center and really using this across their entire patient population. We really see this, you know, wave coming of transitioning to true personalized surgery as we continue to train the next generation of surgeons.
Got it. Okay, and to that end, I think recently you went from about 10 days of turnaround in terms of, you know, getting the CT scan in to being able to send the implant back out to the field. Now we're down to eight days.
Yeah.
You know, eight, 10 days versus eight, you know, it doesn't sound like a ton, but how big a deal is that for your clinician customers?
Yeah. It's actually a really big deal, you know, ultimately that we listen to our surgeons. And I'll just give a little bit more perspective. When we started in 2021, we were at eight weeks and ultimately continued to invest in, you know, what we built as our proprietary digital production system, you know, which is everything from the, you know, intake of the medical imaging to, you know, patient data, the surgeon's specific prescription. It's using our machine learning platform to actually create the three-dimensional surgical plan. And then, you know, what's super unique about our business is we have no inventory, as you know, because everything's built on demand. And then once we get the surgeon's approval of the plan, we convert those to digital files, 3D printed, co-packed with sterile instruments.
So, you know, we put a lot of investment in time in working with our surgeons, working with our hospital partners to ensure that this is a seamless process to onboard onto the platform and, you know, continue to innovate. So, you know, so to your point, you know, 20% reduction is still material. And while spine surgery is typically not an emergent procedure, it is scheduled, it allows us to work better inside of surgeons' workflow. So the response to that has been very strong. And, you know, I know we recently released our guidance for this year of $49 million-$50 million, which we feel really good about.
Got it. Okay. I mean, I'm doing the math on that, and I'm not well, but I mean, five years ago, you were 56 days-ish. Now you're at eight. That's an 80%-85% reduction. It's unbelievable in five years. Do you need to go even lower than that? Can you go lower than that?
While we can, one of the key innovations that we did as part of this 10- to 8-day evolution was actually building capacity because, knowing that we're prepping for the cervical launch as well as the speed that we are training new surgeons and onboarding, with this 10- to 8-day reduction, we built in 5X capacity through our digital production system, which allows us to continue to scale, you know, at the rate that we've been at. So that has a material benefit also in reducing cost because we've taken time out of the process. We've evolved the processes, which, you know, allowed us to grow our gross margin in Q3 to 76%.
Yep. Okay. Okay. Maybe talk a little bit about the sales force. How big is it? And then I'm curious about the cervical launch. Can that help you get into some of these centers that are like, "No, we're, you know, Globus centers or Medtronic centers"? What can that do for you?
Yeah. You know, so for the sales force, we do have a hybrid force. And so we have a dedicated accounts team, you know, that works with our hospital partners, onboard them onto the platform, go through the value analysis committee, make sure that everything that's needed for getting on contract is well managed, as well as working with national and strategic accounts, which, you know, we're continuing to make great headway in getting some of the bigger centers nationally onboard. From a direct team, you know, we have sales directors that's well built out that gives us national coverage. And then because of the very unique nature of our technology, all that would come into the operating room with is a sterile kit with the single-use instruments and the personalized interbody devices. So that's a really simple operating room.
And so because of that, you know, we're able to contract 1099 reps to cover the cases. And so that gives us a lot of breadth with our sales force. And in prep for our launch, we've just gone through significant training on the sales force for our cervical launch because we're going to be able to leverage our current sales force with the cervical launch. And to your point, there are surgeons and accounts that, you know, primarily focus on cervical versus lumbar, which will give us more call points even inside of current accounts where we're on contract.
Got it. Okay. Excellent. Maybe talk a little bit about, you know, this is obviously a very healthy reimbursement environment that you're in. Why can't others replicate what you're doing?
Yeah. You know, so first, you know, we have a very deep IP portfolio, as, you know, did mention my co-founder's an IP attorney.
Yeah.
Right? So we have a very deep patent moat around our technology. You know, and I talk about the evolution of our Digital production system. That very much is our secret sauce of, you know, how we take patient data, how we take surgeon data all through a very compliant way and automate it and continuously train because, you know, we've, you know, treated thousands of patients with our training data and have really built a very integrated process to do this. And we'll continue to innovate there. And ultimately, you know, with the data being as compelling as it is, you know, we anticipate that all, you know, spine fusion procedures, you know, whether it's five years, 10 years, 15 years, will transition to being personalized.
Yeah. Makes sense. I mean, given all the benefits, it makes total sense. I guess the other thing that's unique about the story is the capital light model, which is not the case in spine typically. So tell us, you know, tell us about that attribute of the model. And then, you know, not necessarily timing to profitability, but, you know, there's been a couple of cases where companies have gotten profitable pretty quickly in spine, but a majority of them don't.
Yeah.
And so can you cut down the time by 25%, 50% in terms of, you know, time to profitability versus a typical spine company?
Yeah. I don't think we provided specific guidance on that. You know, however, as we, you know, recently, you know, raised capital in the IPO as well as our recently announced debt facility, you know, that'll get us to near-term cash flow break-even and ultimately to a very leverageable business, you know, particularly as we think about adding cervical inside of our current portfolio, and you know, as we've continued to invest in our core technologies that allow us to automate, you know, drive additional productivity, you know, we see ourselves as having a very different financial profile than a traditional orthopedics company.
Got it. Got it. Okay. I think we're just about out of time, so I have to go in there, Mike. Thank you so much for coming out and all the feedback. Appreciate it.
Absolutely. Thanks.
It's great being here, Mike.
Thanks.