SeaSpine Holdings Corp (SPNE) Q4 2018 Earnings Conference Call Transcript

SPNE earnings call for the period ending December 31, 2018.

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SeaSpine Holdings Corp  (NASDAQ:SPNE)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 4:30 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2018 SeaSpine Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Carrie Mendivil, you may begin, ma'am.

Carrie Mendivil -- Investor Relations

Thank you. Joining me from SeaSpine is CEO, Keith Valentine; and CFO, John Bostjancic. Earlier today, SeaSpine released full financial results for the fourth quarter and year ended December 31st, 2018. During this conference call, we will make forward-looking statements within the meaning of the Federal Securities laws in regard to our business strategy, expectations and plans, our objectives for our future operations and our future financial results and condition.

All statements other than statements of historical fact are forward-looking statements. Such statements may include words such as believe, could, would, will, plan, intend and similar expressions. You are cautioned not to place undue reliance on forward-looking statements, which are only predictions and reflect our belief based on current information and speak only as of today February 27, 2019.

For a description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward-looking statements, please see our news release and periodic filings with the Securities and Exchange Commission, which are available on our corporate website at www.seaspine.com and at www.sec.gov.

I will now turn the call over to Keith Valentine. Keith?

Keith C. Valentine -- President, Chief Executive Officer & Director

Thank you, Carrie. Good afternoon and thank you all for joining us. 2018 was another year of solid execution. When we spun off from Integra almost four years ago, we committed to deliver innovation and to drive accelerating revenue growth. Since then, we have consistently launched differentiated orthobiologics and spinal implant products and upgraded our global distribution network. These efforts have translated into the more than 10% revenue growth in the second half of 2018 across our orthobiologics and spinal implants portfolio in both the US and internationally.

Following the $54 million equity raise we completed in October 2018, we are well positioned and well capitalized to continue that momentum and to continue to take market share in 2019. We remain laser focused on our vision, developing surgeon-centric, cost-effective solutions that combine innovative spinal implant system with industry-leading orthobiologics, which, together, will drive improved procedural solutions and deliver clinical value to the surgeon, hospital and patient. The entire SeaSpine organization is steadfast at executing this vision and we look forward to continued progress in 2019.

Turning to our top line performance. Revenue for the fourth quarter of 2018 totaled $38 million, an increase of 12% versus the year ago period. US revenue increased 9% to $34 million and international revenue grew 45% to $4 million. This caps another solid year for our international business, which grew 16% annually, largely on the strength of a recently added spinal implants distributor in Australia and solid orthobiologics growth in Latin America and Europe.

For the full year 2018, total revenue was $143.4 million, an increase of 9% versus the year ago period. US revenue increased 8% to $127.9 million, with US spinal implants growing more than 8% and US orthobiologics growing nearly 8% over the prior year. In the US, we are continuing to realize the benefits of upgrading and expanding our distribution network across both portfolios, from launching innovative new products and line extensions and by deploying more sets of the very successful spinal implant systems we've launched in the past few years.

Distributors onboarded since the beginning of 2016, contributed more than 40% of our US revenue in the fourth quarter and for the full year 2018. New and recently launched products contributed over 50% of our US spinal implant revenue in the fourth quarter, and more than 45% for the full year 2018. This success was due in part to the investments we made to deploy additional Shoreline and Mariner sets, which increased by over 40% in 2018.

Additionally, OsteoStrand and OsteoStrand Plus and OsteoBallast products, all of which were fully commercialized in 2018 contributed nearly 20% of US orthobiologics revenue in the fourth quarter of 2018. Our continued investment in product innovation and the deployment of more of our highly utilized foundational spinal implant systems, combined with the increasingly efficient and full-scale production of our new orthobiologics products gives our larger and increasingly exclusive distribution network confidence that we can support the growth of their business.

These investments are further supported by our expanded surgeon and distributor training and education programs, which underscore our commitment to providing a world-class customer experience to our surgeons and distributor partners. This commitment was on full display at our Global Sales Meeting which was held in Carlsbad earlier this month. The meeting was a great way to kick off the New Year and to share our focus on near-term priorities and how we can continue to grow together over the longer-term.

It is also an important venue to recognize and celebrate our most successful distributor partners. Our team spent a collaborative and energetic few days with many of our global distributor partners in a series of interactive sessions to build a stronger partnership and mutual commitment to each other and to outline our continued investment in innovation, growth and customer supporting initiatives. We also provided training on our new and recently launched orthobiologics and spinal implant products and systems. The information sharing and candid dialog generated by this meeting created additional excitement and positive energy that we believe will translate into accelerated commercial momentum and success for everyone involved.

Turning to our product launches. 2018 was another exciting year for innovation and execution. In addition to the full-scale production capabilities we now have for our recently launched orthobiologics products. We continue to launch new products in our spinal implants portfolio that address the most critical remaining gaps in our product line and that gain us entry to additional procedures and accounts that we couldn't previously access.

Highlighting a few of the products we launched in 2018, we received FDA 510(k) clearance for and launched instrumentation designed for use with a frequently used third-party surgical navigation system. We launched a comprehensive posterior decompression and disc preparation instrument system to support our fast growing Ventura posterior interbody NanoMetalene system. We initiated what has been a successful alpha launch of our Regatta Lateral Implant and Access System, which features our NanoMetalene technology and we line -- launched a line extension of our Daytona Small Stature Pediatric Deformity System that includes additional implant options for the 4.5 millimeter rod system.

In the fourth quarter, we also initiated the alpha launch of our Mariner Cortical System, a procedural-specific solution for the less invasive, mid-line Cortical approach it is commonly performed by regional centers and ASCs. We expect full commercial launches of the Regatta System and the Mariner Cortical System in the second half of 2019. Looking ahead over the next 12 months, we have another -- robust cycle of product launches planned.

Starting with our Mariner System, we will continue to leverage and extend the application of our foundational Mariner Modular Pedicle Screw platform with the anticipated launches of our Mariner Outrigger and Mariner MIS System around mid-year 2019. The Mariner Outrigger System consists of a range of connectors and instrument designed to support the use of the Mariner System in revision surgeries using either a 5.5 millimeter or 6 millimeter rod. The Mariner MIS system will incorporate towers extended -- head implants and instrumentation into the Mariner platform for application in percutaneous and mini-open MIS procedures. As the degenerative market continues to shift more to minimally invasive procedures, SeaSpine will be well positioned to capture more market share with the launch of the Mariner System.

We also plan to launch a line extension of our Shoreline Anterior Cervical Interbody System, that incorporates our proprietary REEF technology, a 3D surface structure enhanced with NanoMetalene that enables unique, bone-friendly titanium properties. The alpha launch of the Shoreline extension is anticipated for third quarter 2019. We also plan to incorporate REEF technology in combination with our NanoMetalene surface technology in future, in new and next generation interbody -- devices. This includes a boarded interbody for PLIF and TLIF approaches that accommodates both straight impaction and in certain rotate techniques. And an articulating TLIF interbody designed to maximize and play contact as sagittal corrections with a reliable and consistent way to deliver ideal anterior placement using a single easy-to-use end server. These alpha launches are anticipated in late 2019 and early 2020, respectively.

We expect to complement these launches and increase our presence in the OR with the alpha launch of a minimally invasive medical-based TLIF retractor in early 2020. This retractor which will be compatible with our Mariner Modular screw shanks will be designed to provide procedural predictability during access to disc space and implant delivery. Collectively, these new products help address a wide range of surgeon needs and will able us to capture the entire surgical procedure. In early 2020, we plan to alpha launch a new no-profile anterior lumbar interbody device with an optional modular plate. The interbody will include both the screw and an inline fixation option as well as our NanoMetalene and REEF surface technologies.

Prior to that in late 2019, we plan to alpha launch a newly designed comprehensive anterior decompression and disc preparation instrument system to better support our existing Vu aPOD Prime NanoMetalene anterior lumbar interbody franchise. And the next-generation ALIF implant. We received positive surgeon feedback on the new posterior disc prep sets we launched in 2018. And we're excited about the increased visibility of SeaSpine Arch and the OR from these new anterior instrument sets.

Shifting to our orthobiologics portfolio, we have planned for late 2019, the launch of a new packaging configuration for our OsteoStrand and OsteoStrand Plus Demineralized Bone Fibers products to simplify the intraoperative hydration method of the DBM fibers and to improve the procedure integration and delivery of the product with our RAPID Graft Delivery System. This effort emphasizes our desire to not only launch differentiated and innovative new products, but to also makes it easier to use in the hands of surgeons.

Our recently launched products coupled with a robust product development pipeline address attractive commercial opportunities in the United States. Our surgeon-centric product development helps ensure our products meet the evolving needs of surgeons and their patients. And with our increasing investments in medical education and training and in pre-clinical and clinical evidence that we expect to demonstrate more cost effective and improved clinical outcomes with our products to further drive their adoption. We are further positioning SeaSpine as the spine Company of choice among both surgeons and distributors.

I'll now turn the call over to John to provide more details on our financials and our financial outlook. Then, I will wrap up. John?

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

Thanks, Keith and good afternoon, everyone. As Keith noted earlier, total revenue for the fourth quarter of 2018 was $38 million, an increase of 12% compared to the prior year. US revenue increased 9% to $34 million and international revenue grew 45% to $4 million, largely on the strength of a recently added spinal implants distributor in Australia and solid orthobiologics growth in Latin America and Europe.

US orthobiologics revenue in the fourth quarter increased 10% year-over-year to $18.2 million, driven by growth in recently launched products led by the OsteoStrand Plus product and increased sales of a legacy Demineralized Bone Matrix products to new customers. This growth has been slightly offset by a sales decline in our Mozaik Collagen Ceramic Matrix product line. We recently signed a distribution agreement with Kuros Biosciences to market their proprietary bone graft technology under the brand name, OsteoCurrent. We believe that this is an upgrade to our current synthetic bone graft substitute product offering and will help stabilize that declining revenue base.

US spinal implant revenue in the fourth quarter increased 8% year-over-year to $15.8 million and was led by growth from new and a recently launched products, particularly our Mariner Shoreline and Ventura NanoMetalene Systems. Spinal implant surgery case volumes increased by more than 15% but were somewhat offset by continuing mid single-digit price declines in procedural mix.

Gross margin for the fourth quarter was 60.6% compared to 63.3% for the same period in 2017. The decrease in gross margin was due to continued higher manufacturing scrap rates and other inefficiencies associated with the production ramp-up of recently launched orthobiologics products, which were partially offset by lower raw material costs for those manufactured products. Gross margin for the full year 2018 was 61% in line with our guidance.

Operating expenses for the fourth quarter of 2018 totaled $32.5 million compared to $29.2 million for the same period of the prior year. The $3.4 million increase was driven primarily by higher selling, general and administrative expenses. SG&A expenses increased $3 million to $20.4 million in the fourth quarter driven by higher cash and stock-based compensation, a $500,000 impairment charge recorded against obsolete spinal instrumentation and the impact of a $1.5 million non-cash gain recorded in the fourth quarter of 2017 related to the release of a foreign capital tax liability based on the passage of the statute of limitations. Those increases were offset by $900,000 non-cash gain recorded in the fourth quarter of 2018 related to a decrease in the fair value of NLT contingent consideration liabilities.

R&D expense increased $300,000 to $3.3 million or 8.6% of revenue and was in line with our expectations as we continue to invest in product development resources and programs and in clinical evidence to differentiate our DBM and NanoMetalene platforms. Net loss for the fourth quarter of 2018 was $9.5 million compared to a net loss of $7.5 million for the fourth quarter of 2017. Cash, cash equivalents and investments at December 31st, 2018 totaled $54 million and we had no amounts outstanding under our credit facility.

We significantly strengthened our balance sheet in October through a public offering of 3.7 million shares of our common stock, bringing a net proceeds of more than $54 million. We subsequently used a portion of those proceeds to repay all of our outstanding debt. Our free cash flow burn, which excludes financing inflows and outflows was $5.7 million for the fourth quarter and $20.9 million for the full year 2018. We remain focused on expanding our gross margin and continuing to reduce cash-based G&A expenses as a percentage of revenue. However, we plan to continue to redeploy much of that operating leverage toward the sales, marketing and R&D initiatives and inventory and spinal implant set build capital expenditures that are critical to driving sustained revenue growth.

Turning to our financial outlook for 2019. We continue to expect full year revenue to be in the range of $152 million to $156 million, reflecting growth of 6% to 9% over full year 2018 revenue. While we are not providing quarterly guidance, we anticipate that the revenue growth in the second half of 2019 will slightly outpace the first half based on the expected timing of the deployment of additional sets of a recently launched spinal implant systems.

Moving down to P&L, we expect gross margin for 2019 to increase to within a range of 62% to 64% with meaningful expansion starting in the second quarter of 2019, as we more fully realized the benefits of the processing yield improvements we've recently implemented in Irvine. We expect R&D to approximate 8% to 10% of revenue and SG&A excluding non-cash stock-based compensation charges and any non-cash gains or losses related to changes in the fair value of NLT contingent consideration liabilities to approximate 66% to 69% of revenue.

At this point, I'd like to turn the call back over to Keith for closing comments. Keith?

Keith C. Valentine -- President, Chief Executive Officer & Director

Thank you, John. We are pleased with our accomplishments over the past year and our goal to reposition SeaSpine for growth has been realized. 2019 will be another pivotal year as we must continue to execute on product launches and in expanding the reach and increasing the exclusivity of our global distributor network. We have built a solid foundation for sustainable growth, which is supported by our organization of nearly 400 energized employees who are committed to providing high quality, differentiated and complementary technologies that leverage our core competencies in orthobiologics interbody devices and modular spinal instrumentation system.

With that, we will now open it up for questions. Operator?


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Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Matthew O'Brien from Piper Jaffray. Your line is now open.

Matthew O'Brien -- Piper Jaffray -- Analyst

Thanks so much for taking the questions. Three for me. Just to start off on the guidance side 6 to 9 is pretty compelling in the spine industry and I understand you got a big bump from Australia in Q4 of last year, but you've been putting up low double-digit growth the last couple of quarters. So why would we see the overall performance of the business slow down a little bit this year from the last half of last year, especially with all these exclusives and all these new products coming?

Keith C. Valentine -- President, Chief Executive Officer & Director

Yeah, couple of thing, I'll let John make a comment as well. Matt, I think the first one is very strong obviously, second half of the year last year, we just want to ensure how we're starting off the year and as we kick off the year, I think that we'll get greater visibility and granularity to the rest of 2019 and so our effort was to make sure we have a very predictable 2019 that we're planning together and then as things shift, we'll be the first to acknowledge and appropriately make some adjustments.

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

Yeah, the only thing I would add to that Matt is, with the timing of the additional set builds that we're going to deploy when we coincide with that with the expected timing for onboarding of additional more exclusive distributors, that's why we expect a little bit of the higher bump in the second half of the year, just the timing of the set purchases and deployment of those additional sets.

Matthew O'Brien -- Piper Jaffray -- Analyst

Fair enough. And then Keith, when you talked about the -- all these new products and there was a laundry list of them that are coming, they seem really interesting. I'm struck by the number that you've introduced over the last couple of years and how many more are coming. When you either think about the portfolio that SeaSpine offers or even on a procedural basis, how much of a hospital spine needs or a procedure can you cover at this point, are there still some glaring gaps that even in with all these new products, you still won't be able to cover or are you getting to that point where essentially you can cover virtually everything the hospital will need in a case?

Keith C. Valentine -- President, Chief Executive Officer & Director

Yeah, I think it's two step there, Matt, I think technically when you look at the entire portfolio, we can't cover most of the spine surgery that's done at hospitals. I think that the challenge has been, we have to update a number of the items that we talked about for 2019 will be product line extensions or updates and those updates are critical just because there has been a slight change in philosophy, there has been a slight change and how they want instrumentation in implants to perform for different pathologies and we have to update our items for that.

So I don't think it shifts that much, we can still supply, but what shifts is, we're providing a more modern philosophical alternative versus what we had in many of our legacy products. We still do not have a strategy for tumor trauma and that's still an area that is, I think a much different model as we grow, we'll be able to possibly address that, but as a smaller spine Company, I think focusing on where we are focusing now which is largely that it's a degenerative space and the deformity space gives us an opportunity to provide new products that give us an edge as far as new developments and as far as kind of where the most modern philosophies are right now for treating spinal technology.

Matthew O'Brien -- Piper Jaffray -- Analyst

That's super helpful. And then along those lines with the -- all these new products, your exclusive distributors have been doing extremely well recently. I'd love to get a sense for how much more room those guys have left to go, and then maybe some of the conversations you're having with even more distributors given the breadth of your product offering?

Keith C. Valentine -- President, Chief Executive Officer & Director

Yeah. So it's probably great time here talking about this coming from our Global Sales Meeting and a number of the individuals that we celebrated as I talked about in the script earlier, those are the same individuals that have a great deal of bandwidth for some of our bigger increases that we're anticipating in 2019. So I do think they have the ability to go deeper. In addition, no, we also are being very aggressive and opportunistic across the United States on bringing aboard newer exclusives.

I think we've talked about this before, that an exclusive distributor takes a while to be onboarded and really get their feet into the territory focused on us. And so some of the efforts we're making right now will be paying off and toward the end of the year and early next year. But we're continuing to build that pipeline and feel very good after the sales meeting about the momentum and excitement folks have, not only with the new products that are coming out with some of the momentum they're getting with our existing products.

Matthew O'Brien -- Piper Jaffray -- Analyst

Got it. Very helpful. Thank you so much.

Keith C. Valentine -- President, Chief Executive Officer & Director

Yeah. Thanks, Matt.

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

Thanks, Matt.

Operator

Thank you. And our next question comes from Ryan Zimmerman from BTIG. Your line is now open.

Sam Brodovsky -- BTIG -- Analyst

Hi, this is actually Sam on for Ryan. Thanks for taking the question. I think to start out with, hi -- with the licensing deals. Is this something that you viewed as more of an opportunistic move for the Company or do you think this is something we can see a little bit more of going forward in terms of strategy for new products?

Keith C. Valentine -- President, Chief Executive Officer & Director

Yeah, no, I think we've kind of telegraph that especially on the orthobiologics side when it comes to the synthetics that we're going to keep a very open mind when it comes to either partnering or tuck-in acquisition opportunities. And so we felt like this is a very strong opportunistic move to go with a great product that really has some great animal work behind it and we feel very good about our orthobiologics sales force and what their needs are from a synthetic perspective. So, yes we're opportunistic and we're going to continue doing things like that.

Also on the implement side we also feel very good about what that technology brings to some of the new developments that we're working on. I think as was mentioned in the script, there's a number of new items that are coming forward and those items will do well with their technology being complementary and being just another good implant choice, if needed interoperatively. Not to mention they have some new technology that we're going to be working with them on in our Mariner product line. So we feel really good. These are nice tuck-in strategic thing that we can do that just give more choices to the surgeon interoperatively.

Sam Brodovsky -- BTIG -- Analyst

Okay. And then, so the guidance is unchanged from the January announcement, it was just before the two licensing agreements. Was that factored in these two agreements into the initial guidance or should we think about this as something potentially in addition?

Keith C. Valentine -- President, Chief Executive Officer & Director

Yeah both of those agreements really we'll start seeing steam in an effort as we get into the second half of the year. So I think we'll adjust or have further conversation in future calls about how that launch is going and where we see any potential upsides. But, no, it was not contemplated when we gave our original guidance.

Sam Brodovsky -- BTIG -- Analyst

Great. Thanks for taking my question and congrats on another good year.

Keith C. Valentine -- President, Chief Executive Officer & Director

Thank you.

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from Shagun Singh from Wells Fargo. Your line is now open.

Shagun Singh -- Wells Fargo -- Analyst

Hey guys. This is Shagun Singh from Wells Fargo. Thank you for taking the question.

Keith C. Valentine -- President, Chief Executive Officer & Director

Yeah. Hi Shagun Singh.

Shagun Singh -- Wells Fargo -- Analyst

Hi. I was just wondering of the new products and line extensions you called out, which ones are the most meaningful to growth in 2019? And then also I was wondering if you're seeing -- if you have seen any benefit from disruption that some of the larger players yet?

Keith C. Valentine -- President, Chief Executive Officer & Director

Yeah. So when you take a look at some of the things we talked about, the upgrade and kind of new philosophical shifting we're doing in the degenerative space, the interbody ones that we talked about are very important. They have gotten really good momentum from 2018. We feel good about where we're going with those in 2019 and also feel very good with introducing new technology in addition NanoMetalene as I mentioned in the REEF technology.

So those are very strong offerings. The other strong offering, of course, is the upgrades to the Mariner System and Mariner has been a very good open modular system for us, the Cortical offering, the Mid-Line Cortical MIS offering has done very well as we've gotten started and we feel good about the full MIS and then ultimately as we move that system into having more Deformity applications. So I mean, that is the largest part of the spine market is that Degenerative space. And a lot of the products I discussed are all focused on deeper penetration into that Degenerative segment.

Shagun Singh -- Wells Fargo -- Analyst

And that's really helpful. Thank you for that. And Keith, I was just curious, there's a lot of momentum around robotics and spine. But it is expensive and it's not applicable for all procedures and you have indicated in the past that SeaSpine could pivot in a new direction by leveraging technologies in the OR. So how do you see the role of technology evolving to make it more affordable for ASCs and regional centers and do you have a robotic or perhaps a navigational strategy in place? Thank you.

Keith C. Valentine -- President, Chief Executive Officer & Director

We are -- yeah, we are and I think that's a good point to how we view the market, you're correct that I think that robotic technology and some of this new technology is actually very interesting. I think that different sites are getting different value from it. I think it's going to progress into something certainly even more of a greater clinical utility over time. I mean right now, it's more of a navigation and guidance tool that it truly is a robot as I think we would be used to calling robots from other areas of general surgery and what have you.

That said, I do think though that as you look across the United States. Majority of the surgery is being done at regional centers and ASCs. And right now that technology is not affordable for where most of the procedures are or maybe going in the future, depending on your views on ASC proliferation. So I do think there is an opportunity for lower cost options. I do think there is a number of technologies out there that we've reviewed and are interested in exploring, but at the same time, it needs to be affordable and it needs to be something that fits within the surgeons, a routine, if you will, in the OR and doesn't end up being additional time but ends up being seamless benefit. And so that's a kind of the direction and we're certainly spending energy on it, but we do not have anything formal at this time to talk about.

Shagun Singh -- Wells Fargo -- Analyst

Got it. Thank you so much for taking the questions.

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

Thank you.

Operator

Thank you. And our next question comes from Craig Bijou from Cantor Fitzgerald. Your line is now open.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Hey, guys. Thanks for taking the questions.

Keith C. Valentine -- President, Chief Executive Officer & Director

Hey, Craig how are you?

Craig Bijou -- Cantor Fitzgerald -- Analyst

Good. I want to start with a follow-up on guidance and may be Matt's question initially on guidance. And I understand that it's the beginning of the year. A lot of Companies typically approach you with some conservatism. I think the dynamics of your year-over-year comps make it, your comments is somewhat interesting, given that you had a strong second half, and you expect second half of '19 to be stronger than the first half.

So one, I just kind of wanted to see, is there anything that we're not thinking about any market environment things that maybe we should be aware of. And then I guess just kind of your overall impression of the spine market as we come into '19 and kind of how you see it progress throughout the year?

Keith C. Valentine -- President, Chief Executive Officer & Director

Yeah, no, I don't think there's anything out there that we've seen as the year has kicked off that concerns us. So we can put that certainly to rest. I do think there are some dynamics out in the marketplace that are rather interesting. There's certainly different combinations that are going on. Obviously, we have a very formidable competitor that is combining and working through that integration right now with that may or may not spell certain opportunities. I think there's also as we all are aware that the rumors in the marketplace about some consolidation. I think that presents nice opportunities as well.

So. Yeah and I would still say that from the results that have been from the largest competitors. I think that there still opportunity to take market share and we're excited about that opportunity especially with those bigger players, I think that the market is ripe for us some additional efforts on our part to gain some better -- and more exclusive distribution. So no, there's nothing out there that raises great concern. I just think we wanted to be thoughtful and methodical, as we step into 2019 and make sure we're starting off exactly as we anticipated before we start changing what the expectations are for the close of the year.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Okay, thanks. That's helpful. And John, maybe for you on gross margin and even kind of operating expenses. Obviously, you kind of -- you laid out some expectations for 2019, but maybe just looking ahead and obviously I know you're not going to provide guidance beyond '19. But just kind of looking ahead and where -- maybe where we can see gross margin move to in '20 and beyond. And then how should we think about when you will start to see some of that operating leverage and maybe not reinvest like you're doing in 2019?

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

Yeah. On the gross margin, our long-term view is pretty consistent with where it's been, right. We expect to be able to get to the mid to high 60% range over the course of the next two years to three years. And 2019 should be the big pivot year for us, because we worked through all of the challenges with the ramp up of the new orthobiologics products in our Irvine facility. We started to put some of those process improvements and efficiencies into place in the second half of 2018 as we came up the learning curve and just based on the timing of when we see those benefits. How that flows in inventory when the inventory ultimately gets sold through is when we'll start to recognize those benefits in the P&L.

So we're already seeing those benefits in the day-to-day operations. We just don't think they're going to start rolling through the P&L till the second quarter, which is where we see the margin kind of flexing up to get to that 62% to 64% range. So we'll continue to leverage the benefits of those process improvements and efficiencies, and has been the case all along with the Irvine manufacturing site. There's a lot of fixed costs to that plant. So the more volume we drive through it and the scalability of that plants, I anticipate that the orthobiologics manufacturing will be a long-term gross margin driver for us. And on the implant side, I think with scale and continuing to refine our inventory management practices, that gives us a secondary opportunity to grow gross margin, but orthobiologics is definitely going to be the primary driver of that gross margin expansion.

On the SG&A side, the biggest driver so far has been the commission rates and we've talked about as we bring in the more exclusive distributors and the higher rates relative that you pay them in years one and two. We're starting to move into years two and three for some of those distributors that are now meaningfully moving the revenue needle. But also bringing on board new distributors that we brought on board in 2018 and expect to bring on board in 2019.

So those commission rates will still be relatively high, but that's -- those are the distributors -- those more exclusive distributors that get the higher commissions early on in their agreement as they build out their business and hire more sales reps. Those are the folks we want to drive the revenue growth, because once they get that larger footprint that's when you get back to the more market-driven rates and that's been our model all along and it's proceeding according to plan.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Great, that's helpful. And one quick last one. I think you guys talked about some clinical evidence. So in your script, so just wanted to get a sense for any publications or data releases that we should be watching for that could come out in 2019?

Keith C. Valentine -- President, Chief Executive Officer & Director

Yeah. They will be -- we are going to continue having miscellaneous work that we're doing even beyond from an animal perspective, but one thing form the human side for the post-marketing stuff we're doing. You probably aren't going to see much until next year, because we're just starting the start of those -- that enrollment. And so the enrollment will take some time. But we will certainly be chatting about it as we get later in the year of how things are going and what kind of early scene and potentially there may even be single site that may have some data that shared at meetings and what have you. But the overall progress of that won't be until next year.

Craig Bijou -- Cantor Fitzgerald -- Analyst

Okay. Thanks for taking the questions guys.

Keith C. Valentine -- President, Chief Executive Officer & Director

You bet. Thanks, Craig.

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

Thanks, Craig.

Operator

Thank you. And our next question comes from Jeffrey Cohen from Ladenburg Thalmann. Your line is now open.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Hi, Keith and John. How are you?

Keith C. Valentine -- President, Chief Executive Officer & Director

Good. Hey, Jeff. How are you?

Thank you, Jeff.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Just fine. So can you walk me through a little bit as far as the sets coming out as far as the number sets where you expect for example on Regatta or the Mariner sets. Is that going to be in the area of 10 or more toward the 20 or 30?

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

Yeah. The sets. So there are two things in play in 2019, there is the launch of the new systems that Keith walked through that roadmap and those are typically alpha launches and consistent with past practices probably in the 10 to 15 set range. And then as we go to full commercialization, the plans are to sort of frame that out like we did with Shoreline and Mariner, which would be to expand to 40 to 50 sets.

And then as I mentioned in my comments, we increased -- further increased the number of Shoreline and Mariner sets in 2018 by 40% more. So I would anticipate these future set builds and launches to follow that similar cadence in terms of the size for an alpha a full launch. And then if things go as anticipated and we get the high utilization, we would double down on those sets and invest more in the subsequent year.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay. And John, what might you expect to be the potential ramifications on the inventory and it spilled over 2019 from the current levels of about let's say 42.7?

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

42.7 referring to the total inventory amount. Well, there's a couple of things at play. So the instruments and the set builds go into fixed assets, but obviously you need to deploy the implants with it and then have replenishment on the shelf. So we would anticipate the inventory to go up to support those launches, but on the orthobiologics side with the cost efficiencies that can -- should be able to mitigate some of the inventory growth and I think as we shift more to the fiber-based DBM, we can start to scale down the production of the legacy, particularly DBM we'll anticipate that product line will stay active. But right now we're sort of running both at full bore because we're in that transition mode from the particular DBM to the fibers based DBM and I think 2019 is a year where we can start to scale back on the older particularly DBM as we continue to grow the fibers.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay, got it. And could you talk a little bit about the course arrangement as far as for synthetics. Where do you expect to come out on pricing as compared to other DBM products including yours and how does the timing look like? Is that going to happen in the short-term or more in mid-year?

Keith C. Valentine -- President, Chief Executive Officer & Director

So you're talking about the synthetic versus the DBM pricing?

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Yeah.

Keith C. Valentine -- President, Chief Executive Officer & Director

Yeah. So this particular synthetic, we feel comfortable that it will command a premium in the marketplace. Now keep in mind that synthetics and DBM are not at the same levels typically the as cell-based opportunities and BMP. But we do feel because of the animal work and because of what they have shown this product to be able to perform that we are going to be able to achieve a slight price premium on the synthetics side.

Now that said, it probably compares pretty favorably to our premium DBMs our Evo-influenced DBMs also have a premium in the marketplace, whether it's the Evo3 product category or whether it's the ABM that's in our Strand material. It does already command a premium. So will be at similar levels to that.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay, perfect. And one more if I may. John, you previously spoke about the R&D anticipated to be approximately 10%. What was the second metric you gave on the 66% to 69% range?

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

That was SG&A, excluding the non-cash charges which generally our stock-based comp and any gains or losses on changes in fair value of the NLT contingent consideration liabilities, the acquisition accounting.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay, got it. Perfect. It does it for me. Thanks guys for taking the questions.

Keith C. Valentine -- President, Chief Executive Officer & Director

Thanks, Jeff.

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

Thank you, Jeff.

Operator

Thank you. And I'm not -- showing any further questions at this time. I would now like to turn the call back to Keith Valentine, CEO for any further remarks.

Keith C. Valentine -- President, Chief Executive Officer & Director

Thank you, everyone for joining us today and please have a great evening. Bye now.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

Duration: 44 minutes

Call participants:

Carrie Mendivil -- Investor Relations

Keith C. Valentine -- President, Chief Executive Officer & Director

John J. Bostjancic -- Senior Vice President, Chief Financial Officer

Matthew O'Brien -- Piper Jaffray -- Analyst

Sam Brodovsky -- BTIG -- Analyst

Shagun Singh -- Wells Fargo -- Analyst

Craig Bijou -- Cantor Fitzgerald -- Analyst

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

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