NuVasive, Inc (NUVA) Q3 2021 Earnings Call Transcript

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NuVasive, Inc (NUVA)
Q3 2021 Earnings Call
Nov 9, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the NuVasive Third Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to introduce your host for today's call, Ms. Juliet Cunningham, Vice President of Investor Relations at NuVasive. Please go ahead, Ms. Cunningham.

Juliet C. Cunningham -- Vice President Of Investor Relations

Thank you. Good afternoon, everyone, and welcome to our third quarter 2021 financial results conference call. Joining me today are Chris Barry, Chief Executive Officer; and Matt Harbaugh, Chief Financial Officer. Chris will provide an overview of NuVasive's recent business results and trends, and Matt will review our detailed third quarter financial results and our updated financial guidance. Then we'll host a question-and-answer session. The earnings release, which we issued earlier this afternoon, is posted on the IR section of our website and has been filed on Form 8-K with the SEC. We have also posted supplemental financial information on our IR website. As a reminder, this call is being recorded and an archive will be available on our IR website later today.

Before we get started, I'd like to remind you that our comments during this call will include forward-looking statements, which are based on current expectations, and are subject to risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements. Please note, we assume no obligation to update these forward-looking statements. Please refer to our SEC filings for a detailed discussion of risk. In addition, this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures is included in our third quarter earnings release.

And with that, I'd like to introduce Chris Barry.

Chris Barry -- Chief Executive Officer

Thank you, Juliet, and good afternoon, everyone. Earlier today, we reported third quarter 2021 financial results. While progress during the quarter shows that our technology is advancing NuVasive's competitive position in our key markets, our financial performance reflects continued pressure on our elective surgical procedures due to COVID-19, healthcare staffing shortages and global impact from NuVasive Specialized Orthopedics product availability. Matt and I will provide more color on third quarter results and our view of the current environment and its impact on elective surgical volumes. But first, let me update you on progress we're making with our vectors of growth and the commercialization of the Pulse platform and Simplify Cervical Disc. Despite a challenging quarter, I'm proud of our team's progress on our strategic growth drivers. As the leader in spine innovation, we're dedicated to advancing the standard of care in anterior, posterior and cervical spine surgery through the introduction of novel technology. This starts with driving growth in subsegments where we historically had underrepresented market share, such as cervical and posterior.

We are committed to expanding our presence in the $2.6 billion cervical subsegment and see continued runway in the coming years. In fact, not only do we expect to take share in this important segment, but we believe the differentiated technologies in C360, our comprehensive portfolio for anterior and posterior cervical spine surgery will help expand our market opportunities and allow more patients to benefit from these technologies. Third quarter gains show we are heading in the right direction. In the U.S., cervical delivered double-digit growth as we continue to see momentum from C360 led by the Simplify Disc. We are encouraged by surgeon adoption and demand for C360 and are now on track to deliver higher net sales for Simplify than our original 2021 expectations. During the third quarter, the Simplify Disc 1-level investigational device exemption study data was published in the International Journal of Spine Surgery. This study further validates the strong clinical data behind the Simplify Disc and why it is the most clinically effective technology in the cTDR procedure segment.

We've made great progress integrating this device into our supply chain ahead of schedule to meet current and expected customer demand. We're working to ramp our manufacturing capacity into 2022 to continue driving growth in cervical and bringing the superior technology to more patients. Moving to posterior spine, which represents a $1.6 billion opportunity. We continue to expand our portfolio to meet surgeon and patient needs. We recently announced the commercial launch of Cohere TLIF-O and Cohere TLIF-A, both of which are Porous PEEK implants for the TLIF procedure. As part of our Advanced Materials Science portfolio, this brings NuVasive's extensive expertise in material engineering and proprietary Porous PEEK technology to the most widely utilized posterior spine procedure. NuVasive is the only company to offer both for Porous PEEK and porous titanium implants for posterior spine surgery.

As the global market leader in lateral spine surgery, we are well positioned to continue leading in this $900 million anterior spine subsegment. Modulus ALIF, our latest 3D printed porous titanium implant launched earlier this year, and we expect this new product introduction to continue driving positive momentum in our anterior portfolio. Overall, our thoracolumbar business experienced pressure in the third quarter due to an increased competitive environment as well as lower-than-anticipated elective surgical volumes and healthcare staffing shortages. In response to this, we have ramped up and made improvements in surgeon and commercial training year-on-year. And we have continued evolving our anterior spine innovation road map to support all procedural types from lateral to prone to ALIF with new implants and enabling technologies to bring our procedural value to more surgeons, providers and patients. Turning to our Pulse platform. The integration of enabling technology into our procedural offering has been foundational to the success of NuVasive.

First, with neuromonitoring and XLIF and now with Pulse. We commercially launched Pulse in the third quarter, a culmination of years of research and development from our internal teams with input from surgeon experts to build a first-of-its-kind solution that integrates all these essential tools to performance spine surgery and one condensed footprint. Pulse is a software ecosystem that integrates multiple hardware technologies into a single platform in the operating room. Unlike other navigation or robotic systems on the market, Pulse provides surgeons the freedom of faster decision-making through integrated technologies that inform one another, producing a seamless and efficient workflow. As an example, a surgeon can take a full spinal film intraoperatively and perform sagittal alignment measurements, use advanced neuromonitoring, integrated into navigation to improve screw placement, and utilize infrared tracking for navigation, take low-dose radiation images with LessRay and shape rods using computer-assisted technology with Bendini, all through one camera.

So this single unit of capital technology with two fixed screens and wireless device connectivity makes all of this possible, which minimizes the number of technologies and space needed in the operating room. Pulse's extensible nature maximizes the value for the hospital with one initial capital investment and the possibility to add future surgical applications. While it's still in early days, the first commercial cases with the Pulse platform have taken place successfully at multiple hospitals across the U.S. It's incredible to hear the impact Pulse is having in the operating room, especially from surgeons as several have recently presented at EuroSpine, [Indecipherable] and other societies on their experience with the differentiated capabilities of the platform. We're still on track to deliver net sales consistent with our original expectations for Pulse this year and have a strong commercial pipeline of future orders in the U.S., Europe and Asia Pacific leading us into 2022. We believe Pulse, coupled with our comprehensive procedures will help transform the future of spine care.

As a market leader in surgeon education, we know our continued investments in training will further our ability to change more patients' lives. In Q3, there was an increase in surgeon trainings when compared to the prior year and 2019. These trends are encouraging and a reflection of surgeon interest and adoption in our differentiated surgical procedures. With the recent opening of our East Coast experience center, we have even more opportunities to expand our training capacity. I commend our team's commitment to deliver disruptive innovation and educate our surgeon partners, which fuels our ability to scale around the world. Our globalization efforts remain a substantial opportunity for both growth and value creation. Now let me speak to our third quarter performance. Net sales were $270.8 million, down 8.3% year-over-year on both a reported and constant currency basis. Our expectation coming into the quarter was for continued COVID-19 recovery and normal third quarter seasonality.

However, as previously stated in our September investor update, there were substantial unexpected challenges for elective surgical procedures in July and August, and we did not see the volume levels return as we normally expect in September. Instead, we saw a decline in September, which we typically expect to be our largest volume month in the quarter. This was primarily due to the resurgence of the COVID-19 Delta variant, healthcare staffing shortages and higher seasonality in the summer months after a long period of travel restrictions. All of this created for a difficult operating environment for our surgeons and had a significant impact on the company's third quarter performance. Throughout the pandemic, we've kept in close contact with our key surgeon partners across the U.S. to understand what they are experiencing in their hospitals in respective regions. They've shared two key themes: one, the COVID-19 Delta variant resurgence was a factor in Q3's elective surgical procedure slowdown; and two, staffing shortages had a substantial impact on the healthcare system, including elective surgical volumes.

While this slowdown was felt across the globe, some of our strongest U.S. markets experienced this more acutely, which in turn put pressure on our results. However, our international core spine business grew double digits year-over-year in the third quarter, led by Asia Pacific and Europe, which both delivered double-digit growth. The Japan team continues to execute and gain market share, while we see ongoing market recovery across Europe. This growth was largely offset due to NSO product availability in the third quarter. We recently started returning Precice titanium products to market and expect to be in a majority of our key markets by end of year. Matt will share additional commentary on NSO in his remarks. While we saw a sequential improvement from September to October in the U.S., stability of elective surgical volumes is still uncertain. We anticipate this to linger in the fourth quarter.

Although these factors are outside of our control, we are diligently working with our teams, surgeons and providers to manage what is in our control to build a strong foundation for 2022 and beyond. We remain focused on our long-term strategy and progressing on the multiple vectors of growth within our business. This is led by advancing our leadership position in anterior and less invasive surgery, expanding our market presence and opportunistic growth segments and integrating enabling technology as well as scaling our business globally. Given the successful commercialization of the Pulse platform, continued adoption of our C360 portfolio featuring the Simplify Cervical Disc and recent product expansion within our Advanced Materials Science portfolio, we are confident in our organization's ability to deliver the strongest innovation cycle in years.

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

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Thanks, Chris, and good afternoon, everyone. I'll begin by reviewing our third quarter 2021 results and will refer to both GAAP and non-GAAP measures. Total net sales for the third quarter were $270.8 million, a decrease of 8.3% on both a reported and constant currency basis when compared to the prior year period. Of the year-over-year decrease, roughly half was driven by COVID-related headwinds and half was a result of limited NuVasive Specialized Orthopedics product availability due to a company ship hold. Our expectations coming into the quarter were for continued COVID recovery and relatively normal third quarter seasonality. When we communicated adjusted expectations externally in early September, we indicated that July and August were more challenging than expected, and we were not seeing the return to volume levels we would normally expect in September. That trend continued and pressured our results in the third quarter. U.S. Spinal Hardware net sales were $145.1 million in the third quarter of 2021, representing a 10% decrease compared to the prior year period.

We continue to invest in differentiated spine products and expanded our Advanced Materials Science portfolio with the recent launches of Modulus ALIF, Cohere TLIF-O and Cohere TLIF-A. Notably, during the quarter, our cervical portfolio achieved 13.5% growth over the prior year period, driven by C360 and continued strong performance of the Simplify Disc. As Chris said, we are pleased with the early adoption and momentum of the Simplify Disc and are on track to deliver greater than $5 million in net sales this year. U.S. Surgical Support net sales were $60.5 million in the third quarter, representing a decrease of 13% from the prior year period. This performance was primarily driven by the impact from NuVasive clinical services experiencing a reduction in case volumes due to COVID-19. The decline in surgical volume also led to lower net sales associated with biologics and other products and services during the quarter. Also included in U.S. surgical support is our Pulse platform, which was commercially launched during the third quarter.

We are excited that the first commercial cases have been successfully performed in hospitals across the U.S., and we continue to expect to deliver $5 million in net sales this year weighted more in the fourth quarter. While COVID clearly impacted our international business as well, we did not see the decline in volumes that we saw in the U.S. during the third quarter. In fact, our core spine net sales in Asia Pacific, Europe and Latin America grew double digits. However, our international results did not reflect this underlying strength due to limited product availability in our NSO business. We are making good progress on the path to remedy this challenge and expect to be back in the majority of markets by the end of this year. Excluding NSO, international would have grown in the double digits. Turning now to profitability. GAAP gross profit was $182.2 million compared to $210.6 million in the prior year period. The year-over-year decrease was primarily attributable to a $14.2 million inventory charge related to certain NSO products that we withdrew from the market.

The withdrawn products have not been material to our net sales historically. Non-GAAP gross profit was $197 million compared to $210.6 million in the prior year period. Non-GAAP gross margin was 72.7%, an increase of 140 basis points compared to 71.3% in the prior year period. The year-over-year improvement was primarily driven by lower inventory reserves compared to the prior year and increased manufacturing efficiencies. We expect further benefit in the future as we continue to fully integrate manufacturing and distribution of the Simplify Disc into our Ohio and Memphis facilities. Non-GAAP operating expenses were $166.6 million, an increase of 1.5% compared to the prior year period. SG&A expenses were flat compared to the prior year as we maintained discipline on variable expenses. These reductions were offset by infrastructure investments and a moderate return to necessary business travel.

Non-GAAP R&D expenses increased 12.1% to $21.9 million year-over-year or 8.1% of net sales as we increased targeted spending to support multiple technologies including our Pulse platform, Pulse Robotics and Simplify developmental efforts. Non-GAAP operating margin was 11.2%, a decrease of 460 basis points from 15.8% in the prior year period. The year-over-year decline was primarily due to lower volumes and continued investments in the business. Non-GAAP other income and expense in the third quarter of 2021 was $7.1 million of expense compared to $9.1 million in the prior year period. The year-over-year decrease was attributable to lower cash interest expense following the settlement of the 2021 convertible notes upon maturity in the first quarter. This reduction was offset by higher unrealized foreign currency losses driven primarily by the Brazilian real. Non-GAAP tax expense in the third quarter was $6.4 million compared to $9.2 million in the prior year period, resulting in an effective tax rate of 27.5% versus the prior year tax rate of 24.4%. The year-over-year increase was primarily driven by higher valuation allowances and an income tax reserve in the prior year period that did not repeat in the third quarter of 2021.

We reported GAAP net loss of $21.6 million or diluted net loss per share of $0.42 compared to GAAP net income of $5.9 million or diluted earnings per share of $0.11 in the prior year period. Non-GAAP net income was $16.9 million or diluted earnings per share of $0.32. This compares to non-GAAP net income of $28.3 million or diluted earnings per share of $0.55 in the prior year period. Free cash flow for the third quarter was $33.2 million versus $54.3 million in the prior year period, which was primarily related to lower sales volume and increased capital investments to support anticipated 2022 growth. We ended the third quarter with cash and cash equivalents of $234.6 million and an undrawn $550 million revolving credit facility. This positions us well from a capital resource and allocation perspective. Based on performance year-to-date and given the limited visibility for elective surgical volumes for the remainder of 2021, we have updated our full year 2021 financial guidance to reflect these ongoing environmental pressures.

As a result, we now expect net sales to be in the range of $1.132 billion to $1.142 billion, which represents growth of 8.2% at the midpoint of the range compared to full year 2020. Non-GAAP operating margin of 12.5% to 12.9% and non-GAAP diluted EPS of $1.73 to $1.83. As the COVID-19 impact lessens -- we are confident that the investments we have made position us to deliver stronger returns and above-market growth. In 2022, we expect tailwinds from our Pulse platform, market expansion with our strong cervical portfolio, continued growth in our international business and the return of NSO products in key markets. We are very excited about the opportunities ahead and look forward to seeing many of you either virtually or in person at upcoming investor events.

With that, I'll ask the operator to open the call up for the Q&A session.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Mathew Blackman with Stifel. You may proceed with your question.

Mathew Blackman -- Stifel -- Analyst

I appreciate it. Thanks so much. Maybe for me, just curious -- I appreciate the comments on October improving September. Any way to sort of characterize the procedures that are coming back? Are you seeing lower intensity cases come back faster versus more complex cases? Or is it fairly well balanced?

Juliet C. Cunningham -- Vice President Of Investor Relations

Thanks, Matt. Appreciate the question. So far, it's been relatively balanced. I would say that the mix has been fairly consistent. If you looked at the relative impact over the course of Q3, I've talked about this a little bit in the past, certain parts of the country, certain geographies are hit harder than others. So those regions have come back obviously much faster because they were down much greater. But as far as the mix of procedure, it's been fairly uniform. I would say that caveat with trauma and intense or complex deformity, some of those cases may have been flowing through. A lot of the more elective degen cases were down more sharply over the past several months. So the natural mix will probably reflect that. But it hasn't -- you haven't seen a pronounced spike in any given procedure layer over the last four weeks.

Mathew Blackman -- Stifel -- Analyst

I appreciate it. Thank you.

Operator

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

Matt Miksic -- Credit Suisse -- Analyst

Hi, thanks for taking the questions. So Chris, if I could, just on some of the -- I think everyone was wondering about sort of regional color similar to Mat's question just now on the types of procedures that are coming back and the types that were most hardest hit. Was there -- is there anything to say about cervical versus lumbar, about south versus north or other parts of the geography where you feel like you might have more concentration and we're just hit a little bit harder than some of your competitors?

Chris Barry -- Chief Executive Officer

Yes. Thanks, Matt. I'll try to answer this. Clearly, it's hard to unpack in this environment, really looking over the last several quarters. It's been hard to sort of compare and contrast against other competitors because of the different mix you may have in any given geography and because of the different variability we've seen coming out of our geographies, and that's both a global statement, but also just within the U.S. Clearly, if you look at geographically, we saw harder hit markets in the southeast part of the country over the last several months. We've talked about that, less so on the Northeast. That was sort of flowing into September. The Northwest was hit relatively hard, but there are varying reasons. We pointed the COVID variant, and we also started hearing about staffing shortages. So the concentration of our business is probably in some ways, in some situations reflective of the decline we've seen in the markets, but it's moved around so much that in any given month, you may have a shortfall in the Northwest versus Southeast.

So I would say, generally, I don't know that we've been treated any better or worse based on the situation than maybe our competitors. But clearly, it has been a mixed concentration, geographic concentration, I should say, as a result. As far as procedures, clearly, our -- the areas that we've had significant market share is where we tend to see the decline. We're obviously growing cervical, Matt mentioned that, I mentioned that in some of my prepared remarks. And so even through the situation we faced in Q3, we still saw positive signs of the areas that we're focused, the areas where we've got relatively lower share, we're able to outgrow the decline or the volume softness in the market. Where we have high share, we felt the pressure. So TLA, thoracal lumbar, in the anterior space, we felt some pressure.

As far as how it kind of flows back, I said it earlier, I think it builds uniform to me today. I haven't seen anything that would indicate anything coming back any faster or slower. But we're still in early days. I want to see some durability of the procedure volumes. I want to see durability of the regional segments. I want to kind of get past this idea that we're back to normal when we feel it one part of the world when we continue to hear anecdotally challenges in other parts. So we've got ways to go to feel we're back. But the good news is I'm cautiously optimistic that we're seeing the trends start to move in the right direction. We just need to that continue throughout the rest of this quarter.

Matt Miksic -- Credit Suisse -- Analyst

Got it. And then just one follow-up, if I could, on Pulse. I think most folks understand your strength of NuVasive's position in lateral and minimally invasive lumbar. Can you talk about what you see as the potential for Pulse to kind of expand your position in a given center out of that base to a bigger range of procedures that where NuVasive might not have been considered sort of the go-to partner.

Chris Barry -- Chief Executive Officer

Yes, there's a couple of things there. You sort of mentioned where we've had strength in MIS and lateral. I think this enhances the suite of technology that we proceduralize within. It's been the -- I think the strength that we've had as a company is looking more comprehensively looking at instrumentation, look at implants, looking at the surrounding suite of technology acquired to the procedure. Pulse, I think, is a force multiplier within that space. Having said all that, we have, in many ways, the company is created being a disruptive force, creating this excellent market, this lateral market through Pulse and through some of the other investments in areas like cervical and posterior, we think we have a much broader comprehensive portfolio to leverage within any given system. So we hope to have a greater position by hospital, by facility, but by provider because of the scale and scope of our technology and the scale and scope of our portfolio. So we're excited about 2022 and what we're able to unpack and unlock with the investments we've made, clearly just needed to get out of this cycle of some of the environmental conditions, I think we've all faced in the industry.

Matt Miksic -- Credit Suisse -- Analyst

Right. Thank you.

Chris Barry -- Chief Executive Officer

Thanks, Matt.

Operator

Our next question comes from the line of Josh Jennings with Cowen. You may proceed with your question.

Josh Jennings -- Cowen -- Analyst

Hi, good evening. Good afternoon. I just wanted to ask about the NuVasive Specialized Orthopedics product availability issue. Sorry if I missed this, but I just want to make sure I'm clear. Can you just quantify the headwind that you experienced in the U.S. and internationally? And then what's baked into the implied 4Q guide for that -- for NSO product availability? And what are the steps that need to be taken to fill that hole to get that product back to where it was at availability back to where it was? Sorry, one question but with three parts.

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Josh, good to hear your voice, and it was great to see you in person in the third quarter. This is Matt. Chris, feel free to add. But my answer to you or attempt to answer your three questions there was, look if you think about the year-over-year decrease in net sales, the 8% that we talked about earlier, roughly half was driven by the COVID-related headwinds, including staffing shortages and the other things that Chris mentioned. And then the other half was a result of NSO product availability due to the company ship hold. And so if you do that math, Josh, that's going to show you a decrement to net sales on a year-over-year basis of somewhere between $10 million and $15 million. I'll let you do the math. And a greater portion or percent of that was in the international market versus in the U.S. So it was significant.

To answer your question around how are we thinking about in the fourth quarter based on what we see today? We won't have an outsized impact like we saw in the third quarter. The third quarter last year for NSO was one of the strongest quarters we've ever posted in that business. And so that's why you see this outsized impact. And to be clear in September, when we were resetting expectations based on what we were seeing, we still were not 100% certain as to how the ship hold was going to play out. What we know now is that it stretched into the fourth quarter.

Chris Barry -- Chief Executive Officer

And to add on to that, Josh, as far as the path to get back, we feel good. I mean clearly, the situation extended through September, there's lot of reasons why the regulatory workload is a little challenging to predict right now with all the challenges, I think we're facing. But good news is magic is back in the U.S., we expect the broader portfolio back in some reasonable time frame. I don't want to put an exact date because I tend to have been wrong on this a few times. And we're back with a precise family in the international markets with the expectation that we'll continue to return with majority of the titanium product in the very near future. And the impact of the Q4 will be nonmaterial. We did have -- we had an acute situation in Q3 exacerbated by the COVID situation, which resulted in the 8.3 that Matt mentioned.

Josh Jennings -- Cowen -- Analyst

Thanks for those extra details. Appreciate it.

Operator

Our next question comes from the line of Matthew O'Brien with Piper Sandler. You may proceed with your question.

Matthew O'Brien -- Piper Sandler -- Analyst

Afternoon, and thanks for taking the question. So as I look at the guidance here, I'm not overly surprised by the top line coming down, but I think what is surprising is the magnitude of the EPS reduction. So clearly, you're going to continue spending despite the revenue shortfall here as you kind of prep for '22. So where are -- as I look at SG&A specifically, it's up about $62 million year-over-year. Where is that incremental dollar going to? Is it cervical? Is it Pulse? And then what can you do as we head into '22 to ensure that your lateral business in the U.S. isn't under too much pressure? You've got a competitor down the road with the new system that's clearly targeting you guys. What can you do from a spending perspective from just an operational perspective to ensure that, that business doesn't deteriorate too much?

Chris Barry -- Chief Executive Officer

You know what, I'm going to answer that in the reverse sort of what you asked, I'm going to talk about lateral first, and I'll have Matt talk about some of the spending and where the incremental dollars are going in the short term. And listen, historically, as you know, NUVA was primarily kind of a one-procedure company. And clearly, there's increased competitive pressure. We believe we have 40%, 50% of the market share. XLIF is still a primary -- primarily a U.S. procedure. We continue to globalize that in international markets, but it's -- as far as the percentage of U.S. versus percentage of OUS, it's still relatively a specialized U.S. procedure. And so we've done a couple of things. Number one, the execution of our primary strategy to ensure that we're playing more holistically across all key subsegments. Just as a reminder, the anterior segment is about a $900 million segment, half of which is XLIF, half of which we consider to be ALIF and prone.

So we've continued to make good progress in the broader portfolio strategy, cervical, posterior, enabling tech. We've also continued to enhance our anterior portfolio through Mod ALIF. We have some key launches on the XLIF side of the procedural segment next year. We continue to make progress in prone. So I believe with the broader portfolio strategy and then making some clear enhancements to our lateral business. I think we're very well positioned to defend our share and grow our share going forward. But clearly, those two strategies, both enhancing our anterior and minimally invasive segment portfolio and playing more broadly are both essential for us to continue to not only protect our business but grow business broadly. Do you want to talk about the spend?

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Sure, absolutely. So with regard to operating expenses, I kind of split it between SG&A and R&D. And as it relates to SG&A, we have kept in the controls that we've talked about on previous calls as it relates to what we learned at the height of COVID in the second quarter of 2020. And from an SG&A perspective, we were really flat year-on-year despite inflation and other expenditures that took place. So if you look at Q3 '20 and Q3 '21, it's remarkable. They came in $100,000 different on a year-on-year basis. And we have absorbed incremental costs in there. So that tells you that $10 million that we took out from a permanent savings perspective, we've been able to offset that with some expense. And if you go back to Q3 of '19 even, we spent over $150 million. So we think we're getting some good leverage there on SG&A, but we're always looking for more opportunities there. Turning to R&D. I just want to remind you, when we did the Simplify acquisition, we said that we would incur roughly $10 million in incremental expense.

That was not budgeted. Because, obviously, we bought that business in the latter part of the first quarter. Half of that $10 million was going to go against SG&A and half of -- the other half was going into R&D. We're definitely spending to those levels. But with the performance we're seeing with the Simplify Disc in the market, that's good money spent well, I would say. And so that's in that R&D number. And then the other thing I would add is we're spending a fair bit of money on robotics for Pulse, and we expect that trend to continue. So I tried to be very consistent one quarter after the next to say, do not expect R&D expenditures to go down because we're at a period where we've got so many vectors of growth as we go into 2022. We want to make sure whether it's what Chris was talking about in cervical or posterior or whatever, that we're investing to win. And that's really what's kind of going on in the SG&A and the R&D.

Operator

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

Allen Gong -- JPMorgan -- Analyst

Hey, guys. So I guess I have a question kind of just on the trajectory that you're seeing for the COVID-19 recovery, right? I think so I mentioned it already, but it's kind of unsurprising to see the impact you saw this quarter. But we have gotten some different read-throughs on, expectations into what the fourth quarter recovery will look like, whether or not that will accelerate, and we can reach "normalized trends" before the end of the year or if it will take into the first half of 2022 or even longer into 2022. So I understand you're not providing 2022 guidance and that it can be a little bit hard to predict. But based on the trajectory we're seeing today, what is your own expectation for that kind of recovery?

Chris Barry -- Chief Executive Officer

Yes. Thanks, Allen. I guess I've listened, obviously, as you guys have around the different perspectives of kind of where we think things are going. I would say we're sort of in the middle of the road. I believe we have felt and we continue to feel some level of lingering impact of COVID-19 to the extent and the longevity of how that impacts us is still to be determined. I use the word durability. We're seeing better trends, but we need to see those trends continue and increase to get back to normalized levels. There's variability by geography still today. If you've seen Australia has been sort of start and stop, Germany has at least started anecdotally reporting some concerning information on the spikes they've had, areas like the Northwest, Seattle, some staffing shortages continue to be things that we've heard and continue to hear. So we're waiting to see durability and hopefully see the amplitude or the magnitude and the volume of some of these issues start to decline to get back to that normal operating environment.

The challenge I've got right now and the challenge, I think, that a lot of the med tech world specifically the elective procedure-based companies, we're going into the last quarter of the year. December is our largest month, and I can predict our capability, I can't predict staffing shortages and the impact of some of those issues in the month of December where we normally see the largest volume. So I still think that Q4 is going to have that lingering impact. I think it will be obviously less than what we experienced in Q3, but I think it will be something that will mute some of the opportunity that we see. Hopefully, we continue to make strides through the quarter, that progresses into Q1 of 2022. And ultimately, we move past it. But -- So long-winded way, I think we're likely probably in the middle of the road of what I've heard. I'm not overly pessimistic, but I'm not blindly optimistic either. So we've got to kind of see things play out.

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Yes. The only other thing I would say is we've tried to take this into consideration with the guidance that we've given you, we hope we'll be penalized for having been conservative. This is the best that we know right now. And just to be clear, from Josh's question earlier, we're assuming no material impact from NSO in the guidance that we provided today on the fourth quarter.

Allen Gong -- JPMorgan -- Analyst

Got it. And I also have a bit of a piggyback off a question asked earlier. It certainly seems like despite the top line, you are continuing to spend in the fourth quarter to drive growth, which does make sense. But when we think about 2022 potentially growing off of this lower base, potentially still seeing recovery trends. How should we think about the floor for margins, right? Like will you commit to continue to spend to drive the top line? If it means not hitting kind of that 2019 floor that I think we've heard from you before or is getting that floor back up to that 15.8% OM a priority for you guys?

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Yes. Thank you. We remain committed to that long-term operating income as a percent of sales of 20%. In a non-COVID environment, yes, we still view the 15.8% as a floor. Here are a few things to think about. The first thing is on Simplify, I think we can easily plant the flag that with the trajectory of that product just in this year alone, we had said when we did the acquisition, that it was going to be accretive in the second year of acquisition. With the growth we've seen, we're going to see that leverage. So yes, we took approximately $10 million in expense this year that we could not offset with the net sales. Obviously, earlier today, we said we were going to be above $5 million. So obviously, the expense is going to be more than the net sales, but we're going to turn that into an operating profit generator in 2022.

Similarly, for Pulse, with where that is trending, we also will be driving positive momentum on the bottom line. International continues to grow that's going to generate more positive bottom line. We're really pleased with the international results. It's unfortunately, we had the NSO issue that kind of clouds it, but that international business growing double digits. That low to mid-double-digit range that we've put out there, we still feel pretty good about. Now obviously, Germany and Australia is there. But in general, I would say, yes, 15.8% is soundly in our minds as we're thinking about driving operating income, and we've got great vectors of growth as we get into '22 that are going to help that cause.

Operator

Our next question comes from the line of Joanne Wunesch with Citi. You may proceed with your question.

Anthony -- Citi -- Analyst

This is Anthony on for Joanne. Thanks for taking my question. Can you just discuss some of the early feedback you've gotten on pole so far into the launch? Anything that surprised you either on the negative or positive side?

Chris Barry -- Chief Executive Officer

Anthony. We've been very pleased with the feedback so far. It's something we've been very deliberate in our approach to the market. But we talked about the software ecosystem, we've talked about the integrated hardware technologies in a single platform. The extensible nature and how we think that maximizes value through a hospital being able to require a piece of capital, but have that capital live on and create more value, along with our innovation pipeline. Early feedback has been good. It's been a value proposition that really resonates around the workflow, the efficiency, all things that we had hoped for in the integration of these technologies together. So a lot more to go, a lot more to offer and to integrate into the system, but early signs and early feedback have really validated the value proposition that we went to the market with.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of David Saxon with Needham & Co. You may proceed with your question.

David Saxon -- Needham & Co -- Analyst

Good afternoon and thanks for taking the question. We'll, Matt, you mentioned robotics in and an answer to an earlier question, so I'll ask one on the product arm. Can you just give us any more specificity in terms of timing of that first in human? I think you've said 2022 in the past. So any more detail around that? And then following that first in human what are the next milestones until you launch? Can the launch be something we see in '22 or might that fall in '23?

Chris Barry -- Chief Executive Officer

Thanks, David. I'll take it. There's been no real change to our previously communicated time line targeting first in human in 2022. I think I've said, I think it's going to be later in 2022, which then kicks us through a lot of regulatory activities and milestones that we have to execute on. I would think more about it as us getting in and really launching in the 2023 time frame for material revenue and things of that nature. But we've got to get into the clinical setting. We've got to execute our regulatory pathway. We've got a lot of work to do between now and then. We'll continue to update as we move into 2022 on more specifics coming out of Q4, we'll have more to talk about.

But at this point, we continue to really drive the value of Pulse, really create the pipeline for a lot of where we think we'll take our robotic technology and that's going well. So we're -- as we kind of talked about, we consider robotics a key application but not the only application of Pulse system. So we're focused on launching the Pulse, launching the Pulse system effectively and then creating that value chain through things like robotics, other key smart technologies that enhance the value over time. So no changes today. We'll continue to update you in future quarters.

Operator

Our next question comes from the line of Sam Brodovsky with Truist. You may proceed with your question.

Sam Brodovsky -- Truist -- Analyst

Hi, thanks for taking the questions. I'll just stick to Simplify here. If you could just -- there's any incremental color you could provide in terms of where the company is at in the manufacturing transition? And then how that should cover our thoughts in terms of the ability to sequentially grow to end the year and then through '22, that would be great?

Chris Barry -- Chief Executive Officer

Thanks, Sam. Super excited about where we are with Simplify across the entire plan, we're ahead. We spoke about being ahead on some of the revenue that we've generated this year. We also are very much on track and are moving forward with our manufacturing integration. Two steps of that process. First was really optimizing the current supply chain that we inherited through the acquisition. Second piece will be integration into our West Carrollton facility, both unlock substantial capacity and are very much in the time line we've talked about. So we'll continue to see, we believe, incremental capacity through the fourth quarter. That continues to open up in the next year, and it's very much aligned with what we've talked about as far as meeting the demand that we're hearing and seeing from our customers. So full steam ahead. We've -- to Matt's earlier point on expense, we've executed on the expense around creating the capacity that we believe will then support the demand that we're seeing. We get a lot of -- we've a lot of interest. We continue to ramp, and we feel like we're very much on track to really take full advantage of the opportunity in 2022.

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Yes. And Sam, just to finish up on your question. As it relates to the net sales that we envisioned for Simplify for this year. Obviously, in our prepared remarks, we talked that the product would be above $5 million. As you may recall, we were a tad under $2 million in the second quarter came in, in the same ballpark in the third quarter. So we're anticipating seeing some of that strength in that volume in the fourth quarter.

Sam Brodovsky -- Truist -- Analyst

Appreciate it.

Operator

Our next question comes from the line of Matt Taylor with UBS. You may proceed with your question.

Matt Taylor -- UBS -- Analyst

Hey guys, thanks for taking the question. I wanted to get your feedback just as you have visibility on a regional basis in some of the areas that are actually doing well, less COVID impact at this stage. What are they doing? How are they doing versus 2019? And what could that mean for when we do have more COVID recovery in 2022?

Chris Barry -- Chief Executive Officer

Matt, are you -- I guess I'll just take it for Regional are we talking global regions, I'm assuming? Just to make sure...

Matt Taylor -- UBS -- Analyst

Any anecdotal examples. I mean if you could just say in Boston, things are fine and it's up 10% versus '19, are there any things like that, that you could point to that could be reflective to think about how things will recover?

Chris Barry -- Chief Executive Officer

Yes. I mean you just saw just our perspective is, obviously, our business and our hardware volume, but we also have good insight to our NCS business of just macro volumes. And the range of decline in totality last quarter was roughly -- last quarter was around 6% to 10% but it varied. If you go to the Southeast, it was in the high teens to the low 20% range and the Northeast was much lower in more of the single digits. The recovery we've seen reflects that. We've seen strong bounce back in the Southeast part of the country so far. Again, it's only four over four that I'm talking about really September versus October, but it's reflective of the downturn we saw in the course of the quarter. But the standouts were -- the Southeast was the hardest hit, the Northeast was the least hardest hit, Mid-Atlantic was somewhere in the middle and the Northwest was on the higher side.

Regionally, it's been sort of start and stop. Australia has had good moments and bad moments. Europe has been fairly stable and sort of climbing out. Japan has been unusually or maybe surprisingly strong throughout. We continue to see that and continue to be impressed with the team and how they're managing through the pandemic. So it's still a little bit of a tale of where you are at any given month, any given quarter of kind of how things are progressing. U.S. was the most variable last quarter, the most volatile last quarter, and it was a very volatile region, the region within the U.S.

Matt Taylor -- UBS -- Analyst

Thanks for the color.

Chris Barry -- Chief Executive Officer

Thanks, Matt.

Operator

Our next question comes from the line of Anthony Petrone with Jefferies. You may proceed with your question.

Anthony Petrone -- Jefferies -- Analyst

Great, thanks and hope everyone's doing well. One on Simplify and then a follow-up just on pricing. On Simplify, just to level set, when we look at the $2.6 billion sort of global TAM for cervical, where does -- what is the current percent of fusion versus disc replacement in there? And where do you think that mix can go over the next three years? Just trying to kind of level set the size of the opportunity here for Simplify. And then when we think about pricing, there's two kind of notable data points. One, there's supply chain pressures on manufacturers, which could lead to that being pushed to customers. But on the other hand, we're hearing hospitals have upward inflationary pressure due to labor shortages. So when you look at that in the context of price heading into next year, do you think that's a wash? Or does it net out to potentially a slightly greater headwind?

Chris Barry -- Chief Executive Officer

Thanks, Anthony. It's -- as far as the kind of the anterior posterior cervical spine surgery versus the TDR market, TDR is still relatively small. We say probably 10% to 15% of the market now is the TDR market. As far as what it could be, we've talked a lot about this. I think it could be substantially higher. You've had some natural headwinds in that business from a reimbursement perspective that have largely been diminished and has resolved itself over time. I also think us entering the market with our training or education, another player in the market, I think, will also spark a lot of interest as we've seen within the cTDR space. So I'm going to hesitate to put an actual number on it, but I believe it could continue to grow. I think that the TDR, total displacement space in the cervical spine, is that an inflection point?

I think we're coming to the market with a great technology, a differentiated technology and a lot of interest within the technology. So still small today. Growing as a fast subsegment in the cervical space with, I think, a lot of headroom. I'll try to get a better answer for you as we move through the next couple of months. I need to see how it will materialize in the first quarter, second quarter to sort of get a model of where we think it could go. But growth appears to be strong and demand continues to increase on a month-by-month basis. So we feel good about the technology.

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Yes, Anthony, good to hear your voice. This is Matt. with regard to supply chain pressures, this kind of gets to the question earlier around SG&A and R&D, in my mind a little bit. In the second and third quarter, mostly in the second quarter, we did see a fairly sizable expense related to freight, but we're able to mitigate that through expense control, which I mentioned in the prepared remarks and earlier. So far, we've been able to navigate the incremental expense in some of these pockets that are showing up and we're very pleased with that. We'll see how it goes in the future, but that's how we've absorbed them. The other thing I would say is our accounts receivable, our day sales outstanding, all the normal financial measures pretty consistent. I haven't seen a lot of issues there despite the inflationary pressure, the nursing shortages all these other things. And then with regard to your question around price in the U.S. market, it has been incredibly consistent this year and actually last year despite COVID. For our U.S. business, it's generally somewhere between down minus 1% to minus 2%. That's what we saw in the third quarter as well.

Operator

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

Jason -- Loop Capital -- Analyst

Hi, thanks for taking the question. Maybe if I could maybe have a sort of wrap-up outlook-type question here. If I think about next year and the incremental opportunities that NuVasive has, at least the way you guys have laid it out at this point, it Simplify, pulse, NSO coming back online, OUS continuing to grow. Those are kind of the opportunities I see. Is that the right way to think about it? Or is there a more holistic thing to look at that might be factors boosting 2022 outlook?

Chris Barry -- Chief Executive Officer

I mean I think you hit sort of the leading drivers of growth. But I would just say, we think about it as advancing our leadership in anterior and less invasive. We've got key launches. It's been an area that we've had some competitive pressure, but I feel like we've made the right investment and we're -- I think we're poised to execute on our strategies in the anterior space. Clearly, outsized growth in areas where we are less represented, and we talk about expanding our market presence and opportunity to the growth segments: posterior space $1.6 billion, cervical space $2.6 billion, enabling tech. These are all areas where we have relatively either no or very low share. Integrating enabling technologies across our entire procedural domain and our globalization efforts. We're still in what I consider to be early phases of really driving and expanding our business in the global markets. The NSO is a great tailwind and some of the pressure we're feeling over the last really two years, some of that normalization in our base business comes back, all creates, I think, natural tailwinds to really accentuate some of the growth drivers I just mentioned. So I think we're saying the same thing, but that's the way I think about it.

Jason -- Loop Capital -- Analyst

Okay. And just one quick follow-up on Pulse. I wasn't clear. Was there any impact on a revenue basis this quarter? And Likewise, in Q4, is there any expectation of revenue contribution in Q4 for Pulse?

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Yes. This is Matt. So third quarter, we did have minimal net sales, but we did post some net sales in the quarter, but the lion's share of the $5 million is going to occur in the fourth quarter. Thanks for your question.

Jason -- Loop Capital -- Analyst

Got it. Thank you very much.

Operator

At this time, we have reached the end of the question-and-answer session. And I would now like to turn the call back over to Chris Barry for any closing remarks.

Chris Barry -- Chief Executive Officer

Thanks, John. Thanks, everybody, for your time today. I appreciate you joining our earnings call. I'll just reiterate the last question actually was well placed. But I'm very confident in our ability to execute and deliver growth in 2022. We're excited to get out of the current environment and feel extremely excited and looking forward to a strong '22 and our vision to continue to change the patient's life every minute. So look forward to speaking with all of you next quarter. Thank you.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Juliet C. Cunningham -- Vice President Of Investor Relations

Chris Barry -- Chief Executive Officer

Matt Harbaugh -- Executive Vice President And Chief Financial Officer

Mathew Blackman -- Stifel -- Analyst

Matt Miksic -- Credit Suisse -- Analyst

Josh Jennings -- Cowen -- Analyst

Matthew O'Brien -- Piper Sandler -- Analyst

Allen Gong -- JPMorgan -- Analyst

Anthony -- Citi -- Analyst

David Saxon -- Needham & Co -- Analyst

Sam Brodovsky -- Truist -- Analyst

Matt Taylor -- UBS -- Analyst

Anthony Petrone -- Jefferies -- Analyst

Jason -- Loop Capital -- Analyst

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