Carlsmed, Inc. (CARL) Earnings Call Transcript

Hi, everyone. Thanks for joining. Just wanted to come on to say welcome. Thanks for joining one of the sessions at day 2 of our small and mid-cap virtual event. Great opportunity to hear from corporates across the small and mid-cap space where our analysts have really great breadth of coverage, about 1,000 small and mid-caps that they cover in the U.S. So feel free to reach out for -- if you need the schedule for the rest of the day, any additional questions you want to join. But I wanted to pass it over to Travis. Thank you.

Hi, everybody. Travis Steed, the med tech analyst here at BofA. We welcome Carlsmed up next. We've got the whole team, Mike, Leo and Stephanie recently joined as Investor Relations. So maybe I'll turn it over to you, Mike, maybe start with an introduction of the business for those kind of unfamiliar with the story here.

Thanks, Travis, and thanks, Jill, for having us today. Really thrilled to be here. So just a little bit about Carlsmed. We are an AI-enabled med tech company and really founded on a mission to improve outcomes, decrease the cost of health care for spine surgery and beyond. And we developed this breakthrough technology that allows us to take imaging from patients, data from surgeons, create a 3D virtual model of the patient's spinal pathology, the optimal 3D surgical plan for that patient and then the perfect fit 3-dimensional devices that are 3D printed that go into the disc space of the patient and create 3-dimensional alignment. And so we received this breakthrough technology for lumbar spine fusion as well as cervical spine fusion. And with our platform technology, we've been able to meaningfully improve outcomes in this patient population. So what's really unique about our business in the med tech space is that we are digital first. We actually have no inventory. And so we're able to model the surgery digitally, build on demand the devices specifically for the surgery and collect post-op data for every surgeon, every patient that continues to improve the platform.

Maybe to lay the groundwork, what's some of the biggest challenges with traditional spine surgery today and whether for patient, surgeons, hospitals, payers, kind of all the different customers, if you will, and how you're kind of uniquely positioned to solve those problems?

Yes. So when we started the company, we were narrowly focused on this really big problem with spine surgery in that, particularly for complex spinal deformity surgery, it's really difficult to create a 3-dimensional surgical plan that the surgeon can implement in surgery and the patient can maintain that correction postoperatively. And so traditionally, for that patient population, there's a really high revision rate and so this is a challenge for patients, it's a challenge for surgeons. And ultimately, it's a challenge for payers because these are really expensive procedures. And so what we've been able to do is to build a different kind of business where we're deeply focused on delivering the right surgical plan for the patient and the surgeon and build those devices specifically for that patient, for that surgeon. And what we've been able to prove is that we've improved outcomes and ultimately lowered the cost of treating that patient population.

And one of the things that helped validate the approach here is the clinical data you've published and generated. Maybe for especially those newer to the story, walk through some of the clinical findings and how surgeons have responded to the evidence that you've built?

One of the -- when we talk about our deep focus on patient population, we've done most of the clinical data studies on the most complex patients. And so when we look at adult spinal deformity, these are patients that have a complex curvature of the spine, very degenerative disc spaces. And so with our technology, we're able to restore alignment and actually deliver the alignment in the disc space. And so most recent data that was published in the Global Spine Journal showed for patients that received our technology with the 3D surgical plan, the 3D fusion devices versus traditional spine fusion that there was a 74% reduction in reoperations in that patient population. So that's really significant tool that's now available for surgeons to deliver to their patients.

How should we think about the market opportunity that you're addressing today and like whether procedure volumes and kind of growth, et cetera?

So when we look at the market, we play today in 2 distinct but similar markets, lumbar spine fusion, cervical spine fusion. We look at both of these markets right around 400,000 addressable procedures, which takes us north of a $10 billion market opportunity in the U.S. With our early stage, we're growing very rapidly and continuing to train surgeons, accelerate hospital access so that we can make this available to all patients.

And when you think about kind of the difference between lumbar and cervical, anything kind of different to call out from a commercial perspective or kind of clinical perspective?

Absolutely. So the great thing about the market itself is there's a really large overlap in hospitals, surgeons that perform both lumbar and cervical fusion procedures. For the markets themselves and the clinical benefit, there's a lot of overlap in our technology. And so we started with lumbar. We just launched cervical in December of last year. With lumbar, our lumbar platform using the AI-enabled medical device to automate the surgical plan, the patient-specific model, we're able to actually precisely deliver 3-dimensional alignment, which is really important for giving a stable construct that maintains durability postoperatively. For the platform for cervical, we really engineered it, focused on patients with poor bone quality, which is a really big challenge with the ACDF procedure that a large percentage of patients have poor bone quality, and we're able to not only personalize the alignment, but engineer each individual device in a way that supports the fusion with a very high surface area that puts it in a great position for fusion even if the patient has compromised bone quality. And so early clinical experience with that has been really phenomenal because surgeons now have a tool for this more challenging patient population in cervical.

Okay. When you think about just like accounts and percent of accounts you're adding cover and sell into, how do we think about it from like the bottoms-up account basis in your business today?

So we still say that we're in the early stages. And so as we started our deep focus on teaching institutions, where we're able to get on contract and teaching institutions, train faculty, where they are training the next generation of surgeons, we've seen really great adoption with early and mid-career surgeons for this technology where they can implement this in their practice and really embed digital workflow. And so we reported in our last quarter, we grew our surgeon base 60% year-over-year, and we're rapidly adding new surgeons and new accounts to the aprevo platform.

Okay. That's helpful. And then maybe just before we get into a little bit more of the details, like it's been a little more than a year since the IPO, just like thinking about like what you've accomplished and kind of what you're excited about and where do you kind of think you need to improve from here? Maybe just think about what the next year has in store from here.

It's been -- it's really been a phenomenal year since our IPO, and we've hit a number of significant company milestones. And so kind of talk about operationally, when we started the company, we were about 8 weeks order to delivery. And that really allowed us to treat the most complex patients that are scheduled months out. We've invested a lot into the platform, into the technology really to get to where we can treat every patient in a practice. And since the IPO, we've been able to advance our underlying technology that allows us to do this in about a week. So from when a patient has consult to go to surgery in about a week for these scheduled procedures allows us to not only see the most complex procedures, but also where the majority of our procedure growth has been in the 1- and 2-level procedures for degenerative disc disease for both lumbar and cervical. And so that was a huge enabler of us accelerating account access, accelerating our new surgeon training, accelerating our utilization since IPO. We've also launched the cervical platform, which, as we talked about, really engineered for that patient population with soft bone to deliver personalized alignment and the best bed of fusion. We've also most recently received our permanent MS-DRG reimbursement for the lumbar procedure, which really allows us to broaden access for the aprevo procedure and simplifies coding from where it was about 11 different MS-DRGs for hospital reimbursement to 3 that cover every patient that could get an aprevo procedure. And so these are all material tailwinds over the first year that give us a lot of confidence not only in our guide that we put out, but also '27 and beyond as continued accelerators of our business.

I mean, the launch for cervical, honestly, I think it's gone a lot better than I was expecting. I think a lot of people were expecting -- sorry 10% of revenues despite being in the second quarter and launching in December. Maybe I don't know if it's kind of exceeded your expectations or not, but like how should we kind of think about cervical opportunity versus lumbar? Is cervical just going to move a lot faster or is there just something that kind of there's been an unlock here?

Yes. So we're definitely very happy with the launch of cervical. Surgeon response to it has been phenomenal. Where we've had just like with the lumbar procedure, one of the gating items for growth is getting on contract, new hospital approvals, and those have outpaced our own expectation in getting access to this technology, which I think really underpins the strong clinical need for this procedure. And as we think about cervical going forward, we're really excited about the corra cervical launch that will be in Q4 of this year. And that allows us really to complete the personalized cervical fusion procedure because with the aprevo platform, we can do the 3D patient model, the 3D surgical plan, the soft bone-friendly 3D implants for interbody fusion. And with corra, we can now make a personalized fixation plate to ensure that the fusion that takes place in the operating room is maintained and that alignment is maintained. So we see that as an accelerator to cervical in '27 and beyond as we launch. And I think as we mentioned on our most recent earnings call, we expect full year low double-digit revenue contribution from cervical as this continues to ramp very quickly, not just with existing aprevo lumbar users, but also pulling those surgeon users that specialize in cervical procedures.

You said that comes in Q4 of this year? Accelerator for cervical?

Yes. So we'll launch the corra platform in the fourth quarter for cervical. And so exiting the year, we'll have full commercial launch with the aprevo cervical, which is the 3D planning, 3D interbodies as well as the corra cervical, which will have the personalized segmental plates and personalized multilevel plates. We announced we did the first in-man for corra in the first quarter. We've had really great surgeon feedback and the limited market evaluation. And so we're accelerating the launch into Q4 of this year, and we see this as another great growth factor in '27 and beyond.

I -- do you think the accelerator for the growth is like getting higher utilization out of the existing? Is it deepening utilization? Or is it kind of bringing new surgeons? Like how is it going to change on the ground when you have this broader portfolio?

So how we think about this is we have -- we anticipate about half of the procedures will be interfixated without plates, half with plates. And with the plates, we see this as deepening utilization inside the current user base as well as allowing us to accelerate new surgeon adoption with the cervical platform.

Okay. It sounds like '27 sets up as a pretty good year for you guys versus...

Yes. We're really excited about the opportunity to capitalize on a lot of the tailwinds that we've developed in '26.

You're already kind of sharing some of the stuff with investors. I assume like you can -- surgeons probably know some of the stuff coming as well. Is that helping kind of drive some adoption early on and see that you invested in this platform and...

Absolutely. Absolutely. I think one of the -- as we've talked about, we've invested very heavily in medical education. Our world-class medical education team continues to bring top faculty to early and mid-career surgeons. We had our largest medical event, really our marquee medical event this past weekend, which is the aprevo Power Forum and the enthusiasm for the clinical data and really the advancements in the technology platform is really strong in the emerging surgeon user base.

Once they start using aprevo, what's the kind of the typical adoption and utilization ramp look like?

So we typically get a trial approval where surgeons will collect anywhere from 5 to 10 cases, and that typically takes a few quarters to get through the cases. Again, it depends on their practice predominantly deformity, predominantly degen, a mix of lumbar and cervical, collect the clinical data. The hospital typically does an economic analysis and then we move on to contract. And then beyond that, it continues to ramp. And so how we see a lot of surgeons adopt the technology, again, it depends on their practice where they may adopt a specific approach first for lumbar, be it anterior lateral, posterior bilateral, really perfect the technique, the planning and start to expand through their practice to go to long constructs, short constructs, lumbar and then cervical. And so as we see the surgeons move through the process, we see them continue to increase utilization. And we've been adding new surgeons at such a rapid pace. The majority of our surgeon cohort is still in the early adoption phase of the technology, which again gives us a lot of confidence in our ability to continue to accelerate growth.

Where do you see like the early adopters, where they are on utilization for some of these more recent adopters? Like how much gap is there between? And is the kind of the early adopters still moving higher? Or they kind of found the kind of the sustainable rate, I guess?

Yes. So what we typically see, again, it depends on the institution and their particular practice that it takes several quarters for them to get to steady-state utilization. And depending on the practice, that can be -- that will be a significant portion of their overall spine fusions.

Okay. I guess is there still a lot of room between like where those adopters are today and like the early adopters can move up? I don't know how much capacity and the utilization with your existing surgeons, like if they all move to the high end, how much upside could there be, I guess, is one way to phrase it. And maybe you don't want to give me numbers, but...

Yes, it's a -- just as we talked about it in growing our surgeon user base 60% year-over-year. Many of those in the first year of adoption are somewhere in the trial phase. So they'll have the opportunity to expand utilization. And it's really the snowball effect that we're getting in adding new surgeon users really now across 2 platforms with the lumbar and cervical platform.

How long does it usually take to get to steady state?

Depends on the institution. And so it's multiple quarters that can be somewhere between 4 and 8 quarters depending on the particular institution and their practice.

Okay. And then now they've got kind of more of a full offering, can you cover and get more procedures, higher utilization or more revenue per procedure here?

Yes. So I guess, talking about revenue per procedure first. One of the things that's been really unique about our business is we do look at this as a procedural offering. And so we look at aprevo procedure as a procedure where we have average number of levels per procedure that includes the plan. And so our average revenue per procedure for lumbar has been fairly stable and has actually increased a little bit as we've moved to a little higher mix of multilevel procedures. For cervical, we do see some opportunities for increase in average revenue per procedure as we add the corra platform with the aprevo platform for cervical.

Maybe we'll spend a little more time on the reimbursement. The new lumbar DRGs took place October 1, pretty meaningful improvement in facility economics. Like how impactful is this going to be on growth maybe in '27 when that goes into effect here?

Yes. I'll just give a little bit more background on the reimbursement, kind of how we got there. So we developed the aprevo lumbar platform. We received breakthrough technology designation for that. And when we launched, we had a new technology add-on payment, which gave incremental reimbursement to the platform. As that sunset, Medicare issued new codes, which that got to the 11 different reimbursement codes that we have today that ultimately, net-net have an incremental reimbursement to the aprevo procedure over the traditional. Now what goes into place 2 years later from when the NTAP expired October 1 is 3 new codes for aprevo lumbar procedure that independent of access, anterior, lateral, posterior, independent of the number of levels treated or the patient condition, all aprevo procedures will go into 1 of these 3 new codes. So this actually makes it much simpler for the hospitals from a hospital economic perspective. And we look at the national average for reimbursement, we anticipate that this on average is around $30,000 incremental reimbursement for the aprevo procedure versus a non-aprevo procedure. And so we see this as an opportunity to expand access, accelerate hospital contracting with this procedure so that hospitals can provide this to the surgeons that want to provide this to their patients.

Is it changing your ASP in any way? Have you thought about pricing differently because of it?

We're -- we anticipate keeping a similar average revenue per procedure and ultimately expanding access and even the opportunity to expand utilization inside of accounts. So we see this as an opportunity to accelerate volume and continue to be good partners with our hospitals on the economics of providing this to their surgeons ultimately to provide to their patients.