OFIX - Orthofix Medical Inc.'s (OFIX) CEO Jon Serbousek on Q2 2022 Results - Earnings Call Transcript
Orthofix Medical Inc. (OFIX)
Q2 2022 Earnings Conference Call
August 5, 2022 8:30 AM ET
Company Participants
Alexa Huerta – Senior Director-Investor Relations
Jon Serbousek – President and Chief Executive Officer
Doug Rice – Chief Financial Officer
Conference Call Participants
Mathew Blackman – Stifel
Jeffrey Cohen – Ladenburg
Jim Sidoti – Sidoti and Company
Presentation
Operator
Hello, and a warm welcome to Orthofix Medical’s Q2 2022 Earnings Call. My name is Melissa, and I’ll be your operator today. [Operator Instructions]
I now have the pleasure of handing over to our host, Alexa Huerta, Senior Director of Investor Relations to begin. Alexa, over to you.
Alexa Huerta
Thank you, operator, and good morning, everyone. Welcome to the Orthofix second quarter 2022 earnings call. Joining me on the call today are our President and Chief Executive Officer, Jon Serbousek; and Chief Financial Officer, Doug Rice. I’ll start with the Safe Harbor statement and then pass it over to Jon.
During this call, we will be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical facts are forward-looking statements, including any earnings guidance we provide, and any statements about our plans, strategies, expectations, goals or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matters contained in such statements will occur.
The forward-looking statements we will make on today’s call are based on our beliefs and expectations as of today, August 5, 2022. We do not undertake any obligation to revise or update such forward-looking statements. Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risk factors disclosed under the heading Risk Factors in our Form 10-K for the year ended December 31, 2021 and Form 10-Q for the quarter ended June 30, 2022, filed this morning, August 5, 2022, as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at Orthofix in Louisville, Texas.
In addition, on today’s call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to the financial measures determined in accordance with U.S. GAAP. Please refer to today’s press release announcing our second quarter 2022 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results.
At this point, I will turn the call over to Jon.
Jon Serbousek
Thank you, Alexa. Welcome, everyone, and thank you for joining our second 2022 results conference call. On today’s call I’ll provide an update of our second quarter performance and review progress towards our strategic initiatives before handing the call over to Doug, who will provide our financial update. I’ll close the call with our perspectives on the balance of 2022 before opening the line for questions.
Starting with our second quarter performance, total revenue in the quarter was $118.1 million and was flat year-over-year on a constant currency basis. As a result of our commercial channel investments and new product offerings, we delivered solid execution across our Spine business and achieving strong performance in our Global Orthopedics business. These positive results were partially offset by macro headwinds, which had greater-than-anticipated effects on our business.
In particular, we continue to see slower-than-expected rebound in elective complex procedure volumes due to ongoing staffing – hospital staffing issues as well as patient reluctance to seek elective procedures in select areas, which impacted our BGT, Spinal Implants, and Biologics businesses.
Reported revenue for the quarter was materially impacted by the strength of the U.S. dollar relative to our other currencies in which we transact negatively impacting reported revenue by approximately $2.7 million.
Turning to the performance of our two business units. I will comment first on the Spine followed by Orthopedics. Starting with Bone Growth Therapies, or BGT, sales for the quarter were $48 million, down 4% on a reported basis and constant currency basis compared to second quarter of 2021. The decrease in the quarter was largely a result of reduction in complex procedures, which generate a relatively large portion of our spine BGT prescriptions, continued staffing issues and patient’s caution to seek elective surgeries.
On a positive note, we continue to capture market share with PhysioStim and are seeing early commercial traction of AccelStim. These share gains and sales tractions reflect investments we have made in our fracture management channel, which called primarily on orthopedic and podiatric communities to treat fresh and nonunion fractures.
Moving to our Spinal Implants, which includes both Spine Fixation and Motion Preservation. Revenue was down 6% on a reported basis and down 5% on a constant currency basis as compared to the second quarter of 2021. The decline was due in part to lower-than-expected complex cases volumes in the U.S. as well as global competitive headwinds in Motion Preservation. We continue our positive view of the disc replacement market and the leading-edge technology that M6-C artificial disc provides with its demonstrated clinical outcomes.
Turning to our biologic portfolio. Revenue was flat on a reported and constant currency basis compared to 2021. During the quarter, we saw positive trends from new product introductions such as fiberFUSE and from new distributors added in the last 12 months. These trends helped offset the macro headwinds, which negatively impacted hospitals’ abilities to perform the complex elective procedures that often require our biologic solutions.
Moving on to Global Orthopedics business. Sales were up 2% on a reported basis and 11% on a constant currency basis over 2021. This growth was primarily a result of the strength in the international geographies, driven by the benefits from investments we have made in our sales organization as well as revenue from international stocking distributors. In the U.S., we have started to see positive benefits from the new sales leadership team put in place over the last 12 months. Both markets are also starting to benefit from our recent product introductions of TrueLok EVO and Galaxy Gemini.
Now moving on to our strategic initiatives. Let’s start with the product innovation and differentiation. Since January of 2020, we have launched 28 spine and orthopedic products. Starting with BGT, in May, we received FDA PMA approval for our AccelStim Bone Healing Therapy. AccelStim uses LIPUS or ultrasound technology for this healing of both fresh and nonunion fractures. We started the initial limited U.S. market launch during the second quarter, which included conducting sales force training and initial contracting with our payers.
We are pleased to see a high rate of physician adoption from our early training and education initiatives, and we are expecting more meaningful revenue contribution as we move towards the end of 2022 and into 2023 and beyond.
Moving to Biologics. During the quarter, we achieved the first clinical implantation of VIRTUOS, our advanced, first-of-its-kind shelf-stable complete autograft substitute. VIRTUOS was developed as part of our strategic partnership with MTF Biologics, who prepares this complete autograph bone substitute through a proprietary process that preserves all biologic components necessary for bone healing within the graft. It is provided in a room temperature ready-to-use multiple graft. VIRTUOS offers significant logistical and cost-saving advantages to hospitals with improved shipping, storage, operating room efficiency due in part to its environmentally friendly packaging.
Surgeons involved in the exclusive launch of VIRTUOS have provided favorable feedback, and we look forward to broader commercialization later in the year. I will comment later in the call on an exciting announcement we made earlier this week on our strategic partnership with CGBio for recombinant bone morphogenic protein or BMP-2 product.
Turning to new products and orthopedics. We partnered with Lima Orthopedics in the U.S. to create a solution for patients with hip dysplasia or abnormalities of the hip that lead to leg length discrepancy. This novel hip distalization procedure solution using our Fitbone intermediary limb lengthening technology reflects the strength and versatility of the Fitbone platform and patented portfolio and will be available through the FDA compassionate use exemption.
Turning to our second initiative. The ongoing development of our commercial channel to expand patient and surgeon access to our products worldwide. In Q2, our U.S. strategic channel partners continue to see growth over the prior year. As you’ll recall, our channel partners include distributors that carry multiple Orthofix product categories such as hardware and biologics. Most of our channel investment in the quarter was focused on adding U.S. direct reps in BGT to support the launch with AccelStim as well as growing our orthopedics commercial infrastructure. Both investment areas are important for the future growth, and we are pleased with the progress we are making here.
Our internal team worked hard during the quarter to bring the launch of two significant new products on a limited basis in BGT and Biologics. With these launches associated with physician education and sales training, we have put ourselves in a great position for success as the macro environment improves and the volume of elective procedures returned to historical trends.
Now, I’ll turn the call over Doug to review our financial performance. Doug?
Doug Rice
Thanks, Jon, and good morning, everyone. As many of the financial measures covered in today’s call are on a non-GAAP basis, please refer to today’s earnings release for further information regarding our non-GAAP reconciliations and disclosures.
Starting with revenue, as Jon noted earlier, total net sales in the quarter were $118.1 million or flat at constant currency as expected when compared to the second quarter of 2021. In the U.S., total net sales were $93 million or 79% of total revenue, down approximately 3% year-over-year. The primary drivers for reductions in complex procedures consistent with many in our industry this year and other macro and competitive headwinds that Jon covered earlier.
International total net sales of $25 million for the quarter were up 7% in constant currency over the second quarter of 2021 as a result of the recent sales force investments in orthopedics and sales to international stocking distributors. GAAP gross margin in the second quarter of 2022 was 73% compared to 77% in the prior year period, due primarily to changes in our sales mix as well as increased inventory reserve expenses related to set builds for an expanding sales force and increased safety stock requirements driven by the risk of global supply chain disruption.
For the full year 2022, we expect GAAP gross margin to be approximately 74% to 75%, which implies an average rate of 75% to 76% in the second half of the year. GAAP sales and marketing expenses in the second quarter were 51% of net sales, up from 47% in the second quarter of 2021. This increase reflects our investments in direct reps and sales management in Orthopedics and BGT as well as additional training and marketing expenses related to the AccelStim launch, which will continue into the third quarter. These were offset somewhat by the lower commissions on orders from international stocking distributors.
For the full year 2022, we still expect GAAP sales and marketing expenses to be in the range of 49% to 50% of net sales. GAAP G&A expenses in the second quarter were 13% of net sales, down from 15% in the prior year period. The decrease reflects lower legal and professional fees as well as lower employee expenses.
GAAP R&D expenses for the second quarter stayed flat at 11% of net sales compared to the prior year period. Our focus on innovation and differentiation has increased year-over-year, new product development expenses, which were offset this quarter by a larger development milestone payment made in the second quarter of 2021.
We now expect full year 2022 GAAP R&D expense to be approximately 11% of net sales, including an impact of about 200 basis points related directly to our EU MDR implementation efforts, for which we adjust within our non-GAAP financial metrics. Adjusted EBITDA margin in the second quarter decreased to 10% of net sales compared to 15% in the second quarter of 2021, driven by increased costs as well as investments in sales management, direct sales reps and the launch of AccelStim.
We continue to expect our adjusted EBITDA margin for the full year 2022 to be approximately 12% of total net sales as we continue to profitably invest in growth. We expect our adjusted EBITDA margin to increase sequentially in the back half of 2022. The GAAP acquisition-related measurement expense year-over-year decrease of $9.6 million, primarily reflects a second quarter 2022 noncash credit related to the change in the fair value of the Spinal Kinetics contingent revenue milestone payment liability.
We continue to believe in the growth of the M6-C and cervical disc replacement market, but based on the current operating environment, the lower fair value of the underlying liability reflects the anticipated achievement of the remaining revenue-based milestone beyond the contractual measurement end date of April 30, 2023.
Now turning to tax. We had GAAP income tax expense of $600,000 or 18% of income before income taxes in the quarter as compared to a GAAP income tax expense of $2 million or 48% of income before income taxes in the same period of 2021. The tax rate in both periods was driven by timing of earnings as well as GAAP losses without a corresponding tax benefit. For the second quarter, we reported GAAP EPS of $0.12, which stayed flat compared to the second quarter of 2021.
After adjusting for certain items and when normalizing protect, using our non-GAAP long-term effective tax rate of 28%, adjusted EPS for the second quarter was $0.08 as compared to an adjusted EPS of $0.32 in the second quarter of 2021. Regarding cash, our liquidity position remains strong with $60 million at the end of the second quarter compared to $88 million at the end of the fourth quarter of 2021. The decrease was primarily related to the $14 million of increased net inventory, as I mentioned, and the $2 million final contractual payment made to the Fitbone seller.
Capital expenditures were approximately $6 million in the quarter compared to $5 million in the prior year period. The increase was primarily due to investments in operations, the expansion of our manufacturing capabilities as well as an improved customer training and experience center for our partners at our headquarters in Lewisville, Texas. We still expect capital expenditures to be in the $25 million to $27 million range for 2022.
Now shifting to guidance. For the full year of 2022, we now expect reported revenue to be in the range of $455 million to $465 million, which utilizing current FX rates represents flat to 2% growth at constant currency. This revenue guidance reflects a roughly $10 million or 2% anticipated headwind to our top line for the full year at reported rates due to the strength in U.S. dollar compared to the 2021 FX rates.
From a macro perspective, we continue to expect an overhang through the end of the year and into 2023 related to hospital staffing issues and patient reluctance to see collective surgery. Key products like AccelStim and VIRTUOS will gain momentum, but we do not expect to see significant contributions to revenue from these new products until 2023.
Reflecting on our quarterly revenue cadence in the back half of this year, we anticipate that our third quarter revenue will reflect typical seasonality with a 3% to 5% decrease in procedure volumes sequentially versus the second quarter of 2022 as well as the increased FX headwinds from the strength in U.S. dollar versus the second quarter of 2022.
For the full year 2022, we now expect our adjusted EBITDA will be in the range of $53 million to $57 million or approximately 12% of revenue, and our adjusted earnings per share will be between $0.45 and $0.55. These ranges reflect the $3 million FX headwind to our top line due to the strength in U.S. dollar since the May earnings call. Inflation uncertainties, our continued investment in delivering a robust pipeline of differentiated products and expansion of our commercial channel to accelerate our growth trajectory.
I would now like to turn the call back over to Jon.
Jon Serbousek
Thanks, Doug. Moving to the back half of 2022, we are focused on solidifying ourselves as a leader in the regenerative healing technologies in the spine and orthopedic space while also delivering sustainable, profitable growth driven by innovation and differentiation within our product portfolio as well as optimizing our commercial channel. We will also continue to be focused on working capital management while growing our top line sales.
In the near term, we will continue to advance several of our growth drivers, including the M6-C artificial cervical disc, the Fitbone limb-lengthening system, the AccelStim bone growth stimulation device and our expanded biologic portfolio. I’d like to provide a quick update on each of these growth drivers.
Starting with the M6-C artificial cervical disc. We have one of the leading cervical disk platforms in the market with over 60,000 global M6-C discs planted over 16-plus years. We are pleased with the continued strength of the clinical evidence for this technology, and in the U.S., we are progressing the M6-C 2-level clinical trial, which remains on track. We are also in the middle of a global real-world evidence study that will access over 3,000 patients to expand and further reinforce our body of M6-C clinical evidence.
We also recently analyzed our internal records of over 16 years and 60,000 discs implanted with long-term survivorship analysis, which projects a global cumulative survivorship of 99% at 10 years. We believe it is important to invest in these clinical studies to ensure surgeons have the best available information to inform their implant decisions with their patients.
Turning to the FITBONE limb-lengthening system. It was added to the list of reimbursable products and services for the French Ministry of Health and Preventions. This makes FITBONE the only intramedullary lengthening nail included on the French ministry list and thus, the only reimbursable lengthening nail by the public health system in France. As a result of the French reimbursement decision and the Lima partnership we mentioned earlier, we expect to see marginal increase in FITBONE revenue growth in the second half of 2022 and continued growth during 2023 and with the planned U.S. launch of the FITBONE Trochanteric nail as well.
As mentioned earlier, our AccelStim ultrasound product in BGT for the healing of bone with fresh fracture and nonunion fractures had a limited launch in the second quarter. Although the sales force training will not be complete until the end of the third quarter 2022 and contracts with payers is still ramping up. We expect to see more meaningful revenue contribution in 2023 and beyond.
Let’s move to our biologics near-term growth drivers. The Virtuos Lyograft, a first of its kind, shall stable complete autograph substitute for spine and orthopedic procedures recently had the first patient implant and limited market release. We anticipate increasing surgeon demand as we continue to commercialize throughout the rest of 2022 and into 2023.
In addition to Virtuos, we are very excited to launch Legacy demineralized bone matrix in partnership with MTF Biologics in the coming weeks. Legacy, a feature-rich, cost-effective new option for surgeons is an acetal processed prehydrated and flowable DBM study [ph] that is ready to use out of the syringe. On July 30th, 2022, the company entered into a strategic license and distribution agreement with CGBio, a developer of innovative synthetic bone grafts.
The agreement grants Orthofix an exclusive right to conduct preclinical and clinical studies, commercialize, promote market and sell the Novosis recombinant human bone morphogenetic protein-2 or rhBMP-2 bone graft materials and other future tissue regenerative solutions in the U.S. and Canada.
Novosis is the next evolution of the bone growth factor technology market, has been commercially available internationally and implanted in over 50,000 patients and presents a potential compelling alternative to the single product available in the over $650 million current U.S. market. Our deeply experienced biologics clinical and management teams are excited to work to bring an alternative BMP-2 solution to the market.
With Virtuos and Legacy added to our biologics offering, Orthofix now commands one of the industry’s most complete biologics portfolios for spine and orthopedics giving surgeons the ability to select the best options to meet their procedural and patient needs. Bone growth factor is the largest growing segment in the biologics market, and our partnership with CGBio represents an important new future strategic market opportunity.
To wrap things up, I would like to touch on our future plans and direction. Our strategic plan and goals remain the same. We are steadfast on our transformational path, focusing on executing against our short-term goals and driving our long-term high single-digit profitability growth and EBITDA margin expansion strategy. We’ve made significant progress already and expect to continue to do so in the second half of this year and beyond, supported by our clean balance sheet and strong cash flow, which have allowed us to internally fund our growth activities.
We are excited about our key new product introductions in 2022, which we’ll expect to contribute meaningfully in 2023 and beyond to our portfolio performance. Lastly, as previously demonstrated with our successful disciplined approach, we will continue our inorganic business development and see a great deal of opportunity with our balance sheet capacity to execute in the current macro environment.
On a closing note, I’m extremely proud of our global team members as they have shown flexibility, resolve and focus as we’ve navigated this unique and challenging business environment. I am thankful for their commitment to our mission and have confidence in our strategic plan and future.
Thank you for your time today and your continued interest in the success of Orthofix. Operator, would you please open the lines for questions?
Question-and-Answer Session
Operator
Of course, thank you. [Operator Instructions] We will be taking our first question today from Mathew Blackman of Stifel. Matt, over to you.
Mathew Blackman
Hi, good morning everybody. Thanks for taking my questions. I have a couple for Jon and then one for Doug. Jon, everyone’s called out similar headwinds in 2Q and into 2H 2022, but the magnitude you’re implying for the back of the year is more intense. How would you explain that? Is that – is it that you have an outsized complex procedure mix relative to peers? Just any thoughts on your business relative to what we’re hearing from others?
Jon Serbousek
Yes, Matt. Thank you. And regarding the procedure base, we’ve highlighted, as far as complex procedures that we rely on for our BGT business because that’s where they’re utilized and postoperatively as well as the biologics many of our high potential or high potency biologics are used in those complex procedures.
So as we look at uncertainty in that area based on the hospital feedback we get, the sort of the flow of those patients in and some of the patient reluctance in this time for those complex procedures, we see that as a headwind. Additionally, in that area, as far as the headwind in the competitive environment on M6 as well, but we’re looking at the motion preservation, we see that as another issue that we’re going to deal with.
Mathew Blackman
And maybe to that point Jon, just maybe talk a little bit more about the competitive environment. I know you had some comments in the prepared remarks, but is that business still growing year-over-year or quarter-over-quarter? And I appreciate your touting clinical data and generating more clinical data, but how do you stem these shared losses? And is there a timeframe where you think, we could maybe stabilize that business and return it to maybe more typical type growth rates? Thanks. And then a follow-up for Doug, apologies.
Jon Serbousek
Yes. Matt, thank you. The space has become more competitive. Obviously, there’s a new entrant in the marketplace as well as reinforcement and some of the other products that are out there being promoted heavily. However, we see that as an opportunity to expand the market. And that’s why, we have absolute conviction in M6 as far as the leading technology in the space, and then clinical data will drive that as well as the performance of the technology.
So we’re robust on the, feel robust on the artificial disc surgical market, and we’re going to continue to invest in that, and it will level off and we get back to growth. I mean, the fact is we are growing, but we’re not growing to pace we once were. And so that’s, the reality where we’re at, and we’re looking forward to the performance in the future.
Mathew Blackman
All right. And then, Doug, can you bridge us from the old FX guidance to the – on the top line to the new guidance? Say, I think it sounds like to the downdraft is probably concentrated in the, the U.S. hardware biologics and BGT business. Is that the right way to think about where the back half of the year gets more challenging?
Doug Rice
Yes. Good question, Matt. We’ve seen, like everybody, the continued strengthening of the U.S. dollar. We’ve got about 22% of our top line is from OUS and is heavily exposed to the, to that euro-dollar rate, so that’s strengthened. Our results have been impacted by 2% to 3%. I think since the last time we guided in May, you’ve seen further degradation from what we expected by about $3 million, but overall, for the year, I’d put it sort of in the 2.5% to 3% range.
Mathew Blackman
Sorry, I was asking about the ex-FX, the bridge from your old ex-currency guidance to the new ex-FX guidance, so taking out the currency.
Doug Rice
Yes, it’s probably another 0.5% to 1%, about another $3 million from when we guided last May.
Mathew Blackman
And again, that’s going to be isolated probably as I’m hearing the commentary with the complex headwinds to the U.S. hardware biologics and BGT business. I guess the implied question there is, still expect sort of strong growth in the orthopedics, the global orthopedic franchise?
Doug Rice
Yes. The remainder of the, that the guidance shift really is sort of FX on one side related to our OUS exposure. But the rest of it is, like Jon just alluded to and as our comments in the script summarized our exposure to complex procedures, both in our spine hardware as well as our BGT and Biologics product categories. And then we’ve seen macro headwinds through a hospital staffing issues, inflation, patient caution to come back into a clinical environment across the board in really all geographies.
Mathew Blackman
All right. Thanks so much.
Operator
Thank you for your question. We’ll move to our next question, which comes from the line of Jeffrey Cohen of Ladenburg. Jeffrey, please go ahead.
Jeffrey Cohen
Hi, Jon and Doug. How are you?
Jon Serbousek
Good, Jeff. Thank you.
Doug Rice
Good morning, Jeff.
Jeffrey Cohen
Just a couple questions from our end, so I guess, firstly could you talk a little more about hospital staffing and the cadence on the back half as you could call out a relatively strong global business for the quarter. Are you seeing the same issues there? And do you expect that to flow through into Q3 and Q4 as well similarly to the U.S. business?
Jon Serbousek
Jeff, from our channel checks, we in the hospital staffing. There’s – it’s all staffing. It’s just not nurses and doctors. And it comes down to that. They’re projecting to last for another three, four quarters on the short side.
That’s in the hospital. We see migration of cases to the ASC for the smaller that are easier, more straightforward cases. There’s something easier, more straightforward cases and so we see that. On the OUS [ph] standpoint, it’s country by country, region by region. It’s without going the each individual activities.
There are some markets that are back and being more robust, and there are some that are still compressed. So from – on a global basis, we see there’s still an impact out there. We don’t even address COVID anymore in that conversation, but doctors get sick, patients get sick. We don’t even look at that in regard; we just put that into the hospital headwinds.
Jeffrey Cohen
Okay. Got it. And then second for us, can you talk us through a little more about AccelStim and its launch and some of the initial users and what you’re finding out there. Are the users for AccelStim all current users of PhysioStim product? Or are you finding that you’re picking up some interest elsewhere outside of the PhysioStim?
Jon Serbousek
Yes. We’ll pleased where AccelStim is that, it’s the product has been well accept in the marketplace within positive feedback from clinicians, and those are new clinicians. So we’re getting a good lift into the podiatric area as well as the orthopedic area on fresh fracture. And so we’ve been there for quite some time with our PhysioStim in the nonunion area and so those customers are using PhysioStim, and we’re just moving towards new customers on the AccelStim.
Jeffrey Cohen
Okay. Got it. And then lastly, I had a question for Doug on the CapEx guide was that 25% to 27% I heard earlier?
Doug Rice
That’s right. That’s consistent with where we were last quarter as well.
Jeffrey Cohen
Perfect. Okay. That does for us. Thanks for taking the questions.
Doug Rice
Thank you, Jeff.
Operator
Thank you, Jeffery. [Operator Instructions] We’ll be taking our next question today from Jim Sidoti of Sidoti and Company. Jim, over to you.
Jim Sidoti
Good morning and thanks for taking the question. So it feels like your strategy to get the products out is working to expand the sales force is working, but that’s being overshadowed by the pressure on procedures right now. Do you want to look into the crystal ball and give us any kind of indication, when you think procedures get back to pre-COVID levels?
Jon Serbousek
Jim, this is Jon. Thanks for the question. Part of the discussion on procedure return, I mean we see procedures return, and we’re returning more to the ASC. But in the complex factors, the patients have some reluctance and some of its financial economic from our channel check, but also hospitals have less of the capacity to flow through. They’re all open. They’re all moving forward, but the fact is, they’re doing fewer cases.
And they also have to prioritize which service line they want to prioritize cases into. So there’s a – they’re working through this activity, both on the macro headwinds from both the economic standpoint, from the inflationary pressures, but also for how patient behavior occurs. We look – we know that these complex patients, do not get better on their own.
They are out there, and they will come back into the service, into the hospitals to be treated. These are hospital-based cases and the challenge for – as we see it in our portfolio is that we have BGT at Biologics and into some extent, our spine – businesses as well that is impacted by those complex cases. And so we’re over proportioned in that area, and that’s why I think we’ve seen some of – while we’re suggesting some of the results that we’re seeing.
Jim Sidoti
So you talked a little bit about inorganic opportunities. Would you consider maybe getting some devices used in the ASC to kind of hedge against the pressure on these more complex, the devices that you think, you’re going to stay in the hospital for most of your products?
Jon Serbousek
We have – thanks, Jim. We have an initiative to go into ASCs. We have not only our M6-C disc goes into – the hospitals. We have made an investment in Neo Medical and the single-use sterile products and that’s part of our initiative in the ASC, not only in the low back, but also into cervical.
So as we manage through these competitive headwinds and we put together an ASC package, we believe we’re going to have a strong position in ASCs going forward. And that is part of the strategy to deal with the, just this issue we’re talking about today and complex procedures and get a balanced portfolio across all the service line areas.
Jim Sidoti
All right. And then one for Doug, inventory like you’re very similar to other companies. I’ve cover – you’ve increased inventory levels to kind of hedge in, some of these supply chain issues.
I think it’s up about $15 million for the year. Do you think, this is a good level for you? Or do you think you’ll continue to increase inventory, and do you think you get back to free cash flow positive in 2023?
Doug Rice
Good question, Jim. Thank you, on inventory. Yes, net inventory is up in the $15 million range that you suggested. About half of that is from raw materials as we try to take any slack out of anticipated supply chain issues, and our procurement team has done a terrific job of making sure that, we haven’t missed any production or have any issues from any of those parts.
And so we’re happy with where we are from an inventory perspective. Now I wouldn’t expect much more inventory build through the remainder of the year, and yes is the answer to your last question in terms of positive cash flow in 2023 and beyond.
Jim Sidoti
All right. Thank you.
Jon Serbousek
Jim, if I might add one other thing to your ASC discussion or current component. We’ve launched Virtuos, which is a shelf-stable complete autograph substitute working with MTF Biologics. It’s a very appropriate product for the ASC as well as with Legacy. And Legacy, which is the DBM product is another appropriate ASC market, and we’re purposely building the portfolio to go across not only the ASC, but the hospital but we’re also on a global basis.
We talked about our success with Orthopedics and have 11% growth there, and we’ve built that as predominantly in a European channel, but we’re basically increasing our U.S. channel area. And in many of those cases can be done in an ASC or moving towards an ASC in that regard as well. So yes, we feel good about where we’re at across not only spine, but also our orthopedics business along with our biologics.
So I think we’re well positioned for the future. We’re – as we’ve talked about, we’re to transition or transformation point in our strategy. And there’s a number of factors that are coming together that came to a confluence right now, and that’s what we’re managing through. And that’s, what articulating to you.
Jim Sidoti
Understood. Thank you.
Jon Serbousek
Thanks, Jim.
Operator
Thank you for your question, Jim. There are no further questions at this time. So I would like to hand back to the management team for any closing remarks.
Doug Rice
We’d like to thank everyone for their – attending the call and their continued interest and support of Orthofix going forward, and have a wonderful day. Thank you.
Operator
Thank you. This concludes the call today. You may now disconnect your lines.
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Orthofix Medical Inc.'s (OFIX) CEO Jon Serbousek on Q2 2022 Results - Earnings Call Transcript