Carlsmed Third Quarter 2026 Earnings Conference Call - CARLSMED INC

Financial Performance:

• Q3 2026 revenue reached $21.6 million, a 65% year-over-year increase from $13.1 million.
• Gross margin expanded to 77.3% (up 140 basis points YoY) driven by lower contract manufacturer costs and operational efficiencies.
• Adjusted EBITDA narrowed to negative $7.3 million from negative $8.2 million, marking the first quarter of positive operating leverage from sales and margins.
• Adjusted net loss per share was negative $0.34.
• Cash, restricted cash, and investments totaled $80.3 million as of September 30, 2026, with $9 million cash burn in the quarter.
• Term loan debt stands at $15.6 million against a $50 million facility maturing in October 2030.
• Non-GAAP expenses included $2.3 million in G&A for executive transitions and legal matters, and $0.5 million in R&D for similar transition costs.

Guidance and Future Outlook:

• Full-year 2026 revenue guidance raised to $78–$80 million (previously $74–$78 million), representing >56% YoY growth at the midpoint.
• Q4 2026 expected to benefit from the new FY27 MS-DRG reimbursement rules and product launches.
• Full-year 2026 gross margin guidance remains in the high 70s.
• Q4 2026 stock-based compensation expected between $2.75 million and $3.0 million.
• Management anticipates Q4 and 2027 growth acceleration driven by reimbursement tailwinds, new product launches, and expanding surgeon adoption.
• The Aprivo Lumbar Posterior Bilateral System (launched October) and CORA Cervical Plating System (coming launch) are key catalysts for 2027.

Business Segments and Product Lines:

• Lumbar fusion franchise accounted for 88% of Q3 revenue; cervical represented 12% and is ramping faster than prior estimates (previously low single-digit).
• Surgeon user base grew >60% YoY, with procedure volume up 76% YoY.
• Aprivo Lumbar Bilateral Posterior System commercially launched in October, addressing ~7% of annual US lumbar fusions (approx. 30,000 procedures).
• Aprivo Cervical launched in Q4 2025; multi-center ACE registry for real-world evidence enrollment commenced Q3 2026.
• CORA Cervical Plating System is FDA-cleared for personalized ACDF plates, targeting the 60% of cervical procedures that use fixation plates.
• Digital-first model delivers customized kits in ~1 week post-plan approval, capitalizing on 140 bps margin expansion.

Market and Competitive Landscape:

• Positioned as the only pure-play personalized surgery company with a closed-loop AI platform for 3D planning and printing.
• Clinical data shows Aprivo-treated patients (low bone density) had a 2-year re-operation rate of ~6%, an 80-85% reduction compared to traditional short/long fusions.
• New CMS FY27 IPPPS final rule (effective Oct 1) consolidated 11 MS-DRGs to 3 codes (523, 524, 525), simplifying coding and enhancing reimbursement for Aprivo lumbar procedures.
• Targeting early and mid-career surgeons and expanding educational programs for residents and fellows at academic institutions.

Risks and Challenges:

• Forward-looking statements are subject to risks regarding market adoption, reimbursement changes, clinical data interpretation, and regulatory timelines.
• Executive transition costs and legal matter resolutions temporarily impacted G&A expenses.
• Product mix shifts and potential competition in custom implants (though Carlsmed views itself as unique in the pure-play personalized space) are monitored.
• Dependence on continued hospital and payer acceptance of the new DRG coding structure.

Management Commentary and Tone:

• Management expressed high confidence, describing Q3 as a strategic "inflection point" with strong execution and positive operating leverage.
• Tone was optimistic regarding the 2027 growth trajectory, citing reimbursement wins and new product momentum.
• Announced key leadership upgrades: Jeff Bertolini (COO), Rich Heppenstall (CFO), and Dr. Tony Jark (Chief Product and AI Officer).
• Emphasized the capital-light, digital-first business model as a scalable advantage over traditional MedTech hardware models.

Analyst Questions and Answers:

• DRG Impact: Management expects an uptick in new hospital contracts in Q4 continuing into 2027 due to the simplified reimbursement structure.
• Cervical Mix: Cervical mix rose to 12% in Q3, up ~3 points in recent quarters; expected to grow above prior low single-digit estimates.
• Market Share: Growth is primarily from new surgeons and adoption of MIS posterior approaches, rather than simple market share shifts from competitors.
• ASP Trends: Average Selling Price (ASP) remained consistent quarter-over-quarter for both cervical and lumbar.
• Competition: Management reiterated being the sole pure-play personalized surgery company, focusing innovation on surgical plans, devices, and post-op data.
• Guidance Caution: Management noted a prudent approach to Q4 guidance despite strong momentum, expecting a modest sequential step-up from Q3.

Other Key Points:

• Two-year clinical data presented at ESMIS Forum showed significant re-operation reductions for Aprivo in patients with low vertebral bone density (approx. 80% of patients over 50).
• Aprivo Cervical procedure targets high-risk patients (malalignment, osteoporosis, multi-level fusions).
• Investment continues in medical education for residents and fellows to drive future adoption.
• The company is preparing for a multi-center effectiveness registry (ACE) for the cervical platform.