Alphatec Holdings, Inc. (ATEC) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Alphatec's conference call regarding the company's agreement to acquire EOS Imaging, S.A. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Joining us on the call today will be ATEC's Chairman and CEO, Pat Miles; and CFO, Jeff Black. Now I will turn the call over to Pat Miles, Chairman and CEO of Alphatec Spine.

Hello. This is Jeff Black, the CFO. I just wanted to let everybody know that if you haven't seen, in the press release today, there is a link to our presentation on our Investor Relations page. That's what we'll be taking you through today.

Thanks, Jeff. And welcome, everybody. I can't be more excited to inform you about an acquisition of EOS imaging by ATEC Spine. And what we believe this does is really better inform surgery with advanced imaging. So we believe this to be a transformative acquisition for our portfolio, and I think it's complementary to a business that has significant momentum. And so clearly, on this call, we'll go through some forward-looking statements. But really wanted to introduce EOS imaging to you if you are unfamiliar. What EOS imaging does is provide a rapid full-body standing, weight-bearing scan. So it's imaging technology. It's calibrated biplanar -- it provides a calibrated biplanar spine image. It enables anatomical modeling and really just, I think, most importantly, informed surgery. There is 350 units placed globally. They have an academic influence that I think is somewhat unparalleled in our space. It really enables us to provide customized care and I think really builds a significant foundation, especially imaging foundation, for a company that's steeped in significant spine expertise. There are a few consensus in Spine that 1 consensus is that spine imaging matters. And if you look at the Page 4, that outlines all the different companies. I think there's been a lot of investment in imaging technology, mostly enabling imaging technology in the OR. I got to tell you that we think of it in a more holistic way. We intend to use imaging, really, to inform spine across the board. If you go to the next page, Page 5, the one thing that we've laid the foundation for in really, the past 1.5 years is that we have launched what we call an AlphaInformatiX platform. And the first technology through that platform is SafeOp, which is a neurophysiology platform. But what we've established is a conduit in the operating room to deliver objective, real-time actionable information. And so what we believe is that EOS will provide us better information in the operating room and very holistic information. And so if you go on to Page 6, I said a second ago that there's been very little consensus in spine. And when you start to see things, one, you see over 500 peer-reviewed publication, but you also see an international consensus on how to inform spine surgery. I think it really speaks to a value creation that is really now unique to us in the EOS imaging technology. If you go on to Page 7, I think it provides you a little bit of a view when we say holistic, what does holistic mean? And what that means is really from diagnosis all the way through follow-up. And so a more accurate understanding on the patient alignment. These are very complex issues and one that having the type of insight that is provided in a standing, calibrated, full-body scan is profoundly important as determined by international consensus. It enables us to pre-op plan, so it elevates the likelihood of surgical goal fulfillment by integrating, really, fully informed plans in the surgery. With our conduit, it enables us to reconcile preoperative plans for an operative achievement. It also correlates with a postoperative image against the original surgical plan and really provides a conduit to bring about a predictive analytics dynamic that doesn't exist today. And so if you go to Page 8 and you start to look at the type of academic prowess that EOS has achieved, I would tell you that it's significant. And if you look at the U.S. World -- News & World Report Best Orthopedic Hospitals of 2019 and 2020, there are 9 out of the top 10 and 20 out of the top 25. And so if you look at the history of ATEC and you look at some of the headwinds that has existed before, to have this type of academic tailwind, I would tell you, is profoundly important. If you go on to the next page and you start to say, we are currently a domestic-only company, meaning ATEC sales are really focused in the United States. This provides really, prestigious international footprint that what we can do is start to lay the foundation for a future significant interest in the international marketplace. So these provide us really, the start of what I deem to be a very long-term bright future. So kind of break down the strategic rationale in, really, 2 or 3 buckets. And so if you look at Slide 10, you start to think about we're a company that is committed to the clinical experience. And so what this does is this combines world-class imaging with a company that has significant momentum and expertise in spine procedures. Really, it provides advanced 3D planning. So when you start to think about spine surgery and you start to think about the front of the spine and the back of the spine, it starts to inform things like the number of levels, what's the size and the angle of the requirement. From the back, it starts to say, how many levels should we do? What are the type of fixation elements that we should use? How should the rod contouring be? And do I need to release the spine to get the type of alignment elements needed? And so really, it provides patient-specific biomechanical modeling opportunity as well to simulate and plan and optimize the alignment consideration. If you think about the greatest correlative in a long-term outcome, it's spine alignment. And so we feel like this really provides us a level of insight that really, no one has had before, and EOS has not had a way to translate it in the past. So it really provides a predictive analytics model to continue to inform surgery and for us to continue to look. So if you go to Page 11, let me speak just for a second in terms of how it affects us operationally and what the effect organizationally is. And I would tell you that I think that orthopedics in general has been terrible with regard to how they support the marketplace. And what I mean by that is the type of assets that are sent in to support a case where there's not the insight as to what is going on in the operating room is significant. And what this does is it enables to understand what the requirements are prior to surgery and really customize the configuration to optimize inventory planning and really, to affect the cost to serve. And so it's complementary to our sales channel. Clearly, we will hang on to the capital sales effort, but also, we will translate the consumable and the software element into the ATEC force. So we believe there are -- there's kind of a complementary element to the sales force. It elevates the ATEC brand in a significant way with the Nobel prize-winning radiation detection technology that has strong academic influence. I've previously said over 500 peer-reviewed publications. Again, this immediately gets us into an academic stature that we didn't have before. And increased access to a global account base that enables us to really accelerate our posture here in the future in international. So with that, wanted to just give you some background but really turn it over to Jeff and have him talk about the financial impact.

Thank you, Pat, and thank you, everybody, for participating in the call today. On Slide 13, just a couple of general comments on P&L impact. Of course, we're not providing any forward guidance today. The transaction hasn't closed, and then the expectations will close in the third quarter. But just to give a sense of the revenue profile, particularly as you start to dig into EOS financials. So we're looking at adding a $40 million revenue base to the organization, and that consists of an equipment installed base that's got a 5-year CAGR of greater than 25% and a recurring maintenance stream of -- that's growing at a CAGR of over 5 years at 35%. Just a nuance in 2019, as you dig into the numbers and you see the revenue recognition. They actually had a dip in revenue recognition in 2019, but it was -- it's completely related to a change in revenue around aligning revenue with the commercial performance in terms of more aligning their revenue with the working capital requirements to -- at installation. And so what you'll see is even though they did about EUR 20 million in revenue in '19, their booked orders were about EUR 36. And so what that means to us is there's about $15 million in backlog going in 2020 and what we'll call hardware revenue. So we're excited about on day 1, the ability to expand the revenue base with about $40 million in revenue. We also expect this transaction will be accretive to adjusted EBITDA into free cash flow in the first full year of operations. There will be some transaction costs and identification of synergies. But in the full year of -- first full year of operations, we expect this can be accretive. On Slide 14, a bit about deal summary. In terms of purchase price, $88 million purchase price plus about $34 million in the retirement of debt. The way that the deal is structured, it is at the option of the holder to take cash at 2 80 -- EUR 2.80 or equity at 0.5 ATEC common shares per every deal share, and then we will be retiring existing convertible debt of about $34 million. In terms of timing and how we move forward, we will file a tender offer agreement in late April. It will be subject to French regulatory clearance and more other customary conditions, but the expectation is that we will close the transaction in the third quarter of 2020. We've secured commitments from the top shareholders of about 23% of outstanding yield shares to tender for Alphatec stock, and they will all be subject to a lockup. And then finally, 15, pleased at a lot of levels to be partnering with Perceptive Advisors who, very early on in this process, have been fully supportive of this transaction. They're making available to us up to $160 million in new capital. $60 million will be used to refinance our existing term debt and revolver, and there's another up to $100 million for the tender offer to fund the cash that may be required to complete the purchase. But the ultimate amount of cash that will be required really isn't known until the split between tender for equity or cash is known at close. And with that, I will turn it back over to Pat.

Thanks, Jeff. So I think the way to look at this is this is a significant asset to our company, and this is right down the middle of what I would consider what we do very well at ATEC. And what that is, is we translate technology and information into the operating room to influence spine surgery in a -- to further the predictability of care. And so can't be more excited about what we're doing here. This is a long-term play. And at this point, we're pleased to take a few questions if -- who's interested.

[Operator Instructions] Our first question comes from Brooks O'Neil with Lake Street Capital Markets.

Congratulations on the transaction. So what I was hoping you might talk about, guys, is just how does it integrate and leverage the organic innovation machine you've been building at Alphatec. And how do you envision kind of the sales channel, sales and distribution channels, either fitting together or complementing each other?

Thanks, Brooks. This is Pat, and I appreciate the question. What this technology does is uniquely informs spine surgery. And so often, in the imaging field, there becomes actual inconsistency with regard to the type of image that ultimately gets integrated into an operative plan. And what this does is it's standardized it for us. It enables us to really create a preoperative plan and then integrate that preoperative plan in a way that is truly unique to us. And so it also starts to lay a foundation for other fixation elements as well as vending elements and a myriad of different options clinically. And so what we want to do is be the most informed clinically. And so what that does from a sales channel perspective is really, the sales channels are complementary. The EOS sales channel was really a capital force, and those guys really focused on placing units. And with the advent of the kind of significant progress that they've made on the software front, we feel like that really fits well with a consumable force. And so as we continue to place units across the world, our ability to translate business into the operating room based upon the software elements and the translation into the operating room with our consumables is significantly high. And so that's really the basis for our enthusiasm around this technology. And I think that it has such a significant run in front of it in terms of informing the business in general.

Yes. Okay. I get all that. That's fantastic. So second question. I'm just curious. Obviously, Pat, you and I have talked at some length about your feelings about the impact of robots and the huge investments some of the big guys are making in robots. And obviously, you're -- you have always thought differently about the business and try to empower spine surgeons. Just talk a little bit about how you see this furthering your goal of empowering spine surgeons and how it might contrast with some companies' desire to put a robot in the OR and let them run the surgery or whatever.

Yes. Thanks, Brooks. The view for us is that this technology holistically informs. And I think the difference is when you look at the enabling technology that is currently utilized in the operating room, it doesn't provide the same level of information that an EOS scan provides, and so this becomes a calibrated standing. So you are imaged in an active position. The ability to fix a patient back to an active position is a significant benefit. And our issue is this, when we start to prioritize the elements of unpredictability in the operating room, placing pedicle screws doesn't rise to the top of our list. And if it does, we feel like there's a number of alternative elements that can be used to create safety and predictability in pedicle screw placement. And that is with things like image guidance is with things like mechanical elements like single step. And so we believe in neurophysiology. And so we believe that there are options to assemble there that ultimately make placing pedicle screws safe and reproducible. What we are gaining is really kind of a holistic view of how you best fix the spot. And so we believe arming surgeons with that type of information is exceedingly valuable and really an, important first step in establishing ourselves as an information provider of significant scale.

Fantastic. And let me just ask one last question, and it really relates to kind of your existing significant investors. Does this transaction envision replacing your existing institutional investors? Or do you -- will they stay with you through this transaction? And again, congratulations.

Yes. Brooks, this is Jeff. I'll take that. Look, I think we've seen a significant transition of the shareholder base over the course of the last 12-plus months. And we believe these are long-term-oriented investors that really appreciate the growth story and are looking for the long-term play of Alphatec in terms of how do we fit into the larger plan. And I think that our hope, and we believe, that this will be viewed as a positive step forward and really differentiating ourselves to be a big player and continuing to have the opportunity to take market share from the bigger guys.

Our next question comes from Kyle Rose with Canaccord.

And congrats on the acquisition. So just a couple of longer-term questions, specifically here. I guess, how do we think about the commercial model here? I mean we've seen a lot of the industry, particularly from an enabling and a capital perspective, move towards placement models in return for utilization. I think EOS had also mentioned things like that on a payment-per-use model as far as a per scan basis. I mean how do we think about how the actual commercial model rolls out here? Are you willing to place units in order to secure implant share? And then secondarily to that, obviously, a big focus of EOS was on the deformity side, a lot of academic institution from a footprint standpoint that you highlighted. Can you maybe just talk about the immediate overlap with respect to how penetrated you are into those EOS accounts? And what type of cross-selling opportunity that presents from a longer-term perspective?

Surely. This is Pat, Kyle. And I'll let Jeff jump on this as I'm sure I'll miss something. But the first question in terms of how we look at the business and the way we look at this is we look at it as a revenue-generating opportunity through capital. We look at it through a revenue-generating through maintenance, and we look at it through a revenue-generating through the translation of the information into the operating through implant. And I think that EOS struggled from the standpoint of their inability to translate the value of their information in a -- and monetize it effectively. And I think that we really provide that conduit to monetize it. And so we will be open to a multitude of different scenarios for people to acquire or capture this, the utility of this technology based upon types of implant share and utility. And so we feel like those are important financial opportunities to increase the widespread availability of the technology. The second part was more around what's the crossover in accounts. And really, ATEC has sprouted its momentum through a myriad of different type of institutions. A lot of private surgeons have really kind of started to jump on the ATEC bandwagon, if you will, and support the company, but there's also a number of academic institutions. And so excited about a little bit of an academic tailwind because it's something that didn't exist when we took control of the company. And so really, there's not a ton of crossover. We feel like this provides us hospital access in ways that we wouldn't have had it before as well as it begins to lay an international footprint that didn't exist before. So we feel like on a myriad of different fronts, it's really the right acquisition at the right time for us. Jeff, anything to add?