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

Good afternoon again. We're continuing to make progress down the medical device track on day 1 of the 41st Annual Cowen Health Care Conference. We're honored to have the executive team from Alphatec, Chairman and CEO, Pat Miles; and CFO, Jeff Black. Gentlemen, thanks so much for joining this year, and it's great to talk to you. It's high time to get in front of you after an explosive second half of '20, in the middle of a pandemic, no less. But thank you guys both for joining.

Maybe we can off -- maybe we can just start off talking about that second half of '20 performance. I think there's -- I wanted to just dig into -- it seems like there's just success on all fronts. But were there any other -- were there any kind of top 3 biggest drivers of success? Or were you -- was there a significant sales rep or distributor kind of build-outs? I mean clearly, you added new surgeon customers. And the product innovation road map has been very strong and picked up strength in 2020 but maybe started to lay out those 3 channels. But -- and what would you call as the biggest drivers? Or was it really just a blend of everything coming together?

Yes. The way we usually do this is that I provide the color commentary, and then Jeff refines it with clarity. The -- no, the -- I got to tell you, the walk has been candidly as we've architected. And so we always talk about, gosh, how do we create clinical distinction so that what we can do is compel surgeon adoption and then revitalize the sales channel? And all 3 of those things are so intertwined and -- that if we do a very good job in terms of really kind of doing surgical things that are really meaningful, then our opportunity to garner the attention of people is very high. And so I think that what we've done with regard to the surgeons and the sales guys is just do that. And so I think that what you're seeing is what we would deem as being the proposed walk of this thing. So J.B., any...

No. I think you covered it.

Great. And we didn't want to get too aggressive in our assumptions. But I mean you -- the kind of buzz around prone transpsoas, a surgical technique that Alphatec is leading in and introducing, how much pull-through do you think you captured just from the introduction there, attracting new customers? I mean are there anything you can quantify? Because I mean it's still -- it's such fairly early innings. And if that was a major force, I think that bodes very well for 2021 and beyond.

Yes. It's so reflective of a time path for me in terms of the -- this is a very, very fun time at ATEC. And a big reason is that any spine component in terms of when you design and develop things unto itself is just not that inspiring. But the ability to create a workflow and a solution that's just better and provides optionality for surgeons is so exciting. And so I got to tell you, my bullishness and enthusiasm around PTP has never been stronger. And I love what we're doing. Clearly, we launched it back toward the end of last year, but the momentum is palpable. And the solution clearly has been vetted through a hell of a lot of surgery. And so it's -- we have, again, great confidence in the performance of what we're doing there and haven't -- last thing I want to get triangulated on is specific numbers of specific people and cases and everything else. But the reality is it's a driver. And one of the great things too is just the ability to start to see surgeons being compelled. And once they're compelled and you create the level of confidence, what they do is they avail more and more of their practice to you. And so it's those types of things that become magnifiers.

Excellent. Excellent. Just thinking about Alphatec being levered to the minimally invasive segment, as you're introducing the PTP procedure, you had success in the lateral lumbar interbody fusion minimally invasive surgery as well. But I mean how do you -- how should we be thinking about the pace of minimally invasive surgical technique adoption in the spine surgeon community in the United States? I mean we've always thought that it would go faster. Maybe you have as well historically, Pat. I mean what have been the hurdles? And what does PTP do in terms of the pace of converting surgeons to MIS surgeons?

Yes. I've been at this for a heck of a long time. And so I recall the times all the way back to Parviz Kambin back in the early '90s, where they were doing foraminal approaches and calling that minimally invasive surgery. And seeing the endoscopic thing come and go and come back again and -- it's really kind of crazy. One of the dynamics is there's a bell curve of surgeon skill sets as well as there becomes a kind of a pathologic group that unveils itself to these types of techniques. And so when you start to match the -- what types of pathology can be addressed with less morbid procedures, that's one of the drivers of, hey, I know exactly where this fits into my practice. And I can apply it exactly to this place. And so you got to give people a very sound, clear reason where and when and why to use these things. And so I love that about PTP because it really kind of broadens a nice berth of opportunity in terms of different indications for spine. But I got to tell you, one of the great learnings in here is -- here it is, is there's a bell curve of surgeon skills. And what happens is, is the more you can create a rote procedure in terms of -- like things like orthogonality. And so if you look at great surgery in the spine, it's often done like straight ahead at your neck, straight ahead through your belly, straight laterally. And what happens is just the type of movements that are required to create success and limit the complications is higher. And so one of the things that we've done is architect it as best we can, these orthogonal procedures, in a way that creates predictability. And so it's kind of the rationale of things that we love is how do we make sure that the masses have access to these so that the patients get access to them and they're not so technically difficult, where it's the 1% of the 1% that has the ability to do it.

No, that makes sense. I mean because our checks historically suggested that, at least for lateral lumbar interbody fusion cases or adoption of that surgical technique, 2 headwinds were: One, just post lateral -- placing pedicle screws posteriorly while the patient was in the lateral decubitus position. So either surgeons pushed back on that approach and some of the data surrounding it, or they didn't want to have an increased time of flipping the patient into the prone position. And the other piece was just a fear of nerve injury, femoral nerve injury and the clinical sequelae from that adverse event. And PTP seems to have solved both of those concerns. I mean one, you have access posteriorly throughout the procedure; and then two, with SafeOp. I mean is that the right way to think about PTP and potentially converting surgeons? Those are the 2 headwinds or the challenges that you've solved and -- or PTP solves?

Yes. I think that there's a third one as well. And so -- and I got to tell you, the great thing here, Josh, is the fact that there is more lateral know-how here as you will find anywhere in the world. Okay. I'm telling you, it exists here. And that's not to throw stones. I'm just telling you that it's being reflected in the very things that we're doing. And one of the big challenges early on with regard to lateral surgery has been you've restored the height of a disc space with the expectation that you're going to indirectly decompress a nerve. And so what happens is the disc height restores based upon the device, and you create volume where the nerves leave. And so the expectation is that that's going to decompress the neural elements. And it happens all the time. And it's a great utility of that technique. The problem becomes is there's times when the pathology drives you to do an extra decompression. I need to go back into the spinal canal, and I need to determine if I fully decompressed the neural elements. And so these are the options that PTP provides because you're already in the prone position. Surgeons are not comfortable doing decompressions from a lateral position. So just the ability to say, hey, listen, I've restored the height, restored the volume. I've also restored the alignment. But even so, it's like if you have a fixed back, your ability to release the back, go to the front, go back to the back and compress the back. One of the things that -- and we'll get into, I'm sure, this discussion is alignment. And when a surgeon realigns a spine, oftentimes -- and this is not a shot at techniques, but they're guessing. There's not a precision associated with the specific realignment. They don't know within a few degrees as to what they've done. And so just the ability to be able to release the facets and start to really refine alignment, it's one of the greatest correlative of a long-term successful outcome. But to be able to do those things intraoperatively is game changing. And that's why PTP enables us to release the spine in ways that we hadn't before. And you're in a position that's much more natural, so the curvature of your spine is more natural. So anyway, I'll take the entire call up in describing these things, but it's very exciting. So...

Absolutely. No, thanks for all that intel there, Pat. I think, Jeff, Pat, you guys issued 2021 revenue guidance along with your fourth quarter preannouncement. I mean you grew, I think, 40% in the fourth quarter. You grew revenue -- the U.S. revenue, I believe. And the implied guidance range suggests 25% revenue growth in 2021 off of a strong 2020. That's significant outperformance from the market clearly. But that does not include your recent acquisition that you announced of EOS imaging. And it still may be underappreciated in terms of the strategy there. And I wanted to dig in a little bit deeper to just help us understand more fully and investors understand more fully the rationale behind the move. And I think you guys laid it out effectively when you announced the acquisition on your previous earnings call and acquisition call, but maybe just to review as well. One is, I guess, what is the integration risk? I mean it seems that when you've got a capital sales team versus your distribution network, integration challenges are not inherently there. But what is the integration risk here with EOS -- pulling EOS under your roof?

Yes. I think as much as anything, it's just getting ahead of ourselves and losing sight as to who we are. And so some of the things that we're doing to make sure that we preclude it is we'll have one of our guys go to Paris and sit in Paris and really drive the integration. He's a super senior-level guy who has done this before. And I think what happens is -- last thing I want is our quality guy to go run over and delve into the quality system at EOS. We've done a ton of diligence on these things. I think we have a fair understanding of how they operate. And just to be able to start to morph that place into us such that what we're doing is, over time, we will divest different departments within such a -- it's a full integration but out of the gate, staying very focused with regard to what the needs of kind of that structure is going to be. And so I think that's a big one. I mean from a sales perspective -- and I think a lot of people have asked, gosh, you kind of have this capital sales force. Then you have this implant sales force. And one of the things that we want to do is make sure that what we're doing is each of them will roll up to a single person. And so we'll retain kind of the EOS capital sales force. But what we'll do is we'll mirror it against the way we're structured with our implant sales force. And I think part of the challenge that EOS has always had is they have 5 or 7 guys hitting on people once a quarter to see if they can continue to compel them as to this technology. We have guys in the operating room every day that's badgering and making sure that the surgeon understands, gosh, the value of bringing this type of technology into the institution. And we feel like that type of synergy is going to provide great value in expediting the path of placement of the world of -- putting EOS in every place in the world. So it's -- that's the interest because we want the information out of there. And we feel like the information out of there provide the richness for us to continue to improve surgery.

Understood. Maybe you could help us think about the latest-generation system that EOS has kind of proved and is marketing. It's our understanding, and correct me if I'm wrong, majority of the system placements were in kind of adolescent scoli centers where there was deformity -- adolescent deformity experts. And this next-generation system really expands the offering to these adult deformity surgeons. I mean how big of a deal is that? And I mean where do -- I mean it's such a -- much bigger market. There's so many more surgeons in the complex, if you will, or adolescent pedi scoli surgeon population is just such a small segment of the overall spine surgeon opportunity or spine center opportunity. But anyway, I'm -- long-winded question there, I apologize, but you get the gist.

Yes. You've already answered it. I'm just teasing. The -- I think you and I have had these discussions before where the -- we love know-how here. And what's interesting is the translation of know-how. And what EOS has done is they've taken their original experience with the original units. And they've translated the requirements into this EOSedge, which is the next-generation system. And the great part, to your point, is like this has kind of been the scientific pediatric device or imaging system of choice. And to the point where a number of very, very kind of super high-end research organizations have defined or required its utility and -- which I think speaks to the kind of academic rigor that has driven the success of the device. And so now to be able to expand this to adults -- and I go back to the whole -- when you look through the literature and you say what's the greatest correlative to a long-term, successful outcome is alignment, for us to be able to ultimately bring a sophistication to alignment in a much greater way is really an opportunity to create value. And so our enthusiasm is how do we take this device? How do we, in essence, inform surgery in a much more elegant way, driving much more predictable spine alignment? But then there's also elements in it where you can start to appreciate what the bone quality is. And for us to start to demand to match kind of bony implants to the bone quality becomes highly opportune. And so our view is that if spine surgery is decompression, stabilization and alignment, jeez, we can elevate stabilization and the alignment view around spine surgery in a way that, hopefully, a few others can. And so it's super exciting.

Excellent. Thinking about sales synergies post the acquisition, I think you guys have detailed there's minimal overlap in terms of where EOS imaging systems are placed today in the United States and where your -- Alphatec's kind of major accounts are. I mean how would you have investors think about that cross-selling opportunity where having EOS under your roof and then the system, say, at a center, academic center where it's not using Alphatec? How do you -- what's the pathway to get Alphatec implant utilization at that center where there's an EOS system?

Yes. I got to tell you, it's one of those things where it's like you start to look at these things in terms of how quickly you're going to garner access to places like academic centers of great -- with great reputations. And not to dwell on it but there was a bit of a broken past of this company. And so for us to be able to have the credibility now to be able to insert ourselves into these institutions expedite our relevance from a market perspective in a very clear way. And so our excitement is, one, those institutions that have had these in place, just the ability to go in and upgrade them. But the magic in my mind -- and magic may be too amorphous. But the ability to tie the value of that information in the surgery has always been the vision. And that's why we started off with regard to the whole SafeOp platform. So what we would have is a conduit into surgery. And you have to make the first conduit very relevant. And the first conduit has been very relevant with regard to EMGs and SSEPs. But the tool really ultimately becomes a distribution of information. And so our excitement becomes, gosh, how do we upgrade someone's EOS to an EOSedge and provide much more utility from an institutional perspective? And then once we are able to do that, how do we translate that intraoperatively such that the information is providing a greater solution? And then from a research perspective, be able to see the back end of that, hey, based upon what we planned, did we get it intraoperatively? And then you look at the post-operative experience and say how close are we. And so when you think of predictive analytics, you think of research. It really kind of rolls right down the road of what a lot of the academic centers want.

Absolutely. And just on that point, Pat, some of your pure-play and non-pure-play spine competitors, particularly those that have -- are introducing navigation or robotics platforms, they talk about that interoperative -- sorry, preoperative planning. Postoperative confirmation is not in their game. But a lot of them talk about this kind of interoperative ability to tweak the preoperative plan and then confirm it intraoperatively. I know at Alphatec, your customers have intraoperative capabilities. But maybe you could just talk us through maybe an Alphatec case? And now with EOS now under your belt or soon to be under your belt, having that preoperative plane, what happens intraoperatively in Alphatec cases today, minimally invasive cases especially?

Yes. Yes. And so current dynamic is that we have this Bluetooth tablet in there that -- so we're not wheeling in some big monster device. And what we have the ability is tell the surgeon, hey, there's a nerve there, watch out. Or hey, we've seen changes in the somatosensory-evoked potentials. There could be a motor issue that is impending if you don't close the nerve. So you may have a retraction injury before you get it. We're able to say, hey, stop. You start to look at future case -- and I'm not talking about 5-year future case. I'm talking about meaningfully near-term future cases for us to have a correlated standing biplanar image and to be able to take that into the operating room and say, gosh, here's what the plan is. We're going to do these different levels of surgery. We're going to release these different parts of the back. We're going to realign this patient in this manner, our ability to integrate that into the operating room. And let's say we want to do pre-bent rods or all kinds of different tools to make sure that we have the alignment that we're intending, there's so many different options. And there's so much, candidly, internal talent that has done some of these things before. And so the great part is it's not a stretch. There's a real understanding as to how to get there. And so to be able to have those elements immediately is phenomenal. And so I see a very near term where we have the tools by which to be able to take that little tablet and be able to provide the surgeon information as to, gosh, this is where you are. This is where you intended to go. Here's a couple of options as to how to get there, is highly exciting. And you're starting to remove the variables of some of these things in surgery such that you're creating a predictability with them. So anyway, it's exciting. It's a tip of the iceberg too. So...

Understood. I think what's not baked in Street models outside of the acquisition potentially and the full impact there is the international opportunity. I mean you have this agreement with Globus that's going to expire. The EOS acquisition, there's an installed base internationally as well. I mean how has that played into the strategy of the U.S. acquisition in terms of having this OUS kind of base business now outside of the implant realm? And then getting -- kind of accelerating your implant business internationally once you have -- you're all clear from a contractual standpoint with Globus?

Yes. Like it's kind of highly exciting, right? It's like -- I think EOS' reputation academically is phenomenal. And they're at a who's who in institutions. And so to be able to have a hunting license in those institutions whereby we're going in with brand-new technology, the history in spine has been a little bit of, hey, let's take some of our second- and third-generation technology to said country. And the reality becomes is we're going in with the first-generation stuff. We're going in with EOS. And so I think that it really kind of provides an unbelievable hunting license. One thing that I'm a super fan of is focus. And probably I'm narrow-minded to try to a fault. But the reality becomes is I also like to stay narrow with regard to what we're trying to accomplish internationally. And I think much like people have said, gosh, make sure that you guys don't get diverted from the effort with regard to ATEC, you guys have a lot of momentum, I also don't want international to divert us in a way that ultimately doesn't serve the interest of the organization. And so I want to be very thoughtful with regard to how we as an organization enter the international marketplace. And EOS provides us a heck of a foundation reputationally and otherwise to recreate the company internationally. And I think we can be reasonably focal so we maximize the impact we have as well.

Understood. And just thinking about the timing for the EOS acquisition to close, I mean any updates to 2Q '21 time line you guys put forward? Are they still on track?

Yes, Josh. We're still on track. So there -- as you can imagine, there are a couple of regulatory hurdles to get through with the Ministry of Finance and the AMF, which is the SEC equivalent. But we're still on track. We'll have more information in the coming days on timing. But I think the upshot is that we expect to close in the middle of the second quarter.

Excellent. And just what were your guys' reactions to the announcement that Zimmer was spinning out their spine franchise along with their dental business? Is that surprising to you? Do you feel like it represents opportunity? And any high-level thoughts in terms of your reaction to that headline?

Yes. It's I guess, I'd say, little enthusiasm, honestly. Like it's -- we love being spine only. We love being a pure-play spine company. We love being great students of the requirements of spine. We still think spine is not that good, which means there's so much opportunity to make it better and to continue to invest in the improvement of spine care. And I think that there's some cynicism associated with, gosh, spine surgery is not exciting, has been valued about -- maybe you don't know it well enough to realize what to be excited about. I got to tell you, there's a ton to be excited about in spine. And so I love market disruption. The more disruption that gets created, the more opportunity it presents for the smaller guys in the business. And so I'd be fibbing a bit if I didn't say that I love market disruption. I hope they all spin off. So if all of these guys spin off, it's like nothing but opportunity. So...

Great. And then maybe we can wrap up here. I mean there's been a lot of -- the consensus sentiment is a lot of procedures are going to be migrating to ambulatory surgical centers or outpatient settings. In spine, a lot of ACDFs has been in ASCs. But every year, you see more and more spine procedures being taken off the inpatient-only list by CMS. And a lot of them are being -- already being reimbursed by commercial payers. I just wanted to hear your high-level thoughts on how Alphatec is positioned to capitalize on this migration of spine surgeries to ASCs.

Yes. I got to tell you, it's one of those things where we talk in here about the under-60 minute 360. And so when you start to talk about PTP, there's so many different avenues it can go. And one of the great things is for -- let's say somebody has an adjacent level or somebody has a small spondylolisthesis, the ability to intervene upon that thing in a very predictable way and do a 360 in less than 60 minutes based upon it being a very rote workflow is exceedingly high. And so I think a lot of people start to look at the ASCs and say, gosh, we've got to sterilize kits and do things of that nature. It's not about sterilizing kits. It's about providing surgical solutions that ultimately avail themselves to the type of pathology that's driven toward ASCs. And so our excitement is, gosh, we love the whole procedure. We want to supply all the elements to a procedure. That's part and parcel to what outpatient surgery centers are looking for, is something that they can wrap their arms around and predictably do -- align it to a specific type of pathology and have a very predictable cost structure and a very predictable income structure from the experience. So clinically, can you do it super well? You know how much it's going to cost. And you know how much it's going to reimburse. And so I think that very simple road is a good one for us.

Outstanding. Well, I think we're going to have to wrap it up there. We hit the end of the half hour. Thank you, gentlemen, so much for spending time with us this afternoon. We're looking forward to the Alphatec earnings call on Thursday after market. And so we'll talk to you at the latest on Thursday.

Thanks much, Josh. Appreciate it.

All right. Thanks, guys.

Thank you, Josh.

Thanks, everyone.