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

Okay. So now we are live. Welcome, gentlemen. Welcome, everybody, for -- thanks for joining us this afternoon. We're very pleased to have with us Alphatec. The team is Pat Miles, Chairman and CEO; Todd Koning, CFO. Pat and Todd are going to go through a set of slides. And then we are going to hopefully have some time for Q&A. So if you have any questions, please feel free to send them along by e-mail at [email protected], and I'll keep an eye out for them in the meantime. But with that, I'll turn it over to you, Pat and Todd.

Thanks much, Matt. Appreciate it very much. And what we thought is we'd share a few slides. So just as a brief introduction, I've been in this -- in the spine space for north of 25 years. It's one that is of great familiarity. Todd has been in it for a long time as well. And so we're excited to share with you what the -- what's going on in the spine space and particularly how we're navigating forward. And so -- anyway, clearly, there will be some forward-looking statements. You can review that at your leisure. If you look at the industry and you look at really the fastest grower since 2018, it has been ATEC. And that's off of a very challenging backdrop. And I think kind of the thesis that we would like to describe to you is candidly, the confidence in a long-term opportunity that we're literally laying the foundation for as we speak. And so a great place to start with that is really in a place that we created previously in terms of the guys who are all here, and that's lateral surgery. And when you start to think about what compels surgeons, it's how do they do something better, which we deem to be clinical distinction. And when you start to look at opportunities to make surgery better, I got to tell you, minimizing morbidity, meaning minimally invasive surgery and improving things like spine alignment are very, very clear. And so what we've done is we've kind of really applied our years of learnings to evolve our offering within the lateral space. And so where we're seeing a lot of growth is clearly based upon what the surgeons are seeing in terms of advantages clinically in the type of applications of what we call PTP, which is -- stands for Prone Transpsoas, psoas starts with a P. And so it's a patient in a prone position. I was very fortunate to have worked with Dr. Luiz Pimenta at a place previously, where we created what's called the XLIF procedure. And that's a procedure that ultimately built a company called NuVasive. The procedure was done with the patients on their side. And it was a very difficult thing to change surgeons have it in terms of most surgeons do surgery with a patient on their stomach. And there's a ton of reasons why they do that. And so when we started doing surgery on the side, it was very, very difficult. And we ultimately reached probably 20% or 30% of surgeons that we're interested in trying that position in that approach. And oftentimes, there is a lack of reproducibility associated with the outcome because they may have been reliant upon the discretization to create volume for the nerves to come out when really historically, they would directly decompress. And so your spine lesson for this morning is spine surgeries goals are to decompress neural elements to stabilize the spine and then to restore alignment. And so oftentimes, procedures will do some of those and not all of those things. The great part about PTP is it really provides the opportunity to all of those things. And so the applicability to the procedure is heightened. And so anyway, not to belabor the number of reasons why people haven't adopted lateral position surgery, but really an evolution to lateral is lateral surgery done in the prone position. And so we've been designing and developing it since we have arrived, which is around 4 years ago. And so what you're seeing is a reflection of not only that 15-plus years of learnings of having done XLIF before, but also all of the learnings that we have run upon with regard to the experience associated with putting a position in prone to do lateral. And so what we've really been able to do is to mitigate a lot of the shortcomings. And so what you're seeing in terms of the reflection of our growth, people are like, why are you guys growing so fast and others aren't? And really the reflection is that the majority of our growth is happening based upon our sophistication with a place that we created a business before, which is lateral. And I would tell you, there's unmatched sophistication associated with this group's understanding on how to do that. And so the other thing becomes is when we did surgery in the lateral position, we couldn't directly decompress the spine. And so a lot of people or surgeons who were doing things -- procedures that were of the -- where the patients laying on their stomach called PLIF and TLIF, those are the largest segments of the marketplace, they wouldn't do XLIF because they couldn't directly decompress. The great part about PTP is it's in a position you can directly decompress. And so your ability to start to utilize this in patients of all sorts, there's a much wider birth of opportunity to apply this technique. And so we're super excited about that. And we're seeing really the early experience in short-segment surgery, but you're starting to see it evolve into longer, more challenging constructs. And then you're also seeing it starting to be utilized in like an outpatient surgery center. The ability to do a 360-degree lumbar interbody fusion in a surgery center, in a very predictable manner in an hour is totally doable, and we're seeing it every day. And so the great part is having been at this a long time, you really see the evolution of spine surgery. And I think that sometimes you contemplate that how COVID has affected spine. And I think when I started in spine surgery, every spine case would go to the ICU. Clearly, there's such a demand on the ICU with regard to COVID, that couldn't have lasted. And just the ability to start to see these procedures being done in outpatient centers and being done where the patient is up and out of the hospital in a very immediate way is well appreciated, not only by the hospital, but by the surgeon. And so -- but what you have to ask yourself is why can we do this? And why are we seeing the level of expansion. And one of the things that we did back in 2018 is we acquired this technology called SafeOp. And the comments that we made when we acquired it is one of the very important parts of spine surgery is if you're making a small incision, what you want to do is: one avoid nerves; but also understand as you retract and create exposure to access the spine, you want to make sure that you're not crushing the nerve. And so the great part is this SafeOp had what's called automated somatosensory evoked potential. It's just a fancy word by saying, hey, can we understand if we're hurting the nerves. And so the great part is we have technology in the operating room that lasts the entire surgery that tells the surgeon, hey, everything is okay. Everything is okay. And so there becomes great solace in terms of that. And so again, you start to ask yourself, why is this little company ATEC taking on lateral by storm. And it's these technological advances that the surgeons really appreciate it candidly didn't exist before now. And so what you're seeing is you're seeing a lot of people being excited about coming into our office. We've recently moved into a new office, and it's absolutely beautiful, but it's beautiful because it has a cadaveric facility that enables us to really educate the surgeons. And they're learning from the guy who pioneered it in Luiz Pimenta, the faculty. And so we're just seeing a ton of enthusiasm of surgeons interested in learning this technique. And then we're seeing the predictability associated with the reflection of it after they learn it. And so we're very excited about the volume of people coming in. We're more excited about the volume of people doing it after they leave. And so when you start to think about the spine market and you think about kind of the applicability of lateral, it is significant. It's probably a $1 billion market as is today. And what we're seeing is an expansive nature to it based upon our cannibalizing some of what's called GLIF and TLIF, which are just approaches where the patient is already on their stomach. And our ability to directly decompress them really kind of expands us into a broader portion of the entire spine market. And so some other questions, I think, that we've gotten. It's like -- so when you start to look at ATEC and you say, gosh, here's these guys, and they're coming out and they're really making a significant impact in lateral. And then they go and acquire this EOS thing. What was that all about? And back to your spine lesson, it's like spine is decompression and stabilization alignment is a huge part of spine, and there's very few standards in spine. And so one of the things that we look toward is how do we do imaging in a way that ultimately enables us to translate that information into the operating room to effectuate alignment. And so we acquired EOS. And EOS -- if you think about deformity and you think about kind of the people in deformity, there is no doubt about our opportunity to ultimately not only place units, but translate that information. And so when you start to think about the market opportunity, a place like hospital for special surgery has 4 of these. They're wanting more of these. And so you start to say, gosh, we can not only sell these and expand our footprint, but what it avails to us is access to places like HSS or places like UPMC, like these luminary hospitals and hospital systems that ultimately kind of define the future of care. Our ability to access those based upon availing EOS to them through things like an earned purchase type of an agreement is very, very straightforward. And so you start to think to yourself, gosh, here's this company that's effectuating surgery in a big way within a large part of the market. And then what they're doing is they're laying a foundation to be effectual over time with regard to the academic centers that already cover the technology in EOS. And so there's 100 EOSs in France. You start to look at the population in the United States, there should be north of 500 of them here. And so just in terms of the opportunity to start to sprinkle the earth with EOS machines, it's totally available to us. And so the way that we have grown and the way that we think about spine surgery is what we think about is our commitment is to create clinical distinction. And that may just sound like a high level, gosh, we're going to create clinical distinction. The only way you're ever going to compel a surgeon to come over is if you're doing something better. And so we compel surgeon adoption by doing stuff better, which is the whole clinical distinction. And if you don't think that salespeople don't want to sell something that candidly compel surgeons, you're kidding yourself. Most of these guys, and this is not a dig on them, but they're path of least resistance people. And so what they want to do is they want to make sure that what they're selling better is that the patients outcomes, which ultimately enthuses the surgeon. And so I would tell you that when you start to think about a numeric reflection of my commentary, our pursuit is really like how do we create the perfect spine procedure. And so what we do is we look holistically at spine procedure and we say, gosh, where can we better these things? And our view is -- the reason we initiated with PTP is we knew that, gosh, this is the best way in the fastest period of time to make for a better surgery. And so we did that through enabling technology and things like SafeOp and different enabling technologies. And I think you see the reflection of that based upon the 83% new product revenue contribution from an objective reflection. The other thing is we've committed to 8 to 10 new products per year. The one thing that's really kind of transpired over the last 4 years is really kind of the reflection of the love of this market space and kind of the know-how. And the know-how is all about what priorities do you set, what products do you do at what time? And how do you start to configure a portfolio that becomes very, very meaningful? And so if you're going to do -- if you're going to sell an EOS machine and you're going to sell it through the utility of your implants, your implants better be over the top good. If you look at InVictus, I got to tell you, it is an unbelievably sound fixation system. Is it something that's going to create the level of distinction where some sales guys are going to be able to go in and switch everybody's pedicle screws just based upon the screw? Nobody is doing that. However, if it's tied to EOS and then what it does is more than satisfies the surgeon in terms of the utility, our opportunity expands immensely. And so when you start to look at what the priorities have been over the last several years, we've developed a lot of products, we don't kind of do PRs on all the products. But what we've done is really created an unbelievable portfolio and that gets reflected in terms of the volume of new products used. And so when you start to quantify the EOS opportunity, it is significant. And there's not a spine surgery -- a spine surgeon that you won't run into that doesn't covet EOS. And I think to the point of when you look at luminaries and one of the luminaries in the field of deformity surgery is Larry Lenke. And a comment that he made recently at SRS, which is the Scoliosis Research Society, meeting was if you're going to treat deformity, EOS is a requirement. I'm going to tell you, in my 25-plus years of being in this business, I've never heard another device called out as a requirement. And so when you start to think about just the opportunity for us to translate the value of this information through things like 3D planning, predictive analytics, there's so many opportunities for not only us to monetize the placement of these units, but translate the information out of it. And so you start to think about, gosh, in the immediate term, we're evolving surgery based upon things like PTP. And then over the medium term, we're placing all of this capital. And over the long term, we have access to the sole provider of the unique information that comes out of EOS. And so as I start to look at what the long-term thesis of our opportunity is that it's significant. Clearly, what we're doing is we're compelling adoption. And so you start to think about the volume of products per surgery used. And so when we think about a clinical thesis or an intervention, what we want to make sure that we do is we get all of the products associated with that thesis. And so what you're seeing is a continuation of the growth from 2018 through 2021 of the number of products used per surgery. If you look at the growth in Q3 compared to previous quarters in terms of year-over-year growth in average revenue, it was somewhat muted based upon the case type. You saw more shorter constructs just based upon the whole, we can't -- we have to leave ICU beds available. So one of the ways that we saw kind of our business change in Q3 was in that we saw less complex surgery density, you saw less year-over-year growth. And so we love this slide in terms of really a central driver. And I think that what happens is there's a lot of large companies that participate in this space, but I think that what happens is, is surgeons are yearning for someone who's aligned to their interest in -- and what may be in their interest may not be a new screw, but maybe an adjunctive technology that helps them intervene upon a specific patient. And so when we think about design and development in this space, we're aligned with the surgeons in terms of what are the priority of requirements associated with the technology that we're designing and developing. And so I would tell you that, again, what you're seeing is -- and what you're seeing in our growth is a reflection of the compelling surgeon adoption based upon being aligned with them with regard to what the requirements of surgery is. And so when you start to look at, again, the number of products per surgery and you see kind of the line up top, we're close to 4. We have an opportunity for close to 9 when all is said and done and the entire thesis is reflected. And so we're excited about the continuation of growth there. From a sales force perspective, love what's going on. I got to tell you, we're growing the sales force. The sales force is prospering in terms of translating our clinical thesis. We're getting better from a clinical aptitude perspective. A very important part of how we see sales in this business is people being very well versed on all other things to have an effect in the operating room. I would tell you, we're still -- we don't have an A-team across every market in the country. And so when you start to think about our ability to continue to effectuate better and better people in the field, I would tell you, 2/3 of the field is good to really good. 1/3 of the field is either totally not covered or not people who we want representing our interest. And so some of the other challenges in this business are in the literal physical distribution of products. We thought it was important for people to know that we have a centralized location in Memphis where we distribute product. We just opened that, I think, in July. And so the type of, really, efficiencies that you get out of being at a hub where Memphis -- or excuse me, where FedEx is in Memphis and just the type of visibility we get to the available inventory and the ability to process the things and gain hours is very, very attractive. So we're excited about that. We feel like that's going to help us utilize our inventory more efficiently. And then just the opportunity, I think, to start to open up the international marketplace is another foundational step forward in terms of just the progressive reflection of a lot of our efforts. And so I got to tell you, we're just getting going. And you start to look at the things that are meaningful. And to me, the PTP thing, we built the company down the street purely based upon a lateral approach. This is a better approach. And this is not just me saying this is the pioneer who started it, and this is the Society for Minimally Invasive Spine Surgery was kind of overwhelmed by the volume of PTP papers and presentations. I think it's key that we continue to get better in terms of our distribution and kind of the sophistication of our sales force. I love that we're expanding international, and we're starting the process of having a contribution internationally in the coming years. When you start to do things well, people get confident in terms of the company, and that's really the halo effect. And if I go to a surgeon today and I say, hey, can you use my cervical plate? I'm not going to compel them on improving cervical surgery based upon our plate versus somebody else's plate. If I go to him with PTP, I can compel him. But the beauty is that creates a level of confidence where we start to get the halo effect of adoption. And then I've got to tell you, the opportunity that we have with regard to EOS is a monster one, and we believe that making surgery better and aligning with the surgeons is value creation, and that will get reflected in the volume of adoption. So let me turn it over to Todd, and he can walk through the financials.

Yes. I think when we looked at our third quarter, delivering $63 million of revenue. That was a 53% year-over-year growth, 1% sequentially. When you kind of break that down, that's a contribution of $11 million of yields related to revenue after a full quarter of having that under our ownership and leadership. And then $52 million of U.S. organic revenue growing 29%, and that's about 6% ASP growth and about 22% kind of volume growth. And then when you look on the sequential quarter, we were down 7% in our U.S. organic business. And that's really kind of 4% volume, 3% ASP into past point. Much of that really kind of being reflected in the lower ASP cases doing -- or being done, which are a little bit less complex, a little bit more shift to cervical and a little bit simpler PTP approach, if you will. And ultimately, when we looked at the fourth quarter -- the third quarter, what we saw was about $4 million of revenue impact in our U.S. organic business associated with COVID. From a scorecard perspective, like we said, 29% year-over-year growth, outgrowing the market significantly, reflected in 20% growth in surgeon users, which I think is a great reflection of our ability to compel surgeon adoption. Obviously, a little bit less contribution on the ASP growth than historically. But then when you look at 83% of our revenue associated with new products and to Pat's point, 8 to 10 launches per year, approximately 40 of them over the past 4 years. And really, as that continues to be adopted, we're seeing our case -- or our products per case go up from 1.6 in 2019 to 1.8 in '20. And they're now here at 2.0 in 2021. And then just the ability to deliver, not just double-digit growth, but 10 of the last quarters growing greater than 20%. And I think our ability to continue to grow at that rate is confident. Let me kind of look at EOS. So I'm going to spend a lot of time here, but we really kind of identified 3 focus areas: integrating our selling effort, prioritizing our product portfolio and ensuring that we get the development that we need out of that; and ultimately scaling our operations to meet the expected demand in the future. I think I'd point out the 25% increase in our pipeline and the interest on EOS since we acquired the technology. And I think that's a reflection of both the clinical impact as well as our ability to begin to execute on the selling front. And then just finally, guidance and just and just to kind of give you the context there. Ultimately, our guidance for $235 million, growing 62%. That's comprised of about $1 million of the now ended international supply agreement, $26 million of EOS revenue and $208 million of U.S. organic, which is a 47% growth rate. The second half of that really implies about a $57 million number in the fourth quarter. Our second half growth at about 30% year-over-year. And I think with that -- I think the point here is we're just getting started. We've got, I think, a great portfolio of products and procedural solutions, bringing EOS to bear for kind of years to come, entry into the international markets and really leading with lateral and PTP into that billion market opportunity that exists and being able to grow that market opportunity and our share of it through convincing and compelling kind of TLIF and GLIF cliff users to adopt our PTP approach.

Yes. So we have 98% to go. So it's -- we get probably close to 2% today. There we go. But anyway, that's our story, and we're sticking to it.

Excellent. Thanks, guys. So we have, I think, about a little under 10 minutes left here. So maybe -- I think we've all maybe talked enough about what happened in Q3 with respect to COVID and the environment in staffing. You did flag this sort of sequential decline in September, which I think was -- which was helpful for folks. But maybe just looking at Q4 and December for a second, one of the questions that's come up talking to clinicians and hospitals and other companies is the intensity or the reliance on December for the fourth quarter deductible push and all the things that we know about spine in particular, and some of the other musculoskeletal markets we are getting procedures done. Given that some of the centers in the U.S. are still a little bit challenged in terms of bandwidth and staff. Is that something that -- what kind of confidence do we have that folks who are going to be able to get that done, especially with the desirable vacations and everything else against that understaffed general climate in hospitals and the OR? How are you thinking about that? Or how is that contemplated in your guide at this point?

Yes. I'll start with qualitative and [indiscernible] quantity is best. The whole COVID thing -- and I'm sick of talking about it is a tale of 500 counties. And so one will come up, the other will go down. And so I would tell you that we've contemplated all of these things in terms of how we are going to finish out the year. I think that -- I think everybody is learning, right? And I think that there was such an expectation all the way back to last year that it's like, all right, this COVID things over and then we're going to run back to normalcy. And it's just really not been the case. And what happens is even from a surgical kind of load perspective on a specific -- I think about specific practices and I've talked to the surgeons and they're booked out through the first quarter of next year. And so just this whole dynamic of where everything is going to catch up in the fourth quarter or there's going to be some huge boom, they can't. And the things that we can't control, which I think everybody has kind of spoken to, is the staffing things and just the capacity of different places. And so my expectation is we're going to see some of the same puts and takes for a little while. I think we're bullish in terms of -- just in general, we're seeing more and more places open up, there being a slow return to a more normal state, but it's not without an overhang. And so I think at this point, we've matured based upon kind of the continuation of being kind of slap back with the whole variant thing to understand that this is not an overnight return to normalcy, but it's going to be more of a long drawn out one. And we've contemplated those things as it relates to just the management of our business.

And Matt, I think the kind of the context, we do know that COVID hasn't gone away. But I think in terms of sequentially improving from third quarter to fourth quarter is what we're seeing there. Clearly, staffing challenges our environmental context that we have to kind of contemplate and did contemplate in our 4Q guide. And then I think the third point is there definitely is that seasonality that is historically there in terms of demand for surgical procedures in the fourth quarter. And I'd tell you that we're seeing that demand. So I think with that as kind of context, as we kind of looked at how things played out in the third quarter by month. And we saw procedural volumes trough in August. They got better in September and got better again in October. And as you kind of -- as you could imagine -- like I look at that on a weekly basis on an average daily sales. And you can kind of see that thing sawtooth up. And as we looked at the context for the quarter, we looked at our historical improvement here over the last couple of weeks and months. We ultimately came out with a guide of $57 million, which -- our philosophy is to put a number out there that we believe we can achieve and have a reasonable opportunity to exceed. And so what gave us some confidence of a $57 million guide, which is about 30% year-over-year growth in the fourth quarter, really kind of comes down to the fact that our October ADS was higher than our Q2 average daily sales. So I think that was a good confidence builder and really for us to achieve our guidance, we don't need to see the same level of sequential improvement. We still need to see some improvement, but not at the same slope, if you will, through November and December. And so kind of all of that came -- were the factors and how we ultimately got comfortable with the $57 million.

Fair enough. So not straight lining in October, but not expecting the kind of hockey stick that you might get seasonally in a normal Q4. Is that a fair way to think about it?

I think so.

You know what's going to funny, Matt, is there becomes an undeniable truth. And it's when people have met their deductible, the likelihood of them getting surgery and kind of the -- it being their financial incentives, there still is an enthusiasm to get it done in a year.

Yes, absolutely. Understood. Or at least as a spectator, I understand. You're living it. So a little perspective. But one other question to make sure that I asked just because in a couple of minutes we have left. I mean, I thought you did a good job. We saw each other at NAS and in sort of flagging the fact that everybody was thinking and worried about the sequential pressure in Q3. I think we don't cover the stock, but it seemed like numbers came down, kind of readjusted appropriately. And then you sort of -- you came in with what was a pretty solid quarter, I thought underlying with some sequential pressure as you kind of flag. Nobody really knew exactly what the pressure is going to be like. But then the stock seems to be kind of back off again and not to hold you accountable for the performance of your stock price, but is there something out there just looking at the chart and feedback that you're getting, that would indicate that there's something that is maybe misunderstood or folks are confused about or uncertain about that's driving some of the up and down post the quarter?

I guess the way I think about it is this has been a resurrection, Matt. You're familiar with the story, and we've known each other for years. And so I think that people are like, gosh, is there room for a smaller company to make for a big run? And there's been a lot of small companies over the last several years that haven't. And what's happened is there's been a lack of appreciation for what innovation -- real innovation and real clinical distinction creates. And so I think that a lot of the questions are, hey, do these guys have it in them to make a huge run? And so, to me, I think that gets a little bit of the overhang. But we've been growing, as Todd said, 10 or 11 quarters north of 20%, we have every expectation based upon the volume of key -- or key performance indicators that, that level of enthusiasm continues. The other thing is, I was in surgery on Monday. The surgery is really good. And so when you start to see the different demographics that ultimately create adoption, what happens is you get confident in the long run of a business. And then you see foundational technologies like EOS. The opportunities for things like SafeOp and you start to see the performance of these things ultimately reflect in individual surgeries, you realize that there's a heck of a run in front of it. And so to us, I think that they're just -- this is going to be the perpetuating wait and see. And you know what, we're going to continue to perform. And the great part is years from now, we're going to look back and laugh over the fact that I think that there's a little bit of an overhang in the fact just based upon the wait and see.

And Matt, I think the point is that our confidence in our ability to grow at plus 20% a year or greater is strong. And I think to Pat -- for all the reasons that Pat laid out. And that's why you've seen us, I think, speak more directly to, one, our historical performance of being able to do that. The one quarter we didn't, we grew 10%, and that was in Q2 of 2020 when everybody else went backwards because COVID. Two, you saw us be more specific and deliberate about our market opportunity, our ability to grow that opportunity. And then specifically, the amount of growth attributable to lateral. And so we grew $11 million year-over-year in the quarter on our U.S. organic growth. Half of that was attributable to the lateral business. And so all of these things are an effort to build confidence in our confidence to continue to grow the business at a rate of 20-plus percent a year.

Well, that's helpful. And sometimes the heads-down execution on the fundamentals is what makes the difference. So good luck with that. And I really appreciate you taking time to speak with us and to just being here in the conference this year.

Thanks so much, Matt.

You bet. Take care.