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

Well, good afternoon. We're starting a session today with Alphatec. My name is Matt Miksic, medical device analyst here at Barclays. We have Todd Koning, CFO and P&A for the financial organization. So thanks a lot for filling.

Thanks for having us.

You've got -- I guess there is a couple of things I wanted to try to touch on because I think folks who are close to the name will want to [indiscernible] today. Before we kind of get into a little more of the meat of the business and the strategy for this year. But the first one, you made some disclosures on Monday about Silicon Valley Bank and often mix that into a conversation like this, but you said something I want to give you an opportunity to at least communicate what it is that you're trying to on your cash position in a...

Yes, absolutely. Just from an SBV exposure standpoint, we had about $14 million exposed there on your balance sheet. All the other cash was really off their balance sheet and one of the market funds. And so I think that's kind of point one and put that in the right context. I think as we said at the beginning of the year, we came out and announced our critical-term facility. We've got access to total cash and liquidity to $275 million. And so it's really 14 $275 million, so about 5% of the total cash and liquidity available to the company. And so we're trying to put that in the right context. And obviously, what the Fed did in the FDIC for the weekend kind of probably trumps all of that.

Right, exactly. So that would have become a little less of an issue post the Fed announcement. So all right. And then the other, I guess, not to sort of change the topic again away from -- I think this will be a little more closer to you operationally as you folks want to hear what you deal at the [indiscernible] means for you? I mean I don't think it was a surprise to see Alphatec [indiscernible] around that announcement. I guess maybe Pat may have thought about dropping them a thank you card or something like that. It's nice gesture, but I guess just maybe give us a sense of what do you think that does to your opportunities to add to your field force and any other sort of operating or strategic opportunities that, that might present for you?

Yes. Well, clearly, it is disruption in the market space. I think if you look at the history, if you look at infrastructure, we benefited from that disruption. You look at the fact that we came through COVID stronger than we entered. That was a disruption. And our expectations will be the beneficiaries of this disruption as well. And as you can imagine, part of our story is to continue to grow our sales footprint, and really, our history has been to partner with sales agents on an exclusive basis. Many of those have come from a NuVasive background and we would expect that this news would really just, I think, increase the flow of opportunities. Our guidance suggests that we will add distribution capacity, if you will. And so I think all of this just really gives us more options and to -- for us to continue to run the play. And I think strategically for us, nothing changes. We're going to run the play. I think this gives us a tailwind. And frankly, I think in that years long.

All right. Okay. And I guess the one thing that it seems like it's a little different about this situation than, say, Stryker or some of the others is that this comes during a year when you've made some commitments on the profitability on the margin. So we're not sort of in the pedal to the metal phase of like as many reps, good reps as we can. How does that -- how do you think about the sort of the pluses and minuses around your budget for reps? And does this increase just the potential quality of the candidates? Or are we really talking about potentially just putting around there, if you were going to add 25 or something this year? Does this mean why we could add 35 or how to think about the variability?

So the first thing I'd say is that we're totally committed to financial commitments we've made. So we're not walking off of those. And for this year, that is to be adjusted EBITDA breakeven in the full year. And so that's what our guidance implies, and that's what we'll do cash flow breakeven in 2025. So kind of the markets from a profitability statement point. And as we look at the opportunity here, I would say our business has been growing over the last year as much by increased utilization of our existing surgeons as well as really growing our business in the agencies where we exist today. And so one of the things we began sharing in last year was really the amount of growth that our agents who have been with us for a year or more, so kind of on a same-store sales basis, have been experiencing. And in the full year, it was 43%. So I think that's meant to communicate the fact that our growth is coming from our existing sales position through adding surgeons where we exist today, plus getting more business from existing surgeons in that same footprint. And so I think that will continue from our perspective based on what we're seeing. And I think also when you look at the data we shared in the 4Q, we have a graph that kind of shows the annual cohort of surgeons and surgeon cohort that joined the company and their utilization each year continues to go -- grow. Even in the 2018, their 2022 utilizations higher than the 2021 utilization. And so I think that was a great indicator for adoption of the technology, deeper penetration of our accounts as we broaden our offering. And so I think our belief is we'll continue to add sales distribution that's in the plan. It will be opportunistic. But a lot the lion's share, if you will, or growth in '22 and '23, does come from existing distribution.

Right. On the budget element, a finer point on that, maybe just a little more detail. I mean, we have a plan that's going to guidance of 26% implant growth, right? And so when you put a plan together like that, you have some dollars side for investment to say, hey, this is going to come from new territories, investments we're going to make. And so when there's disruption in the market, all that does is, again, the funnel improves, maybe it gets bigger. But ultimately, you're still looking for the right investments, and you're going to use the investment dollars we've allocated to make the best investment for money. And that process, that Todd points strategy still holds. Does it get some tailwinds and maybe as it gets a little more advantageous to take advantage of? Yes. But ultimately, it's the same plan.

Okay. So yes, multi sort of factor growth model is what I'm hearing and makes a ton of sense, right? You get a surgeon trained once they're at that point, then they start to kind of become more and more productive, I guess.

And that's a multiyear event, too. And so when you look in the fact that we trained -- we have over 500 surgeon training events in 2022, you really begin to see those in '23, '24, '25.

Yes. Okay. And one of the things about this segment and you segment that just for context, potentially created a prone lateral, if you will, that represents maybe $1.5 billion of revenues or something like that. You're sort of sneaking up on what, $400 million in that range. I guess how much of that market penetration is reflected in your numbers approximately? And sort of like where do you think that goes to in a year, where do you think that goes to in 2 years in terms of market penetration, not your growth, but just sort of category penetration?

Yes. So one of the things we did in the third quarter, we said that lateral business is about 25% of our overall surgical implant business. And in the third quarter, that was about $80 million. So that's about -- lies about $20 million in the third quarter. So annualize that, you get to $80 million of lateral revenue -- lateral associated revenue, which is depending on how you saw the market mid- to high single-digit penetration. And what we'd tell you is that our lateral business grows faster than our overall average. And so we continue to grow that business, and I think we'll continue to take share in that market. But the point is we're still in the lateral market and overall. And so there's a ton of opportunity for us to continue to grow and penetrate.

And when you say lateral, you're talking about like traditional lateral or prone lateral?

And I would say we size the lateral market, whether it's prone or traditional as being the $1 billion, $1.5 billion size with about $2 billion of posterior -- traditional posterior PLIF and TLIF business that can ultimately be adopted bilateral position. And so that's kind of how we look at that end.

Okay. And that's a little bit differently than some of the way the folks are down the road or looking at it, I guess. And just in terms of -- because I think they think of it as this MIS TLIF opportunity that never really came on board, the lateral idea, if you will.

Correct. And there are lots of reasons for that.

Sure. Right.

And we believe that PTP and lateral transpose really addresses many of those concerns from a position standpoint, most uniquely by virtue of the fact that we intra-operatively monitor the health of the saphenous nerve, which allows you to avoid the most common complication of lateral surgery, which nobody else does. And so that's a big reason. I think also when you look at our positioning and all of the way we've designed it through physician retractors and the like, instrumentation, that ultimately allows for more predictable and repeatable experience in the hands of [indiscernible].

Okay. And I guess the big-picture view is that opportunity is maybe 5% if we think of your lateral business at $80 million. And you're the leader in that market, the creator in that market currently, even if you get some company and even if that company has growth plans, there seems like there's an awful lot of room for expansion and growth unlike just lateral and XLIF 15, 20 years ago. NuVasive's really the only player there. And it was a long kind of hard growth -- on board and all idea. So it's really -- it's kind of amazing actually that we have this fairly mature market with all of a sudden sort of like a penetrated segment for really a new approach that seems to be in a lot of interest.

Completely. I mean, you don't have to get people comfortable with retroperitoneal space, which that's already done. People are already comfortable with lateral surgery in general. And so some of those challenges you don't have to train through. So really, oftentimes, we're training through our approach rather than trying to train through our approach and why lateral health is better.

Yes. So one of the other themes in Spine has been this capital consumable model and Alphatec entered that with the acquisition of EOS, maybe talk a little bit about how the imaging system is either helping open doors or helping sort of contract around volumes, pulling through implants and the kinds of things that folks often attribute with enabling technology like a robot. How is that platform helping Alphatec do some of those things?

Yes. You want to take that?

Yes. When you look at the -- one of the things I think that we underappreciated, maybe that I'm pleasantly surprised by is just the brand equity that the EOS has. And so we share the examples of places like in HSS, which we didn't have access to that hospital prior to EOS. And with the combination of the 2 companies, we were able to leverage the placement of EOS with contractual access to HSS. And so that's -- those are kind of blocking and tackling type opportunities. When you look at the surgeons we talk to, we're sharing -- we were with -- I met with the surgeon last week and interested in coming over to ATEC. And he said, "Hey, I think 3 things. And the first thing he said is, I need an EOS. And so it's just that's anecdotal, but we talk to these folks and they have a -- to them, the fact that we've acquired EOS, it has a lot of -- among the academics and among the big academic institutions, has a lot of brand reputation. And so people look at that and they know we're serious about Spine, we're committed to a longer-term run here. And so that creates, obviously, the obvious things like the HSS example, but it also creates just a lot of brand equity with our surgeons. There's -- with the SRS, there's a lot of users, 2/3 of those folks are using EOS with ISSG, which is the Premier Study Group. Those folks are required to have an [indiscernible] in that Premier Spine study group. And so that's the brand equity. I think from a placement perspective, we have a lot of options, right? I mean there's people that are willing to write a check. There's people that we have a utilization-based rebate that they can place the EOS and then they can earn it -- earn back the utilization rebate on their implants until we compare it that way. There's also a financing options. So there are a lot of different ways we can place in the EOS and we try to take advantage of -- we want to make it easier for the customers.

Okay. That's helpful. And then I guess, you touched on another theme, which is sort of access to what sometimes called deformity or scoliosis surgery in spine, which is kind of a tight knit, a bunch of own clinicians that don't really try a lot of new stuff. So it's getting access to that segment, which EOS has helped to do. I guess what sort of realistic goals have you said in terms of if that's 20% of the market, about 25% of the market. If like Alphatec is equipped to start penetrating that segment or do you feel like this is sort of a thin edge of the wedge? We hope to get there in 3 years, we hope to get there in 5 years, given the systems are a little different. The sizes for pediatric are a little different. What's your plan there?

So I think it's one of the areas that we're excited about because thus far, we really haven't, I think, cracked the code there. And ultimately, it's not like, hey, you're going to use all my stuff. Like it doesn't work that way. You got to add some value. And so we've been working on that. And in fact, we've just been through some alpha cases here, adolescent idiopathic scoliosis solution, derotation in a smaller diameter and smaller [indiscernible] hardware, which you'll see later this year. And we're really excited about our ability to deliver that in the hands of people who have historically used EOS to do their diagnostic in their assessment. And so I think that's a huge opportunity for us. You're right. I mean if you want to be -- if you like we do want to own the Spine world, you have to be relevant in longer-term deformity segment. And it's a great way for us to start there. And then if you think about the things we've learned from patient positioning and TTP, how we've applied that to LTP, I think there's a great opportunity for us to apply that same kind of learning in the AIX space as well because the spine is reasonably flexible, still have a great opportunity to provide precision influence getting back to predictability, usability of surgical experience in that segment.

Okay. Yes. And one of the -- when you talk about -- let me stop to see if there's any questions in the audience. And there's not at the moment. But one of the things that Pat comes from obviously, one of the legacy challenges for NuVasive was with all the time that they spent and worthwhile time developing excellent, focusing on lumbar and minimally invasive. They sort of, I think, in the early days, willingly -- willfully ignored, put out of their sort of focus area cervical, which is maybe 1/3 of the market or something like that. And then had a hard time kind of getting that going, getting that out of first gear. And so what's your strategy on that? How does Pat think about bandwidth resources, research focus, concentration of the sales force? Where does cervical fit into your strategic plan?

Yes. So cervical is clearly part of the plan, and we've been and we'll continue to put development resources in that space. We've got active programs there. You'll begin to see some of that come out and come to fruition over the next year or 2 as well and set you think of corpectomy, especially maybe thoracic space, we've been able to really leverage our approach there to cervical corpectomy as well. And so we're definitely working on some of those or complex is that you see in the cervical space and just development influences there as well. ACDF is still a pretty good surgery. And so as you think about where we wanted to initially focus we could make the most impact further the field was Spine the most. And that's why you saw us at with lateral, that's where we had the most and have historically added the most clinical decision. That's really the machine, if you will, and that convinces people to look at this adopt this and once you do that in their trust there, and you're much more likely to get more of their business out.

Got it. Yes. And I guess one element of it has been the cervical disc is over not old or in some places, but at least now with simplified doing well at NuVasive if one of those assets were to be available to you and there's not many really good systems, I think it's fair to say. Is that an area where it's a little tough to build from scratch at this point, a lot of long-cycle studies that have to be done? Is that something strategically that sit out with Pat?

Absolutely. I think we believe in motion preservation as a concept and that works. It is not a burning platform for us. That's early like we got a ton of growth. But again, if we want to be the company we want to be, I think you got to have something at some point and so to your point, I think we'll be open eyes and opportunistic as it comes.

Okay. And then on -- back to the guidance and the growth, I mean, it's been impressive. You've sort of like reignited old world line growth in a public company, which has been impressive. But now every year, I think we sort of look at guidance and where you land and what you delivered and it must be an ongoing challenge to figure out like where we're going to land this thing next year after what we just did. I guess, how do you get to that number? How do you get to that, whatever it is mid-20s number that you're in now and get comfortable that you're going to be able to do it again and you're going to be able to do it again?

Yes. So I think our philosophical approach is to put numbers out there that we believe we can achieve and have a reasonable opportunity to exceed. So that's kind of a starting principle. I think as we went into this year, we wanted to look at where The Street was $412 million, I think, going into the year. We would look at our long-range plan. Our long-range plan kind of said low 20% CAGR with respect to that. And looking at where we were exiting 2022, well, we pulled that together and felt ultimately overall, a 25% total revenue growth in the year was a great place in the [indiscernible] and that made $430 million, which was significantly higher than Street was at $412 million. Felt like it was a good place to start because again, as we looked at the surgical revenue, you really built that or that $383 million, which is the surgical component of our property, to be mid-teens volume growth and high single-digit revenue per procedure. And so if you compare that to what we laid out in the long-range plan, which was mid-teens volume growth and kind of 5% revenue per procedure, we baked in some higher revenue per procedure, largely because of the experience we had in 2022 where revenue per procedure grew 14%. And so we felt like those tailwinds that we saw in 2022, many of those be manifested in '23 and you want to make it higher revenue per procedure there. And we laid on their volume growth consistent with the long-range plan. And to the extent that we beat the expected. And so going into the year, we felt that was a place with a set bar. I don't know, you do analytics to get comfortable with that. And ultimately, we did. That's what we're in.

And back to sales rep growth. That's obviously part of it. Do you talk about the decrease that you're expanding for like this year, what your target is plays into was it really last year's growth that's part of this year's plan?

One of the things we talked about a ton internally, and I think it speaks to the confidence of the sustainable growth is what we're doing today is really reflected 2 years from now. And so I can tell you 4 or 5 years ago, it was much tougher to say, "Hey, we're going to grow 25% next year. What do we grow this year?" It was 0. Okay. But we've been doing this now for a little bit. It's like the stuff we experienced in '22, that was all a result of the foundation we built in 2021. And so as we look to '23 and into '24, we're trying to figure out what we're doing, actions we're taking now that are really going to drive growth in '24 and '25. And so just as we think about the investment, we try to look at it without it. We want to meet our financial commitments, and we also want to create opportunity for sustainable growth. And so that's the lens we're doing with. And so to some degree, the '23 story is a little easier because we've kind of already baked those decisions. And then some of that's to your point about you've made the investments and they're kind of coming to fruition. But the investments we make this year is all about what's the growth in 2025 for example.

And because a good chunk of our volume as well comes from productivity, we're not completely dependent on [indiscernible].

Right. Yes. We're coming up on time here. But I think just to point out, in the past, there's been this perception that in order to grow, we need to add new reps. And so when you talk to somebody in June or you start somebody in September and one of your company is thinking would be sales rep growth is not what we thought it was going to be or it sounds like it's lower than what they expect for, all of that's in the context of things that are going to influence next year and year after. So even though, for example, this is going to be a great year as dropout of this deal that lands on your team, that's the kind of thing that would contribute to your point to like '24, '25.

And ultimately, you create clinical distinction, you're going to compel surgeons to adapt. Once you do that, you're going to attract the attention of the sales force to come.

Got it. Okay. Well, congrats on all great progress. Thanks so much for spending the time.

Thank you.

Thank you for having us.