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

And it's a pleasure to have ATEC Spine and from the company, Todd Koning, CFO; and Tina Jacobsen's in the audience, Investor Relations. So thank you for coming.

Thanks for having us.

I want to start with Q1. Obviously, record revenue growth, 54% following a very strong 2022, where you had 44% growth. We've been seeing this type of growth from you guys for a number of quarters. And obviously, that's well ahead of the spine market. So maybe let's start there and kind of talk about some of the drivers of that growth and then how you guys have been able to outperform the market as you have?

Yes, great. Again, thanks, Craig, for having us, and I love talking about the business. So good spot to start. From a growth perspective, we, as you said, kind of came into the quarter, and I think we delivered a good strong quarter, 54% year-over-year growth. When you look at the components of that and you kind of look at where we landed on our surgical revenue, and I think the growth there was just around that same 50-plus percent growth. Ultimately, so much of that's kind of coming through in terms of volume as well as revenue per procedure. On the volume side, that's really been a strong component of our overall thesis. And if you look at 2022, I think we trained 20% more surgeons -- or excuse me, we saw 20% more surgeons adopt our procedural approaches and technology. And really, that surgeon adoption drives such a strong volume component to the business. And the guys that adopted in 2022, if they follow the path of their previous annual cohorts, we'll continue to use more and more ATEC procedures in their overall practice as time goes on. I think we've shared in the past the different annual cohorts and how their utilization increases year after year after year, even going back to the 2018 cohort. So -- and I think when you understand that as people adopt a procedure like PTP, they begin to utilize that in simple pathologies first and the more complex pathologies as time goes on. And so the utilization of the approach increases. And then when you gain the trust and confidence of a surgeon in some of their most complex cases, you ultimately earn their business in other areas. And that's really kind of what we're seeing in terms of driving the overall volume of the growth. And that's been such a strong component of our growth story. When we came into 2023, so our guide initially of $438 million really implied kind of mid-teens volume growth and kind of high single-digit procedural ASP growth. And so as we saw the Q1 numbers come through, we raised our guidance. We dropped to $7 million. We've raised balance of the year $5 million, so $12 million up in total. And that was really on the basis of increased volume. So we continue to see volume as being the biggest driver and it really kind of comes down to surgeon penetration and growing surgeons. And maybe just one other strata throughout there is as we look at the Q1, when we look at the sales agencies that have been with ATEC for a year or more, they grew at a rate of 48%. And so that just tells you that we're growing in the places that we're established, which is an important component of sustainable growth.

Got it. Very helpful. And we will get into some of the specific procedures. But I wanted to ask first about kind of your view on procedure recovery, you look across ortho. In Q1, there was a robust procedure volume, probably more on the hips and knees side versus than what we've seen in spine, but still spine volumes were up from some of your competitors. So one, what did you guys see from a procedure recovery perspective? And the conversations that I've had with spine companies is that there wasn't as much pent-up demand in spine as maybe hips and knees from COVID or coming out of COVID. So we'd just love to kind of get your perspective on, one, the Q1 procedure recovery, but then just the level of pent-up demand that may be within the market.

Yes. I think take my comments for what they were or are. At the end of the day, when you're growing 50% in a quarter, kind of understanding what's market versus share is, it's a little bit -- the market component of that becomes a little bit of noise. I will tell you, though, like the strength of the business coming out of Q4 and into Q1, we really didn't skip a beat. And I think like that speaks to, I think, more than anything, it speaks to the continued adoption of our technology and the confidence that we have and I think doing what we're doing and saying that we're going to do. From a recovery standpoint, I think people often ask about staffing and those types of things as being a headwind. And I will say there's certainly staffing challenges out there still, they remain to some degree, but not nearly to the degree that they were a year ago. And so from my perspective, staffing should, at worst, be neutral year-over-year and more likely will be a tailwind to overall capacity and ultimately volume.

That's helpful. So maybe a little bit on the product side now. So PTP, a lot of your success has been driven by PTP. And I wanted to start, just so we understand kind of what PTP is relative to other types of procedures. And in terms of what you're seeing from a surgeon adoption, where are we in -- what inning are we in? And how much of the PTP adoption that you have seen has come from docs that were doing lateral surgeries prior? Or are you pulling in other types of procedures into that?

Yes. So PTP really the evolution or the continued evolution of lateral surgery. And as you know, Pat and many of our team had the experience of really creating a lateral space and category at a company that's not too far down the road from where we are today in Carlsbad. And ultimately, it was really there to really address the broader question of why did only 1/3 of surgeons or surgeries that really could be laterally approached? Why was it only 1/3 that ever adopted that approach when lateral surgeries are less more of the procedures, less blood loss and faster recovery. So it's all those good things. And so when you kind of looked at how to address that, you kind of looked at the fact that there's still a lot of variables in spine surgery. And so our view is when you create clinical distinction, you compel surgeon adoption. And that clinical distinction in lateral really comes from trying to control some of the variables that were not controlled well. I think a great example of that is our use of a patient positioner. Can you imagine creating a procedure in early 2000s and then 15 years later, still using tape to take the patients to the bed. With our use and development of patient positioning, you can ultimately really position the patient in a very precise and controlled manner in a way that tape doesn't allow for. It seems very, very simple and straightforward. But when you do that and then you design all of the other components of the procedure for the specific requirements. And so we talk about the retractor in all of the interbodies and the instrumentation, very specifically designed to meet the needs of a lateral approach and then doing lateral in a prone position, so laying on the belly, traditional lateral is usually around your side, our PTP, prone transpsoas, psoas starts with a P, so PTP. The patients are laying on their belly in the prone position. And that is a much more natural way for surgeons to do surgery, and that's kind of how they're taught. If you look at a traditional surgical intervention, posterior approach like a PLIF or a TLIF, those are done with the patient in the prone position. And so it's a more natural way for surgeons to approach the patient. It also gives you some additional improvements. And when you understand that spine surgery is decompression, stabilization and alignment. Being in the prone position allows you to decompress directly if that's what you like, release the facets of the spine posteriorly. And also with the belly hangs allows for a better lordosis so you get better curvature, achieve more curvature of the spine, and that's really what -- one of the things you're trying to accomplish in the spine intervention. And so those are some of the things that the position naturally helps and benefits from. And then of course, as we developed PTP, one of our early first acquisitions was SafeOp. And SafeOp is a neuromonitoring platform. And to be a serious player in lateral surgery, you have to have neuromonitoring because when you approach from skin to the spine, you have a muscle called the psoas muscle, that psoas muscle has nerves in it. And you bring your dilator through that muscle, you expand the muscle and you don't want to run into a nerve more or less and damage it. So you have to have a way to avoid that, and that's neuromonitoring. That's why we bought SafeOp. And then what we did is we knew that one of the reasons people didn't adopt lateral surgery is because the most common complication is residual thigh pain or weakness. And that's -- and that happens because you damage the saphenous nerve. So we ultimately took SafeOp, we iterated it and developed a way to intraoperatively, in real-time, monitor the health of that saphenous nerve. So the integration of all these components in a procedure addressed a number of the hurdles for adoption. So that was why we -- that's how we developed PTP and kind of why. And then when you look at the fact that many of the early success, I think, was with people who ultimately were lateral Hoffa and used lateral procedures in their overall practice. And so you don't have to teach them necessarily how to do lateral or convince them why lateral is better, but the procedural approach itself that we developed through PTP and the differentiated neuromonitoring, all are compelling reasons to adopt PTP. And I think we've seen a lot of that early on in the launch of PTP in our lateral approach. And as we look then at really the market opportunity, and we've talked about lateral today is about a $1 billion market. And there's about $2 billion of traditional posterior PLIF and TLIF business out there. And so the opportunity really is how do you convince surgeons who aren't using a lateral approach to address those lower lumbar, degenerative cases, how can you use lateral to do that for all the good reasons we talked about earlier. And so through the amount of training, we've trained probably on average -- well, 2 years ago, it was 400 people. We trained about 500 this past year. We did another 100 plus in Q1. And we're starting to see more people who don't have lateral in their procedural -- if you want to think about it that way. And so that gives us the confidence that we're starting to penetrate that broader traditional posterior approach and bringing that into a lateral market.

Got it. That's helpful. And you're just launching LTP. And I guess the question that I have with that is if you have prone or PTP that was taken from the lateral procedures and trying to take from the more posterior procedures. One, I guess, what does LTP offer? How will it coexist with PTP? And I guess, in a way, why is it needed? Why is it a specific lateral procedure needed that's not prone when -- I know you've talked about the advantages of prone?

Totally. So I think there's a couple of things. One is people do get used to a position and some people are comfortable in a decubitus position. So I think there's a level of familiarity and comfort with that. So that's one. I think broadly speaking, we ultimately want the pathology to determine the approach and give surgeons tools to address the pathology with the best approach. And we think that LTP ultimately taking the learnings from PTP when you think about all of the specific things that we've designed for the procedural approach itself, applying the patient positioner and really, what it does is it gives a great opportunity to do a lateral at 4, 5 and above. So for those of you who don't know, there's 5 vertebrae in the lumbar region. And really, most of the surgery happens between L3 and L5-S1. And lateral is great for 4, 5 and above because your hip bone, your iliac crest gets in the way from doing a lateral procedure between L5 and S1. But a fair amount of pathology happens in L5 and S1. So typically, people can either do a posterior PLIF or TLIF to address L5-S1 or you can do what's called ALIF, which really comes in through the belly. And surgeons want to do orthogonal surgery. They want to come in from the side directly or they want to come in from the belly or directly to the back. And so what this allows us to do is we've created a combination procedure, if you will, which allows a 5-1 ALIF in the lateral position to come in orthogonally as well to address 5-1 and then you can come in laterally and do 4-5 and above. And so that gives great optionality for people who like to do an ALIF at 5-1 versus a PLIF or a TLIF and really, that gives surgeons flexibility and a ton of efficiency as well. And we didn't talk about it on PTP, but when you do a traditional lateral in kind of call it the old way in decubitus, when you tape somebody, you ultimately do your lateral, then you have to untape them, break the room down, break the sterile barrier, reposition the patient in the prone position so that they can place the pedicle screws for the stabilization. In PTP, you don't have to do that. It's all in one. So you avoid the whole breaking down, and it's a much more efficient procedure. LTP is much the same way. Oftentimes, people will stage patients day 1, day 2, they'll do their ALIF, and then they'll do their L4-L5 and maybe L3-L4 whatever the pathology requires. And so you can now do your ALIF and your laterals all in the same surgical experience, which is a big advantage as well.

Yes, makes sense. So moving on to what you guys call informatics, enabling tech. So you have SafeOp, which we discussed a little bit. You have EOS, which is a standing imaging system, just made an acquisition of a robotic system that looks a little bit different than what the robots are on the market today. So maybe just discuss a little bit on kind of where your -- the platform for enabling technology is today, how you're integrating it, how your procedures are currently kind of running through that enabling tech and then what the robot can give you going forward?

So today, EOS has been such a widely accepted imaging platform, especially in kind of the pediatric space. It's low-dose radiation, it's been around for years. And so a very strong base of installed base in kind of academic pediatric settings. And so it's been a very widely accepted technology. The second generation was launched a couple of years ago, and that's ultimately what's being sold and installed today, it's called the EOSedge, much higher acuity imaging and whatnot. The beauty of EOS is that it gives you a standing, weight-bearing film and image, and it gives you the full body. And that's important because, as I said earlier, spine surgery is decompression, stabilization and alignment. And alignment is the greatest correlative to long-term positive spinal intervention outcomes. And so why does that make a difference? Because typically, people will do segmental films and really kind of maybe from the top of the hip to the thoracic area, if you've got a lumbar degen case. And so the challenge with that is you don't know if the patient is kind of retroverting their hips or bending their knees because they're in pain while you're taking the picture. So you don't get a true understanding of what the actual lordosis and curvature of the spine is in a normal standing position. And so all of this stuff has -- is related to itself. And so EOS has been a great way for us to ultimately understand true global alignment, which allows for surgical planning and really doing that kind of in an automated way. So you can take your scan and get your global alignment measures, and there's a number of them that ultimately help surgeons plan surgery and how much correction they want to get in an intervention. Bringing that into the interoperative experience with -- here's the plan, and then intraoperatively understanding what kind of correction you can get. EOS will also help you understand bone density at different vertebral levels, which is, today, a DEXA scan kind of gives you an averaging. This will give you great clarity on what's the quality of the bone in different levels, which will allow you to be more precise and better prepared as a surgeon to intervene on a patient. Additionally, it will allow you to bring in pre-bent rods, which, again, aimed to give you the type of correction that you want and be a little bit more efficient intraoperatively. And then through a lateral intervention, you would have clearly the neuronavigation of SafeOp as well as then REMI, which we just bought or the Fusion Robotics asset that is a navigation-abled robotic platform, which you can clearly place the screws. And then our view and vision of how you integrate the navigation component into a lateral procedure is really to be able to navigate your initial dilator so that you can ensure your orthogonal and in the place that you want kind of anterior and posterior on the spine. And then place a retractor, monitor the position of that retractor so that if it begins to migrate south anteriorly that you can correct that. And so you can navigate that intraoperatively and assess that with real-time information and then be able to navigate your disc prep and your interbody placement and doing all of that with minimal fluoroscopy. And one of the realities of lateral surgery today is it takes a lot of radiation for patient and surgeon. And doing that in a navigated fashion will ultimately reduce the amount of radiation. And so when you think of somebody who may not -- who has not adopted lateral, but kind of believes in it, but maybe haven't thought that they've got enough volume to really justify going through the work to learn it and maybe don't feel great about the radiation component. Once we integrate the navigation robotic aspects of our acquisition into the lateral procedure, that will address that concern as well. And so really, we're trying to take as many variables out of spine surgery as possible to ensure that you get a reproducible and a predictable experience.

And what's the timing of some kind of combination...

Combination of all that of all that?

Of all that, yes.