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

Hello, everyone, and welcome to the Goldman Sachs 44th Healthcare Equity Conference. I'm honored to be joined here today by Todd Koning, Chief Financial Officer of Alphatec. And with that, we'll dive into some questions. Todd, welcome.

Thanks for having me, Phil.

Absolutely. Let's start with the market, Todd. I'd like to get your perspective and your team's unique view on the spine market. You talk about it being ripe for opportunity. Can you further elaborate and expand on that?

Yes. I think ultimately, one of our kind of foundation of beliefs is that today, we are 100% focused on spine. We're going to continue to be focused on spine. And really, it's about, I think, purpose as a company. And ultimately, we think there's so much opportunity because spine surgery today really isn't great surgery. There's so much opportunity to kind of improve. I think a statistic we like to point to is, is that 3 to 5 years, you got a 15% to 25% probability to get a second intervention if you've already had a spinal intervention. And so that tells me that there is a huge opportunity to make that experience better. When there's opportunity to make outcomes better, you can create value in that process. And ultimately, that's why we're in pursuit of the perfect procedure. And so you can see that through our commitment to innovation and our commitment to doing that with a complete focus on not just the hardware, but it's why we are focused on a procedural approach because ultimately, the surgeon has to get to the spine, intervene on the spine and get back out again. And all of that is part of the procedural approach. So that's why you see us really invest in a full procedural approach and not just in kind of the hardware component of spine surgery. And ultimately, we think that's one of the main ways of being differentiated and delivering better outcomes.

Understood. Over the past 4 years, your growth has outpaced the rest of your spine peers, and congratulations on that. Can you give us some of the drivers that you believe have allowed you to consistently outpace the peers?

Yes. I think it kind of goes back to our pursuit of the perfect procedure. And I think when you kind of look back and look at what the industry has done and really what many of the people at ATEC did in a higher experience in creating lateral surgery and really pioneering it. And ultimately, lateral surgery, it kind of capped out at maybe a 1/3 penetration of the opportunity to really apply that technique to the appropriate pathologies. And so the question is why was it only ever adopted by 1/3 of the people or 1/3 of the procedures that it could have been adopted for. And so you kind of see us really try to answer that question. And so ultimately, you see us launch a procedure called PTP, Prone TransPsoas. You see us now recently launched LTP, Lateral TransPsoas. All of that is done in a way to really advance lateral surgery and to address some of the hurdles to adoption. And our view is how do you make lateral surgery, great surgery in the hands of the masses in a very predictable and reproducible fashion. And so you look at that experience and you kind of look at what we've done with PTP and you look at a lot of the training. And so some of the dynamics that go on is, is really our growth is one of both volume or kind of procedural adoption as well as one of revenue per procedure growth. And so last year, just to put some numbers on it, we grew about 44% in surgical revenue, delivered $350 million in total and $303 million of surgical revenue. That $303 million grew 44%, 25% growth in procedural volume and kind of mid-teens growth in revenue per procedure. We also added about 20% more surgeons last year than we did the previous year. And so we're growing our surgeon base. What we also know is that when surgeons trust you in some of the more complex pathologies, they're more willing to give you some of the other procedures as well. And so you can see the utilization of every surgeon cohort kind of going back to 2018, increased their utilization year after year after year. And so lateral surgery, PTP in particular, people tend to use it in a straightforward pathology to begin. And as they get more and more comfortable with the procedure, they apply it to more complicated pathologies. And that ultimately results in a greater utilization. And that's so much about what we're doing is helping the surgeons to do better surgery. And I think the broad adoption and the increasing adoption of more complicated pathologies is a reflection of that.

Got it. ATEC has done some nice acquisitions in recent years here. And this consolidation has accelerated in the spine industry. How do you expect it to impact your ability to grow and achieve your growth targets? And how are you doing things differently? And how are you seeing some of the recent spine deals impacting ATEC?

Yes. A little bit on the deals we've done. I mean you look at SafeOp and SafeOp is all about neural monitoring. And if you're going to be a meaningful, serious player in lateral surgery, you have to have a neural monitoring platform. We bought SafeOp because not only did it apply -- did it give us access to we call triggered EMGs, which allows you to go through the psoas muscle without hitting a nerve, but it also allowed us to develop the ability to avoid the most common complication of lateral surgery, which is residual thigh pain. That residual leg pain happens because when you expand your retractor, you kind of pinch the femoral nerve. And you starved of oxygen, that creates the complication. And so we're able to monitor that nerve in real time, so you can avoid that complication. So if you get the signal that says, hey, you're compromising the nerve, you can close the retractor, let the nerve rest, reperfuse and then you can go back and finish your surgery. And so that was a meaningful innovation. We knew the folks who had created SafeOp. We had high confidence in who is coming over. There was great know-how in the people around the technology. You look at EOS. EOS, the acquisition, it is the accepted or unaccepted standard of imaging for full body standard imaging capability. And there's a ton of know-how around that business. And we're in the process of -- really, I think beginning -- well, next year, we'll launch some features that we've developed, the ability to do rod bending, automated measurements, global alignment measurements. We're working on better understanding kind of vertebral bone density. And so some of these things will really help us continue to add value to the preoperative planning process. And then when you look at what we've done with REMI, we bought a navigation and a robotic technology that ultimately allows us to integrate that into a procedural approach. And so we're going to integrate that into our lateral approach, and we think that one of the opportunities and one of the -- I think the misses in the industry is that robots have really not been integrated into a procedural approach. They've really been there to place pedicle screws, which I think works certainly from an efficiency standpoint, but probably more evident and longer construct rather than short construct surgeries just because you've got some setup time that you have to invest in setting up the robot. And so the efficiency really plays off when you have a multilevel construct. And so our view is how do you take technology, what we believe is Fusion Robotics technology that we purchased, small footprint, relatively lower price point and ultimately integrated into a procedural approach to really make answer some of the final barriers to adopting lateral surgery. We can talk more about that later, but that's kind of been our view, which is let's find very, I'd say, relevant technology to address problems that we know that we have to adoption and apply that technology in such a way that addresses those. So really technology there to solve a problem. And that's how we view the enabling technology and to do that with people who have deep knowledge and expertise in the areas that you've adopted or that you've purchased. And so I think you can kind of see that both in SafeOp and EOS, and that's what we believe we've done with REMI. From a market perspective, clearly, the Globus and NuVasive transaction has gone on. And from our perspective, we've been beneficiaries of disruption in the market. We were the beneficiary of kind of the Stryker and K2 transaction. And equally, we think we'll be the beneficiary of this certainly from -- I think, from access to great sales talent and feel good about where we're at relative to that.

That's great. Shifting gears a bit towards lateral and the evolution of lateral in spine. Your team developed a pioneer first-generation lateral over 2 decades ago and underwrite the ATEC umbrella, the team advanced the procedure with PTP, as you mentioned, in now LTP. What is ATEC done to improve lateral surgery broadly? You touched upon it a little before, but any additional comments?

Yes. I think first and foremost, part of the adoption challenge was position. And so ultimately, surgeons learn how to do surgery with the patient either in the prone position, so on their belly or laying on their back in the supine position. And so when you had to place a patient on their side to do first-generation lateral, it was an awkward position. There's a lot of training that goes along with that. And so placing the patient on their belly in the prone position for PTP was, I think, a great opportunity. One, just from a familiarity standpoint. But two, it gives you direct access to the posterior column. Meaning if you're a surgeon and you feel like that you need to have some direct decompression. So remember, spine surgery is about decompression, so taking pressure away from the nerves that cause the pain stabilization. Once you've taken something away, you've destabilized the spine, so you have to stabilize the spine after you've done that and then alignment. And alignment is really making sure that the sagittal alignment of the spine, you have the right amount of curvature and really restoring the natural curvature of the spine, so that you have proper global alignment. And so -- but the PTP position allows you to get -- the belly hangs allows you to get a little bit better natural alignment access to the posterior column allows you to do some direct decompression to the extent that you need to or what they kind of call loosening the spine to maybe loosening the facets and allow that spine to then move again to get the kind of alignment that you want in the spine. Additionally, we've developed a patient positioner. You'd think after 20 years of doing lateral surgery, you'd stop using tape. Seems like a very basic observation. But frankly, we've learned a ton over the last 3 or 4 years as we've developed our PTP approach and developed the positioner. And now it allows you to manipulate the I guess, the anatomy of the spine, so that you can get the best access to the disc space through manipulating the spine in a way that is beneficial. I touched on the neurophysiology, but clearly, as we've advanced neural monitoring, one of the reasons, again, 15 years, 20 years after lateral surgery was started and you ask yourself, why did NuVasive still have 50% of the market. It's because they were really the only 1 that had surgeon-directed EMGs from a neural monitoring platform. And so that was why we needed to have a neural monitoring platform and our ability to innovate on that platform and really find a solution that allowed us to avoid the most common complication through automated SSEPs is an advancement and also addressing a hurdle to adoption. And I guess finally, I'd just say you look at what we're doing and what we're going to do with the Fusion Robotics acquisition and ultimately, how we view navigating the lateral procedures. So using navigation to place a retractor to monitor the position of the retractor, so it doesn't kind of migrate down due to gravity and put the vessels at the interior column at risk, navigating disc prep and interbody placement, really addresses the amount of radiation that a lateral procedure ultimately generates through the use of fluoroscopy and as well give surgeons who maybe want a bit of a safety net around navigation and lateral is a technique heavy approach. And so to the extent that you can use navigation to provide predictability and reproducibility in the surgical experience. I think all of that really addresses many of the hurdles to broader adoption of lateral surgery.

So on that adoption point, on the first-generation lateral adoptions, it was around 25% began to stall out. With these advancements that you're bringing to the market, where do you think that could go?

Yes. I think we sized the market at current market about $1 billion. And then there's $2 billion of additional posterior approach surgery, PLIF, TLIF kind of for degenerative lumbar surgery. And ultimately, much of that can really be addressed through a lateral approach. And now that we've launched LTP, where you have access to L4, 5 and above through a lateral approach, you can also then -- we've developed a retractor for a midline ALIF approach. And so being able to do that in a single position, MidLIF approach for 5, 1, now you have really all the tools you need, whether you want to use LTP or PTP to address the pathology from S1 on up. And I think part of our commitment has really to chase the perfect procedure and ultimately, implied in that is let the pathology dictate the approach. And so ultimately, giving flexibility tools and a choice to the surgeon in terms of what they want to use to address the pathology that the patient presents with.

And with LTP launching now, is there any overlap between LTP and PTP usage by doctors? And overall, how will the 2 procedures coexist?

Yes. I think certainly, LTP and PTP both have their unique approaches. And I think from an LTP and a PTP, clearly, where they overlap is really lateral access to the disc space L4, 5 and above. Where they differ is clearly LTP, you can do a single position ALIF as well. They both are single position in the sense of you don't have to come down and reposition the patient to do your posterior fixation. So one of the big advances in our approach has been to do posterior fixation and lateral access all in a single position and doing that in such a way where you don't have to reposition the patient. And so the way LTP is different is you've got access to ALIF in a single position. PTP obviously gives you access to the posterior column. And ultimately, I think those are really the 2 main differences. But they both benefit from single position, no repositioning to do your posterior fixation after you've done your interbodies and access to our neurophysiology platform.

Shifting gears a little bit towards enabling technologies, and you touched upon the EOS acquisition. What is EOS capable of today and what additional uses and capabilities do you expect to emerge out of EOS kind of medium to longer term?

Yes. Today, EOS is great for doing a preoperative image. You get a full body scan and understanding global alignment. And we know that alignment is the greatest correlative to long-term positive spine intervention outcomes. And so alignment is really important. And so what we've done is we've automated the global alignment measures. And so that really I think, one, gives surgeons kind of immediate access to those measures. And ultimately, we'll make use of those because they have access to them. The surgical planning component to that. And then really where we're headed with it is our ability then to take that plan, bring that image to the interoperative experience, reconcile that plan. And then you can take a postoperative assessment, take another EOS scan after the operation. So you'll have your preoperative assessment, understand the pathology, make your plan for the procedure that you'll do to address the pathology, bring that plan intraoperatively, understand intraoperatively if you're achieving your plan. Postoperatively make your assessment and say, did I get what I expected to, what I plan to? And then you can kind of follow that patient over time in follow-ups with EOS. EOS is a standardized image, meaning that it's got enough resolution that you can measure a patient pre and postop with enough, I guess, accuracy that allows you to compare them in a meaningful way because it's also a standard image you can begin to tag those images and apply a machine learning tool to that, so that you can ultimately learn from the experience, not just across patients, but longitudinally within a patient. And so our view is like in 10 years, you'll have a large population of data that we'll say pathology, plan, here's what I achieved in my plan and here's what happened over time. And our ability to learn from that and say, okay, well, hey, look, if a single -- if a patient presents with a single-level spondylolisthesis at L4-L5 and if I -- our experience would tell us, you should apply this procedural approach to address that pathology. I think ultimately, our ability to understand that should put us in a great position to just to really kind of evolve the way that you monetize the intervention and kind of begin to share risk over time. Of course, that's years out. But clearly, information in the relative to EOS is going to be a huge value driver over time.

Understood. You just recently announced an acquisition of a navigation-enabled robotic technology from Fusion Robotics. Can you talk about that functionality? What it adds to your portfolio? And when do you think it might integrate into ATEC procedures?

Yes. So when you look at Fusion Robotics and what we bought there, I think one of the great things is the team that came with that asset acquisition is absolutely phenomenal. They've got deep, deep experience in kind of many of them in the Medtronic stealth navigation and [ Mazor ] experience. So it's a group of people who very much understand navigation and robotic navigation. So that's kind of the first thing. The second thing is what they ultimately set out to do is create a navigated robot that had a lower price point. About 1/3 of what you would have to pay for another robot. And that ultimately address some of the workflow challenges that the existing robots have, which the existing robots have a very large footprint they come in. And ultimately, you have to do sometimes a second or a third spine intraoperatively to recapture our image because the patient has moved because you've intervened upon them. This -- this technology has the opportunity or the ability to recapture your image just with 2D fluoro. And so you look at the footprint, the footprint is small. It sits within the sterile field. And so really from a price point, from a footprint and a workflow standpoint, what they developed is significantly better than what's out there today. Our plan is the first thing we'll do is we'll get our screw system cleared with the platform. So it's kind of a very straightforward experience. We should -- we plan to do that by the end of this year, have that clearance by the end of this year. The second thing we'll do is we'll get the freehand navigation capability cleared through FDA. And so that's an important thing just because virtually every fellow that comes through a fellowship today has access to navigation. And so for us to be able to have a freehand navigation offering is meaningful. And then the third thing we'll do is we'll integrate the technology into our lateral offering. And so as I shared before, that really means placing the retractor, doing your disc prep, monitoring the retractor position, placing the interbody, doing all of that kind of in a navigated fashion, which avoids a lot of radiation, creates more efficiency and ultimately, accuracy in the procedure.

Shifting gears now to the P&L and the outlook. Your LRP that you've put out publicly suggests significant operating margin expansion from '21 to '25. And so far, you're executing really well against our plan. Can you walk us through what is driving the expansion so far? And what gives you confidence in your ability to get it all the way to achievement in '25?

Yes. So when you look -- when we set our plan and we did our long-range plan last year, early last year and really said, from '21 to '25, we're going to grow revenues a little bit north of 20% CAGR. And we're going to essentially breakeven adjusted EBITDA in 2023, deliver about $800 -- excuse me, $80 million adjusted EBITDA in 2025 on $555 million of revenue and get to cash flow breakeven in 2025. And really, so far, we've grown faster. We're on our commitments to deliver adjusted EBITDA breakeven this year. The adjusted EBITDA breakeven assumption implies about 800 basis points of operating leverage this year. Over the course of '21 to '25 was about 2,500 basis points of operating leverage. That really came in like 2 main chunks. Here, a little bit of R&D, we get about 300 bps out of R&D leverage, but 2,200 basis points out of SG&A leverage. 1/3 of that comes from our ability to drive down our variable expenses relative to sales. And that's really structuring our sales. So we have a sales -- an exclusive sales agent model where we ultimately pay an industry competitive rate for base sales, which essentially is whatever you sold last year is your base rate. And then if you grow above that, we'll pay you extra points for growth. And so as growth in kind of absolute numbers gets a little bit smaller, your percentage here goes down over time. Your effective commission rate will walk down over time. And so that's the kind of the 1/3, and that's contractual. So we've got high conviction there. And then the 2/3 really comes from leveraging the infrastructure that the company built. So you think about '21, our infrastructure investments, we walked into a new facility in Carlsbad. We opened up a Memphis distribution facility, acquired EOS, really scaled up our surgeon education, surgeon training. We've also got the leadership team in place that can run a $1 billion-plus company. Our sales management team is in place. And so we really built out a company to be very capable of becoming a much bigger company than it was in '21. So we're getting probably 2/3 of that walk through really the leverage of the investments that we've made. And so when you look at our performance in the second half of 2022, which is really the first time you have a clean comparison because of the '21 acquisition we did in April of EOS, you saw 800 basis points of operating margin leverage -- or excuse me, adjusted EBITDA margin leverage. In the first quarter, we expanded adjusted EBITDA margins over 1,000 basis points. When you look at that experience, the leverage came in the way we expected it to. And so sitting to my seat, first thing is [ hitch ] number. Second thing is hit it in the way that, that you expect and you planned it to. And so the fact that the leverage is coming in the way that we expected it and planned it to gives us great comfort and confidence in our ability to continue to deliver on the commitments that we've made from a margin standpoint.

Right. And you talked about your commitment to reach breakeven. But how do you balance that against your desire to continue to invest in product development, continue to be acquisitive? And how does the REMI acquisition, for example, in the development path [Indiscernible]?

Yes. So as I mentioned, about 300 basis points of the total margin expansion is in R&D. We've really not levered our R&D at all at this stage. And so there's a couple of things. One, to the extent that we overachieve on the top line, we can invest some of that back into the business while still delivering the absolute dollars on adjusted EBITDA. And so you kind of see the R&D investment where it's at. And the fact that we acquired REMI, we acquired about $5 million of run rate expense in that business. And ultimately, our R&D today is about 10% of sales. And so we do $450 million this year, that's $45 million of sales. We grow that 10%. I can basically double my investment in REMI if I needed to. So my point being is not that we're going to double it on REMI alone, but there's plenty of investment dollars to continue to invest in the top line engine of the business. And I think you've seen us grow 44% last year. We grew over 50% in the first quarter. Our guide this year is 30% or 28%. You're seeing strong revenue growth that has corresponded and correlated with the investment in R&D. And so obviously, we have our profitability objectives and commitments that we're going to hit. And to the extent that we can continue to support the business with R&D investment, we're going to do that because we ultimately believe that's the route of the growth of the company. I mean it's create clinical distinction. When you do that, you're going to compel surgeons that do adopt because you're helping them do better surgery. And when you do that, you attract a great sales force and happens in that order and the foundation of that is investing in R&D.

Yes, makes sense. And the growth really has been remarkable. So I want to continue on that theme. In the final 6 minutes, maybe talk about a few other growth drivers, one of which, of course, is international expansion. So I'd love to hear your thoughts around how international presents additional growth opportunity?

Yes. So I think international is really 2 things I'd highlight there. One is both -- is the top line opportunity as well as, I think, our strategy and how it really supports a profitability profile. Our strategy is to really go narrow and deep. I think I've had experiences in the past where the tendency is, hey, let's go to every country that has interest in and we'll buy and maybe you do a little bit of distributor -- stocking distributor experience and you build out some direct businesses. It becomes very difficult to really scale that at a profitable level over time because the distributors tend to cap out because they're not committed. There's a heavy clinical requirement. And ultimately, you have to go to markets that, one, our of size; two, that have pricing profile that reflects the value you're bringing; and three, markets that ultimately kind of respect the input of the surgeons making the clinical decisions and have an influence on what vendors are chosen. And so when we looked at that, we said, New Zealand, Australia and Japan are 3 great examples of that. And so our strategy is to really build direct businesses in those markets. One, because we believe that we can get to ultimately a higher penetration rate. And when you do that, then you'll drop down more profitability in the long run. And so that's really our strategy. And we're just getting started from a sales perspective in Australia and New Zealand. We've got a great team there, a great leader that we hired maybe 1.5 years ago, a year ago now, and she's building on a great team there with great know-how. I think part of businesses are collections of people and having confidence in the people that you work with trust and hiring people who have know-how and expertise in an area. And I kind of look at that Australia, New Zealand team, and that's exactly that. And we're starting to do the same thing in Japan now as well.

Got it. That's great. You've expanded your sales footprint meaningfully. Is there still additional opportunity there? And you mentioned with some of the M&A activity there may be opportunities. How do you think about expanding the sales footprint?

Yes. The first thing I'd say there is oftentimes people think that are the longevity or the sustainability of our growth is capped by geographic expansion. And I think the point I'd make there is, we've made -- we've been purposeful about highlighting our what we call same-store sales. So for the exclusive agents that have been with us for a year or more, what's their growth rate. In the fourth quarter -- in the second quarter, it was 48%. And it's the preponderance of our sales. And so what that tells you is our growth is coming from the established sales footprint that we have, which really reflects those agencies getting more procedures of their existing surgeons as well as getting greater overall penetration of surgeons in their area. So I think that's the first point I'd make. The second point is the question, which is have an opportunity to continue to grow our footprint. And the answer is absolutely. We're totally underrepresented in places like the Twin Cities in the Northwest like Seattle. We're just kind of getting started in Chicago underrepresented in Milwaukee. I mean, the Northeast is a place that we have area to continue to get stronger and more penetration. So there's a ton of opportunity for us to continue to add the right people in the right geographies as we continue to compel surgeons to adopt the technology. And I think to your point, I think the NuVasive and Globus merger is really almost an accelerator for that and gives us an opportunity to, I think, get access to a very high level of quality of individuals.

Understood. And you talked about bringing on additional surgeons. Can you speak a little bit as to surgeon training and how that's evolving for ATEC?

Yes. Last year, I think we did just about 500 surgeon training events. And so I'd say early on in PTP, it was, hey, let's train on PTP and the basics of it. Since we've launched PTP and since people have begun to use it, get more comfortable with it. And what happens is surgeons will use it in a straightforward pathology. And as they get more and more confident in the procedural approach, they'll really leverage the platform to address a wider variety of pathologies and more complicated pathologies. And so for instance, now we have a course or 2 that addresses PTP and complex pathologies and how they do that with PTP. And so I think it's a great example of how a procedural approach evolves over time as people begin to use it and understand its utility in a broader set of patients. And I think patient -- or excuse me, surgeon training is a great proxy for surgeon adoption. So I think, again, kind of the longevity and the sustainability of the growth is underpinned by the fact that we're training a ton of folks. We added 20% surgeons more last year, and we know that each cohort does more every year that they use the products. And so feel great about where we're headed.

That sounds great. And I think with that, we're just running out of time. So Todd, I want to thank you for attending and for the answers to the questions. It's very helpful. Thank you, Todd.

Thank you.