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

Hello, everyone. Thanks for joining us for another session today. I'm Drew Ranieri. I'm the medical device analyst here at Morgan Stanley, and it's my pleasure today to have Alphatec with us, CEO, Pat Miles; and CFO, Todd Koning. So before we jump into it, just a quick disclaimer, but important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your MS sales rep. With that out of the way, thanks again for being here, Pat and Todd.

And maybe Pat, for you to start before we get into some of the growth drivers. I think we need some help at least from what I can see, you're continuing to take share, you're driving the highest growth in spine, you're on the cusp of -- well, you have turned EBITDA profitable, yet investors look at the chart and see the stock down 25%, [office highs]. It's trading like the wheels have fallen off. So maybe just talk to us a bit more about your comps in the business today, your extension of PTP and just we'll go from there?

Yes. I'm one of the largest shareholders individually, and it's from my buying into the company. And so I share kind of the interest, which I think is a hugely important piece of looking at companies is when the head cheerleader buys in, it's reflective of confidence. And the only shares I have sold is to cover taxes and I'm bullish on the long run of this company. I think the landscape is an unbelievable opportunity. I look across it, and I see the potential confusion. We love uncertainty, the uncertainty associated with the Globus NuVasive, thing we think is an opportunity. Clearly, there is some shakeup at Orthofix. Opportunity, when you look at the big company's commitment to the space, we see it as nothing but opportunity. So independent of what we're doing in the landscape is profoundly opportune for us. Based upon what we're doing is there's a sophistication at ATEC that's unique. The whole being spine-focused is a tremendous opportunity. Our serving the interest of an area that we've been in for a heck of a long time individually is opportune. And so you start to see the tailwinds as you say, it's like PTP. So the very procedure that we created at a previous place, we made better, and then the company that we were at got acquired. If you don't think that, that's not a tailwind opportunity, I think it's a miss. And so I look at PTP. I look at the continued expansion into the more complex surgery with PTP. We just launched the lateral suite in terms of the procedure, LTP, the ability to grow that out. We don't have a sense to accommodate demand. And so as I look at kind of the landscape and I just see just the lateral franchise, I look at the demographics, and Todd will go into some of the growth, but the people who have been with us for a period of time are growing at 38%. So when you start to look at what the demographics of the growth are, the demographics suggest same-store sales continue to grow at least twice anybody in the market space. And so I look at just even the short-term drivers of growth are completely intact and there's the tailwinds of the market environment. And that's not to even start to go into the other things that will drive a long-term reflection of growth which is in the EOS and then clearly, the navigational robotic element. And so I've never been more bullish than I am today. I'm playing long. And so when I see the volatility, I don't like it, but it's one of the things where it's like, I know that this is a short-term phenomenon.

Got it. No, I appreciate the color. And Todd, maybe for you. We know you're around 5% market share player today. And to Pat's point growing well in excess of your peers, you might not necessarily be the barometer for market growth -- for the market, but with 2/3 of the quarter really past us, has the third quarter kind of shaped out to be where you wanted it or you expected it? Or anything that you can kind of comment on trends from your surgeons or the procedure volumes that you're seeing?

Yes, Drew. I think -- well, first, thanks for having us. Appreciate the opportunity. When we looked at Q2, we clearly grew 40% in the quarter, 30% volume growth, 7% or 8% revenue per procedure growth. We added 25% more surgeons in the second quarter than we did the previous year. So much to Pat's point, the engine of growth is totally intact and that hasn't let up. And so we feel very good about where we're at in terms of the business. And really, I think some -- we're obviously not the market, but I think our perspective on where we're at, totally intact in terms of our expectations and where we're driving the business.

Do you feel comfortable where consensus is kind of shaking out to around $112 million for the quarter?

Yes, very.

Okay. Okay. Maybe getting into the kind of the growth drivers of the business, Pat, let's talk about PTP and maybe the lateral side as well. So you launched PTP back in 2020. How are you kind of thinking about really what's left for PTP? I mean it's been such a strong driver for the company. But where are you today? Where do you kind of see the procedure 12, 24 months from now?

Yes. The -- I think that it's in its infancy still. I remember years ago when we created the lateral procedure at the other company, we launched in 2003. It wasn't until 2008, like that -- at times, there's almost a bit of a lag, but we've seen tremendous adoption of it. We've seen tremendous enthusiasm. I was not complaining that like we have 21 surgeons at the office on Friday. It's like the volume of interest in what we're doing is significant. And so the great part is, PTP is that driver. And so the dynamic is that there's great protection of that procedure, not only in the know-how, but in the technological element. And so what we acquired several years ago is this neurophysiology platform called SafeOp. And so the ability to -- if you're going to go in with a small incision and you're going to approach the spine, you want to know where the nerves are, you don't only want to know where the nerves are, you want to know what the health of the nerve is as you retract it. And so much like you would push on a garden hose and slow the water down, you do the same with regard to the vascularity in your neural elements. And so to not understand that is a big problem. The #1 complication in lateral surgery is neural, and so the ability to have this technology on board is high. You'll start to see more and more publications with regard to the value of that. And so people are saying, gosh, this proprietary element within the context of this proprietary procedure is of great value. And so we've attracted a lot of the people who are wanting to understand how they can apply it to a relatively straightforward procedure. And so we're seeing that. But people who learned it in '21 and '22 are now doing more complex things with it. And so the opportunity for us is now to design and develop more complex implants. More complex implants are more expensive. And so the beauty becomes is we're seeing the complexity of the utility of the procedure continue to grow, and that's a barometer for us to understand. It's -- one, it's being well adopted, two, it's being accepted in more opportune financial ways. And so we will launch an expandable lateral cage at NASS, will launch an expandable corpectomy element next year. And so you start to see just the reflected elegance of this surgery, which is less morbid, tons of other benefits be applied to more complex surgery. And so that will be a tailwind as it relates to the continued adoption. And we have seen no falloff in whatsoever with regard to the volume of interest in terms of coming in. And so we look at those things and you say, "Gosh, it's a proxy for future growth." And so with no change in that, we're highly bullish with regard to what's going on.

And over the last 12 months we trained over 500 surgeons, have come through the facility. And I think leading indicators for adoption and growth, I think that's a great one. When you look at what we're training people on we're training people on PTP, LTP, but we're also doing more complex training or training for more complex pathologies using PTP as well. And so the courses we're doing are evolving with the utilization at.

Yes. And the point is a good one. It's like you build a pipe and your ability to deliver more things through that pipe is high.

Got it. Great color. And let's touch on LTP for a moment. You recently launched it first half of this year, late first quarter, early second quarter. Pat, you've talked about kind of the positive early reception on the technology, but also your demand is actually outstripping your supply at the moment. So understandably, this could be a bit of a moving target given some of the demand. But when are you going to have the adequate field supply that you need? Is that this year? Just how are you kind of thinking about that and the feedback from the surgeons?

Yes. We're getting more and more sets every day. And so it's being alleviated. I hope forever that the demand outpaces the supply in the -- yes. It's a -- it's not as though we haven't modeled aggressive growth with regard to the tool. The great part is the acceptance of the tool. I think that at times there becomes kind of this negativity around spine. And the negativity around spine is wrong. It's misdirected. And the dynamic is there's a currency, which is the implants in spine, and so many companies, especially the big ones that are so transactional focus on only the implants. The opportunity to make spine better outside of the implants is so significant that it's kind of outlandish. And so for us to ultimately make spine better by concentrating on things, including the implants, but other things as well is very apparent. And so when I was in Brazil in 2001, creating XLIF, we were taping patients to beds. You know what they're doing today. They're taking patients to bed. And if you're taping a patient to a bed, I would suggest that there's better ways that you can ultimately manipulate the patient in a way to create a more predictable experience for the surgeon readily -- in a readily straightforward way. And so when people say, spine's commoditized. They don't know spine. Spine is still not that good. When something is not that good, it can't be commoditized. And so I look at LTP and some of the things that we've done, there's been such a wave of interest in terms of ALIF, in terms of anterior column surgery. Our ability to go from L3 to S1 in a single position and do bilateral screws in the back. So you think of spine as decompression, stabilization and alignment. Our ability to do those things with regard to LTP are very apparent because we have control of the patient based upon an investment in a bed frame that ultimately holds the patient versus taping them. And so that's why it's kind of laughable to me, it's like, ah! it's commoditized, you don't know spine. And so it's -- maybe the screw pitch is commoditized. I'll buy that, but the screw pitch is not spine surgery.

Got it. Got it. And maybe just on the lateral market in general, the $1 billion market. Just talk about kind of your expectations for competitive conversions, but also pulling surgeons from PLIF and TLIF into the fold. And sorry to add on here. But just -- I mean, $1 billion market is pretty sizable. But what are you kind of -- you've been seeing from the competitive response here?

Yes. Yes. To me, back to the whole spine surgery and people not appreciating the opportunities. If you have to -- like the goals of spine surgery, which I mentioned, are decompression, stabilization and alignment. If a patient needs what's called a direct decompression, if there's something on the nerve so often a surgeon historically would go from the back and they would do a posterior approach. And they would, in essence, be relegated to a smaller implant based upon the neural aperture that they'd have to place it in. And so the great part about lateral is you get all the benefits of a huge implant in an anterior reconstruction but you get to do it while the patient is in a prone position, which is the position that they're used to decompressing in and the position that they're used to stabilizing it. And so PTP is such a profound opportunity because you don't have to, in essence, forego the limited size of implant, you get to put in a huge implant and reconstruct the anterior column while you also get to do it in a position with which you're familiar. And so many surgeons had dismissed using lateral because lateral is in such a strange position to them. Before XLIF, nobody -- it wasn't a common position to operate in. So a lot of people were never trained in lateral position surgery. And so you have a bunch of surgeons who've been doing PLIF and TLIF for a long time, which is the lion's share of the market and lion's share of the pathology that a surgeon sees and now you get to adopt all the benefits of lateral surgery to what historically has been a posterior approach market. And so it's not a $1 billion market. It becomes a $4 billion market because ultimately, you get access to the PLIF and TLIF guys. And so it's -- but again, I think the opportunity is one of how do you continue to improve the experience and I think we're doing that. That's why you're seeing the growth.

Got it. Let's maybe hit on industry disruption. You mentioned the Globus NuVasive merger there. But have you actually seen it being a benefit year-to-date so far? Is there more to come? And we've heard from those parties that there hasn't been elevated attrition, but we've also heard from a larger player that they are starting to see a disruption benefit. So just what's the Alphatec view there? Are you seeing it? When do you kind of expect to see any type of industry disruption benefit?

Yes. I would say we love disruption. It's one of the things where -- if you look at the historical reflection of these assemblies, it's not as though Synthes and J&J didn't have great people there. And so to suggest there's going to be like -- and that was -- I would say that wasn't a great one. It would be my nice assessment, while I'm here. The -- I can't imagine the Globus NuVasive being significantly different. And it's not as though they're super smart there and they were less smart here. And so the challenge of these things is these things take time. And the dynamic becomes is there's a lot going on. It's like the duck on the water. There's a lot going on underneath the water. There's not a lot going on top of the water. And what happens oftentimes is we have specific priorities. We will direct our effort with regard to that disruption to specific spaces where we're in need of representation. The sales opportunity is a good one. The challenge becomes is, a lot of these guys have noncompetes. So they're going to have to sit out there and noncompete. We're going to have to get the inventory. Like there becomes a longevity associated with these things. So 2 years from now, I think a lot of people will say, "Whoa, that was a lot of disruption." It takes a little while to get done. And so -- do we see a lot of opportunity? We see a ton of opportunity. Is it going to take some time? It's going to take some time. And so -- but again, I think every time that there's been disruption back to the K2 Stryker thing, we prospered. And so to me, it's a tailwind.

And Drew, like there's -- these are people that -- many of whom Pat hired at the other place. It's not like somebody has finally given us a list and we can start calling people. Like these are discussions that have been ongoing and relationships that exist and have existed for a while. I think the other thing that is a little bit probably unique here is probably the quality of the candidate and the kind of the probability of sales pull-through once you attract the candidate as compared to maybe our historical experiences in terms of recruiting new reps and those types of things. And so like our level of confidence in our ability to kind of deliver on the disruption, quite high for those...

Yes, and just to add to Todd's point, is in the surgical thesis is the same, like we created a surgical thesis at the last place. And so if somebody wants the next generation of what they've previously done, they'll come here. So the great part is, it's I would suggest that culturally Globus and NuVasive are different organizations. I would say having been part of the leadership of NuVasive, is a much more -- it's a much easier place from a surgical thesis perspective to come to us, thing as there's a lateral Maven dynamic at ATEC.

Got it. Maybe one of the emerging themes that ATEC has been enabling technology kind of well, maybe started with SafeOp, then EOS and now you acquired REMI this year. So let's hit on kind of the enabling tech side. But maybe one thing with EOS, just kind of help us understand where the installed base is today, where -- it sounds like there actually could be a replacement cycle that could happen in the U.S. And one of the things that I -- going back to when you announced the acquisition was the potential for a bridge of -- basically you could pull through implant or implants with EOS. So -- how are you kind of thinking about all that on the EOS side?

The -- so SRS, which is if you're a spine guy, the Scoliosis Research Society is the meeting. It's -- and so they become the driver in a litmus test. And so during the meeting, last year, one of the guys said, how many people have an EOS and 70% of the audience raised their hand. And then it's like how may have more than 1 and 30% raised their hand. And so you love when the society that makes the rules and creates the reflected course of action, when they, in essence, affirm the value of your technology. And so the opportunity -- so the way that we see the business is we see a tailwind in a growth profile with lateral for -- as far as the eye can see. The great part about EOS is that the value that it brings in terms of variable mitigation is very apparent to us. And so what we've spent the last almost 2 years doing is completely designing in kind of the automation associated with the imaging modality. And so when somebody gets an image today and we'll launch it in Q2 '24, but what will happen is they'll get the image. It will automate all of the measurements. And so remember, we said spine surgery is decompression, stabilization, alignment, they'll get all the alignment parameters. We will take those alignment parameters and then we have a tool in the operating room to reconcile what the plan was against what they're getting in the operating room. Alignment is the greatest correlative to a successful long-term outcome for a patient, for us to ultimately create an objective measure of alignment, we think, is hugely valuable. And then we have a postoperative image to say, how did we do against what the plan was and what we did intraoperatively. All that information goes to a cloud. It will inform what goes on next. And the beauty becomes is you'll never get that information if I have to ask a patient 1 million questions every time through the office. I do get that information if I automate the process. And so to automate that process, have it go to a cloud, have the -- all the data in the cloud is phenomenal. We've gone through all the IT stuff. We built all the background stuff. We have 8 Alpha sites. We have 18,000 images -- And so the great part is all that stuff is going on today. If you want customized rod, all this, again, Q2 '24 will be I'm going to check this box. I'll get a customized rod. I'll get to customized rod in the reconciliation. So you say, gosh, how are you integrating into the implant stuff? It's in place. We'll verify it through the end of this year and the beginning of next year, and we'll launch it in the second quarter of '24. Then what you see is you say, gosh, the momentum with regard to all of the lateral stuff, you'll start to see the influence of EOS. And then there's also a bone quality measure. And so we said decompression, stabilization. If I'm going to stabilize the spine, I want to know what the underlying tissue is. If I could tell you that, gosh, there's a specific bone quality that you're going to have to ultimately change the stabilization tool, that's valuable. And so then I can start to ultimately reflect the stabilization tools based upon the bone quality. That will be a 25 phenomenon. And so as I start to look through what the reflected opportunities with regard to not only what we're doing on the lateral front, but ultimately, how it influences surgery from an alignment and a stabilization perspective, I see that EOS being such a great long play. And also, you start to say who are we as a company? I would tell you that we're -- we've done good getting 1 and 2-level degenerative surgeons totally interested in a less morbid approach with regard to PTP and LTP. We haven't [affected the long] scoliosis community. The scoliosis community affirms the value of our technology. We've now designed in our implants for our approach to the scoliosis community. So again, I see it as a great opportunity. And I'm sorry for droning -- but you ask me. The other piece is how do you bring more precision to the experience. And I've been totally underwhelmed with robotics. I think again, if you're going to have $1.5 million tool that gives you an angle to place a pedicle screw, that's kind of underwhelming. And so -- but the opportunity to integrate these things into the workflow to create the bell curve of surgeons, enable them to do the same work as great surgeons by creating precision and getting them into the anterior part of the spine and working them through that, that's the opportunity. So from an enabling technology perspective, we feel great about where we are with regard to the long run on EOS and all the navigation robotic elements that will ultimately continue to elevate the precision associated with what we're doing. Sorry.

Few follow-ups. Maybe for Todd, just on the EOS replacement cycle, how should we kind of be thinking about that as maybe a growth opportunity for the company?

Yes. I think if you look at the U.S., we're probably north of 200 installed base, and frankly, probably around 50 of those are kind of edge. So there's a sizable replacement opportunity that comes along on the replacement cycle. And I think that will be multiyear as we go. And so feel good about that opportunity, as a tailwind. I think what's super exciting is kind of what Pat's talked about in terms of the incremental feature set that's coming out in the middle of next year. I think really once we deliver that, and I think that gets a little bit of momentum and people start to internalize and understand, like I think ultimately, that really is kind of the catalyst for driving...

And those are all EOSedge feature sets...

Correct.

And so what's going to be interesting is you won't be able to get the feature sets without upgrading to the EOSedge.

Got it. For rod bending in the bone.

Yes, exactly. Exactly.

Okay. Maybe let's touch on REMI. You just mentioned that you've been underwhelmed by robotic systems. So maybe talk about why you bought REMI, what's different about it? And the clear opportunity is pull-through for your implant portfolio. Should it be any less than some -- should it be any less of an opportunity than what your peers have been able to do in the field?

Yes. To me, it's a great question. It's like -- we just got a 510(k) to assemble the REMI robot to our posterior fixation. And so to be able to do what everybody else is doing, we'll do that through the end of this year. And so the great part is, we'll utilize the robot in a very narrow way with a small audience of surgeons to verify that everything is perfect with regard to the placing of posterior fixation. I think what happens is people conflate screw placement to spine surgery. It's part of spine surgery. It's just the stabilization part. And so when we start to think about navigation and robotics, what we think about is the entire procedure. And I've been around this stuff for -- since the early '90s. And I remember, we at Sofamor Danek bought stealth surgical navigation technologies. And the application was always narrow based upon the whole screw placement. I think when you start to apply the technology to the PTP procedure, and you say, "Hey, I can place this exactly where I want it, limit the radiation that the surgeon is taking on from either the fluoroscope or an O-arm and be able to -- so radiation free, be able to place the retractor exactly where I want it. The dilator exactly where I want it and then have a fiducial on the retractors. Hey, it moved. Like the last thing you want in a surgery is for the exposure to move, you could hurt something. And so the great part is the type of things that we can design in with this technology that ultimately furthers the safety and limits the potential complications, I think, is hugely important. But people aren't doing that today. They're using it for screw placement. And again, I think it's a bore. If that's all you're utilizing this technology for. The other thing is there's a camera in the operating room. We're going to have 2 cameras with regard to ours. Part of the other camera is going to be for the reconciliation of the information that's coming out of EOS. And when you start to think about an ecosystem that's been well thought out that ultimately effectuates the decompression and stabilization and alignment. I feel like we're in a great place. And so anyway, it's going to take us a little bit of time to design and develop in the navigation and the REMI piece that ultimately is well integrated into the surgery. But again, I think the beauty becomes is, we have great momentum on the lateral side. The EOS stuff looks unbelievable, and now we get an opportunity to ultimately participate on the navigation robotics front.

Got it. We only have a minute left, but Todd, really talk about kind of your like commitment to EBITDA breakeven this year and the leverage opportunity you had. I know you're anxious to get into 2024. But I mean, how should we be thinking about just the leverage opportunity from here onwards?

Yes. I think clearly, I think we're kind of in a special spot. We're just Q2, we grew 40% and expanded our adjusted EBITDA margins over 1,100 basis points. That's kind of the first half story. Coming into the year, our full year assumes about 830 or 840 basis points of EBITDA margin expansion on 30% revenue growth. And so I think we're starting to become in that special spot of excellent top line growth and expanding profitability margins. And so we're super happy to deliver the breakeven or profitability -- adjusted EBITDA profitability in the second quarter, the way we did. And I think as you look at how we're doing that, it's really come in the way we laid it out in our long-range plan. And so when we said in our long-range plan, we are going to expand the operating margins by 2,500 basis points from '21 to 2025. We said 60% of that's going to kind of come out of the leverage of the infrastructure, the overhead of the business and 40% of that is going to come out of really our variable selling expenses. And so the confidence that I have prospectively is predicated on the performance that we delivered in the second half of last year where we expanded EBITDA margins by over 100 basis points than 1,100 in the first half of this year. All of that came the way we laid it out and the way we designed it. And so I think so often, companies find themselves in a spot where they need to become profitable. And so they lay a plan and try and cut their way to it. We're delivering profitability because that's the way we built the business. I think the timing was fortuitous in terms of the environment we are in. But ultimately, this is when we were planning on doing it. And it was going to come after we've built the infrastructure of the business and as we continue to grow our distribution footprint and the way we've laid out and contractually constructed the selling expenses more or less. And so I think our view is we're very much on track to deliver the profitability expansion. It's a commitment that we have. I think we've oftentimes talked about, hey, to the extent that we overachieve on the top line, we dropped an extra 10% of that overachievement to EBITDA and continue to invest in the growth engines of the business. That's kind of been the model that we've had. And I think that's how we've kind of laid it out going forward. And so I feel very good about where we are in terms of being able to deliver on the profitability and the top line growth.

We're unfortunately out of time, but Pat, Todd, really appreciate -- I really appreciate you joining us today. Thanks so much.

Thanks, Drew.

Thanks.