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

Good afternoon. My name is Craig Bijou. I'm one of the medical device research analyst here at Bank of America. And it's a pleasure to welcome ATEC Spine. And from the company here, we have Todd Koning, Chief Financial Officer. So Todd, thank you.

Thanks for having me, Craig.

So let's -- I want to start big picture. I mean, obviously, I don't want to cover you guys. So maybe just before we dive into some of the details on Q1 and your business in spine market, let's just talk about what you guys have done over the last 3, 4 years. You've got an impressive run. Growth has been well into the double digits, really impressive market share taking over the last 3 years. I think you're at 6% roughly now. So maybe just talk about what's driven that, products, rep hiring, procedure, development?

Yes, absolutely. Thanks for the opportunity. I think if you look at the kind of the remake of the company since 2018, I think we've grown at an annual CAGR of about 40% over that timeframe. And when you kind of dig in and you look at how we really started with that, I mean, clearly, when we rebuilt the company, there was a big focus on upgrading all of the core components of the spine surgery, so all the posterior fixation, the interbodies and the plates and all of those types of things. Because fundamentally, you have to have that. And one of the benefits we had was we were able to attract a very large number of some of the best engineers down the road. California being a right-to-work state, ultimately, we're able to do that and, fundamentally, have one of the -- what we think to be one of the best R&D, we call it, the innovation machine, the organic innovation machine at our place to really create some best-in-class posterior fixation and interbody work. And ultimately, we've done that. We've kind of perpetuated that and continue to do that. Along the way, we bought a company called SafeOp. SafeOp was our neuromonitoring platform, kind of knowing that we ultimately wanted to set out and answer some of the questions around why did lateral surgery only really penetrate 1/3 of the potential market that it could have, why did it kind of cap out that way. And so really being -- wanting to answer that through really what we kind of consider a novel lateral procedural offering in the form of PTP, knowing we needed a neuromonitoring platform to do that, to facilitate that. Because if you're going to do lateral surgery, you have to be able to avoid injuring the nerves when you create your surgical corridor through the retractor placement. The other thing that we were able to do with SafeOp, which is totally unique to ATEC, is to be able to monitor the health of those nerves interoperatively. That allows you to essentially avoid the most common complication associated with lateral surgery, which is neural deficit in the legs and the thighs. And so that has been a strong, strong moat around our lateral offering and one of the reasons why we see a lot of adoption. Lateral surgery has really been the premier driver of growth of the company. It perpetually grows at a rate faster than our overall rate. We think that we have about 12% of the $1 billion lateral market today. We think that $1 billion could actually be $3 billion as we penetrate some of the more traditional posterior-approach surgical surgeries and convert them to lateral surgeries. And so lateral has really been, I would say, since the late 2000, early 2001, the driver of growth of the company. Along the way, we also bought a company called EOS, which had an imaging. It was an imaging company. And it allows for full-body standing imaging. And there's a couple of things. One, it's a low-dose radiation. So it's great just from a patient standpoint. Two, it doesn't have any magnification issues. And what that means is you get a standard image, which really has allowed for the comparison of images over time, which is something that spine has lacked forever, an ability to compare a patient longitudinally over time with imaging. So EOS enables that through its unique imaging technology. And then the other thing that's also done is -- and -- is given us an entry into the deformity space. We're very much a degenerative lumbar-focused company. That's where lateral surgery is, like that's been a lot of the history of the company. With EOS being widely accepted clinically by some of the most foremost experts in deformity, like the International Spine Study Group, the Scoliosis Research Society. It tells you that the technology is good from an imaging perspective and helps them understand and treat patients. And so we have developed and be launching later this year a suite of products that kind of further that. We need to talk more about that. But it's been a part of how, ultimately, we are going to start entering and impacting and influencing an adult and a pediatric deformity space as well. And so that's really been on the technology front and really the procedural. I think the other thing is we're very focused on procedures rather than widgets, if you will. And so our focus on helping the surgeon do better surgery from the minute they open the patient to the minute they close them, I think that ultimately helps us create procedures that ultimately help surgeons do better surgery. And we've designed from kind of all the requirements necessary to do that rather than just the interbody. And we kind of come back to our principles of create clinical distinction, meaning you help surgeons do better surgery. That will compel surgeons to adopt. And once you've done that, you'll be able to track the sales organization. And so if you kind of go back again to 2018, clearly, we had people selling our products then. There's a lot of nonexclusive agencies that were out there. We have really remade the sales organization into an exclusive sales agency model, and that has really been through the improvement in the product portfolio and, fundamentally, the -- I think, just the quality of the company and the quality of our products and procedures that we're selling. And so we continue to attract some of the best sales folks out there. But what is most important is that we're driving surgeon adoption through clinical distinction and then ultimately finding the sales support to support that surgeon adoption.

Got it. Thanks for that. Thanks for the overview. I want to talk about Q1. But actually, given some of the comments that you just made, maybe I'll ask first about the lateral market. And obviously, you mentioned the 12% market share in lateral. There's a market leader that's roughly 50% share. So I guess, maybe if we can go a little bit deeper into kind of what's driving that. You have PTP. You have LTP. So a couple of different procedures focused on that market specifically. And then what are you bringing to the market that maybe is missing from the market leader and then the rest of the competitors in the space?

Yes, great. So we really started with PTP and a couple things, our neuromonitoring platform. So if you look at all lateral procedures, it's really NuVasive, which was the -- or is the NVM5 platform and SafeOp, which is our neuromonitoring platform. Those are the 2 monitoring platforms that have surgeon-directed EMGs, which essentially means that you can avoid hitting a nerve when placing the retractor in surgery. That's really important. You don't want an injured nerve. And that's kind of table stakes. It's why NuVasive was able to hang on to so much of that market share over time, even though so many competitors kind of came in with a lateral offering, because none of them offered a competitive neuromonitoring alternative. And so we came along. We bought SafeOp, created surgeon-directed EMG. So that allows us to enter the spine -- or enter the muscle, the psoas muscle to create a surgical corridor without injuring the nerve. The other thing that we were able to do is monitor the health of those nerves in real time. The most common complication associated with lateral surgery is neural deficit in the thighs because the saphenous nerve can get starved of oxygen. And so ultimately, what we are doing is monitoring that nerve. And so if it seems to be degrading, we can close the retractor and let it rest. Let it reperfuse. You get a green light. Then you can open it back up again, and you can finish your surgery in that sense without potentially injuring the nerve in that way. So that has been a huge competitive advantage for us, and there's also been a moat around the share that we've been able to take because we keep it. From a lateral surgical procedure standpoint, the fact that the patient is in a prone position offers so much versatility. And because from being able to access the posterior spine, you can decompress certain parts of the spine, if that's what you want to do, do some direct decompression and then you can finish your lateral and do some indirect decompression. It gives you more optionality as a surgeon, ultimately. And I think that optionality is appreciated and surgeons like it because they have those options. And so you can do a -- an S1 on op. You could do a TLIF at S1-L5 and then you can do laterals L4-L5 on op, if you needed to do that. And you do that all in a single position without having to move the patient, and then you can do your posterior fixation in that same setting. And so it gives you a lot of flexibility. It also gives the OR and the OR staff a ton efficients -- of efficiency compared to laying somebody in the lateral side -- or in the lateral position, lateral decubitus position or on their side. And I guess the other thing I'd say on that is if you look at LTP and its uniqueness and much like PTP, where you've designed for all of the requirements of the procedure -- maybe let me go back to PTP before I go to LTP. The retractor design, that's got some very unique things that were specifically designed to help the surgeon know if they're orthogonal through fluoroscopy. And there's just some very good elegant design factors associated with that. The weight of the retractor is really important. Because in the prone position, gravity kind of works against you. And so you had to design the retractor so you wouldn't have to do that. We've got a 2-bladed retractor, which is unique and specific and has some advantages to a 3-bladed retractor. And then, of course, we have the patient positioner. And the patient positioner is specifically designed for PTP, and it's radiolucent. And it's got all sorts of ways that you can, with precision, position your patient in a way that you can't with tape. And so I think from our perspective, when you know that spine surgery lumbar, even like 1-, 2-level spine surgery has a 10% to 15% revision rate, when hips and knees have a 1% to 3% revision rate, it tells you that spine surgery still has a lot of improvement and opportunity. And so our thought was how do you bring predictability and precision into the procedural approach, and that's kind of where you see all of this design sophistification in the procedure, not just the interbodies and the screws. And from an LTP perspective, you can have all of that procedural sophistication available to you. But you also have the opportunity in a single position through tilting of the table or -- of the positioner to do an ALIF at 5-1. And that's just a real elegant way to do an ALIF at 5-1 and do some laterals above and then be able to provide your posterior fixation, all without having to flip or stage a patient.

Got it. That's helpful. And maybe just -- you mentioned in the beginning, $1 billion lateral market going to $3 billion. So one, kind of, I guess, maybe explain what expands that market. And when you look at what you guys are doing specifically, yes, there's share capture, but how much of it is actually expanding the lateral market by pulling in some of those traditionally lumbar procedures?

Totally. So we size today's market at $1 billion. There's about $2 billion of PLIF and TLIF business that's out there, so a traditional posterior approach surgery. The opportunity is to essentially adopt a lateral approach where you're today using a PLIF or a TLIF. And so the question is, why hadn't they in the past? And so clearly, neural injury was a real cause for concern, and SafeOp addresses that and, fundamentally, kind of positioning and somewhat of a bias towards wanting to be -- or having the ability to do some posterior decompression. But the beauty of a lateral surgery is you get a much bigger interbody than you do a PLIF or a TLIF, and that should ultimately mean better opportunity for fusion. And that's really what you're trying to accomplish is a fusion. And so lateral surgery gives you that opportunity. It gives you some indirect decompression. All of that should lead to less blood loss and a faster recovery and, really, less muscularly traumatic experience. And I think there's also a dynamic that goes on when the patients in the prone position for PTP. It's a very familiar position for people who do traditional PLIF and TLIF approaches. And just from an adoption standpoint, the bailout procedure is right there, and it's kind of at their fingertips. And so our walk into the lateral market has been very much one of share taking and essentially people who have used lateral surgery in the past, really wanting the next-gen lateral solution, which is PTP. And so that has been, I think, been largely our experience in growing lateral. I will say more and more often, though, you see and you talk to surgeons, who primarily are TLIF surgeons, coming in, learning the procedure and beginning to adopt. So I think we're very much on the thin edge of the wedge there, but starting to see that make a difference.

Got it. That's helpful. Maybe let's kind of shift over to Q1. We're not too far removed from you guys announcing. So maybe a quick recap. You had strong growth, 30% revenue growth on a tough comp. So maybe just talk about some of the highlights on the revenue side from the quarter and then maybe we can get into some of the profitability.

Yes, absolutely. So to your point, our surgical revenue grew 30% on a 55% comp, toughest comp of the year. Just what we thought was, I think, on the surge of revenue, about $2.5 million north of where consensus is at to your point, just, I think, a strong quarter. I mean, volume growth there was in the low 20s with the revenue per surgery being about 6%. I think we're 23% volume growth, 26% revenue per procedure growth. Revenue per procedure grew nicely. Our guide's really typically been around mid-single digits for the full year. So kind of right down main street there relative to that. I think some good tailwinds on Biologics attach rate, expandables. Lateral surgery grew faster than any other segment of the business again. Lateral has a revenue per procedure that is twice our overall average. And so that also kind of benefits the revenue per procedure on average, just from a mix standpoint. From the volume perspective, I think 23% volume growth, that was underpinned by 21% surgeon adoption. And so oftentimes, like -- we like to point to -- or people like to point to the addition of reps and those types of things for an indicator of future growth. That certainly is. But fundamentally, it's a little bit of a lagging indicator because, typically, you go and grab the sales rep once you've got confidence to surgeons wanting to adopt your technology. And so the fact that we had 21% surgeon growth is such a leading indicator to future growth. It's a huge thing for us. The other thing I'd tell you is that we talked about 150 surgeon training engagements. If you go back to 2022 and 2023, we have done about 500 trainings a year. And the high watermark is typically in the second quarter at about 150, meaning the other quarters are between 100 and 125. So we had a significant step-up in surgeon training in the first quarter, which is really a reflection of the level of interest in what we're doing and is a great leading indicator for surgeon adoption, which obviously is what drives procedural volume. We raised our guidance. We beat by 2.5%, raised the back half by 3.5%. We did that on the basis of incremental volume growth. And so I think the thesis that we laid out in October of last year when we did our capital raise, which was ultimately to buy forward instruments and inventory so that we can continue to grow the business at significant rates and take advantage of a fertile field for rep conversions to support the surgeon adoption, I think that's playing out exactly as expected. And so that's evidenced by the surgeon training, the surgeon adoption. I'd also say that 21% surgeon adoption is twice that, which we laid out on our long-range plan. And so I guess the last point I'll make -- I know I keep saying it's the last point on surgeon adoption. But the last point I'll make on that is our surgeons use more and more product or procedures or adopt more procedures every year after they have come and started using ATEC procedures. So there, our penetration in their practice grows every year, and we've seen that going all the way back to the 2018 cohort. And so kind of getting back to a confidence of our ability to continue to grow on the basis of surgeon adoption that's already happened, much less to say the surgeon adoption that's to come.