Alphatec Holdings, Inc. ($ATEC)

Thanks, and good morning, everybody. Thanks for joining us today. So we're very pleased to have with us again at our conference Alphatec, Todd Koning, Chief Financial Officer; Robert Judd, VP of Finance and Head of Investor Relations. So thanks again for joining us.

Thanks for having us.

You bet. All right. So maybe just to start to frame topics I want to go through and a lot of the questions that we get from investors is before we get into what's happened in the last few months and kind of where you're headed this year, is just to recognize the significant progress that you made last year and kind of turning in this time last year was questions around capital deployment, questions around financing, questions around EBITDA. And I think congrats on clearing all those questions, I think, during last year and kind of ending the year in a pretty strong place in terms of cash flows and EBITDA, and all those things, financing seem to be -- and can you keep growing at these rates. So it's been a volatile Q1 for lots of stocks in our universe. Maybe a little bit more so for some of the SMID and small caps. So that's certainly you've been no different for Alphatec, I think, in that regard. But maybe talk a minute about the opportunity within Spine. It's a large market. You're a small player. There's some shifting around at the top in terms of market share that really just started to happen in a more significant way last year, which whatever the opportunity was a year ago, it seems like it's sort of loosened up and maybe becoming a bigger opportunity now. Maybe just talk about your position in the market and ability to keep growing, and then we'll get into some other questions.

Yes. Well, thank you, Matt, and certainly agree really, I think, by and large, on the whole, very pleased with the progress that we've made over the course of 2025 in terms of growth and profitability and cash flow and all of that. And operationally, the things we've done and the improvements we've made, I think, give us a level of confidence that we can continue to do those things that we need to do to be successful from a numerical standpoint. I think you take a step back and to answer your question on the broader market, I think if you just think about spine surgery, I think spine surgery is still a ton of opportunity for improvement. And if you really want to understand like where does share move, I think share moves to the players that ultimately can bring clarity and help surgeons do better surgery and ultimately, our view has been if you can help surgeons do better surgery, and we call that clinical distinction, you'll ultimately compel them to adopt your procedural solutions. And once you've compel them, you'll attract the right sales talent. And so if you look at the state of spine, spine revision rates are still unacceptably high. You compare revision rates in spine surgery to hips and knees, and I think you'd find them to be very disappointing. And if you look at the literature, the literature would tell you that's because of really a lack of global and segmental alignment. And ultimately, that's why we think EOS is such a powerful product, and we can talk more about that. But our view has been, we believe that we've got the technology that helps you understand what the alignment is, what it needs to be and how to get there through EOS and EOS Insight. We've been very focused on a procedural approach to the spine. Surgeons they look at the pathology in a patient, they don't ask themselves what screw I'm going to use. They ask themselves what approach, am I going to use to treat the patient. And that approach is the procedural approach. And so that's why we look at procedures and design and develop procedures from an integrated standpoint. We think that's been helpful for surgeons. And I think ultimately, have been a part of our ability to drive share and so -- then you kind of look at the broader market itself and you look at some of the disruption in the -- I would call it, the mid majors. You look at Stryker leaving spine, selling to private equity. Well, before that, Zimmer had done the same. J&J spinning out NuVasive obviously sold to Globus. And so I think opportunity for us to continue to drive share I think is high because of, one, I think our view of how to make spine surgery better, and that's kind of -- that's the whole point. But then I think the environment for us to execute that, I think, is pretty right.

Okay. And talk to investors about spine, I'll just say it, it's not every investor's favorite end market for a variety of reasons. I think one is its pain. One is it seems, it's pretty intense anatomically and in terms of the implants and the sort of call it the surgical mechanism of action for treating pain. But it's a well-established market. It's -- you could say, it's not, I mean it is not difficult to diagnose, but there's a diagnosis involved. But the patients are typically like knee pain, for example, they're driven into their clinicians because of pain, because of the condition, and that either results in a bunch of things or ultimately with enough stability results in surgery. The other point I'd make, just to say it, is in defense of spine, it is 1 of the 4 most cash-accretive procedures that hospitals do and so I always say, like if you ask any hospital, if they would like to do more spine surgery, I think the answer is always going to be sure, yes, we'd like to do more spine surgery. I think it's labor delivery, cardiac surgery, orthopedics and spine are kind of the big 4. And so those are good kind of, I think, pillars of support. And so then the question is, how do you drive share? And you talked a little bit about procedural approach. You also talked a bunch about which are helpful, some of the metrics that you measure and present to investors to kind of help folks understand the trajectory and the progress that you're making. So maybe run through those, and then I have a couple of quick follow-ups.

Well, just one of the things we talk a lot about is surgeon adoption, as Todd just talked about. And when you look at our material, we share -- usually shared every year, we shared it in our Q4 call is the adoption curve of surgeons. And if you look back at the new surgeon users over the last 8 quarters or so, it's been around 20%. It was 23% in Q4. But what we find is the last couple of years, the surgeons that we have on board exiting the year drive mid double-digit volume growth the following year. And so -- and if you look at those utilization charts, which we show for the past 7 years or so is they keep going in year 3, 4 and 5 as well. And so our view is, we continue to convert new surgeons. The surgeons have a long tail of surgeon utilization improvement that gives -- I mean, Todd and I, as we look at the numbers, a lot of confidence that we can continue to grow at the rates we -- certainly in the dollar form share taking at those rates over the foreseeable future. And so go back to, are we converting surgeons, the surgeons use more of our stuff and that really is the growth algorithm. We get more case ASP as well. I think our guidance for the year is low single-digit case ASP. That's reflective of getting more of the procedure, which is also kind of a capturing of surgeons business, if you will, as well because we're getting more of their procedures over time, and they're doing more complex surgery with us as they get more experience with ATEC and with the procedures as well.

And one of those, I mean, the surgeon adoption and the utilization is pretty obviously important. But some of those metrics can also kind of move around, which I think can be a little bit confusing as we follow them, we've sort of been scratching it since wait a second, you beat numbers, but revenue procedure went down or you missed numbers, but revenue procedure went up. There was a quarter, I think, like that in 2024. And so like what, there's a mix element to this as well that kind of ties it with your adoption. So you bring folks on, for example, maybe the -- you tell me maybe the beachhead or the point of entry is, is your lateral or prolateral procedure that gets them involved with Alphatec. But then they start doing more procedures that might, as a surgeon drive down their prolateral, lateral, some of the some of the biggest ASPs that they might do. So maybe talk a little bit about the ebbs and flows of that number on a just an average procedure basis and why it might be moving around and what that tells us.

Yes. So that's absolutely true. I think you look at Q4, overall total company case ASP was flat year-over-year. as you break that down, though, what's interesting is you look at just the lateral procedure or just the cervical procedure. And those had case ASPs that grew year-over-year by 6%. So to your point, there's -- and then so in the U.S., you look at those 2 elements. And so there's a healthy case ASP growth within 2 of those key procedures. And yet at a total U.S. level, case ASP is 1% or about 1.5% growth year-over-year. And that's because of the mix of cervical. We've made some progress in the cervical space over the past in 12 months, and we're getting more utilization from surgeons in cervical and it's hurting the case ASP growth a bit. And then there's also a little bit of -- there's about 100 bps of impact from the U.S. business -- or sorry, from the OUS business. The case ASP right now, it's a nascent business for us, but it's got a lower case ASP. And so there's a little bit tightness there, and that's how you kind of get to the flat ASP in Q4. But I think we -- as we look out at the year, we know we're going to comp through some of the cervical stuff that we hit middle of last year as far as growth goes. And so we know the underlying growth is healthy and good. And so that's where -- as we look at the full year. And I think one of the things if you just step back from our business at your point, there's some -- we're taking a lot of share, and it doesn't happen in a -- we'd like it to happen in a perfect linear experience, but the reality is it's lumpy when you're volume growth is through taking share. And so as you look at the year, I think we feel real confident about that case ASP and some of these metrics annually are just easier predictors, then quarter-to-quarter, you get some lumpiness in them. But I think the real measure is how do you do on over a series of quarters or over a year.

Right. And just to put some -- taking share shape some color around that growing 15, 20x the market growth rate, if I'm not mistaken, something like that. It's just you're growing way and way above.

Multiples of the market.

Yes, exactly. So all right. And that's helpful. One of the other things that's been a topic around the company has been reps. I think there's been time to land. There's maybe a lot of excitement, maybe too much excitement over too much focus on reps. Like are you hiring enough? Are you taking them from somebody else. But at a steady state, obviously, the way we've looked at it is and, correct me if I'm wrong, is that when you're a smaller spine company in the portion of a $10 billion, $15 billion market and you're taking share that equates to opening accounts and adding coverage for territories and hospitals and things like that, which means you need reps to grow just to need capital to outfit those new centers. So maybe talk a little bit about what the growth in reps look like relative to your growth rate, where some of those reps are coming from? Just level set color on what's happening on that element of your growth model.

Yes. I think and again, I think the reps are there to support the surgeon adoption in the end. But when you look at the environment, and once you grab the attention of a surgeon, there's a pretty good chance that the rep who's livelihood is dependent upon that surgeon's business is going to figure out the kind of need to talk to us. And so that naturally happens. And there's all sorts of reasons why sometimes they come and sometimes they don't. I think the, I will call it, the changing environment in the industry relative to the transactions that have gone on disruption, if you want to call it that. I think that's kind of lowered the friction and those are multiyear experiences any time a company spins out or gets acquired or something like that. It's a multiyear experience for when reps either want to be a part of or realize they're less interested and ready for a change in those types of things. And so I think, again, the environment from attracting the right talent to support the selling, the surgeon adoption is there. I think you're also right, much like when you invest in the instrumentation and the inventory required to grow a territory early in that investment period, the efficiency of those assets is relatively low. And as you see the adoption curve grow, then you're going to see those assets turn and you're going to get a higher rate of return on those assets once you're kind of full utilization, it's the same way with sales reps and territories. And so I think the other reality is as you get bigger and as you have territories that of substance, the people who are there to essentially build the confidence and have the relationship with the surgeon and the clinical experience, being able to bring in newer people into the fold for surgical support, that model becomes more effective as well in terms of supporting the ongoing surgical requirements. And so I think the growth algorithm kind of works in both ways. You need competitive reps, but you're also adding new reps to fold, if you will.

Got it. And just not to dive back into the period of time of who's taking reps from whom. But if you were to look at where market share stacks, Medtronic Globus, Stryker, and so what's the selection of reps coming into the company look like relative to those players?

Yes. And by and large, it looks like the market. And so I wouldn't tell you that we're benefiting. We're over-indexed from one to the other. Again, I think kind of depends on geography and the attraction of surgeons. But by and large, it reflects the overall market share in the industry.

And then I do get the question, Stryker selling to VB Spine, does that open up a whole bunch of reps that are coming, and I have my view on that, but what's your -- how has that changed the type of conversations that you have, with the number of conversations that you have because of some of the either proposed strategic moves like J&J spinning DePuy Spine or Striker making that move. How has that changed? Is it a volume change? Or is it a quality change? How would you describe it? In terms of additional reps being available?

From those areas?

Yes.

Again, I think it just lowers the friction of change. And people are just like, hey, if I'm just like anybody, if your current environment is uncertain, if you think there's more certainty to the left or to the right, maybe you're more interested in looking to the left or to the right.

Sure. Yes. Like I was -- I feel more confident 6 or 9 months ago than I feel now something were to have that conversation. So the last and maybe one of the more important things that you've been investing in, and it's an important part of Spine and it's an important question, I think, for any innovative player that's gaining shares or enabling technology. So you have a number of enabling technology elements that are used already for prolateral, for lateral. You just need the table stakes, nerve avoidance and these are complex minimums procedures that have benefits, but they're little technically more challenging and the tech helps with that. What -- maybe let's talk a little bit about the role of your Valance robot the kind of goal and market strategy of that and maybe compare and contrast with what investors in the market has learned about, call it, the bigger platform robots that have come to market from, say, Medtronic and Globus.

Yes. So I think a couple of things. If you look at kind of large-format robots, the primary goal is to place pedicle screw. And clearly, placing pedicle screws is important. I think if you looked and understood the utilization of those robots, you'd find them reasonably low. I think at the end of the day, there are reasonably high price points. And so you have to place some institutions that, one, either have large capital budgets or to have enough volume to earn them out. And there's only a certain amount of those throughout the country. So if I just go to price point to start, I think our price point being in kind of that $0.5 million range, prices at such that, one, you can still place in a large academic setting because it is a differentiated robot and navigation platform. I think, two, it's great for the community hospital setting and ASCs for those reasons. And so what is our offering? Our offering is a -- it's really a robotic and navigation platform, and we have developed it and are launching it to be integrated with PTP. And we did that because we think that the technology should address challenges of surgery. And so our view was how do you launch the Valence robot in such a way that it addresses some of the adoption hurdles of lateral. If some of those adoption hurdles of lateral are the surgeon has a fair amount of fluoroscopy exposure, the navigation component, the robotic navigation component helps with that, especially in place of the retractor. And then, of course, placing the retractor itself, which is creating the surgical corridor for lateral surgery, is probably one of the most complicated parts of the procedure. And so being able to navigate that with a level of confidence and efficiency and predictability. I think that is also a hurdle to adoption. And so I think our view has been, let's integrate this in a procedurally and workflow friendly way so that it really adds value in the surgical experience. And so that's been the pitch. Now the beauty of it is, it's still a platform. You can place the pedicle screws on in other surgeries, and you can use the freehand navigation component separate from that as well. And so it's a very flexible platform that gives you optionality to adopt it and use it in a variety of procedures. But again, our view is to launch a procedurally integrated workflow.

Got it. And I think there is a sense of the sort of larger players, that larger robot players that hospital makes a commitment to a large platform robot. The benefit to the manufacturer is that typically comes with some expected or contracted level of screw utilization and commitment. In this case, breaking down the friction around adoption and then driving efficiency and adoption without having to commit an commit to the hospital to another platform. I know it takes a little bit of getting our [ mind ] programmed fun around robots to be this one. This one is better than that one. So this -- it's an interesting and different approach to robotics -- kind of we're winding down, but maybe just talk a second about what was a hot topic last year which was turning the corner on EBITDA, cash generation, cash deployment and kind of what gives you the confidence that you've hit the right balance of supporting new accounts with inventory and sets but also continuing to drive more cash flow out of the business.

Yes. I think as we set up our -- really our cash flow goals for the year and the level of profitability that we have, I think on the profitability side, we delivered about 41% drop through to get to about 12% adjusted EBITDA last year. We exited the year at about 35% drop-through in the fourth quarter as we comped out of some of the cost rationalization actions we took the previous year. Our guide this year assumes about 32% drop through. I feel like that's kind of a floor. And given the fact that we exited a 35% rate, we feel pretty good about going into the year this year. And you think about the cash flow, probably the biggest component to that is really the deployment of sets and inventory and kind of getting back to this $0.75 on a gross dollar basis. And really, as you think about how we've set up the investment we really do understand, hey, what's our revenue goals by procedural flavor, what assets do we have in the field today? What's the efficiency of those assets? How do those -- how much -- how many assets do we need to add to that to support the growth and that ultimately yields what we have. And so I think that's how we look at it. I think the ability to manage that effectively. I think last year, I think it should be a pretty good validation of our ability to manage through that and understand what is required to grow and feel good about our opportunity to do that this year.

Great. Well, thanks so much for taking the time again.

Thanks, Matt. Thanks for the time.