Alphatec Holdings, Inc. ($ATEC)

Bank of America, really happy to introduce ATEC Spine. For our next presentation, we have CFO, Todd Koning.

Thanks, Adrian. Appreciate you guys having me, and thanks for coming. I'm Todd Koning, CFO here at ATEC. And I think there will probably be some forward-looking statements. So be aware. We'll talk about our growth algorithm, our -- how we continue to grow and some of the catalysts that we have in the business. We clearly demonstrated the ability to leverage the growth that we've seen in the business implied in the way we've built the business, and we'll talk a bit about that, and we have the opportunity to strengthen our balance sheet as well. But first, I want to talk about the overall market opportunity. And we sized the market to be about $10 billion in total. And given our size, we're just slightly under 10% penetrated. We think there is so much opportunity for us to continue to grow at outsized rates above the market growth. The overall market, we feel is healthy, kind of a low to mid-single-digit growth rate, which really in the context of maybe the last 5 or 6 years seems to be like in recovery mode and feels good from our standpoint. When you look at that market in the terms of the $10 billion, I think what has been really the focus of the company for a fair amount of time has been the lateral market. And we sized the lateral surgery market to be about $1 billion. We think it's one of the faster-growing segments of the market. And it's one of the faster-growing segments of the market because ultimately, it allows for lower blood loss, less morbid procedure and essentially like a faster recovery for patients. So there's a lot of good reasons to do lateral surgery. And we think lateral surgery is a great alternative to address the traditional posterior approach surgery market, which we size is about $2 billion. So traditional posterior approach surgery can be addressed through a lateral surgery approach. And fundamentally, we think that ultimately gives better results and allows surgeons to do better surgery and patients to get better care in the long run. And so we'll talk more about our lateral offering and how that ultimately addresses that market as well and continues to drive that growth and really our outsized growth in that space. I think if you went back 6, 7 years. I've been with the company about 5 years now. But if you went back to the remake of the company in 2018 when Pat Miles, our CEO; and Luiz Pimenta, our CMO, came over to remake ATEC, they set out to really answer the question of why did lateral surgery only address about 1/3 of the total opportunity? Like what -- what got in the way of a broader adoption of that surgery if that surgery is so much better. And so the 3 tenets of our strategy have not changed in that time. And the first thing is really to create clinical distinction. And what do we mean by that? We mean allowing surgeons to do better surgery. And when you do that, you ultimately compel their adoption. And there's no better way to have sticky share taking, if you will, than to compel somebody by virtue of the quality of what you provide them. And so our approach has been to really attack the spine market through a procedural view. A surgeon doesn't see a patient and say, what screw, what pedicle screw am I going to use or what interbody will I use? They look at the patient, they then understand their pathology and then they say, what procedure am I going to apply to that pathology to treat the patient. And in the context of that, you have all the components of a surgery. And so we've focused on the procedural adoption and the procedural approach to solving some of spine's greatest problems. And in the process, we've compelled surgeons to adopt our procedure. And when you do compel a surgeon to adopt your procedure, you get the attention of the best sales talent in that area to support that new surgeon adoption. And I think that's been well demonstrated by the volume of surgeons that we've seen, which you can see here on the left-hand side of the screen, the consistent growth in surgeon adoption and the increased utilization in each one of the cohorts on an annualized basis. And then here, you can see that on a quarterly basis going all the way back to 2024, we've seen approximately 20% growth each quarter in the number of surgeons who ultimately are utilizing our procedure. And I think that underpins the point of compelling surgeon adoption through clinical distinction. So where it all started was really lateral surgery. And when we created PTP and our lateral approach, it was through a very deliberate view on how to tackle some of the hurdles of a broader lateral adoption. And so part of that was positioning. Part of that was the repeatability and the reproducibility of a lateral procedure. And so you've seen us invest in things like a patient positioner, things like neural monitoring, which allows us to monitor the patient not just to avoid hitting a nerve when you create or when you place your retractor and create the surgical corridor, but also monitor the health of the nerve intraoperatively so that you can avoid the most common complication associated with lateral surgery. And we're the only company who can do that. And then you look at all of the, I think, the procedural elements. And so when you create a procedure, oftentimes, you set the requirements and really set the rules for surgical engagement. And when you create a procedure and you set the rules, people oftentimes follow those rules. And so that's one of the things that allows us to ultimately architect a highly productive or highly reproducible and predictable experience from a lateral standpoint or procedural standpoint. And also, it enables us to do -- to capture the lion's share of the revenue opportunity for that procedure, which is why you see our revenue per procedure at probably $12,000 on average over the past 12 months and because that represents our ability to ultimately capture a large portion of the revenue share in the procedural -- in the procedure that goes on. And you can see on the slide a number of the different components of those procedures. And then what happens is as a surgeon adopts your procedure and you think about lateral surgery, they will apply that platform approach, the PTP approach or LTP approach to a broader set of pathologies, the more confident they get in utilizing the procedure. And as they do that, they have greater adoption. And as they do get more and more confident with PTP and LTP, they ultimately expand their adoption to other parts of our portfolio like ALIF or cervical or increasingly deformity. So speaking of deformity, EOS is an imaging system that we bought in early 2021. And it was well established in many of the leading academic settings and since then has continued to be evident in our ability to access those academic settings. So it is widely accepted as the standard, the best image for spine care. It's a standing full body weight-bearing biplanar, meaning you get a picture from the front and a picture from the side, low-dose radiation image. And what that image is, it's a standard image. And so we ultimately can create a structure -- a set of structured images through the EOS image that allows us to ultimately understand what is the image and what is the patient what are the pathologies they have, take that apply our AI algorithm to create the automated alignment measures. We can compare those alignment measures to normative values. We can then create a plan for the surgeon, do all that in a very clinically integrated way. That will then generate a patient-specific rod to support the intervention. They can order that rod. We will deliver that rod for surgery and then they'll intervene on the patient based on the plan that they created. Then after the operation, they can measure the patient again through EOS. And because it's a standard structured set of data from an image standpoint, we can now compare the patient's experience on a longitudinal basis through EOS images. And that really then, as you think about more and more EOS imaging and that longitudinal data set becoming more and more prevalent across more and more sites and surgeons, we will have a very proprietary structured data set for us to really understand based on a pathology, based on patient demographics, what was the intervention, how did that intervention get reflected after the surgery and then how did the patient fare over time. And then we can learn from that. And ultimately, that can then turn into some sort of predictive modeling as well. And so what we've seen in our early experience with EOS Insight and EOS Insight is the software application layer that does all of the work that I've just described outside the imaging, of course, that experience over the last 18 to 24 months has been very good for us. So you can see the graph on the right-hand side of the slide. It will tell you that after 6 months of implementing EOS Insight, the sites that we have that, their volumes have grown about 30% relative to the prior 6 months before EOS Insight was implemented. And so we think that's a very promising signal and sign for the influence that information and data has on the surgical decision-making process. And we think that's obviously value-added. Otherwise, you wouldn't see the increase in the volume post implementation. Here, we want to talk a little bit about Valence, and Valence is our navigation and surgical robot that we've just launched here in this past quarter. And Valence has been a like a navigation -- a surgical navigation platform that we have integrated into PTP. So whereas most spinal robots have been built to place pedicle screws, which is great for the placement of pedicle screws and it reduces some surgeon burden from a physical burden as well as a mental burden and really just gives confidence in terms of knowing where you're going to place the pedicle screw, whether that's through a navigation component or a surgical robotic placement. And I think that becomes more and more prevalent over time. But what we've done is we have integrated our navigation and surgical robot platform into PTP to ultimately create a more predictable and reproducible experience in lateral surgery such that it can be made available to a wider set of surgeon skill sets. And so imagine that you can now place your retractor, you navigate the placement of your retractor. You can navigate your discectomy and your endplate preparation. You can navigate your interbody placement. And all of that -- and then you can, of course, navigate and robotically place your pedicle screws. And so we think that ultimately gives a surgeon who may not have a great history or amount of lateral experience, give that surgeon more confidence that they can intervene a patient in a lateral way in a more precise and predictable manner. Our international experience has been one of, I think, being narrow and deep has been our strategy. A couple of years ago, we entered Australia and New Zealand, and that has been a good experience for us, continue to grow. About a year or so ago, we entered Japan. In March, we did our first PTP in Japan. We're very excited about the international experience. I think what our strategy internationally is, is to be in a narrow set of countries to go deep so that we can build a direct sales organization. We can reflect the clinical thesis of the company, which should allow us to get greater penetration and drive a higher profitability profile in those markets. And then speaking of profitability, you've seen the company deliver on its profitability commitments over the last number of years. We've significantly improved our profitability profile largely because of the way we've built the company. And so we invested in infrastructure and scaling the business over the early part -- the early years of the company's build-out. And then you can see in 2023 and then into '24, our profitability went from negative to positive. So we became positive adjusted EBITDA in '24. We're now positive cash flow here in exiting '25 and now here in 2026. And so the strong profitability growth you're seeing here, 44% growth is the implied growth in EBITDA on our 2026 guidance for adjusted EBITDA. Like ultimately, the way we've built the company, the leverage comes through the business because we've built a very scalable organization. We've invested in the infrastructure. So the growth that is to come can drop through at a greater rate in the future. And so I think that gives us great confidence in our ability to continue to grow profitability at a meaningful rate here in the future. We also had the opportunity because of the increased profitability and cash flow of the business to refinance our term debt. We had about $200 million of term debt that we refinanced. I think we're super happy with that because we saved about 300 basis points of interest, which is about $6 million a year as well as I think it sends a strong message to have great partners like we did underwrite the quality of the business. And I think that speaks volumes from where we came. And then finally, our overall guidance for the year, 15% top line growth at $882 million, $134 million EBITDA and $20 million of free cash flow on the year. And so I think we're pretty -- I think we're uniquely positioned to deliver outsized growth in excess of the market growth continue to drive profitability expansion, which ultimately, I think, leads us to greater and greater cash flows as we go. And so I couldn't be more excited about what we're building, what we're doing for patients and surgeons and how that's translating into a financial outlook. So thank you very much.