Q4 2019 Earnings Call

Good afternoon, everyone and welcome to Alphatec sports quarter in fiscal year 2019 financial results announcement, we would like to remind everyone that participants on the call well make forward looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to.

Defend materially.

These uncertainties are detailed in documents filed regular the with S. easy.

During this call you may hear the company of affirmative reported amounts which are in accordance with U.S. GAAP as long as non-GAAP or pro forma measures reconciliations of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items.

And provide managements view of why this information is useful to investors.

Joining us on the call today will be Eightx, chairman and CEO, Pat miles and CFO, Jeff Black now I'll turn the call over to Pat miles chairman and CEO of Alphatec spine.

Thank you and walk into the Q4 and for your 20, Nike Inc. Conference call.

We are I appreciate your interest very much in each area and we are coming to you from basis on France home, Yes, Medicals third yes once it medical.

We.

Expanded the forward looking statements.

This quarter. So we have two pages of please.

Well you those at your leisure.

So I'm on slide four what are you putting if he was agreed your free cash we are really delivered on our commitment.

We watched what new products, we establish an offshore footprint with the clearance and launch of our see about neural monitoring but for and we increased the percentage of new product revenue from less than 10% in Oh, you team to 37% in 2090.

We drove revenue growth.

The original target was 30% within a strategic sales network and we've been here at 42% growth within the strategic sales.

The the for your growth was initially targeted at the beginning here between 12, and 70% and we finished the year at 30% to a full year growth.

We also expanded revenue for surgery, a 17% so a very good here.

If we peel back a little bit look in Q4, Oh 29 feet.

Hi.

What do you see it is you see 35% growth from Q4, 18 Q4 90 so.

Hey, a significant amount of growth fifth consecutive quarter accelerating double digit.

Your your U.S. revenue growth of 11% sequentially from Q3 to Q4 and 36% in average daily sales, a Q4 18 or 19, so again really a very strong your execution from a financial perspective.

If you go to slide six and you start to said Gosh. You know we initially started the year I said it wouldn't agree clinical distinction compel surgeon adoption and revitalize the sales should be a very good here. So let's take a look at what the progress wasn't war on slide seven.

So uh huh, when we started the here or in 20 team and we had less than 10% of our revenues come from a new products and I I think it speaks to what we talk about the organic innovation machine <unk> Q4, 48% or revenue came from from new products, which is outstanding.

Well, we also watch or see no.

Dramatic system, it's really going to be the cornerstone of our distinction in the operating room and Additionally finished out the year fulfilling the obligation of Oh, Oh commercially releasing 12 product.

If you go to slide eight you say gosh, how do we can tell surgeons adoption really a 21.1% increase in the revenue per case 20, Q4, 19 versus Q4 18, it's the highest growth rate since inception of anyway.

We added a 72% revenue growth from the top 20 Surgeons Q4, 19 versus Q4 18, and then we always talk about convoys sales as being a big part of who we are how do we get the entire procedure and so we we finished Q4 19 with 1.7 so.

We continue to see a ratchet oh, the number of products persevered reviews, which which again I think is it is really one of the showing metrics oh of our success in compelling surgeon adoption <unk>.

When you start to look at revitalizing the sales channel.

50% revenue growth from our top 20 distributors again, a very significant amount.

47% increase in dollars dollar revenue our distributor another significant increase and when you start to look at the overall revenue 90% of the revenue contribution comes from our strategic network. So it speaks to a is solid foundation.

And then 44% revenue growth within the strategic.

Distribution network so.

All in all 2019 was a great year. He was a year that was built in 2018 translation in 29.

So I couldn't be more excited with the year than we have.

Well what starts and look forward into 20, Twond and the board has to really what the what the new ways Tech is going to do in twice one that's what we're going to do is what I can see the can tell surgeon adoption with clinical distinction.

And what that means is somewhat vitality index in terms of what amount of our revenue is going to come from from new product. So we believe that 60% of of our revenue will come from new products. In 2020, we will again won eight to 10, new products HM from a convoys salesperson.

Second we expect it we're going to reach a two unique broad product category. So personally.

And then another big focus of 2020 is gonna be integration launch Oh, Yes imaging, we previously talked about a 20% U.S. revenue guidance of about a 128 to 131 and so again, we look for continued strong growth in and a great year.

Do you go to slide 11, where we are making a big difference in improving clinical decision, making in driving better patient outcomes is really in information. We started out with baseball, which is Oh, no physiology based information and we recently added imaging as another source of in for.

Amazing to drive better outcome.

For those of you who are not familiar with yields imaging, you'll see when he is a rapid calibration, we bear in full body yeah.

The virtues in what did provide you which is a bicycle your image and three d. patient specific anatomic model.

Just provides a ton of opportunity you have 350 units installed globally. They have significant academic influence with greater than 500 peer reviewed publication.

It enables us to start to customize care and really provides us a technical foundation.

So exceedingly site.

The sequence of these acquisitions. If you go to page page 13 is it safe really quickly the conduit and into the operating room for us to deliver information.

And we get better inform the opposite of experience, we can influence a better sponsored.

What are the key areas a great focus on slide 14 is a line.

Why is the most poor would an element of a long term successful clinical outcomes.

And there's a picture on the slide that shows.

The source of the image the three d. reconstruction or the image and ultimately the conduit by which we delivered for the operator.

Jeremy is that Oh alignment has not been objective we delivered to the operating room, so as to effectively manage the during surgery.

And so no we really get to expand the information I'm really from end to end are all stages of care and diagnosis. We are planning in surgery, the postop assessment as well as follow it makes it makes it a much more important player.

In this space.

Let me give you a little bit about how we in for the first thing you're going to do is looking to lower left hand corner and the ability to create an image, which ultimately influences the diagnosis.

It seems a little yellow so oftentimes, there's compensatory dynamics associated with the diagnosis that informs the surgeon then we can create three d. reconstruction of damage and input into the surgical plan.

Our ability to understand the number of level the angles that we need from 11, the type of information instrumentation that we bought a surgery become significant with this platform.

The other thing we can do you start to look at what specific products that we send him Mr. I think everybody appreciates that spine surgery. It is very inefficient with regard to the number of products that they send in for any individual sure our capacity to start to limit the number of products we have to send in.

To fulfill its specific surgery based up on a pre plan is a significant opportunity.

So our ability to start to control the specific dynamics associated.

With the individual surgery as well start to Peel out of the information.

Data that will drive our ability to ultimately create patient specific type of employee.

The ability then to access the cloud and deliver this information in terms of a surgical plan ended the war and reconcile against a surgical plan is a significant opportunity and post operative we assess how posted we come to the original plan. So the ability to correlate used to image is just.

Okay.

So when we talk about.

When we talk about this technology and we talk about the ability to nice to have a plan that is that is that that is correlated. It is a significant opportunity to have a two calibrated images.

And then Oh, ultimately you do that but time and time and time and time again, you will then start to inform your surgical planning process in a way that nobody else can do and so we cannot be more bullish we're excited about the acquisition of U.S. imaging and if you turn to slide 17.

We believe that it informs your food dotcom and that's what we're committed to and that started no long term value. So we believe that it enhances the clinical or clinical prowess optimizing inventory planning in the lessens the cost of sure you know based DHX brands.

Complements both sales channel, meaning we will dropped off the 350 units placed and they will dropped off at the Oh, yes. The sales the areas that we have read strengthen and additionally, it starts to provide.

Access to the HM two the international marketplace here in the future that we will re enter a with a partner that has a significantly positive reputation and so with that I will turn it over to Jeff about him onto the fat.

Well. Thank you Pat Thank you everybody for joining the call today, Oh, Oh give a quicker hi went on revenue gross margin Empeno highlights I'll talk a bit about the balance sheet, but what occurred you'd also take a look at the full set of financials that we released today in the press release.

So my Nineteena as Pat mentioned, you know, it's very strong performance by strategic distribution, we saw no more than 40% growth in both the fourth quarter and full year and this is really on the heels of strong commercial traction from new products.

We also expected to see a greater decline in legacy Bermuda than we did see so yeah. We're certainly pleased by 35% growth year over year, the fourth quarter, and just under 30% a year over year for the full year.

In terms of outlook for 2020.

Yes, we're expecting about 20% growth in total U.S. product revenue.

We expect between 24, 25% from our strategic distribution channel and we continue to see legacy in terminated.

Decline.

[laughter] went 20, a little bit the margin very consistent.

With what we've communicated in past quarters.

Since 90% of our revenue were grew 9% of a revenue in 2018 was driven by legacy products and we saw is very significant wrapping between 19 on new product introductions of new product adoption.

We began picking up very very aggressive write downs on on our legacy products. So our margins reflect about 800 basis points in non cash you know, we will continue to see crusher and about that level and 2020, and then we'll start to see a normalized.

21.

Slide 20, just some quick beautiful highlights it I think that again common theme here, we're continuing to make significant investment in R&D and the product portfolio, we're making significant investments in the sales channel Yeah. Most of most of the Oh investment is really in.

Investing in new distribution.

We we'd actually held the line on gene in fact gene has been well 2019 to 20.

[noise] and 22 couple of comments in the balance sheet ended the year with a 47.1 million in cash I think importantly.

Around the requirements to fund the potential cash requirements for the proposed acquisition abuse, we announced last week, we've secured up $260 million in capital 60 million that will be used to refinance our existing term debt.

And then up to another $200 million will be will be a used to do fully funded the cash required that might be required to complete the purchases yos as you all probably know the tender offer which we expect to go out in April will be a tender for cash where equity. So it remains to be seen what the castle.

From a cash requirement is on.

And then finally in terms of or the the makeup of the piano its really the same story.

I mean, it's already investment in R&D continued investment in sales channel to support an accelerating rate of growth, it's far above market rates of growth. So we saw your 24% revenue growth in 29 team and that was against the headwinds Oh declines in our street.

<unk> distribution as well as need be planned unwinding of our international revenue stream.

And with that'll carry back over the past.

Thanks, Jeff 2019 has been a a very formidable here for the new way to just seem all our EUR 2019 national sales meeting and I got to tell you. It's a brand new company. If it was a very fun place to be and we believe ourselves could be a disruptive force in the field and so with that.

We'll now take question.

Thank you to ask a question you'll need to press star one on your telephone to withdraw your question past the pound key piece, then by well be compiled the candy roster.

Our first question comes from Brooks O'neil with Lake Street Capital. Your line is now open.

No good afternoon guys.

I'd like to start obviously I'm excited about big deal with acquisition and.

Just curious if you could provide a little color.

Initial response to the basic CE CE launch and then just talk a little bit upon how you see integrating you live as we move into 22, what do you get past close the transaction.

Thanks Brooks this is Pat I wouldn't take that went on.

First and foremost I will tell you that I am thrilled with the SEPA surgical launch I think if you look across the landscape of all of every spine company every spine company has attempted to enter the lateral surgery space without the.

Without the interest in participating in really what the availing technology is which is automated but never physiology and so what what we did is when we started this we said what we'll do is we will apply automated information to their surgery in a way that we're able to identified.

Where the nerves are but we will also add a feature set there and determine what the health of the nurse.

And I got to tell yet we are well underway for a very unique device and distinguishes.

Most of the company and so I think the more clinically sophisticated we could be the better off we are well very early on in the launch we launched in November we're seeing a lot of traction and a lot of enthusiasm around this device.

So this gives me great confidence based upon the fact it reflects really the core competence competency in a company and what I think that is our ability to to reflect the utility of information to translate better surgery and that was much of our enthusiasm around iOS was the yet.

Lets say gosh, how do we take the information out of out of iOS and ultimately continues to drive better surgery. The beauty of it is is we get information that it's really early or much earlier than the inter operative experience. So in the diagnostic.

So really the early experience is gonna be to inform.

The iOS surgical planning with all of the Atech implants, and then a bit the next relatively immediate phase is the start to integrate the surgical planning platform through the alpha informatics platform, which houses safe up less than what we can do we start.

For the information in the operating.

But even even if we just Ah garner greater access to the 350 units placed and we start to begin to see translation of sales through each others. A place is oh prowess I think a you're going to start to see significant momentum around this acquisition. So we're we're actually.

Eating lakeside.

Right.

Second quick question.

I understand it's going to take some time to close the deal what are some of the key things that need to happen between here and you know somewhere in the third order to get that transaction closed.

Yes, Brooks, it's really all regulatory at this point so the the plan is that there's a.

Process that will take us to mid April <unk>, what we expect to launch the tender offer in France on Euronext and then it's really a matter of just getting through that process and you're jumping through a number of regulatory groups that are all customary closing conditions the expectation.

Is that we would we would see this close in you know in July or August.

Right.

Great and then last question for me is just can you talk a little bit.

No you mentioned in the prepared script, eight and new products from the organic innovation machine, but can you just give us some sense of your excitement about the continuing trajectory of new product introductions.

Hi Tech.

Yeah, Brett Yeah, It's really won the best you know.

And one of the grid competencies of our company clearly you look at the 2019 growth and you look at all of the attribution to new products I think that we're getting a lot of traction with regard to the new stuff candidly, usually it takes longer and so I'm Oh, yes, somewhat pleased about the early traction.

A lot of the does the new stuff the things that you will see come for is we've talked a lot about designing the specific requirements for prone transource surgery, and so what you're going to find is you're going to find companies that have no longer or there are no longer interested.

Innovation start to apply their previous goods to a surgery that requires specific designing developing and so you will see a design and development effort around PTP. This can be unique atech. Additionally, what you're gonna see is several new products within the post your fixation realm as well is as a T.

And so we can't be more excited about the number of things going on the here you'll see products in the eight to 10, we opted to go ahead and list them. After we launched and just because we feel like it makes most sense strategic and so anyway and should be a great year.

Right.

Right, where it's good for you guys keep up all the good work.

Thanks much.

Thank you next question comes from Matt O'brien with Piper Sandler Your line is now open.

Hi, guys. This is larger on for Matt. Thank you for taking the questions and congrats on a nice quarter here.

You know I guess.

Clearly a lot of these new products are really starting to pay dividends over the last.

Launches over the last couple of years I guess, what that said it seems like you've been talking a little bit more about going deeper within those accounts and that you're currently in today.

Which you know as I'm sure you you know can sometimes be just a challenging as sort of getting the door open in the first place.

So maybe you can kinda talk to your strategy. There I mean is it getting in front of more surgeons, you know pitching advantage at their products and the top down at somebody to Tuitions, you know more bundling any color there would be helpful.

Yeah. Thanks. Thanks. Thanks for the question this is Pat.

I will go to really you know in a couple of ways like I think the more clinical distinction that we can create the more we were held the partners of the surgeons who were currently doing business.

And so that's why we're so bullish on making in informatics platform that distinguishes us as as a company in elevates really our clinical sophistication and so as you start to think about how do you start to make a meaningful impact on on larger groups. A surgeon I think will you have to it.

It was do something better such that what happens is is a the surgeons partner coaxes heading in the room of the surgeon using our stuff and says no starts to understand why maybe his patients are getting how the hospital slightly sooner or he's getting a better result, and so I believe in its those types of things that ultimately you know moved Sir.

Yes.

I think additionally, getting more out of.

The same surgeon and that's the whole convoyed sales, we look at surgery through the lens of a procedure and how many products oh per procedure or per surgery, we can.

Sell into that means what we've done as we control more of a surgery. We mitigated were variable based upon the architecture of the entire experience and so that's really the way we look at the expanding into a more surgeons that have been a HM.

Relationship with a surgeon utilizing our stuff and then how we go deeper into the account.

Okay. That's very helpful. And then I guess continue on the same point here I mean looking at the utilization of your existing surgeons leave you said the revenue per kg increased by 17%, which I think it's the same as last quarter.

I mean, it you know if you start to look out a couple years just wanted to gauge whether you know you believe your portfolio products is complete enough for that to continue to keep marching higher and then if not you know are there any gaps you need to Phil. Thank you.

Yeah, It's really it's really a great question in down and I will tell you. The answer is isn't unequivocal, yes, and and I say, yes, because we will continue to chase the requirements of surgery, one of the things that iOS will bring us into is greater complexity and.

What happened disease. When you gave the confidence of a surgeon what happens is it gives you a shot and then once you have performed well he's had a great experience with the with your products. What happens is it enters into more and more complex surgery, which means more and more level and then increase revenue per procedure.

And so that's what you're starting to see you're starting to see greater confidence Seville.

Greater confidence available to us from the surgeon and then you're seeing him apply our goods to more and more complex surgery.

I think with <unk> with the ability to start to garner access to the iOS platform aren't going to start to understand surgery and start to two collaborate.

With those surgeons, who really hard to find that course, especially from a spinal alignment perspective enables us to continue to participate in more and more complex surgery. So I think you'll continue to see that go up overtime and you know as we evolve the portfolio it'll be chasing those indications.

That's great here. Thank you.

Thank you and next question comes from kind of Us with Canaccord. Your line is now open.

Great. Thank you for taking the questions in a in congrats on a strong Q4 in 2019. So I guess, it's one of your talk <unk>, maybe a little bit more on a understated the sales team obviously, the the investments and the focus on the commercial team that you put in place over the last several years is played out but maybe just help us understand.

How we should think about the pace than the cadence of some of the hiring on a go forward basis, and then just how bill underlying productivity improvements you know as we move into 2020 do you have big hires from near the end of 2018 that are going to roll off non competes and become more productive just help us understand how we should think about that natural productivity and 2020.

Yeah. Thanks, Kelly I forget exactly if it's a timely question in that we just came off our our national sales meeting.

This past weekend in India had 175 of our closest friends all assemble and one of the things I I talked a lot about is really the kinda the cadence in a disciplined we're creating in our sales entity and I think that that's a reflection of the.

Kind of you know historical experience that a lot of our sales leadership passing on Super pleased with that.

I got to tell you what we're doing is we're creating clinical solutions that require a clinical aptitude and I don't think that we we have yet.

And and so I think we haven't in pockets and so I think that our challenges is are we starting to get the right people in the right geography I think the answer is yes, and I think we have a lot of people coming off of noncompete, they're very strong contributors I got to tell you, we're not where we need to be with regard to the clear.

On a go proficiency across the entire Salesforce and so I'm looking forward to building that in as we continue to a wall, but Oh, we are light years from where we were a year ago, we will be light years from where where we are in.

We ended 2020 from where we started oh the here and so my enthusiasm is the level of competence increased dramatically.

The level of Oh, where we need to get to from a clinical proficiency still needs work and so I would tell you that you know I always feel like we're always in the early phase because we can always get back.

Sorry, and then one.

No no what I was very helpful. I appreciate it and then when you think about moving from I. Appreciate the commentary earlier about safe up I guess just.

Well if I understand you know when we should expect to see that has a meaningful driver of revenues whether that be directly or indirectly it'll be opening up a council on selling through can you know.

Implant in pull through or you do you need you asked in the integration of all of the planning and then the and the other software tools before that can really happen or should we expect to see some new accounts come onboard just from your safe off and informatics you know in the first nine months of this year.

I think you should expect to see new accounts come onboard based up on safe up as we know it today and and and so.

You will always see it as as a as a as a passive contributor the the revenue generated directly from the North physiology system is not going to be significant put them, but the dollar volume of influence will be and so we've already started to see significant traction from the from the system, but we've always thought.

It could be a conduit for information and so when you start to think about the things that we can deliver through thereby pulling information out of the crown.

Yeah, there's so much to do on that front in terms of informing surgeons with.

Hmm objective actionable information you surgeons, we've always said they urine for information what we're doing is providing them timely information is very very relevant and so we're seeing immediate traction with regard to see if our platform I'm very excited and when we start to say gosh, we'll see at least to ER.

There are two products keys for surgery, that's a significant walk up in you know I look forward to the day that I'm on the call that we're talking about you know well over three products for surgery, because what were what we're really getting is the entire architecture of the procedure.

But that really is is that based upon our capacity create relevant out of the informatics left and I think we're doing that very early I can't be more excited about what we're doing on it yet he front to me the automated SXCP FRE and so it's an exciting time with regard to kind of the early phase of our arc.

[music].

And then last question I want to make sure Jeff did some attention to its overall thoughts on Capex this year and investments in and that's an inventory just your how should we think about that as we move through the year.

Yeah, because I think a U.M., giving specific guidance by the idea and expect a similar level of investment that you saw in in 2020, you know we spent roughly 20 million on.

On a new implants and instrument kits for new product introductions. I think you can think about as a similar level of investment for for and for 21.

Great. Thanks for taking the questions.

Sure.

Thank you.

Hi mine there to ask a question you'll need to press star one on your telephone.

Next question comes from Sean Kang with H.C. Wainwright. Your line is now open.

Hi, Thanks for taking my question. This is Sean Sean Zhang for arcade H.C. Wainwright.

So my first question is.

I remember you provided longer term guidance, so 200 million by 2022, even before the announcement on the acquisition Oh U.S.

Oh based on the.

Expectations over the synergy.

How can you positively impact so longer term guidance.

Yes, John this is Jeff Thanks for the thanks for the question, we think in any given we've not given any specific guidance to two to.

Oh on new year's transaction and what that incremental revenue will be we did we get a indicate last week that you know it's about a 40 million dollar run rate business. So I think the short answer that question is that we absolutely believe that this accelerates our path to 200 million.

I see that's helpful. Another question Annie's.

I had a related question. He is so regarding the pull through effects from the iOS.

How easy easy for on institution I couldn't use decision to.

Condition from a non alphatec products too I for the crops, if they choose to do so.

Is there any that contractual litigation.

To disengage from.

Yes, Sean. This this is Pat I'm. The one thing you can kind of nothing's easy.

And Dan and so we realize that there will be a process I would tell you that there is more distinction in the U.S information then there is in the individual screws and and and placing interbody device.

Depending upon the type of indication for surgery, we believed that the value will be.

Attributed to the information more so than at times. It will for the implant system. So we feel like that will drive implant change, it's not going to be universal and it's not going to be fast, but ultimately will no effect in how good we do with regard to the integration of that information into our.

Systems.

I see.

Thanks for answering my question and congrats on your strong quarter again.

Thank you I'm not showing any further questions at this time I'd now like to turn the call back over to Pat mass if any further remarks.

I'm not showing any further questions at this time.

I would now like to tend to call back over to Pat miles for any further remarks.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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