Q1 2020 Earnings Call
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Good afternoon, everyone and welcome to Alpha text first quarter 2020 financial results and recent corporate highlights announcement.
We would like to remind everyone that participants on the call will make forward looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the FCC. During this call you may hear the company refer to reported amounts which are.
In accordance with the U.S. gap as well as non-GAAP or pro forma measures reconciliation of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in the press release.
Which identify and qualify it all.
And.
Excluded items and provide management's views of why this information it's useful to investors joining us on the call today will be Eightx, chairman and CEO, Pat miles and CFO, Jeff Black now I will turn the call over to Pat miles chairman and CEO of Alphatec spine.
Thanks, Michelle Ah thanks, everyone for joining the call.
Before getting into the presentation I want to take a minute with some per prepared remarks relate to the atech family because I know many are listening in.
So first of all I want to say thanks for your continued engagement in productivity over the past two months I'm. So proud of how we support each other during this crisis through the donation of paid sick time, well foregoing base salary for stock to preserve cash for payroll or the extreme focus by EUR one on driving the business.
For despite being separated.
I can tell you. The business is pushed ahead regulatory filings have continued alpha evaluations have been completed.
Workers have been fully supported the recruitment of T. tell us and customers haven't missed a beat.
I believe will exit this challenge stronger than were.
Where we entered it.
Which is what distinguishes great companies, you've been committed to our mission and we're completely committed to you you can expect to see inc. and increasing presence in the workplace starting soon as I'm sure grew volume and project work continues to pick up but.
But it will happen that a methodical way clearly to ensure that everyone is safe.
With respect to our outlook on that business I could not be more bullish we saw strong momentum going into the crisis, which is reflected in our Q1 results and while we have certainly been impacted by coal with the interest from our expanding surgeon community and distribution channel is absolutely palpable.
I'm encouraged by signs of recovery in surgical volumes and while it's way too early to predict.
One we'll see full recovery I am confident it will come back strong.
We have taken critical steps necessary to strengthen our balance sheet and secure runway.
We've made strategic decisions to pullback spend in certain areas for the team focused on preserving our most valuable asset our employee base and maintaining momentum on keep development initiatives. We originally secured an additional 35 million dollar commitment from squadron capital extending the runway we need to focus on moving the business for.
We remain unwavering in our commitment to bring innovation to a market that needed.
And we have a team and the resources to make that happen.
So just wanted to make sure I Didnt Miss anything before I jump into the Q1 2020 score card.
So clearly that company has strong momentum when you start to see things like 27% year over year revenue growth you have to be optimistic.
Additionally, 56% of that was from new product, which compared to 22% a year ago in Q1, and really less than 10% in fiscal year 18.
34% revenue growth was seen within our strategic distribution and strategic distribution as a reminder of the guys. We're gonna go the distance with us.
Also saw 15% year over year average revenue per case growth in what that speaks to really is the confidence in our and our new devices in our business and that's up from 30% from Q1 18.
We talk a lot about convoys sales, meaning how many product categories sell into surgery, and we continue to see that tick up. It was 1.7 in Q1 and really this is our six consecutive double digit year over year revenue growth in a quarter.
And so wouldn't that when we go through our business update the areas that we're going to talk about really it is is our focus as it relates to revenue momentum.
The status of of iOS, the balance sheet, and really where we see the spine market going on so I guess first and foremost is is that.
One thing that you'll hear us remind me of is our businesses in the operating room and one thing that we have a pension for his focus in our priorities really remain the same as is.
We're going to continue creating clinical distinction, we're going to continue to compel surgeon adoption and we're going to continue to revitalize our salesforce and really we did that in Q1.
And so what you'll see out of US. This year is you're still going to see eight to 10 releases in 2020 of new products.
The design meetings continued in earnest virtually so the surgeons made time for us a lot of them. Yeah. We're candidly thrilled to engage with us over this this period of a slowdown as well.
Regulatory submissions continued.
So as it relates to our capacity creep clinical distinction I will tell you. The momentum is is palpable.
As it relates to compelling surgeon adoption.
We continue to evaluate our alpha products and we continue to see more and more products use per procedure and so it's very gratifying to see say five used with our retractors with used with our our fixation system or or Interbody systems, and so you're really start to see the procedural strategy come into fruition also.
Revitalizing our salesforce.
I got to tell you the recruiting is going exceedingly well savvy distributors know that the future spine is at Atech and so it's been entertaining too.
To see the volume of distributors that have come our way and often times. Their focus is how can I best serve my customer and when they absent themselves that question. We're clearly the solution that a lot of distributors run to we're also trying to elevate the attitude of our sales force during the slowdown.
With a number of online calls and whatnot due to engage them and keep them first in terms of what we're doing clinically.
So transitioning over to the two iOS.
Clearly we the.
Weve.
Change directions as it relates to what we're doing there so really proposing alternative.
Collaborations so we still believe in the in the clinical thesis that really drove the transaction, but we do believe that theres been a material adverse event, resulting in our terminating the decision.
If you really kind of delve in channel check you'll realize that the near term focus.
From hospitals is in preparedness and in cash generation from elective surgery.
And our concern was it really pushed out the the acquisition of capital equipment.
But again back to the original prominent it hasn't undermined our clinical confidence in the emit collaboration and so what we're doing is we're exploring other collaborative type of arrangements that really meets both companies strategic needs and so I would say that's that's a big change.
The jump over into the what's going on from our view in the spine market I got to tell you everybody is opined on this and I'm not sure that we're going to provide the any new information, we're totally encouraged by the recovery, but it's still way too early to make any concrete judgments. So.
We see spine surgery, starting to come back and we see the enthusiasm around elective procedures. The one thing that we know is the is the hospitals need to generate revenue in the way they generate revenue is through.
Elective surgery, and probably the closest thing to non elective surgery in orthopedics is fine and so we're seeing a inexpedient return to.
To the procedural volumes, but again I don't want to get into a long discussion based upon the volume of uncertainty. This still exist so with that I will turn it over to Jeff Black to review the financials.
Thank you bet.
So a couple of minutes just starting on a key focus area and that's our balance sheet. We think is important to start with that and specifically speak to the cash runway.
So we ended the first quarter with a $27 million in cash we made a draw in early April on our existing credit facility with squadron. So we ended the quarter with 47, how familiar in cash on a pro forma basis.
We also recently executed a commitment letter for 35 million door expansion of the facility with squadron a part of those proceeds will will pay off our revolver with mid cap in the remaining will be available to draw as needed.
We've also extended the maturity of the entire credit facility, but two years to 2025, we've removed all financial covenants, we expect.
To close this financing by the end of May.
We absolutely believe this is the right financing of the right time for US provides a runway we need to execute on our growth plans.
We've also made some decisions on cost containment across the organization again, as Pat mentioned with an eye toward presuming preserving employee base and maintaining key product development initiatives.
And finally, we think it's important to note that in Q1 or Kasper was elevated over prior quarters really do that transaction related litigation expenditures recall that litigation was it typically high in Q4 related to our patent litigation. So we saw that cash impact in the first quarter.
On the revenue.
We saw 34% year over year growth from our strategic distribution channel importantly, as Pat mentioned this is a mix of not just increases in surgical volume, but more complexity and a continued increase in the products per case, which is driving revenue per case higher.
And our legacy distribution channel continues to perform at a level where we.
Actually above the level, we expected to be at this point.
Gross margin is held steady as expected we continue to see a bit of a margin drag from excess and obsolescence on legacy products.
Expect us to continue through 2020, as we continue to transition to new products will start to see this normalize in 2021 and once you know normalizes our variations in gross margin will primarily be driven by product mix.
But we continue to believe that mid term.
We will maintain.
Margins in the mid 70% range.
So little bit about the piano, an opex, our non-GAAP opex profile remains consistent year over year again in line with our expectations as we continue to make investments in new product development and build out our strategic sales channel.
I think importantly, we continue to hold the line on Gionee essentially been flat to last 12 quarters and below 2017 run rates. When we started the strategic pivot if the company.
With that I'll turn the call back over to path for closing comments.
Thanks, Jeff.
You got another we remain fixated on storing better spine surgery, we feel like that's a great business and what to do it through innovation. So.
I think spine is probably the least of the quote unquote elective surgeries in hand, we know that the volume of spine surgery will return on those returning and and and we are prepared so thank you very much for your attention and now happy to take question.
Thank you again, ladies and gentlemen, if you wish to ask a question at this time. Please press Star then one on your Touchtone telephone. If your question husband answer for you wish to remove yourself from the Q. Please press the pound key.
Within any background noise, we ask that you. Please place your line I'm you want your question has been stated.
My first question comes from the line of Brooks O'neil with Lake Street. Your line is open. Please go ahead.
Thank you very much and good afternoon, guys presume the opening comments in all you're doing did kind of keep the business moving forward I was just curious.
As you look at the spine business in spine surgeries do you sense. There is some growing pent up demand or said differently have some of the postponed cases going away permanently or do you expect those ultimately to get done when the hospitals in or is open up for bid.
Yes again.
Yeah, Brian This is Pat.
I think it's abundantly clear that these have been postponed and you hear a lot as hospitals talk about working on Saturdays and Sundays, and then an increasingly or hours and and a lot of.
A lot of.
Solutions to avail spine surgery to to a broader audience and so I would I would say absolutely that that I think people are just.
Holding off until.
Insurance is affirmed their competencies affirmed.
But.
And speaking to the surgeons in the hospital there is a heck of lot of pent up demand out there.
Great. That's very helpful and then second quarter.
Obviously, a fairly late in the year unless you're a release of output for matter to save Bob can you just talk about what the disruption related kobin as Don if anything to your launch there and what you lay into due to try to.
Reestablish.
The kind of momentum I think you all hope to get.
When the original plans were put in place.
Yes. Thanks for the question books that there's so many things that come to mind. When you ask that question I I think that.
One of them well I'm. So proud of about the team is the product development team has been awesome in the downtime and so so we launched the product in late last year and in the clearly the momentum has has ticked up you know month after month, and then and then you see.
Ceasing of of our the volume of cases in middle of March but the the beauty is it is we continue to evolve the system a lot of the system is a software based system. So the opportunity to continue to create sophistication that thing is significant and so super proud of them.
You know, but I'm going to tell you I am so confident that that was the right.
Acquisition.
Whatever it was to two years ago.
This is such a distinguishing element for us to provide information into the operating room and what you'll see US do can is to continue to choreograph surgery with regard to providing information and when you start to look across the landscape and you look at what companies are doing few companies are providing the limited footprint, but but the valuable information.
That the that the Alpha informatics platform provides and so anyway.
ICSC exceedingly bullish and excited about us continuing to.
Kind of evolved in terms of integrating that into every type of procedure that we do need.
Commercial traction that again.
That's great.
As were more and then I'll turn it over.
I heard your comments about the he'll assist them situation totally get it myself at least from my perspective, but how do you read the Pos even in the do you think they still hope to find ways to collaborate with you guys or is this the.
Joe did the.
Partner and.
There's going to be mad not going to take it anymore.
Yes, I guess I don't want to speak to there no I'm sure.
Got to I'm, probably the most disappointed Brooks.
I like that technology, and I think that there's real value in what that technology provides and so kind of going back to the prepared comment or the presentation is is the clinical thesis around our collaboration.
Haven't changed at all.
The problem becomes is is is that at a small company in and you know in cash screen King you have to you have to look at it how both companies are best served and so I think there's there's the leadership. There is is is excellent and there's a great relationship with the guys.
So I'm bullish on our opportunity to collaborate I hope we can put it together I think it will serve the interest of both companies, but it's got to be different collaboration than what we went into and it's you know the suggestion that a pandemic hasn't changed things I think it is is false and so what we're trying to use his stewardship.
Great spine surgery, we feel as they can help us do that and that means a collaboration of sorts.
Great I lie there were more of course Superga jump could you just update us on how you feel about the availability of capital right now recognize the New addition was squadron what the.
And you said it had no covenants, but can you just refreshes what the rate is on that that would squadron then and how you feel about where you're at right now thanks a lot.
Yeah. Thanks, Thanks, Brooks look we feel like I said I think this is absolutely the right financing at the right time. It gives us the run or we need to go execute this this business and maintain the employee base maintain product development initiatives the terms.
In terms of interests are the same its level at LIBOR plus 8%.
10% floor, 13% ceiling.
We've extended our maturity by two years removed financial covenants. So.
We feel that we're we're well positioned here with this available capital to continue to execute the business.
Great. Thank you very much as very helpful.
Thank you and our next question comes from the line of Matthew O'brien with.
For Sandler Your line is open. Please go ahead.
Afternoon. Thanks for taking my questions three for me for starters, just looking back at Q1.
Permits were is really good kind of meeting among all of our spine terms and growth.
Can you just kind of deconstruct, where some of that growth came from and then and then.
Pat just on the revenue per case side of things that.
Improvement that you saw there how much further as our to go specifically with that metric.
The.
Yeah. Thanks, Thanks for the question day, the deconstructing the revenue I would say you know.
The biggest driver I think it is really kind of confidence in terms of.
The utility of the new devices and the ability to do more complex things with the new devices, and then attracting more surgeons that ultimately utilize the devices and gain confidence.
I wish it was more cosmic than that I will tell you I don't think that we have really met the.
Kind of our procedural.
Aspirations and by that I mean, when when all of these things start to get integrated really toward the end of the year I got to tell you like I I think that the Convoyed element will will pick up significantly in so I think a lot of it is hey, let's see what these guys are doing it.
Seems like that they there there's a competent bunch.
And then bringing on you know some some distributors that that are are.
Clinically adapt and so.
Right.
I wish it was more than that I'll, let Jeff comment if he thinks that there is anything I'm missing as it relates to the to the to the one.
Yeah, I, certainly add to that and just in terms of we try to break it out on the increase it's really across the board to pass point, it's new surgeons coming on board increasing volumes existing surgeons doing more business increasing volumes, increasing case complexities are using actually more parts for every where appropriate.
Because you're doing.
More level and more complex constructs and then the ability the confidence inspired by a surgeon actually using more product categories per case. So the drive the driver for that increases really across the board of in all three of those categories.
Okay, well, that's great to hear.
And now looking forward for maybe looking back to help us the forward a little bit.
What did you see towards the end of March as far as procedural slowdowns and then what did you see in April and how are you feeling again very early days here in May as we think about the rest of this quarter.
Yeah, So I'll, let Jeff pipe in after after I provide the 60000 foot color.
Which is.
Literally we saw a relatively abrupt.
A slowdown in the second half a margin and and so what we saw is mostly trauma cases being done.
Or or cases that warrant elective like if somebody had foot drop or there is a mile a path that case and what would happen is is those cases would go ahead go in and so April was was was very slow and again I think it was still pretty reflective of the same type thing you saw some.
Hey, if he's doing surgical cases, and whatnot, but it was profoundly at a slow down and so.
Really not like.
Yes, that's going to try to quantify any abbott.
I think there's too much uncertainty I would say that you know we're bullish on on what's going on I think to kind of replicate what a lot of the other companies is that have already communicated there's a bullishness in terms of everything coming back and they're being a pickup really in the back half of this quarter.
Yes, okay. So when you speak about when you think about average daily sales right in your fourth quarter being seasonally the highest quarter.
Going into the pandemic in mid March.
Yes, we started seeing the average daily sales approach Q4 volumes, so that was encouraging.
Okay. Okay.
Okay got it thats helpful. Thanks.
Okay and then the last one just is.
Looking forward a bit as well.
And I've been asked and all the spine companies. This on these calls but just thinking.
Thinking about the opportunity coming out of this you've got a lot of lot of support from squadron, you've got a lot of cash already.
A lot of your smaller competitors don't is there a bigger opportunity to take share coming out of this than people realize from was it was a small players or if the larger ones, there or maybe a little bit more distracted by another can pay or whatever it may be to even be more successful on the share taking side of things Q4. This.
Here into 2021.
Yeah. The I would tell you the recruiting dynamics out there are phenomenal.
And the recruiting dynamics, especially with the big companies.
Meaning that we love taking people from the big companies because oftentimes they are lethargy is.
Is there a killer appeal and so the great. Part is is we created this machine here from a from a product development perspective, where I think these guys are saying how do I start new when this pandemic is over and what we've seen as we've seen a ton of interest in what we're doing because they knew of our commitment toward the can.
Continued evolution of spine surgery and so.
Yes, the the commented that we will.
Evolve out of this better than how we went in it is absolutely real and so and going a lot of of salespeople and surgeons and otherwise.
Kind of coming our way because again I think that they look who I want to be with over the next 10 years and and.
What company do I want to line my interest to serve the interest of my surgeon, who is serving as patients and I got to tell you.
This has been a very good time for us.
Alright very helpful. Thanks, so much.
Thank you enter next question comes from the line of Kyle Rose with Canaccord. Your line is open. Please go ahead.
Great. Thank you very much for taking the questions and good afternoon, everybody. So I just wanted to kind of touch.
Take a step one further than and Matt. Prior question. There, maybe just help us understand the dynamics you saw specifically in the second half of March and April and we've heard on other calls with companies have varying sizes, just you'd see procedure volumes declined in the 70% to 80% range for for the month of April.
I guess number one is that fair when when you look at your business and then number two maybe kind of help us understand what's happened in the first 10 11 days as far as the month of May and kind of how that that's looking on a go forward perspective.
Yeah. This is Jeff.
I think this to speak to my my earlier response every week, we saw great momentum going into the crisis in the first half of March in terms of average daily volumes, we saw a pretty abrupt.
Shutdown, if you will or decrease in those volumes, but will also say that in April frankly, starting starting even first or second week of April.
Volumes are are beyond where we expect them to be for its also so we we ended April.
Much better spot that we expected to occur.
Early early signs of recovery or we're very optimistic.
Okay.
And then when we think about the types of cases that are getting done obviously I understand the dynamic around trauma in anything emergent, but we think about the recovery you've seen maybe some of the encouraging trends we've seen for the month of April.
What what types of cases are being done and I guess, what studied are they being done in or hear more about speed, we see hearing more about more of the simple cases.
Obviously, those don't carry the same seven price tag to some of the larger complex cases, so maybe help us understand.
How much of it is a procedural perspective as far as weakness versus.
A mix perspective, and how that might change.
I think you know.
Think everybody's been relatively correct on this at least from our view is it. It's a I think that a lot of of single in two level surgical cases going on it as sees.
The I think a lot of minimally invasive stuff going on.
No that can be done in a relatively bloodless away.
And so I think it's really kind of how you described it which becomes relatively non complex stuff so that the.
Yes, you beds aren't very unlikely to be utilized and and I think a relatively straightforward short.
It would segment in terms of not a number a fewer number of levels being done. So I think it's what you described.
Okay.
On for Jeff I think Jeff you talked about the medium term margin outlook stated in the mid 70 percents just wanted to make sure I heard that correctly that didnt.
Does that capture any type of you over the near term headwinds from a gross margin perspective, and kind of how should we think about how that will ebb and flow has the recovery progresses.
Yes, I think clearly with a with a decrease in volumes, you're going to see less efficient absorption of overhead, but but I would say you know.
We still feel good about our our target going into 2021.
We will be in the mid Seventys, particularly as this CNO margin drag this behind us. So I think you may see a temporary blip, if you will because less overhead absorption or less volume, though at over in the very near term button in the mid term, we still feel very good about that.
70, mid 70% target.
Okay and then just the last question for me and then I'll hop in into Q again, it's just.
You talked with the increase in convoy sales, obviously is the safe up.
Seems to be a real value driver there maybe kind of just talk about the power that product has opened up new accounts, but then also distribution talent and then maybe just how far into that launch are you with respect to where the existing businesses. Now is 25, 25% of your distribution channel in physicians using into the 50%.
And just try to understand how much of a.
Of an opportunity has within the existing users now versus just kind of.
In the future income line.
Yes, it's a great question I think.
We're in a profoundly early phase.
As you. Appreciate these are relatively technical devices and take time for us to train everybody.
Just kind of downtime was really provided an opportunity for us to do a fair amount of training I would say were 25% or less into it if you will.
Things end up taking more time than what you ever want but the value that they bring his extraordinary and so when you start to think about.
The different type of Invictus, which is our pedicle screw system utility people are starting off very simply with regard to integrating in integrating it into our pedicle screw utility with with the with.
Stimulate DMD and then there what they're doing is evolving it into lateral with regard to these stimulated the MGM. The SXCP. So it's really kind of a walk and so we're in a very early stages of that walk likely less than 25%.
Well penetrated into our our group, but kind of the clinical experience with it has been phenomenal and and candidly. It's it's a unique technology and so we're seeing a lot of.
Receptivity to.
From hospitals and from surgeons and really kind of.
Makes me very bullish in terms of what the acceptance is going to be especially as we continue to assemble this into a procedural way with with other adjuncts and so.
The whole shaping will just be part of the Alpha informatics, there will be such a substantial number of element to it will go into how we often provide information into surgery. So.
Great. Thank you very much for taking the question. Thanks go.
Thank you and your next question comes in a line of Arthur He was H.C. Wainwright. Your line is open. Please go ahead.
Hi, Good afternoon, everyone. Thanks for taking my question. These officer for shown Lee I have two questions. Oh first one is regarding the you as.
You guys give us more cutter on what kind of other I'll turn to collaboration option you would exploring with them.
Yeah, you know they I would prefer not to get into it because there's nothing to to announce or nothing business concrete. It's it's a.
So.
Yes, if it's it's not acquisition type of relationships the hard work commercial in nature and so.
That's probably is deeply that get into just because it's in such as such an early stage.
Okay. Thanks, Thanks for additional color.
And there are on the regulatory side.
I noticed you guys have submitted additional new product.
Implication of from your side have you seen any.
Slowdown or impact from the Kobe 19 to the.
Good tray approval.
Yet.
I got to it.
Let me Brad one second on a regulatory team as their outstanding at hand, and we really haven't to date and so we.
We're shoring up a part of our portfolio that I think is is going to be has as a.
As outstanding is as the rest of it as we continue to launch new products and so we have several.
Submissions in and I think they're moving along as.
As expected and so haven't really seen much of an impact.
No okay, great. That's great. Thank you. Thank you very much.
Thank you and I'm showing no further questions and I'd like to turn the conference back over to Pat miles for any closing remarks.
Just really appreciate everybodys interest in that in a check.
We are really creating a monster and that can't be more excited about what's going on and hopefully we'll return from this pandemic.
Everybody safe and Anda and stronger so thanks much.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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