Q3 2020 Alphatec Holdings Inc Earnings Call

Good afternoon, everyone and welcome to Alphatec <unk> third 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.

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 need here to company refer to reported amounts.

Which are in accordance with the U.S. GAAP as well as non-GAAP or pro forma measures.

Conciliations 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 management's view of why this information is useful to investors.

Joining us on the call today, well be Eightx, chairman and CEO, Pat miles and see it so Jeff Black.

Now I'll turn the call over to Pat miles Chairman and CEO.

[laughter].

Welcome everybody to the Q3 2020 financial results Conference call. In this conference call you will hear some forward looking statements.

I will shave you reading the forward looking statement, but I would ask that you review.

So I would tell you that I'm. A Q3 2020 was was a was a good quarter for each arc clearly the the the highlights are a revenue growth of greater than 40% in.

In the U.S.

Well, we believe that that will outpace the rest of industry also super excited about the follow on offering it really creates a runway to execute on our growth initiatives.

And then lastly, Ah really the clinical experience just continues to evolve and so really our continued approach based new products will will really drive our long term growth and so let's delve a little bit more deeply into the score card and I think you'll find that the momentum that the numbers under the numbers are good.

And so I I told you a greater than 40% year over year, where a U.S. revenue.

20% year over year growth in revenue per surgeon.

The utilization of new products is greater than 70%.

Hats off to the organic innovation machine and a 13% year over year growth in average revenue per case up 32% since Q3 of 2018, which makes for our eighth consecutive quarter of double digit year over year growth and the average products kept product categories sold per surgery at 1.8.

What you'll find is because our commitments.

Haven't changed they likely won't change for for a little while in that yeah. We will continue to create clinical distinction and what that means is is really continues to build that organic innovation machine that we that we talk about the other one is is computed compel surgeon adoption, which means how do we start to increase the revenue had none.

<unk> products sold per surgery, I'm really through innovative means and then lastly, computer weren't revitalize the sales channel than 10 advance toward exclusivity or.

In the U.S. and so.

Is that your ability the good start from the back and go to the front and go back to the back really enables you to approach more spine surgeries more efficiently and then lastly, we always talk about the tenants of surgery being being decompression stabilization and alignment in the prone position really improves the restoration.

Of alignment in so we believe that previously developed lateral systems do not fulfill the requirements of prone lateral surgery, and we will not be reproducible and so.

In addition to PTP, we're also working with professor arms, and taking T lift to the next level and we are we are doing that and working on it cheating improved alignment through less disruptive surgery. So to date, we have launched a sigma tea with and really it's a.

Sigma element debit as a political based access system bill to them.

To deliver less disruptive more predictable surgery provides direct visualization of key anatomic landmarks as well as when we start to think about convoys sales and we say cash putting products together to ultimate reflect predictability in a procedure you start to see that the Sigma retractor is used with Invictus Mif's Mod.

Which is delivered with single step identity is used in the inner body space and safe up neural informatic system is utilized to make sure that the the screws or in the right place in the in the neural elements are are okay.

But.

If you if you start to think about.

Cold is is 50%. So you have to think casters traction there year over year growth an average revenue per cases up 13%.

32% versus Q3 of 18, and then year over year growth in revenue per surgeon is is 20%. So again I think that these things speak to the number under the number and really create a little bit of momentum.

I would tell you there's really three key ways that we that we compelled increased surgeon adoption and one of them is is you create confidence and what that means is when a surgeon has more confidence what they started doing is pushing more complex surgery, you're way and so more complex surgery oftentimes means more levels and so I would tell you that's one way.

The other the other way becomes.

Is a new procedures in terms of us providing them technology that ultimately avails their ability to do things that they that they couldn't do before and so.

The the ability to start to provide them optionality and efficiency of things that candidly are better and then the last thing is what we talk about a lot, which becomes a whole convoy sales, which becomes or the or the different products that we would that we would design and deliver for this procedure realisation being adopted so I think that.

That's a really great segue into into into the convoy sales and the and the really the impact of the Alpha informatics last safe up.

Catalyst has what the catalyst has been too much of our products per procedure reflection and when you start to see cash, whereas at most impacted and so you look at the blended rate of one eight products per procedure you.

You saw the Sigma T left that we just launched you're going to see an increase in that area you clearly already to see it in the lateral space and that suggests that there is a lot of adoption in terms of.

Where we're heading from a from a lateral perspective.

When you take a step back and you start to view the investment thesis.

And how things are done and how things are paying off I think again this can all.

Functions.

[noise] together and if you look at that phase one investments and you start to see what the return on that spanned it's relevant information, which is the safe up platform lateral which is a great growth area as well as post your fixation as we earn the entire procedure and that's up significantly clearly and.

And then phase two becomes a lift <unk> lift a lot of growth there and as I think I mentioned.

In the near past, we're in the very early stages of an alpha experience with regard to a number of surgical products that ultimate ultimate complement the the portfolio as well so.

Moving on to to to the sales force in revitalizing the sales channel.

Can't be more excited about what's going on there.

Dancing really torn exclusivity and that's all about how do you compel people and how do you compel surgeons ultimately drives a sales force to be compelled as well and I think that you're seeing.

A a.

Very good performance on that and and so you're seeing U S revenue growth year over year, among top 20 distributors at 43% percentage of sales driven by strategic channel at 92% and U S revenue growth from strategic distributions, 47% and so I think that those people who are engaged in becoming clinically adept in.

Are are really driving significant growth the great part is there's so much opportunity for expansion.

So our early phase reflects of 103% growth in U S revenue per distributor since 2018 that means we're decreasing the number of distributors, but they're they're creating more revenue per distributor, which is really kind of the reflection of professionalizing. This salesforce. The crazy part is we still have a ton of geographies that are significantly under or.

Completely unrepresented and so we're still building this thing out and we're doing it with momentum which is the most comforting part and then you say.

You look at the whole, 92% of our revenue contribution coming from the strategic sales sales network and on the right. If you really the revenue per distributor, making the March that one would expect with regard to the level of success I think that we're having so I will let Jeff delve into the details financially and so on I turn it over to Jim.

Thank you and thank you all for joining the call today.

Some commentary on revenue, which we announced earlier in the month direction October and then announced again today.

Strong momentum in Q3 roubles recovery that we saw in late second quarter continued throughout the quarter.

Low 70% range, even with the impact of of safe of intangible amortization, which kicked in during the year.

We're still seeing drag from excess and obsolete lessons charges on legacy product lines, but that impact has reduced from about 800 basis points in 2019 to about 602020, we will continue to see improvement as we put legacy impact behind us we expect that our normalized EBITDA.

Though is really more in the 300 to 400 basis points range. So.

So with that we continue to expect gross margins in the medium term to be in the in the in the mid 70% range.

Onto the PML on on a non-GAAP functional basis, meaning if you strip out.

Noncash stock based compensation litigation in terms of our run rate expenses on R&D and SGN. Today, you will see that we are continuing to make investments in R&D and the sales channel filling top top line momentum supporting long term sustainable growth.

We did start to see some leverage in the business in Q3 over last year, but over the medium term, we still continue to expect to make what we'll call outsized investments relative to our peers in product development and sales channel.

NSG under you see that dollar growth, it's coming strictly from sales investment in fact, DNA has remained down to relatively flat over the past 15 quarters.

And then finally moving onto the balance sheet. The follow on offering in October has provided us with the runway to continue to aggressively fund our growth initiatives, our cash usage as you see here driven primarily by investment needed to see the supply chain with instruments implant sets to support a growing revenue base that is now more.

Let's commitment to advancing the clinical experience in spine and we are truly just getting going and so excited about two three and looking forward to.

Moving forward.

We will now open the floor for questions as a reminder, in the interest of time, please limit to one to two questions per color.

Thank you.

First question is from the line of Kyle Rose from Canaccord Your lines now open.

Thank you very much for taking the question and congrats on on a very strong corner here I'm wondering if we could just touch on just a little a couple of of the biggest drivers and obviously new products would shoot you I'll end on the call are are significant to maybe maybe just frame out b a pat the the P. T P opportunity.

Farming over 550 cases, you're going to move into the full launch what should that really you know look like when you move into the full launch in the queue for in in 2021, and maybe help US understand you know 550 cases is at 20th Surgeons you know some of which are legacy alphatec. Some of which are are new customers just.

Trying to understand what what that really represents from a growth opportunity over the course of you know call. It. The next 12 to 18 months.

Yeah, Yeah, Thanks, Kyle Uhm.

First let me address the procedure itself.

One one of the interesting parts of having built lateral decubitus before at the other place was that that.

Once we get it everybody came out and said we can do that and they said gosh. Yeah. We have a retractor. We had maybe we haven't neurophysiology thing from R. E N T division in and we have an implanted and they never designed for the requirements of the specific procedure and to this day I still see that companies still having a predominance of market share in that.

Space and so what what I would tell you that you know through the first 550 surgeries. What we did is really kind of applied the learnings to creating the specific requirements designing to those requirements and so I I I think what happens is you know when you when you contemplate how surgery should go it should go based upon someone having thought through all.

All of the different elements and and really that's what we're finding and we've seen it great evolution in terms of the experienced based upon having designed our way into the into the procedure and so literally <unk>.

What <unk>, what you've seen as a very narrow group I'm not gonna give you exact numbers of the surgeons, but it's a very narrow group. The great thing about this procedure is there's a ton of optionality and so if someone's trying to stabilize an unstable spine do you have the ability to go to the back of the spine and put screws in Uhm and then go back to the front of this fine and then go back to the <unk>.

Who's who successes determinant on.

On spine and so I think the spine only thing gives us a great opportunity to continue to bring people in that are have committed their their vocation to spine surgery and so.

We're seeing really a kind of a continued level of larger company previously larger company type of individuals clearly, we're still small companies that I guess that means.

A lot of a lot of things, but were seeing him from guys.

Guys, who had no.

Reasonable businesses and now they're they're getting the opportunity to move their surgeons into technologies that maybe have not been previously available to them and so we're.

We are seeing.

I'll I'll I'll give you what I believe it would be the puts and takes a minute I'll, let other day, Jeff answered with the substance.

The.

The reality is is what we're seeing is outsized adoption of our procedures and so when you start to think about what provide you bullishness. It's when you start to see people applying.

Our spine procedures with great success reproducibility, and so believe you me.

We're doing our best to not get ahead of ourselves and but it is also key that there is that there is.

Some respectability with regard to what our current growth pattern looks like and where we believe we're heading.

If another pandemic hits.

Clearly, it's problematic what we've seen though is that.

Hospitals are not the icu's are not overflowing, we're seeing surgeons, who are who are.

Taking every precaution and and being diligent with regard to.

Getting back to intervening in the volume of patients that they did prior to the pandemic and so I think that we see relatively a relatively methodical walk forward.

Again.

We're concerned too about the things that are a lot of our control, but when you start to see the type of demographics that we're seeing we're trying to be consistent with regard to our projections suggestion.

I think I think covered it well and I think again, we're trying to be.

As careful as we can not to get ahead of ourselves and understanding that they're always there is that risk of another sort of pullback from that's pandemic related but at the same time, we feel very comfortable in the health momentum in the business and our ability now to continue to exert invest in an accelerated way in ensuring that we can we can bring on new.

Distributors in new surgeons and.

Comfortably enable them with the right products in the supply chain.

Feel good about it.

That's really great color guys. It really appreciate it and then just a quick follow up if you don't mind I wanted to switch gears I know you had just recently launched the Invictus M. I S Tower I'm. Just curious you know apologies if I missed it in your prepared remarks, but just curious what some of that initial feedback has been I know, it's early days, but just kind of what you're hearing from from your surgeons.

Then it'd be kinda just take like a step back you've done a lot of work to really build out your your cervical portfolio and that cervical opportunity. So can you just walk us through like how you're feeling right now with your portfolio and just how you're thinking about you know about opportunities, we kind of move into 221 and again I really appreciate you taking the questions.

Sure sure I.

I Gotta tell Ya I like it.

And that training.

Be thoughtful with regard to the responses first of all the tower.

The invictus.

Mm I as tower is gone phenomenally, well I think the functionality.

Of that system is outstanding it falls right within the competency of what we do exceedingly well, which becomes mechanical design.

Vice development and so if you when I when I start to think about.

The organic innovation machine and I start to think about component of that I would tell you a great competency of this company becomes and the types of things that we're launching through Invictus and so.

And again not to be get ahead of myself, but it's somewhat not surprising in terms of the the the level of enthusiasm behind those types of devices and so I would tell you that the foundation of our portfolio is where we intended.

I think what's going to distinguish us though is not just the implant systems, but the things that assemble them and that's why we're so excited about things like PTP and and and the Sigma T lift and just the ability to fix problems and spine that haven't been addressed before and so I think that that's that's really the benefit of being a spy and only profoundly curious.

Company that has a kind of internal knowhow and so.

I would tell you that the portfolios in a place that we intended and I'm thrilled that we're going to continue to commit dollars too.

Are are fixing of problems and spine because that will be what distinguishes us so anyway.

Is it always discernible surgical stone exceedingly early phases.

We're in our evaluation period.

But I think that that will be very pleased here in in 2021 to have a cervical portfolios it will.

Compete with anybody's.

In the business and so that should be a relatively first half of 2021, we're already doing cases and getting experience now.

Thanks, guys.

Next question is from the line of Josh Jennings of Covid Your lines now.

Good afternoon, thanks for taking the questions.

Great to see these third quarter results.

I just keep a lot of really strong metrics and I think the implication is that.

The new surgeon customer adds a new alphatec surgeons are building as well I'll be how are you doing any specific metrics room and I was just wondering if there's any.

Can you just how we how we how we look at it in America.

Josh I'm sure you can appreciate we generally don't disclose actual surge of numbers or how many we've added but but we can tell ya.

<unk> leave that.

As Pat had mentioned early on that as a result of the slowdown in the pandemic actually did allow us or from the pandemic allow us to to access a population of surgeons and bring them on frankly will earlier than we would have expected rich because they had time to think about their next move and so.

It required based upon the procedures and so one of the things that has has I think evaded spine surgery.

Is this whole dynamic of making.

Image guidance, a routine part of a specific procedure based upon the type of value that provides and so recently we have.

Create a relationship with.

Fully adopted in the marketplace are we talking about 10000 P. T. P. The year are we talking 50000 or some other number.

Instead of adopted lateral.

Oh, that's fantastic that's great. Let me just ask one more I I really really appreciate that color I'm, hoping you might just give us a broad sense of how you feel about the safe up platform and how it's been accepted in the marketplace today and maybe what you hope.

It can help you do in the marketplace story 2021.

Yeah. Thanks, Thanks Brooke.

We've talked about it in the past there certainly some some areas that are still white spaces for off the tech and I just wonder. If then how do you think about building up your presence in some of these major markets over called the the next 12 months or so.

Yeah. Thanks for the question the I I would tell you like you know the the the.

I assume it's set investments in channel in the bathroom, but just curious if there's some other stuff that you're you're a bit new Hampshire, a at times because of where you were from a capital position and thanks so much.

Yeah, and then I think I think you nailed it in terms of you know, we we now have the ability and flexibility to to make the commitment to we need to make to ensure that we've got you know the the implant sets the instruments to to see the market to to drive. This your continued adoption, particularly with new surgeons in new distributors I think beyond that.

In your per procedure Theres Salesforce expansion.

Without doing much so I assume there're some conservatism.

Yes.

[music].

There are so many opportunities just to become better as a company and so I would tell you the everything is going.

Right now we have.

Have light years to go in terms of.

Okay I'll disconnect.

[music].