Alphatec Holdings Inc. Q1 2023 Earnings Call
And in adult deformity, and again I'll speak a little bit more on that as we roll forward.
So an area of profound familiarity to the company as lateral and.
When you start to think about sophistication being demonstrated through multiple distinctions are the same subject I would tell you that lateral is a profound competency in and so when we talk about designing procedures from the ground up we can't be more excited about what we're doing with regard to the lateral L. P. P transverse approach and so.
What you've seen in the marketplace is a big swing back to analyst and so what surgeons want to do is they want to do a conventional midline a width and the beauty of this procedure is that it provides the ability to do a live at five one and are in a position of great familiarity and so the most common treated levels are L. Three the S. One we want to be able to have a.
Solution for lateral approach surgery, a L. T. P is a reflection of all of our know how internally and can't be more excited about it. It really does enhance economics. When you don't have to turn the room over you don't forego all the expense associated with the all of the disposables in the surgery as well as you know just the you start to think about a patient under anesthesia.
As you so that the beauty of the economics, the ergonomics and the Optionality provided by this is exceedingly valuable and then what we get to do as we get to integrate some of the experiences that we had on the patient positions as well as what we've done exceedingly well on the safe upfront. So just super excited about the momentum and all that's going on in that Oh.
Arena.
Our.
Our momentum fairly on a procedural front is fantastic our run with iOS is yet ahead and just because we're has had been very focused and candidly successful on the momentum creation portion with procedure realization in the lateral space. It doesn't mean that we can.
Commit the same type of prowess.
Procedurally for things like AI as I thought it would be valuable to just provide a little bit of a vision on how we're.
Leveraging is to increase our influence in deformity and really beginning to extend procedural strategy.
Lateral and advanced care in something like Oh, Yeah, Yes, which is adolescent idiopathic scoliosis.
I mentioned that we launched the Invictus DVR direct but people rotation instrumentation.
And so the great part of as we've launched that instrumentation, but now when you start to think got how are we going to have influence across something thats been somewhat of a mature market.
About what we're calling alpha informatics platform you can think about is when you think about how we're automating measures and so if a patient goes in it gets automated measures and they get.
A preoperative plan.
And you realize through the automated measures that theres, a rotational deformity when a patient gets zero theater, a surgeon you rotate to spine via a system like D V or what theyre going to use ultimately is is there going to shape up in a way that also provides motorboat potentials such that when they do rotate the spine it will provide them a.
And a confidence that everything is OK neurologically. So you start to see got how to save up start to.
Provide influence in that surgery and it becomes a relatively apparent and then just the ability to say how do we integrate the information that we got from the ear spinner operatively and that will be with an inter operative assessment that will be available in 2024, and then the ability to ultimately take that.
Information from you can apply bending corners preoperatively, such that we can understand exactly what's going to go on with the surgery is again another opportunity to influence what's going on in <unk>.
Surgery.
And then lastly, a position of an ultimate effectuate.
The ability to more precisely and more a minimally.
Place implants based upon the patient's position and so we feel like there's a ton of opportunity to proceed realized outside of lateral and it really create momentum for the company outside of of what's previously gone on them. This is a I think a really kind of a key slide and a kind of a thesis that that.
So it really hits home with us as we think it's entertaining that something that spine is commoditized and I think that they look at the inflation of spine surgeries as implants or screws and when you start to look at outcomes you start to see how our spine outcomes.
Orthopedics and they're less predictable for orthopedics and so if you start to look at the graph and you say gosh, what's the revision rate of a total knee surgery in five years, and a 3% and you say gosh, what's the total hip replacement revision in 10 years and it's around 5%.
But then you start to look at spine surgery, you look at degenerative surgery in a 10% to 15% from one to three years and adult deformity, if it could be up to 25% to 30% in two to five years. So it's fascinating to us if people think gosh. If this is a commoditized environments. When we realize there's still there's still a ton to do to make this stuff better.
And our view is is that.
But really it's about how do you start to mitigate variables in it if your commitment is to mitigate variables that doesn't mean more screws. What it means is more information and that's how we ultimately expand the influence of Eos and so developing an integrated spine. Most powerful information based variable mitigation system has really been a commitment that we've made with.
Regard to yields and so just the ability to understand the preoperative phase and what you're going to start to see through that use our system is automation and so the days of surgeons.
Measuring all of the different parameters that they're trying to achieve through the intervention is going to be gone because ultimately we're going to do that in an automated way, which will ultimately help automate surgical planning and all that will help with the diagnostic process.
Other things can be fun is to bring this stuff into the operating room and really understand what the type of changes that we were able to garner with regard to some of these.
Patient specific type of rock understanding of patients bone quality utilizing them.
A reconciliation inter operatively to make sure that you're getting what you are trying to achieve based upon what your original surgical plan was.
And then assessments and follow up.
And then again, if you keep doing that a bunch of times. There is a predictive analytic reflection that ultimately creates just just a much greater predictability.
Our our variable mitigation doesn't stop at yes, it's likely that such a.
The exciting part of the platform becomes is how do we continue to even inter operatively become more sophisticated how do we become more precise and that's what's so exciting about the investments that we just made in diffusion robotics platform and so our intention is to improve our procedural predictability and efficiency, while reducing while.
Reducing radiation exposure.
I don't really think of these things we think of them, how we would integrate them procedurally and if you look at the picture on the far left to get them really the opportunity to intervene in place Robotically navigators EMG verified pedicle screws that means combining two technologies, both and navigation and robotics.
Russ.
EMG, so that youre affirming in terms of the screw placement, but it doesn't stop there and this is where we think that our opportunity is is to integrate these things procedurally and then what we'll be able to do is we'll be able to navigate the latter one decision plans only anatomy trajectory to celgene for precise dilator and retract replacement with integrated automated neural navigation.
It provides real time information on location and health nurse interoperable. So do you see the Buda assemble these technologies to create one more precision to make it a much safer surgery.
So we believe that that's going to again mitigate variables as it relates to the intervention.
And then navigation enabled robotics platform enhances predictability monitoring retractor migration throughout the surgery.
While doing this prep and Interbody placement again adds an element of precision and so.
Again, I think that all of these things ultimately drive a variable mitigation effort that again makes for a greater level of predictability. So just can't be more excited about the distinction and that continues to provide which ultimately compel of adoption, which ultimately confused enabled us to build our field force and so.
As discussed on our most recent call.
We cannot cannot be more enthusiastic about the team that surround the fusion robotics platform and we love to see.
Those guys arent getting with regard to what the requirements are to make this stuff are seamlessly integrated into what we do with regard to procedures and so the founders who we've talked a little bit about bread plate and then Kevin fully had been around since the mid nineties and they notice our platts this field exceedingly well and.
We just believe that our capacity to integrate this technology into the procedures as I. Just described is the opportunity until we get to do so without a foundation a versatile platform that ultimately has a very small footprint, which we think is also a great day.
Advantage and so.
We believe our are supposed to be really uniquely well positioned for the for the the informatics arms race, that's going to ensue and so I think with regard to the preoperative Cape.
Capabilities in August I described earlier all of the inner operative elements that drive a procedural sophistication and then an understanding of what happens post operatively and that's feeding that being that back in such that surgeons will have an understanding of the type of.
Experienced that the patient had we feel like is a is a recipe for for forward success. So I think that statistically as we are to date the whole compelling surgeon adoption is being reflected as we continue to increase the blended <unk>.
<unk> per category.
The other I think element of a reflection is that continued interest in our surgeon education, which was 100 this quarter and in.
The demand continues to be a profoundly robust and I expect we'll do four to 500 again this year.
And so very excited about continuing to host surgeons here at our facility in Carlsbad.
Well actually I think that.
The the distribution team is getting better and better.
We're still a small company were less than 5% market share and so our focus really is how do we strategically filling large geographic gaps how do we continue to compel surgeon adopters and show them that.
That really remains our focus.
The one thing that's gotta make you exceedingly bullish is that those people who have been around a long time are growing at 48%.
You know theres nothing that I think makes us more confident in the trajectory of what's going on is that the people who have been around this a long time understand that they have a clinical labs due to our drilling.
Wade so what we're trying to do is computer advance that clinical attitude earn increase share by our share of existing surgeon users and further penetrate adjacent geographies.
Within existing.
Areas and so.
That's the color commentary on the business and then I'll turn it over to Tom to talk about financials.
Thanks, Beth and good afternoon, everyone. We appreciate you joining the call today.
So I'll begin with revenue first quarter total revenue was $109 million, reflecting a 54% growth over the prior year and a 3% increase compared to the previous quarter.
$109 million in revenue is comprised of $94 million in surgical revenue was $50 million.
First quarter surgical revenue of $94 million increased 55% compared to the prior year period procedural volume grew 40% in the first quarter with average revenue per case, expanding 11% year over year.
Revenue mix continues to shift towards procedures with more products per case, and greater complexity, and where a lot of them related revenue contributes the most of the growth.
Revenue related to our recently launched Siri are expandable cage in biologics also grew solidly in the quarter.
<unk> revenue in the first quarter was $15 million up 46% compared to last year with solid execution on deliveries and installations. In addition to an order that was delivered in a non strategic international geography.
For the remainder of the P&L first quarter non-GAAP gross margin was 72, 4% up 20 basis points compared to the prior year.
First quarter, non-GAAP , R&D was $12 million and approximately 11% of sales compared to $9 million.
And 12% of sales in the prior year the increase on an absolute dollar basis was driven by continued investments to organically expand our product portfolio and advance the alpha informatics platform.
non-GAAP SG&A was $81 million and approximately 74% of sales in the first quarter compared to $61 million and 85% of sales in the prior year period, we delivered over 1100 basis points of improvement.
With our long range plan, approximately 40% of the leverage came from variable selling rate of improvement while.
While the balance was driven by leveraging the infrastructure investments we've made.
Total non-GAAP operating expense amounted to $93 million and approximately 85% of sales in the first quarter compared to $69 million and 98% of sales in the prior year period, demonstrating 1270 basis points of operating leverage here.
Adjusted EBITA was a loss of $5 $2 million or approximately 5% of sales in the first quarter compared to $11 million adjusted EBITDA loss.
16% of sales in the prior year.
1080 basis point improvement as a percentage of sales was driven primarily by SG&A leverage. These results continue to demonstrate the leverage we can deliver as our business grows.
We ended the first quarter was $117 million in cash that includes $95 million.
Net proceeds from the grade level term loan offset by $28 million Paydown of our revolving credit facility operating cash use totaled $35 million, which was predominantly related to investments in inventory and instruments.
Sales growth.
New product launches.
First quarter of each year is also seasonally burdened with some compensation related payments we.
We continue to expect full year 2023, cashiers to meaningfully improve relative to 2022.
Adjusted EBITDA improved consistent with our long term plan.
The carrying value was $449 million, we continue to have undrawn and available borrowings under both the midcap revolving credit facility and the break bulk terminal.
So turning our look to the full year 2023 in line with the pre release, our first quarter financial results. A few weeks ago. We continue to expect full year 2023 total revenue to grow 28% to approximately $450 million that includes 2023 surgical revenue growth of approximately 30% to 393.
And he loss revenue of approximately $57 million.
Our sales growth drive leverage across our business, we continue to expect to achieve adjusted EBITDA breakeven for the full year 2023.
Our revenue results of $20 three enables us to absorb about $4 million of investments in the robotics navigation technology, we acquired while continuing to deliver on our commitment to achieving 100 basis points of adjusted EBITDA margin expansion clearly the momentum of the business is strong which positions us well to achieve our profitability and free cash flow goals and our law.
<unk> plan.
The next few slides provide additional context for our 2023 guidance and I'll start by sharing how are expectations for procedural volume growth and the expansion of average revenue per surgery shape surgical revenue guidance.
We will continue to train surgeons at a robust rate, which drive surgeon adoption and utilization training surgeons builds loyalty and enables surgeons to work up the procedural complexity curve both of which increased utilization. The Middle chart is a testament to the consistent ramp in utilization that are certain cohorts have demonstrated each year.
We now expect these dynamics to fuel high teens percent procedure volume growth for the full year 2023 compared to the mid teens volume growth we expected previously.
Average revenue per surgery growth as our mix shift towards procedures that require more products per surgery like PGP and LTP.
For surgeries with greater complexity, all of which feature higher revenue per procedure than our overall average. The gradual addition of expandable implant to our portfolio and increasing biologics attach rate are also enabling us to capture more of each procedure revenue opportunity.
We expect these dynamics to drive growth in average revenue per surgery at a high single digit percent rate for the full year 2023.
So with respect to the rest of the P&L, we have begun to demonstrate how this business scales as we grow and we expect that dynamic to continue through 2023 guidance for breakeven adjusted EBITDA. This year implies 800 basis points of improvement relative to full year 2022.
Our confidence in delivering that level of operating leverage for the full year 'twenty three is shaped by the 800 basis points of margin expansion that we drove in the second half of 2022 and by the strong 1080 basis points. We drove in the first quarter of 2023. Additionally, the components driving this leverage as we grow our consistent with what we.
Bribed and our long range plan last may.
So we are pleased to be able to continue investing in the priorities that support business growth, while achieving our financial commitments.
So in closing 2023 has started out strong and we continue to see great momentum in the business surgeon interest is strong as demonstrated by the training metrics Kashered earlier. This is a leading indicator of adoption, which ultimately drives the magnitude or procedure growth. We are achieving it was clear to us when you enable surgeons to do better surgery to earn their trust and a greater share of their own.
<unk> procedural volume.
You can see our commitment to invest in innovation through our prioritization of research and development.
Our organic innovation machine.
This completely focused on revolutionizing the approach to spine surgery through the recent acquisition of the fusion robotics assets. We added a tremendously knowledgeable team of people that will lead the integration of navigation enabled robotics into our procedural offerings.
We are laser focused on executing our strategy and I can't think of a place I'd rather be that in the middle of what we're doing here at <unk>.
And as you might expect we have an active IR calendar over the next few months and I hope to connect with many of you in person with that I will turn the call back over to Pat.
Thank you very much Todd greatly appreciating so our view is the spine spinal future will be defined by information.
Our foundation of the <unk> platform.
<unk> asset as well as the future robotics assets. Most recently added will be foundational to our success and so only a tech has the know how and technological foundation UCITS funds information standards and.
That's where we're heading with that we will take questions.
Thank you we will now open the floor for questions I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We will go first to Matt Blackman of Stifel.
Hi, Good afternoon, everybody. Thank you for taking my questions I've got two in.
And maybe just to start a question for Todd and I'm sure you're going to love. This one.
But you know we're almost a year into the three year, a three year <unk> laid out and as we run our numbers and even baking some deceleration it seems like you're tracking well ahead of plan, particularly on the top line and I. Appreciate this may not be the forum for you to update the MRP, but it does feel like you could do your 2025 revenue goalposts as early as 2024.
The question is am I missing something or is there a reason beyond.
Comps are a law of larger numbers, while you might see a deceleration to sub 20% growth over the next 12 months that makes that sort of earlier than <unk>.
Expected arrival on the $555 million revenue go bone goalposts more challenging than were appreciating and I've got one follow up.
Well thanks, Matt.
Talk to you too.
That's a good question and happy to answer and give some context I think our view is the business continues to be strong and we've been abundantly clear about our commitment to.
Creating clinical distinction to drive surgeon adoption and the level of adoption that we have had seen which has driven driving the procedural volume has been strong the.
Leading indicators of surgeon adoption surgeon training I think are all trending north of our long range plan kind of milestones if you will and so.
Certainly like where we are relative to the revenue strong growth this year guidance around 30% year over year growth our long range plan assumptions as you remember, we're just kind of low twenties percentage growth. So I think we enter the last two years of our Ela with.
Really ahead of the game and with some <unk>.
When you work our tails, if you will and so I feel good about where we're going to probably come sort of answering specifically what 2025 revenue is going to be but that shouldn't mispriced.
And then.
Relative to the adjusted EBITDA components of that much of our work as we start as you know is time phased and so.
I think on an absolute dollar basis, we would view $80 million of adjusted EBITDA as being the the floor and I think we've often talked about incremental revenue over our guide dropping through at kind of 10 cents on the dollar.
I think more or less I think you can kind of begin to think about how adjusted EBITDA might like.
Might be different from the $80 million on a higher revenue number by doing some of that now.
Great I really appreciate that and because a lot of stuff to pick from here, but you know one of the things I haven't heard you talk about recently and I suspect progress is being made I was just on international just remind us where you are.
On the international rollout of Australia, Japan, what's left to do.
And I guess really what's a reasonable way to think about when we start seeing visible revenue contribution could it be in 2024, I mean, I think we've got it baked into 2025 I'm just wondering if its evolving a little bit faster.
Yeah, Matt I appreciate the question.
Spine week earlier this week in Australia.
So much I think as these things become are the right people around it and so the foundation that we're building with the Australian team is outstanding and we're starting to do business literally.
March was the tender the initiation of that business and the great thing is I think that there is a shared surgical kind of thesis.
The one.
Adopted lateral surgery.
Very quickly and favorably and there is still utilized lateral surgery. So I think from a competitive perspective and from an opportunity standpoint.
Readily apparent and I think that we have a team there to ultimately do very well and so I would say, we're just literally getting out of the gate on the Australian front, we probably have another year on the at least on the Japanese Japan business front again I think.
If I heard you speak subjectively about right people around things there is a lot of enthusiasm to for us to get into Japan.
I guess again, a very vague, but I would say.
New Zealand Australia.
A great team getting off in a robust manner, hopefully will see a contribution just a it'll be a small one towards the end of the year.
The whole Japanese market will be probably a year year and a half 25 is what we're thinking.
But love the foundation we're building.
Great. Thank you so much I appreciate it.
Yeah, Thanks, Matt Thanks, Matt.
Well move next to Brooks O'neil at Lake Street capital markets.
Yeah.
Good afternoon, guys. So I'm, just curious if you'd comment how significant and ongoing industry consolidation impacts your ability to grow and at those long term growth targets.
Yeah.
Right.
Well I would say.
So much of it becomes.
I was just kind of work in the business as we know and I'm not trying to be coy at all and I think I read somewhere recently somebody just talking about not a lot happens until the until the integration takes place in and so you know candidly, it's been somewhat quiet out there we love.
What we're doing I got to tell you I Love. The addition of the navigation robotics.
And I think there's a lot of people. This is a small town in terms of spine and I think a lot of people understand the prolific nature of how we integrate technology to create better procedures and so I think that's been demonstrated through our run to our guidance add from $83 million in whatever it was 2018 to $4 50 in terms of our <unk>.
<unk> this year and so.
I don't think that you can take that.
And I think people understand that and I think as you look at safe up as being a proxy for how we integrate navigation I like our chances and with navigation team that's over in Colorado. The level of Knowhow is kind of outlandish and so again I guess.
I pay less attention to the dynamics of all of the frenetic and the space and just continue to say how do we create a distinction how do we can tell adoption and how do we get the right people in each of the different territories and I think our excitement is how do we.
And in and compelling inspire great sales guys to come over and join the family.
A lot of great stuff, that's going on here, we are a heck of a long run and we want them on our team.
Great Defense.
More so obviously you had PTP before you add Remy.
Could you just talk a little bit about whether you'd see remy enhancing.
The PTP procedure or are you thinking about it more with L. P P and deformity and some of this other stuff that's coming down the line.
Yeah.
It's a great question Brooks.
Brooks.
The dynamics are that PTP adoption is profoundly robust and then you asked why do you need more technology and one of the requirements associated with PTP is really it's like how do I get that first dilator orthogonal to the spine and the.
Challenges is it takes some radiation that is generated by the forest co for the X Ray machine and so our desire is to continue to protect not only the surgeons, but increase the precision by limiting the volume of radiation, having people be able to play something more precise and then also give them a heads up like one of the things I love.
About our SSC P is it tells a surgeon hate maybe there's something wrong. There is a degradation in the <unk> signal, we'd love to integrate the same type of dynamic here, where what you didn't know the surgeon is hey, maybe they are attractive slightly moved and you would love some type of an alert and so when you start to think about all the opportunities to mitigate variables in surgery.
Our view was this was a great investment because ultimately what we can do is integrate these technologies in a way that continues to limit the technological tend to surgeon Gestalt and can we provide technology to augment their efforts and so we feel like PTP and LCP are great opportunities to do that and then we just think that integrating these with the whole E.
<unk> system of Eos and safe off and the others. Just again provides great value and mitigates the variables in surgery.
Great. Thanks.
Thanks, a lot and keep up all the great work.
Thanks Brook I appreciate you.
We will go next to Josh Jennings with TD Cowen.
Hi, This is Eric on for Josh Thanks for taking the question.
Wanted to talk about Remy for a second I was just curious to hear feedback from surgeons that you're hearing on that acquisition.
What are their thoughts on the combination of Remy with the tech portfolio.
Yeah.
No it is.
And it's not unexpected.
It's been very very favorable.
Was over at as I said earlier as overt spine weakened in Australia, and there were several U S surgeons and several <unk>.
Australia, and surgeons, who approached me in.
We are exceedingly pleased.
And candidly they readily see the opportunity to integrate these technologies and we've always talked about having two independent technologies like a neurophysiology and a navigation system that tells you in two different ways that hey, you're safe.
That through pedicle screw play.
Placement as well as things like get Trans Solus approach and so these guys readily understand what are kind of the thinking is around this.
Acquisition, and I can't say I've, yet to hear of anybody who hasn't been supported.
Sure some of the old approach.
But.
And our view is we'll demonstrate like we're in this for the long haul we will demonstrate over the long term guidance.
We envisioned with regard to the integration of this technology to our portfolio.
Eric I think the opportunity is to really integrate it into the full procedural approach to date.
Robotics and navigation have largely been all about pedicle screw placement, which certainly has some value, but we think the <unk>.
Real value is being able to integrate it into our procedural approach to mitigate variables of surgery.
Understood that makes a lot of sense of an.
Totally appreciate that it takes some time to integrate that sort of technology into the portfolio, but when would it be appropriate for us to start seeing contributions from the Remy acquisition and revenue.
Yes, I think.
The short term in terms of the six to 12 months effort is going to be how do we get all of our implants.
Through the regulatory clearance and make sure that all of it is they are used together in a relatively conventional manner I would tell you, there's probably 25 issues when youll start to see the integration of procedurally of how these things all fit together.
We have great confidence in the elegance of this integration.
Understood. Thanks for the questions.
Thanks, Ed.
And we'll take our next question from Sean Lee of H C. Wainwright.
Good afternoon, guys and thanks for taking my question.
One probably a little higher level, one on the robotic surgery.
In terms of the.
Lateral surgery suite Alphatec is focusing on.
Promotion of surgeries currently are using robotic assistance.
And with the right devices and technologies, where do you think that number can get to over the next day.
Four to five years.
Okay.
Yeah, I think it's a great question Sean.
I would say.
If I were to be a a betting man.
I would say, 3% or less today.
<unk>, 1% during last really people are not utilizing it for the anterior column as much as it's being promoted as such.
I think that it has been sketchy at best.
Robotics in the lateral.
Trans source.
Approach you guys have talked a lot about it.
I think had been inspired about it but.
Little to none is done.
I think that there's a great capability and I guess I'm more more inspired by.
The navigation portion maybe once we navigate something will hold with an arm and if that's robotics that I'm inspired about that too.
I think that there is a real opportunity when you start to think about predictability orthogonality is a big driver of that and so for us to create an orthogonal exposure in the spine and hold it in a place and tell somebody if it moves I think that's very valuable and so my hope is what we would do is again demonstrate enel.
Other requirement for lateral surgery through these means like I can't I can't imagine a stronger position that we have in lateral surgery with automated SSE piece.
How how somebody doesn't utilize automated SSE piece.
Appreciate the discerning element of a degradation of a of a signal as a precursor to a potential motor deficits.
Why would you not use that and so I think as we continue to apply these technologies to a procedure again I think as Todd comment in terms of variable mitigation. That's the thesis of what we're trying to accomplish and so more long winded than you hoped but it's.
I think it's less than 1% today I think it has a propensity to be very very valuable and I think that we're going to be the.
The standard bearer as it relates to making the rules of procedure that we know that.
Great that's very helpful.
That does conclude our question and answer session. At this time I would like to turn the call back to Pat miles for closing remarks.
Thanks very much.
I appreciate everybody's interest and excitement.
About <unk>, we're literally just getting started we have a heck of a long run and excited about the.
So anyway, thanks very much.
And that does conclude today's conference again. Thank you for your participation you may now disconnect.