Alphatec Holdings Inc (ATEC) 2009 Q1 法說會逐字稿

Good day and welcome to the Alphatec Spine, Inc., first quarter fiscal 2009 results conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Peter Wulff. Please go ahead, sir.

Thank you and good afternoon everyone. Welcome to Alphatec Spine's conference call to discuss our first quarter ended March 31, 2009 financial and operating results.

With me today are Dirk Kuyper, President and Chief Executive Officer; and Ebun Garner, General Counsel.

By now you should have seen a copy of today's press release announcing first-quarter 2009 financial and operating results. If you do not have a copy of today's press release, you can find it in the investor relations section on our website at www.AlphatecSpine.com.

Before we start there are a couple of items we would like to cover. I would like to remind you that this call is being webcast live and recorded. A replay of the event will be available later today on our website and will remain available for at least 30 days following the call.

We would like to remind you that our discussions today include forward-looking statements. These statements are based on certain assumptions made by us based on historical trends, current conditions, expected future developments including business prospects, product development objectives, future financial performance, and other factors we believe to be appropriate in the circumstances. Risk and uncertainties may cause our actual results to differ materially from those projected in these forward-looking statements.

You can find a discussion of these factors and more information about us in our filings with the SEC, including the risk factors section on our annual report on Form 10-K and subsequent quarterly reports on Form 10-Q and periodic filings on Form 8-K.

These forward-looking statements are made as of the date of this call, and we assume no obligation to update these statements publicly even if new information becomes available in the future.

This broadcast is covered by US copyright laws, and any use or read broadcast of any or all or in any portion of this conference call may only be done with our expressed written permission.

I will now hand the call over to Dirk Kuyper, Alphatec Spine's President and CEO.

Thank you Peter. Good afternoon and thank you for joining us today.

We are pleased to report revenues for the first quarter of 2009 to a record $30.6 million, representing a 32% increase over revenue from the same period last year. This represents the seventh consecutive quarter of record revenues and an accelerating growth rate over prior periods.

In the US we grew first-quarter 2009 revenues by approximately 27.7% over prior year and sequentially by 7.6% over the fourth quarter. This performance reflects the ongoing strength of our core business.

We also reported European revenue of $1 million for the first quarter of 2009.

We are also proud to report positive EBITDA of $1.4 million for the first quarter, reflecting our ability to demonstrate operating leverage while continuing to drive strong topline growth and invest in our robust product development pipeline.

We continue to grow at rates significantly higher than the spine market through the introduction of innovative new products, improvements in our US sales force, and expansion of our international operations.

This afternoon we will provide additional highlights on our operating performance from the first quarter of 2009 as well as an overview of new product introductions and accomplishments in the quarter.

Consistent with our comments from the year-end call, I will focus my remarks on updating you on the four primary drivers of growth at Alphatec -- one, the continued expansion of our core product portfolio, especially in the area of MIS; two, product development initiatives addressing the aging spine market; three, US sales force expansion; and four, international expansion. I'll then turn the call back over to our CFO, Peter Wulff, who will provide a more detailed review of our financial performance. And following Peter, I will come back and discuss 2009 growth initiatives and review our updated 2009 financial guidance before opening the call up for questions.

First, I will discuss the continued expansion of our core product portfolio. After launching eight new products in our core product portfolio in 2008, we remain on target to launch an additional 11 products in 2009.

We expanded our fusion product portfolio in the first quarter by introducing both new products and line extensions. I will take a minute to highlight three of these products -- the ALIF, the VIP packaged allografts, and AlphaGRAFT ProFUSE. We showcased our Universal Novel Anterior Lumbar inter fusion -- Interbody Fusion System, ALIF, implant and instrumentation at the American Academy of Orthopedic Surgeons meeting in Las Vegas in February and completed our initial commercial release in the first quarter.

In addition we successfully completed the commercial release of our proprietary vacuum packaging system, which we call VIP, for allograft implants as well as for AlphaGRAFT ProFUSE products. The VIP is a proprietary packaging system that provides for rapid hydration of a graft. Currently allografts come fresh frozen and must be thawed or freeze dried and must be soaked for 20 to 30 minutes prior to implantation. The VIP system allows for a hydration level that is equivalent to 20 minutes of soaking of a traditional allograft after only 30 seconds in the VIP system, thus providing a substantial time efficiency in the operating room.

We believe that our ProFUSE demineralized bone scaffold provides a substantial growth opportunity for the company. Our proprietary VIP system allows for rapid and uniform hydration of the scaffold with any liquid, including proteins, bone marrow aspirate, blood, or any other fluid the surgeon chooses. Once hydrated, ProFUSE can be squeezed and formed much like a sponge and is designed to fit compactly inside a PEEK or allograft spacer, providing our sales force the opportunity to pick up additional revenue per procedure. When our spacers are used, ProFUSE has the potential to add roughly $1,000 to $1500 of revenue per procedure.

Next, I will discuss our second growth driver initiatives addressing the aging spine. We believe that throughout 2008 we successfully positioned Alphatec as the market leader in providing solutions for the aging spine. We invested heavily in R&D to in-license, develop, and commercialize new and innovative products to treat aging spine conditions. The majority of these products will not make significant contributions to our revenues until late this year, 2010, and thereafter.

One of our key aging spine initiatives is the OsseoFIX Fracture Reduction System. As we have previously stated, the FDA has requested clinical data support our 510(k) application for the OsseoFIX. We announced on our year end call that we expect to begin our 510(k) clinical study in the second quarter of this year, and we believe we are on target.

As a reminder, we received CE Mark approval for OsseoFIX and launched the product in Europe in the fourth quarter of 2008. In the first quarter we expanded commercial adoption of OsseoFIX in Europe and treated over 50 patients and 80 levels. We are enthusiastic about the strong initial response to OsseoFIX and look forward to continued uptake of the product.

We held our second training lab in Vienna in early March, and we had 35 surgeons and a total of over part 50 participants in attendance.

We also continue to invest in technology addressing the aging spine and our core product line through several acquisitions of proprietary technologies.

First, we acquired a proprietary technology to treat lumbar spinal stenosis that we call Helifix and Helifuse.

Secondly, we acquired several patents related to a unique, zero-profile standalone inner body technology for ALIF in cervical fusion.

Third, we secured the distribution rights to a tissue-based, in vivo wound covering product called AmnioClear. AmnioClear is derived from the inner lining of the placenta, the amnion. The amnion has natural anti-adhesive, immunogenic, and anti-inflammatory properties and has been used for decades for corneal repairs as a protective wound covering. We believe there may be a substantial opportunity in spine for the AmnioClear product.

Next, I will discuss our third growth driver, our improved US sales force and distribution channel. In previous calls I stated that we added several key distributors throughout 2008. Through the first quarter of 2009, we saw incremental improvements in sales productivity from distributors that were added in the fourth quarter of 2008, and we expect continued improvement throughout the remainder of 2009.

We have over 85 total distributor organizations in the US, which we believe represent over 240 individual sales representatives, and we remain committed to our goal for 2009 achieving 85% exclusivity among our distributors. We will continue to take advantage of opportunities to upgrade and to expand our network.

Finally, I will discuss our fourth growth driver, international expansion. We continue to expand internationally, and in the first quarter we were recorded $1 million in revenue from Europe and $5.8 million from Asia. We are encouraged by early interest in and uptake of OsseoFIX in Europe, which has in a short time driven new distributor relationships and surgeon adoptions.

In the first quarter we executed new distribution agreements in Belgium, Denmark, Germany, Italy, The Netherlands, Austria, and Spain. In Japan we saw early contribution from direct spine sales representatives that were added in late 2008, and we continue to drive a shift in revenue mix to [increase] (technical difficulty) sales of high-margin Alphatec Spine products.

In the first quarter, spine revenue for our Asian subsidiary doubled from the same period in 2008 and was up sequentially 20% over the fourth quarter of 2008. Overall Alphatec Spine products now represent over a third of all Asian revenue.

Finally, we successfully conducted a move to our new manufacturing facility in the first quarter without any disruption to our operations. We are now housed in a new facility with a footprint to provide expansion without incremental build out. We are anticipating improved efficiencies and cost savings from this consolidation from three manufacturing and distribution locations to a single state-of-the-art facility.

We are proud to have just reported our seventh consecutive quarter of record revenue and our first quarter of positive EBITDA. We believe that through the strength of our core product offering and distribution network we will continue to expand both our revenue base and market share. We have created a platform to support the vision and a talented, high-energy team at Alphatec for continued success.

I would now like to turn the call back over to Peter to discuss the first quarter financial results, and I will conclude with an update on 2009 product initiatives and financial guidance. Peter?

Thank you Dirk.

The following remarks are about our reported financial results for the three months ended March 31, 2009.

Consolidated revenues for the first quarter of 2009 were $30.6 million, an increase of 32% from the $23.2 million reported in the first quarter of 2008 and an increase of 7.6% over the fourth quarter of 2008.

US revenues for the first quarter of 2009 were $23.8 million, an increase of 27.7% from the $18.6 million reported for the first quarter of 2008 and an increase of 8.3% over the fourth quarter of 2008.

Asia revenues for the first quarter of 2009 were $5.8 million, an increase of 28.1% from the $4.6 million reported for the first quarter of 2008.

European revenues for the first quarter of 2009 were $1 million. There were no European revenues reported for the first quarter of 2008.

Consolidated gross profit for the first quarter of 2009 was $19.8 million, an increase of $4.5 million over the first-quarter 2008 gross profit of $15.3 million.

First quarter 2009 gross margin of 64.6% improved over the 59.2% gross margin reported in the fourth quarter of 2008 and was lower in the first-quarter 2008 gross margin of 66.0%. The year-over-year decrease in gross margin was primarily due to royalty payments that we did not have in the first quarter of 2008 and higher depreciation expenses on our growing installed surgical instrument base, partially offset by improved manufacturing efficiencies.

For the first quarter of 2009, US gross margin of 70.8% was improved over the fourth-quarter 2008 gross -- US gross margin of 63.7%.

Total operating expenses for the first quarter of 2009 were $22.9 million, a decrease of $8.3 million compared to the first-quarter 2008 operating expenses of $31.2 million. The decrease was primarily due to $11 million in litigation settlement expense incurred in the first quarter of 2008, partially offset by increased sales and marketing expenses in the first quarter of 2009.

Research and develop expenses for the first quarter of 2009 were $2.9 million, a decrease of $300,000 compared to the first quarter of 2008 of $3.2 million. The decrease in expenses was primarily due to in-house consolidation of previously outsourced prototyping and other development activities.

Sales and marketing expenses for the first quarter of 2009 were $12.8 million, an increase of $2.7 million compared to the first quarter of 2008 of $10.1 million. The increase was primarily due to US sales commission expenses related to the increased US sales volume and increased sales expenses in Asia.

General and administrative expenses for the first quarter of 2009 were $6 million, an increase of $400,000 compared to the first quarter of 2008 to $5.6 million. The increase was primarily due to legal fees and expenses related to maintaining and expanding our patent portfolio.

The net loss for the first quarter of 2009 was $4.4 million or negative $0.09 per share both basic and diluted compared with the first quarter of 2008 net loss of $15.8 million or negative $0.34 per share both basic and diluted.

We had $1.3 million of in-process R&D expenses in the first quarter 2009, and on an after-tax basis this equates to a negative impact of $0.03 per share as earnings to our bottom line.

Adjusted EBITDA of $1.4 million was reported for the first quarter of 2009 compared to negative $800,000 for the first quarter of 2008.

The company exited the first quarter of 2009 with $10.1 million in cash and cash equivalents.

Now, we would like to take a moment to address the use of cash in the first quarter as well as steps that we are taking to maximize our cash position throughout the remainder of 2009.

Cash used in the first quarter was front-end loaded to fund the several initiatives. First, we invested heavily in inventory buildup to prepare for our manufacturing relocation and to support or field inventory expansion in anticipation of new product launches. Second, we invested in the build-out of our state-of-the-art manufacturing and R&D testing and lab facilities. Third, we incurred in-process R&D expenses of $1.3 million. And lastly, our cash position was adversely affected by the increase in accounts receivables as some hospital customers stretched their payments.

We have spent considerable time evaluating our cash position as well as our current and future cash needs, and we have established a goal of maintaining our cash position at or near current levels throughout the remainder of 2009. We anticipate inventory efficiencies to result from the realignment of our manufacturing operations and expect to manage down inventory levels which we have built up in anticipation of the manufacturing facility move and product launches in the first quarter, and we are also aggressively working to manage down our DSOs and work with our hospital customers to reduce accounts receivable.

We are confident that through internal measures we can reach our stated 2009 financial guidance and adequately fund and grow the business.

Now I would like to turn the call back over to Dirk.

Thank you Peter.

Now I will provide you a brief update of our 2009 growth initiatives and review our updated 2009 financial guidance before opening up the call for questions.

As you may recall, we expect to launch 15 new products in 2009, 11 addressing the core fusion market and an additional four that address the aging spine market. While our core product launches span the breadth of offerings, I'm going to take a moment to talk about our exciting new, minimally invasive ARC Portal Access System and GLIF Technique, which we believe addresses a $200 million market opportunity in the US. Then I will take a minute to provide an update on OsseoFIX and OsseoScrew.

The ARC Portal Access System and instrumentation is our breakthrough access system that provides a far lateral approach to the spine with the patient in a natural, face-down position. The GLIF Technique, which is an acronym for Guided Lumbar Interbody Fusion, was designed by surgeons to allow them to form a 360-degree, minimally invasive procedure without the need for repositioning of the patient. When augmented with posterior pedicle fixation, the ARC and GLIF are designed to reduce the overall length of the lateral lumbar procedure, thereby reducing operating room costs and trauma to the patient.

We are on target to conduct our initial limited commercial launch of GLIF in the second quarter. Today at the American Association of [Neurosurgeons] meeting in San Diego we are introducing the ARC Portal and GLIF system. We anticipate a full commercial release in late 2009.

The system and technique were presented at the recent Spine Technology meeting in London in conjunction with the Spine Arthroplasty Society meeting and received favorable reviews as a new, innovative access system for the future.

OsseoFIX. As previously discussed, we are extremely pleased with the launch of OsseoFIX in Europe and the early uptake of the product. In the US we continue to anticipate beginning enrollment of the clinical trial in the second quarter of 2009.

The OsseoScrew system is our unique pedicle screw solution for treating patients with poor bone quality. We believe it has increased pull-out and holding strength as well as improved purchase in osteopenic bone. In addition, it can be used open or minimally invasively and works with our currently available Zodiac instrumentation.

As many of you may recall, we had originally hoped to submit the 510(k) for the OsseoScrew by the end of March, but we pushed out our timing to conduct additional testing to ensure that the product was able to achieve the increased pull-out and holding criteria that we established internally. We remain on target in our expectation to submit our 510(k) in the second quarter but will likely file our submission towards the end of the quarter. We continue to anticipate US market launch in late 2009, which is in line with previous expectations.

I will now provide our updated 2009 financial guidance, which is to achieve full-year revenue of $125 million to $128 million and increase from previous guidance of $123 million to $125 million.

We are raising our adjusted EBITDA guidance $12.5 million to $14.5 million from our previous guidance of $12 million to $14 million.

We are confirming our expectations for positive, GAAP-based EPS occurring in the third quarter of 2009.

We expect gross margin expansion over the next two years, driven by manufacturing efficiencies, product mix, and new product launches or redesigns that are intended to reduce commitments to third parties. In 2009 we anticipate gross margins improving through the year and anticipate a range of 65% to 67% for the full year, which compares favorably to the 63.9% from 2008.

One last comment before opening up the call to questions. It's significant to note that our current industry currently faces many challenges, both related to increased scrutiny on surgeon and company relationships as well as the broader economic uncertainty and the potential impact on procedure volumes. We are pleased that our culture at Alphatec holds our employees and distributors to a high standard and that our selling practices are ethical and we believe would withstand any level of scrutiny.

As it relates to the broader economy, we are fortunate that our business continues to see substantial growth, and to date we have not seen a slowdown in procedure volume, product utilization, or desire for innovation.

As Peter discussed, we are cognizant that some hospitals have extended their payment terms, and we are actively engaged in working down and managing our receivables. Further, we have established a number of internal measures to maintain our cash balance at or near current levels, which we believe is sufficient to fund and grow the business and to reach our stated 2009 financial objectives.

Our mission is to be the leading, independent, full-line spine company with a focus on solution for the aging spines -- for the aging spine, and our goal is to improve the aging patients' quality of life. We expect surgeons to continue to see a shift in their practice to increasingly older patients, in line with global demographics. As such, we have invested heavily in proprietary technology that will outperform current standards in patients with poor bone quality and which position the patient for a market leadership position in what we believe represents the fastest growing segment of the spine market.

Thank you. And I would now like to open it up for questions.

(Operator Instructions). Tao Levy, Deutsche Bank.

This is actually Seth for Tao. First, I just wanted to give you a little congrats on the revenue growth. It's pretty impressive.

So I just wanted to first ask you about something that happened during the quarter. You put out an 8-K on Stout Medical, which I think is the agreement that discusses the OsseoFIX, and they were -- I think they were required to return the $400,000 payment to you, and you are going to pay it back to them over -- I think over 12 or some -- I guess a certain period of time. One, maybe can you just hash out the thought behind that? And maybe is that in any way related to the delay I guess in the OsseoFIX product progress?

Seth, this is Dirk. I will break that into two components. First, regarding the OsseoFIX. When we entered in the agreement together with Stout, which frankly has been a tremendous partner in developing these products with us, we obviously had anticipated approval through a 510(k) without the need for a clinical trial, and as such we had sort of pegged a date for beginning, minimum royalty payments.

In discussions with them because of the need for the trial and sort of not knowing when -- how long that was going to take, we agreed to defer those minimum royalties until after FDA approval, as long as we are making strong progress towards getting that approval. So that's sort of OsseoFIX.

The money you are talking about relates to another agreement we have with them for an expandable interbody device, and as we had really focused on both OsseoFIX and OsseoScrew, that development program kind of sat off to the side, and we really hadn't worked on it yet. And so it had a similar situation where it had a minimum royalty obligation, which we've deferred as well. And then we have been paying them a anticipated development fee as part of that.

And what we've done is basically reset the clock. So they returned the money to us. It begins again in July, which is when we believe we will have the engineering resources available to really crank up that development project, which we see as sort of a next -- a nice next step for the GLIF system.

Well, that clears that up. Peter, on the balance sheet, I just wanted to talk about the receivables and the items that you just discussed. So I mean, if I calculate your DSO, it went up by six days. Your inventory is up a little bit, and I think you stretched your payables it looks like a little bit in the quarter as well, maybe for cash management purposes. Can you just talk about the -- I guess the duration of your DSO? Do you have anything out there that's in the hundred-plus day range? And at what point do you get to -- or when do you get to the point where some of these are maybe not collectible? And also on your European sales, I think we've talked about it in the past, but have you had any problems collecting on those?

Yes. Thank you Seth. First of all, I will remind everybody that in accounts receivable also is included $2.5 million of deferred revenue, which is shown under the liabilities section of the balance sheet as well. As we've disclosed previously, for the deferred revenue accounts, we record them as revenue only at the time of actual payment, when that occurs.

In terms of the US hospital accounts receivable, we did see an increase in the past quarter here. We are actively monitoring and have taken steps to manage this back down. And as part of this process, it does not indicate that there is any inability for hospitals to pay. That's actually never been the case here. It's simply their change in behavior to stretch their payment cycle slightly.

Okay. So no issues there.

No. No.

And then I guess also on Europe, to continue down there, you added a significant number of distributors this quarter. Are we going to -- or should we expect to see some stocking orders like we saw in the fourth order?

You will, yes. And we look forward actually to ramping up that business there with all these various distributors. It will be a mix of the OsseoFIX product line as well as our core product portfolio. So as you monitor going forward, we would expect therefore the deferred revenue balance to be somewhat subject to change, if you will, as these orders come through.

Okay. Great. And then just one last one. Maybe if you'd just discuss volumes in the quarter and had you seen any slowdown in your procedure volumes or just in general in the acute care setting.

Dirk, maybe (multiple speakers) [you can] take that one.

Yes. Hi Seth. In regards to sort of the global procedure volumes, we have not seen really any change. You know, in specific areas there's been a little bit, but frankly we adding -- through the addition of the new distributors we are really growing our market share much faster than the market anyway, so we've really not seen a lot of impact.

But spine general -- or spine surgery in general is not really elective. By the time you need surgery -- and you're only talking about 1% or 2% of the universe of spine patients or back-pain patients that ultimately get surgery. By the time they need surgery, it's really not elective. I mean, they are either trying to restore their quality of life or prevent permanent damage to nerve structures, and so they really need to have surgery.

So we've talked to a lot of surgeons, and we really don't see -- some of them are busier than ever, and then in a few pockets they've seen some decrease, but I would say certainly up to this point it's pretty steady.

Bill Plovanic, Canaccord Adams.

Congratulations. You beat on the top line and the operating when you back up charges. You guys are definitely moving in the right direction.

Just a couple of questions if I could. If you could kind of parcel out the domestic growth, is that in any one area -- cervical, lumbar, biologics? Is there anything growing faster than anything else? Or is there any specific contributor that you could put -- could point to?

Well, we're -- the whole line is growing very nicely, which we are very pleased with. In particular, Trestle continues to grow at a very, very strong clip, significantly faster than the market, and we are very pleased with that. The other area where we've seen very nice growth frankly is in Zodiac, with the addition of those distributor organizations in the fourth quarter, we've seen a substantial uptick in our Zodiac, in our pedicle screw business as well. But it's really growing across the board. We've seen good growth in biologics, growth in our interbody. So it's really been a very nice sort of across-the-board growth frankly.

When do you think -- you hired a lot of distributors in the fourth quarter. Do you think it will be the typical six to nine months where they're hitting on all cylinders? And if so, is that kind of where you are getting the confidence to raise guidance from?

Well, there -- certainly there is a lag time between when you put them on -- they have to go through the process of getting the products through the hospitals' procedures to get them approved through use. That can take anywhere from three to four months. We really started to see sort of the contribution of those new distributors rise in March. And we see that continuing. So yes, certainly as we sort of extrapolate out how quickly they are able to move the business, we feel very comfortable with raising the guidance.

And then what -- this quarter, what was the In-PRD charge for?

This is Peter. There was $1.3 million in IP R&D, and as Dirk had alluded to, it's for the Helifix/Helifuse technology acquisition. It was also for the patents for SpineVision, and then also there were some other minor products that we acquired as well.

Then your charges in your other income line? That expense was a little higher than normal. Was there anything out of the ordinary there?

Yes. There was a -- first of all you've got under "other" basically unrealized foreign exchange gain and losses for our European denominated receivables, and then also what you have in there is the interest expense that we have for our debt that we have on the books.

And how was the -- how much was the FX charge in the quarter?

The FX charge was about $260,000 as a loss.

Okay. And then Asia at $5.8 million was extremely strong, and is that a sustainable number from here? Is that kind of how we should model that out, or does that -- is it still kind of lumpy, up and down?

It -- we hired a number of direct spine reps in Asia in the back half of the year, and their primary job was really to help accelerate the shift away from the distributed product to Alphatec product. But in the process they've also been able to garnish new business, and so we've seen a nice growth in the business.

We have not projected a tremendous amount of growth in Asia, more of the shift, and so you know I wouldn't model too much of that in, to be honest. I think it's going to stay somewhere around there.

So it will stay at the 5800 a -- or $5.8 million a quarter?

Yes, I think that's reasonable.

Then just clarification. You said a third of the revenues in Asia are from Alphatec products these days?

That's correct. Which is about a 80% increase from prior year.

Okay. And then last question is just, your sales and marketing spend is pretty hefty. It was up -- sales were up $2 million, and that was up over $1 million. Just some clarification on kind of what that spend is on and what -- when do we start seeing some leverage on that line item? And that's it. Thank you very much.

Yes Bill. The majority of this spike really in the first quarter is because of the AAOS tradeshow that we participated in in March in Las Vegas.

And obviously the commissions.

Oh, obviously the commissions as well. Well that's -- and we talked about that before. But that's -- that remains to be trending consistent on revenues as we grow our revenue line for US sales commissions.

With no more questions in the queue at this time, I would like to turn the call back over to Dirk Kuyper.

Thank you.

Thank you for your participation and your interest in Alphatec Spine. I personally am very proud of what our team has accomplished over the last two years. And I believe we are now uniquely positioned with the right products at the right time and the right people. And I look forward to sharing our future successes with you as we move forward in the years ahead. So thanks again for your participation, and good evening.

This does conclude today's conference. Thank you for your participation.