Alphatec Holdings Inc (ATEC) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alphatec Holdings Fourth Quarter and Year-end 2009 Results Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference, Peter C. Wulff, Chief Financial Officer and Vice President. You may begin.

Thank you. Thank you very much and good afternoon, everyone. Welcome to Alphatec Holdings' conference call to discuss our fourth quarter and fiscal year ended December 31, 2009 financial and operating results. With me today are Dirk Kuyper, President and Chief Executive Officer, and also Ebun Garner, General Counsel.

By now you should have seen a copy of today's press release announcing fourth quarter and fiscal year-end 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'd 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. Risks 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, 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 U.S. copyright laws and any use or rebroadcast of all or any portion of this conference call may only be done with our express written permission.

And now I'll hand the call over to Dirk Kuyper, Alphatec Holdings' President and CEO.

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

This afternoon we'll provide highlights of our operating performance from the fourth quarter and full year 2009, as well as an overview of the Company's accomplishments in 2009. I will focus my remarks in updating you on our four primary growth drivers. First, the continued expansion of our core product portfolio; second, future product development initiatives addressing the Aging Spine; third, U.S. salesforce and distribution improvements; and fourth, 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. Following Peter, I will come back and discuss the status of the pending Scient'X acquisition and review our preliminary 2010 guidance, which we issued on December 17, 2009 in connection with the announcement to acquire Scient'X. I'll then open the call up for questions.

Our revenues for the fourth quarter of 2009 were $36.6 million, representing growth of 29% over the same period a year ago. This represents the tenth consecutive quarter of record revenues and a 12% sequential increase over the third quarter of 2009. In the U.S., revenues reached 28.3 million in the fourth quarter, reflecting growth of approximately 29% over the prior year.

Revenue for the full year 2009 was a record $132.2 million, representing a 30% increase over 2008 revenues. Full year 2009 U.S. revenue reached $104.5 million, an increase of 28% from the $81.5 million reported for 2008. We continue to grow revenues at rates significantly higher than the growth rate of the spine market through the introduction of innovative new products, the strengthening of our U.S. salesforce and expansion of our international operations. This performance reflects the ongoing strength of our core business.

We're equally proud to report adjusted EBITDA of $5.9 million for the fourth quarter, which is a 21% sequential increase over the third quarter 2009 adjusted EBITDA of $4.9 million.

Fourth quarter 2009 net loss was $1.3 million, compared to a $5.1 million net loss reported for the same period a year ago, and non-GAAP earnings were positive by approximately $600,000 for the fourth quarter after adding back Scient'X-related transaction costs of $1.4 million and IP R&D of $500,000. Non-GAAP EPS for the fourth quarter was a positive $0.01 per share.

Full year 2009 adjusted EBITDA reached $15 million, reflecting strengthening operating leverage as we drive strong top-line growth while we continue to invest in our robust product development pipeline. Our reported net loss for the full year 2009 was $13.3 million, which compares favorably to the $29.3 million net loss reported for 2008.

2009 was a transformational year for Alphatec. Throughout 2009 we invested heavily in developing our product pipeline and the combined efforts of internal development and technology licensing agreements have resulted in what we believe is one of the strongest pipelines of innovative technology in the spinal market.

We executed an agreement to acquire Scient'X S.A.S., which creates global scale, offers significant revenue and cost synergies and compliments our core product portfolio, and enhances our aging spine focus. The combined entity will be the third-largest pure-play spinal company in the market and the only one that is truly global with operations in Europe, Asia, and South America.

We are pleased with our accomplishments in 2009, especially in continuing to grow revenues at roughly three times the growth rate of the broader spine industry while positioning Alphatec Spine for long-term growth.

Highlights of 2009 regarding our four primary growth drivers are as follows.

First, throughout 2009 we continued to expand our core product portfolio by introducing both new products and line extensions, as well as securing additional intellectual property and distribution rights. We launched 12 new products throughout the year, including line extensions and upgrades to our spinal fusion product portfolio, minimally invasive products and biologic platforms. These products include the ILLICO SE Percutaneous Fusion System, Solis Stand-alone Anterior Lumbar Interbody Fusion Device and the GLIF ARC Portal System, as well as several others.

We launched the ILLICO SE Percutaneous System in August. This system, in combination with the ILLICO Retractor, completes our Lumbar MIS portfolio and allows us to take market share in the fast-growing MIS segment of lumbar fusion. We continue to be encouraged by surgeon acceptance trends and expect demand for the product to accelerate throughout 2010.

As we announced in late 2009, we submitted the Solis Stand-alone ALIF device to the FDA for 510(k) clearance in early November. We're in the process of responding to questions we received from the FDA. We are on track to launch Solis in the U.S. upon market clearance, which we now believe will likely occur in the second quarter of this year. The 2009 interbody fusion market in the U.S. is estimated to be more than $950 million.

Solis is a zero-profile, self-locking interbody device for ALIF procedures and is based on intellectual property that we acquired in 2009. We believe that a zero-profile, single action locking implant is a substantial improvement over devices requiring screws or additional locking steps. The simple insertion and fixation result in a quicker procedure that we believe will reduce the risk to the patient and cost to the hospital. Solis is a platform technology and we will look to build off of it to develop other applications, including cervical and lateral interbody implants utilizing this concept.

In addition to several product introductions resulting from internal development efforts, we also completed technology and product license agreements that expand both our core and aging spine portfolios and meaningfully enhance our biologics offering. We are particularly encouraged by the strengthening of our biologics platform. We estimate the U.S. biologics market to exceed $1.5 million in 2010.

I'd like to take a minute to discuss our agreements with Parcell. In January of this year, we entered in an exclusive distribution agreement with Parcell Spine pursuant to which Parcell will license and supply us with Parcell's proprietary adult stem cells for the treatment of spinal disorders.

The stem cell, which Parcell commercially calls the ELA Cell, is a unique adult stem cell. The ELA cell, which is highly concentrated due to Parcell's proprietary isolation method, has the potential to yield up to 600 times more stem cells in a similar volume of stem cells harvested from bone marrow. This product, our ProFUSE Demineralized Bone Scaffold and the recently announced distribution agreement with ETEX Corporation are all examples of our focus on providing biologic solutions to improving fusion rates.

We have successfully positioned Alphatec as the market leader in providing solutions for the aging spine and throughout 2009 invested heavily to end license, develop and commercialize new and innovative products to treat the aging spine. Consistent with my comments on our last quarterly call, the majority of these products will not make significant contributions to U.S. revenues until late 2010 and beyond.

Key products addressing the aging spine that I will discuss today are OsseoFix, OsseoScrew, and Helifix. One of our key aging spine initiatives is the OsseoFix Spinal Fracture Reduction System. We are pleased to announce that in the fourth quarter of 2009 we reached a milestone for OsseoFix adoption, with over 550 patients in Europe having been treated with OsseoFix for vertebral compression fractures, representing over 700 vertebral levels.

We are enthusiastic about the strong initial response to OsseoFix and look forward to the continued adoption of the product, especially as we introduce it and other key products to the Scient'x distribution and direct sales markets in Europe, South America, the Middle East, Africa and Asia.

We are continuing enrollment in our OsseoFix 510(k) clinical study in the U.S. where we expect to enroll 100 patients at 15 clinical sites with a 12-month follow-up. At this time the initial enrollment ramp has been slower than we expected and we have initiated a marketing campaign to raise awareness of the trial in the local markets for the clinical sites. We will provide an update once we learn more about the impact of this program on referral patterns.

With respect to the OsseoScrew, we are excited to report that we received CE Mark clearance in February of this year and the first surgeries have already occurred in Israel and will take place in March in Germany. In the U.S. we submitted OsseoScrew's 510(k) to the FDA at the end June after conducting extensive of the product. We remain in discussions with the FDA regarding the OsseoScrew 510(k) application and we are in the process of responding to questions that we received in December.

Lastly, we showcased Helifix for the first time at the 2009 North American Spine Society meeting in November. In line with previous expectations, we expect to submit our CE Mark application for Helifix by the end of the first quarter. We remain on track toward an initial product launch in Europe in mid-2010. Helifix is designed for the treatment of lumbar spinal stenosis, which is the leading cause for spine surgery in patients over 65. Helifix, which is a non-fusion product, will be first percutaneous, self-distracting interspinous implant on the market.

As many of you know, the regulatory environment has become increasingly challenging. We believe that our development pipeline addressing the aging spine is comprised of truly differentiated products and as such, faces regulatory hurdles. We are working collaboratively with the FDA to provide additional clinical information as requested and to effectively move through the regulatory clearance process.

We will continue to provide updates on our discussions with our FDA, particularly as they pertain to OsseoScrew and OsseoFix. As previously stated, we are extremely enthusiastic for the eventual launch of both OsseoScrew and OsseoFix in the U.S. market, but given timing uncertainties we are focusing on market adoption through Scient'x distribution in international markets while we pursue U.S. approval.

Our third growth driver is our improving U.S. salesforce and distribution network. We remain on track with our goal of expanding our salesforce both in terms of absolute numbers and dedication and we exited 2009 with roughly 280 sales reps, up from 240 at the end of 2008.

We exited the year with over 95 distributor organizations, of which approximately 75% are exclusive to Alphatec and we remain committed to our Company goal of reaching 85% exclusivity. We are in late stage discussions with several new distribution groups and expect to see progress on this front throughout 2010.

Our fourth growth driver is international expansion. We continued to expand internationally and in 2009 revenues from Europe and Asia reached $27.6 million, representing growth of over 39% versus 2008. In Europe we expanded our product distribution network by initiating sales in the Benelux, Denmark, Germany, Italy, Spain, Turkey and Israel, which have resulted in 2009 annual revenues of $4.1 million, an increase of 93% over 2008. In Japan, we added additional direct sales representatives and we continue to increase the proportion of revenues that are derived from sales of high margin Alphatec spine products.

After an extremely predictive and busy 2009, we believe that we have created a platform to support the vision and leadership at Alphatec for continued success. Our mission is to be the leading independent full line spine company, with a focus on solutions for the aging spine. Complimenting our continued track record of product innovation and revenue growth, the Scient'x acquisition moves Alphatec into a strong position to execute on that mission, creating the third largest independent pure-play spine company competing on a global basis.

I'd now like to turn the call back over to Peter to discuss the fourth quarter and full year 2009 financial results. I will conclude with 2010 guidance and an update of the pending Scient'x acquisition.

Okay. Thank you, Dirk. The following remarks are about our reported operating performance for the fourth quarter and fiscal year ended December 31, 2009.

Consolidated revenues for the fourth quarter 2009 were $36.6 million, an increase of 28.7% from the $28.4 million reported for the fourth quarter 2008. U.S. revenues for the fourth quarter 2009 were $28.3 million, an increase of 28.7% from the $22 million reported for the fourth quarter of 2008.

Asian revenues for the fourth quarter 2009 were $6.6 million, an increase of 37.7% from the $4.8 million reported for the fourth quarter 2008. European revenues for the fourth quarter 2009 were $1.7 million, an increase of 2.7% from the $1.6 million reported for the fourth quarter 2008.

Consolidated revenues for the full year 2009 were $132.2 million, an increase of 30.4% from the $101.3 million reported for the full year 2008. U.S. revenues for the full year 2009 were $104.5 million, an increase of 28.3% from the $81.5 million reported for the full year 2008.

Asian revenues for full year 2009 were $23.5 million, an increase of 32.7% from the $17.7 million reported for the full year 2008. And European revenues for the full year 2009 were $4.1 million, an increase of 92.9% from the $2.1 million reported for the full year 2008.

Gross profit for the fourth quarter 2009 were $22.7 million, an increase of $5.8 million, or 35%, over fourth quarter 2008 of $16.9 million. Fourth quarter 2009 gross margin of 62% increased over fourth quarter 2008 gross margin of 59.2%. Gross profit for the full year 2009 was $84.1 million, an increase of $19.4 million over the full year 2008 gross profit of $64.7 million. Full year 2009 gross margin of 63.7% is roughly flat with the full year 2008 gross margin of 63.9%.

While we are starting to realize modest gross margin improvement, we are not satisfied with our overall margin performance as it relates to our expectations. We continue to work on this as a key area of focus and to look to leverage improvements that we have made in manufacturing efficiencies to reduce cost of goods sold and lower our royalty burden.

As we have previously reported, our gross margin has been adversely affected by sales mix and the manufacture of an increased number of instrumentation sets that we believe are a necessary investment to drive future revenue growth. In 2010 and beyond, we expect to realize significant cost savings from manufacturing as we work through inventory, lower our product costs and reduce our royalty burden, as we continue to strive toward improving profitability.

Total operating expenses for the fourth quarter 2009 were $23.0 million, an increase of $2.0 million compared to fourth quarter 2008 of $21 million. The increase was primarily related to an increase in research and development and sales and marketing expenses, partially offset by a decrease in general and administrative expenses.

Total operating expenses for the full year 2009 were $93.7 million, an increase of $1.2 million or 1.0% over the full year 2008 of $92.5 million. Increases in both research and development and sales and marketing expenses in 2009 were partially offset by decreased litigation settlement expenses and a decrease in general and administrative expenses.

Research and development expenses for the fourth quarter 2009 were $3.6 million, an increase of $0.6 million compared to the fourth quarter 2008 of $3.0 million. Research and development expenses for the full year 2009 were $13.5 million, an increase of $500,000 over the full year 2008 of $13 million. The increase in 2009 research and development expenses was primarily due to product development in both our core product and aging spine portfolios.

In-process research and development for the full year 2009 was $6.4 million, which is a significant increase over the $2.8 million of IPR&D reported in 2008. This increase in IPR&D reflects our investment in novel technologies, as well as our achievement of certain development milestones.

Sales and marketing expenses for the fourth quarter 2009 were $13.4 million, an increase of $1.9 million compared to the fourth quarter 2008 of $11.5 million. Sales and marketing expenses for the full year 2009 were $51.5 million, an increase of $9.1 million over the full year 2008 of $42.4 million. The 2009 increase was primarily related to the increased sales commissions expenses for the increase in U.S. sales volume, as well as increases Asia sales volume.

General and administrative expenses for the fourth quarter 2009 were $5.6 million, a decrease of $700,000, compared to the fourth quarter 2008 of $6.3 million. Fourth quarter 2009 general and administrative expenses included $1.4 million of transaction expenses related to the Scient'x acquisition.

General and administrative expenses for the full year 2009 were $22.3 million, a decrease of $1.1 million compared to the full year 2008 of $23.4 million. The decrease was primarily due to reduced litigation settlement expenses, legal expenses, and partially offset by $2.6 million in transaction expenses related to the Scient'x acquisition.

Net loss for the fourth quarter 2009 was $1.3 million, or negative $0.03 per share, compared with a net loss of $5.1 million or negative $0.11 per share for the fourth quarter 2008. Net loss for the full year 2009 was $13.3 million or negative $0.27 per share, compared with a net loss of $29.3 million or negative $0.63 per share for the full year 2008.

On a non-GAAP basis, for the fourth quarter 2009 we reported net earnings of $600,000, compared to 2008 non-GAAP net loss of $4.9 million. On a per share basis, our non-GAAP EPS for fourth quarter of 2009 was positive a penny per share, $0.01 per share versus a negative $0.11 per share for the fourth quarter 2008. Our non-GAAP loss was $4.3 million for the full year 2009, a decrease of $11.2 million compared to the full year 2008 non-GAAP net loss of $15.5 million.

On a per-share basis, our non-GAAP EPS for 2009 was negative $0.09 per share versus negative $0.34 per share reported for 2008. Non-GAAP net earnings or loss excludes in-process research and development expenses related to the Scient'x acquisition and litigation settlement costs.

As of December 31, 2009 cash and cash equivalents totaled $10.1 million. Our net cash burn for the full year was $8.2 million and $4.0 million for the fourth quarter of 2009. In the quarter we paid $1.2 million of one-time disbursements associated with our pending acquisition of the Scient'x purchase, roughly $2.0 million in debt servicing costs, and the balance on capital expenditures, the overwhelming majority of which was related to the purchase of instrumentation to support new and ongoing product launches.

As you may have noticed, we recently completed a direct placement of $6.6 million of our common stock to certain of our existing shareholders. We also recently filed a Universal Shelf Registration Statement on the Form S-3. This registration statement will allow us to issue up to $100 million of primary equity at some point in the future. This vehicle provides long-term flexibility to opportunistically fund future business growth.

In addition, the registration statement includes a Registration of Shares of the common stock currently held by Healthpoint Capital. This will provide Healthpoint Capital with the option to sell shares, if it chooses to do so, in an orderly manner.

Now I'd like to turn the call back over the Dirk.

Thank you, Peter. I'd like to take a minute to comment on our pending acquisition of Scient'x. We are pleased that in late 2009 we entered into a definitive agreement to acquire Scient'x Groupe, S.A.S. Scient'x is the largest independent spine company outside of the United States.

With the inclusion of Scient'x, we have a global scale to reach over 50 international markets with over 450 sales reps in aggregate, carrying our aging spine and core fusion technologies. This allows us to compete across all major markets with a substantial and established international distribution platform and to rapidly capitalize on the significant pipeline of products we have developed.

In addition, Scient'x compliments our current product portfolio with key dynamic solutions for fusion, non-fusion and cervical disc arthroplasty and enhances our focus on the under-served and fast-growing aging spine segment of the market. We expect to take advantage of cross selling opportunities as well as realize the near-term cost synergies through the elimination of redundant costs in the U.S. and manufacturing efficiencies that will in turn increase profit and cash flow going forward.

The combined entity creates scale that will strengthen our ability to execute on our mission of being the world's leading independent spine company. And we believe the financial strength of the combined company will provide us with improved access to capital that will allow us to continue to invest in innovation and enable us to maximize profitability and shareholder value.

For 2009 the combined entity had a pro formal annual revenue of $182.3 million, reflecting approximately 25% year-over-year revenue growth. We believe the transaction will be accretive to adjusted EBITDA for the full year 2010, as well as EPS, excluding amortization of intangible assets, transaction expenses and related restructuring charges.

Upon the closing of the Scient'x acquisition, we will move rapidly to launch several key technologies into the Scient'x network. Between the two companies, we have over 15 products slated for market launch in 2010 addressing our core spine product portfolio as well as the aging spine market. We have prioritized key product launches for Europe in the second quarter of 2010 and we'll be focusing on OsseoScrew, OsseoFix, ILLICO, Zodiac, and Trestle.

There are significant opportunities beyond just enhancing our growth initiatives that result from this transition and they are as follows. First, positioning - the merger of Scient'x and Alphatec enhances our Aging Spline platform. Dynamic fusion is an opportunity to expand our Aging Spine portfolio and the addition of a widely accepted cervical disc compliments our international product portfolio and provides a future opportunity in the U.S. market. More broadly, we see the immediate opportunity to compete globally in multiple segments of the spine industry.

Second, increase distribution. We are meaningfully increasing our global market presence with the addition of new exclusive distribution networks and positioning Alphatec as one of the leading international spine companies.

Third, increased product breadth. With the addition of Scient'x we are able to offer a complete portfolio of spinal products and compete with the market leaders in all segments of the spine market. This will also help to maximize our revenue per procedure and revenue per sales representative.

Fourth, the combined management team. Oliver Burckhardt and I have worked together in the past at Aesculap and he and I agree on critical concepts such as corporate culture, ethical responsibility and product quality. We expect little or no ramp up time in incorporating Oliver and his senior team in Europe, Asia, South America, the Middle East and Africa into the management team at Alphatec.

Fifth, competence. At Alphatec we have worked hard to optimization our manufacturing and R&D, which we will leverage as we integrate Scient'x's products into our product offering. Conversely, Scient'x has an international focus on scientific education and surgeon training that we expect to leverage.

Finally, six, synergies. We anticipate significant cost synergies and earning leverage as we integrate Scient'x into Alphatec stemming from the elimination of redundant U.S. operations and SG&A expenses as well as future efficiencies related to manufacturing costs. We are optimistic that we'll see incremental revenue synergies as well through immediate cross-selling opportunities.

We're moving rapidly with planning the integration and consolidation within the U.S. selling from general and administrative functions. We expect the transaction to close by the end of the first quarter and we expect to complete the initial integration phase in April with the realization of SG&A cost synergies to follow shortly thereafter.

In conclusion, we are looking forward to merging the Scient'x team with Alphatec and becoming an entity with global presence and scale as we continue to introduce disruptive technologies to the spine market. We have begun active training and product demonstrations of key Alphatec products throughout Europe where Scient'x has a strong presence, namely in Spain, France, the UK and Italy.

We have established a robust product introduction cadence that is focused on our Zodiac, ILLICO, OsseoFix, OsseoScrew, Helifix and Trestle products. We are starting to see momentum build and are encouraged that we will experience early adoption and we have already begun to ramp up production to meet expected revenue forecasts.

At this point, I'd like to provide financial guidance for the first quarter 2010 and to reaffirm our guidance for pro forma financials for the full year 2010.

We expect first quarter 2010 revenues of $38 million and an adjusted EBITDA margin of at least 15%. The financial guidance for the first quarter 2010 reflects operating results prior to the acquisition of Scient'x.

We are reaffirming 2010 financial guidance from December 17, 2009, which we provided when we announced the Scient'x acquisition. We anticipate annualized pro forma revenue of $220 million to $225 million and $32 to $35 million in annualized adjusted EBITDA and positive EPS for full year 2010 excluding amortization of intangible assets, transaction expenses, and related restructuring charges.

We are reiterating this guidance to reflect the 2010 pro forma impact of the pending Scient'x transaction, on a full year basis, as if the acquisition had closed on 1st, 2010.

As previously announced, the Scient'x transaction is currently expected to close by the end of the first quarter of 2010 and is subject to the approval of the Company's shareholders. We recently sent out the Proxy Statement for the shareholders meeting, which is scheduled to occur on March 16th and we expect the transaction to close shortly thereafter.

In summary, we are extremely pleased to have exceeded our growth objectives and reported revenue growth of 30% for 2009 while substantially bolstering our global position and product platform. We are confident that we can sustain this growth rate going forward while leveraging our platform to drive earnings. We look forward to closing the Scient'x acquisition and realizing the benefit of cross-selling opportunities and cost synergies.

Lastly, we hope that many of you are coming to New Orleans on March 10th through the 12th to attend the Academy of Orthopedic Surgeons annual meeting. Many of the products we discussed on today's call will be showcased at our booth. We look forward to seeing you there.

The Board of Directors and I are extremely pleased with the performance of the entire Alphatec team. As I mentioned previously, 2009 was a transformational year for the Company and we accomplished an incredible amount that would not be possible without our team of talented and dedicated employees that exhibit a can-do attitude every day. This team has excelled in every way during 2009.

We welcome our friends and new team members from Scient'x and believe we are well positioned to drive growth and shareholder value going forward.

Thank you and I'd now like to open the call up for your questions.

Thank you. (Operator Instructions) Glenn Novarro, RBC Capital Markets

Oh, good afternoon guys, two market questions, one on pricing. All of a sudden we're starting to hear pricing pressure in the marketplace. This was talked about from J&J and then Stryker and most recently Medtronic. So just wondering to get your sense of what you're seeing in the marketplace with respect to price and what are you assuming in your revenue guidance for pricing pressure in 2010? That's one question.

And then secondly, with Medtronic reporting today and their spine numbers coming in light, looks like the spine market came in more in the mid-to-high single-digit range, so below the historic 10% number. So what's your assumption for spine market growth in 2010 and can you still do your numbers if the market kind of falls into that mid-to-high single-digit growth outlook? Thanks.

Okay, thanks Glenn. In terms of pricing pressure, I mean, there is and there has been pressure in the marketplace.

As we look at our pricing in 2009 versus 2008, through the whole year we only saw about a 1.0% erosion in price, so we feel very good about that and we're not -- we don't think that that's going to intensify at this point. We're pretty comfortable with how that looks. In terms of 2010 and how we built our model, we basically did not assume any price increase, nor did we assume any price decrease. We assumed that prices would remain relatively flat.

In terms of the market growth rate, obviously we continue to grab market share from what we believe are the larger players in the market. I personally don't believe that procedure volumes or growth rates have decreased significantly and if you look at sort of the population demographics they would speak for that procedure volumes, if anything, will increase in the future, not decrease. So I'm not sure that I would agree that the market is slowing down per se.

Okay, just one follow-up. So you're assuming flat pricing for 2010. Just curious why you're assuming flat pricing when pricing went down in 2009. Is it more of a mixed assumption? In other words, you're launching several new products in 2010 that would be premium priced and therefore allowing your pricing to be flat?

That's correct. I mean, as we launch new products that are unique, obviously they will command a premium that would offset any pricing decrease that we might see in the standard products.

Okay, great. Thank you.

Raj Denhoy, Jefferies & Co.

Hi, good afternoon guys.

Good afternoon, Raj, how are you doing?

Doing okay. Wonder if I could just ask a little about the OsseoScrew product? I know it's a little bit of a soft subject, but here it's still languishing at the FDA. I wonder if you could just give us some update on what they're asking for, the prospects for that device getting approved here? Just any update would be helpful.

Okay. We received the last set of questions in December and they pertain primarily to two topics, one having to do with bony ingrowth into the screw to show that it's stabile. The second was a clearer explanation of the testing methodology that we used because it was unique.

And the third was screw retrievability. So the reason its taken us a little bit of time to respond is we were waiting for the next set of animals to be sacrificed to get the histology slides. We now have that. We have the histology report and we are drafting our response. It's due March 12th, I believe, and we intend to get it in shortly before that.

So I think we've got a very positive dialog with the FDA and I think we're moving in the right direction in terms of getting approval. So we still anticipate getting the product onto the U.S. market hopefully in the first half of the year, but you know the FDA has certainly become more challenging and we're working through that.

On the other hand, we have a huge opportunity, obviously, with this screw through the Scient'x network. And we're actively promoting the product and really getting ready for the closure of the deal so that we can move in a large way with OsseoScrew, both in their direct markets and then the other markets. We did have our first couple of surgeries performed very successfully in Israel, so we're very encouraged, at least with the initial clinical results.

Getting back to the U.S. a little bit, as you're aware there's all this talk about the 510(k) approval process at the FDA and some potential changes there. Does that have any bearing here? I mean, is there a risk that, as that process plays out, that you may get caught up in it and it could delay this approval?

Yes, we're -- obviously we're hopeful that we're going to get through this last round. I mean, you sort of judge by the types of questions you get, but this is, I mean, it's one of the challenges. OsseoScrew is a novel product and so we're working through their questions. Ultimately they could come back and ask for clinical data, which we'd have to deal with, but at this point we're trying to address the questions.

But there's no doubt that the 510(k) process is changing and its something we're going to have to watch going forward and ensure that when we submit a product that we've done all of everything that we think they're going to need in the future up-front. As opposed to what has traditionally been done. I mean, the bar has definitely been raised.

Great. On the Parcell product, which you mentioned, the stem cell product, do you have any early data comparing that to the other stem cell products on the market? Do you know any way that you can sort of differentiate that from the Trinity product, the Osseo products over your competitors?

Yes, Raj, we're not talking about it a whole lot at this point. It is -- we don't have any clinical data at this point that shows the differences per se. We're going through some of the testing right now, the animal testing and then we'll move to clinical after that. What I can tell you is one substantial difference is that this comes from live donors, as opposed to from cadaveric tissue and we believe that that, in terms of cell viability, reproducibility, is substantially better than the current products on the market.

Okay and just one last one on salesforce. I'm not sure if you gave the number of sales reps in the quarter. But then, also, as you look at the combined Scient'x/Alphatec salesforce, as you've taken a harder look at the overlap there in the U.S., is there a possibility you might be able to acquire some sales assets there that could help out in 2010 and beyond?

Yes. As we've looked at their distribution network there are actually a number of distributors that are in areas that are complimentary to ours and we will be adding them or we plan on adding them to the Alphatec sales group, so we will see a pick up there. In a couple of cases, we will leave the Scient'x distributor and the Alphatec distributor in the same market due to particular relationships, but we should see a pretty nice pick up.

As of the end of the year, we had approximately 280 salespeople in the U.S. So we should see a little bump after the acquisition.

And where do you think that's going to be a year from now, just to get a square number?

I would guess around 320, 330.

Okay, very good. Thank you very much.

Thanks, Raj.

Matt Dolan, Roth Capital Markets

Hey guys, good afternoon.

Hi Matt.

Maybe a follow-up on the guidance. Can you --are you still looking for it looks like low-to-mid-20% growth on a pro forma basis? Can you walk us through contributions, geographically speaking? How quickly can Europe grow versus the U.S. and what type of assumptions are you making there?

Okay. We see continuing the mid-20's growth rate in the U.S. in terms of that. Obviously there's a significant synergy opportunity in terms of cross-selling in the international markets, so we do expect, especially in Europe where virtually all of our products are CE Marked, to see a very nice pick up in growth there as we flow the products into the Scient'x distribution network.

They have direct sales organizations in France, Italy, the UK, and a very strong distributor in Spain and those are all markets where we either weren't in or were just barely starting. So we should see a very nice pick up there.

And does that include assumptions for a launch of aging spine there, a wider launch of aging spine with Scient'x?

Yes, absolutely. I mean, a couple of the products we're focusing on right up-front are OsseoFix and OsseoScrew and then Helifix as soon as it receives CE Mark.

Okay and then on the transaction itself, you mentioned I think $2.0 million of cost synergies thus far, but you indicated there could be kind of more to come. Can you help us kind of quantify that? Is it multiples of the $2.0 million or what do we see in terms of synergy on the cost side?

Hi Matt, this is Peter. Yes. We expect for the U.S. side of the Scient'x SG&A, on an annualized basis, to yield us about $5.0 million in cost savings.

Including the initial $2.0 million? Okay. And then maybe to take that one step further, Peter, on the overall leverage side of things in terms of your EBITDA targets for 2010, where are you getting that? It looks like G&A in 2009 was static to down. Maybe walk us through where the leverage comes from, both on the G&A line as well as gross margin?

Well, I think one thing we've shown as a team is the ability to grow revenues higher than any growth in our operating expenses. So we plan on continuing on doing that in 2010 and then also, with the cost synergies in Scient'x here, there'll be additional leverage coming from that.

I think, Matt, besides the cost savings that we achieve here in the U.S., the international operations of Scient'x are profitable and as the sales increase through the cross-selling, we see increased profitability coming from there as well.

Okay and then last one, Dirk, on the product side of things. Now that you've had a little bit of time to digest Scient'x, do you see any - and I know you've got a number of products coming out already this year - but any new updates on where you go next, a cervical product or others that we've talked about historically?

Yes, sort of the product that we're very excited about sort of short-term is the dynamic fusion aspect. So taking their isobar rod, which they've evolved now into Isobar Evolution - it's sort of a smaller version - and using that we think it's a very nice compliment in our aging spine strategy in terms of at the index level providing some flexibility to enhance fusion. So we see that as a significant opportunity here in the U.S., but also globally.

Obviously the other product that's extremely interesting, especially in the international markets, short-term, is their cervical disc. It is really -- I'd almost call it a third-generation disc, if you will. It's the only ceramic-on-ceramic disc on the market. Does extremely well and we want to leverage and we want to leverage that into a number of international markets. They're expecting regulatory approval in China this year and that certainly will be a very interesting market for that product.

We've not made any decisions about the U.S. market at this point in terms of doing an IDE, but we continue to evaluate that.

Okay. Thanks a lot, guys, congrats on the progress.

Thank you.

Thank you, Matt.

Bill Plovanic, Canaccord Adams

Great. Thank you. Good evening.

Hey Bill.

Hi Bill.

Hi guys. So a couple questions here, first just on the gross margin. In the fourth it was just a bit low. Just wondering if there's anything in particular that was impacting that this quarter outside of the mix?

No. As I made in my prepared remarks, we are somewhat disappointed in the product margin not coming through as quickly as we'd like. We have seen improvement in manufacturing cost synergies. However it's taken several months longer than anticipated to work that through from inventory to cost of sales. So that's one part of it.

The other element of it, as I mentioned, is our surgical instrumentation base continues to grow to support our sales and we expect that over time to be leveraged as we get these products more adopted in the marketplace.

Okay and then the Parcell product. When do you expect to launch that product?

Right now we're going through the animal testing that we think is necessary to prove out the product itself. Once we have that, then we'll start to look for to do some clinical work. So we're anticipating potentially being able to launch towards the end of 2010.

Okay. Okay and then INPRD charges quarter? I missed that. That was for the Parcell deal?

Yes. It was.

Okay and then lastly just, I mean, that was an impressive quarter internationally. Is any of that stocking or is that through any direct channels or just if you could -- was it one country broad-based? Just give us a little color on that so just that we get confident that that growth rate could continue.

It -- what -- on the positive side, we continue to see a very nice buildup of OsseoFix sales. We did have a couple of stocking orders in there. They were not huge, but Belgium placed a fairly good sized stocking order, as well as did Columbia and South America, which are new. But it continues to be a little lumpy, but overall we're really pleased with the development of the base business as we move forward.

And the Asian business was especially strong. Was there something there specifically? Because, I mean, that's been running, I don't know, maybe about 5.0, 5.5%-ish a quarter and then all of a sudden it popped up to six and-a-half.

Well, we added a number of direct reps earlier in the year, in 2009, and I think they're starting to contribute in a more significant way. So we're really pleased with the growth of the spine sales in Asia and the overall development. They've just done a phenomenal job in Japan. I think we'll see a little bit of a hit this year because of the government will take a price reduction. We're anticipating around 5.0% but the growth rate has been very strong and a lot of them have to do with the addition of a number of reps that we put on earlier in 2009.

And then, Peter, I was wondering if you could help us out just on kind of what the one-time charges would look like leading up to the closure of the Scient'x acquisition? And then how much you'd expect in kind of one-time charges that you set as you go through that integration period in the second quarter?

Yes. We're still working on some of the figures. We've got ranges right now where we would expect in the first quarter of this year for our stand-alone financials to have about a little less than $1.0 million in continuing transaction-related expenses.

After closing, we do expect some restructuring expenses as it relates to the wind down of Scient'x's U.S. operations. That amount is expected to be somewhere between $700,000, maybe, to $900,000, as far as we can see at this point.

I mean, is it fair to say that a lot of that is occurring prior to the closure, the kind of wind down in integration? It sounds like you've already done -- started the cross training internationally. I mean, is this -- it's almost like once the deal is closed here you're pretty close to hitting the ground running, in terms of all the integration issues.

Well, we expect to hopefully get this all behind us after the second quarter. It'll be closely after we close the deal.

Yes. We're -- we've been obviously preparing for the integration and the idea is to hit the ground running. So we've certainly tried to get ready for that. We have significant sales training planned over the next few months, as soon as the close occurs and a lot of activities. So we've been really getting geared up in terms of being ready for the integration. So, as soon as the deal closes, we can hit the ground running and realize the synergies very quickly.

Fantastic. That's all I had. Thank you.

Thank you.

We'll see you on March 9th.

You bet. Thanks, Bill.

Thank you.

(Operator Instructions) I'm showing no further questions in the queue.

Okay, then we'd like to close up. Our mission is to be the leading independent full line company with a focus on providing solutions for the aging spine and our goal is to improve the aging patients' quality of life. The aging population is a global phenomenon. It's estimated by 2030 over one billion people worldwide will be over the age of 65. This represents a tremendous opportunity for Alphatec.

As surgeons continue to see a shift in their practice to increasingly older patients, we plan on being their spine company of choice worldwide. As such, we've invested heavily in proprietary products that will outperform current standards in aging patients. We believe this positions us for a market leadership position in the fastest growing segment of the global spine market.

With that, thank you very much and look forward to seeing you in New Orleans.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day. 13