Alphatec Holdings Inc (ATEC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Alphatec Spine First Quarter Fiscal Year 2010 Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions on how to participate will be given at that time. (Operator Instructions) As a reminder, today's call is being recorded. At this time, I would now like to turn the conference over to your host, Mr. Peter Wulff. Sir, you may begin.

Thank you. Thank you and good afternoon, everyone. Welcome to Alphatec Spine's conference call to discuss our first quarter ended March 31, 2010 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 Alphatec Spine's first quarter 2010 financial and operating results. If you do not have a copy of today's press release, you can find it on 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.

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 Factor section on our annual report on Form 10K, subsequent quarterly report on Form 10Q, and periodic filings on Form 8K.

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 rebroadcast of all or any part of this conference call may only be done with our expressed written permission.

I'll now hand the call over to Dirk Kuyper, Alphatec Spine's President and Chief Executive Officer.

Thank you, Peter. Good afternoon and thank you for joining us today. This afternoon we'll provide highlights from our operating performance from the first quarter of 2010. Are customary, I'll focus my remarks on updating you on our three primary growth drivers. First, the continued expansion of our core product portfolio; second, future product development initiatives including those addressing the aging spine; and third, improvements on expansion of our global sales force and distribution network. We'll then turn the call over to Peter Wulff who will provide a more detailed review of our financial performance. Following Peter, I will come back and discuss progress that we've made on the integration of Scient'x's and Alphatec Spine's operations as well as our 2010 guidance. We'll then open the call up for questions.

Our revenue for the first quarter of 2010 were $38.4 million, representing a growth of 26% over the same period a year ago. This represents the eleventh consecutive quarter of record revenues and a 5% sequential increase over fourth quarter 2010. In the US, revenues reached $28.4 million for the first quarter of 2010, reflecting growth of approximately 19% over prior year.

Revenues in Asia for the first quarter were reported at $6.1 million, an increase of approximately 5% over prior year. European revenues reached $3.9 million in the first quarter of 2010, representing a 303% increase versus the $1 million reported in the first quarter of 2009. We continue to grow revenue at rates significantly higher than the growth of the spine market through the introduction of innovative new products, strengthening of our US sales force, and expansion of our international operations.

This performance reflects the ongoing strength of our core business. We are equally pleased to report adjusted EBITDA of $5.4 million for the first quarter of 2010 compared to $1.4 million reported in the first quarter of 2009. First quarter 2010 non-GAAP net loss was $226,000 excluding Scient'x acquisition related transaction cost and restructuring costs of $4 million, and in process R&D expenses of $0.5 million.

Non-GAAP EPS was break even for the first quarter of 2010 compared to a non-GAAP EPS of minus $0.06 per share reported in the first quarter of 2009. The first quarter of 2010 was extremely busy and productive at Alphatec Spine. We closed the acquisition of Scient'x late in the quarter which creates global scale, offers significant revenue and cost synergies, and complement our core product portfolio and aging spine focus. As of now, Alphatec Spine is the third largest pure play spinal implant company in the market. We have created a Company that is truly global with a span of operations in the United States, Europe, Asia, the Middle East, Africa, and Latin America. During the quarter we reached significant milestones in the development and launch of products within our aging spine portfolio.

As of March 31, over 900 patients have been treated in the European union with our OsseoFIX spinal fracture reduction system, a minimally invasive device that stabilizes the vertebral body following a vertebral compression fracture. OsseoFIX is now being sold in six countries and is being launched through the Scient'x direct sales organizations in France, Italy, and the UK. We estimate the market opportunity for VCF products in the top five European markets to be approximately $170 million and we believe that OsseoFIX's unique design and positive clinical experience will allow it to take significant market share over the next 12 to 24 months.

OsseoScrew, our proprietary expandable pedicle screw system designed for patients that require additional fixation during a fusion surgery was approved and launched in Europe in the first quarter of 2010. The initial surgical results are promising and OsseoScrew has been successfully used in revision and in highly osteoporotic patients with no complications reported to date. The fusion market potential in the top five European markets we estimate at $360 million and OsseoScrew is a unique lead product to drive market share pull through of our Zodiac and Illico pedicle screw systems. We are pleased with our accomplishments in the quarter, especially in continuing to grow revenue at double the US growth rate in the broader US spine industry while positioning Alphatec Spine as worldwide leader in the spine market.

Additional highlights of the first quarter regarding our three primary growth drivers are as follows. First, as it relates to our core product portfolio, we saw strong adoption of Illico SE, our minimally invasive posterior fixation system in the quarter. As of March 31, Illico contributed roughly a third of the revenue growth over prior year for US revenues. This system in combination with our 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 more implant and instrument sets are launched into the US market.

With regard to our unique standalone interbody device, Solis, as discussed previously, we are in discussions with the FDA regarding the Solis 510K application. While we'd hoped for approval in the second quarter, we are conducting specific tests the FDA has requested which will be completed in early June. As such, we believe we are tracking to achieve US clearance in July and to launch Solis in the third quarter. We continue to be very optimistic based on recent approvals in the space and the positive aspects of the product.

Solis has tested equal to or superior to the predicate devices in the FDA mandated biomechanical testing. We believe that a zero profile single action locking implant is a substantial improvement over existing devices requiring screws and or additional locking steps in close proximity to vital organs and major blood vessels. This simple insertion and fixation process will result in a quicker procedure that we believe will reduce the risk to the patient and the cost to the hospital.

Of course our expected launch date is based on our assumption that the FDA will not require supplemental clinical data and we are confident to that end. The 2009 ALIF interbody fusion market in the US is estimated to be more than $350 million. Solis will be a platform technology for us and we will look to build off of it to build other applications, including a cervical and a lateral interbody implant utilizing this or similar concepts.

We're particularly pleased and encourage by the strengthening of our biologics platform. Sales in the US bone replacement market which includes growth factors, stem cells, synthetics, composites, and allografts, and other similar products should reach $1.8 billion in 2010 according to Biomet GPS.

I'd like to take a minute to discuss our future distribution of a proprietary adult stem cell as a result of the agreement we entered into with Parcell Spine. As a reminder, pursuant to the agreement we entered into in late 2009, we have exclusive worldwide rights to distribute this product for the treatment of spinal disorders. The cells, commercially called ELA cells are a novel population of adult stem cells which are phenotypically and functionally distinct from other adult stem cells. ELA cells which reside throughout the body are found in certain concentrations in larger numbers per volume of fluid than bone marrow and-or blood derived adult stem cells such as mesenchymal stem cells.

The high concentration of cells enables the ELA cell to be used as a therapeutic without expansion. Other adult stem cells generally require an expansion step to insure a large enough concentration of cells to reach a therapeutic threshold. Research has shown that the ELA cells have immunosuppressive properties. We believe that a stem cell product derived from live donors offers clear advantages over current products being offered including known cell count and viability, known patient history, and a more reproducible product. We continue to make progress toward market launch and are currently conducting what we believe are the final tests required prior to a market launch in the third quarter of 2010.

GLIF continues to gain interest and momentum within the surgeon community and we're in the process of rolling the product out to additional surgeons during the current quarter. We plan to educate additional clinicians and expand our user base over the balance of the year with regularly scheduled cadaver training labs. Also the interest level in Europe has been high as well and we plan to launch GLIF to selected key European sites in the third quarter of this year. Although the revenue impact of GLIF will be low initially, we expect it to grow through the second half of this year and be more meaningful in 2011.

Our second growth driver relates to future product development initiatives addressing the aging spine. We have successfully positioned Alphatec Spine as the market leader in providing solutions for the aging spine, have invested heavily to end license, develop, and commercialize new and innovative products to treat the conditions that effect the aging spine.

Demographic shifts will continue to drive this market segment as the population ages worldwide and the need for spinal implants address the unique aspects of this group, become more important to every surgeon's practice. Consistent with my comments on our last quarterly call, the majority of these products will not make significant contributions to US revenues until late 2011 and beyond and we do not include US revenues of these unique products in our financial guidance. Key products addressing the aging spine that I'll discuss today are OsseoFIX, OsseoScrew, and Helifix.

One of our key aging spine initiatives is the OsseoFIX spinal fracture reduction system. As I mentioned earlier, we're extremely pleased with the continued successful uptake of OsseoFIX in Europe and as of March 31, over 900 patients have been treated in Europe with OsseoFIX. We are enthusiastic about the strong response to OsseoFIX and look forward to even higher levels of adoption of the product, especially as we introduce it and other key products through the Scient'x direct sales force and distribution channels in all major markets of Europe.

Our OsseoFIX 510K clinical study is underway in the US and we expect to enroll 100 patients at 15 clinical sites with a 12 month follow-up. We're continuing with our marketing campaign to raise awareness of the trial in the local markets of our clinical sites. In addition, we have a meeting this week with the FDA regarding certain study parameters. We'll provide an update once we learn more about the impact of the recruitment program and the outcomes of the discussion with the FDA.

With respect to OsseoScrew, we are excited to report that we received CE Mark clearance in February of this year and the first surgeries have occurred in Israel, Germany, and Greece. We see OsseoScrew as a tremendous door opener in the European market and it has the ability to pull through adoption of our entire pedicle screw line. The initial results in Europe have been extremely promising. The product has been used in spondylolisthesis cases in revisions where the pedicles were enlarged, in heavy smokers, and in compromised bone. In each case, the screw performed as expected and resulted in superior fixation.

In the US, we announced earlier in the second quarter that the FDA informed us that the OsseoScrew 510K will require additional clinical data. As announced at that time, the clinical study requirements will result in a delay of the US launch of this product. We're preparing for a pre-IDE meeting with the FDA to discuss the parameters of the clinical data, the number of patients, and the follow-up period to support the 510K with clinical. We will provide an update once we've finalized the parameters of the study with the FDA.

In line with our expectations, we plan to submit our CE application for Helifix, our percutaneous product for treating spinal stenosis during the current quarter and remain on track towards an initial product launch in Europe in mid-2010. Lumbar stenosis is the leading cause for spine surgery in patients over 65. Helifix which is a non-fusion product will be the first percutaneous self-distracting interspinous implant on the market.

Our third growth drivers are our improved global distribution network which has been considerably improved with the addition of Scient'x. We now have over 450 sales reps in 50 countries, allowing us to compete across all major markets with a substantial and established international distribution platform. In addition, through this distribution platform, we are able to rapidly capitalize on the significant pipeline of products we have developed. We have prioritized key product launches for Europe in 2010 and will be focusing on OsseoScrew, OsseoFIX, Illico, Zodiac, and Trestle as we leverage Scient'x's international footprint. In 2011, we also plan to launch these products into key Asian and Latin American markets following the obtainment of necessary regulatory clearances.

In the US we remain on track with our goal of expanding our US sales force both in terms of absolute numbers and dedication. As a standalone Company, Alphatec exited the first quarter of 2010 with more than 270 sales reps in the US which is comparable to the number of sales reps that Alphatec had at the end of 2009. As a standalone Company, Alphatec Spine has approximately 75% exclusivity amongst its sales force and we remain committed to our goal of reaching 85% exclusivity.

In addition, as a consequence of the US Scient'x sales integration, we have added approximately 30 sales reps in the US. We are pleased to announce that we closed the follow on equity offering in mid April resulting in $42.5 million in net proceeds to the Company. We believe that the proceeds provide the capital needed to fund our general corporate purposes and working capital including the integration of Scient'x. With the integration of Scient'x underway that's being well capitalized for the long-term, we have completed what has been a transformation of Alphatec Spine into a global leader within the spine industry.

Now I'd like to turn the call over to Peter to discuss the first quarter 2010 financial results. I'll conclude with comments on the Scient'x integration and update pro forma financials and concluding remarks.

Thank you, Dirk. The following remarks are about our reporting operating performance for the first quarter ending March 31, 2010. As noted earlier by Dirk, on March 26, 2010, we close the acquisition of Scient'x. The effective date of the acquisition for accounting purposes is March 31, 2010. The reported consolidated balance sheet includes the fair value of acquired assets and assumed liabilities of Scient'x in accordance with the acquisition method of accounting. The first quarter 2010 reported consolidated statement of operations and consolidated statement of cash flows does not include the operating performance of Scient'x.

In our Form 10Q, we reported the unaudited pro forma combined information of revenues, gross margin, net loss, and adjusted EBITDA for both the first quarter of 2010 and 2009 respectively. The following prepared remarks therefore represent the operating performance of Alphatec Spine on a standalone basis for the first quarter 2010. Our second quarter 2010 operating results will include Scient'x on a consolidated reporting basis.

Consolidated revenues for the first quarter of 2010 were $38.4 million, an increase of 25.6% from the $30.6 million reported for the first quarter of 2009. US revenues for the first quarter 2010 were $28.4 million, an increase of 19.4% from the $23.8 million reported for the first quarter of 2009. Asian revenues for the first quarter of 2010 were $6.1 million, an increase of 4.6% from the $5.8 million reported for the first quarter of 2009. European revenues for the first quarter of 2010 were $3.9 million, a 303% increase over the $1 million reported in the first quarter of 2009.

Gross profit for the first quarter 2010 was $24 million, an increase of $4.2 million over first quarter 2009 of $19.8 million. First quarter 2010 gross margin of 62.4% was below first quarter 2009 gross margin of 64.6%. The decrease in gross margin of 220 basis points was primarily driven by geographic sales mix. As we reported in today's earnings release, our gross margins in the US were 69.9%, a decrease of 90 basis points compared to the last year first quarter and an increase over fourth quarter 2009 of 170 basis points. The sequential quarterly gross margin improvement is primarily due to improving production costs and reduced royalty burden partially offset by modest US hospital price erosion and instrument depreciation.

Our gross margin for the Asia market segment for the first quarter of 2010 was 35.3%, a decrease of 800 basis points from prior year gross margin of 43.3% and fourth quarter 2009 gross margin of 39.5%. The decrease was primarily due to unfavorable mix of lower gross margin of non-spine products. The European gross margin for the first quarter of 2010 was 50%, an improvement of 950 basis points over prior year first quarter and 390 basis points improvement over fourth quarter 2009. The improvement in gross margin is driven primarily favorable by product mix and a broader product offering.

Total operating expenses for the first quarter of 2010 were $27.6 million, an increase of $4.7 million compared to first quarter 2009 of $22.9 million. The first quarter of 2010 includes $4 million in acquisition related restructuring and transaction expenses, excluding these acquisition related expenses, total operating expense increased only $0.7 million compared to first quarter 2009, primarily related to an increase in research and development and sales and marketing expenses.

Research and development expenses for the first quarter of 2010 were $3.7 million, an increase of $0.8 million compared to the first quarter of 2009 of $2.9 million and the increase in research and development expenses was due to product development in our core product and aging spine portfolios. In process research and development for the first quarter of 2010 was $450,000 which is a significant decrease from the $1.3 million of IP R&D reported in the first quarter of 2009. The first quarter 2010 IP R&D expense related to the exclusive license and distribution agreement with Parcell Spine for licensing in the ELA stem cell technology.

Sales and marketing expenses for the first quarter of 2010 were $13.8 million, an increase of $1 million compared to the first quarter 2009 of $12.8 million. The increase was primarily due to increased sales commission expenses related to the increased sales volume in the US and other various marketing expenses. General and administrative expenses for the first quarter of the 2010 were $5.6 million, a decrease of $0.4 million compared to the first quarter of 2009 of $6 million. The decrease in G&A is primarily driven by reduced legal and patent fees relating to the [prostitution] of our patent portfolio.

Adjusted EBITDA was $5.4 million in the first quarter of 2010, a significant increase of $4 million compared to the $1.4 million reported for the first quarter of 2009. Adjusted EBITDA represents increased operating leverage while driving year over year revenue growth of $7.8 million in the first quarter of 2010. Net loss for the first quarter of 2010 was $4.7 million or negative $0.09 per share both basic and diluted. Compared with a net loss of $4.4 million or negative $0.09 per share, both basic and diluted for the first quarter of 2009.

On a non-GAAP basis for the first quarter of 2010, we reported a net loss of $226,000 compared to the first quarter 2009 non-GAAP loss of $3.1 million. On a per share basis, our non-GAAP EPS for the first quarter 2010 was $0.00 per share compared to negative $0.06 per share reported for the first quarter 2009. Non-GAAP net earnings or loss excludes in process research and development expenses and Scient'x acquisition related transaction and restructuring expenses.

As of March 31, 2010, cash and cash equivalents totaled $12.7 million which includes $1.6 million of cash from the Scient'x acquisition. During the first quarter we raised $6.6 million in equity to extinguish the 2007 Form S3 shelf registration statement in advance of our having a new shelf registration statement becoming effective. Our uses of cash in the first quarter of 2010 included $1.3 million in transaction related expenses, $2.6 million in debt servicing costs, and $1.7 million to fund ongoing operations, primarily for inventory and instrument capital investments.

In mid April, we closed a follow on equity offering resulting in $42.5 million in net proceeds to the Company. On a pro forma basis, our cash position for March 31, 2010, adjusted for the net proceeds was $55.2 million. We believe that the proceeds from this offering provides adequate capital to fund general corporate purposes and working capital, including the integration of Scient'x. The follow on offering also enabled HealthpointCapital to sell 9.4 million shares of our common stock, thereby reducing its ownership in our common stock to 38% based on 87.3 million of total common stock outstanding as of the end of the first quarter 2010.

On a pro forma combined basis, including the first quarter operating results for Scient'x, the first quarter 2010 combined revenues would be $49.8 million, an increase of 19.3% over prior year pro forma combined revenues for $41.7 million. Scient'x revenues were $11.3 million and $11.1 million for the first quarter of 2010 and 2009 respectively. Their pro forma combined adjusted EBITDA was $6 million for the first quarter of 2010 which means that the Scient'x acquisition was accretive to the $5.4 million reported adjusted EBITDA in our first quarter 2010 financial statements.

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

Thank you, Peter. I'd like to take a minute to comment on the acquisition of Scient'x which we closed late in the first quarter of 2010. With the inclusion of Scient'x we will have global scale to reach over 50 international markets with over 450 sales representatives in aggregate, carrying our aging spine and core 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've developed.

In addition, Scient'x complements our current product portfolio with key solutions for fusion, dynamic fusion, non-fusion, and cervical disc arthroplasty and enhances our focus on the underserved and fast growing aging spine segment of the market. We've already begun taking advantage of cross selling opportunities. We're actively training sales reps throughout Europe on products within the core Alphatec Spine product portfolio as well as those within our aging spine franchise. We have prioritized key product launches in Europe to the second quarter of 2010 and throughout 2010, be focusing on OsseoScrew, OsseoFIX, Illico, Zodiac, and Trestle.

As of now we have begun to see strong interest and up take in several countries, particularly where Scient'x has a strong presence such as Spain, France, the UK, and Italy. We are encouraged with the significant early adoption of these products and have already begun to ramp up production to meet expected revenue forecasts. We're moving forward rapidly with the integration in the US of the Scient'x selling, general, and administrative functions into Alphatec and as of April 30, Scient'x and Alphatec finds US operations have been consolidated.

We expect to realize near-term cost synergies through the elimination of redundant SG&A costs and we're on track to annual savings of $5 million. Longer-term we anticipate US and manufacturing efficiencies that will in turn increase profit and cash flow on a going forward basis. We're pleased to welcome the Scient'x team to Alphatec Spine and we look forward to leveraging the strengths of both companies as we introduce disruptive technologies to the spine market.

We are seeing increased price pressure in the US market as hospitals try to decrease their costs and control the number of vendors they deal with. On some cases, this presents a challenge. More often we believe this represents a significant opportunity for Alphatec. As a full line Company with a comprehensive product line, we can and do effectively compete for hospital contracts.

The novel products that we have launched or plan to launch realize premium prices, offsetting broader market related price declines. We're also in a unique position to leverage our production capacity to reduce costs and maintain margins over the long-term, offsetting any potential negative pricing trends. Many of the products we were introducing such as Illico SE, Solis, GLIF, ProFUSE, and the ELA stem cell offer cost advantages to the hospital by way of operating room efficiencies, reductions in actual cost, or improved outcomes.

At this point, I'd like to provide updated financial guidance and reaffirm our guidance for pro forma financials for full year 2010 and for the 2010 financial reporting basis. Reaffirming our prior guidance, we anticipate pro forma combined revenues of $220 million to $225 million and $32 million to $35 million in pro forma combined adjusted EBITDA and positive non-GAAP EPS for the full year of 2010, excluding amortization of acquired intangible assets, acquisition related transaction and restructuring costs. We reiterate this guidance to reflect the 2010 pro forma combined effect on a 12 month basis as if the acquisition had closed on January 1, 2010.

On a financial reporting basis, we expect full year 2010 consolidated revenues in the range of $208 million to $213 million and adjusted EBITDA in the range of $32 million to $35 million and positive non-GAAP EPS, again excluding amortization of acquired intangible assets and acquisition related transaction and restructuring expenses. The financial reporting basis guidance reflects the actual closing of the Scient'x acquisition at the end of March 2010 and the inclusion of Scient'x's actual operating results, effective as of April 1, 2010 into the Company's consolidated statement of operations and cash flows.

As previously mentioned, the Scient'x transaction closed on March 26, 2010. We have absorbed acquisition related expenses that had a negative impact on GAAP EPS in the first quarter of 2010 and we expect to absorb some additional acquisition related expenses in the second quarter of 2010.

That concludes our prepared remarks. I'd like to open it up for questions.

(Operator Instructions) Our first question comes from Glenn Novarro with RBC Capital Markets.

Thanks. Good afternoon, guys. A question regarding revenue guidance this year. You're reaffirming guidance but back in December when you first established guidance, the Euro was between $1.40 and $1.45. Now it's sitting here between at $1.30 and part of the revenue ramp now is going to come from European revenues as well as the Scient'x acquisition. So, can you walk us through what type of revenue hit you're now absorbing because of the lower Euro and what the offsets are in your guidance for the rest of the year?

Thank you, Glenn. Hi. This is Peter speaking here. The financial guidance we've provided assumed an exchange rate of $1.35 to the Euro. As we looked at this guidance, if there is a slippage from $1.35 to $1.25, the effect on the top line is about 1.5% of our consolidated revenues or somewhere around $3 million US. So, we'll have to wait and see how the actual Euro responds now in light of the news this morning from our friends in Europe and what they're doing there. This is possibly the effect that we could see, this $2 million to $3 million downdraft if it continues to slide down in terms of the strength of the Euro.

Maybe talk about what could be potential offsets? Where could the possible upside this year in revenues?

We're particularly encouraged by the early uptake in Europe, especially in the Scient'x network and some of the initial indications for orders that we're getting. So, just to reiterate, maybe say it a bit differently, the original model we have based on an exchange rate of $1.42 and in this guidance we adjusted it to $1.35. So, we have already taken that into account. So, we do see upside certainly in Europe. I think some of the products are performing exceptionally well and the uptake's been extremely positive. So, that could certainly offset any impact from the Euro.

Great. And just one last question. Can you tell us what spine pricing was down for you in the quarter? And what you're assuming for the full year? Thanks.

Yes. The US hospital pricing was very modest that we saw in the first quarter compared to prior year end. It was about 0.4% across the basket of products that we saw.

Okay. What's the assumption for the rest of the year? Just modest pricing? Is that pricing you just gave me pure pricing or including mix?

It does include mix across the product categories. It's hard to project what mix will be. We would expect pricing for the rest of the year to be in the very low single digits. Obviously as we look to launch new products, we hope to blunt that effect on the core business that we have and additionally, I think as you see on our US gross margin performance, we are seeing a pull through into cost of goods of our reduced product costs as well to blunt any effect on price.

Okay. Great. Thank you, guys.

Thanks, Glenn.

Our next question comes from Raj Denhoy with Jefferies.

Wondering if I could ask a little bit about the US performance in the quarter. It was up 19%. If you look at the productivity per sales reps, it was essentially -- it was flat. Your growth kind of matched the number of sales reps you added. I'm curious as you move through the year, what gets that number up? Are you anticipating that number rising towards the back half of the year? What gets us there?

There are a number of new products that we launched towards the end of the year. The products that we licenses from ETEX, DuoFuse, and NanoBlast that are starting to show some very nice pickup in revenue. So, we expect those to continue. The AmnioShield is starting to pickup very nicely. GLIF is starting although it's still at a very low level; as we increase the number of sites we expect that revenue to grow. Illico SE is continuing to show very nice growth.

Obviously we didn't launch it till August so certainly we still have some ramp time, but even on an absolute basis, it's growing. So, there's a number of new products that were launched in the back half of last year that are really starting to get their traction now and should continue to drive increases in productivity, especially on the biologics side.

Okay. So, when we look at the guidance for the year, can you tell us how much of that, the $208 million to $213 million, how much of that is going to be Scient'x, how much contribution are you building in?

We look at it this way. Scient'x for this year will be about 25% of our total business.

Okay. So, the $208 million to $213 million, we should assume 25% will be Scient'x.

Correct.

And then within that -- sorry to jump around a little bit. But within the guidance overall you mentioned that you have some expectations for Solis as well as ELA this year. Would you share with us how much you're expecting from those products this year?

We have no revenues for either of those two products baked into the revenue guidance for 2010.

Okay. Fair enough. And then just one last question. The J&J royalty payments, can you give us an update on where that stands and if that's still expected to come off here very soon.

Yes. The J&J royalty payments ceased the month of May and we would expect for the second half of 2010 on a US basis when we look at US gross margins, an uptick of about 300 basis points for that segment and then on a consolidated reporting basis, an uptick of North of 200 basis points on consolidated gross margin.

Okay. Just one last one. I guess there was some talk about a Japanese distributor you were potentially going to be divesting? Is that still something that's in the works?

Yes. That's actually been accomplished. That should substantially help our margins going forward.

What's the revenue offset in Asia-Pacific?

The revenue offset is about $3 million. But realize that was at virtually no margin. So, we kept the spine revenue. It's all the non-spine that we got rid of and so actually net-net it's going to have a positive impact.

On the margin side. But from a revenue basis, that's $3 million a quarter we should assume is coming out of Asia-Pacific?

The total reported last year is about $10 million in top line revenue. The bottom line was negligible and net profit or even very low gross margin. We baked this into our financial guidance for revenues this year, Raj, and we expect the offset to be in sales improvements both in the United States and in Europe.

But realize also we're picking up quite a bit of Asian revenue from Scient'x that offsets that as well.

Great. Fair enough. Thanks, guys.

Our next question comes from Vivian Cervantes with Maxim Group.

Thank you for taking the question. Drilling down into Europe, it looks like you guys had some good performance there. If you could just characterize that and compare-contrast with some of the anecdotal things we're hearing about a difficult European market? And then maybe drill down, if you can, on how much off the strong European revenue number is off of OsseoFIX?

OsseoFIX is one of the primary drivers of revenue and I think I mentioned previously that through the end of the year we had approximately 500 or so patients that had been treated. In the first quarter we got up to 900. So, we almost doubled the OsseoFIX revenue in one quarter. So, that clearly has had an impact. Illico SE is now starting to pickup. In particular we don't find the environment in Europe difficult at all, to be honest. We're extremely pleased with how things have developed there.

One of our strongest markets notwithstanding Scient'x has been Germany which has come on very strong and so we continue to be very encouraged about the opportunities in Europe and again, we're really grabbing share from other companies. It's not so much pioneering work and we've really got the unique products there like OsseoFIX and now OsseoScrew that open the door for us to be able to pull in all the standard products. We think we're in a very unique position in Europe.

It appears that the products that are going to be brought over to Europe will be coming in from the US. We don't expect the whole volcano eruption to disrupt the flights for much longer but I understand there's significant air traffic delays and such into Europe. I'm wondering what planning you're doing to make up for something similar to this, especially as you grow your European presence.

Yes. It's actually one of the things that we were contemplating was a major distribution hub for Europe since our business we believe will be quite substantial there. One of the things we're doing is actually speeding that up. So, where we may have taken a little more time and shipped product from here, our plan is to move more product to Europe quickly so that they have the product on hand should there be disruptions and should we have to move to ships versus air freight.

At this point in time are you finding that there's a lot of disruptions to the current operations, particularly as you try and build inventory?

No. Not really. We haven't seen - from an inventory standpoint or sales standpoint, we seen any. We've had a couple delays with flights that impacted a training program where we could only get the surgeons from Spain to that particular training program which worked out quite effectively. So, there's been a little bit of travel issue but not any product issues to date.

Thank you. That's helpful.

I would add on that, bear in mind we have the presence of Scient'x in France. So, we've able to leverage their distribution capabilities on land there.

Okay. That's helpful. Thank you. I'll get back into queue.

Our next question comes from Tao Levy with Deutsche Bank.

Hi. It's Seth here. Just two quick questions. First, and if I'm hearing this correctly, it sounds like over the course of the year then your European business is going to pace growth and your domestic business will probably lag a little bit and that's just based on all the new products you plan on putting into the international markets? Is that the right way to think about it?

I think the European growth rate will be higher. Yes. I don't know if that means the US lags per say, but certainly the European growth rate, we expect to be quite high.

So, Dirk, there's obviously more opportunity there in the US as well to -- like you said, take more accounts and grab more distributors, increase sales?

Right. There is. There's no doubt. I think with -- although the FDA has really caused some challenges certainly, we still feel very strongly about Solis and our ability to bring that to market. A lot of times it's just an issue of timing. They're asking for data that they haven't historically asked for which throws you back into sort of a loop of having to go collect it. But beyond the opportunity with additional distribution in the US which we're aggressively pursuing, all the products that we launched in the back half of 2009 and the potential for ELA and Solis in the second half, we feel very good about the US growth rate as well.

Great. And just the other question has to deal with the capital raise. Do you plan on deleveraging, taking out some of the short-term and longer-term debt? Or do you have any other infrastructure builds planned? Thank you.

Thank you, Seth. This is Peter. We do intend to reduce our interest costs that we have with the existing lenders that we have. We'll do that either through discussions with those particular lenders or otherwise we'll contemplate going to market and reducing the costs down to what I feel is more appropriate for our size of balance sheet and operations and cash position for the Company. In that process there may be some portion of in particular the term debt that may be considered to be retired early, but I think we'll be able to discuss this really in our next quarterly call once we've concluded the discussions.

Okay. Thank you.

(Operator Instructions) Our next question comes from Bud Leedom with Global Hunter Securities.

Hi. Can you hear me?

Yes. Hi, Bud.

Hi, Bud.

Hi. Thanks for taking my questions. Just regarding OsseoFIX, the trial in the US, I think you had mentioned that you had less than ten patients enrolled at the end of 2009. Does this upcoming meeting with the FDA effectively mark a restart or is the trial still ongoing here in the US?

The trial is still ongoing. What we've been struggling with is getting a final approved protocol with the FDA. The purpose of the meeting is not to reset but to go back and nail down the final protocol because what has happened because we don't have the final -- we can enroll patients based on sort of this conditional approval, but without the final protocol, there are a number of IRBs that won't allow us to start. So, it's definitely impacting our ability to enroll and we need to resolve those outstanding questions. So, we have hired outside counsel and we're going in hopefully with the goal of resolving those issues so we can get the enrollment sped up.

Great. Obviously those were very nice numbers that we're seeing in Europe in terms of the procedure volumes there. Just out of curiosity, are you seeing any push at all from the JoM vertebroplasty study that seems to have impacted the US market in Europe? Are you seeing any push there?

Initially there was in certain countries in the Netherlands, for instanced, was one. There was some temporary impact. But I would say that has actually bounced back. To be honest, we're really taking share on the other side on the kyphoplasty side and have been very effective in switching over kyphoplasty business in certain countries, such as Germany. Kyphoplasty is far larger than vertebroplasty.

Okay. Great. And then just finally on OsseoScrew, I was wondering if you might be able to share the timing of this pre-IDE meeting with the FDA and has this continued to support a 510K pathway or are we looking at a PMA? Maybe if you can just provide a little bit of detail there?

Yes. We do not have the meeting scheduled as of yet. Our plan is to put together our proposal and our proposed protocol before we go to them. We anticipate having that meeting in the next 60 days or so. And it is a 510K with clinical.

So, they have not come back and said that we need to do a PMA or a class three. It's actually a very positive dialogue in this case and we're encouraged. We're hopeful that we can come up with some reasonable clinical data that they want but until we have the meeting, it's hard to say. But we've started working with our clinicians to figure out exactly what we believe will resolve the questions that they have and we will be presenting that, as I said, in the next 60 days.

Alright. Thank you very much.

Thanks, Bud.

Our next question comes Bill Plovanic with Canaccord.

Thank you. Good evening. Can you hear me?

Yes. Hi, Bill.

Hi, guys. Just you talked about the distribution and I know you've already done the integration. I was just curious of how much overlap, how much did you let go? Do you think that you might see some revenue dyssynergies in the near-term? How should we think about that at least domestically? And then even the same question internationally in the EU?

Let me deal with the international first because it's easier. There really were no dyssynergies in Europe or outside of the US. We've been able to really be very strategic in terms of how we have put that together. So, that has been generally extremely positive. So, we really see no loss of momentum. What Scient'x did see in the first quarter was a number of their distributors holding back, waiting to see what products we were going to launch with.

So, we expect that to ramp up. I think outside of the US, we feel very good about it. In the US we let go about two-thirds of their distribution network because of the overlap. We clearly worked on sort of the most important relationships first in terms of maintaining those and we have built the dyssynergies into our revenue guidance which we anticipate to be around $2 million or $3 million.

When you say you let go of two-thirds of the distributors, what percentage of the revenues roughly was that? If you're saying $2 million to $3 million is only a quarter of the revenues or something - ?

Yes. It was less than 20%.

Okay. So that's definitely built in?

Yes.

Okay. And then just I was wondering, obviously everybody's asked the questions on pricing and kind of what drives things going forward, but I think as we look at the sequential growth from Q4 to Q1, at least domestically, typically that's been a strong quarter or a strong sequential number we've seen in the past and this is kind of the first year where we haven't. I was wondering if there was anything outside of kind of the pricing impact or anything else that you think might've contributed to that?

Yes. If you look back, you'll see between the second and third quarter we had a very large sequential jump. As we look at it, I think we're just absorbing that as we take the next step up. We added a lot of surgeons, a lot of new business between Q2 and Q3. And so I think we're just taking the next leg up here. We feel very good about that going forward.

Okay. And I apologize if this question was already asked but there's a lot going on in Europe right now. As you look at your business from Greece, Turkey, Italy, is that a big component to your business?

Greece was a relatively important partner for us. The others from an Alphatec standpoint, not so much. We haven't really seen any change out of Greece in terms of the ordering pattern. The business continues to move very positively. So, we'll have to see. But I think we're adding so much there and so much new product. I think we really -- the business isn't going to stop. It continues. We're grabbing shares so I think we should be in a good position.

That statement that it's important to you, not to put you on the spot, but of your European businesses, is it more than half your European business coming out of Greece? How should we think about that if we quantify that?

No. It's not that important.

Got you. Okay. Thank you very much.

Ladies and gentlemen, I see no further questions at this time. I'd like to turn the conference back to your host, Mr. Kuyper. Sir?

Okay. Thank you very much. Thank you for joining us. Our mission is to be the leading independent full line spine Company with a focus on providing solutions for the aging spine. Our goal is to improve the aging patient's quality of life. The aging population is a global phenomenon. It's estimated that by 2030, over one billion people worldwide will be over the age of 65.

This represents a tremendous opportunity for Alphatec Spine as surgeons continue to see a shift in their practices to increasingly older patients and we plan on being their spine Company of choice worldwide. As such, we've invested heavily in proprietary products that outperform current standards in aging patients. We believe that this positions us for a market leadership position in the fastest growing segment of the global spine market. Thank you and good evening.

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