Alphatec Holdings Inc (ATEC) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Alphatec Spine's second-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 will follow at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Peter Wulff, Chief Financial Officer. Mr. Wulff, you may begin.

Thank you and good afternoon, everyone. Welcome to Alphatec Spine's conference call to discuss our quarter ended June 30, 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 second-quarter 2010 financial and operating results. If you do not have a copy of today's press release, you can find it in the Investor Relations section on our website at www.AlphatecSpine.com.

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

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

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 10K, subsequent Quarterly Reports 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 in any portion of this conference call may only be done with our express written permission.

I will 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 will provide highlights of our operating performance from the second quarter of 2010. I will focus my remarks on updating you on our primary growth drivers, the continued expansion of our fusion product portfolio, product development initiatives addressing the aging spine, our growing MIS platform, our Biologics platform and improvements and expansion of our global sales and distribution network.

I will then turn the call back over to Peter, 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 and our operations, as well as provide updated 2010 guidance.

I will then open the call up for questions.

Our revenue for the second quarter 2010 were (sic) $45.4 million, representing growth of 55% over the same period a year ago. On a pro forma basis, year-over-year quarterly revenue growth was 10% or 12.5% on a constant currency basis. This represents the 12th consecutive quarter of record revenues for Alphatec.

In the US, revenues reached $29.3 million for the second quarter 2010, reflecting growth of approximately 11% over the prior year and 1% year-over-year growth on a pro forma basis. We are particularly pleased that our US gross margins reached a record 71.4% in the second quarter, reflecting manufacturing efficiencies.

European revenues reached $8.9 billion in the second quarter, roughly 20 times more than in the second quarter of 2009. On a pro forma basis, quarterly European revenue growth was 75%, year over year.

Revenues in Asia for the second quarter 2010 were reported at $5.2 million which is over two times more than the second quarter of 2009. Revenue for the rest of the world were reported at $2 million in the 2nd quarter of 2010.

While we continue to grow revenues at rates above the growth rate of the broader spine market, our growth rate in the second quarter was below our expectations, due to a number of factors that we will review in further detail later in the call. We remain confident that the fundamentals at Alphatec Spine are as strong as ever -- as they ever have been and that we are well-positioned for a reacceleration of US revenue growth, continued market share gain and long-term success.

Adjusted EBITDA of $3.8 million was reported for the second quarter 2010 compared to $2.5 million reported in the second quarter of 2009. Second quarter 2010 non-GAAP net (sic) loss was $300,000 excluding Scient'x acquisition-related expenses of $2.6 million and in process research and development expenses.

Non-GAAP EPS was break even for the second quarter 2010 compared to non-GAAP EPS of a negative $0.04 per share reported in the second quarter of 2009.

The second quarter of 2010 was an extremely busy time at Alphatec Spine. We achieved record US surgical procedure volumes and record numbers of hospitals that used Alphatec product during the quarter. We completed the integration of Scient'x's US operations, realizing estimated US operating cost synergies of $2.3 million in savings over the second quarter 2009 and $1.2 million over the first quarter of 2010.

We began initial integration of Scient'x's international operations and we held our first combined international distributor meeting at the end of June. In addition, we strengthened and reorganized our international sales and marketing team to improve our product positioning and geographic focus.

We are increasingly enthusiastic that the combined Company creates global scale, offers significant revenue and cost synergies and complements our product portfolio and aging spine focus. 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 June 30, over 1,100 patients had 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 12 countries. And it is experiencing continued acceleration in product adoption. We estimate the market opportunity for VCF products in the top five European markets to be roughly US$170 million and we believe OsseoFIX's unique design and positive clinical outcomes will allow it to take significant market share over the next several years.

In the US, we are revising our OsseoFIX 510(k) clinical study after discussions with the FDA that occurred in June. The modified study is to be a head-to-head, two to one randomized clinical study versus kyphoplasty. While this doubles the number of patients in the study to over 200, we believe the revised trial will be far easier to enroll in a timely basis.

We also will be expanding the number of clinical sites as part of the revised protocol and will provide updates as to the progress of the study on a go-forward basis.

OsseoScrew, our proprietary expandable pedicle screw system designed for patients that require additional fixation during a fusion surgery, was approved for use in Europe in the second quarter of 2010. We are pleased to report that through June 30, 57 patients have been treated in four countries.

The initial results have been extremely promising. The product has been used in spondylolisthesis, in revision cases, in heavy smokers and in patients with compromised bone. In each case the screw performed as expected and resulted in superior fixation. We see OsseoScrew as a door opener in the European market and it has the ability to pull through adoption of our entire core product line.

We estimate the fusion market potential in the top five European markets to be approximately $360 million. In the US, we are continuing to evaluate our approach to getting the OsseoScrew approved for sale. We are planning on meeting with the FDA in the fall to discuss the parameters required to obtain US regulatory approval.

In line with our expectations, we submitted a CE application for Helifix, our percutaneous product for treating spinal stenosis during the second quarter, and we remain on track toward an initial product launch in Europe during EuroSpine in mid-September. Lumbar spinal stenosis is a 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 European market.

We have successfully positioned Alphatec Spine as a market leader in providing solutions for the aging spine. Demographic shifts will continue to drive this market segment as the population ages worldwide and the need for spinal implants to address the unique aspects of this group become more important in a resurgence practice.

The majority of these products will not make significant contributions to US revenues until 2012, and we do not include US revenues of unique products in our financial guidance. We have built a solid platform in MIS with both our ILLICO and GLIF ARC systems, and this allows us to take market share in the growing MIS lumbar fusion market.

We saw continued adoption of ILLICO SE, our minimally invasive posterior fixation system in the second quarter, and we launched the system in Europe during the quarter as well. This system, in combination with our ILLICO retractor, completes our posterior lumbar MIS portfolio.

The GLIF ARC continues to gain interest as the only true alternative for lateral system which allows patients to remain prone during the entire surgical procedure. We are pleased with the momentum generated within the surgeon community, and are in the process of rolling the product out to additional surgeons during the current quarter. We plan to expand our user base over the balance of the year with regularly scheduled cadaver training certification labs.

The interest level in Europe has been high as well, and we plan to launch GLIF to selected key European sites after the EuroSpine meeting in September of this year. Although the revenue impact of GLIF is still low, we expect it to grow through the second half of this year and be meaningful in 2011.

In regards to expansion of our core fusion franchise, we remain in discussions with the FDA regarding our 510(k) application for marketing clearance of our unique ALIF interbody device, SOLUS. We recently completed specific tests requested by the FDA, and we are encouraged that SOLUS has tested equal to or superior to the predicate devices in the biomechanical testing.

We believe that a zero profile single action locking implant is a substantial improvement over existing devices requiring screws or additional locking steps in close proximity to vital organs and major blood vessels. We are engaging in a constructive dialogue with the FDA and continue to expect a positive outcome for SOLUS, but it is unlikely that it will make an impact on US revenues in 2010 as it is not built into our guidance. We have submitted SOLUS for CE Mark, and we hope to launch in Europe in the fourth quarter of this year.

We were recently notified by the FDA that we were granted a 510(k) for our ALIF Plate which will be marketed under the brand name [SPTA]. The plate, in combination with the ALIF interbody and the novel distractor introducer we launched in 2009, rounds out our product offering and should allow us to gain market share in the ALIF market. We expect to launch SPTA at the North American Spine Society meeting in Orlando in October of this year.

The 2009 ALIF interbody fusion market in the US is estimated to be more than $350 million. We are particularly encouraged by the strengthening of our Biologics platform. Sales in the US bone replacement market, which include growth factor, stem cell synthetics, composites, allograft, and similar products, could reach $1.8 billion in the US in 2010, according to Biomed GPS.

We are in the process of establishing a separate business unit for our Biologics business, and have already begun to hire a specialty sales force to support our growth plans and the pending launch of our stem cell product. As a reminder, pursuant to the agreement we entered into in late 2009, we have exclusive worldwide rights to distribute our stem cell lines for the treatment of spinal disorders. The cells, commercially called [elo] cells are a novel population of adult stem cells derived from live donors which are phenotypically and actually distinct from other adult stem cells. We believe that a stem cell product derived from live donors offers clear advantages over current product offerings, including known cell and viability counts, known patient history and more reproducible product.

We have finalized all of the preclinical testing required for market launch, which we expect to occur in the current quarter. We have not included elo stem cells into our updated guidance.

Our final growth driver is our global distribution network, which has been considerably improved with the addition of Scient'x. We now have [our] 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 capitalize on the significant pipeline of products we have developed. We have prioritized key product launches for Europe in 2010, and we'll be focusing on OsseoFIX ILLICO ZODIAC and TRESTLE initially, 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 attainment of necessary regulatory clearance.

We've undertaken several initiatives to increase the productivity of our US distributor reps. We are pleased to have recently added several new first-year distribution agents and expect to have additional new reps on board in the third quarter with additional groups joining Alphatec Spine in the fourth quarter. More importantly, we are enthusiastic about the quality, level of talent and experience we have been able to attract, with seasoned reps showing an eagerness to move from competitive manufacturers.

In the second quarter, we began to strategically add direct sales representatives in underserved markets which we plan to continue throughout 2010 and 2011.

Lastly, we are pleased to announce that we closed a follow-on equity offering in mid-April, resulting in $43.1 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 underway and our being well-capitalized for a long-term growth, 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 second-quarter 2010 financial results.

Thank you, Dirk. The following remarks are about our reporting operating performance for the second quarter, June 30, 2010. As previously announced, on March 26, 2010, the Company completed the acquisition of Scient'x . As of March 31, 2010, the Company's consolidated balance sheet includes the fair value of Scient'x's acquired assets and assumed liabilities. Commencing April 1, 2010, the Company's consolidated statement of operations and consolidated statement of cash flows includes the actual operating results of Scient'x.

In connection with the Company's strategy to focus on the sale of spinal implants in Japan, Alphatec Pacific entered into an agreement in April 2010 to sell one of its wholly-owned subsidiaries, IMC Company, to a third party. As a result of this disposition, the Company is reporting the actual operating results of IMC's revenues and earnings or losses as discontinued operations for both periods of 2010 and 2009.

For the year ended December 31, 2009, IMC's revenues was $11.5 million -- US dollars -- and IMC's net income was $0.3 million. For the three months ended March 31, 2010, IMC's revenue was $3.1 million and IMC's net income was 0.

To present comparative revenue results, we are utilizing pro forma revenues. The Company's pro forma revenues includes revenues for Scient'x for all periods in 2010 and 2009 and do not include revenues for IMC for all periods in 2010 and 2009. The press release issued today provides our geographic sales segment performance on both a GAAP basis and a pro forma basis in a tabular format. On this call, I will be discussing the actual performance of our business on a GAAP basis.

The consolidated revenues for the second quarter of 2010 were $45.4 million, an increase of $16 million or 54.5% from the $29.4 million reported for the second quarter 2009. US revenues for the second quarter 2010 were $29.3 million, an increase of 11.1% from the $26.4 million reported for the second quarter 2009. European revenues for the second quarter 2010 were $8.9 million, a 20 (technical difficulty) increase over the $0.4 million reported for the second quarter 2009. Asia revenues for the second quarter of 2010 were $5.2 million, an increase of $2.6 million or 101.4% from the $2.6 million reported for the second quarter 2009. Rest of the world revenues for the second quarter 2010 were $2 million.

Gross profit for the second quarter 2010 was $28.8 million, an increase of $8.9 million or 44.5% over the second quarter 2009 gross profit of $19.9 million. Second quarter [of] 2010 gross margin of 63.5% was below second-quarter 2009 gross margin of 67.9%. However, gross margin increased sequentially 110 basis points over the first quarter 2010 gross margin of 62.4%.

The decrease in gross margin of 440 basis points over prior year second quarter is primarily due to the geographic sales mix associated with our increased European business segment, which contributes lower gross margins.

As reported in today's earnings release, our gross margin in the US for the second quarter of 2010 was 71.4%, an increase from both prior year second quarter US gross margin of 69.4% and first quarter 2010 of 69.9%, reflecting increased manufacturing efficiencies and reduced royalty burden, partially offset by US price erosion.

The European gross margin for the second quarter 2010 was 42.1%, an improvement of 300 basis points over the prior year second quarter gross margin of 39.1%. The gross margin in Europe was pressured by a large stocking order of implants and surgical instrumentation, which brought margins down from the typical 50% levels which we would normally expect.

Our gross margin for the US market segment for the second quarter 2010 was 57.1%. The improvement over previous reported period reflects the disposition of IMC, which had historically contributed gross margin of 30% or less.

Total operating expenses for the second quarter 2010 were $31.9 million, an increase of $6.2 million compared to the second quarter 2009 of $25.7 million, and includes $5.7 million in operating expenses associated with the addition of our newly acquired European operations. The second quarter of 2010 includes $1.8 million in acquisition-related operating expenses. Excluding the acquisition-related expenses, total operating expense increased $4.9 million compared to second quarter 2009.

Research and development expenses for the second quarter 2010 were $4.9 million, an increase of $1.5 million compared to the second quarter 2009 R&D expenses of $3.4 million. Second quarter 2010 includes R&D expenses of $0.7 million that are related to the Company's new European operations. In process research and development expenses for the second quarter of 2010 were $0.1 million, a decrease of $4.4 million compared to the second quarter 2009 IP R&D expense of $4.5 million.

Sales and marketing expenses for the second quarter of 2010 were $17.1 million, an increase of $4.8 million compared to the second quarter 2009 sales and marketing expenses of $12.3 million. Second quarter 2010 include sales and marketing expenses of $2.7 million that are related to the Company's new European operations.

General and administrative expenses for the second quarter 2010 were $8 million, an increase of $2.5 million compared to second quarter 2009 G&A expense of $5.5 million and second quarter of 2010 includes G&A expenses of $1.3 million, related to the Company's new European operations.

Adjusted EBITDA was $3.8 million in the second quarter 2010, an increase of $1.3 million compared to the adjusted EBITDA of $2.5 million reported for the second quarter 2009.

Net loss for the second quarter 2010 was $3 million or negative $0.04 per share, both basic and diluted, compared with a net loss of $6.3 million or negative $0.13 per share, both basic and diluted from the second quarter 2009.

On a non-GAAP basis, EPS for second quarter 2010 was breakeven, compared to the negative $0.04 per share reported second quarter 2009. Non-GAAP net loss or earnings excludes in process research and development expenses and acquisition-related expenses.

As of June 30, 2010, cash and cash equivalents totaled $38.4 million. In mid-April, we closed a follow-on equity offering, resulting in $43.1 million in net proceeds. And we believe that the net proceeds from this offering provides adequate capital to fund general corporate purposes and working capital, including the integration of Scient'x .

Our use of cash in the second quarter 2010 was $17.3 million, excluding the equity offerings net proceeds, and consisted of $3 million in debt service costs, $4.8 million in nonrecurring acquisition-related payments and an increase of $10 million of inventory and surgical instruments.

As of June 30, 2010, our net inventory position was $50 million which represents approximately 27% of our annualized second-quarter revenues. Historically, we have managed inventory at a level of 21% to 22% of annualized quarterly revenues and expect to return to these levels by year end.

We built up inventory in anticipation of sales into our currently -- recently expanded European channels. Our US Hospital Accounts Receivable performance remains on a consistent trend at roughly 50 days sales outstanding.

And 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 our second-quarter results. While we continue to grow at rates that outpace the broader spine market and many of our competitors, we were disappointed that we did not achieve our internal goals for the quarter.

This was attributable to several factors, namely price pressure in core markets, the unpredictability of product approvals with the FDA, as well as the complexities associated with integrating an international organization in Alphatec Spine.

We spent considerable time in evaluating the issues we faced in the quarter. We have implemented a number of initiatives to accelerate growth, and we are confident that we are stronger than we have ever been and are well-positioned to take advantage of our global position and innovative products -- those both on the market today and in our development pipeline.

As previously discussed, we saw increased pricing pressure in the US market in the second quarter, which we believe to be in the mid-single digits as hospitals try to decrease their costs and control the number of vendors they deal with. While in some cases this presents a challenge, more often, we believe this presents an opportunity for us.

As a full line spine company with robust product line, we can and do effectively compete for hospital contracts with favorable terms. We expect pricing to remain under pressure through 2010 and have adjusted our assumptions accordingly.

Through manufacturing efficiencies, we believe we can more than offset pricing trends and protect our US gross margins as demonstrated through our second-quarter performance. We are in a unique position to leverage our production capacity to reduce product costs and expand margins over the long term, despite a challenging pricing environment.

We have an ongoing strategic plan to become the low-cost producer for spinal implants, and have made strides in that regards in the first half of 2010.

Longer term, our focus on building out our MIS and biologic platform positions Alphatec well in those market segments that are experiencing continued growth. Many of the products we are introducing, or plan to introduce, such as SOLUS, ProFUSE and the elo stem cell offer cost advantages to a hospital by way of operating room efficiencies, reduction in actual costs and improved outcomes. We believe these products will earn premium prices, offsetting broader market-related price declines.

We have refocused our efforts on adding new distributor agents, direct sales reps in underserved markets, and in upgrading our sales management infrastructure. In addition, we have put in place incentive programs that reward our sales management team for a year-over-year revenue growth for the addition of key new distribution partners, as well as for new surgeon customers.

In order to focus on increasing our US growth rate and sales rep productivity, we recently put in place an incentive plan for distribution agents to incentivize year-over-year sales growth as well as cross-selling across our full platform of products in each surgical procedure. We look forward to realizing the benefits of these changes in additions through the second half of 2010 and into 2011.

We have made tremendous progress in integrating Scient'x into Alphatec Spine in the second quarter. As I previously stated, we completed the US consolidation, realizing significant cost savings, and have commenced initial integration of the international operations. It did take longer than anticipated to get Alphatec products loaded into Scient'x's international distribution system, and for us to get Scient'x's products loaded into Alphatec's US inventory.

There was a great deal of complexity involved in loading thousands of new SKUs into each respective format. And this process took longer than we previously anticipated. It has since been resolved and we are invoicing and shipping products across the entire organization.

Separately, we saw an unanticipated slowdown in orders from our international distribution partners of Scient'x products from historical levels during the second quarter. We believe this to be temporary as some distribution agents held back purchases until we clearly explained our consolidated product strategy going forward. Over 120 distribution partners from around the world attended our international sales meeting in Vienna, and we were pleased with the discussions and subsequent order commitments for products for the rest of 2010.

In July, we received word that TTLIM, a pedicle screw system received clearance from the [SFDA], the regulatory body in China, and we anticipate launching the product in China in the second half of 2010. We are on track to launch our elo stem cell product towards the end of the 3rd quarter and it will be the highlighted product for us at the North American Spine Society meeting in October.

We believe this will provide a substantial opportunity for pull-through of other core Alphatec products. Sales of the elo stem cell are not factored into our guidance.

At this point I would like to provide updated financial guidance, pro forma financials for full year 2010 and for the 2010 financial reporting basis.

We believe that in the second quarter of 2010, the US and European spine market growth slowed from their historical levels. Although we are confident that demographics will lead to continued long-term growth of the global spine market as a result of the deceleration of the market, we are revising our internal growth projections for 2010 to reflect current market conditions. Our revised guidance reflects an annual growth rate at Alphatec Spine that will continue to outperform the spine market.

We now anticipate pro forma combined annual revenues of $188 million to $193 million and $21 million to $24 million in pro forma combined adjusted EBITDA, and a positive non-GAAP EPS for the full year 2010, excluding acquisition-related expenses. The Company's pro forma revenues include revenues for Scient'x and do not include revenues for IMC, for all periods in 2010 and 2009.

The revised annual pro forma revenue guidance reflects an annual growth rate of 10% to 13% over pro forma 2009 revenue of $170.8 million. On a GAAP reporting basis, we expect full year 2010 consolidated revenues in the range of $178 million to $182 million and adjusted EBITDA to be in the range of $21 million to $24 million and positive non-GAAP EPS excluding acquisition-related expenses. The GAAP reporting basis guidance reflects the actual closing of the Scient'x acquisition at the end of March 2010 and the inclusion of Scient'x actual operating results effective as of April 1, 2010, into the Company's consolidated statement of operations and consolidated statement of cash flows, and includes the sale of IMC reported as discontinued operations.

Thank you. I will now open the call up for your questions.

(Operator Instructions). Raj Denhoy. Jefferies.

Good afternoon. Just trying to parse out softness in the quarter, you laid out a lot of different potential explanations, price cuts, complex integration. I'm curious from when you take a step back and you look at what really happened in the quarter, were expectations just too high for how quickly Scient'x (inaudible) to contribute? Did you get blindsided by what happened in the market? Maybe just some better clarity around -- maybe we just missed it in the way we put our numbers together. Just some thoughts there would be very helpful.

Yes, Raj. I think we underestimated the complexity in getting the Scient'x product loaded into Alphatec and vice versa. Alphatec product loaded into Scient'x. It took us about six weeks longer than we had originally estimated, and it really -- we are talking about thousands of SKUs, completely different platforms and numbers that have nothing in common.

So we had to work through that. So we think we lost about six weeks of productivity that way. So that certainly had an impact.

You know we did see pricing pressure in the US with the mid-single digits and that certainly had an impact on the foreign exchange rate. Had about $1.4 million impact during the quarter. We didn't really talk about that, but certainly that is in there as well.

Okay, but when you look at the guidance cut for the year then, you know how much of that is price --? How much of that is ongoing integration issues? Just trying to get a sense of what we're looking at going forward here.

You know, $11.5 million of the change is the taking out of IMC, which I think we had originally thought we could cover. But clearly that, based on current market conditions, is not the case. So it seemed wise to certainly back that number out, although Japan is performing extremely well, especially in spine products. We are very encouraged by the growth rate there.

You know, we lost the six weeks, obviously, in terms of the loading up of the product. We are not going to get that back. And we adjusted for what we believe's sort of the market growth rate, which is low single digits at this point.

As far as the complexion of the combined sales forces, have you seen any -- did you lose anybody to that process?

Well, it did --. We didn't necessarily lose anybody through the process of the integration although it did take longer than we anticipated to get the Scient'x distributors up and running on Alphatec product, obviously. And that certainly had an impact.

We've got them trained now. They're up and running, so we think that should move forward in a positive way. We did start to call out some of the nonperforming distributors during the quarter, and have started a process now to layer in what we think are much higher tier of sales rep at the top end to replace those that we've culled out.

Okay and then one last one and I will jump back. The guidance cut on the adjusted EBITDA number, I haven't had a chance to run it through the model yet, but what -- obviously you cut the revenues. But was there some associated increases in expenses that were not expected in the sense is it -- is the leverage maybe taking a little longer to flow through here as well?

This is Peter. The leverage is a little bit longer to flow through. As a percentage of revenue, the guidance is 11% to 13% of the guided revenue. The prior year -- the prior guidance was about 15% of revenue. So there is some element of our fixed operating costs that are compressing the margin ever so slightly.

And where is that differential coming from? Is it higher SG&A cost, G&A? I mean, where are you not seeing the leverage that you thought you're going to?

It would be in G&A.

Okay. I'll let some others jump in. Thanks.

Vivian Cervantes of Maxim Group.

Good afternoon. Thanks for taking the question. Tried to figure out if maybe there were -- there's a possibility that existing resources were stretched, pulled in many different directions and, therefore, some of the targets were not met. Could that be the situation here? In which case are there other pockets in the business, where you think you need to be beefed up?

I know you had mentioned sort of revamping the distribution or the sell-side. But is there anything else that maybe we may be lacking on that these to be beefed up. Because I don't know, maybe you bit off more than you can chew at this time, given the complexity of the many moving parts that you're trying to do.

Yes. It's a good question. I mean, I think we've worked through all of the integration issues, certainly in the US. And we've made good progress internationally, especially in France.

So you know, I think we are well-positioned at this point. You know, we did make some changes in terms of the international sales management. We moved the gentleman who was running Asia-Pacific to -- back to France to head marketing. We hired a new gentleman for Latin America, who is coming up to speed on spine, but is extremely well known in the Latin American market. Worked for B. Braun for a number of years.

So we -- I think we are well-positioned at this point moving forward. But clearly, you know, there were some things that we needed to work through. It's an extremely complicated organization and I think we are -- we've got it well-positioned at this point.

So if you take a look at your, I guess, laundry list of things to do for the integration, would you say that maybe you are more than halfway done or are maybe less than halfway done with what you need to do? Where are you on that list?

You know, I would say on the US side, we are 90% done and internationally probably more like 50%.

So it sounds like you may have one more quarter of transition before everything is properly locked and loaded, and just ready to steamroll. Would that be a fair characterization?

You know, we feel pretty good. In terms, we obviously focused on getting the sales and distribution up first, right, and then we saved all sort of the back-office stuff as a second phase. So you know, we -- obviously some of the international partners, we think, held off whether it was because they had a large inventory or they weren't sure what we were going to do with the combined product line.

You know, we've since seen, since our international meeting in Vienna at the end of June, we have seen a nice pick up and have received some substantial orders. So we think we're -- on the sell-side we think we are over the hump.

Okay. That's helpful. Thank you.

Glenn Navarro of RBC Capital.

Thanks. If I just run the numbers to get to somewhere around $180 million this year, looks like you are going to do some -- you need to do $50 million in 3Q and $55 million in 4Q. So, given the fact that there's going to be increased pricing pressure and I don't think you're saying add anything new for product flow, how do you get to that sequential growth? Is that all just fixing Scient'x? That's my first question. Thanks.

When we look at it on a pro forma basis, when you add in Scient'x for the first quarter of this year, obviously they are reported in our numbers for the second quarter of 2010. That's -- and the IMC has reported a discontinued operations from the first quarter of 2010.

The pro forma revenue number for the first half of 2010 is about $92 million and the guidance -- the low end of the guidance of $188 million implies second-half revenue therefore of $96 million. So when you break your quarterly down a bit it's a little less than what you're trying to pencil in. And so, that's one thing.

And then, we are just basically assuming continued growth for the second half of the year to be in the high single digits on an aggregate --

For the US.

Yes. In the US. So we do continue to see growth, obviously, in Europe and have seen growth, actually, in Asia on its core business. So when you look at this, we are looking for the full year on the low end of the revenue guidance range of 10% growth compared to full-year adjusted 2009.

So if we had to model out sequentially then, 3Q should be flat to slightly down from where we were in 2Q. Assuming just natural seasonality and then an uptick in 4Q. Is that fair?

That's a fair statement. We would expect some growth in third quarter as some of these initiatives will take track. But it won't be as robust as growth because of the seasonality of August.

And then you commented that pricing was down mid-single digits. Is that pricing excluding mix or is it including mix?

Yes. It's including mix overall.

So then, pure pricing was down 7% or 8% for you guys?

It's hard to say, it's hard to say. You know, certain categories are more price-sensitive than others. But as we are seeing Illico still providing growth year over year that's offsetting it a little bit. But we basically look at it on an overall category within the US, and look at the mid-single digit range.

It's sort of -- I want to address your first question a little bit in terms of products. We have released a few products that we think are going to help in the back half on the Biologics side. We introduced NanoBlast which is a nanocrystal and tricalcium phosphate that will compete with Vitoss. We introduced [duo fuse] and reintroduced Amnio Shield in a new form, in a dry form.

We also launched a new deformity smart set into the market. And I think those will have an impact as well as we are rolling out this month additional GLIF sets into the market. So we do see those providing both some positive impact in terms of price mix and growth in the second half of the year.

Can I just ask one more follow-up on price because I think what I heard from [Striker] and Zimmer and J&J was pure pricing down mid-single digit was a little offset from mix. So maybe all-inclusive pricing down in the 3% range.

And it sounds like your pricing was worse in the quarter. Do you feel like your pricing was worse than the market? And maybe can you talk to us about what category specifically hit you the hardest? I imagine it's just your typical rod and screw business that got hit the most.

Yes. It's the typical products are the ones that are getting, you know, under some pressure, but I would say our -- it's consistent with what we're seeing. You know, we are in the mid-single digits. And you know the mix is offsetting it some. But I don't think that we are feeling any more significant a pressure than anyone else. I mean, we are all competing in the same accounts.

Okay. Great. All right. I will jump back in the queue.

Doug Schenkel of Cohen & Co.

So first question to, maybe, be a bit pointed about this. You guys reported Q1 results, I believe, on May 10. So you had at that point about five weeks in the bag already and I guess about seven or maybe eight weeks left to go. You attributed this miss which, relative to consensus, I believe was about $7 million to the things that we've talked about at great length, pricing pressure, unanticipated challenges with the Scient'x integration and, then, a little bit of product approvals.

But that's a pretty big -- again, the consensus number [isn't] your number but I didn't get the sense that you guys were indicating to anyone that you thought it was the number you are comfortable with. You guys missed by a lot. You provided the guidance number pretty much midway through the quarter.

You know, does this speak to a trend that developed in a pretty big way in the back half of the quarter? Is that's (sic) what's going on here? Or should we feel a little bit less comfortable with the visibility that exist for this business in this environment?

No. I think definitely that the -- what took us by surprise was the uptake in the European market, you know, and that -- we didn't, we thought really that some of those orders would still come in before the end of the quarter and they actually rolled into the third quarter. Certainly the foreign exchange is about a $1.5 million impact. And the other -- what you've got to consider -- the $3 million of that miss is the IMC number which we had not backed out which was a mistake on our part.

So I don't think it's really a visibility issue. I think we do have a very good handle on the business and it did -- the integration just was a -- it took us a little longer than we had anticipated. But I think we are there now and we've seen a nice -- you know, we're already -- the first month of this quarter we are seeing a good rebound.

Okay. You know, you guys have typically, in a lot of ways, used pricing as a way to gain share in an environment where others are either getting more aggressive with pricing or maybe, put more appropriately, they are being forced to make concessions. How does that -- how should we think about that with you guys? And I want to spend some time on this because I think the way you guys have talked about this at least through this point this year is that you have said you probably can absorb more than others, and that you might be able to pass this along to some of your partners and some of your distributors.

It doesn't seem like that happened in the quarter. So are you actually more susceptible to pricing, given your historic way of going about gaining share?

No. I don't think so. You know, and you got to remember our margins for the US actually improved during the quarter even with the pricing pressure. So, you know, and that's really what we meant in terms of having the ability to leverage that, that although we may be losing a little on the top line, we are not losing it in the margin. And I think ultimately that is where we win.

So I think we continue to do compete in the market. We are not leading with price, but certainly we are being competitive with what's going on out there. It is rolling through the country. And you know, I think it still presents an opportunity for us in the long run.

Okay one or two more. A couple of your competitors talked about reimbursement challenges, I think, in thoracic lumbar region. Anything you guys have seen new in that way?

Yes. I think insurance companies are pushing back harder but I think that is a reality. Certainly we hear that from our surgeon customers that they're having to fight harder to get approval for certain procedures that are being routinely denied. And then they have to push hard to get them approved.

Ultimately, what we did see even though we had some challenges on the revenue line, actually our procedure volume hit a record during the quarter, which is encouraging. So we feel we are picking up share.

Last one, if you gave an update on discussions with the FDA, specific to the [warning] letter, I missed it. Was there any update there, anything new on that front?

No. I didn't. I didn't, we did not give an update on that. We are working through it. We have submitted all of the answers. We are in discussions with the local office and the next step is for them to come basically and reinspect. And we expect that in the next sort of 60 to 90 days. So we think that we've handled all the issues. They were all procedural-based, how we deal with [capas], but is how we deal with medical device reporting.

And I think we satisfied them that we have corrected the deficiencies in the procedures. And now we are just waiting for them to come reinspect.

Okay. Thanks for taking the questions.

Bill Plovanic. Canaccord.

I have a couple of follow-up questions here. So just, you talked about the procedures that are being declined by the insurance companies. I'm curious. What types of procedures are those exactly?

I think they are standard lumbar procedures primarily.

Okay. And --.

For discogenic pain, sort of single level or two level fusions.

Okay.

And it is not that they are being ultimately declined. I think they are just -- they are making it harder.

Okay. And then just as you look at the business, I think you commentaried to one of the other questions was that the -- about halfway complete on the integration OUS 90%, complete US. But then, you know, sales and distribution is first.

Would you say that the sales and distribution component of the US is complete? And then the same question for OUS. Where is that complete from a sales or distribution standpoint and then just define what you mean by 50%? What else needs to be done internationally to complete that process?

In the US in terms of the integration of the Scient'x sales force, that is complete at this point. So all the contracts are done. I mean, they are all signed up. They're up and running. So I think that is completely done and as I mentioned, we are culling out some of the nonperforming agents. We are bringing on some new top-tier agents that we think are going to help us grow the business going forward and we are adding direct reps. So sort of that's in unserved market segments in the US.

Internationally, I think we are in a similar situation. Most of the contracts, if not all, have been signed at this point. We have not lost any distribution partners in Europe. Basically, I would say it's 100% done.

You know, we do have regulatory product approval cadence to go through in terms of Latin America, Asia. We did train a large number of distributors in Vienna at the end of June. So we think that we are good there.

So when I talk about 50%, it's really kind of the back office. We need to get Scient'x up and running on our ERP system. We need to get their subsidiaries in the UK and Italy up and running on ERP systems. You know, it's sort of the back office things. Get all of our procedures in place. Get them SOx-compliant. It's those types of items that I'm talking about.

Okay. And then, Dirk, as you look at the business so the distributors are trained. You still have to get some of the products approved. Just as you look at the progression of your business chronologically, May, June, July, going into August, do you truly feel that we've hit bottom yet? Or do you think we are sliding into the bottom? Where would you characterize us on that on that curve?

Well, you know, we saw a good pickup in June in terms of orders. We got a substantial order out of one of the international partners. And we are -- and I think that is continuing. So I think we have come through the bottom of the curve and are starting to head back up with a very strong focus on the European market, obviously.

And then, Peter, if you could clarify for me again. So you have to do $96 million in second-half revenues to meet the guidance as it stands. So you have got to print $96 million -- because it's extremely confusing given the pro forma, the IMC back and all of this stuff. You know I don't think anybody just looking at this on face value can even discern this.

But if you just did $45 million -- so you're telling me and I think your commentary was flat to down slightly Q3 up Q4, I mean, the bottom end of the range -- you know, I've got to do like $43 million to $45 million and then I need to do the balance of that 50-ish to run it out. So that's -- I mean, that's what we're talking about?

Let me help everybody on this and I think one thing we have attempted to do in the press release is the back of those schedules there provides all of our investors and people who follow the Company, both the GAAP reporting and the pro forma reporting [our] revenues. So we've tried to provide as much visibility for everybody as possible.

So given that, the bottom of the range for the year is $188 million on a full year pro forma basis. You know, we reported $45.4 million for Q2. When you look at Q1 2010, pro forma, it's $46.7 million. So then the guidance for the rest of the year is the $96 million. So I think that helps everybody get there.

I think I would ask for your models to look back at your first-quarter actuals to adjust them on a pro forma basis to include the incremental $11 million in revenue that we have for Scient'x, and then to subtract about $3 million in revenues for first quarter for IMC. And I think when you look through your models there than with what Glenn Navarro was commenting and you're saying, it will provide the clarity.

Okay. And then just as I look at the cost structure some of the commentary was new incentive plan for distribute -- US distributors going forward. That means higher commissions and then secondly Biologics segment kind of setting up a separate business there, that means incremental cost.

So looking at what SG&A was or sales and marketing on a normalized basis this quarter, how much of an incremental spend is that, going into the back half of the year that we should be thinking about?

We've actually been -- let me make three comments. First of all, we haven't talked about gross margin expansion. And we touched on it in the last call. Our manufacturing efficiencies and our ability to reduce our royalty burden remains on track and, as this quarter reports, is on track.

And we've actually seen an uptake there. So I think everybody should take a look at that and we will continue to improve on that going forward. On the selling commission rates, we will continue to manage those and even though we are providing these incentives, we don't think they will have a material effect, really, on a percent of revenue basis.

And on your third point, I think on the additional selling costs for rolling out the Biologics, again, we are modulating that against the uptake of sales. So we believe that will end up being afforded.

The EBITDA guidance that we have provides for annual margin of a range of 11% to 13%. So we don't see really any structural issues there. And, obviously, with the reduction in the revenue guidance we have here, we have also taking taken a look at other operating costs and modulated those down as well.

So we will, as you have seen us to be nimble in the past, we will be nimble here in managing these operating -- the other operating expenses as well.

And can you dumb this down? Simplify it for me. What do you have to get in Q3, Q4 combined on an adjusted EBITDA to hit that number that you're talking about?

Let's see. That would be about [3.8 and 5, 4]. (inaudible--microphone inaccessible). Yes it's about $9 million to $10 million. So basically, doubling what we've reported for the first half of this year.

Okay. And is -- just the last question is, you mentioned GLIF and you kind of continued the rollout. How many doctors are using it now and when is this thing ready for prime time?

It will --. You know, I don't really want to speak to the number of surgeons at this point because I think that just plays into our competition's hands. But it is increasing. And we think that we are ready for a full market launch around the end of the year.

Okay. Great. Thank you very much.

[Patrick Lincoln] of Lazard Capital Market.

Good afternoon. Thanks for taking the question. I wanted to start with just the US business. You know, if I just assume for simplicity's sake that the Scient'x team that you kept didn't actually generate any revenue, it still looks like your core Alphatec business took a pretty big step down in terms of growth rates this quarter.

I just wanted to ask if everything was stable there? Because we haven't really talked about your core group yet on the call.

Okay. The core -- you know, the core group at Alphatec was stable. I mean, revenue was relatively flat for the quarter. We see that picking back up, going forward.

As I mentioned, we did cull out some distributors. You lose some sales with that. But we are replacing them with what we believe to be a higher caliber group and so we expect that to pick up.

And I'm sorry, I've been jumping around between calls, but did you guys call out the number of reps you have on the street in the US now?

No. We only -- we made mention of the total global number which is about 450. The US number is pretty flat to what we reported before.

And then in terms of, just on the elo stem cells, it sounds like that's -- you plan to bring that product to the market later this year. And what clinical did you complete as a part of the process and what data do you have to support the launch?

Yes. The data we have is very similar to what the other products on the market had when they launched. So it is all basically preclinical. It is in vitro testing and animal testing and, you know, there's an athymic rat model that is used. And that's, basically, what we will launch with. But that is consistent with what other people have launched with in the market.

And this falls all under the FDA -- excuse me, not the FDA, but just the tissue donation process and is outside the purview of the FDA? Is that correct?

It -- you know, the stem cells are ultimately derived out of the bone marrow. So that is where they originate. Therefore, we consider it amalgamous use in the use in terms of bone formation.

And then on OsseoFIX, I know you mentioned a larger trial -- randomized. Is that going to lower the waiting period for patients to be enrolled in the trial?

Yes. That was one of the big gives that we got in agreeing to change the trial to randomized trial, was to take up the waiting -- to basically reduce the waiting period so that we could actually get enrollment.

And then on SOLUS, and I apologize if I missed it, but did you guys give an update on the timeline or any potential regulatory hurdles you have left to --?

We submitted the data. We've had some very constructive dialogue with the FDA. And we are continuing to be extremely optimistic. I can't really give you a specific time at this point. You know, we are hopeful before the end of the year. But we are still working through that area.

Great. Thanks for taking the question.

Glenn Navarro of RBC Capital.

Just one question on distribution. I know one of the goals over the last couple of years was to take the US distribution and try to make as many of those distributors exclusive to Alphatec. Can you tell us where you are in that process and has it slowed as of late with integration? I am just wondering if maybe that was another reason for the US business to come in light? Thanks.

That continues to be obviously a clear goal to get to a completely exclusive sales force. You know, that did actually take a little bit of a back seat as we tried to integrate the Scient'x group. We brought most of them on, on an exclusive basis. A few we brought on, on a nonexclusive basis. And so, you know, I think from a percentage standpoint it actually went down a little bit to the low 70% and our goal had been mid-80s. So you know we are continuing to work on that, but as I mentioned, too, we are starting to really cull out the non-forming -- the nonperforming and most of the nonperforming are nonexclusive. And we will continue to work through that process.

And we are only bringing on either direct or exclusive at this point.

And the mid-80 goal, is that something that we should think about end of 2011?

You know, that's probably fair. You know, I may -- I think that would be fair. Yes.

Okay. Great. Thank you.

At this time, I'm showing no further questions. I would like to turn the call back over to you for any closing remarks.

Thank you. Our mission is to be the leading independent full line spine company with a focus on providing solutions for the aging spine and our goal is to improve the aging patient's quality of life. The aging population is a global phenomenon and it's estimated by 2030 over 1 billion people worldwide will be over the age of 65. And this represents a tremendous opportunity for Alphatec.

In addition, we continue to build and strengthen on our other core strategic growth drivers -- our core fusion put platform, our MIS platform, our Biologics platform and our global sales organization. We believe Alphatec Spine is uniquely positioned for a market leadership position in the global spine market.

Thank you very much and good afternoon to everyone.

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