Alphatec Holdings Inc (ATEC) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alphatec third quarter fiscal year 2010 results conference call. At this time all participants are in a listen-only mode. Later we will conduct the question and answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference call is being recorded. Now your host for today's conference, Michael O'Neill, Chief Financial Officer of Alphatec Spine. Please begin, sir.

Thank you and good afternoon, everyone. Welcome to Alphatec Spine's conference call to discuss our third quarter ended September 30, 2010, financial and operating results. With me today are Dirk Kuyper, President and Chief Executive Officer, and Evan Ganner, our General Counsel.

By now you should have seen a copy of today's press release announcing Alphatec Spine's third quarter 2010 financial and operating results. If you don't have a copy of today's press release, you can find it in the Investor Relations section of 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 are 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 important information about our filings in the SEC, including the risk factors seen in our annual report on form 10-K, subsequent quarterly reports in form 10-Q, and periodic filings in 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 portion of this conference call may only be used with our express written permission. I will now hand the call over to Dirk Kuyper, Alphatec Spine's, President and CEO.

Thank you, Mike. Good afternoon and thank you for joining us today. Before we begin, I want to take a minute to introduce Mike O'Neill who has joined Alphatec Spine as our new Chief Financial Officer, Vice President and Treasurer. Mike joins the Company from Mentor Corporation where he was Vice President and Chief Financial Officer, from November 2007 to March of 2009. Prior it joining Mentor, Mike spent the previous 20 years with Johnson & Johnson with his most recent position being Vice President and Chief Financial Officer Johnson & Johnson Worldwide Information Technology.

We're extremely excited to welcome an experienced professional such as Mike to Alphatec Spine's management team. Mike's depth of knowledge in the medical device industry and experience in multinational operations has enabled him to immediately add value and I am looking forward to working with him over the upcoming years. This afternoon we'll provide highlights of our operating performance from the third quarter of 2010. I will then turn the call over to Mike who will provide a more detailed review of our financial performance. I will then come back and discuss progress we made on the integration of Scient'x as well as our updated 2010 guidance. I will then open the call up for questions.

Despite challenges currently facing the spine market, we're pleased to have reached several significant milestones which position Alphatec Spine uniquely for the future. First, through the acquisition of Scient'x we have achieved our goal of diversifying our revenue internationally with 33% of our revenues now coming from outside of the US.

Second, we are demonstrating leverage of our P&L and expect to be cash flow and earnings positive in 2011 which means we are near reaching our goal of sustainability, and,third, our aging spine strategy and innovative technologies are spot on. The adoption of our key differentiated technologies in Europe such as OsseoFIX, SOLUS and OsseoScrew is establishing Alphatec Spine as an innovation leader in the spine market and is a positive indicator for the future of the Company as we achieve regulatory approvals for all of these products in the US, Asia, and the Latin American markets. We indicated in the second quarter that we expected Q3 revenues to be flat as compared to the second quarter 2010 and we reported that our revenues for the third quarter were $44.8 million, representing growth of 49% over the same period a year ago and in line with the second quarter.

On a pro forma basis, year-over-year quarterly revenue growth was 2% both as reported and on a constant currency basis. In the third quarter, sales in the US reached $30 million, European revenues reached $5.8 million, revenues in Asia reached $6 million, and revenues in the rest of the world were reported at $3 million. We reported adjusted EBITDA $5.3 million for the third quarter of 2010, an increase of $1.5 million over the second quarter 2010 on flat revenue indicating our ability to leverage the P&L.

We reported non-GAAP net earnings of $700,000 or a penny a share which is an improvement of $1 million over the second quarter 2010's loss of $300,000. We continue to make progress on our goal of having positive GAAP earnings and expect to have full year positive GAAP earnings in fiscal year 2011. Third quarter US revenue of $30 million represents growth of 15% year-over-year and 3% on a pro forma basis. We're particularly encouraged with the performance of our biologics and MIS products which continue to show strong growth.

Internationally, Alphatec Spine products continue to perform well, and we're pleased with the adoption rate of these products. In particular, some of our core technologies such as OsseoFIX, OsseoScrew, SOLUS and Helifix are opening doors and driving new relationships which are positive indicators for the future. These products are proving themselves in a challenging environment and building Alphatec's reputation as an innovator in the Spine market.

European sovereign debt and budget issues continue to be a challenge in some markets mainly Greece, the United Kingdom, Spain and France. We continue to see meaningful expansion in Germany which represents the largest single market in Europe. Since the closing of the Scient'x acquisition, we have retained all of the major international distributors and are increasingly confident that this is a strong platform from which to grow. Latin America and Asia Pacific represent significant opportunities for the future as a spine markets in these areas are growing rapidly and we have prioritized regulatory approvals of Alphatec Spine products in those markets where Scient'x products are already approved. Sales to Japan continue to be extremely promising as evidenced by year-over-year revenue increase of 24% in Asia.

Now, I will provide a brief update on our primary growth drivers at Alphatec. Products initiatives addressing the aging spine are growing MIS and biologics platform, the continued expansion of our fusion product portfolio, and finally, expansion of our global distribution network. During the in terms of aging spine, during the quarter we reached significant milestones in the development and launch of products in our aging spine portfolio. OsseoFIX continues to gain momentum in particular we're pleased with the level of adoption in Germany which significantly out paces the overall spine market.

As of September 30, 2010, over 1,600 patients have been treated in the European Union with OsseoFIX. We estimate the market opportunity for vertebral compression fractures in the top five European markets to be approximately $170 million, and we believe OsseoFIX is unique design and positive clinical outcomes will allow it to take significant market share over the next several years. In the US, we have conditional FDA approval for the revised protocol of our 510(k) study which is now a one to one randomized study versus kiefplasty. The primary end point is nonimpieriority was the secondary end point of superiority. We'll enroll 270 patients at up to 30 sites sites with one year patient follow-up and we're currently enrolling patients in several sites and expect to add additional sites in the near future.

OsseoScrew continues to open doors for Alphatec Spine in Europe. It is being used in patients with poor bone quality for spondylolisthesis repair and for revision surgeries. Through September 30, 2010, over 100 surgical cases have been completed using OsseoScrew in multiple countries including Israel, Greece, and Germany with excellent results being reported. Surgeons are particularly pleased with the ability and revision cases to use the same diameter screw instead of having to use a larger diameter which was the only option prior to OsseoScrew and to gain additional fixation through the screw expansion capability.

We recently launched the product in Spain and Belgium and plans to commence a European post market clinical study to demonstrate the positive outcomes in the first quarter of 2011. We're pleased to report that we launched Helifix in Europe in the third quarter of 2010 in conjunction with euro spine. The first Helifix cases were completed in Germany and Switzerland and we expect expansion into additional countries and markets during the fourth quarter.

Helifix, which is a none fusion product is the first minimally invasive self distracting interspineus implant on the market. We built a solid platform in minimally invasive surgery with both our ILLICO and GLIF ARC system which allows us to increase our market share in the growing MIS lumbar fusion market. The GLIF ARC continues to gain interest as the only true alternative for far lateral system allowing patients to remain in the prone position during the entire surgical procedure, and we are pleased with the momentum generated within the surgeon community. GLIF is in the final phase of our limited release and we're moving towards a full market launch slated for the first half of 2011. We are actively adding new surgeons and are pleased that they have increased their use of the product after the initial trial.

While still not material, revenues doubled in the third quarter of 2010 versus the second quarter and we expect a significant increase in the fourth quarter of this year. To date two level and L 4 L 5 cases have been successively performed which expands the potential opportunity for GLIF. In a market that is becoming increasingly crowded, GLIF is the only lateral access technique that is truly unique and addresses significant challenges of the lateral procedure. We're particularly encouraged by the strengthening of our biologic platform.

Sales in the US bone replacement market which includes growth factors, stem cells, synthetics, composites, aloe graphs and similar products could be as high as $1.8 billion in 2010 according to biomed GPS. In the third quarter, we established a biologics division and hired several sales specialists to support our growth plans in the launch of the puregen osteoprogenerator allograph cell. We're excited to announce that the first case was done in September in Los Angeles and the puregen osteoprogenerator cell was featured prominently at the North American Spine Society meeting in October. There is strong early momentum with the product and tremendous excitement about the potential.

While still early, we are optimistic that puregen could contribute meaningfully to our 2011 results. We're planning to enroll patients in three post release clinical studies, one for ACDF, one for posterioral lateral fusion and one for lumbar interbody fusion and we hope to have sites enrolling patients before the end of this year. In regards to expansion of our core fusion product offerings, we resubmitted our SOLUS 510(k) application to the FDA with the revised indication of supplemental versus stand alone fixation and we're hopeful that we will receive a response from the FDA in the fourth quarter of 2010.

We launched SOLUS in Europe during euro spine and to date several cases have been successfully completed in Germany. We launched aspita, anterior lumbar interbody fusion plate this October as well at the North American Spine Society meeting in Orlando. This plate in combination with the A lift interbody and our novel distracter introducer we launched in 2009 rounds out our product offering and should allow to us gain market share in the ALIF market.

Our final growth driver is our global distribution network which has been considerably improved with the addition of Scient'x. In the third quarter of 2010 we were able to refocus on adding an upgrading our US distribution network. We added several new independent distributor agents in the third quarter of 2010 and see the opportunity to add additional agents in the fourth quarter. We expect the new additions to start contributing revenues in the near future. Separately, we add the directed sales representatives in key strategic markets and will continue to do so in 2011. Now I would like to turn the call over to Mike to discuss the third quarter 2010 financial results. I will conclude with an update on the integration of Scient'x pro forma financial guidance and concluding remarks.

Thank you, Dirk. The following remarks are related to our reported operating performance for the three months ending September 30, 2010. As a reminder, the Company completed the acquisition of Scient'x in March 2010 and 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. Additionally, the Company sold one of its Japanese subsidiaries, IMC, in April of 2010. As a result of the disposition, the Company is reporting the actual operating results of IMC as discontinued operations for both periods of 2010 and 2009.

To present comparative revenue results we are utilizing pro forma revenues. The Company's pro forma revenues include revenues for Scient'x for all periods in 2010 and 2009 and does not include revenues for IMC for all periods of 2010 and 2009. The press release issued today provides our geographic sales segment performance on both a GAAP basis and a pro forma basis.

On this call, I shall be discussing the actual performance of our business on a GAAP basis. As previously mentioned, consolidated revenues for the third quarter 2010 were $44.8 million, an increase of $14.7 million or 49% from the $30.1 million reported for the third quarter 2009. US revenues for the third quarter 2010 were $30 million, an increase of 15.2% from the $26 million reported for the third quarter of 2009.

European revenues for the third quarter 2010 were $5.8 million, more than 400% over the $1 million reported for the third quarter 2009. Asia revenues for the third quarter 2010 were $6 million, an increase of $3 million or almost 100% from the $3 million reported for the third quarter 2009. Rest of world revenues for the third quarter 2010 were $3 million. Although the third quarter typically reflects some seasonality due to summer vacations, we are pleased with our revenue performance as compared to the second quarter 2010.

US revenues of $30 million for Q3 were 2.4% higher than Q2. Asia revenues of $6 million were 14.5% higher than Q2. Rest of world revenues of $3 million were 54.2% higher than Q2. Our European revenues of $5.8 million were 35% or $3.1 million lower than Q2. This variance is primarily attributable to the inclusion of a large stocking order from an international distributor in the second quarter.

We continue to expect our international revenue to be subject to large variations as distributors invest in our technology. Gross profit for the third quarter 2010 was $28.9 million, an increase of $8.8 million or 44.1% over third quarter 2009 gross profit of $20.1 million. Third quarter 2010 gross margin of 64.5% was below third quarter 2009 gross margin of 66.7% which represents a decrease of 220 basis points.

The decline in gross margin is primarily attributable to a significant shift in geographic mix and to a lesser extent the inventory step up and amortization of intangibles associated with the Scient'x acquisition. These declines in margin were partially offset with favorable manufacturing efficiencies, reduced royalty expense, and favorable amortization expense reductions. Q3 2010 gross margin of 64.5% increased sequentially 100 basis points over Q2 2010 gross margin of 63.5%. The variance can be attributed to many of the same drivers noted in the year-on-year comparison that the impact of geographic mix is substantially less.

As reported in today's earnings release, our gross margin in the US for Q3 2010 was 77.8%, an increase from both Q3 2009 US gross margin of 68.9% and Q2 2010 of 71.4%. The increase is specifically driven by increased manufacturing efficiencies and reduced royalty burden. Europe margins were reported at 27.6% which were lower than expected.

After a review of our Q2 operating results, we determined that the classification of expenses within cost of goods sold versus operating expenses was not aligned with our common classification. These were updated in Q3 2010 and the year-to-date Europe margins are at roughly 40%. It should be noted that these reclassifications did not impact the bottom line in any period. The reported European gross margins include the acquisition related inventory step up and amortization expenses. Excluding these acquisition related expenses, our margins would have been in the high 40's.

Research and development expenses for Q3 2010 were $3.7 million, an increase of $100,000 compared to the Q3 2009 R&D expenses of $3.6 million. Q3 2010 R&D expenses, sorry, Q3 2010 includes R&D expenses of $700,000 that are related to the Company's new European operations. In process research and development expenses for Q3 2010 were $2.4 million, compared to $50,000 in Q3 2009. The majority of the Q3 2010 IPR&D expense was related to a milestone payment related to our puregen product.

Sales and marketing expenses for Q3 2010 were $17.1 million, an increase of $5 million compared to Q3 2009 expenses of $12.1 million. Again, Q3 2010 includes sales or marketing expenses of $2 million that are related to the Company's new European operations. General and administrative expenses for Q3 2010 were $7.9 million, an increase of $4 million compared to Q3 2009 G&A expenses of $3.9 million. Q3 2010 includes G&A expenses of $1.9 million related to the Company's new European operations.

It should be noted Q3 2009 G&A expenses included a reversal of $1.2 million in legal expenses related to the settlement of a litigation matter. Adjusted EBITDA was $5.3 million in Q3 2010, an increase of $600,000 compared to the adjusted EBITDA of $4.7 million reported for Q3 2009. Q3 2009 adjusted EBITDA has been updated to reflect the exclusion of $1.2 million in transaction costs that were previously reflected in G&A.

Our net loss for Q3 2010 was $3.8 million or negative $0.04 per share compared with a net loss of $1.3 million or negative $0.02 per share for Q3 2009. On a non-GAAP basis EPS for Q3 2010 was positive $0.01 per share compared to break even reported Q3 2009. Non-GAAP net earnings or loss excludes IP R&D expenses, acquisition related expenses and restructuring expenses.

As of September 30, 2010, cash and cash equivalents totaled $28.9 million. Our use of cash in Q3 2010 was $9.6 million and was primarily attributable to $3.9 million from increased inventories and $4.8 million from increased accounts receivable. As of September 30, 2010, our net inventory position was $53.6 million which represents approximately 30% of our annualized Q3 revenues.

Historically, we have managed inventory to level of 20% to 21% of annualized quarterly revenues and expect to return to these levels by the first half of 2011. As previously disclosed, we had built up inventory in anticipation of sales into our recently expanded European channels. The Company has now slowed inventory builds, instrument spending as well as reduced discretionary spending to manage the cash burn within the business.

While the Company expects to continue to burn a modest amount of cash in the fourth quarter of 2010, we anticipate being cash flow positive in 2011. Finally and while not specific to the third quarter of 2010, we recently announced the signing of an amended and restated loan agreement with Silicon Valley Bank that provides for $32 million revolving line of credit. The credit facility provides a significant reduction in debt service and terminates the principle payments that existed in the prior credit facility. Previously, our cash flows were negatively impacted by the interest expense associated with the old credit facility and the repayment of principle on the term loan.

Going forward, we have extinguished the repayment of the principle and the term loan and moved to simple interest expense on the revolver. This will have a positive increase in cash flow for the Company moving forward. Now I would like to turn the call back over to Dirk.

Thank you, Mike. We have made tremendous progress integrating Scient'x into Alphatec Spine in the third quarter. As I previously stated, we completed the US consolidation, are making progress related to the integration of the international operations. We're encouraged by the adoption of Alphatec products by the international distribution and direct sales organizations. We're continuing to launch products in key European markets and are investing and building out our direct sales organization says in France, Italy and the United Kingdom.

Over the next year we will focus on streamlining our product portfolio and operations and we expect to be substantially done with the integration of the international operations by mid-2011. The spine industry has seen several challenges throughout 2010 both in the US and overseas which have tempered overall revenue growth through a decline in procedural volumes and pricing pressure. As of now we believe that pricing in the United States has stabilized, and we have not seen significant further erosion since the second quarter.

Procedural volumes continue to be under pressure. In particular, lumbar procedures related to degenerative disk disease and nonspecific disk general I can pain are generating pushback from ep insurers who made approval criteria far more stringent than previously. This led to delays and in some cases cancellations of procedures. In our estimation this impacts approximately 15% of the lumbar fusion market T remains to be seen if this is a short-term delay of procedures or a fundamental shift in the market.

Our belief is that eventually many of these patients will end up getting a fusion procedure after having exhausted other available therapies. At Alphatec Spine we expect to see continued growth driven by our innovative technologies addressing the aging spine market segment which is bolstered by favorable demographics and positive results from Europe. We're also confident that our focus on building out our minimally invasive and biologics platforms positions Alphatec Spine well in those market segments that are experiencing continued growth.

We believe that many of the products we are introducing or plan to introduce such as SOLUS, ProFUSE and pure GEN off cost advantages to the hospital by way of operating room efficiencies, reductions in actual costs and improved outcomes. We believe these products will earn premium prices offsetting broader market related price declines. In addition, we anticipate that our global footprint will allow to us grow internationally and take advantage of growth markets such as those in Asia Pacific and Latin America. While we are confident that we are well positioned to continue to grow despite the challenges currently facing the industry, we believe that growth of the US spine market remains unclear as it relates to procedural volumes.

Additionally, there are international debt and solvency issues impacting government funded health systems. As a result, we're revising our internal growth projections for 2010 to reflect these current market conditions. Our revised guidance reflects an annual growth rate at Alphatec Spine that will continue to out perform the overall spine market. We now anticipate 2010 annual GAAP revenue of $170 million to $172 million adjusted from $177 million to $182 million previously. We expect pro forma annual revenues of $181 million to $183 million adjusted from $188 million to $193 million. We anticipate GAAP and pro forma adjusted EBITDA of $19 million to $20 million, adjusted from $21 million to $24 million previously. The revised annual pro forma revenue guidance reflects annual growth of 6 to 7% over pro forma 2009 revenues of $170.8 million. Thank you, and now I would like to open the call up to questions.

(Operator Instructions) Our first question is from Raj Denhoy of Jeffries. Your line is open.

Good afternoon, guys.

Hey, there.

Hi, Raj.

Wonder if I could start, you know, with Europe. I think it was probably the one line that was a lot weaker than most expecting and curious if you could just provide us a little more detail on, you know, what you're seeing over there in Europe and you commented that the salesforce not changed at all, the distribution network not changed at all and seems like the fundamental demand out of Europe is lower than it was last year and continues to be somewhat depressed and perhaps if you could offer comments on when you think that's going to come back.

We do think that it is somewhat temporary. Obviously certain markets where we enjoyed substantial market share have been under some pressure, Greece in particular is one where we saw a significant decline in business in the third quarter. Again, we think that comes back. You know, the business is a little bit lumpy due to stocking orders as well as products move in and out. What we're particularly encouraged by is the pickup of Alphatec Spine products in Europe which has been actually ahead of our expectations, so overall I actually feel very positive about how things are developing in Europe, and I think once some of these countries specific issues are behind us we should see a nice pickup.

With your comment on the demand for Alphatec products the other thing that stuck out was the OsseoScrew demand in Europe and I think last quarter it running at was north of 50 cases and now it is north of 100 cases. Just that sequential increase of 50 cases, you know, given that the product was now available to all of your distributors in Europe, that just strikes me as not that large of an increase and I am curious, you know, why that product which we had such high hopes for is not growing perhaps at a faster clip.

We had it in a limited number of countries. It took awhile, frankly, I think I mentioned in the second quarter that we had some challenges getting our products into the Scient'x system. We really were only in a few countries until sort of the latter part of the third quarter, so actually we think that the interest level and the ability to open doors with OsseoScrew is quite high, so we're very encouraged by it. You're right, on a procedure volume basis it is somewhat low still. We're also working through issues in terms of reimbursement and all of that, but really if you look at all of those cases were done in a limited number of countries so far, and we're really just ramping up, so we had a sim lar experience with OsseoFIX sort of in the beginning it picked up slow and then it really sort of accelerated after we got it out into a number of countries and the product was out there in a bigger way.

And just last thing on your EBITDA guidance for the year. You know, pretty significant cut there. One of the things we also looked for in the Scient'x data was the significant leverage that transaction would bring you on your expenses. You know, but it looks like on an adjusted EBITDA basis the fourth quarter number will be somewhat below or very close but perhaps below what you did in the third quarter and implying that your operating expenses, you know, are going to be running at roughly the same level if slightly higher so I am curious what happened to the leverage we were supposed to see and is that getting pushed out here now?

I think part of the issue is this late in the year your ability to react to the overall expense profile is somewhat restricted. So obviously in the long run all expenses are variable. In the very near term some of those expenses are fixed, so it is just the nature of nine months under our belt, as we pull down the revenue there is just fixed element to the P&L that we cannot deal with that quickly.

Okay. Fair enough. One last clarity point. I think you said the European gross margins I was a little unclear. You said roughly 40% for the first three quarters of the year and a little bit of a catch up here in the third quarter. Does that imply 40% roughly for the fourth quarter for European?

Yes, I think that given that we have some acquisition related expenses in both Q2 and both Q3 from Scient'x, I think the margin that we have on a year-to-date basis for Europe is reproduceable as we go forward from here.

So roughly 40%?

Yes.

Okay. Thank you.

Thank you. Our next question is from Charles Shaun of Stifel Nicholaus. Your line is open.

Thank you. For Europe would you be willing to talk to the stocking order in the second quarter? How much in revenues was that order?

I think in my scripted remarks, Charlie, we said it was a significant contributor to the 3.1.

Okay.

A large part of the 3.1. It was not all of that was the distributer.

Okay so let me ask that question just a little bit differently. If there had been no stocking order in the second quarter, would revenue -- what would revenues have done sequentially from the second quarter to the third quarter.

We would have been down a little.

Down a little. Okay.

Which is seasonal.

Okay. Second question is just the curiosity would you be able to share how much the legacy sign ex business generated in revenues during the quarter?

We're not disclosing Scient'x specific revenue.

Okay. In terms of the trends that we saw in the US for Alphatec, can we talk a little bit more about what happened on the volume front because if when we adjust the revenue number for what our guesstimate is for the Scient'x contribution, seems as if the legacy Alphatec business actually accelerated if pricing was stable it suggests that maybe volumes improved on a sequential basis.

You're absolutely correct. You're reading it right. The underlying Alphatec product volumes increased.

And is that just primarily a share gain phenomenon or is there something else?

It is a share gain.

Okay. Great. Last two questions. Could you provide an update on the US approval process for OsseoScrew because I think the last time we received an update Alphatec was going to meet with the FDA sometime during the fall to discuss a go forward strategy.

Yes. Actually, what our -- we're discussing our strategy right now internally. Our current thinking is that we are going to resubmit the 510(k) slightly differently, and we think that we have a way to push that forward prior to going back and discussing any type of clinical trial. We'll make that decision here in the next few weeks.

Will you announce that via a press release or in some type of investor setting?

You mean what our go forward strategy is?

Sure.

Yes. Probably not. I am not sure it is significant. What our feeling is that there is an opportunity to get the product reregistered in this way, and it is basically sort of a 90 day window if you will. Certainly when we hear something back from the FDA we would certainly announce that.

Great. Thank you very much.

Thank you. Our next question is from Bill Plovanic of Canaccord. Your line is open.

Good evening.

Hey, there.

A couple of updates here. One, I know it is tough for you to do, but I was wondering if this point, is there any kind of indication we can get on 2011? Should the trends that we're seeing in four '10 we rely on that or any color on 2011 at this point might be helpful.

We're not prepared to give any kind of guidance on 2011, but what I can say is that we think we're well positioned, feel very good about where the integration is at, feel very good about the global platform that we have for supporting our product. We're very pleased with the pickup of Alphatec products internationally and for where we're at in the US. We started adding distributors again as you know that is part of what made us very successful previously. We have puregen launched and hopefully we'll hear about SOLUS here before the end of the year, so I think we're well positioned for 2011. Obviously this has been a tough year for the industry and for us, but I feel very good about where we're at.

And then as you talk about putting Alphatec products internationally, you know, have you gotten all of the sets out SOLUS you want for all the differentiated products for OsseoScrew, for SOLUS, and for any other major products that you have out there? Are those fully stocked at this point internationally or are you still working on that and if so, when do you have all of the instruments out you want?

We have moved substantial inventory into the European market, realizing we talk internationally right now our focus is primarily Europe because that's where we have the regulatory approvals. Certainly we have all the product in the markets. Now,Now, within the European Union it isn't one home owe genius market. We still have to get regulatory approval on an individual country basis and as an example we only recently got approval in Italy. Actually during the third quarter, so we'll continue to see a ramp up as we add countries to it, but basically to answer all of your questions all of the products are available in the market and as we get those approvals then certainly it rolls out. In terms of other international markets, we have pry prioritized and aggressively pursuing registration in Latin America, specifically Brazil which is the major market, and then in Asia specifically China which we think is a substantial opportunity.

But, Dirk, I guess I am getting at can we expect to you pretty much have all the registrations and product in place by Q1 2011, Q2 2011, I mean kind of gauging how the integration is going to me that's one of the biggest drivers for those O US sales is just having all of those differentiated products in the bag.

For all of the market -- for the international markets that you see E mark, they're all basically a proved and in the market and we're rolling them out. I think by certainly the beginning of Q1, you know I think Europe is basically done and, you know, Brazil and China, China we're about halfway through. It is about an 18 month process. Brazil, you know, when it is also depends we think it is a 12 to 18 month process, so those take some time.

Okay and then can we go back to SOLUS in the US and where you are with that? Does that need studied? You know, is that a different submission?

It was resubmitted as you know to the FDA with the altered indication for supplemental fixation versus stand alone, and we expect to hear before the end of the year from the FDA, so far we have gotten no questions, so things are progressing.

And it seems like the competitors at least with similar types of devices are getting approval on that basis as a complementary rather than stand alone?

Yes. We're optimistic.

And then last question and I will jump back is just any detail on the pureGEN studies you're conducting? What are those looking like? Are those 50 patient series or are those randomized controlled and then when would we expect to see data from those and that's all I had. Thanks.

Yes. You know, it is three separate studies. Really, the primary objective is to prove safety and efficacy certainly in anterior fusion and for the lumbar fusion. The anterior cervical is non-randomized. The posterior is certainly is, so the number of patients varies, but we expect to start enrolling before -- have some sites up before the end of the year, and to obviously gather the data quickly. There is a tremendous amount of interest we have already 17 sites that have signed up to be included in the clinical studies, so we think we'll be able to generate data fairly quickly. It is really looking at fusion rate and the quality of the fusion.

So the way I should think about that, though, is maybe you have product and it is kind of all of the sales agent's bags with it by the end of the Q1 2011, think of it that way?

Yes.

Great. Thank you very much.

Thank you. Our next question is from Doug Schenkel of Cohen. Your line is open.

Thanks for taking the questions. Your updated sales guidance seems to suggest that if I am doing the math right that Q4 sales will be about flat relative to what we saw in Q2 and Q3. We're a good way actually almost halfway through the fourth quarter. Given all of this, is it right to conclude that based on what you have seen this quarter thus far and what you're expecting over the balance of the quarter that you're not really expecting an end to the year pickup in US volumes or is it indeed that you are expecting the US to improve and expecting weakness to be more persistent in other geographies.

Well, normally you would expect the fourth quarter sequentially to be up from the third quarter just because of seasonality, but with the uncertainty that's out there certainly in the US it is more procedure volume at this point rather than pricing, and with sort of some lack of clarity in some of the key European markets right now we chose to be conservative, and to put out what we feel very comfortable with in terms of our ability to generate. Obviously we're going to drive for as much as possible. We'll have to see where it goes.

Just to be clear, all of those comments are as of the end of Q3. We're not discussing anything as it relates to what might be going on in Q4.

Okay. But to be clear and that is helpful but, Dirk, based on what you described it sounds like you're not more conservative relative to what you were expecting heading into the quarter in the US or in Europe? You're really expecting just a continuation of trends and you're taking a conservative stance across all geographies given what's going on in the market right now.

Exactly.

And then actually I do want to ask another question on Europe, but before I come to that, just one question on pricing in the US. When you describe pricing as stable, should we take that to mean stable at the current levels of what you were describing the last few quarters? I guess by that what I mean is I think you talked about pricing being at least a midsingle-digit head wind in the US.

So we have sequentially Q3 to Q2 in the US. We have pricing deterioration of less than a percentage point.

Okay . Year-over-year it is still a midsingle-digit --

Year-over-year it is still midsingle digits, correct.

Okay. And last question. It is another question in Europe because I just want to make sure we're understanding what's going on there. I mean, there is clearly market issues and some specific issues in geographies like Greece, but if I go back to the first quarter on a stand alone basis Alphatec did I think about $4 million in European sales I think Scient'x did about $5 million on a stand alone basis so that got you to $9 million on a pro forma basis. In the second quarter you did about the same although as you noted today there was a large stocking order. In the third quarter you had I guess about a $3 million sequential decline which again may not be fair given that there was a stocking order in the second quarter but no matter how you slice it, assuming my numbers are correct, you're a decent amount below where the Companies were on separate independent basis and on a pro forma basis you're below where you were at the beginning of the year. Again, there is market dynamics here but it does seem like you're far below where we probably would have expected you to be even independent of market factors. Is this science? Is something not going to plan on the Scient'x side? Is something not ramping the way it should? Can you help us just understand what's going on here?

Yes. Realize we were in the process of ramping in Europe and Scient'x also had some products that were being sold as sort of investments to distributors and so what we do feel very good about is the underlying business is solid, and the pickup of Alphatec products has been extremely positive, and we think that the Scient'x business is stable, so overall we feel good about it. The problem with each of the quarters, you know, there are significant lumps that occurred whether you talk about the first quarter for us that was a big lump in there for a Tikkun try, and so you know that unfortunately is going to continue for a while until we get all of our technologies invested in all the markets.

But the bottom line is there is, you know, when it comes to integration challenges that you may have been facing early on, you feel like you have turned the corner there?

Absolutely. I feel very good about the business, the fundamentals of the business at this point. I think it is stable, and we're seeing a lot of positive pickup on the Alphatec side, so I think for the long-term it looks very positive.

Okay. Thanks again for taking the questions.

Sure. Thanks, Doug.

Thank you, sir. Our next question is from Vivian Servantes of Maxim Group. Your line is open.

Hi. Hello. Can you hear me okay?

We got you, Vivian.

Hi. Sorry, I am jumping calls a little bit and I am not sure if this question has been asked. I wanted to sort of check in with you a little bit on your sense for the US environment and contrast that with Europe and there is some thinking out there that reimbursement pressures are increasing and I just wanted to get your thoughts on that versus US versus Europe.

Well, certainly what we have seen primarily here in the US is procedural volume pressure, especially as it relates to discongeneralic pain procedures, lumbar procedures, and we think that certainly continues for a period of time. As I mentioned in my scripted remarks remarks, we'll have to see whether it is a temporary situation or fundamental shift. In Europe we have not seen at this point any big shifts in reimbursement, but certainly you have to anticipate with some of the issues and some countries that potentially there could be some of that and we're trying to be pro active about that.

Thanks. Second question I have has to do with the FDA and I know you have a whole bunch of products in front of the FDA at this time. Can you maybe give us a sense for what we're looking at in terms of again realistic -- your ability to continue to squeeze products through the FDA before the year end and as we look at 2011?

Well, you know, the biggest opportunity short-term that is in with the FDA is the SOLUS device, and we expect to hear prior to the end of the year on that, and obviously with the revised indication we're cautiously optimistic about that. We have been able to get other products through the FDA such as speed which we got cleared in September and so I think we have a pretty good cadence on those products. OsseoFIX, you know, we got conditional approval to for the revised protocol for the study, and OsseoScrew we're planning to resubmit here before the end of the year based on sort of a new strategy with the FDA, so I think going into 2011 we have got pureGen on the market. We have SPTA. Hopefully we'll have SOLUS. Our MIS products continue to drive growth, so we'll go to full market launch on GLIF, so I think we have a pretty good cadence going.

That's helpful. Thank you.

Thank you.

Thank you. I am showing no further questions or comments at this time. I would like to turn the conference over to Mr. O'Neill for any closing remarks.

I will hand over to Dirk.

Thank you. In conclusion, I just want to reiterate the key themes which position Alphatec Spine uniquely for growth in the future. We have achieved our goal of diversifying our revenue internationally with 33% coming from outside the US. Alphatec Spine now has one of the broadest international foot prints in the spine industry which is a tremendous platform for leveraging our innovative technologies. Secondly, even in a difficult pricing environment, we're demonstrating leverage of our P&L and fully expect to be cash flow and earnings positive in 2011 which means we are near reaching our goal of independent sustainability. Thirdly, we are establishing TCEH as the innovation Leader in spine, the increasing adoption of our key differentiated technologies in Europe such as OsseoFIX, SOLUS, and OsseoScrew and the release of pureGEN in the US is a positive indicator for the future of the company. We strongly feel that our focus on the aging spine MIS and biologics and spot on and positions TCEH as a key player in the market going forward regardless of procedure volumes or pricing pressures and commoditized products. Thank you very much for your time and attention. Good afternoon.

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