Alphatec Holdings Inc (ATEC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Alphatec Spine fourth quarter and fiscal year end 2010 results conference call. (Operator Instructions) As a reminder, this conference call is being recorded. And now I'll turn the call over to Michael O'Neill, Chief Financial Officer. Please begin, sir.

Thank you. Thank you and good afternoon, everyone. Welcome to Alphatec Spine's conference call to discuss our fourth quarter and fiscal year ended December 31, 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 fourth quarter and fiscal year 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'd like to remind you that this call is being webcast live and recorded. A replay of the event will be available later today on our website and will remain available for at least thirty 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 us in our filings in the SEC, including the "Risk Factors" section in our annual report on Form 10-K, subsequent quarterly reports in Form 10-Q, and periodic filings in Form 8-K. These forward-looking statements are made as of the date of this call and we assume no obligation to update these statements publicly, even if new information becomes available in the future. This broadcast is covered by U.S. copyright laws and any use of or rebroadcast of all or any portion of this conference call may be used only with our express written permission.

I'll 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. This afternoon I'll provide highlights of our operating performance from the fourth quarter and full year 2010, as well as an overview of our accomplishments during the year and then turn the call back over to Mike, who will provide a more detailed review of our financial performance and guidance for 2011. I'll then come back with closing comments and then we'll open the call up for questions.

I'm proud of the team at Alphatec Spine and the Company's performance in 2010. Despite well documented challenges facing the U.S. and international markets, as well as the challenges of integrating a major international business, we continued to grow at rates that exceeded that of the overall spine market while maintaining a culture of excellence and high ethical standards.

In 2010, we transformed the Company into a global leader through the acquisition and integration of Scient'x. Alphatec Spine is now the third-largest global pure-play spinal implement Company with a broad and deep portfolio of products distributed in over fifty countries. We are one of only two spine companies with a fully integrated R&D and manufacturing, which enables us to design, transfer and manufacture with scale and speed-to-market.

Throughout 2010 we continued our focus on both the core spine market, as well as expanding our differentiated product offerings in aging spine, MIS, and biologics. We have a full pipeline of proprietary and unique products which are experiencing early success and adoption throughout Europe.

In addition, we created a standalone biologics division and significantly enhanced our biologics platform in 2010 with the launch of the PureGen osteoprogenitor cell allograft. We expect rapid expansion of our biologic products throughout 2011.

In 2010, we achieved several key objectives. First, we achieved our goal of diversifying our revenue, internationally, with over 30% of our revenue now coming from outside of the U.S. Secondly, we have demonstrated leverage of the P&L and expect to be cash flow and earnings positive in 2011, which means we are approaching our goal of sustainability and third, our aging spine strategy and innovative technologies have proven to be spot on.

The adoption of our aging spine products in Europe, such as OsseoFix and OsseoScrew, as well as Solus and ILLICO, has positioned Alphatec Spine as the innovation leader in the spine market and is a positive indicator for the future of the Company as we achieve regulatory approvals for these products in the U.S., Asia and Latin America.

For the full year of 2010, we achieved annual GAAP revenues of $171.6 million, which represents 42.3% growth over 2009, and we achieved pro forma revenues of $182.9 million, representing 7.1% growth over 2009 and 8.3% on a constant currency basis, which significantly outpaced the growth of the broader spine market.

For the full year 2010, we reported adjusted EBITDA of $18.9 million, representing a 32.3% improvement over 2009 adjusted EBITDA, further indicating our ability to leverage the P&L. We reported non-GAAP loss of $1.4 million, or a loss of $0.01 per share, which is an improvement of $2.9 million over 2009's non-GAAP loss of $4.3 million, or a loss of $0.09 a share. We expect to have positive GAAP earnings in 2011.

We continue to focus on our strategic growth drivers at Alphatec, which are product initiatives addressing the aging spine, MIS and biologics, the continued expansion of our fusion product portfolio and expansion of our global distribution network. During the quarter and throughout 2010 we reached significant milestones in the development and launch of products within our aging spine portfolio.

Internationally, certain of our core technologies such as OsseoFix, OsseoScrew and Helifix, are helping to drive new relationships with surgeons and are positive indicators for the future. These products are proving themselves in a challenging market and building Alphatec's reputation as an innovator in the spine market.

OsseoFix continues to gain momentum. In particular, we are pleased with the level of adoption in Germany, which significantly outpaces the overall vertebral compression fracture market growth. As of year-end 2010, over 1,900 patients in the European Union have been treated with OsseoFix.

We estimate the market opportunity for VCF products in the top five European markets to be $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 2011, we expect to continue to drive adoption rates throughout Europe as the body of clinical evidence regarding the safety and efficacy of the product continues to grow.

In the U.S., we've reached agreement with the FDA for the revised protocol of our OsseoFix 510(k) clinical study, which is now a one-to-one, randomized study versus kyphoplasty. The twenty patients enrolled in the original study will count toward the total enrollment. The primary end point is non-inferiority, with a secondary end point of superiority.

We enrolled 270 patients at up to 30 sites with a one-year patient follow up and we are currently enrolling patients in several sites. We expect to add additional sites and patients in the near future. Based on the revised inclusion/exclusion criteria agreed upon and other changes to the protocol, we anticipate completing enrollment in 2011 and we'll provide updates accordingly.

OsseoScrew continues to perform well and opens doors for Alphatec Spine in Europe. It is being used in patients with poor bone quality as well as for spondylolisthesis repair and revision surgeries. Through year-end 2010, approximately 200 surgical cases have been completed using OsseoScrew in multiple countries, including Israel, Greece and Germany, and we recently launched the products in Spain and Belgium with excellent results being reported.

Surgeons are particularly pleased with two clinical advantages that OsseoScrew offers. First, the ability in revision cases to use the same diameter screw through the screw's expansion capability instead of having to use a large diameter screw to gain additional fixation. Secondly, current practice in highly osteoporotic patients has been to use fenestrated or cannulated screws and inject PMMA cement to achieve additional fixation.

The problem created by this technique is that cement extravasation rates have been reported as high as 70%. OsseoScrew allows for increased purchase and fixation in these patients without the use of cement, thereby potentially improving outcomes. We are commencing a European post-launch study to demonstrate the positive clinical results of this change in practice in the first quarter of 2011.

We built a solid platform in MIS with both our ILLICO and GLIF/ARC systems, which allow us to increase our market share in the growing MIS lumbar fusion market. MIS revenues for the full year 2010 grew over 480% from prior year. GLIF/ARC continues to gain interest as the only true alternative for a full lateral procedure, allowing patients to remain prone during the entire surgery.

To date, two and three level, as well as L4-L5 procedures have been successfully performed and we recently completed our first international procedure. In a market that is becoming increasingly crowed, GLIF/ARC is the only lateral access technique that is unique and addresses the challenges presented by a lateral procedure.

During 2011, we expect GLIF/ARC to make a meaningful contribution in the second half of the year. We plan to launch additional MIS products in 2011, including a facet screw system and a unique MIS interbody device for TLIF and PLIF procedures.

We're particularly encouraged by the strengthening of our biologics platform. Sales in the U.S. bone replacement market, which include growth factor, stem cells, synthetics, composites, allografts, and similar products, could be as high as $1.8 billion according to Biomet PPS 2010 data.

In the third quarter of 2010, we established a biologics division and hired sales specialists and biologic experts to support our growth plans and the launch of the PureGen osteoprogenitor cell allograft. The first case was done in late September in Los Angeles and the PureGen osteoprogenitor cell was featured prominently at the North America Spine Society meeting in the fall.

There is strong early momentum with the product and tremendous excitement about the potential of a pure population stem cell that is not derived from a cadaver. While still early, we expect PureGen to contribute meaningfully to our 2011 results. We are planning to conduct three post-release clinical standards, an ACDF study, a posterolateral fusion study and a lumbar interbody fusion study. The first patients have already been enrolled in the ACDF study.

In regards to expansion of our core fusion products offering, recall that we resubmitted our Solus 510(k) application to the FDA with the revised indication of supplemental versus standalone fixation. We are completing the additional testing versus the predicate device that the FDA requested and we'll be submitting the data shortly.

We believe the data shows Solus is biomechanically superior to the predicate and are hopeful that the FDA will grant us approval prior to midyear. We launched Solus in Europe during the EuroSpine meeting and several cases have been successfully completed in Germany. We are currently launching the product into additional international markets in Europe.

We launched Aspida, an ALIF plate, this October at the North American Spine Society meeting in Orlando. This plate, in combination with our ALIF interbody and the corresponding Novel distractor-introducer, rounds out our ALIF product offering and should allow us to gain market share in the $350 million U.S.ALIF market.

Our final growth driver is our global distribution network, which has been considerably improved with the addition of Scient'x. In the fourth quarter of 2010, we refocused on adding to and upgrading our U.S. distribution network. We added several new independent distributer agents, as well as some direct sales representatives in key strategic markets in the quarter and expect to continue these improvements throughout 2011.

In conclusion, we are pleased with the cadence of product adoption in 2010, particularly of our innovative aging spine technologies in Europe, as we believe this is a positive indicator for future growth. While we pursue approvals for key products in the U.S. that address conditions affecting the aging spine, we expect meaningful contribution from both biologics and MIS to drive growth rates greater than the U.S. spine market.

Now I'd like to turn the call over to Mike to discuss the fourth quarter and full year 2010 financial results and to provide financial guidance for 2011. I'll then offer concluding remarks and open the call up to questions.

Thank you, Dirk. The followed remarks are related to our reported operating performance for the fourth quarter and fiscal year ended December 31, 2010. As a reminder, the Company completed the acquisition of Scient'x in March 2010. Commencing April 1, 2010, the Company's Consolidated Statement of Operations and Consolidated Statement of Cash Flows included the actual operating results of Scient'x.

Additionally, the Company sold one of its Japanese subsidiaries, IMC, in April 2010. As a result of this 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 do not include revenues for IMC for all periods of 2010 ad 2009.

The press release issued today provides our geographic sales segment performance on both a GAAP and a pro forma basis. On this call I will be discussing the actual performance of that business on a GAAP basis and where appropriate, referencing pro forma comparisons.

As previously mentioned, consolidated revenues for the fourth quarter 2010 were $46 million, an increase of 38.4% from the $33.3 million reported for the fourth quarter 2009.  U.S. revenues for the fourth quarter 2010 were $32.1 million, an increase of 13.5% from the $28.3 million reported for the fourth quarter 2009.  European revenues for the fourth quarter of 2010 were $5.7 million, an increase of 238% versus the $1.7 million reported in Q4 of 2009.

Asia revenues for the fourth quarter were $5.7 million, an increase of 74.5% from the $.3.3 million reported in fourth quarter 2009. Rest of world revenues, which we define as the Middle East, Africa and Latin America, for the fourth quarter 2010 were $2.5 million, all of which was new business in 2010.

Compared to Q3 2010, we had a 2.5% sequentially improvement in Q4 revenue versus the $44.8 million reported in Q3 of 2010. On a pro forma basis, fourth quarter revenue was down 1.3% versus Q4 2009 and revenue was flat on a constant currency basis. Positive growth in the U.S. and Asia, principally Japan, was offset by declines in Europe and the rest of the world.

On a GAAP basis, consolidated revenues for full year 2010 were $171.6 million, an increase of 42.3% from the $120.6 million reported for full year 2009. U.S. revenues were $119.9 million, an increase of 14.7% from the $104.5 million reported in 2009.

Europe revenues were $24.2 million, an increase of 491% versus the $4.1 million reported in 2009. Asia revenues were $20 million, an increase of 67% from the $12 million reported in 2009 and rest of world revenues were $5.7 million, all of which was new business for us in 2010.

Pro forma revenues for the full year 2010 were $182.9 million, an increase of 7.1% from the $170.8 million for 2009 and an increase of 8.3% on a constant currency basis.

Gross profit for the fourth quarter of 2010 was $31.5 million, an increase of $9.5 million over fourth quarter 2009 of $22 million. Fourth quarter 2010 gross margin of 68.4% increased over fourth quarter 2009 margin of 66%. The increase in gross margin was primarily attributable to reduced royalty burden, reduced amortization expenses, and positive manufacturing efficiencies partially offset by pricing, geographic mix, and acquisition-related amortization expenses. Fourth quarter gross margin of 68.4% improved, sequentially, 390 basis points versus third quarter 2010, which was 64.5%. This is principally driven by a favorable geographic sales mix in the fourth quarter. As reported in today's press release, our gross margin in the U.S. for Q4 2010 was 78.1%, an increase from both fourth quarter 2009 of 68.2% and third quarter of 2010 of 77.8%. The increase is specifically driven by manufacturing gains, as well as a reduced royalty burden. Europe margins were reported at 41%, consistent with year-to-date margins as of the end of the third quarter, which were reported at 39.3%. The reported European gross margins include the acquisition-related inventory step up and amortization expenses. Excluding these acquisition-related expenses, gross margins would have been in the forties. Gross profit for full year 2010 was $112.8 million, an increase of $31.8 million over 2009 gross profit of $81 million. Full year 2010 gross margin was 65.7%, a decrease of 1.5% from 2009 gross margins of 67.2%. This was driven predominantly by pricing and geographic sales mix. Total operating expenses for the fourth quarter of 2010 were $33.2 million, an increase of $10.8 million compared to fourth quarter 2009 of $22.4 million. Included in operating expenses in the fourth quarter of 2010 are $6.8 million of expenses that were generated from the acquired Scient'x subsidiaries The increase in operating expenses was primarily related to incremental sales and marketing spend associated with the expansion of our biologics division, and as noted in our press release, increased legal fees related to ongoing litigation matters. Operating expenses for the full year 2010 were $124.6 million, an increase of $33.4 million over 2009 operating expenses of $91.2 million. Included in 2010 are $17.3 million of expenses that were generated from the acquired Scient'x subsidiaries, as well as $6.1 million in transaction and restructuring-related expenses. The incremental expenses in operating expenses was primarily related to both sales and marketing and G&A. Included in operating expenses is in-process R&D, which was $3.0 million in 2010 versus $6.4 million in 2009. R&D expenses for Q4 2010 were $4.1 million, an increase of $0.5 million compared to fourth quarter 2009 of $3.6 million. Sales and marketing expenses for fourth quarter 2010 were $19 million, an increase of $6.2 million compared to fourth quarter 2009 of $12.8 million. These expenses include $3.1 million that are related to our new European operations and our new biologics division. G&A expenses for fourth quarter 2010 were $9.6 million, an increase of $5.5 million compared to fourth quarter 2009 G&A expenses of $4.1 million. Q4 2010 G&A expenses of $2.4 million relate to the Company's new European operations. In addition, the incremental increase includes legal fees related to litigation matters, but also spans all administrative functions.

The net loss for the fourth quarter 2010 was $2.9 million, or negative-$0.03 per share, compared with a net loss of $1.3 million, also negative-$0.03 per share for the fourth quarter of 2009. As noted in our press release, we incurred nonrecurring costs of $1.4 million in the quarter associated with the refinancing of our credit facility.

The net loss for the full year 2010 was $14.4 million, or negative-$0.18 per share, compared with a net loss of $13.3 million or negative-$0.27 per share for 2009. The net loss reported for 2010 includes $7.5 million of onetime charges comprised of transaction-related expenses, restructuring costs, and the refinancing of our credit facility. This compares to $2.6 million of onetime charges attributable to the same items included in our 2009 net loss.

Non-GAAP EPS for the fourth quarter 2010 was negative $0.02 per share, compared to a positive $0.01 per share for Q4 2009. Non-GAAP net earnings or loss exclude IP R&D expenses, acquisition-related expenses, and restructuring expenses. Non-GAAP EPS for the full year 2010 was negative-$0.02 per share, compared to non-GAAP EPS of negative-$0.09 per share for 2009.

Adjusted EBITDA for the fourth quarter 2010 was $4.4 million, compared to adjusted EBITDA of $5.8 million for fourth quarter 2009. Adjusted EBITDA represents the income or loss excluding the effects of interest, tax, depreciation, amortization, stock-based compensation, and other nonrecurring income or expense items such as IP R&D and transaction-related expenses. Adjusted EBITDA for the full year 2010 was $18.9 million, compared to adjusted EBITDA of $14.3 million in 2009.

As of December 31, 2010 cash and cash equivalents totaled $23.2 million. Our use of cash in the fourth quarter 2010 was $5.7 million and was primarily attributable to milestone payments paid under license agreements and the restructuring of our credit facility with Silicon Valley Bank. Excluding these items, operational cash flow was neutral for the quarter.

As of December 31, 2010 our net inventory position was $51.6 million, which represents approximately 28% of our annualized fourth quarter 2010 revenues. As of September 30, 2010 our net inventory position was $53.6 million, which represented approximately 30% of our annualized Q3 2010 revenues. As previously discussed, it has been one of our priorities to reduce inventory levels as a percentage of revenue and we will continue to do so in 2011.

I'll now provide guidance for 2011. We anticipate annual 2011 revenues of $195 million to $205 million, and $25 million to $28 million in annual adjusted EBITDA. We anticipate generating both net income and positive free cash flow for the full year 2011.

Our revenue guidance includes revenue from currently approved products in their respective markets and regions. Implicit in these assumptions is an improvement in our global gross margin performance in addition to operating expense leverage. We note that gross margins will be positively affected by reduced amortization expenses, reduced royalty burdens and ongoing manufacture efficiencies, which can be offset by regional mix shifts, product mix within regions and pricing pressures.

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

Thank you, Mike. We have made tremendous progress in positioning Alphatec Spine as a global leader within the spine market. We're continuing to broaden our reach internationally through the launch of products in key European markets. In addition, we are investing and building out our direct sales organizations in France, Italy and the UK.

Globally, we are harmonizing our product portfolio and supply chain operations and expect to further leverage our P&L in 2011 and beyond. We're working diligently to gain regulatory approval for Alphatec products in all major international markets, especially in Latin America and Asia, where we see significant opportunity for the future.

The spine industry saw several challenges in 2010, both in the U.S. and overseas, which have tempered overall revenue growth through a decline in lumbar procedure volumes due to payor denials, specifically for degenerative disc disease, reimbursement challenges and pricing pressure.

As of now, we believe that the U.S. spine market is stabilized. In the fourth quarter of 2010 we experienced a sequential decline in price from the third quarter of 2010 to the fourth quarter of approximately 1.0% and a mid-single-digits price impact for the entire year.

We expect the U.S. spine market to grow in 2011 by 2.0% to 3.0%, driven by increased procedure volumes offset by continued modest pricing pressure. Internationally, we believe the European market will continue to be under pressure from potential structural healthcare budget reductions and expect this market to be flat in 2011.

Asia and Latin America will continue to enjoy robust market growth of high single digits. Overall, we expect the 2011 global spine market to be a more stable environment than 2010. Our annual revenue guidance for 2011 of $195 million to $205 million implies revenue growth in a range of 7.0% to 12% year-over-year, which we believe will outpace the growth of the overall spine market.

Our confidence in our ability to outperform stems from continued international expansion, the strength of our MIS and biologics platform and our pipeline of innovative technologies addressing the aging spine market segment, which is demonstrating positive results in Europe.

Many of the products we have introduced or plan to introduce, such as Solus, ProFuse and PureGen, offer costs advantages to the hospital by the 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.

Alphatec Spine in uniquely positioned to continue to take market share and achieve its goal of becoming a top five market leader. We have the most exciting product pipeline and product portfolio in the industry and we are laser focused on the highest market growth segments - aging spine, MIS and biologics.

We have a global distribution footprint comparable to the market leaders. We are one of only two companies in spine that is fully vertically integrated, allowing us to control costs and speed to market and we have a highly motivated and competent team driven to succeed.

Our focus in 2011 is to achieve sustained profitability and free cash flow while continuing to take global market share. We look forward to sharing our success with you in the years to come as we achieve our goal of being the leading independent spine company in the market.

Thank you and I'd now like to open it up to questions.

(Operator Instructions) Matt Dolan, Roth Capital Partners

Hi guys, good afternoon. This is Matt Palmer in for Matt Dolan. Thanks for taking the questions.

Hey Matt.

I wanted to ask first if you could provide a little bit greater granularity on the sequential softness you saw in Europe. Was this a result of pricing or procedure volume trends? And you mentioned a return to growth. Is this something that you expect to start seeing immediately? Actually, you said it was a little bit flat, so, I mean, how do you expect this to trend given the headwinds that you're seeing in those markets?

Well, actually, we're quite encouraged at this point by the European side of the business. We believe that it's stabilized. It did take some time to get all of the products into each of the markets. Even though Europe is perceived as one market, you actually have to go to each country individually to get your products approved and we essentially through that process with the Alphatec products at this point and so we think we're well positioned going forward.

Maybe as a follow on in Europe. You mentioned that you believe that margins in the high forties are possible. Is this something we should expect for 2011 and can you maybe help us understand the timing and the rate of margin increase?

Yes. So the comment is really directed at the inclusion in 2010 of both the inventory step up as well as the acquisition, the intangible amortization, the impact to the Europe gross margin. The impact of the inventory step up will roll off in Q3 2011. So essentially, what you'll see is order of magnitude of 350 basis point improvement in the gross margin in the back half of the year for the European business.

Okay, that's helpful. Thank you and then can you break out the number of reps that you added, where you are in the U.S. sales network today? And you mentioned that you made some changes. Was there any turnover that you saw?

The overall number is still about 270 or so, yes, in the U.S. We did add some, a couple of very competent new distributors in a couple of markets and we did lose, we did have a little bit of turnover as well, although we were able to basically hold on to all of the business in that area and replace him very quickly.

Okay, great. I'll hop back in queue. Thanks.

Glenn Novarro, RBC Capital Markets

Oh, I didn't know I switched to the Royal Bank of California.

There you go, Glenn.

When did they -- when did California become a monarchy? All right. Thank you for taking my questions. So, first on the U.S. Revenues stepped up a little bit here in the fourth quarter. You've kind of been running this $29 million to $30 million run rate. You came in at $32 million. I'm just wondering, did you get any, like, stocking orders or onetime orders from some of theses new distributors? Just any more clarity on the slightly better U.S. number, that's question one and I'll have a follow up.

Okay. No. I mean, that basically represents an increase in the business. PureGen was launched at the end of September. It did contribute, although it was obviously moderate, although we're very encouraged by the rate of increase of adoption of PureGen. So that really just is an increase in customers and procedure volume.

Okay and a follow up on the revenue forecast. You mentioned both GLIF and PureGen would significantly add to sales in 2011. Can you define "significantly"? Are we talking about $5.0 million, $10 million? Could you quantify it? Thanks.

Yes, I think the word we used was "meaningful", not (inaudible - multiple speakers).

Meaningful. Okay. Do you want to put any numbers around that or?

Yes, Glenn. Actually we don't want to start getting into breaking out product-by-product, particularly as it relates to the programs that are new in terms of their introduction. I think what we connotate by "meaningful" is that internally, for us, we have expectations of the business making a difference in 2011.

Okay and then I may have missed it. Did you give us and update on OsseoScrew in the U.S.? Thanks.

No I did not and that's a fair point. We -- our intention is, as we've indicated before, that we are going to resubmit a new 510(k). If you recall, in the original submission we came to somewhat of an impasse in terms of retrievability and the ability to prove retrievability, although we are quite confident that the screw can be undeployed and removed in osteoporotic bone. The challenge was the only model we could show that in was sheep. Sheep bone is significantly more dense than human bone.

In the meantime, we've actually devised a tool that allows us, even in year-old sheep, to retrieve the screw in what we think is a clinically acceptable fashion and so our intention, after doing a little bit more testing, is to resubmit a new 510(k) shortly into the FDA.

Okay and then once you do that there's a 90-day clock?

That's correct.

And probably, if everything works out we may have something on the market mid-year. If not, I guess we move to plan B, which is a clinical trial. Is that correct?

That's correct.

Okay. Thank you for taking my questions.

Thank you.

Doug Schenkel, Cohen & Co.

Hi. Good afternoon.

Hey Doug.

Hi Doug.

So over the summer, I think was, early summer, this, I guess last year, you made some changes in the U.S. distribution and sales infrastructure to improve your longer-term positioning in the U.S. In your prepared remarks you talked about some other changes you made over the last quarter. When would you expect to see some of the improvements related to these changes materialize at the revenue line and in terms of modeling, is this something that we should be thinking about in terms of pacing, pacing our quarter revenue build?

Well, the -- obviously, from the time you put them on there's a certain period of time before they really start delivering, because you have to go through the technology assessment committees of the hospital to get the product in. So there is -- its certainly at least a three month, if not sometimes longer, lag. But some of the ones that we put on in the fourth quarter we're already starting to see some positive development from. We had a fairly substantial distributor start this quarter and that's already starting to provide revenue as well. So it certainly sort of will grow through the year, but we feel very good that we've really added some high quality distributors recently.

And then maybe another Europe question. If you take Scient'x standalone European sales form '09 and combine them with Alphatec's standalone '09 European sales, clearly there's a bit of a drop off year-over-year. I guess I'm asking you to reflect a little bit. Could you try to break out, in some form or fashion, how much of this was related to integration challenges, how much of this was the industry and what's going on structurally in Europe? And given that sales were essentially flat sequentially, are we -- are you at a point where you're very confident that things have leveled off and its other than some of the ongoing structural issues, you guys have everything moving in the right direction from getting products into new markets and getting the sales force and distribution infrastructure moving full force ahead?

Okay, well we do feel that have things under control in terms of the integration side of the house and clearly the issues were it was some of both. Structural issues impacted us pretty significantly. For Alphatec, one of the key markets that we had developed in 2009 and was quite strong, frankly, was Greece and in 2010 Greece basically, virtually stopped for a period of time and that had an impact.

So there clearly were structural issues within the market itself that impacted us and overcoming some of the challenges of adding a large number of new products into the Scient'x sales organization. But I think where we're at today is notwithstanding there's still some structural issues, I believe and certainly if you look at what's going on in the Middle East today, that poses some additional risk, I think. But in terms of the integration side, we feel very good about where we're at.

Good and that's helpful and maybe one more question for Mike. Clearly a nice pickup at the gross margin line in Q4. Is this a good run rate and is some of the pricing challenge, pricing headwinds that exists in this market masking some of the improvements that you guys are making from the manufacture and sourcing standpoint?

Yes. I think there's multiple dynamics. I think we have -- we've been fortunate with some manufacture improvements. In Q4 versus Q3, we had some favorable regional mix that helped us and the challenge is, obviously, as we expand globally, is consistently trying to manage the regional mix, the mix within a region, offset by local pricing issues, etc.

So I think that, as we look forward, we're going to anticipate positive margin contribution, but its going to be a balance between how much we can get out from what I would call our core manufacture capability and how much is the balance of mix. For me, as I look at the business, it's the one sure way that you can make sure you're improving you margins is to continually launch clinically differentiated products that command a superior price in the market. And to the extent that you're able to do that, you'll always be able to drive your margins higher.

But I think that while we had a good cadence to margin, we certainly look to improve it in 2011, but the caution there for, for example in the U.S., is looking at the split between our implant business and our biologics business. They do have very different margin profiles, so we need to be mindful of that as well.

Okay. That's all very helpful. Thanks, guys, for taking the questions.

Sure.

Thanks.

Amy, Jefferies & Company

Hi. This is Amy in for Rah. How are you?

Hey, Amy.

Amy.

Great. I just have a question around kind of with the sales and marketing and G&A. You must have had a quite a run up in Q4. Can you just help us think a little bit about how that's going to roll out in 2011? Is it still going to be a lot of investment, I guess, with the biologic and OUS? Is that still going to continue in the first half of the year and then slow down a bit?

Yes. So, I think, as I relates to the U.S. biologics division, a lot of that investment is behind us in Q4, so what you'll see is the annualized effect of that rolling into 2011. We also, as it relates to commercial resources in Europe, we plan to add resources in our direct markets, so France, UK, and Italy. Some of those heads are already in place in Q1 and some of them are going to be added throughout the quarter and into the first half of the year. So we do see a bit of a ramp and frankly, we also want to be mindful of managing the expansion of our resources in line with the revenue projections that we've got.

Great. I think that's it for me. Thank you.

Thank you.

Bill Plovanic, Canaccord

Thanks. Good evening. A couple of clarification questions, if I may. So you had $9.6 million in G&A in the fourth quarter. There was some legal in there. How big was the legal and is the run rate basically whatever that number is minus the legal?

So I don't want to get into the specifics of what the legal number was. The legal number is not a run rate that can be projected forward. We had a definite blip in Q4. Does that -- I'm not sure that entirely answered your question, though. In terms of the overall sales and marketing and G&A, the profile that we have in Q4, absent of one-timers, is the profile that we have in the first half of the year.

Okay. That's the question. Thank you. As we look at Europe, its been a little lumpy in the past. I think the beginning of 2010 it was really big, as you were stocking in the new products into Europe from the merger and then, as I look at Q3-Q4, is that kind of the run rate I use for Europe, is we're at a $6.0 million, $5.5-6.0 million, kind of working off that level? Or will it continue to be dumpy?

Well, no. That's a good level to work from. There will probably continue to be some lumpiness to it as we bring new countries in line, but that would primarily be Latin America and Asia and towards the end of the year, not the beginning.

Okay, so that's good. Okay and then just a housekeeping, what FX on the dollar amount in the quarter?

I'm sorry, what was the question again?

The foreign exchange impact on the dollar amount in Q4.

It was 1.3%, so its 1.0%.

Okay, on a reported or pro forma?

Reported.

Okay, and then just as we look at Q1 on a revenue basis, you've been -- I think somebody said you've been bumping around this $45-46 million level for a while. Its Q1, would you characterize it as flat, up, down, I mean, just directionally how should we think about it?

It looks encouraging.

If I would analyze that, I'd say its flat-to-up.

Yes, we really don't want to get into detailed inter-quarter commentary at this point.

Okay, that's fine. And then, as you look at interest expense, what was your long-term debt as you exited the year?

The revolver is $33 million.

And that's how much you have outstanding?

That's how much we have outstanding, yes.

And then what should we assume for interest expense going forward?

About 6.0%.

And that includes baked in with all the amortized costs and all of that?

Yes?

And then which new products do you have baked into your guidance for 2011? Which are the kind of ones that are really adding?

The ones that were launched early last year, so PureGen, Aspida.

GLIF.

And GLIF as well.

Okay, then the last question. We talked about gross margins earlier. I think what we're trying to get a handle on is you exited the year with a 68.4% gross margin, much higher than all of us expected. Is that the new base or it was you were able to really run the machines and get a good margin in the quarter and we'll probably see that back off a little as we flip into 2011?

Yes. I think you've got to back off that one. We had a strong regional mix that impacted that number.

Great. Thanks, guys.

I think you've got to look at Q4 in the context of what we had for total 2010.

So when you say it'll be -- you're looking for it to increase in 2011, you look at 2010 as a total number?

As a total year, yes. Not as a fourth quarter as a springboard.

Great. Thank you very much.

Okay.

Thanks, Bill.

Vivian Servantes, Maxim Group

Hi. Thank you for taking the question. I'll just have a couple of more big picture questions here. I'll start off a little bit with the FDA and how that workout is trending for you and maybe wrap that a little bit with comments provided earlier about gross margins being lifted by a decrease in royalties. Are you able to redesign products, submit that to the FDA, and get that cleared through to help gross margins? Any color there would be helpful.

Well, first, Vivian, to the question on the FDA. We actually, in the last couple of months, have been encouraged by what we see as a definitely improving dialog with the FDA and are hopeful that that's going to continue, so that's been extremely positive. On the royalty side, it isn't so much about redesigning products as it is royalties rolling off due to the expiration of the patents.

That's helpful. And then I'm going to touch base a little bit on Scient'x. I think at one point we had talked about some of the activities that are going on there. You've got activities both on the front end as well as the back end and last we checked, the front end was moving along well and supported by the fact that you're hiring folks in the UK, Italy and such. How are things looking in the back end, particularly with the integration of systems and all that? Any color there would also be helpful.

Yes. I think, Vivian, as I've said before, one of the real challenges when you start to integrate a global organization is to have the information architecture necessary to manage the business. We're in the process of -- we obviously have an MRP system that we've utilized in the States. We want to upgrade and deploy that globally so we have total transparency.

Frankly, its not something you can just pull the switch and do it overnight. Its going to take time and resources. Its very much part of our near-term planning for 2011 and we hope to be able to deploy internationally towards the back end of the year, but it very much part of our planning for this year.

So once we -- and I guess, maybe, I'm thinking 2012 now. Once we get this deployed in 2011 are we going to see any cost synergies from these back office efforts or any contribution --?

I certainly think we can begin to think that way. Whether its realized in the P&L that quickly is another issue, but I think just having the efficiency and effectiveness of managing the business globally on one system is there. Frankly, I've got a personal belief that, from a supply chain standpoint, that's where we'll see the bigger benefits. We will get some operating benefits, but leveraging the balance sheet as well is going to be an important part here.

Okay and then, finally I'll jump back into queue after this. Any thoughts on some of the synergies, cost synergies that we're looking to drive out of Europe from the integration, the timing of that, given some of the back office work that's going on and some of the front office? Or should we start to see maybe a little bit of that exiting next 2011 or?

Yes. I think you've really got to be looking at we're nine months into the integration. Back office-wise we've still got work to do, so therefore, I think its -- 2011 is a transition year for us and I'd be anticipating to see benefits more in the 2012 horizon.

Very helpful. Thank you.

Thanks.

(Operator Instructions) Charles Shaunl, Stifel Nicholas

Great, thanks. I'd like to start by asking the 2011 revenue guidance question a little differently. In the event GLIF does not gain traction and Solus doesn't get approved in the U.S. in 2011, can the 2011 revenue guidance still stand?

Well, Solus is not in that guidance at all, because its not approved and what we've put in for GLIF is relatively modest compared to if we look at -- MIS is growing very nicely for us. PureGen we feel very good about. The ramp rate on some of the other products that we've launched in the biologics area - AmnioShield, ProFuse, which is being pulled along with PureGen - also are contributing very nicely. So, in terms of that guidance, its really based on what we have in the market and what we know about.

Okay, so the guidance does not include not-approved, unapproved product, right?

That's correct.

Okay, great. Also, for the EBITDA guidance of $25 million to $28 million, I was wondering if you could just give us a little more direction on how the various P&L line items should trend in 2011? For example, as we're thinking about the Company supporting the launches of GLIF and PureGen, could we see selling and marketing spending coming in a little heavier this year? Or could we see leverage on that line? Just some granularity would be helpful. Thank you.

Yes. Okay. So I think in my -- I think in our prepared comments I made the statement that we're leveraging our operating expenses in 2011 and so that is across the board in terms of yes it includes R&D, includes admin and it includes sales and marketing. So while the absolute level of spending is increasing, it is leveraged in terms of its ratio to sales.

Okay. Okay. I wasn't absolutely clear as to whether or not operating expenses included costs of manufacturing as well, so.

Oh. No, so that would be my gross margin comment.

Okay. Okay.

And then, separately, I had a comment in there as it relates to operating expenses being leveraged.

Okay, great and then just a quick follow up question on OsseoFix and the updated study protocol here for the primary and secondary end points. Could you tell us what the follow up timeframe is there?

It's one year.

One year.

Yes.

So if we finished enrollment in 2011, we get the end point data in 2012 and then probably FDA approval towards the end of 2012, early 2013?

Probably 2013.

Okay, great. Thanks, everyone.

Okay. Thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn the call over to management for any closing remarks.

Thank you. In conclusion, I'd like 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 over 30% coming from outside the U.S.

Alphatec Spine now has one of the broadest international footprints in the spine industry, which is a tremendous platform for leveraging our innovative technologies. Secondly, 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.

Finally, we are establishing Alphatec as 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 U.S. is a positive indicator for the future of the Company. We strongly feel that our focus on the aging spine, MIS, and biologics market segments is spot on and positions Alphatec 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 and 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.