Alphatec Holdings Inc (ATEC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your First Quarter Fiscal Year 2011 Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce Mr. Michael O'Neill, Chief Financial Officer. You may begin.

Thank you. And good afternoon, everyone. Welcome to Alphatec Spine's conference call to discuss our first quarter ended March 31, 2011 financial and operating results. With me today are Dirk Kuyper, President and Chief Executive Officer, and Ebun Garner, our General Counsel.

By now you should have seen a copy of today's press release announcing Alphatec Spine's first quarter 2011 financial and operating results. If you do not have a copy of today's press release, you can find it in the Investor Relations sections 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 that our discussions today include forward-looking statements. These statements are based on certain assumptions made by us based on historical trends, current conditions, expected future developments, including business prospects, product development objectives, future financial performance and other factors we believe to be appropriate in the circumstances. Risks and uncertainties may cause our actual results to differ materially from those projected in these forward-looking statements. You can find a discussion of these factors and more information about us in our filings with the SEC, including the risk factor section in our annual report on form 10K, subsequent quarterly reports in form 10Q, 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 expressed 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 first quarter of 2011 then turn the call 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 we'll open the call up for questions.

I'm pleased with the overall revenue performance for the first quarter of 2011 and proud of the Alphatec team. 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 implant Company with a broad and deep portfolio of products distributed in over 50 countries. We believe that we are one of only two US spine companies with fully integrated R&D and manufacturing which enables us to design, transfer, and manufacture with scale and speed to market.

As we entered 2011, the spine market continued to face headwinds in the US and international markets. Despite that, we are still able to grow at rates that exceed that of the overall spine market while maintaining a culture of excellence and high ethical standards. For the first quarter of 2011, we achieved revenues of $49.7 million which represent pro forma growth of 6.6% over consolidated first quarter 2010 revenue and 5.2% growth on a constant currency basis. In the US we grew our first quarter 2011 revenues by 7.8% on a pro forma basis which we estimate significantly outpaced the growth rate of the broader US spine market.

We reported adjusted EBITDA of $4.4 million in the first quarter of 2011 and a non-GAAP income of $0.1 million or $0.00 per share. We remain confident in our goal of achieving positive GAAP earnings in 2011. We achieved an important key objective in the first quarter of 2011 which was to reestablish our revenue growth momentum. We're back in the business of taking market share and continue to significantly outpace the growth rate of the overall spine market.

This is attributable to three primary factors. First, our products are contributing meaningfully to sales, particularly PureGen and other products launched in late 2010 such as Aspida. Second, we are achieving increasing market penetration demand and product adoption in international markets. Third, we are realizing the benefit of our refocus on our US distribution network that began in late 2010. As we continue to leverage our expanded global footprint, drive adoption of PureGen, and launch more of our products into the US market such as SOLUS, we're increasingly confident in our long-term ability to exceed the overall market growth rate and continue to take market share.

Despite our success in reaccelerating our revenue growth rate, we absorbed additional expenses in the first quarter that negatively affected our bottom line. Some of these were one-time in nature such as restructuring, recruitment, relocation, and regulatory expenses that were above and beyond what would be expected under the normal course of business. In addition, we invested heavily in additional sales infrastructure in Europe, specifically with respect to the hiring of sales representatives in France, Italy, and the UK. We also continued to bill out our biologics-focused sales organization here in the US. To date, these costs are not yet fully offset by the growth in revenue. Mike will go into more detail about our strategies to leverage our P&L which will allow us to deliver on our guidance of being GAAP earnings and cash flow positive in 2011.

From a business perspective we continue to focus on our strategic growth drivers at Alphatec which are product initiatives addressing the aging spine, minimally invasive surgery in biologics that continue an expansion of our fusion product portfolio and expansion of our global distribution network. Internationally, certain of our technologies such as OsseoFIX, OsseoScrew, and Helifix continued 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.

In 2011 we expect to continue to drive adoption rates of OsseoFIX throughout Europe as the body of clinical evidence regarding the safety and efficacy of the product grows. We continue to work closely with the FDA on the 510k study and are continuing to enroll patients as we look to bring this exciting product to the US market. OsseoScrew saw acceleration in adoption in the first quarter and is opening doors for Alphatec Spine's core products in Europe. With the release of a MIS compatible delivery system for OsseoScrew in the first quarter, we anticipate further acceleration in the adoption rate.

We are on track for a resubmission of a new 510k to the US FDA in the second quarter as previously announced. We built on a solid platform in MIS with both our Illico and GLIF-ARC system which allow us to increase our market share in the growing MIS lumber fusion market. GLIF-ARC continues to gain interest as the only true alternative for a lateral system allowing patients to remain prone during the entire surgical procedure. To date, two and three level as well as L4-L5 procedures have been successfully performed and during the second half of 2011 we expect GLIF-ARC to make a more meaningful contribution to our revenues.

We plan to launch additional MIS products in 2011 including a Fixcet screw system and a unique MIS interbody device for TLIF-PLIF procedures. Within our biologics platform, we are particularly pleased with the strong uptake and demand for the PureGen Osteoprogenitor cell allograft. The first case was completed in late September of last year in Los Angeles and as of the end of the first quarter of 2011 over 400 cases have been performed. There is strong early momentum with the product and conversions and utilization continue to grow.

There is tremendous excitement about the potential of the pure population stem cell that is not derived from a cadaver. While still early, we expect PureGen to contribute meaningfully to our 2011 results. Early radiographic data is encouraging and shows good bone formation which is an indicator of fusion. We've enrolled patients in all three of our post-market clinical studies for PureGen -- an ACDF study, a posterial lateral fusion study, and a lumbar interbody fusion study. We expect to complete enrollment in all studies in 2011. We're pleased to announced that we received 510k clearance from the FDA for SOLUS in the first quarter. We are commencing a limited launch in the US and expect a broader market release in the second half of 2011. Other products recently launched such as Aspida and AlphaGuard have also contributed to our overall revenue momentum and we expect this trend to continue through 2011.

Our final growth driver is our global distribution network which has been considerably improved with the addition of Scient'x. Internationally we continue to grow and enhance our footprint. In the first quarter we completed the acquisition of a Company licensed to sell medical devices in Brazil which will allow us to enter the Brazilian market on an expedited basis. In the US, we saw increased production from several of our new distributers and sales representatives that we added in the fourth quarter and we continue to take advantage of opportunities to add and upgrade to our sales network.

In conclusion, we are pleased with the reestablishment of our top line growth momentum in the first quarter, driven by new product contributions, sales into certain emerging markets, and our strength in the US distribution network. While we pursue approvals for key products in the US that address conditions affecting the aging spine, we expect meaningful contributions from both biologics and MIS to drive growth rates greater than the US spine market.

Before turning the call over to Mike to provide a more detailed review of our financial performance, I'm pleased to announce the addition of Pat Ryan as Chief Operating Officer of Alphatec Spine. Pat joins us from Abbott Vascular Devices where he had been Vice President, North Asia, since August of 2010. Prior to that position, Pat served as a divisional Vice President of worldwide operations for Cardiac Therapies at Abbott. Pat's focus will be on driving operational excellence and efficiencies across our global platform. In addition, with the departure of Oliver Burckhardt in April, we are streamlining our international business and I will be taking a broader role in driving our commercial operations. Both Mike and I are looking forward to working closely with Pat as we continue to build our global team.

I'd now like to turn the call over to Mike to discuss the first quarter 2011 financial results and to provide financial guidance for 2011. I will then offer concluding remarks and open the call up for questions.

Thank you, Dirk. The following remarks are related to our reported operating performance for the quarter ended March 31, 2011. 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 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 2010.

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 do not include revenues for IMC for all periods of 2010. The press release issued today gives 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 our business on a GAAP basis and where appropriate referencing pro forma comparisons.

As I'm sure you have noticed in our press release we are now reporting our global revenues as those derived from the US and those derived from our non-US businesses. As we continue to establish Alphatec as a global leader within the spine market, international sales now represent over 30% of our reported revenues. However, while our US revenues are predominantly the result of direct selling efforts, our international business is a combination of direct and distributed sales. The nature of the distributed business creates volatility driven by stocking orders for new products.

In the context of this volatility, we are concerned that by focusing on specific regional results we will be highlighting short-term ebbs and flows of orders rather than focusing on the overall strength and trends of the business. Having reviewed over 20 companies from small to large within the medical technology space, we believe that our new disclosure practice is in line with industry and competitive standards. With that said, we believe we will continue to provide appropriate commentary as needed about specific and regional performance as relevant information and trends affect the nature of the various businesses.

As previously mentioned, consolidated revenues for Q1 2011 were $49.7 million, an increase of 40.8% from the $35.3 million reported for Q1 2010. And more importantly on a pro forma basis, the growth was 6.6% versus Q1 2010. US revenues for Q1 were $33.9 million representing pro forma growth of 7.8% from Q1 2010 and exceeding the growth rate of the US spine market. International revenues for Q1 2011 were $15.9 million and grew by 4% on a pro forma basis over Q1 2010. Strong performances in Japan, Asia-Pacific and Latin America drove the international revenues. While Japan exhibited robust strength in the quarter, the sustainability of these results remains unclear given the uncertainty of the environment in light of recent events.

Gross profit for Q1 2011 was $32 million, an increase of $8.4 million over Q1 2010 of $23.6 million. Q1 2011 gross margin of 64.3% was below Q1 2010 gross margin of 66.7%. The decrease in gross margin of 240 basis points is primarily due to geographic sales mix. The US gross margin improved versus the prior year which is primarily attributable to manufacturing aberrances, reduced royalty burden partially offset by unfavorable pricing. The international gross margin of 47.5% declined on a year over year basis from 53.8% in Q1 2010 as our sales base expanded dramatically into distributer markets around the world.

When comparing US gross margins for Q4 2010 with Q1 2011, it should be noted that the gross margin at the end of 2010 was the high point of the year at 78.1%. Our average gross margin for the year 2010 was 74.4%. The rapid increase at the end of the year was driven by favorable manufacturing variances from activity that occurred earlier in 2010. As the market slowed in 2010 we adjusted our manufacturing activity to reflect the reduced volumes as favorable manufacturing variances from early 2010 that drove the Q4 margin are now being offset by the reduced manufacturing activity in late 2010 and early 2011.

In addition, several other factors contributed to the sequential decline in our gross margin. Specifically pricing pressure in our core business coupled with product and business mix shift impacted the margin by 230 basis points. Royalties on new products and amortization contributed 110 basis points to the decline. Our international gross margin improved sequentially from 46% in Q4 2010 to 47.5% in Q1 2011 and is attributable to the mix in business associated with our sales performance in Asia. Qualitatively, our margin profile in our previously disclosed regional businesses is in line with what was reported in Q4 2010.

Total operating expenses for Q1 2011 were $34.3 million, an increase of $7.2 million compared to Q1 2010 of $27.1 million. Q1 2011 includes $600,000 in restructuring expenses. There were no in process R&D expenses for Q1 2011, a decrease of $500,000 compared to Q1 2010. In addition to the restructuring expenses for severance that have been specifically identified in our financial statements, we absorbed costs associated with recruitment, relocation, and regulatory product approvals that were higher than anticipated and also higher than can be expected under the normal course of business. But for these items, our operating expense profile would've been consistent with Q4 2010.

When comparing Q1 2011 expenses to Q1 2010, all line items are increasing in large part due to the incremental impact of running a global business which was not in place in the prior year ago period. R&D expenses for Q1 2011 were $5.4 million, an increase of $1.7 million compared to Q1 2010. Sales and marketing expenses for Q1 2011 were $18.6 million, an increase of $5.2 million compared to Q1 2010. In addition to the aforementioned impact, the increase also includes the full impact of the newly created biologics division and spending to support our global sales and marketing activities.

General and administrative expenses for Q1 2011 were $9.1 million, an increase of $3.5 million compared to Q1 2010. Net loss for the first quarter 2011 was $1.9 million or $0.02 per share compared to the net loss of $4.7 million or $0.09 per share for the first quarter 2010. Non-GAAP EPS for Q1 2011 was $0.00 per share compared to $0.00 per share reported Q1 2010. Non-GAAP net earnings or loss excludes in process R&D, acquisition-related inventory step-up, amortization of intangible assets and restructuring expenses.

Adjusted EBITDA was $4.4 million in the first quarter 2011, a decrease of $1.1 million compared to the $3.5 million reported for the first quarter of 2010. The decline in adjusted EBITDA is primarily due to incremental expenses associated with operating a global business that were not in place in Q1 of 2010. Adjusted EBITDA represents net income or loss excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation, and other non-recurring items such as IP, R&D, and transaction-related expenses.

Cash and cash equivalents were at $21.5 million at March 31, 2011. After adjusting for one-time cash outlays, operating cash flow was flat versus yearend 2010. During the quarter we purchased certain rights to intellectual property associated with the 510k cleared product. And as previously mentioned, we purchased a legal entity in Brazil that would accelerate our ability to sell Alphatec products in that market.

As of March 31, 2011, our net inventory position was $52.6 million which represented approximately 26% of annualized first quarter sales. This compares to net inventories of 28% of the fourth quarter 2010 annualized sales as reported at yearend 2010. As previously discussed it's been one of our priorities to reduce inventory levels as a percentage of revenue and we will continue to do so throughout 2011.

Our net accounts receivable at the end of Q1 2011 was $43.4 million, an increase of 9% versus Q4 2010. With a sequential sales increase of 8% we have witness an increase in our DSOs for our international businesses and we are taking the necessary actions to reduce such international DSOs in the coming quarters. As Dirk has mentioned, we are pleased with our revenue performance in the quarter but we still need to focus our attention with respect to gross margin performance and managing operating expenses within the business.

To that end we have undertaken some restructuring activities although negatively impacting our first quarter earnings will be a positive contribution as the year progresses. We remain focused on utilizing our manufacturing facility to take advantage of additional in sourcing activities. In addition we are aggressively pursuing cost improvement activities within our facilities to further improve our margins.

With respect to operating expenses, we are managing our global financial obligations and headcount resources centrally to ensure attainment of our targets across the various businesses. As previously discussed we are also focused on the working capital contributions of inventory and receivables to ensure that we generate our projected cash flow. During the quarter we aggressively managed the fixed capital investments of property plant and equipment and the investment in instrument sets to a modest number and well within our internal target. With the addition of Pat Ryan, our new COO, we are confident that we will be more successful in addressing each of these areas in a more disciplined and focused manner.

I will now reaffirm our 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. Now I'd like to turn the call back over to Dirk.

Thank you, Mike. We've made tremendous progress in positioning Alphatec Spine as a global leader within the spine market. We are continuing to broaden our reach internationally through the launch of products in key European markets. In addition, we are investing in 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.

The spine industry faced several challenges in 2010 both in the US and overseas. We currently believe that the US spine market has stabilized versus 2010. In the first quarter of 2011 we experienced a sequential decline in price from the fourth quarter of 2010 of approximately 1%. Consistent with our comments on our yearend 2010 call, we expect the US spine market to grow in 2011 by 2% to 3% to be driven by increasing 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 we expect this market to be flat in 2011. Asia and Latin America will continue to enjoy robust market growth in the high single digits.

Overall, we expect the 2011 global spine market to be a more stable environment than it was in 2010. Alphatec Spine is 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, minimally invasive, and biologics. We have a global distribution footprint comparable to the market leaders.

We have reaccelerated our growth engine and continue to take market share, a testament to our team and our products. 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 quarters to come as we achieve our goal of being the leading independent spine Company in the market.

Thank you and we'll now open the call up for questions.

Thank you. (Operator Instructions) Our first question comes from Raj Denhoy from Jefferies.

Hi. Good afternoon, guys.

Hi, Raj.

I wonder if I could ask a bit about the focus on the sales force starting domestically. Can you provide how many sales reps you have now in the US? And also the rate of turnover? Because it also sounds like you're also improving your sales force, maybe not just adding numbers?

Our absolute number has not changed much. We're sort of still in the 275, 280 range. Within that we have made some significant upgrades as well as added a few direct sales representatives where it made sense. We did have at the beginning of the year a turnover of one of our major distributers, but frankly we were able to maintain all the business and replace quite a bit of that with direct sales representatives as opposed to a new distributer.

Is that 275, 280 number, you're comfortable with then for the rest of the year? Do you think you'll be adding more?

As opportunities come up, there is a potential for some dislocation in the marketplace coming up. We'll take advantage of those opportunities as we can. I don't think we're fixed on the particular number but right now what's most important to us is increasing exclusivity and upgrading the underperformers.

Okay. Then just on Europe, I appreciate Michael's comments on the reasoning behind not providing European sales numbers, but as you guys are aware one of the issues on the stock the last few quarters has been lack of visibility on the European business. It's been a little bit choppy. I'm curious what you can provide to give us some comfort that Europe has stabilized at this point and has not continued to deteriorate.

Fair point, Raj. The revenue in the first quarter for Europe was -- continues to be stable. As we pointed out I think at the yearend call, we thought it had stabilized and basically revenue was flat quarter to quarter which frankly we see as a positive. And I think we're starting to build with the additional sales footprint from there to reestablish growth. So, it has not deteriorated any further.

Okay. So, it's still hovering in that 5.7, 5.8 kind of range.

That's part of the color commentary I was referring to, Raj. Without getting into the specific numbers, it's essentially flat.

Okay. Fair enough. And then just one on products and I'll jump back. You mentioned PureGen, some of the early adoption, 400 cases I think you mentioned. Are those your existing customers? Have you been able to capture any new customers because of PureGen? Who's using it now?

I would say it's a combination. Obviously we approached Alphatec friendly surgeons sort of in the first wave but we're also seeing some very positive conversions and hopefully that will also translate to further increases in our core business as these surgeons become comfortable with us. I think primarily we're converting surgeons who already bought into the concept of stem cells but we're also having -- able to convert surgeons who are using other products.

Okay. Thank you.

Thanks, Raj.

Thank you. Our next question comes from Glenn Novarro from RBC Capital Markets.

Hi. This Brendon on for Glenn. First question, can you kind of provide us an update on the enrollment numbers for the US OsseoFIX clinical trial and then also I think you usually provide the number of patients that OsseoFIX has been used in year to date? Can you give us an update on that?

I don't have the exact number in the clinical trial. We have continued to enroll patients. We're still in a limited number of sites so far. So, we have not expanded the trial as of yet. We're still working through some issues with the FDA. We had agreed to the revised protocol but we're still working through a couple of things. So, I don't have the exact number but we do have those three sites, we continue to enroll patients.

In terms of the total utilization, I assume you're talking about in Europe?

Yes.

It's above 2,200 at this point.

Okay. Then can you help us parse out what portion of the 2011 revenue growth is from just adding new distributers versus organic growth or new product growth?

I think the answer to that, Brendon, is no. We're not going to give that level of specificity.

Okay. Thanks.

Thank you. Our next question from Doug Schenkel from Cowen and Company.

Hi. Good afternoon.

Hi, Doug.

Hi, Doug.

So, last year obviously a lot of difficult market-wide challenges which to some extent seem to be if not improving, certainly stabilizing, but there were also some Company-specific challenges in the US related to some of the changes in distribution and there were some other integration related changes in Europe. Things seem to have stabilized on both of those fronts over the last quarter or two at least. Is it fair to declare at this point that those things are in the rearview mirror and at this point you're building the Company off of a base that you're comfortable with in both geographies?

Commercially, absolutely. We feel very good about where we're at both in the US at this point and I think our ability to grow sequentially 8% demonstrates that and internationally as well. On the commercial side we feel very good and I think we're still on the operational side working through some integration issues. But a lot farther down the road than we have been.

I think, Doug, also from an infrastructure standpoint, we've just embarked on deploying the first part of our global ERP system. Clearly that's going to extend across the ocean in time. So, there's still work to do there as well.

Okay. Thanks for that. And just a specific question to the -- a question specific to the P&L. You may have explained this in your prepared remarks. If you did, I missed it. The R&D spend I think went up pretty significantly. Not just year over year but also relative to the last three quarters of last year. Is this the right run rate moving forward for R&D spend?

No. it's not. We had some specific expenditures in Q1 that were higher than anticipated as it related to regulatory approval of products, not what we had anticipated but what ultimately ended up being necessary. I would not assume that was a run rate.

Okay. And last question, you talked about Brazil a couple times in your prepared remarks. How meaningful are you thinking of that as an opportunity and how quickly could that have an impact on the P&L over the balance of the year or over the next few years?

I should point out that we are already in the Brazilian market with Scient'x products. And that actually that business is growing. So, that gives us a very good footprint to go from. We think that Brazil is a substantial opportunity for us especially with the Alphatec products and one of the reasons we decided to acquire the [SND] was to help speed up that process. So, we see the opportunity as significant. We're probably talking 2012 or later before we see really something meaningful. But right now the Scient'x products contract to perform very nicely there.

Okay. Thanks for taking my questions, guys.

Thank you.

Thank you. Our next question comes from Charles Chon from Stifel Nicolaus.

Thank you. Dirk, on your comments related to pricing, can you tell me where we are now on a year over year basis in the US? So, if there was a sequential decline of roughly 1% from the fourth quarter to the first quarter, are we now talking about a year over year decline of more than mid-single digits in the US, like 7%, 8%?

No. It's still mid-single digits.

Okay. Can you provide more color on pricing outside the US? Anything noteworthy there?

There's clearly some pressure in Europe but it's hard to quantify at this point. It's specific to individual countries. So, we haven't seen anything dramatic.

Okay. As you move into emerging markets how would you characterize the pricing there? Are you finding that you have to go in with price points that are well below where you are in other international regions?

Each market is different obviously and the pricing varies. There's certain countries where pricing is relatively attractive and others where due to the healthcare system, the pricing is lower, government-dictated. I think we're adjusting to each of those markets. It's fairly mixed but I wouldn't say that we're -- we're not unhappy with the pricing that we're getting in any particular market at this point.

Okay. Just a last question on pricing. As we move into the second quarter and beyond, how should we think about price declines going forward? Because we get to annualize that step-down pricing decline from the year before in the second quarter. I'm just wondering is the magnitude of the year over year price decline -- does that start to narrow now going forward?

Yes. It does. The anticipation is the comps get a little better once we move into Q2.

Okay. So, would it be more appropriate to think maybe somewhere in the lower single digits, perhaps 1% or 2% kind of the similar decline we saw from the fourth quarter to the first quarter?

Yes. I think the last three quarters we've communicated sequentially about 1% give or take down in each quarter. Year over year it's about 4% to 5%, mid-single digits. The comps, obviously we took a haircut in Q2 of last year. The comps get a little better, specifically for the quarter. So, I think we should be looking for less of an impact than we're seeing year over year right now.

Okay. And Michael, last question is for you. With the top line out performance I was actually hoping that EBITDA would come in a little better despite all the planned spending and investments during the quarter. So, I'm just wondering if you could give us a little more detail on how we should gauge EBITDA as we move through the year? When do you think we could see meaningful operating leverage? Should we be kind of backend loading the year here? Or do you think we could actually see some meaningful improvements starting in the second quarter and beyond?

I think overall obviously the gross margin situation for us, we had some -- a few changes there that weren't quite anticipated. EBITDA is probably not where we really wanted it in Q1 but I still think as we roll forward into the remainder of the year we are looking for meaningful contributions in each quarter. We're not looking at a hockey stick Q4. Clearly we have a strong revenue performance in Q1. We've got the seasonal impacts of revenue that will impact us in Q3 obviously. But in terms of managing the margin and managing the operating expense ratios, I think we would anticipate that we're going to be looking to be able to contribute EBITDA as the year unfolds as opposed to the back quarter.

If I can add on to Mike's comment, also some of the restructuring charge we took in particular was to solve that problem on a go forward basis.

So, Dirk, if we took out that restructuring charge, how much do you think it would've contributed to EBITDA?

The charge itself was $600,000.

Okay. Great.

And if you look at some of the -- I'm conscious in terms of the designation of one-time events. So, there were a couple of other items that hit Q1. Our expense profile, if you negate those impacts, our expense profile was the same as Q4 2010.

Right. Okay.

We're going to be managing that as we go through the year.

Okay. I was actually wondering if there may have been another restructuring charge hidden somewhere in the P&L. But I understand now. Thank you very much.

Thanks, Charlie.

Thank you. (Operator Instructions) Our next question comes from Bill Plovanic from Canaccord.

Good afternoon. Thanks for taking our questions. This is Mark on for Bill. Wondering if you could provide a little more commentary on the US market in particular procedure volumes and as far as payer pushbacks, if you're still seeing that? Has that stabilized at all? And roughly how much of that impacts your growth this quarter?

The payer pushback is continuing similar to what we saw in the back half of last year. I wouldn't say that we've seen any improvement or really necessarily any further acceleration. But it continues to be a factor. When we look at first quarter 2010 procedure volume versus first quarter 2011 procedure volume for Alphatec, we're very pleased with the growth which to us even with the pressure is a strong indication that we're taking share.

Okay. And then as far as your international distribution channel, there's been a lot of shifting around there. I just wanted to know if you could give us currently what's roughly your mix as far as direct and distribution now and where should we expect that to be at the end of the year?

We're direct in Japan, Italy, to some extent. It's a mix. France, the UK. Those are the direct markets. And that's not going to be any different at the end of the year. That's what we focused on, not adding additional resources in order to accelerate growth. All of the other markets are independent distributers.

Okay. And then finally with your biologics sales force in the US, where would you like to grow that to?

We started off with a certain number. They're actually specialists. So, they support our sales network in terms of being sort of the experts, the clinical experts on our biologic products. As the sales of biologics expands, we do intend to add to that force and we continue to build it out. I don't think we want to give out a specific number at this point but certainly we have the intention of continuing to build that out as the sales continue to grow.

Great. Thank you.

Thanks.

Thank you. If there are no further questions, I would not like to turn the conference over to Mr. Kuyper for any additional remarks.

Great. Thank you very much. The key takeaway from the first quarter is that we have regained our top line momentum. Excluding the one-time events we were non-GAAP earnings positive and cash flow neutral. We are taking the necessarily steps to improve our operating efficiencies and we believe we're well positioned to continue to take share and to deliver on our goals for 2011. Thank you very much for participating and good afternoon.

Ladies and gentlemen, this does conclude today's conference. You may disconnect and have a wonderful day.