Alphatec Holdings Inc (ATEC) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Alphatec Spine's fourth quarter and fiscal year end 2011 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I now want to turn the conference over to Mark Francois. Please begin.

Thank you for standing by, ladies and gentlemen. I am Mark Francois, Senior Director of Investor Relations for Alphatec Spine. Thanks for joining us today for Alphatec Spine's conference call to discuss our fourth quarter and fiscal year end 2011 financial and operating results. Speaking today will be Alphatec's Chairman and Chief Executive Officer, Les Cross; Dirk Kuyper, President Global Commercial Operations; and Mike O'Neill, Vice President and Chief Financial Officer. Also on the call is Ebun Garner, our General Counsel. As the operator said, the remarks today will be -- you'll be in a listen-only mode. After those remarks have been concluded, we will open up the call for your questions. The call will be recorded today, February 28, 2012, and a replay of this call will be available on our website for at least the next 30 days.

Before I turn the call over to Dirk, I wanted to remind you that today's conference call contains forward-looking statements made under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Such statements relate to the operation results, sales and marketing strategies, projections for the 2012 sales, operating margins, adjusted EBITDA growth, net earnings and economic and commercial market conditions. These forward-looking statements are based on the Company's current expectations and are subject to a number of risks, uncertainties and assumptions that could cause actual results to materially differ from those forward-looking statements. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. Many of these risks, uncertainties and assumptions are discussed in our 2010 annual report on form 10-K for the year ended December 31, 2010, and on form 10-Q for the quarter ended September 30, 2011, filed on March 4, 2011, and November 4, 2011, respectively, with the Securities and Exchange Commission as well as other filings on form 10-Q and periodic filings on form 8-K. Our SEC documents are readily available on the website at www.AlphatecSpine.com.

With that, I will hand the call over to Dirk.

Thank you, Mark. Good afternoon, everyone, and welcome to Alphatec Spine's fourth quarter and year end 2011 conference call. Before we begin our comments on the fourth quarter results, I would like to bring your attention to a separate press release we issued moments before this earnings announcement. In an effort to strengthen Alphatec Spine business prospects in 2012, we have realigned the top leadership roles at Alphatec Spine. Effective immediately I will focus my energy on global sales and marketing strategies with a clear focus on revenue growth and will assume the role of President Global Commercial Operations. Les will assume the role of Chairman and Chief Executive Officer and will have the responsibility for driving our initiatives related to global operating excellence.

With the two of us focused on our respective areas, the realignment should strengthen Alphatec Spine's ability to more effectively navigate a difficult spine market in 2012 as we seek to ensure that the Company meets its profitability and cash flow goals for the year. We believe this should benefit shareholders as well. We believe that Alphatec Spine is well served by these changes and I am personally looking forward to working with Les as we continue to strengthen Alphatec Spine's position in the spine market in 2012. Les, I will turn the call over to you.

Thanks, Dirk. Good day, everyone. I can't tell you how excited I am about this new realignment. To really put it in simple terms, Dirk and I are taking a divide and conquer approach to unlocking the sizable stakeholder value that exists within Alphatec Spine. As Dirk said, he will focus on the commercial operation side of the Company while I will focus on global operational excellence, in particular, innovation and a continuous flow of new products, improving our gross profit margin, leveraging our current cost structure, driving strong cash flows, and delivering to our customers world-class customer experience. We're excited about this. We think it's an exciting approach to a market that is going through change and a different way of approaching the market and our customers. I look forward to demonstrating the success of this structure to you on future calls. With that said, I would now like to turn the call back to Dirk to review the quarter and full year.

Great. Thank you, Les. This afternoon I am going to provide highlights of our operating performance from the fourth quarter and full year 2011. I will then turn the call over to Mike who will provide a more detailed review of our financial performance followed by our guidance for 2012. I will then come back with closing comments and we will open the call up for your questions. The key messages from today's calls are continued solid revenue growth across most of our channels, a strong new product cycle starting to contribute to revenues, our global distribution platform continues to expand into emerging markets. We generated $2 million in cash in the fourth quarter and the Company was cash flow positive for the full year by $2.5 million before items that Mike will discuss in a moment. We are making initial progress streamlining our cost structure and increasing manufacturing efficiencies.

In addition, we have engaged a corporate consulting partner to help expedite and maximize these efforts. We anticipate that 2012 will be Alphatec Spine's best year yet. We have strengthened our leadership team and our focus is on continuing to drive revenue that out paced the growth of the overall market while meaningfully improving our profitability. Overall, we are pleased with our revenue growth for the fourth quarter and for the full year.

In the fourth quarter we achieved revenue of $49.5 million which represents growth of approximately 7.6% over the fourth quarter of 2010, or 7% on a constant currency basis and near the high end of our quarterly performance in 2011. This is a solid result, given the ongoing headwinds in the spine market. It was also a 4% increase sequentially over the third quarter of 2011. This is a testament to the strength of our organization that we continue that we continue to deliver above-market growth under such challenging conditions.

For the fourth quarter of 2011 US revenues grew by 2% year-over-year and international revenues grew by 18.8% on a constant currency basis. While US revenue growth was positive and out paced a flat to down market, the rate of growth was at the lower end of our historical performance in 2011, reflecting year-over-year market pressures. On a sequential basis in the US, we are seeing the pressures on pricing and volume moderate and we are hopeful that these market trends will continue. International sales benefited from strong performance in Japan. Our Biologic business enjoyed strong growth in the fourth quarter and we continue to be very pleased with this performance, although it did have a modest impact on our gross profit margin as biologics typically carry lower margins than our other implants. Mike will cover the details of our gross margin later in the call.

For the full-year 2011 on a GAAP basis we achieved revenues of $197.7 million, an increase of approximately 15.2% over the full year 2010. On a constant currency and pro forma basis, full year 2011 grew 5.8% over the full year 2010. For the full year 2011 on a pro forma basis our US business grew 8.9%. International business for the full year grew 6.3% but declined by 1% on a constant currency basis. Strong growth in Japan and Asia Pacific was offset by weaker sales in Europe, Middle East and Africa.

In 2011 we made key appointments to our senior leadership team to strengthen our global business in operations, regulatory, quality and clinical marketing, and human resources, and in late 2010 in finance. While the primary objective of the Company remains driving global sales growth, we are also keenly focused on streamlining and strengthening our operating performance in 2012. We are not satisfied with our performance in this area in 2011, we are actively assessing our current systems and affecting improvements. While we made progress in the past few months, we have a lot more to accomplish in this area.

As we stated last quarter, we are focused on three key initiatives in 2012. Reducing our cost of goods sold and increasing efficiencies in our US operations, reducing cost of goods sold in our international operations, and reducing SG&A expenses internationally all of which we believe will enable us to achieve our long-term goal of 20% non-GAAP adjusted EBITDA margins. Over time we expect these cost reduction programs to achieve annualized cost savings approximately $2 million. We will provide more details around these initiatives on our first quarter conference call.

We are also focused on reducing our global SG&A expenses. We have already discussed the efforts undertaken last August to reduce SG&A expenses in our US operations and in the fourth quarter we started to see some benefit from that action. Overall, SG&A expenses for the fourth quarter of 2011 were at their lowest level for the year and we are pleased with this progress. We had significant inventory write-offs in 2011 which amounted to $8.2 million. Throughout the integration and after upgrading our senior management team, we uncovered several issues related to inventory in Europe and the US which resulted in these write-offs. Our expectation is that these are now behind us and we're putting in place measures that should ensure that we do not repeat this performance in 2012.

To expedite our success in this area, we have enlisted the support of a corporate performance improvement consulting firm. They are experts at operational efficiency improvement and their support will help us more quickly define and strengthen our essential business processes. As we discussed, Alphatec Spine is in the midst of an exciting new product cycle which we expect to have positive impacts on our 2012 revenue after the full market launches later this year. Our new products include a next generation anterior cervical plate, Trestle Luxe, our Avalon occipital cervical plating system, the Epicage MIS Interbody system and our Alphatec Solus ALIF device. The addition of these new products expands our depth in several spine verticals including cervical, interbody and MIS. We remain focused on full market release of each of these products.

OsseoFIX continues to do well in Europe as a vertebral body reconstruction implant and is being used in vertebral compression fractures, trauma and in tumor surgery. While OsseoFIX is on the market in Europe, last week we filed a new investigational device exemption, or IDE, study protocol with the FDA for our pivotal 510-K study which, after the agency's approval, should begin enrolling patients in second half of 2012. We closed out the original trial late in 2001, submitted the data to the FDA as a feasibility study, and we will be publishing the results. We exceeded all of our endpoints and believe that our new study should allow us to more rapidly enroll patients.

OsseoScrew continues to gain acceptance in Europe as an alternative to cement augmented screws. We continue to be pleased with OsseoScrew's ability to pull through our entire product line into hospitals due to its superior performance in complex constructs and patients with poor bone quality. In the US we have so far been unable to get regulatory approval for this exciting technology. We remain committed to making this technology available to US surgeons and patients and are in the process of reevaluating our FDA strategy and we will keep you informed of our progress.

Within our Biologics platform, PureGen, our osteoprogenitor cell allograft continues to perform well in the marketplace and has been successfully implanted in more than 1300 patients through December. As you recall, in June of 2011 our partner, Parcell Labs, received an untitled letter from the FDA regarding PureGen. In the letter the FDA raised questions in connection with Parcell's position that PureGen is within the classification of human cell or tissue-based products that are regulated solely under Section 361 of the PHS Act. We subsequently met with the agency and provided more complete information about the function of PureGen. During the meeting we also presented safety data collected on over 300 patients which showed an adverse event rate that compares favorably to other bone grafting options.

For 2012 we will continue to look for new geographies where we can leverage our products. We believe that our global focus on new markets, especially emerging markets in Asia Pacific and Latin America, will continue to strengthen our global diversification. We remain quite pleased with the performance of our business in Japan which consistently produced solid double-digit growth in 2011. We are also pleased to have begun selling Alphatec products in Australia in the fourth quarter through a new distribution partner. Customer feedback has been extremely positive and our team is excited to expand our brand.

In closing, I want to reach a rate that the transformation of Alphatec Spine continues to make progress. Today, our business has never been stronger and our ability to succeed never greater. We have the right products, strategies and global team in place to be successful in 2012 to help us achieve our goal of being a top five market leader. With today's announcement on realignment of responsibilities, we are undertaking a bold and new paradigm that we believe will allow Alphatec to take advantage of the opportunities and dislocations in the US and global spine markets. You have our commitment that Alphatec Spine will remain dedicated to conducting its business with a sense of urgency, accountability and excellence.

I will now turn the call over to Mike to discuss fourth quarter 2011 financial results and to provide our 2012 financial guidance. Mike?

Thank you, Dirk. The following remarks are related to our reported operating performance for the quarter ended December 31, 2011. To present comparative revenue results between 2010 and 2011 we are utilizing pro forma revenue schedules. The Company's pro forma revenues include Scientec for all periods of 2010 and do not include IMC for any period of 2010. The press release issued today provides our geographic sales segment performance on both a GAAP and pro forma basis. On this call I will be discussing the actual performance of our business on a GAAP basis and, if applicable, referencing pro forma comparisons.

Beginning with the first quarter of 2012, we will no longer need to use pro forma comparisons. Dirk has already covered the US and international sales for both the fourth quarter and the full year, so I won't repeat those numbers. I will, however, echo Dirk's comments that overall we are pleased with our revenue performance in spite of the difficult environment and recognize our need to improve our operating performance.

Gross profit for Q4 2011 was $24.9 million or 50.3% of revenue compared to $31.5 million or 68.4% of revenue in Q4 of 2010. Gross profit and gross margin in the fourth quarter were impacted by one-time charges totaling $5.5 million, primarily related to inventory write-offs and adjustments. After netting out this impact, the underlying gross margin was approximately 61.4%. As compared to the prior period where considerable favorability was attributable to high plant throughput, we experienced more moderate absorption of manufacturing costs in the current quarter. Favorable gross margins from our business in Japan was more than offset with increases in milestones and modest price impacts. Mixing gross margin associated with our Biologics business also contributed an 80 basis point decline in margin.

US gross margins for Q4 2011 were 57.2% versus 78.1% reported in the Q4 2010. After adjusting for inventory write-offs and the equalization of manufacturing absorption, the adjusted gross margin for the fourth quarter was 71.6%. Increased milestone payments represent 140 basis points. Price and Biologics mix were an additional 320 basis points. The remaining variances were attributable to other manufacturing activities. International gross margin was 36.9% for the fourth quarter of 2011 versus 46% in the fourth quarter of 2010. After adding back the one-time adjustments, the overall gross margin would have been 53.4%.

When comparing the gross margin of the fourth quarter of 2010, we have seen improvements directly attributable to the continued success of Japan which enjoys a comfortably higher gross margin than the other regions of the world as well as modest mix and cost improvements. In Q4, we invested significant resources to improve our inventory control and processes. In 2012 we anticipate achieving greater visibility and predictability with respect to our forecasted gross margins, and we believe that the level of write-offs experienced in 2011 should not repeat itself in 2012.

As we announced on January 5, 2012, the Company reached a global supplement agreement with Cross Medical Products, a subsidiary of BioMed, regarding a license agreement dispute and a patent infringement dispute. As part of the settlement, Alphatec Spine has agreed to pay Cross Medical $18 million, and we made an initial payment of $5 million in January of 2012. In addition to the initial payment, we will make 13 payments of $1 million per quarter thereafter starting in August of 2012. The Company has expensed $9.8 million in the fourth quarter of 2011, which was charged to operating expenses as a legal settlement adjustment. Of the remaining $8.2 million, $8 million will be recorded as a licensed intangible asset to be amortized over the next seven quarters in 2012 and 2013, plus an associated imputed interest of $200,000.

A non-cash charge of approximately $1.1 million per quarter of intangible asset amortization will be reflected in cost of goods sold in 2012. However, these amounts will be added back as part of our adjusted EBITDA calculation. Total operating expenses for Q4 2011 were $41.4 million. Excluding the $9.8 million supplement expense I mentioned previously, operating expenses were $31.6 million, a decrease of $1.6 million compared to prior year of $33.2 million, and a sequential decline of $1.1 million from the $32.6 million reported in Q3 of 2011. The sequential improvement reflects the positive benefit from the activities undertaken over this past summer in addition to aggressively managing our overall operating expense profile. After factoring the additional one-time expense incurred in Q4 2011, our operating expenses were $30.5 million compared to Q4 of 2010.

GAAP net loss for the fourth quarter of 2011 was $16 million or $0.18 per share compared with a net loss of $2.9 million or $0.03 per share for the fourth quarter of 2010. Non-GAAP net loss for the fourth quarter of 2011 was $5.2 million or $0.06 per share compared to non-GAAP net loss of $1.5 million or $0.02 per share reported for the fourth quarter of 2010. Non-GAAP net loss for the fourth quarter of 2011 includes adjustments for $9.8 million related to the Cross Medical settlement as well as the amortization of intangible assets and restructuring expenses.

Adjusted EBITDA was a negative $1.2 million in the fourth quarter of 2011, a decrease of $5.6 million compared to the $4.4 million reported for Q4 of 2010. The decline in adjusted EBITDA is due to reduced gross profit noted above compared to Q4 2010 offset by lower operating expenses. Adjusted EBITDA represents net income or loss excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation and other nonrecurring items such as restructuring expenses, IP R&D and transaction-related expenses.

Cash and cash equivalents were $20.7 million at December 31, 2011, which is a $1.5 million decrease from the $22.1 million reported at September 30, 2011. For the fourth quarter, the business operations generated $2 million of cash flow which was offset by a further $3.5 million of additional debt repayments associated with our working capital line of credit. Cash and cash equivalents at the end of Q4 2011 reflected $2.5 million decrease from the $23.2 million at December 31, 2010.

Excluding debt repayments of $5 million, our business generated $2.5 million of cash flow for the year. The debt repayments associated with our working capital line of credit were a function of a covenant violation associated with calculated adjusted EBITDA. Our bankers waived the fourth quarter violation and in January restored $2.5 million of the repayments. The remaining $2.5 million in repayments will be used as a reduction in our overall credit facility and will reduce the total amount of debt owed by the Company. We remain committed to generating cash flow and improving our level of profitability in 2012 in order to support the additional financial obligations of the BioMed settlement.

As of December 31, 2011, our net inventory position was $45.9 million, a decrease of $2.9 million versus Q3 of 2011. Our net accounts receivable at the end of Q4 2011 were $41.7 million, an increase of $1.9 million or 4.8% as compared to Q3 of 2011. Our day sales outstanding were in line with the previous quarter and represents a solid performance given our geographic mix of revenues. As we transition into 2012 our clear focus remains on improving our global gross margin and operating expense profile to ensure the business generates an operating profit and an ability to generate superior cash flow to meet our financial obligations and to sustain the growth of the business.

Our financial guidance for 2012 is as follows. For full-year 2012, annual revenue guidance will be in the range of $204 million to $209 million, growth of 3% and 6% respectively. We anticipate our gross margin in 2011 to be in the range starting from the low 60s in Q1 and improving sequentially through the rest of the year as we focus on our major initiatives. Adjusted EBITDA guidance will be in the range of $23 million to $27 million, or 11% to 13% of sales. We anticipate generating positive cash flow for the full year 2012 while still servicing our debt and settlement obligations.

With several new products recently introduced in transitioning to full commercial release, the revenue contributions that we expect from these new products will accrue towards the second half of 2012. In addition, the Company's revenue guidance range includes only modest contributions from PureGen, our osteoprogenitor cell allograft. Now, I'd like to turn the call back to Dirk.

Thank you, Mike. The take-aways from the fourth quarter are that we continue to generate solid top-line growth. We expect the global spine market in 2012 to remain challenging, but we will continue to address this environment by controlling what we can, focusing on innovation to maintain a continuous flow of new products, expanding our global footprint, reducing our manufacturing costs and right-sizing our operating expense structure to drive improved profitability and cash flow.

Longer term, we continue to believe that the spine market fundamentals remain quite exciting as the global population ages. People over the age of 65 years are expected to account for a disproportionately large number of future spine procedures due to the effects of general wear and tear as they maintain active lifestyles later in life compounded by a higher prevalence of disease states such as obesity, diabetes and osteoporosis.

Over time we expect our revenue mix to continue to migrate from our core fusion business that today represents about three-quarters of our sales to higher growth spine solutions that will treat the aging spine. As a recognized leader in commercializing innovative technologies, Alphatec Spine is well positioned to continue to capitalize on these growing trends in the spine market. We continue to be uniquely positioned to achieve our goal of being the leading independent spine company in the market. Thank you, and now I would like to open the line up to your questions.

Thank you. (Operator Instructions ) You have a question from Bill Plovanic of Canaccord. Your line is open.

Great. Thanks. Good evening.

Hi, Bill.

I just have two questions. One, your commentary that pricing and volume pressures were moderating given that your Biologics grew in the US year over year. That would mean your metal business has probably been pretty flat sequentially in the US. I'm just trying to figure out or get kind of color why that may be occurring and what is really going to get that moving in the right direction again.

Hi, Bill, so that's a good question. It was basically a flat. Part of that relates to a product that we had to stop distributing primarily in the fourth quarter. It is a pedicle screws called Xenon. We discovered a regulatory glitch and needed to clear that up with some supplemental filings. We have done that, but we've got that cleared up and we expect to re-launch it by the end of the quarter, but that had about a 3% intact on our growth rate. So, overall, we think the US business, that aside, is still growing at a reasonably good rate.

That is a pretty significant impact. And you think those customers will come back?

Well, it will take a little bit of time. We are -- we will re-launch it and we think we can regain certainly a portion of it.

Okay. And then you gave pretty good guidance on some of the things going on in terms of expenses going forward. I really wanted to zero in on the R&B line. That has come down pretty significantly. We were running over $5 million and now that has just hit a bottom that we have not seen in, I don't know, probably since 2009 in terms of a run rate. I'm curious as to going forward is this the new run rate we are looking at? Are you looking to maybe scale back in some of the unnecessary spending in R&D to maintain drive to profitability you're looking for or kind of just any color is helpful?

So Bill, a couple things there. We had a couple of major projects that have now transitioned out or transitioning out of R&D in to commercialization. So, we had a pretty heavy burn rate in 2011 and some of the products in development. Also, in addition, we have obviously made some choices in terms of the programs that we are going to invest in. So, it is more of a timing issue, per se, than just a conscious effort to reduce it. Although in fairness as we go into 2012 looking at the overall portfolio of our operating expenses, we do need to transition some of that spend in to the clinical trials that are going to be necessary to bring some of these programs to fruition.

So, if I wanted to look at this, if you were running closer to an 8% to 10% rate, you exited the year at 6.5%, should we take it more going back to the 8% to 9% for R&D on a go-forward basis?

I would certainly take it up on a go-forward basis.

Okay, that is all I had. Thanks.

Thank you. And the next question is from Raj Denhoy of Jefferies & Company. Your line is open.

Hi. This is [Amy] in for Raj Denhoy. Thanks for taking our questions. I guess the first question, on the Q3 call you all noticed there was a number of stocking orders that were going to roll into the 4Q numbers and, as well, I know you all mentioned that you thought that Australia was going to be relatively strong from a stocking perspective. Could you provide a little more detail into the international market and how much was comprised that stocking?

Actually, a couple of those orders that we talked about they are still in the works. One of them actually came in this quarter and the other one is continuing to go forward on the international side. So, there's some timing issues in terms of regulatory approval that sort of has delayed some of that. We are continuing to work through that. It's hard to predict exactly when those orders come in just based on so many moving parts between the regulatory process of that particular country, import, licenses and everything else.

Great. And then you also noted that Russia would be coming online for this quarter?

That is the one that we are still pursuing.

Okay. And then I guess regarding for [Gentix], I think on the Q3 call you all had already presented to the FDA regarding the safety data, if I'm not mistaken, so has there been any communication with the FDA since then or any -- ?

You are referring to PureGen, correct?

I'm sorry, PureGen, yes.

Yes. There is ongoing dialogue with the FDA.

Okay. So, no timeline for when you all could (inaudible) any resolution and still no impact to your marketing of the product?

That's correct. The product continues to be available to our customers and we continue to work very closely with the FDA.

Great. And then just one more on Solus. I know you are still on beta launch last quarter and expected to go to full commercial launch this quarter, is that still on track?

We are moving towards the commercial launch. The targeted date was towards the end of this quarter. It may slip a little bit, but the beta is continuing to do quite well.

Great. That's it for me. Thank you.

Thank you. Our next question is from Josh Jennings of Cowen and Company. Your line is open.

Good evening, thanks for taking the questions. First off, in terms of in Q4 you talked about some headwinds you are facing. Can you quantify them at all in terms of both the US and international marketplace? How much -- talking about your physician and hospital customers, what type of volume pressure were you seeing maybe just directionally and then also for Alphatec specifically, what's the pricing pressure environments like?

I will start with the pricing pressure. Actually, sequentially, we are continuing to see it moderate, so I think that's a good sign in terms of year-over-year. I'm talking specifically about the US. There continues to be volume pressure in terms of procedures specifically around lumbar surgery, degenerative disc and those types of things. Again, somewhat dependent on the surgeon's practice, but that certainly continues to be a pressure point and I think will be going forward for a while. And then the other area of headwinds is really the sovereign debt issues in Europe and the impact that is having on our distributor's ability to access credit lines and pressure within the healthcare systems. So, we think we understand those at this point, but it continues to be a challenging environment but in that environment is also a lot of opportunity.

Some competitors commented on pricing pressure in the mid single digits, some in the higher single digits. Are you willing to break that out?

So, for the US marketplace in our hospital pricing, year over year we are low single digits and sequentially it's one -- less than 2%.

Thanks for that. Looking at guidance, for 2012, what are some of the assumptions you baked in, in terms of US international market growth, and maybe sort of on the continued pricing pressure are you looking for just direction? I know you probably don't want to give out specific numbers, but stable environment, increasing headwinds or less headwinds?

I think overall we are continuing to forecast and see pricing pressures virtually globally and so that is built in to some of our assumptions. I think in Japan, specifically, there's a reimbursement rate that's coming in April and that is built into our assumptions as well. So, we continue to see what I would say has been downward trends in pricing pretty much throughout the regions where we compete.

In terms of category volumes, I think depending on your point of reference, the US is anywhere from flat to down maybe up a little bit, but essentially flat. Europe we see is zero to down given some of the macro pressures that we have. And then we have modest category increases in other regions, Latin America and Asia, driven principally by some of the larger markets that we participate in. So, we are not looking bullish at category, we are not looking bullish at pricing.

Can you comment specifically on the Biologics market? They had some disappointing results from two high-profile competitors. What are you guys seeing in the marketplace? You commented on a strong Biologics performance this quarter, but you have the Infuse issues out there. What are the -- concern around Biologics? Is Infuse not providing or the disruption not opportunities for other players? Maybe just some color on that and where you see the opportunity in Biologics in 2012?

Biologics continues to be one of our focus areas going forward along with aging spine and minimally invasive. So, it is an area of focus for us. We are quite pleased with the results in 2011 and we have a fairly broad product line across the spectrum. We have a product called ProFUSE that is doing extremely well for us. We are actually seeing somewhat of a pickup in allografts which may be related to the situation with Infuse. So, I think that whole space is somewhat influx, but we see it as an area of opportunity and feel quite good about our position and our ability to grow in it.

Great. Any update on distributor ads in the quarter or direct sales ads and any guidance towards expectations for adding distribution sales reps in 2012?

Not in terms of specifics, but there obviously are opportunities internationally with some markets where we have not penetrated yet. Russia being a very important one for us in 2012, but there are some additional markets we think we have some opportunity in, and in the US there's a fair amount of dislocation that we are setting to see with the Synthes DePuy merger and we think we are well positioned as a company to take advantage of some of that having a very broad product line, some very unique products and I don't think we are prepared to give any specific numbers, but we are definitely aware and targeting a number of situations.

Excellent. Thanks a lot.

Thank you. The next question is from Mark Landy of Summer Street. Your line is open.

Hello can you hear me?

We can hear you, Mark.

Good evening, guys. Just a quick one on the (inaudible) tax. Are you able to tax any of the future customers in 2013 or is that going to be directed to the P&L?

I don't think we are looking at it as a directed to the P&L yet, Mark, but in fairness I don't think we have given it full due diligence yet in terms of how we should approach it.

Okay. So, is it fair to assume just from the outset that perhaps a portion will be directed in some portion will be passed through?

That would clearly be our objective, but I don't know that I want to get any more specific than that at this point.

Sure enough, Mike. And then did I hear correct? You said that pricing was down 2% sequentially?

I said less than 2% sequentially. It was down mid single digits year-over-year.

Correct. So, if I have a look at the fourth quarter specific (inaudible) December and the end of the year, how much of that pricing pressure was stocking (inaudible) for the end of the year versus general market pricing pressure?

I would say in the main it was general market pressure because our stocking business really did not change materially one quarter to the other.

Lastly, as I kind of look out to 2012 kind of relative to where you were in this position looking out at 2011, I think a lot of things -- there were just a lot of moving parts relative to approvals and PureGen was, I think, meant to be a greater contributor in 2012 than it will be, and also there's been some stocking -- delays in stocking issues. Net-net, if I look out in 2012 relative to the 2011 plans, how much of the delays in stocking out of 2011 that will fall into 2012 will make up for some of the delay in the approvals and in, I suppose, the reduced impact of PureGen?

I'm trying to think where to begin on that one. Clearly, we had some misstep's with some new product introductions and I think we've had some opportunities to participate internationally that haven't materialized as quick as we would've liked. So, for example, if you look at PureGen I think our original expectations for PureGen post approval were quite large. I think the impact of the untitled letter and the continued uncertainty has tempered that growth expectation. I think the overall slow down in the category is having its impact in terms of the magnitude of the size of our new product introductions. I think as we look at an opportunity, for example, like Russia and Australia in Q4, we got Australia but I think it could have been bigger. We did not get Russia, but we are still looking forward to it in 2012. So, I think that you have got puts and calls all over the place and so it would be difficult for me to kind of box in $10 million of something that should have occurred in '11 and is a bolt-on for '12. I just don't see it as clean as that.

Net-net would you say it is a negative or positive? If you sum up all those costs, would you say you are carrying over relative to initial expectations for 2012 -- '11 in to 2012, would that be a net positive or net negative as you set down in the operating plans for 2012?

I think that if you look at the underlying plans you might view it as a positive. I think you've also got to look at some of the macro headwinds in some of the businesses where we compete and some potential declines in the base business which is why I think as we think about guidance here we try to be pretty conservative in terms of what we believe this deliverable in '13 -- sorry, in '12 for all the reasons we are talking about.

And that's exactly -- you hit the nail on the head, Mike. I'm trying to figure out what the up side is relative to the initial expectation if there is any versus those puts and calls, but we can take some of that off-line, not a problem. Thanks for answering my questions, guys.

Thank you. (Operator Instructions) There are no further questions in the queue right now. I would like to turn the call over to the Dirk Kuyper for any closing remarks.

Thank you very much for joining us today. We are very excited about the realignment in the management of the Company and believe that this will position Alphatec very well to take advantage of the challenges and the opportunities that are out there today. So, with that, we will conclude the call. Thank you and good evening.

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