Alphatec Holdings Inc (ATEC) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. I'm Mark Francois, Senior Director of Investor Relations for Alphatec Spine. Thank you for joining us today for Alphatec Spine's conference call to discuss our first quarter 2012 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 this call is Ebun Garner, our General Counsel.

During our prepared remarks, you'll be in a listen-only mode. After our prepared remarks have concluded, we'll open up the call for your questions. As a reminder, this conference call is being recorded today, May 8, 2012, and a replay of the event will be available later on today on our website and will remain there for the next 30 days.

Before I turn the call over to Les, I must 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 Company's operational initiatives, sales and marketing strategies, projections for 2012, operating margins, adjusted EBITDA growth, net earnings and economic and commercial market conditions. These forward-looking statements are based on the Company's expectations and are subject to a number of risks, uncertainties, and assumptions that could cause the actual results to materially differ from those from the 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 2011 annual report on Form 10-K for the year ended December 31, 2011, which we filed on March 5, 2012, 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 our website at AlphatecSpine.com.

And with that, I'll turn the call over to Les.

Great. Thank you, Mark. Good day, everyone, and welcome to Alphatec Spine's first quarter 2012 conference call. This afternoon I will provide highlights of our operating performance from the first quarter of 2012. I will then turn the call over to Dirk for a review of our commercial operations. Mike will follow Dirk and review our financial performance and guidance for the remainder of 2012. I will then come back on the call with some closing comments and open the call up for questions.

Before we begin our discussion, I wanted to share with you some exciting news that developed today and that we announced today, and this news will help us push the Company forward with our growth initiatives. With our organization alignment nearly complete and Dirk focusing on the Company's commercial operations to drive revenue growth, and with me focused on driving global operation excellence with the respect to new products, margin improvement, and managing our cost structure, we are better positioned to capitalize on the sales opportunities while driving our 2012 operating improvement goal.

So with that said, today we filed a Form 8-K announcing that we have entered into an equity line of credit financing arrangement with Eclipse Advisors, LLC. Pursuant to our agreement with Eclipse, Eclipse has committed to purchase up to $25 million of our common stock over the next two years. This stock will come from our existing shelf registration already in place, and we expect to be able to close on our initial round of financing in the near future.

We anticipate that the proceeds will provide substantial benefit to Alphatec Spine as we unleash the value of the Company. Our balance sheet will be strengthened to support our core business needs. The funds will supplement our organic cash flow, enabling us to better invest in our product development process, which includes clinical studies, and to accelerate product introductions into the market.

As our business strengthens, we will become active on the acquisition front for new products and technologies to further accelerate the growth of the Company. There is a pipeline of interesting new products and technologies out there, and while we're not going to discuss any specifics with you here today, we do expect to see significant consolidation in the spine industry over the next couple of years.

But I should clarify, by "technology" I really mean those products that already have regulatory approval and are currently commercialized in the marketplace or are very near commercialization. That's the kind of product or the company we're looking for.

Compared to other financing structures, we review this particular strategy as the best option for us and our stockholders, and this is for several reasons. First, the transaction can get done quickly. Second, we will be able to control the cadence of the rounds of financing. And last, we believe that the stock placement by Eclipse will be a stabilizing factor for our existing shareholders, and it may help reduce some of the volatility in our stock.

Turning now to the first quarter results, the key messages from today's call are -- sales level in our core hospital channel remains strong, and we did see modest sequential growth from Q4 2011. Sales growth in selected international markets remained strong, and these markets include Japan and Latin America. Sales mix and operating efficiencies drove year-over-year improvements in our gross profit margin by 140 basis points to 65.7%. Excluding the Cross Medical settlement, gross profit margin improved 340 basis points to 67.7% during the quarter.

Gross profit margin improvement and operating expense controls drove record EBITDA for the Company, a strong adjusted EBITDA margin of 12.8%. And we continue to make incremental progress in streamlining our cost structure and increasing our manufacturing efficiencies.

Overall, while the first quarter wasn't the highest sales quarter in Alphatec Spine's history, we did achieve $48.5 million in revenues, which represents a respectable performance given the ongoing headwinds in the spine market and the challenging comparable we had for the same period in the prior year. Operationally, the Company performed much better, and we are pleased to report strong adjusted EBITDA of $6.2 million. This is a record for the Company.

Turning now to a review of our operations for the first quarter, we are very pleased with the progress we made with our performance improvement initiatives in the first quarter. At the top of our list of initiatives are those that support near-term revenue generation and those that will enhance our customers' experience. This includes initiatives centered around product development, manufacturing, sales operations, and world-class customer service.

While we are focused on driving the revenues from our current product portfolio in global markets, we have reprioritized our product development resources to accelerate the release of near-term technologies that represent the greatest revenue potential in the next 12 months. But at the same time, we are keeping our eye on our longer-term pipeline and strategy.

We have also made substantial progress with our initiatives to reduce our cost of goods sold. We plan to begin in-house manufacturing of certain high sales volume and high-cost implants that we are currently outsourcing to third-party vendors. Our first example of this is our Trestle Luxe anterior cervical plate. We are nearing completion of the manufacturing validation of the equipment we bought. It's all gone well so far, and we expect to complete this integration in the second quarter of the year.

We are also working on leaning out or streamlining operations in many functional areas to improve our gross margin and lower our operating cost structure. We have mapped out many of these current processes and have identified several opportunities to reduce work in progress, or WIP, shorten cycle times, improve fill rates, lower shipping costs, and in the round, improve our customer service. Collectively, the streamlining activities we are currently focused on should contribute to our cost savings goal of approximately $2 million in annualized benefits when fully implemented.

We have also made substantial progress in streamlining other areas of our operations. Specifically, our newly formed Sales Operations Group has increased our focus on inventory management to optimize our field inventory, set administration to improve customer service levels, while providing better capital efficiency on these sets.

While we still have a lot more work to do to strengthen our gross margins and reduce our global operating expense profile, we are pleased with the progress we've made so far and the initial impact that it's had on our margin. Over time, this should help us achieve our long-term goal of 20-plus percent GAAP-adjusted EBITDA margins. You have our commitment that Alphatec Spine will remain dedicated to conducting its business with a sense of urgency, accountability, and in search of excellence.

One last item I would like to mention before turning the call over to Dirk is to thank Dr. Stephen Hochschuler for his service on our Board of Directors. Steve agreed to step down from our Board of Directors so that we would be in compliance with our NASDAQ requirement for independence in our Board after my appointment to CEO. We are extremely pleased that Steve will continue to provide great value to the Company, as he remains a key part of our strategic Scientific Advisory Board, where he in fact acts as Chairman.

So with that said, I'd now like to turn the call over to Dirk for a review of our commercial operations.

Thank you, Les. The spine market continues to face challenges. In the US, we see continuing pressure on pricing in the low single digits and procedural pressures related to a decrease in payer approvals for lower lumbar surgeries. We are beginning to see the signs of the US market stabilizing and hope that this trend continues as we move through 2012.

In Europe and the Middle East, economic and political turmoil continue to negatively impact healthcare and our business in particular. Compared to the first quarter 2011, consolidated first quarter 2012 revenue was down about $1.3 million, or about 2.5%. I would like to point out that the first quarter of 2011 was a particularly strong quarter for Alphatec Spine and therefore represents a difficult year-over-year comparison period.

While the first quarter revenue results were not as high as expected, there are certain bright spots that I'd like to highlight. Further, we're in the midst of several initiatives in the US that we believe will have an impact on revenue growth going forward, and I will mention these briefly. Similar to the revenue impact of new products, we expect these initiatives to contribute in the back half of 2012 and beyond.

Turning to our US sales, for the first quarter of 2012 we reported US sales of $32.6 million. US sales include our direct business in hospitals and our stocking distributor business. In our US hospital channel, our primary domestic business, sales were even with the first quarter of 2011 in spite of market pressures. Excluding our Xenon pedicle screw system, which was not available for sale during the first quarter, US hospital sales grew about 3% over the first quarter of 2011 and about 1% sequentially from the fourth quarter last year.

US hospital sales were driven by growth of our biologics and MIS products, including Ilico SE. We're pleased to say that Xenon is back on the market as of April and should be a contributor to our sales again in the second quarter.

Sales in our US stocking distributor channel were lower by about $1 million due to several large initial stocking orders in the first quarter of last year that did not repeat, coupled with lower replenishment purchases by our distributors in response to market pressures of lower surgical volumes.

Total OUS sales were $15.9 million. OUS sales for Alphatec include Japan, Europe, Middle East, Africa, Latin America, and Asia-Pacific. Overall, our total international business in the first quarter of this year was even with the first quarter of 2011. International revenues continue to be driven by strong growth in Japan and Latin America, but business in Europe and the Middle East was sluggish as a result of slowed economies, reduced government expenditures on healthcare, and political turmoil.

In Latin America, the business of our subsidiary, Cibramed, is beginning to ramp up, and we continue to expand our Brazilian and Latin American distribution channels in anticipation of regulatory approval of Alphatec products.

But we continue to see significant above-market growth in Japan. Beginning in the second quarter of this year, Japan's growth rate will be partially muted by an across-the-board 8% reimbursement rate decrease for spinal implants that was imposed by the Japanese government on April 1st of 2012.

Finally, global sales were also impacted by a decision we made late in the first quarter regarding the Alphatec Solis ALIF device. While Alphatec Solis has received high praise from surgeons, and the implant has performed flawlessly, we have voluntarily recalled the deployment instrument to improve its performance. Instrument issues were rare and appear to be related to surgeries involving extremely hard or sclerotic bone where there has not been sufficient vertebral endplate preparation to remove the hardened bone layer prior to deployment of the device.

As we have previously stated, Alphatec Solis was in a beta launch phase. We expect that the modifications we make to the Alphatec Solis instrumentation will require resubmission of its 510(k) with the FDA. And while timelines with the FDA are always uncertain, we do not expect this process to be a lengthy one, and we hope to have the Alphatec Solis back on the market by the end of the year.

In the US, as I mentioned, we are taking several initiatives to accelerate our revenue growth rate. First, we are focusing our sales management team on driving new product adoption, surgeon conversions, and increased penetration within existing customers and agents. In addition, the team will continue to focus on driving exclusivity among our distributors.

Second, we are actively working with our key distribution partners to grow their footprint, and we also continue to add direct sales representatives in key areas that have been historically underserved by our current organization.

Third, we are increasing our medical education programs for MIS and other core technologies to drive surgeon adoption.

Finally, we are ramping up the manufacture and release of additional sets of several key products, including TRESTLE Luxe, to drive incremental revenue. We believe that TRESTLE Luxe is the best cervical anterior plate on the market, and we will continue to look to pick up market share with this exciting product.

I look forward to updating you on our progress on these initiatives in the quarters ahead. With that, I'll turn the call over to Mike for a discussion on the first quarter 2012 financial results and to provide updated financial guidance for the remainder of 2012.

Thank you, Dirk. The following remarks are related to our reported operating performance for the quarter ended March 31, 2012. With the close of the first quarter 2012, we are no longer using pro forma comparisons. The press release issued today provides our geographic sales segment performance on a GAAP basis only.

Les and Dirk already covered US and international sales for the first quarter, so I won't repeat those numbers. I will, however, echo Les's comments that overall, we are pleased with our improved operating performance. We are laying a solid foundation on which to build our 2012 and future business performance.

As we announced on January the 5th, 2012, the Company reached a global settlement agreement with Cross Medical Products regarding a license agreement dispute initiated by Cross Medical and a patent infringement dispute initiated by us. As part of the settlement, we agreed to pay Cross medical $18 million, and we made an initial payment of $5 million in January 2012. In addition to the initial payment, we will make 13 payments of $1 million per quarter thereafter, starting in August 2012.

From a P&L perspective, 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 beginning with Q1 2012, plus associated interest of $200,000. A non-cash charge of approximately $1 million per quarter of intangible asset amortization will be reflected in cost of goods sold. However, these amounts will be added back as part of our adjusted EBITDA calculation.

Gross profit for Q1 2012 was $31.8 million, or 65.7% of revenue compared to $32 million, or 64.3% of revenue in Q1 2011. Gross margin improvement of 140 basis points from the first quarter of 2011 is primarily attributable to operating efficiencies and regional sales mix. US gross margins for Q1 2012 were 70.2% versus 72.1% reported in Q1 2011.

When adjusted for the amortization impact of the Cross Medical settlement, US gross margins would have been 73.4%, representing ongoing operational performance ahead of the prior year period. We also noted a sequential improvement in the underlying gross margin versus the fourth quarter of 2011 once the impact of one-time charges has been eliminated. The increased biologics revenue mix was a negative impact versus 2011, so we are clearly seeing the impact of our internal actions with respect to gross margin.

International gross margin was 56.4% for Q1 2012 versus 47.5% in Q1 of 2011. The continuing performance of Japan relative to total international revenue generates a favorable mix effect versus prior year, as Japan has higher gross margins than the other international regions. We experienced higher gross margins in the remainder of our international regions versus the prior year, partly attributable to the continued growth of the Alphatec business and underlying margin improvements from our French operations. In addition, we saw a 270-basis-point improvement in the international gross margin associated with the elimination of inventory step-up valuation included in Q1 2011.

While we are pleased with the international margin improvements, I would caution, as Dirk has already mentioned, that the ongoing margin performance of Japan cannot continue due to the reimbursement rate cap effective April 1, 2012. We also believe that the regional mix effect of Japan's results is temporary relative to the remainder of the year.

Gross margin has clearly been a focus of our attention for some time, and while we are seeing improvements in many areas, I would be cautious about using our Q1 results as a new basis for adding sequential improvements throughout the year.

Total operating expenses for Q1 2012 were $31.9 million, a decrease of $2.4 million compared to prior year of $34.3 million. We are continuing to demonstrate that we can be disciplined and effective with the deployment of our resources.

GAAP net loss for the first quarter 2012 was $1.3 million, or negative $0.01 per share, compared with a net loss of $1.9 million, or negative $0.02 per share, for the fourth quarter of 2011. Adjusted EBITDA reported for the first quarter of 2012 was strong at $6.2 million, an increase of $1.8 million compared to the $4.4 million reported for Q1 2011. The increase in adjusted EBITDA reflects higher gross profit and lower operating expenses compared to Q1 2011. Adjusted EBITDA represents net income or loss excluding the effects of interest, taxes, depreciation, amortization, stock-based common compensation, and other non-recurring items such as restructuring expenses, IPR&D, and transaction-related expenses.

Cash and cash equivalents were $16.9 million at March 31, 2012, which is a $3.8 million decrease from the $20.7 million reported at December 31, 2011. The Company's tax position at March 31, 2012, reflects a payment of $5 million to Cross Medical as part of the settlement discussed above. 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 Cross Medical settlement.

As of March 31, 2012, our net inventory position was $48.2 million, an increase of $2.2 million versus Q4 2011. The increase primarily represents a ramp-up in international finished goods inventory of Alphatec products as we continue the transition of the Alphatec portfolio into our international markets. Our net accounts receivable at the end of Q1 2012 were $40.6 million, a decrease of $1.1 million, or 2.7%, as compared to Q1 2011.

Our sales performance in the first quarter of 2012, while slightly lower than our forecast, was respectable in light of the challenging spine category and a robust comparable period. The overall profitability of our business has made substantial progress, and we are seeing the benefits of our actions impacting the P&L, the balance sheet, and our operating cash flow.

While we have clearly been comfortable with our ability to derive cash flow from our operations to grow the business and cover the Cross Medical settlement obligations, I believe the actions we have taken today with respect to providing additional equity financing are both desirable and necessary for our future success. The financing will allow us to strengthen our balance sheet to help us maintain and grow our core business while giving us the added flexibility to take advantage of the ongoing dislocation occurring within the worldwide spine category.

As it relates to guidance, our financial guidance for the remainder of 2012 is as follows. Full-year 2012 annual revenue guidance will be in the range of $204 million to $209 million, or 3% to 6% growth over 2011. Adjusted EBITDA guidance will be in the range of $23 million to $27 million, or 11% to 13% of sales. The Company expects to generate positive cash flow for the full year 2012 after fulfilling its banking and legal settlement obligations.

As a reminder, we had previously indicated that our revenue accumulation throughout 2012 will be biased towards the second half of the year. While gross margin performance in the first quarter of 2012 clearly benefited from positive regional mix, we do not anticipate these benefits will continue to accrue throughout the year. Operational improvements will generate sequential improvements in gross margin, as we have previously guided.

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

Good job. Thank you, Mike. The transformation of Alphatec Spine continues to progress. We are off to a good start in 2012. We do acknowledge that market headwinds continue to work against the industry, but we have made significant progress realigning our management structure that will allow us to continue to grow our business in spite of these market conditions. At the same time, we will be driving forward on operational excellence initiatives to improve our margin and gross profit.

We will focus internally on our operational initiatives to drive innovation and ensure a continuous flow of new products. We will expand our global footprint. We will reduce our manufacturing costs, right-size our operating expense structure to drive improved profitability and cash flow. Additionally, we are very pleased to have the opportunity to raise cash to help us get our new products to the market faster and allow us to be opportunistic in a market that is likely to experience consolidation.

I would like to thank all of Alphatec Spine's stakeholders, especially our employees and selling partners, who are persevering to make Alphatec Spine a stronger Company. Together we are excited to unleash the value of Alphatec Spine for all stakeholders while delivering a world-class experience to our customers as we move forward.

Thank you, and I would now like to open the call up for questions.

Thank you. (Operator Instructions.) Raj Denhoy, Jefferies.

I wonder if I could ask a bit about the guidance. Particularly on the revenue side, you guys are pointing to a reacceleration, or an acceleration in growth, I should say, in the back half of the year. And I'm curious what you point to that gives you confidence you're going to see the results improve.

Raj, this is Dirk. A couple of things. One, as we mentioned in the prepared remarks, Xenon came back onto the market in April. And although it will take a little time to regain the revenue that we had, we do see that as a positive contributor. We also -- you know, some of the initiatives we're taking, we're refocusing our sales team, our management team, on driving incremental revenue within our current base, whereas over the last couple of years, they had really been more focused on growing the distributor network versus increased penetration within the network that we already have. So we think those things will contribute.

We do have some new products launching in the back half. PureGen continues to do well. And we expect to get Alphatec Solis back on the market towards the end of the year.

The other piece I would add there, Raj, is TRESTLE Luxe is proving itself to be a very important product for us, and we're accelerating the expansion of that program. And we believe that's going to be able to drive some incremental revenue.

So I think rather than the big one-time new products, we're looking at continuing to introduce new product from within the range to keep the portfolio as fresh as we can. So I think that Q1 was obviously more challenging than we expected, but we're still comfortable that we have line of sight to the revenue numbers that confirm guidance.

Good. Does any of that confidence, though, imply any sort of improvements in the market backdrop?

No, not really. But as I mentioned, we do see the market beginning to stabilize. But we have not modeled in any improvement.

We're still modeling pricing deterioration, as we articulated at the end of the year.

Okay. And I guess Japan, I suppose, is a fairly good market for you. I guess the price cuts have now kicked off, I guess, April 1. How does that factor into your view of the year, at least the balance of the year?

Well, we had planned that in, obviously. This happens every two years in Japan, so it was modeled into our planning for the year. We knew it was coming. You know, we continue to grow very nicely in Japan and expect to continue to do well. Obviously, this takes a little bit of wind out of the sails, but we're continuing to take market share there. We believe we're number four in the market today.

Okay, and then just one last question, just on the profitability. You were pretty clear that the gross margin expansion we saw in the quarter was more of a geographic phenomenon than anything structural was taking place, but you've also outlined a lot of initiatives that are underway here in order to improve the profitability. And I guess I'm trying to gauge the timing of when we can start to see some of the benefits of the initiatives you've outlined on the cost side.

Yes, I think, Raj, so what we saw in Q1 was somewhat masked by the regional mix. And what we articulated when we came out at the end of the year with our margin guidance is we're anticipating sequential expansion of our gross margin as we go through the year. We're not banking on suddenly the fourth quarter being miraculously good compared to the rest.

So we did see operational improvement in Q1 in both the US and in France. They were masked by some of the regional impacts and the inventory step-up, which were greater. But we would expect to continue to see expansion of our margin as the year progresses, quarter by quarter. And we're comfortable that a gross margin in the mid-50s, and we build from there throughout the remainder of the year.

Sorry, mid-60s. My apologies.

Okay. Just, sorry, one last one just on the equity line of credit you established today. My sense is, from how you described it, that's really more to provide you some flexibility should you need it. I believe you're probably sticking to your commentary about having cash sufficient, both in the Company now and then also your cash generation to satisfy what you need, and that additional $25 million really just gives you some flexibility to do additional things. Is that the way we should think about it?

Yes, I think we're not moving off our stated position that we believe the underlying business has the ability to generate sufficient cash flow to support the business as well as the Biomet settlement. I think what we're doing here is we're providing ourselves air cover in the event that we need it in terms of expanding the business. It is a capital-intense business, and we'd need to front-load some of that capital to get the return. But we also, as Les articulated, we want to be in a position to potentially take advantage of some of the dislocation that's occurring. It's not necessarily the number-one objective, but it's certainly up there as part of the overall plan.

And my sense is, reading those documents, you ask them for the money and then they basically have 30 days to give it to you. Is that the way it works?

Mechanically, it's a put notice, yes. At this point, I don't really want to get into the overall mechanics of it, but it is a put notice, and it's an obligation to purchase.

Over a 30-day window, if I read that --

Yes.

Great. Thank you.

Bill Plovanic, Canaccord.

So just on whoever dropped the last question, so if -- so you put it to them, and then they, reading through this, they can either take it all down or only half of it down if it's a certain price? Or do they put it to you?

No, we issue a put notice and there's a 15-day window where they are obligated to purchase 50% of the put. And there's a second 15-day window where they're obligated to take the second 50% at a predetermined calculated discount.

But you don't have to do the whole $25 million in any put notice?

Any put notice is at our sole discretion to issue.

So you pick the dollar amount?

There's a calculation that determines the cap on the dollar amount, but we pick the dollar amount.

Okay. That's actually more helpful. And it's just straight equity at a discount? Is there warrants or anything else attached?

There's no warrants. It's a straight deal.

Okay, but it has a discount.

The agreement is actually online.

Okay. Yes, no, I was reading the 8-K. My next question just is with -- you talked about the stocking business that you had. I think a while back, we talked about the impact of PODs and how much that was contributing to your overall business. If I remember correctly, it was 10% to 15% of revenues. I was wondering if you could tell us today, kind of generally, what percent of your business is PODs in the US?

Bill, this is Dirk. It was never 10%. It was always substantially less than 10%, so just to clear that up. And it actually, I would say, is on the decline, not the increase today. So it remains very comfortably below any level of materiality, which to us would be 10%.

And just to look at some of the terminology you used, do you think it was the stocking -- I take it the stocking would be the POD business, for the most part?

No. No, we have a number of stocking distributors in the US that have no affiliation with surgeons.

But we do classify them within our total stocking distributor business.

Okay. So just for clarity, the US POD, it's less than 10% of the US business -- significantly less or substantially less, to use your words -- and it's on the downside.

Yes.

Okay. And at this point, would the loss of that business be material to your overall -- if that business went away, which we've seen some stuff go on in New Hampshire, and I think it's 378 or 387 for the Worker's Comp in California, would that be material to your adjusted EBITDA projections or your loss projections for the year?

I think to the extent that we say that the revenue contribution is not material, then overall, the business isn't material in totality. I mean, I don't want to split hairs in terms of the profitability of some of these businesses, but obviously, our margin to those businesses is substantially lower than our margin in our regular direct hospital business.

Right, okay. And then with Solis, with the product being pulled off the market, do the instrument predesign again, would we expect another write-off of that instrument inventory again, as we saw last time?

No. If you remember, the first time we had built a large number of sets in anticipation of the launch, and we actually made some changes to the implant, and that's what caused that write-off. This time, we did a beta launch with a much smaller number of sets to validate that we in fact had solved the problem, which in fact we're continuing to see. So there is no write-off of any substance involved in this.

I should point out that this problem that we're having is not dissimilar from the problem that every other standalone ALIF device has in the market with these types of patients. And we're hopeful that we can overcome it as opposed to doing what some of the other companies have done, which is put warnings and contraindications in their IFU.

Okay. And then last question. I'll jump back in the queue. Just a lot of commentary around gross margins in the geographic contribution, what-have-you. Is there a potential, given that revenues were slightly below in the US, that you'll be running your facilities at a lower run rate, and therefore we would see gross margins come down just because of less overhead absorption in the next couple of months?

I think at this point in time, we're comfortable that the loading of the facility is correct. I'm not expecting the kind of gyrations that happened in 2010 that caused massive distortions -- sorry, significant distortions -- in late '10 and early '11. So we're not expecting any of that to repeat itself.

Great. Thank you very much. I'll jump back in the queue.

(Operator Instructions.) Matt Dolan, Roth Capital Partners.

So the first question is on the EBITDA guidance, and apologize if this is repetitive. We've been bouncing around here. But given the run rate in Q1 and your commentary around both higher sequential revenues throughout the year as well as gross margin, are there investments to anticipate in the operating expense line, or why wouldn't adjusted EBITDA fall through as we go through the year from the Q1 run rate?

Yes. I think, Matt, one of the things we've tried to do as we kicked into this year is to manage the expenses in the early part of the year, and that's why I think we recorded operating expenses below, I think -- obviously, Q1 last year, and I believe Q4 of '11 as well. So we feel that we're being a lot more disciplined and judicious about the operating expense profile.

Having said that, we want to make sure that the business is well positioned to take advantage of opportunities, and if that means that we need to ramp expenses in certain areas -- commercial expenses, clinical trial expenses if need be -- we've got the flexibility within the P&L construct to be able to do that. And so in my mind, it's not really just looking at the P&L for Q1 and extrapolating it out for the rest of the year. It's that we're comfortable with the EBITDA range that we have provided, given what we see is going to unfold for the rest of this year.

Okay, that's really good. Okay. And then on the sales side of things, you've talked a lot about improving productivity numbers among reps and so forth. Maybe you can give us a little more detail on what the new strategy is so that we can get confidence in that revenue progression this year. Is it an increase in directly employed reps or those distributor reps with exclusivity contracts or something else? What's helping us get there, logically speaking?

Matt, this is Dirk. It's really all of the above. One, it's really focusing our management team on driving incremental productivity within the current distribution network. What we've done historically is focused them more on growing that network, and we see a tremendous opportunity as we look through the different verticals of business in terms of going back now and improving penetration rates, getting additional product pickup within the current surgeon customer community and within the current distribution network.

Secondly, we are ramping up the number of direct sales reps that we have in areas where we just have not been able to attract the type of partner that we want. And that has been ongoing since, certainly, the first quarter.

And thirdly, not just increasing exclusivity on a go-forward basis, but also enforcing exclusivity with current distributors. And we think there is significant leverage that we can get out of those activities.

Okay, great.

And maybe, Matt, one of the other growth strategies is this continuous flow of new products. One of the things that we decided, we were trying to work on too many R&D projects, so we've actually focused the team on a number of projects that have the potential to deliver revenue in the back half of the year, and we've fully resourced these projects. There is commitment throughout the organization that these projects will come out on time.

And so, at the same time as Dirk is preparing the sales organization to be more efficient, we're about to give them a lot more tools as the year progresses.

Okay, that's very helpful. And then finally, on just a very general question on revenue guidance, what are you expecting for Alphatec market share this year? Does it go up, down, sideways, what?

That's a good question. Obviously, we intend to capture market share as we go forward. What's interesting, even though on a sales basis the revenue was flat or basically up just 1% in the US, Q4 to Q1, on a unit or a procedural basis, we actually saw improvement. So we think we're still taking share, but not enough right now to offset price declines, and that's what we're looking to correct. So we believe we will have the ability to continue to take share and to continue to grow above the market on a go-forward basis.

Thank you.

Mark Landy, Summer Street Research.

So thanks for taking my call, and I apologize if I missed a good deal of the call placing other calls that were going on. But I think I did catch the gist of some of what you said relating to the product focus or the new product focus. And I suppose my question relates to the regulatory process related to the refresher-type products versus these new products. Obviously, the brand-new products that you've been speaking about for a while are taking longer than one thought and are more expensive. But what have you anticipated as the average appearance time for these refresher products? And do you think that you can meet those timelines that you're looking at in terms of pulling them together when you get (inaudible)?

This is Les. Excellent question. As we went through this screen, we started with 24 pretty well-thought-out R&D projects. And the screen was, which of these projects can we get out this year, considering all the elements -- regulatory, manufacturing, quality, clinicals? And we focused on this number of products based on the factors that, A, it's a very clear path to get it through the FDA, it's already approved by the FDA. We have some other wonderful products that are in the pipeline that are going to take a little longer to get through the FDA, but that was definitely one of the screens we put these products through before picking them to be our focus products for the year.

Okay. And then you turned to the transition of a more in-house manufacturing from other parties manufacturing for you. Where are you on that regulatory process? Was most of it --

We're actually into the OQ-PQ process as we speak. So we're going through process validation right now.

Okay. And is that just the typical timeframe, Mike, or does anything kind of --

I think, with a new technology, the actual process validation takes its time. It's been underway for two months right now. I don't want to commit a date as to when we pull the trigger on it, but we anticipate -- we're on our internal timeline for process validation and clearance.

Perfect.

And it certainly is in sync with our back half expectations.

You know, Mike, I think you and I discussed some of this offline, but your basic business has been doing really well. And it's not since you joked about kind of flying under the radar screen. It seems to be being a little bit more of a tough time right now, forecasting due to some of the markets. But I think last year we had some of the large companies that had some (inaudible) products, they had some (inaudible) maybe with some share for you guys to pick up. They had some of your competitors were (inaudible) are now maybe coming around to there. How much, you know, of that growth do you think that has gone away or opportunity has gone away, and now you're competing head to head where before you were able to get (inaudible).

This is Dirk. We think there's still opportunity in the market. It has been tough. We do see it stabilizing some. And as we get some of these new products out and I think this refocus of our sales team is overdue and will allow us sort of to get back on track in terms of reaccelerating our growth rate. So I think that opportunity is still there. It may not be quite what it was, but it's certainly still there.

Actually, Mark, it's a complex question, obviously. I think that the price deterioration that we have been seeing isn't necessarily the same as the way our competition sees it. We clearly took a significant step down in 2010. We've gone through a lot, an anniversary, a lot of those elements as we go into 2012. So our prior period comparisons on pricing don't look that bad when we talk in terms of low single digits. But it's clear from what's going on in the marketplace today that pricing is still quite prevalent, and price decreases by our competition and by our customers are still very much top of mind. So it's an issue that doesn't go away.

And Mike, I'll catch up with you guys on some of the refocusing of the sales force. (Inaudible.) But my last question is probably more of a corporate strategy and a corporate focus. You know, there was this push towards branding the Company as the Aging Spine Company. How do you think about that branding relative to perhaps some of the trials and tribulations that you've had in getting some of those new products through? And how do we think about the positioning of Alphatec to both the public and to the physicians while you kind of go through a refresher and then hopefully wait for some of those new products to get, you know, when it does get vetted through the FDA?

Yes, that's quite a question. So in surveying externally and internally since I've been with the Company, the Company is respected for being an innovator and a leader in bringing a lot of these new technologies to the market, and we certainly want to continue to have that reputation. And so we will continue to broaden our product offering, to treat the aging spine as well as deformities and the cervical area as well. But I think our focus on the aging spine is still a key part of our strategy. Dirk?

Yes, exactly. I mean, it really means just broadening the definition a little bit about what "aging spine" is. And one of the areas where we're clearly focusing going forward is deformity, and adult deformity is a growing segment of the market. So although we haven't been able to get a couple of the products on the market in the US yet, they certainly are driving business internationally. And I think we're very well recognized, and have been recognized, for that focus. And every surgeon today is seeing the graying of their patient population, and so I think it continues to be a good space for us.

Fantastic, guys. Thanks for taking my questions.

(Operator Instructions.) Josh Jennings, Cowen.

This first one's hoping you could give us a little bit more color on pricing. You know, you called out this Japan price cut of down 8%, and I think overall, you commented that overall pricing was in the low single digits, and the headwind. Can you break that out at all regionally? I mean, was pricing incrementally sequentially worse in the US, Europe, or other international markets, or was it incrementally better from Q4?

I would say for us as opposed to for the category, in the US, our hospital pricing sequentially was better in Q1 than it was in Q4. And so it's flat, for all intents and purposes. So versus a year ago, we're low single digit. And we've seen that contracting over the last three to four quarters as we compare to the prior period.

So for us, we've seen a contraction in pricing, but I would say that as it relates specifically to Japan, it's across the board. It's all competition; they're seeing the same thing. I think that what we're seeing in certainly the developed economies of Europe is pretty heavy price pressure based upon government cutbacks in state-funded healthcare programs. And that's pretty much universal. I don't think that they're treating any of our competitors differently than ourselves. So we're all faced with that. And that's a continuing and evolving problem.

So for me, it's more of, if you look at the state-funded programs, that's going to be continuing in 2012. Japan should be relatively stable from a reimbursement standpoint for the next couple of years. And in the US, I think that we versus our competition, it's relatively stable, but you still have this continual downward pressure that impacts the business quarter to quarter.

Well, thanks for that, and just on the Xenon pedicle screw, was the April reintroduction to the market the timing that you had anticipated back when you gave guidance on the Q4 call? And when do you think you can get back to the run rate that it had historically been?

Yes, it was a couple of months later than what we had originally anticipated on the Q4 call. And what we're pleased with is we saw an immediate pickup by a few of the original customers. And some, it will take a little bit of time to get that run rate back up. So we think that we can certainly get back there, but it will take a little bit of time.

And then the last one to Solis. What were the expectations for that product? I know it was just in beta launch, but what type of headwind is that creating in terms of those revenues falling out of your budget, and where? And I understand you're describing new product introductions as picking up the slack, but I was just curious on how big of an impact that is to your outlook for the year.

Yes, we have not been public, Josh, with the contribution of Solis in 2012. Obviously, it's a product that we have expectations for, but in the context of the overall revenue projections for the year, we're comfortable that we can have some downsides and some upsides.

Understood. Okay, great. Thanks, appreciate it.

Thank you. This ends the Q&A portion of today's conference. I'd like to turn the conference over to Les Cross for any closing remarks.

Great. Thank you, operator. Thank you, everyone, for your time and attention. We look forward to joining you back here next quarter and to update you on the progress of this re-engineering of Alphatec Spine. So thank you.

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