Alphatec Holdings Inc (ATEC) 2012 Q4 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 fourth quarter 2012 financial and operating results. Speaking today will be Les Cross, Alphatec's Chairman and Chief Executive Officer; Mike O'Neill, Vice President and Chief Financial Officer; and Tom McLeer, Senior Vice President of the US Commercial Operations. Also on the call today is Ebun Garner, our General Counsel.

During our prepared remarks today, you'll be in a listen-only mode. After our prepared remarks have concluded, we'll open up the call for your questions. And as a reminder, this call is being recorded today, February 28, 2013. And a replay of that event will be available later on our website and will be there for the next 30 days or so.

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 include statements related to the Company's revenue and adjusted EBITDA expectations for 2013, the success of the Company's initiatives from 2012 and 2013 to drive global sales growth, increase margins and increase operating efficiencies, the ability to achieve certain conversions in connection with the Phygen acquisition, contributions to the Company's revenue and earnings in 2013 from the introduction of new products and sales and marketing strategies, improvements to the Company's cost structure and operating margins from operational initiatives, and the timing of US FDA regulatory decisions that impact the commercialization of products.

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 the actual results to materially differ from the forward-looking statements. The Company undertakes no obligation to update any forward-looking statements, whether the result of new information, future events, or otherwise. Most of these risks, uncertainties and assumptions are discussed in our 2011 Annual Report on Form 10-K for the year ended December 31, 2011, 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 www.alphatecspine.com.

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

Good job, Mark. Thank you. Good afternoon, everyone, and welcome to Alphatec Spine's conference call to discuss our fourth quarter and year end financial and operating results. 2012 was an exciting year of change at Alphatec Spine, a year of preparing the Company to deliver sales growth and profitability. We now have a new team, a new vision, a new culture at the Company.

When I talk to people about 2012, I highlight the six major achievements that, now implemented, we believe will give us a route to win in 2013. These achievements include a new leadership and a new culture, a focused R&D team that is delivering a continuous flow of new product, significant progress in achieving operational excellence.

We have strengthened our US commercial team with the addition of Tom McLeer. In fact, Tom will say a few words today later in our call. I also appointed Pat Ryan as the leader of our international business, with a mission to focus on leveraging our impressive footprint. And in a later call, Pat will update our investors on that as well.

And finally, we have had tremendous support from our Board of Directors as we've installed this culture of change at Alphatec Spine.

Having spent much of 2012 implementing these initiatives, I'm pleased to report a very solid fourth quarter and a strong finish to 2012. The quarter was clearly our best revenue performance of this year, and I am confident the initiatives we have installed are gaining traction. I am extremely proud of the entire Alphatec team for delivering these excellent results.

Since becoming the CEO almost a year ago -- in fact, almost exactly a year ago -- a good portion of the heavy lifting with our initiatives is now behind us. Our focus in 2013 is on executing our plan, the plan that will deliver revenue and profitability results that we hope will meet or exceed the guidance that we're going to talk about later in the call.

With that, I would like quickly to cover a few fourth quarter highlights and then turn the call over to Tom, who will cover our US commercial strategy. This will be followed by Mike, who will discuss our financial results in much greater detail.

With respect to the top line, we achieved global revenue of nearly $53 million in Q4, about a 7% growth compared to Q4 of last year, or approximately 8% growth on a constant currency basis. We are pleased to see that contributions came from both the US and the international business in driving this excellent result.

Our US business totaled $34 million and grew 4% in the fourth quarter of 2012 compared to the same quarter last year. This was driven by another great quarter from our biologics business and the traction we're gaining with the Phygen integration, which we completed, as you remember, in November of 2012.

Our biologic profile is a broad suite of solutions for surgeons that include demineralized bone matrix, products in multiple forms, a tissue barrier to prevent scarring, the NEXoss synthetic bone matrix that we'll license later this year, a range of structural allograft interbody spaces and, of course, our stem cell product, PureGen.

The Phygen transaction provides us with access to a network of over 100 leading US spine surgeons who formed Phygen several years ago out of the desire to deliver cost-effective products and improve treatment outcomes for spinal disorders through surgeon-inspired technology. Phygen and its products and technologies, combined with those of Alphatec, represents another important growth opportunity for the Company in 2013, as we go through the year and pursue conversion of the Phygen spine surgeons over to the Alphatec family.

Our US implant revenue in Q4 achieved more than a 4% growth sequentially over the third quarter. We expect 2013 to be a better year for our implant and instrument business, driven by the combination of the new products we expect to launch in 2013 and the surgeon conversions we expect from the Phygen acquisition, all of which will be managed by our strong US commercial organization that is led by Tom McLeer.

Our new product pipeline in 2013 includes important line extensions and several new products. Our new anchored anterior cervical interbody device, called Pegasus, which offers single-step deployment of the anchoring blades without the need for impacting the implant. In addition, our new MIS ILLICO Alphatec screw fixation system, enables spine surgeons to immobilize and stabilize spinal segments without the need for pedicle screw and rod constructs. Both of these products have received FDA market clearance in December, and we will begin their prospective rollouts as the year moves forward.

Additionally, the new product class of 2013 includes the planned relaunch of our much-anticipated Alphatec Solis device, which is a unique anchored interbody device for the lumbar spine. Alphatec Solis was relaunched in Europe in January of this year, and we anticipate relaunching the product in the US in late Q2 or early Q3. Overall, including Pegasus, the ILLICO FS, the Alphatec Solis, we expect to launch approximately seven new products in 2013.

With respect to our biologics portfolio, and specifically PureGen, our stem cell product, I wanted to provide our investors with an update related to the product status in the marketplace. Since our last update on PureGen, we have had ongoing discussions with the FDA and have submitted a formal Request for Designation to state our case that PureGen should be classified as a tissue-based product and not as a biologic. In prudence, we have also engaged discussion with the FDA to understand the structure of clinical trials that would be required to obtain regulatory approval for PureGen should it not be classified as a tissue.

Just recently we became aware that the FDA conducted a site inspection of each of the two vendors that are collectively responsible for the procurement, processing, and storage and shipment of PureGen. In response to these inspections, the FDA issued several Form 483 observations related to the PureGen product. In spite of the fact that the product has been used in over 3,500 patients with no adverse events related to the product, we have voluntarily taken the prudent approach not to ship any additional product until these observations have been addressed to the FDA's satisfaction. We hope this will take less than a month, and we will certainly keep our shareholders informed.

While we continue to maintain a collaborative relationship with the FDA regarding the classification of PureGen, given the ongoing uncertainty regarding its regulatory status and the Form 483 observations, we are expecting only modest contribution from PureGen in our 2013 revenue guidance. The potential impact from the lost revenue of PureGen for the remainder of 2013 is approximately $6 million, and the guidance that we will give later in the call does not include the $6 million.

At this time, I'm pleased to invite Tom McLeer, our Senior VP of US Commercial Operations, to say a few words about our US strategy.

Thank, Les. It's a pleasure to be a part of the Alphatec team. 2012 set the stage for an exciting new year, with many new product introductions and continued expansion of our flexible distribution model. We firmly believe that our mix of direct reps, independent commission agents, and stocking distributors, as well as our direct-to-hospital sales efforts, provides us with a key competitive advantage in addressing our customers' needs. As the market changes, we will continue to address the combined needs of Alphatec and our customers in a careful and thoughtful manner.

In addition to our flexible distribution model, we will continue to expand and improve our biologics and implant product portfolio. Working closely with our surgeon advisors, we have identified several opportunities for product improvement and expansion. We will continue to capitalize on acquisition and licensing opportunities to dovetail with our internal development efforts. We believe that this will allow us to rapidly grow both our per-customer and per-procedure revenues within our existing customer base.

Our biologics offering continues to see healthy growth each time we launch a new product, and we continue to seek to expand this portfolio. These efforts should make Alphatec an even more attractive and comprehensive option to new customers.

A few weeks ago, we held a meeting in Carlsbad with a number of key Phygen surgeons, with another meeting scheduled for March 9. The surgeons were exposed to Alphatec products and culture, and a good portion of the day was spent discussing the numerous synergies and opportunities created by this transaction. Everyone left the event excited about having Alphatec products available for the Phygen surgeons, and the increased exposure of the Phygen technologies were received through Alphatec's distribution channels. We believe that throughout the year, we will continue to accelerate the synergies and revenues provided by this acquisition.

Les, now I'll turn the call back to you.

Great. Thank you, Tom. Outside of the US, our international segment also posted strong results in Q4, with revenues of $18.7 million, which represents growth of almost 12%, or nearly 16% growth on a constant currency basis. This result represents a new international revenue record for Alphatec. Notable success was achieved in Latin America and Japan. Additionally, international sales grew by almost 18% over the third quarter of 2012. International sales did represent over 35% of our total Q4 revenue. I think this really speaks to the fact that we do have a very successful and broad global organization that we will continue to leverage.

We look forward to continued success from our international business in 2013, which we expect will be driven by deeper penetration in our established European markets, growth opportunities in new markets in Central and Eastern Europe, and the sale of Alphatec products into Latin America and the Asian-Pacific regions. This will happen following receipt of product registration in these important markets. We hope to receive that registration prior to the end of the year. We also continue to target new geographies for the Scient'X and Alphatec products.

Our operations in Japan continue to be a growth engine for our international business and for our Company as a whole. The team there does an outstanding job. The recent receipt of approval in Japan to sell our NOVELA PEEK Spinal Spaces should also help drive our penetration and our revenue in 2013.

On the operations side of our business, we continue to make incremental progress to the leaning out of our supply chain and manufacturing facility. Lean is a continuous improvement process that has, and we expect will, continue to pay dividends in reducing our cost structure and our working capital requirements. 2012 was a deep dive into the building and sustaining our lean culture, and the beginning of a scaled lean implementation effort. We have much to achieve, but I'm very pleased with the progress we've made to date.

So with that, I'm very pleased to turn the call over to Mike O'Neill for discussion of our financial results.

Thanks, Les. Let me echo Les's comments that our fourth quarter was a solid ending to 2012 and that we are pleased to see increasingly more positive financial results for Alphatec after a year of hard work.

Les already covered the discussion of global net revenues and growth rates for Q4 2012, so I won't repeat those quarterly figures. For the full year of '12, Alphatec's net revenues were $196.3 million, or approximately 1% lower than 2011. On a constant currency basis, fiscal year 2012 is about 1% higher than 2011. Considering the headwinds that the global spine industry continued to face in 2012, along with our internal efforts to strengthen Alphatec's revenue growth and profitability, we feel that this is a respectable result, given the traction we achieved in the fourth quarter.

US net revenues totaled $130.5 million, down approximately 3% compared to 2011, reflecting ongoing spine industry challenges in domestic markets, offset by very strong growth within our biologics business.

International net revenues totaled $65.8 million and represented more than 33% of the Company's 2012 total net revenues. International revenue in 2012 was up 3% compared to 2011. On a constant currency basis, our international business grew approximately 7% over 2011. This result reflects continued pressure in spine markets in Europe, offset by our growing operations in Latin America and Japan. Our business in Japan had another record year, with revenue approaching $29 million for the year and growth of 20% over 2011.

Gross profit for Q4 2012 was $32.1 million, or 60.9% of revenue compared to $24.9 million, or 50.3% of revenue in Q4 2011. The Company's ongoing efforts to improve manufacturing efficiencies continued to yield benefits in the quarter. However, gross profit and gross margin for the fourth quarter of 2012 included charges totaling approximately $1.3 million associated with the write-off of certain instrument sets and inventory in connection with the ongoing product rationalization strategy for Scient'X and its subsidiary product lines. This negative impact represented 250 basis points of gross margin.

US hospital pricing remained relatively stable in the quarter, and both product and regional mix were less of an impact than observed in previous quarters. Additionally, gross profit in the fourth quarter of 2012 was reduced by $1 million for the amortization of a licensed intangible asset as part of the Cross Medical settlement described in prior earnings results calls and noted in today's press release.

US gross margin for Q4 '12 was 66.3% versus 57.2% reported in Q4 of 2011. International gross margins were 51.1% for Q4 of 2012 versus 36.9% in Q4 of 2011, reflecting the continuing positive performance of Japan. Given the nature of our international distribution business, quarter-to-quarter fluctuations between regions and product mix do influence the overall gross margin profile of this business, although the impact in Q4 of '12 was less than in prior quarters this year.

Total operating expenses for Q4 of '12 were $36.1 million, a decrease of $5.3 million compared to prior year of $41.4 million. Q4 2011 expenses were significantly influenced by the litigation settlement charge of $9.8 million. Excluding that charge in Q4 of '11, operating expenses in Q4 of '12 were higher by $4.5 million compared to Q4 of '11. Operating expenses for the fourth quarter of '12 included $800,000 in transaction costs associated with the Phygen acquisition and $300,000 for certain IP R&D expenses associated with the Scient'X acquisition. Both of these items are specifically excluded from the adjusted EBITDA numbers that we report.

In addition, Q4 operating expenses were impacted by $1 million of Phygen from the business activities, $1 million of ongoing litigation expenses associated with current matters, $700,000 in commercial spending, and $600,000 in administrative expenses. The increase in G&A costs in the quarter are not expected to impact the underlying cost structure of the business in 2013.

GAAP net loss for the fourth quarter of '12 was $5.4 million, or negative $0.06 per share compared to a net loss of $16 million, or negative $0.18 per share, for the fourth quarter of 2011.

Adjusted EBITDA in the fourth quarter of 2012 was $5 million, or 9.4% of revenues, compared to negative $1.2 million reported for the fourth quarter of '11. Adjusted EBITDA represents net income or loss, excluding the effect of interest, taxes, depreciation, amortization, stock-based compensation, and other non-recurring items such as restructuring expenses, severance expense, and transaction-related expenses.

Cash and cash equivalents were $22.2 million at December 31, 2012, representing a $1.5 million increase from the $20.7 million reported December 31, 2011. The Company's cash position at December 31, '12, reflects payments totaling $7 million to Cross Medical in 2012 as part of the settlement discussed above, $2 million for the Phygen deal, and additional $2.3 million associated with licensing investments.

These expenditures have been offset by positive cash from operations and the benefits of our June refinancing with MidCap Financial. The Company has been able to generate cash from its business activities, invest the necessary capital for revenue growth, acquire new technologies to fuel growth in our future, and satisfy our settlement obligations.

As of December 31, 2012, our net inventory position was $49.9 million, an increase of approximately $1.5 million and related to the consolidation of our Phygen inventory. Our net accounts receivable at the end of Q4 2012 was $41 million, a decrease of $700,000, or 1.7% as compared to Q4 2011, and an increase of $3.4 million, or 9.2%, as compared to Q2 of 2012. The decline in AR year over year has been a function of our sales performance, coupled with continued diligence with respect to collections. Despite depressed economic conditions in certain parts of the world, we are not witnessing a deterioration in our ability to collect our accounts receivable.

2012 has clearly been a year of transition for Alphatec. We have endeavored to lay the foundation for revitalized innovation within the organization, we are integrating new licensed technologies, we are capitalizing on the enormous opportunities represented by the Phygen acquisition, and we are evolving the culture within the Company. We believe that 2013 will be a significant year for the Company, predicated on the fundamental requirement to execute flawlessly. As we look at the global environment, we are well positioned to take advantage of our geographic presence and to accumulate market share.

For our guidance for 2013, we continue to believe global spine market pressures are stabilizing. And when we couple this with our new product pipeline, expected Phygen contributions, and continued international expansion, we believe 2013 will be a strong year of growth for Alphatec Spine.

The encouraging global spine market trends we experienced in Q4, and the Q4 revenue run rate that resulted from this, will be muted somewhat by our expectations for PureGen, and we therefore believe it is prudent to be cautious with respect to our revenue guidance when we look out over the full year of 2013. We have only included very modest revenue for PureGen as part of our 2013 guidance.

With that said, we expect full year 2013 revenues to total approximately $204 million to $210 million, or approximately 4% to 7% growth over 2012. And full year 2013 adjusted EBITDA will be in the range of $24 million to $27 million, or approximately 21% to 36% growth over 2012.

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

Great. Thank you very much, Mike. Well, I think it's clear the theme for 2013 is execution. And with that execution, we should have a very exciting year at Alphatec Spine. I would like to thank all of the Alphatec Spine stakeholders, especially our employees, for the hard work that is making Alphatec Spine a stronger Company. Together we are on a journey to unleash the value of Alphatec Spine for all stakeholders while delivering world-class experience for our customers as well. 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.

Thank you very much, and Karen, we would like to open the question up for calls -- or questions -- you know what I mean.

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

I wonder if I could ask you a little bit about the revenue guidance. It seems like there's some puts and takes here in 2013. Maybe starting with Phygen, I think in times past, you've talked about perhaps a $15 million contribution from them in 2013. Are you still comfortable with that?

Yes, we are. And I'm trying to be real transparent here. If you look at 2012 and you look at our guidance for '13, we make assumptions around implied category growth, market growth. We have the same assumption in for Phygen, and we took out $6 million for PureGen. Forgive me if I get my fees mixed up. But that's essentially how we get to our guidance frame.

So the key difference is an assessment of overall market growth in the underlying business.

Okay. But then if you think about international, and I think that the US has some puts and takes there as well with Phygen and PureGen, as you mentioned. But then internationally, you posted a very strong fourth quarter here. Now, if you look at it into '13, the yen is probably going to hurt you guys quite a bit, given your exposure there. What do you think you're going to do in international growth in '13?

I think that we still want to see the international business be a significant portion of our growth in 2013. I think our growth profile in Japan is slowing. We've had three years of exceptional performance. And I think the rest of our international markets are still somewhat challenged.

I think Les alluded in his scripted remarks about the opportunities for us to get product registrations in, say, China and Brazil. And we hope they'll be contributions in 2013. But they're not currently part of our guidance range. So we still look to those regions to provide good quality growth for us. We're also conscious that it is still a significant chunk of our business that's distributor, so we are subject to those vagaries. But I think that we have that accommodated in the guidance range.

So when you think of the $204 million to $210 million, how much currency is in there for you?

How much of what is in it?

How much of a currency offset?

It's not that significant that I would call it out.

Okay. Just lastly, then, the fourth quarter international growth, that 16% constant currency number you put up, was there some stocking in there? Because that was such a strong number. I'm just curious, again.

So we have, with the exception -- I'm sorry -- direct markets, again, for reference, are France, Italy, UK, and Japan. We're stocking distributors in every other country around the world. We had very strong performance in Latin America in Q4. That was a significant contributor. We also saw some of our Central and Eastern Europe businesses uptick. But I would also point out that our direct markets delivered pretty good results as well. But certainly, Latin America was a standout, as well as Japan continues to fuel the growth.

Okay, thank you.

Matt Miksic, Piper Jaffray.

Just a follow-up on the international versus US. When you look at the growth in '13, just to be clear, are you expecting, just in reported growth, your US business to be growing faster than international, or vice versa?

If you exclude Phygen and just look at our base business, I would say our US business is pretty much growing at market in the plan. And that would be true for our international markets as well, where we have a slightly higher growth profile.

Okay, that's helpful. And then I was wondering if you could give some color, qualitative or some sense of the magnitude, of how some of these new products you've talked about have contributed in the fourth quarter as well. You know, the biologics products and the other products that you've launched late in '12.

Yes. So I think, we called out biologics specifically, and I would emphasize non-PureGen. We had an exceptionally strong quarter for our core portfolio of products in Q4. I want to say one of the products was up by 34% or 35% in the quarter. So it wasn't coming from PureGen; it was coming from the base portfolio.

As we think about, or as you think about the guidance that we have put out there, we obviously expect products that either have just recently been launched or are about to launch to contribute more to the back half. So I was thinking first half is definitely going to be lower than the second half of the year. And I would also provide some color that I think Q1 is going to be the lowest quarter of the year, given the following issues.

We have specifically excluded PureGen going forward. So you have PureGen's in Q4. It's essentially out of Q1. As we get into the adoption curve for the Phygen positions, of both our technologies and their technologies, that's going to build throughout the year. And in addition, some of the new products that Les alluded to in his comments are going to be more biased towards the back half versus the first half in terms of revenue contributions.

I'm glad you mentioned the first quarter. Is there also any selling day discrepancies that we should be aware of, as some of your brethren have had that issue facing them in Q1.

Yes, we looked at that. Obviously, we're in a short month right now, so that's the obvious one. So I think we do have a couple of days' difference in Q1 versus Q4. And that's another component as to why Q1 is below Q4 sequentially.

Right, right. That's helpful. And then finally, and I'm not sure if -- well, I'd love to get your sense on these 483s, maybe just speak to your confidence and some color around the type of issues that we're talking about and your confidence that they can be resolved to the agency's satisfaction here in the next couple of months.

Yes, absolutely. This is Les. They're our vendors, so we don't really feel very comfortable discussing it at any great length what the 483s were about. But I think we said in the script that we would hope that these 483s would be cleared within a month or so. So I think that shows you that there's nothing that major, and they are certainly working together with us and FDA counsel to make sure we respond appropriately and timely to the FDA.

Okay, very helpful. Thanks.

Bill Plovanic, Canaccord.

A couple of questions here. You referenced a 4% US implant growth sequentially. Is that inclusive or exclusive of Phygen?

In Q4 versus Q3?

Correct.

I believe that was exclusive of Phygen.

Okay.

I'm hesitating; I'm just looking around the room. I'm pretty sure it was ex-Phygen.

Okay, that's helpful. And then switching to the gross margins, you're paying, or you're amortizing for (inaudible) Cross, and I think that ends in Q -- does that end in Q3 '13? So in Q4, '13, basically, there's $1 million less in cost buried in the COG line, or how do we think about that?

Yes, it's actually not right on the quarter. I think it actually expires in November, so there is a bit of a pickup in Q4 from the Phygen, from a pure P&L perspective. Let me just clarify, Bill, because I love being corrected. It was inclusive of Phygen, not exclusive of Phygen, to your first question.

Great. And the Phygen contributed about $1.3 million?

$1.2 million to $1.3 million, yes.

Added to. Okay. And then, okay, it's mid-November, isn't it? Isn't it like the 15th of the month on that, they way it was directed?

Yes. You don't get a full quarter relief from Cross. You get some pickup.

Okay. I've got a bunch of questions, so I'm flipping around here. And then as the PureGen product goes away, was that a big margin contributor, or what type of margin impact does that have?

So I think that, like most of our biologics products, it's in the 50s, low 50s, sometimes dips over to the high 40s, depending on the SKU mix. Plus we also have a commission rate that's not inconsistent with our base commissions from our distributors. So it obviously contributes something, but it's not as painful as some of the metal products when they come down.

And that, when exactly was that pulled, or did you stop selling that product?

I believe two weeks ago. I'm just confirming with the room.

Yes, two weeks ago.

Okay, so mid, so basically, it was running, it's about a $6.5 million a year product. I'm trying to think, on a monthly basis, it was about $550,000-ish a month, is what I'm trying to get at.

Between $550,000 and $600,000. Yes, you're not far off.

Okay. I'll ask one more, and then I'll jump off. Just a simple one. Is the med tech tax, as you look at this, where are you putting it in your P&L, and how much do you think it's going to cost you on an annual basis? And that's all I have. Thanks.

So we show it as an operating expense, so it's not in gross margin. It's OpEx. We estimate it's anywhere from $2.3 million to $2.7 million or $2.8 million for us. Like all good companies, we've actually been writing checks since the middle of January for this. And so that's reflected in our operating P&L as part of our guidance.

Thank you, and good quarter.

Josh Jennings, Cowen and Company.

Just first on PureGen. Is that $6 million that you're not baking into guidance -- does that have any incorporation of any pull-through of your biologics or hardware included in that assumption?

It's a net number. So we have comprehended it, and the pull-through for us is really on the ProFUSE side, and that's already comprehended in our number.

Okay, great. And then just understanding that Alphatec's more of a share gain story and not as levered to over market growth, but your commentary on US, expectation for US business growing in 2013 sort of at market levels. Can you just describe what your outlook is for the spine market in the US in 2013? And then --

I think not inconsistent with our peers and other competitors here. We're looking at a relatively stable situation right now. We're probably in the 2% to 3% in terms of category growth, and that's obviously the demographics of volume are contributing to the upside, and the impact of pricing, which again, we still see that as a pull-down on the category. We noted modest price declines in our Q4 hospital business, and we see that continuing in 2013.

Great. Any ability to give some, just -- that low single digits that you've been experiencing early in the year, you said it was stable. Is that the level? Is that what modest is?

By stable, I mean we're probably low to mid-single-digits declines. And we're probably seeing 1% to 1.5%, something like that, flow through. So we're not looking at massive declines. But it's a constant pressure.

Understood. And then lastly, just a position on distributors. One, your appetite for any incremental acquisitions similar to the Phygen deal. And then, secondarily, any insight into these recent OIG inquiries to hospitals inquiring about specific relationships with physician-owned distributors, and your sense of how the OIG progresses from here. Thanks a lot.

So I think Tom referenced it in his commentary. We do have, and we continue to maintain, a flexible distribution business. We do, on our stocking distributor side, we have a distribution policy that basically adheres to the safe harbors identified by the OIG in terms of percentage of ownership of an institution and the percentage of contributions of revenue.

So that's a proxy for, if a business model fits within our distribution policy, we are certainly open to doing business with them. We have walked away from business because of structure. And I think we've still got an opportunity for us to participate in this as we go forward.

Yes. Said another way, if that part was for sale and we could make money out of it, we'd certainly take a look at it.

Great. And then just lastly, any insight in terms of expectations for next steps for OIG or any implications for their recent inquiries?

I don't think there's anything we can provide that's additional color there.

Okay. Appreciate it. Thanks.

Glenn Novarro, RBC Capital Markets.

Yes, this is Brandon on for Glenn. Thanks for taking my question. First, I just want to touch on the strong sequential revenue uptick in the fourth quarter. Did you see any increased seasonality in the US in the fourth quarter? And then separately, did you add any big distributor that could have contributed to this performance?

I don't think there was anything. Obviously, the Phygen piece was a contributor. The biologics growth was a big contributor. I don't think we added any significant distributors in Q4.

We had some new products. Remember, we licensed NEXoss. We introduced the BridgePoint product. So it's basically our plan starting to gain legs, which is what we talked about, right? Continuous flow of new products, sales force productivity, and add to that accretive licenses and acquisitions. So lo and behold, I think it's starting to have an impact.

Okay, that's helpful. And then Medtronic recently reported and noted some softness in January in Europe. Can you guys talk a little bit about what you're seeing in Europe at the beginning of the year and if you're seeing this same degree of softness?

Well, you saw our international results were good. Our direct markets, we saw good growth, and so that's Italy and the UK and our French market. We saw some strength out of Eastern Europe. But certainly, Greece and Turkey and some of those places aren't answering the phone right now. But we're all setting that. You'll remember that Alphatec Spine made an investment in Brazil to create our own business to drive business in Central, South, and Mexico. That's starting to have a great impact for us. And Japan. So I think we've got a very well-balanced international portfolio.

Okay, but has anything changed in the European market in the first couple of months of 2013, I guess, is my question.

No, nothing at the macro level, no.

Okay. And then last question. Can you provide just an update on that commercial reimbursement in spine. Has that gotten any better or gotten any worse? Thanks.

I think it's taking a little longer to get the approvals for fusions, particularly DDD. Some of the carriers are requiring longer conservative care times. So it's just been pushed back a little bit.

Thank you. (Operator Instructions.) Mark Landy, Summer Street Research.

Good evening folks, and a good quarter. Just picking up a little bit on Brazil, kind of Latin America, registration comment and getting through ANVISA, how far along their process are you, and how many of the key products have you gotten through their process and ready to be sold and distributed in those markets--in Brazil?

It's an excellent question. So today, our strength there is with the traditional Scient'X products from our French facility. They were registered either before the acquisition or after the acquisition. So they've been successful with the Scient'X products.

Some markets, they're already selling Alphatec, Mexico being an example. The approval for Brazil for the Alphatec products is expected in the second half of this year. We've gone through a couple of the stages, including the site inspection, and we would hope to see Brazil approval come through in the second half of the year, and we should be in the market next year in a big way, thanks to the footprint we have in not only in Brazil, but Central and South America.

Les, in terms of the Scient'X approvals, are very under reciprocity, or did they go through the comment approval?

I'm not sure I understand that question. I'm sorry. And I'm looking at people around the table, and they're all staring at me as well.

That's okay. There was a period, and I think it's closing, or it's become a lot more difficult, to get approval of products in Brazil. You went through, it was foreign approval reciprocity. So if you had a CE mark or approval in a foreign country, Brazil would honor that approval, and there would be reciprocity and ability to sell.

So I think I -- I don't know the answer to your question. Scient'X products were approved when I got here. I can tell you we have gone through the long process of getting US-manufactured products approved. It is a lengthy process. That's why it's not done. But the important steps are having them visit the facility here, which you have to wait for, and we have achieved that. And they have accepted our filing. So we've done the hard part. It's really just a matter of waiting for a stamped document. You know, we're at that stage, but it could be -- we expect it in the second half of the year. What happened with Scient'X, I really don't have a lot of clarity.

Okay, I'll ask my next question offline relating to that. But then, if we look at that, a little bit at PureGen, you've had some heartache and grief with that relationship. Is there a Plan B? You know, it's not out of the woods yet with the FDA, and now with the 483s. When do you think about a Plan B for that product?

It's a good product. The physicians that use it are getting outstanding success with it. Our partner, Parcell's, continues to work hard with us. I think we are working hard with the FDA, and they're listening to us. And we have several meetings coming up with the FDA in the not-too-distant future. So I'm very hopeful that a product that actually meets a need in the market and has been successful in implementing and accelerating fusions. But I always have a Plan B, but I don't think we're ready to discuss it today.

That's fair enough. And then, Les, it's more of a philosophical, high-level question. You implemented the strategy of increasing the cadence of improvements and product line extensions over novel product development, obviously given the issues at the FDA, and not what only you are going through, but the entire industry is going through. How has that gone, and how sustainable is that strategy, and when do you have to start thinking about really pushing the Scient'X novelties through the agency?

We've had a good track record with the agency in the last few months. You'll see, if you look at our press releases, we've had several products approved. The only major product we're waiting on is Solis. We've talked about that. But in our guidance, I think Solis and Epicage are the only products --

Not in the guidance.

They're not in guidance, though in guidance that we gave today are only products that are already approved by the FDA.

Okay, so right now, there's still a little bit of runway room with the line extensions and the improvements, and there really isn't that much pressure on really taking the, let's say, the aging spine products through the agency?

Yes, you're right.

Okay. Thanks, guys.

But don't forget an important step in the growth of this Company, we've proven now that we fill gaps in our product range through accretive licensing deals. And we only do deals these days that have FDA approval or are about to get FDA approval. So NEXoss and Pegasus being two examples where we work with fine partners who had already achieved the FDA milestones prior to us getting into the business.

Okay, thanks. Appreciate it.

Matt Dolan, Roth Capital.

This is Chris Lewis on the line for Matt. Thanks for taking the questions. I was hoping you could just talk a little bit about the Phygen surgeon conversion cycle. Just at this point, how many of those surgeons have become active ordering customers, and what level of activity have you seen from those converted surgeons at this point?

That's probably too much information. Frankly, I will tell you we have a strategy. We had a number of surgeons in, as Tom talked about, here a couple of weeks ago. And we spent a whole day educating and demonstrating the product. We have another one of those next weekend, I believe. And so we actually have a strategy and a plan, but I think I'd rather not talk about how many surgeons -- I mean, it is a competitive business, after all. But obviously, in the guidance, we expect to see a steady stream of surgeons converting to our products as the year goes by.

Okay, fair enough. Thanks.

Thank you. And I see no further questions at this time. I'd like to turn the conference back to Mr. Cross for any concluding remarks.

Well, thanks, everybody. They were good questions, and thanks for listening in on our call, and we look forward to updating you as we finish the next quarter. So thank you very much, and we'll disconnect now.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.