Alphatec Holdings Inc (ATEC) 2013 Q1 法說會逐字稿

Ladies and Gentlemen, thank you for standing by. I am 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 2013 financial and operating results.

Speaking today will be Les Cross, Alphatec's Chairman and Chief Executive Officer; Tom McLeer, Senior Vice President of US Commercial Operations; and Mike O'Neill, Vice President and Chief Financial Officer. Also on the call today is Ebun Garner, our General Counsel.

During our prepared remarks, you will 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 call is being recorded today, April 30, 2013. A replay of the event will be available later 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 include statements related to the Company's revenue and adjusted EBITDA expectations for 2013, the success of the Company's initiatives to drive global sales growth, the ability to achieve surgeon conversions in connection with our Phygen acquisition, contributions to the Company's revenue and earnings in 2013 from the introduction of new products and sales and marketing strategies, and the timing of US FDA and other foreign and domestic governmental agency decisions that impact commercialization and distribution of our 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 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 2012 annual report on Form 10-K for the year ended December 31, 2012, which we filed on March 5, 2013, 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. With that, I'll hand the call over to Les.

Great. Thank you, Mark. Good day, everyone, and welcome to Alphatec Spine's conference call to discuss our first-quarter financial and operating results. I am pleased to report another great quarter for Alphatec Spine. Overall, our first-quarter performance met most of our expectations and follows the excellent results we posted in the fourth quarter of last year.

It is clear to me that the investments we made into Alphatec last year -- into the leadership team, innovation, operations, and business development activities are paying dividends, and they are enabling us to execute better in a challenging spine market. I'm extremely proud of the entire Alphatec Spine team for embracing our transformation last year and stepping up and delivering another excellent quarter in Q1.

We are off to a great start for the new year. Following the strong fourth quarter, Alphatec's revenue growth in the first quarter continued to outpace the overall spine market, which at best remains flat. Our consolidated first-quarter revenue totaled $50.4 million, growing at 4.1% over prior year or 6.4% on a constant currency basis. We are extremely pleased to achieve this excellent result in spite of the continued headwinds in the global spine market.

Adjusted EBITDA also came in strong, at $6.1 million or 12.1% as a percentage of revenue. Mark will cover the financial details in much greater in a few moments. Our US revenues totaled $33.1 million, representing a growth of almost 2% over the first quarter of 2012. This was driven by the Company's acquisition of Phygen.

Excluding Phygen, US sales trailed last year's first quarter by approximately $1 million on a same-day sales basis. Our US hospital business was impacted by an uptick in pricing pressure, which Tom will discuss in great detail shortly.

But we did see an increase in units sold. Additionally, the loss of PureGen sales in Q1 2013 amounted to approximately $1 million.

I would like to provide an update on Phygen. While Phygen's run rate is a little under our expectations at this point, we are executing on our integration plan and have made excellent progress in reaching out to the many Phygen surgeons. We continue to believe that Phygen and its network of over 100 leading US spine surgeons represents a significant growth opportunity for Alphatec in 2013 and beyond.

I would like to provide a quick update on the status of PureGen, which remains on shipping hold that we placed it in last quarter. As we mentioned last quarter, the FDA conducted site inspections of each of the two vendors who are collectively responsible for the procurement and processing and storage and shipment of the PureGen product.

They were issued several Form 483 observations as it related to PureGen. Each of these vendors has filed their response to the observation with the FDA and are waiting for the FDA to provide feedback on the response prior to us resuming shipment of PureGen. As mentioned last quarter, our revenue guidance for 2013 assumed only a modest contribution from PureGen this year.

As it relates to our domestic business, I would like to address the recent OIG Special Fraud Alert that was issued in March regarding PODs, or physician-owned distributors. We are in complete agreement with the OIG's position that all physician-owned distributors, or PODs, must be formed and act in compliance with all the applicable laws.

As we have stated many times in the past, Alphatec has worked with outside counsel to develop a stocking distribution policy that requires the very few PODs that we work with to be in compliance with the applicable laws. Following the issuance of the Special Fraud Alert, Alphatec once again worked with outside counsel to review our stocking distributor policy, and as a result, we have amended the policy to ensure that our policy addresses all of the concerns of the OIG that was raised in the Special Fraud Alert.

In light of the Special Fraud Alert, it's likely that we will see a shift in some surgeons' practices. Some will move back into a more traditional model, utilizing our existent or employed sales force. Some entities may reach out to the OIG for an advisory opinion to determine whether their business structural model is satisfactory in the eyes of the OIG, and we strongly are encouraging to do this. In addition, hospitals may drive change by only electing to buy and be billed directly for a manufacturer such as Alphatec. However, regardless of the changes, Alphatec's flexible distribution strategy should enable us to succeed in this changing, evolving environment.

Our international revenues totaled $17.4 million, representing a growth of 9.3% over the first quarter of 2012 or approximately 16.4% on a constant currency basis. Our international business continues to represent more than a third of our total business.

Our subsidiary in Japan once again performed very well, but its growth in the first quarter was significantly impacted by the steep devaluation of the Japanese yen against the US dollar. On a constant currency basis, our Japanese subsidiary posted a growth of 9.2%.

We continue to have high expectations for our new product pipeline this year, and we are seeing a good initial traction with our first launches. These launches have been very exciting and very successful, and Tom will cover these in greater detail shortly.

In the cervical segment, our Pegasus anchored interbody device, a unique implant that offers a single-step deployment of the anchors into the adjacent vertebrae, has really been well received. Likewise, the lumbar spine, the recent FDA 510(k) market clearance of the Alphatec Solus, has enabled us to get an early jump on the evaluation case of this product. We are very pleased to see the interest growing in the marketplace for this product. Both of them have incredible potential as we move forward.

Last, I'm pleased to announce that we just received FDA 510(k) market clearance for our new improved Epicage system. This represents the third consecutive product that has received market clearance from the FDA more quickly than we had anticipated. The team is doing a great job.

At this time, I would like to invite Tom McLeer, our Senior VP of our US Commercial Operations, to provide some more color around the US commercial results and strategy.

Thanks, Les. We are certainly pleased with the results from the US commercial group, considering some of the hurdles we faced in Q1. Let me start with some of the spine market fundamentals that we are seeing in the field.

Insurance approvals remain a slow process as insurance companies continue to ask for extended periods of conservative care, and this has slowed the case volumes for many of our key surgeons. We also continue to experience pricing pressure in some of our accounts. Hospitals are looking to implement fixed pricing for each procedure or each construct to reduce costs, even ahead of contract expirations.

In certain instances where it made sense, we did make pricing concessions to protect existing business or to gain new business. In other cases, we had to decline participation. While we continue to seek to maintain pricing, we anticipate pricing will remain a challenge as it has for the past two years.

We were able to offset a portion of the impact with an increase in unit volumes and products on contract. Another opportunity to mitigate pricing impacts in 2013 comes from our new product launch cadence that should strengthen our US implant and instrument business, which I will discuss next. In addition, we continue to use our broad Biologics portfolio to drive increases in our per-procedure revenue.

With respect to field training, we had two very successful Strike Force training meetings for our salespeople and distributors that were conducted in Chicago and Carlsbad. Training was conducted on Pegasus, Alphatec Solus, ILLICO Multi-level, and ZODIAC Deformity DVR.

As Les mentioned, we have completed the first cases for our new Pegasus anchored cervical interbody device, and all have gone well. The Pegasus anchor deployment is achieved through a unique insertion tool that is simple to operate. In contrast, competitive products deploy the anchors using a hammer to impact them. In addition, we believe Pegasus technology is superior in that surgeons have the ability to retract the anchors intra-operatively, if needed, to reposition the implant.

Thus far, cases have gone well, and Pegasus has received positive initial feedback. We are now working towards a full launch. There is continued excitement in the field with this product.

Several Alphatec Solus cases have also been completed since its relaunch, all of them with excellent results and quick operative times relative to the competition. Alphatec Solus is an anchored ALIF device that provides four points of fixation from a single deployment step.

Surgeon response has been very strong since the relaunch, and all cases have gone very well. Final evaluation cases are being conducted, and we'll then be ready for a full launch. There is keen interest in the field, and several new distributors have expressed interest in selling this product instead of competitive products.

The ILLICO multilevel and ZODIAC Deformity DVR upgrades were received with great interest at the Strike Force meetings. These products will allow our surgeons to successfully complete longer level MIS and deformity constructs. We believe that ILLICO MIS is now one of the most flexible MIS systems on the market, while ZODIAC DVR continues to expand our versatility in the deformity market.

As Les mentioned, we were pleased to receive FDA clearance for our new and improved Epicage system a couple of weeks ago. Epicage is a unique posterior interbody spacer that allows consistent midline anterior placement. Epicage is a crescent-shaped PEEK interbody device that is flexible, allowing it to be delivered through a small, straight tube.

As Epicage exits the delivery tube and enters the disk space, it flexes back to its original shape. This product will provide another option for surgeons focused on obtaining good anterior column support.

To complement our new product pipeline for 2013, we firmly believe that our mix of direct reps, independent commission agents, and stocking distributors, as well as our direct-to-hospital sales efforts provide us with a key competitive advantage in addressing our customers' needs. As the market evolves, Alphatec will continue to address the customers' needs of our surgeons, hospital, and distributor customers in a careful and thoughtful manner.

The integration of Phygen continues to move along. In addition to two very successful Phygen open houses, we have had numerous other meetings and visits with these new customers. The surgeons have been exposed to Alphatec's culture and comprehensive product offering, and much discussion is centered around the numerous synergies and opportunities created by this transaction.

Phygen's surgeons have already been involved with the evaluation of many of our new products and are providing critical input into our new product development efforts. We believe that throughout the year we will continue to accelerate the synergies and revenues provided by this acquisition.

With that, I'd now like to turn the call over to Mike for a discussion of our first-quarter financial results.

Thank you, Tom. The following remarks are related to our reported operating performance for the first quarter ended March 31, 2013. Our first quarter was a solid beginning to 2013, and we are very pleased to see positive and consistent financial results for Alphatec after a year of transition in 2012 and within a spine market that continues to be challenging.

Les already covered the discussion of global net revenues and growth rates for the first quarter, so I won't repeat those figures. Gross profit for Q1 2013 was $32.7 million or 64.9% of revenue compared to $31.8 million or 65.7% of revenue in Q1 of 2012. Gross margin in Q1 2013 held up very well considering the impacts of price and mix that were working against us.

As Les and Tom highlighted, US hospital pricing declines in Q1 2013 rose from the typically low to mid single-digit declines that we experienced throughout 2012 to mid single-digits as some of our hospitals moved to construct pricing. We anticipate being able to offset any ongoing pricing declines with higher average selling prices for the new product introductions and increased revenue per procedure, as Tom had indicated.

Gross margin was also modestly impacted by regional and product mix in the first quarter. Additionally, gross profit in the first quarter of 2013 was reduced by $1 million for the amortization of a licensed intangible asset as part of the Cross Medical settlement, which we have described in prior results calls. We have now reached the first anniversary of the settlement, and while we have parity year over year, we will still highlight the quarterly amortization charge and the impact it has on our gross margins.

In the first quarter of 2013, this represented approximately 200 basis points of margin. US gross margin was 69.7% in Q1 of 2013 compared to 70.2% in Q1 of 2012 and was primarily driven by price and mix. International gross margin was 55.8% for Q1 of 2013 versus 56.4% in Q1 of 2012.

Given the nature of our international distribution business, quarter-to-quarter fluctuations between regions and product mix influence the overall gross margin profile, and this accounts for the slight change in margin for the quarter. Q1 2013 margins for our international business improved sequentially from Q4 of 2012 by 470 basis points.

Total operating expenses for Q1 2013 were $34.1 million, an increase of $2.2 million compared to prior year of $31.9 million. Q1 2013 expenses were significantly influenced by higher legal expenses for ongoing litigation matters of approximately $1.3 million, operating expenses related to Phygen's business of $1.2 million, and a new medical device excise tax that amounted to $600,000.

Adjusted EBITDA, a measure we guide to, was $6.1 million in the first quarter of 2013 or 12.1% of revenues, compared to the $6.2 million or 12.8% of revenues reported for the first quarter of 2012. Adjusted EBITDA was reduced by the $600,000 in conjunction with the new medical device excise tax. 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.

GAAP net loss for the first quarter of 2013 was $2.6 million or negative $0.03 per share, compared to a net loss of $1.3 million or negative $0.01 per share for the first quarter of 2012. Cash and cash equivalents were $19.3 million at March 31, 2013, compared to $22.2 million reported December 31, 2012. The Company's cash position at March 31 reflects payments totaling $1 million to Cross Medical in Q1 2013 as part of the settlement discussed above, and a payment of $1.7 million to the manufacturer of the Pegasus device.

As of March 31, 2013, our net inventory position was $50.5 million, an increase of approximately $600,000 versus Q4 2012, with such increase being primarily related to implants for our new product launches. Our net accounts receivable at the end of Q1 2013 was $40.7 million, an increase of $100,000 as compared to Q1 2012 and a decrease of $300,000 as compared to Q4 of 2012.

Our AR performance has been a function of our continued diligence with respect to collections, and we are not seeing any meaningful deterioration in our days outstanding on a global basis.

And now for our guidance for the remainder of 2013. The Company continues to expect revenue for 2013 to be in the range of between $204 million and $210 million on a constant currency basis, or approximately 4% to 7% growth over 2012. The significant devaluation of the Japanese yen has impacted our first-quarter business by over $1 million. And with the expectation that the yen's exchange rate will not substantially improve in 2013, the aggregate revenue impact to the remainder of 2013 could potentially be as high as $4 million.

To provide a little more color on guidance, we hope to see a contribution from the new products this year, including Alphatec Solus and Pegasus. When combined with the Phygen surgeon conversions and strong, ongoing commercial operations internationally, we believe that we can offset some of the negative impacts on our business that we have discussed today.

As a result of these expectations, we are maintaining our guidance on a constant currency basis. Similarly, we are maintaining our adjusted EBITDA guidance, which should be in the range of $24 million to $27 million or approximately 21% to 36% growth over 2012, and representing approximately 12% to 13% of revenue. As previously stated, this guidance assumes only modest contributions from PureGen that have been realized earlier in the year.

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

Great. Thank you, Mike. As we entered 2013, our theme was execution, and we clearly have accomplished this in the first quarter. We look for the remainder of 2013 -- as we look at the remainder of 2013, we continue to expect the global spine markets will remain choppy, and we expect to see continued price pressure and reimbursement pressure.

However, with only a modest market share, our strategy to deliver a continuous flow of new products, reduce costs, reduce our working capital, and strengthen our global commercial operating team should enable Alphatec to deliver our planned results. I would like to, again, thank all the Alphatec Spine stakeholders, especially our employees, who are working incredibly hard to make Alphatec Spine a stronger company that delivers greater value to all stakeholders and world-class experience to our customers.

You have our commitment that Alphatec Spine will remain dedicated, conducting its business with a sense of urgency, accountability, and continuous improvements. Thank you. With that said, I'd like to open the call up for questions, please.

(Operator Instructions). Matt Miksic, Piper Jaffray.

Wanted to follow up on one of the incremental headwinds you described, which was this pricing -- greater pricing impact. Can you give us a sense of -- we have been kind of living with this -- well, at least by most other companies' accounts, we have been living with this sort of like mid-single digit pressure. And it sounds like you're seeing something -- if I understand it, you are seeing something incrementally worse than Q1 because of kit pricing.

Wondered if you could drill down maybe into -- is it different types of products where you're seeing more pressure? Is it uniform across your business? Any additional color you could provide would be helpful.

Yes. Okay, Matt. Thanks. So I'll go first, and I think Tom may be able to come in with some comments as well.

So I think what we've seen for the last number of quarters for our US hospital business is in the low to single mid-digit pricing declines year over year. And Q1 was slightly different for us. We hit the mid-single digit number, and that was -- it was coming about from renewals of contracts earlier than anticipated. So contracts that we were essentially dealing with for renewals later this year.

It was also dealing with construct pricing, as we mentioned. So there was an impact that we saw in the first quarter that, frankly, given the ramp of our new products that we are anticipating launching in the remainder of the year, we weren't able to have the offset that I talked about as part of the prepared remarks. But, Tom, do you have any additional comments?

Yes. I just say that we did have a variety of contract changes in Q4. A lot of these can take 3 to 6 months, sometimes longer, to work through as the hospitals move to construct pricing and try to sort all that out. So it's a little difficult to say that this will continue through the whole year, at least right now.

And, regionally, any color? Is this cropping up everywhere? Or is it east versus west, vice versa?

No. I think it was fairly uniform. Not one big GPO. It was pretty consistent all the way around.

Okay. And then I guess on the new product side, can you give us a sense, maybe, what kind of mix you were getting before? I'm assuming this low to mid was a pure pricing number, and now that's squarely mid for you. What kind of mix were you getting before that was helping you to potentially offset that, and maybe how these new products will impact that over the next, whatever it's going to be, three or four quarters..

Yes. That's a great question. This is Les. So you remember when we first started to reorganize the Company, we talked about the fact our flow of new products had really slowed to a trickle. Thanks to the focus of the team -- you remember, we talked about the fact we agreed to focus on 6 to 8 major projects.

They've all now either hit the market or have FDA approval. So I will tell you, what we have done, we have done without a lot of tailwind from new products. And so we expect to see our new product index start to contribute a lot more than it has.

So what that means is the average price we get per case will go up. And the reason we licensed our NEXoss, the synthetic biologic -- if you remember, we did that -- was so that these new products can be used with that. And that will also take the price up. So the team has done a great job without significant new products for the last several months, and now we have a rich pipeline of new products for Tom and his team to take to the market.

And would you say maybe the opportunity there is to drive a low single-digit kind of positive mix benefit for you over time, or is it potentially better?

I think that at this point in time, you've got to be thinking low single digits. I wouldn't want to get too ambitious this early in the year.

But clearly, as products like Pegasus, and Solus, and ILLICO DVR start to impact the marketplace, our average selling prices are going to be higher for those products versus what they are already.

That's great. And then on the dynamic -- just the last question here on the Fraud Alert, the OIG language around physician-owned distributorships. Can you give us some -- it's early, still; it's only been about a month or so, but any sense of how the trends -- what has the market reaction been, the transition, understanding maybe you'll get -- there will be fewer new PODs, but the folks who are invested in these structures, hospitals involved with these structures, are you getting a sense that they are coming to you to sort of potentially structure a new arrangement? Are they waiting it out? Any color as to the market response that you are seeing.

I mean, the answer to your question is yes on all those points. Some of the larger PODs that decided they should move away from the business model and would want to get their membership of physicians to zero. Some will just get out of the business, because the hospitals don't want to do business with them anymore. And some have actually gone to the OIG to ask for an opinion on their business model, which they feel is in line.

So it's a mixed bag, and I will tell you, I heard last week a new POD started up last week. So it's a real mixed bag. I know what we are doing is taking it very seriously and making sure we comply with the OIG Fraud Alert.

Right. Of course. And in a situation where a hospital doesn't want to do business with a POD, I guess, you have been doing business with the PODs; the hospital is sort of the end customer. What is your opportunity to bridge that gap and then continue the relationship with the operating surgeons in the hospital in the end?

Yes. Well, that's exactly what's happened in a couple of cases, where the hospital has actually said, we only want invoices from Alphatec. We will pay Alphatec. We don't want any invoices from any distributor. Not just PODs. A lot of hospitals are playing it very safe and saying we'll only do business with the manufacturers, not with distributors.

So it's a mixed bag. But the beauty of it is, we have said all along we have a flexible distribution strategy. If the hospital wants to buy direct from us, we are happy to work with them. If the hospital is trying to consolidate through a distributor to cut costs, we will work with the distributor if it's an appropriate distributor. So I think we will benefit from our flexible distribution strategy.

Great. Thank you, Les, for the color.

Matt Dolan, ROTH Capital Partners.

So I wanted to start on the guidance and just kind of run through what is assumed here. First, maybe Mike, you could just clarify that you used the word constant currency guidance versus, I think, reported last time. So what is your reported guidance? Should we take $4 million off the high and low end of the range?

That's what I would do if you're factoring out the impact of the yen.

Okay. Great. And then in terms of what your underlying assumptions are, can you walk us through the Phygen contribution versus how you expect to perform relative to the core spine market within that guidance?

Yes. So I think, as we have said in some of the prepared remarks, the Phygen conversion has not in Q1 gone as quickly as we would have hoped. Having said that, there's been a significant amount of activity and effort from Tom's part of the organization to really start driving some of the position conversion, as well as, frankly, get the physician input into the portfolio.

So I think that we are gaining more traction than we had. And we still have expectations that Phygen is going to be a significant contributor to our top line in 2013, and so that's still fundamentally part of the guidance. And, frankly, it contributes to the growth in the overall portfolio of the business.

So where you're not seeing Phygen contribute, are those accounts going somewhere else, or are they converting to be direct Alphatec customers?

No. In some cases they've converted to be direct Alphatec customers. What has really happened is I don't think we have sent a really good, clear message to the Phygen physicians early in this integration. Tom and I are now talking directly to the physicians. And they really do understand the value of being part of a dynamic, physician-led spine company.

So we expect to see the conversions to happen a lot faster rate. The beauty of it is the physicians are still doing business the way they used to do it. The opportunity isn't lost. We just had to reframe the message, who delivers the message, and spend time with these physicians. And based on my experience, a lot of them are going to be excited to work with us.

Okay. That's great. And then on the EBITDA side, if I look at what you did in Q1, it doesn't anticipate much improvement in the overall -- you know, the absolute number, even the margin for the remaining three quarters of the year. Can you just talk through some of the puts and takes on EBITDA?

Well, I think -- so obviously, if you look at the guidance range on revenue and you look at the Q1 split that we have, so there needs to be a clear acceleration, and all of the plans and activities that we have talked about are going to impact Q2, a softer Q3, and Q4, as that unfolds.

We are continuing to experience -- we are looking to improve our gross margins as the year unfolds. We also have to recognize that we have now got some additional bolt-on expenses as a result of Phygen. But relative to the mix of the business, that should be able to contribute. So I think that we still feel comfortable that we have an opportunity to expand our margins, but that the guidance range is appropriate for where we are.

Okay. And then, last one, Les, on your M&A strategy, can you just give us the latest there? Where are you thinking in terms of your ability to look at other deals, either licensing or outright acquisitions?

So we have nothing that we are ready to announce, but Tom and I have quite a shopping list that we are working our way through. I think most people would agree we need to get the Phygen integration behind us and deliver the expected results. But as that happens, I think you can expect to see us continue to look around, both in the US and outside the US.

Thank you.

(Operator Instructions).

Well, LaToya, it looks like we don't have any more questions. Is that correct?

There are no further questions at this time.

Well, great. So thank you for your help, and thank you for everyone that listened today. And we look forward to talking to you again, and hopefully reporting another great quarter. Thank you.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.