Alphatec Holdings, Inc. Q4 FY2021 Earnings Call

Good afternoon, everyone, and welcome to the webcast of ATEC's Fourth Quarter and Full-Year 2021 Financial Results. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on the current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the Company refer to reported amounts, which are in accordance with U.S. GAAP as well as non-GAAP or pro forma measures. Reconciliation of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Leading today's call will be ATEC's Chairman and CEO, Pat Miles; and CFO, Todd Koning. Now I will turn the call over to Pat Miles.

Thanks so much, Paul, and welcome, everybody, to ATEC's Q4 full-year 2021 financial results. In the call, you will find some forward-looking statements. So if you'd like to review that at your leisure, I would invite you to do so. 2021 was a good year. I would tell you that during a pandemic year, we grew to $243 million in total revenue, which was a 68% year-over-year growth rate. A bunch of highlights that you'll hear about during the call, we continue to pioneer PTP, which has gone exceedingly well. It is the largest revenue growth contributor in 2021. We launched more than 10 products. We closed the EOS imaging acquisition, which contributed $30 million to full year revenue. We opened a new headquarters, which is absolutely beautiful and increased sales in surgeon education capacity, which is key to our effort moving forward. We trained greater than 400 surgeons. We opened up a distribution center in Memphis to further the foundational building effort and closed a $350 million convertible debt offering to fuel investment in future growth. Looking at Q4 2021, we had 42% organic revenue growth, 23% growth in surgeon users, 9% growth in average revenue per case, and 84% of the products used were new. This marked our 13th consecutive quarter of double-digit revenue growth, with a growth rate of 11% to 13% being greater than 20%. The excitement here is really sector-leading growth, showing a three-year organic U.S. revenue CAGR of 36%. We've built one of MedTech's best growth stories, and our best is yet to come. Our focus continues on clinical distinction, compelling surgeon adoption, and evolving a sales force that keeps getting better. Starting with the clinical distinction scorecard, as you know, we are in pursuit of the perfect spine procedure. Spine still has challenges and a ton of opportunity. We've released approximately 40 products from 2018 through 2021, which reinforces significant revenue generated by new products, which is 84%. More than 40% of Q4 revenue growth was driven by our lateral portfolio, showcasing the unmatched know-how and sophistication of ATEC. We aren’t only taking from lateral surgery; we’re also converting users from PLIF and TLIF, adapting to their preferences for operating in the prone position. Additionally, we’re seeing an increase in complex case utilization, including corpectomy for cancer and trauma. For years, minimally invasive surgery has been relegated to hospitals, but we're now seeing a 60-minute, 360-degree fusion in an outpatient ASC setting. This is enabled by automated neurophysiology. Understanding nerve health when performing a lateral approach is crucial to avoid injury. Our technology uniquely identifies where the nerve is in the psoas. From 2018, with the acquisition of SafeOp, we've pursued automated SSEPs, a complex process few can perform. The growth in ATEC surgeon training visits indicates an enthusiasm for our offerings. On the EOS front, we're enthusiastic about how to use the technology to increase system placements, advancing surgery at pre, intra, and post-operative stages. We’ve achieved $13 million in EOS-related revenue for Q4, and the development team in France is doing a great job in launching products. EOS is not only critical in enhancing clinical outcomes but also ensuring that surgeons who have never seen us before can become familiar with our products. We’ve identified a path to drive sales and utilization, and the number of scans per day at leading facilities highlights our momentum in the sector. Our clinical influence is crucial, especially during the diagnostic phase of surgery. We've changed access dynamics for surgeons, allowing us to integrate pre-op films with intra-op data. The long-term data value we collect will enhance pre-surgery planning and ultimately turn our operational dynamics into an efficient process. Our commitment to spine surgery focuses on ensuring the best for surgeons and the best outcomes for patients. The excitement around PTP is palpable, making it a game changer.

Well, thanks, Pat, and good afternoon, everybody. Thank you for joining us today. I'll begin with revenue. Fourth quarter total revenue was $74 million, reflecting 68% growth over the prior year, and an 18% growth compared to the third quarter. Our $74 million in revenue is comprised of $61 million in organic revenue and $13 million of EOS contribution. Fourth quarter organic revenue of $61 million grew 42% compared to the prior-year period, and revenue from lateral procedures contributed over 40% to growth in the quarter with strong reception to the recently launched ALIF stand-alone interbody system as a notable contributor. The resurgence of COVID-19 and continued hospital labor shortages pressured surgical procedure volumes late last year, but the magnitude of impact was lower in the fourth quarter than in the third. The fourth quarter year-over-year volume growth was 30%, driven by our sales footprint and the continued expansion of surgeon adoption, with surgeon users up by 23% compared to last year. Average revenue per case grew 9% year-over-year as the revenue mix shifts towards more complex procedures. We recognized $13 million of EOS-related revenue for the fourth quarter, reflecting strong deliveries and representing pro forma growth of 42% compared to revenue on a stand-alone basis in Q4 of 2020. For the full year 2021, total revenue was $243 million, reflecting 68% growth compared to 2020, consisting of $212 million in U.S. organic revenue, $30 million contribution from EOS, and $1 million from a now-terminated international supply agreement. Total non-GAAP operating expenses amounted to $226 million, around 93% of sales, reflecting the expansion and professionalization of our distribution network, surgeon training, and efforts to support our growing business. We ended the fourth quarter with $187 million in cash, with operating cash use of $44 million related to investments to support growth. For 2022, we expect full-year total revenue to approximate $305 million, representing 25% growth. We anticipate organic revenue near $260 million, implying growth of 23% compared to 2021, with EOS-related revenue around $45 million. To clarify, we expect about 1/3 of the EOS revenue to be recurring and 2/3 related to placements. Historically, about 36% of revenue was recognized in the first half of the year.

Great stuff, Todd. Thanks so much. The reality is so much of this becomes about the creation of confidence, and the creation of confidence comes when things go right. PTP is doing just that. We're taking share of a large market and expanding by converting traditional TLIF and PLIF surgeons. We're also increasing case complexity and offering outpatient reconstructive spine surgery in just 60 minutes. PTP has established itself as a category leader in minimally invasive surgery. This creates a halo effect on our other best-in-class portfolio elements, facilitating our distribution efforts as we expand internationally. The EOS opportunity is significant for accessing hospitals and surgeons, translating data, and evolving our industry. We believe the decade belongs to ATEC, and we're excited about the long-term journey ahead. Additionally, I want to invite you to the 2022 ATEC Investor Day in beautiful Carlsbad, California, at our headquarters, where you'll see management presentations, a facility tour, Q&A, and demonstrations of PTP and EOS. You can sign up on our website. With that, we will close and take questions.

We will now open the floor for questions. The first question comes from Brooks O'Neil with Lake Street Capital. Your line is open.

Congratulations on a great year and the progress you're making. I don't understand why you're not going to add this Investor Day in Minneapolis, Minnesota this year. Well, let me just ask you, obviously tremendous success with PTP, and it sounds like proceduralization in spine is really working for ATEC. Can we expect any additional new procedures in 2022 and beyond? Or do you think you've laid out the areas that are most impactful for you guys?

Yes. Thanks a lot, Brooks. Spine surgery is still not yet predictable in the hands of the masses, which really avails itself to so many opportunities. The vast majority of surgeries are currently being performed at the L4 to S1 level, with significant potential for anterior column surgery from L4 to S1 and other approaches. We believe there's still much to be done in proceduralization and cervical opportunities as well. Our commitment extends beyond implants to aligning with surgeons, equipping them with everything necessary for improved interventions.

Pat, can you talk a little bit more about the PCP growth that you saw in Q4? And what's contemplated for 2022? It seems like there's a great opportunity in transitioning into PLIF and TLIF cases, which you mentioned. Can you give us more insight into that growth and its progress?

Yes. Thanks, Matt. We've trained more than 400 surgeons, indicating a strong enthusiasm for our procedure. As is the case in our business, there can be a lag in seeing immediate results after training. Surgeons begin with conventional cases before ramping up to more complex procedures. As you see guys who were trained in earlier quarters, we expect to see that reflected in Q4 and the first quarter of 2022. We're optimistic about the transitions from PLIF and TLIF as they embrace lateral approaches, driven by the predictable surgical outcomes we offer.

Great end of the year. I'd love to hear more about your vision regarding the migration of spine surgeries into ASCs. How much of ATEC's revenue currently comes from ASCs, and how do you anticipate the industry evolving with this shift? There have been mixed reactions regarding ASC potential in spine—what is your outlook?

I've been involved since 1995, and I recall the early efforts to introduce minimally invasive surgery. While we've seen promises in outpatient spine surgery, the market has lacked meaningful solutions until now. The combination of escalating clinical efficacy and the pandemic's recent shifts towards same-day discharges has catalyzed an increasing transition toward ASCs. We believe procedures like single-level spondylolisthesis can certainly be done in outpatient settings, marking a progression toward greater ASC adoption.

I'll just go with the boilerplate question about Q1. I assume January was challenging. Just curious what you're seeing in the first quarter and maybe the best way to frame it is, are you guys comfortable with where consensus is in the first quarter, something like $66 million or $67 million?

Thanks, Matt. As many have reported, COVID impacted January due to the Omicron variant. However, our average daily sales have improved week by week, bettering the initial sales trends. January is better than February, and we feel optimistic about it trending in the right direction. We are comfortable with consensus estimates of $65 million and $66 million and anticipate generally effective adaptations to the pandemic moving forward.

Could we talk a bit more about EOS? Can you help us understand how your guidance breaks down regarding capital versus service-based revenues in 2022?

Certainly, Kyle. We are merging implant sales management with EOS sales. The integration of our teams is an exciting development that allows us to leverage access to facilities previously unavailable. How we come to pricing will vary among customers, but we'll explore both capital placements and volume-based rebates. We're optimistic about the opportunities this business brings and how it merges with our traditional model.

You mentioned volume-based EOS agreements. Are these predominantly based in the U.S. due to prior international challenges? Any insight into the magnitude of those benefits would be appreciated.

Currently, our international sales are limited, with significant U.S. traction. Our EOS strategy focuses on domestic placements for our systems, yielding maximum growth potential. We're excited to leverage EOS to accommodate surgeons who may have previously overlooked our products. This targeted and empowered access will enable us to effectively scale our strategy within the U.S. market.

Can you shed light on your growth philosophy amid COVID, staffing challenges, and supply chain concerns?

We maintain an outlook similar to last year's order of magnitude with both viral and staffing challenges. The supply chain issues, while present, have not stopped us from making progress as we manage our risks effectively. In Q1, we feel the trends are positive, but overall, we’ll adapt to whatever impact the pandemic and supply chains have on our operations this year.

Regarding EOS, what are your expectations for gross margins, and how would you define your data-sharing goals for the current year?

Our data-sharing capabilities are nascent but hold immense potential. We're investing in building a high-trust IT environment, targeting improvements in patient-reported outcomes, and aggregating imaging data to enable comprehensive analytics. These enable us to explore clinical, operational, and economic insights that can redefine how we approach spine surgeries. We are dedicated to creating a data-rich environment that aids both surgeons and hospitals.

As for the EOS gross margins, they tend to be in the mid- to high 30s, influenced by distribution agreements. However, most of our focus is on maximizing U.S. margins, which we expect to improve with time. Integrating our resources in the U.S. will provide significant advantages.

Could you expand a bit on your international expansion plans, including product offerings and targeted geographies?

We're very excited about our international opportunities, focusing initially on New Zealand, Australia, Japan, and the U.K. Our goal is to create an impactful entry in these markets, mirroring our strategies in North America. The healthcare approaches in these countries align with our methodology, providing a strong foundation for growth.

Our commitment to these markets involves our best offerings. We believe it is essential for both patients and clinicians to present our full suite of products and services for spine surgery. Our approach ensures a consistent message across our international teams and enhances access to the best care.

We can't be more excited about the progress and are committed to building a long-term partnership with everyone involved in ATEC’s journey. Thank you very much for your interest.

This concludes today's webcast. Thank you for participating. You may now disconnect.