Alphatec Holdings, Inc.

Good afternoon, everyone, and welcome to Alphatec's third quarter 2020 financial results and recent corporate highlights announcement. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on 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 the U.S. GAAP, as well as non-GAAP or pro forma measures. Reconciliations 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. Joining us on the call today will be ATEX Chairman and CEO Pat Miles and CFO Jeff Black. Now, I'll turn the call over to Pat Miles, Chairman and CEO.

Welcome, everybody, to the Q3 2020 Financial Results Conference Call. In this conference call, you will hear some forward-looking statements. I will save you reading the forward-looking statement, but I would ask that you review it. So I would tell you that Q3 2020 was a good quarter for ATEC. Clearly, the highlights are a revenue growth of greater than 40% in the US. We believe that that will outpace the rest of industry. Also, super excited about the follow-on offering. It really creates a runway to execute on our growth initiatives. And then lastly, really the clinical experience just continues to evolve. And so really our continued approach-based new products will really drive our long-term growth. And so let's delve a little bit more deeply into the scorecard. And I think you'll find that the momentum, that the numbers under the numbers are good. And so I told you a greater than 40% year-over-year US revenue, 20% year-over-year growth in revenue per surgeon. The utilization of new products is greater than 70%, hats off to the organic innovation machine, and 13% year-over-year growth in average revenue per case, up 32% since Q3 of 2018, which makes for our eighth consecutive quarter of double-digit year-over-year growth and the average product categories sold per surgery at 1.8%. What you'll find is our commitments haven't changed. They likely won't change for a little while in that we will continue to create clinical distinction. And what that means is really continue to build that organic innovation machine that we talk about. The other one is continue to compel surgeon adoption, which means how do we start to increase the revenue and number of products sold per surgery really through innovative means? and then lastly, continue to revitalize the sales channel and advance toward exclusivity in the U.S. Taking a deeper look, if you say, gosh, how are they doing from the whole creating clinical distinction thing? We're building the organic innovation machine and I would tell you that our target is always between 8 and 10 products a year and if you look to the to the right you'll see that in 2020 we will launch north of 10 products. I think the real litmus test though is in the new product revenue contribution. That means is people are utilizing the new stuff that we're creating. But really I think our approach based sophistication is really the means by which we're attracting surgeons. And I can't think of two more prominent surgeons helping us continue advanced spine by really creating clinical distinction. Then on your left, you have Luiz Pimenta, the surgeon who really pioneered lateral surgery. And then on the right, you have Jurgen Harms, which was the pioneer of T-list surgery. These two surgeons are working with us to obsolete their last best effort. And so we have a great run in front of us based upon the types of things that these two are doing. I think the first way we're doing that is through PTP. And PTP is not prone lateral. And a lot of people say, you know, we do prone lateral. I got to tell you, when you've done close to 600 surgeries, you understand the requirements better than anyone. What happens is you start to understand what the real needs of this technique are. You start to understand that orthogonality enhances predictability and reproducibility of the lateral approach. What that means is it's going to be transferable to more surgeons based upon, again, the elegance of this orthogonal approach. Additionally, it increases optionality and expands applications in thoracolumbar surgery. and what that means is that your ability to start from the back and go to the front and go back to the back really enables you to approach more spine surgeries more efficiently. And then lastly, we always talk about the tenets of surgery being decompression, stabilization and alignment and the prone position really improves The restoration of alignment. And so we believe that previously developed lateral systems do not fulfill the requirements of prone lateral surgery and will not be reproducible. And so in addition to PTP, we are also working with Professor Harms and taking TLIFT to the next level. And we are doing that and working on achieving improved alignment through less disruptive surgery. So to date, we've launched the SIGMA T-LIFT. And really, the SIGMA element of it is a pedicle-based access system built to deliver less disruptive, more predictable surgery, provides direct visualization of key anatomic landmarks, as well as when we start to think about convoyed sales and we say, gosh, putting products together to ultimately reflect predictability in a procedure, you start to see that this SIGMA retractor is used with Invictus MIS MOD which is delivered with single step. Identity is used in the inner body space and Safe-Op neural informatics system is utilized to make sure that the screws are in the right place and the neural elements are okay. But if you start to think about, you know, creating clinical distinction and compelling surgeon adoption. What makes us different really is our focus on investing in making spine surgery better, which means the entire approach. Often industry makes decisions purely on implants. When you start to think about compelling surgeon adoption through clinical distinction, the only way you really do that is when you are aligned and have kind of an aligned interest shared with the surgeons. And if you look to the left, oftentimes industry makes decisions only on making slight differences in the implants that ultimately are the currency. But when you invest on the right in the entire procedure, what it ultimately creates is really an aligned interest with the surgeon who ultimately has to serve the patient. And so that becomes really a big part of what we do. And so when we start to think about how we compel surgeons and what the metrics are that reflect success there, we start to see, gosh, is there an increased revenue and number of products sold per procedure? And I mentioned the 1.8, and I'll get into that a little bit more. We start to think about a year-over-year growth in cases with greater than one product sold is 50%. So you have to think, gosh, there's traction there. year-over-year growth and average revenue per case is up 13%. That's 32% versus Q3 of 18. And then year-over-year growth and revenue per surgeon is 20%. So again, I think that these things speak to the number under the number and really create a little bit of momentum. I would tell you there's really three key ways that we compel increased surgeon adoption. And one of them is you create confidence. And what that means is when a surgeon has more confidence, what they start doing is pushing more complex surgery your way. And so more complex surgery oftentimes means more levels. And so I would tell you that's one way. The other way is in new procedures in terms of us providing them technology that ultimately avails their ability to do things that they couldn't do before. The ability to start to provide them optionality and efficiency of things that candidly are better. And then the last thing is what we talk about a lot, which becomes the whole convoy sales, which becomes are the different products that we would design and deliver for this proceduralization being adopted. And so I think that that's a really great segue into the convoy sales and really the impact of the alpha informatics slash safe op catalyst. what the catalyst has been to much of our products per procedure reflection. And when you start to say, gosh, where is it most impacted? And so you look at the blended rate of 1.8 products per procedure. You saw the Sigma-T lit that we just launched. You're going to see an increase in that area. You clearly already see it in the lateral space, and that suggests that there's a lot of adoption in terms of where we're heading from a lateral perspective. When you take a step back and you start to view the investment thesis and how things have done and how things are paying off, I think, again, this kind of all functions together. If you look at the phase one investments and you start to see what the return on that's been, it's really information, which is the SAFOP platform, lateral, which is a great growth area, as well as tier fixation as we earn the entire procedure. And that's up significantly clearly. and then phase two becomes the A-LIFT, PLIFT and T-LIFT, a lot of growth there. And as I think I mentioned in the near past, we're in the very early stages of an alpha experience with regard to a number of cervical products that will ultimately complement the portfolio as well. And so moving on to the sales force and revitalizing the sales channel, can't be more excited about what's going on there. We're advancing really toward exclusivity. And that's all about how do you compel people and how do you compel surgeons ultimately drives the sales force to be compelled as well. And I think that you're seeing a very good performance on that end. And so you're seeing U.S. revenue growth year over year among top 20 distributors at 43%, percentage of sales driven by strategic channel at 92%, and U.S. revenue growth from strategic distribution at 47%. And so I think that those people who are engaged and becoming clinically adept are really driving significant growth. The great part is there's so much opportunity for expansion. So our early phase reflects 103% growth in U.S. revenue per distributor since 2018. That means we're decreasing the number of distributors, but they're creating more revenue per distributor, which is really kind of a reflection of professionalizing The crazy part is we still have a ton of geographies that are significantly under or completely unrepresented. We're still building this thing out and we're doing it with momentum, which is the most comforting part. Then you look at the whole 92% of our revenue contribution coming from the strategic sales network. On the right, you see really the revenue per distributor making the march that one would expect with regard to the level of success I think that we're having. I'm going to let Jeff delve into the details financially, and so why don't I turn it over to Jeff.

Thank you, Pat, and thank you all for joining the call today. Just some commentary on revenue, which we announced earlier in the month, or actually in October and then announced again today. Strong momentum in Q3, robust recovery that we saw in late second quarter, continued throughout the quarter. We saw growth in surge in adoption led by new products. which are now more than 70% of our revenues. And we saw continued evolution of the sales channel as Pat alluded to. Surgeon counts were up. We expanded geographies. We're also going deeper into existing geographies with our strategic sales channel. In fact, revenue from the strategic channel was actually up 47% year over year. September we saw the strongest month in U.S. revenue in the company's history. Our average daily sales actually in the third quarter surpassed the peak we saw in the fourth quarter of 2019, which is indicative of momentum because typically a fourth quarter is strongest in this industry. And as expected, volumes under our supply agreement for legacy products with Globus continue to wind down as that agreement nears the end of its term. In terms of revenue guidance, how we think about the rest of the year and then into 2021, We expect to see sequential U.S. revenue growth of 5% to 10% in the fourth quarter with full-year U.S. revenues at $140 million to $142 million. That compares to our initial U.S. revenue guidance prior to the pandemic was $128 million to $131 million, and total revenue we had previously guided $130 million to $134 million. So, again, continued momentum. And in 2021, we expect U.S. revenue growth of approximately 25% with international revenues under a supply agreement continuing to wind down through expiration of the Globus Agreement in early Q3. Moving to gross margin, we maintain gap margins in the low 70% range, even with the impact of SAFOB intangible amortization, which kicked in during the year. We're still seeing drag from excess and obsolete lessons charges on legacy product lines, but that impact has reduced from about 800 basis points in 2019 to about 600 in 2020. We'll continue to see improvements as we put legacy E&O impact behind us. We expect that our normalized E&O is really more in the 300 to 400 basis points range. So with that, we continue to expect gross margins in the medium term to be in the mid-70% range. On to the P&L on a non-GAAP functional basis, meaning if you strip out non-cash stock-based compensation litigation in terms of our run rate expenses on R&D and SG&A, you'll see that we're continuing to make investments in R&D and the sales channel fueling top-line momentum, supporting long-term sustainable growth. We did start to see some leverage in the business in Q3 over last year, but over the medium term, we still will continue to expect to make what we'll call outsized investments relative to our peers in product development and sales channel. In SG&A, you see that dollar growth. It's coming strictly from sales investment. In fact, G&A has remained down to relatively flat over the past 15 quarters. And then finally, moving on to the balance sheet, the follow-up offering in October has provided us with the runway to continue to aggressively fund our growth initiatives. Our cash usage, as you see here, driven primarily by investment needed to seed the supply chain with instruments, implant sets, to support a growing revenue base that's now more than 70% from new products. So when you look at the last four quarters, on average, 50% of our operating cash use has been CapEx. It was nearly 70% in Q3. With the fundraise that we executed in October, we're now well positioned to fund the continued momentum that we're seeing, which will continue to fuel our expected growth that is well above industry rates. And with that, I'll turn it back over to Pat.