Alphatec Holdings, Inc.

Good afternoon everyone and welcome to the webcast of ATEC's fourth quarter and full year 2020 financial results. 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. Pat Miles, and CFO Jeff Black. Now I will turn the call over to Pat Miles.

Welcome, everybody, and good afternoon to the Q4 2020 ATEC conference call. Clearly, today we will be making some forward statements, so if you'd familiarize yourself with that, I will save you from having to listen to me read it. Things are going well. Really, no complaints. I think, you know, when we say well, we oftentimes like to quantify what that means, and so average revenue growth over the past eight quarters has been 30%. And so I think that that's a good start to how we're turning around the company and the momentum that it's created. I guess more importantly, and what I guess provides me the most optimism is really what we're doing is we're fulfilling the mission of revolutionizing the approach to spine surgery. And I think the launch of our prone transois PTP is really a reflection of that. And and I'll give you a little bit more on that to come. We're also increasing the clinical prowess, really the know-how of our sales force and expanding in exclusivity, which is exceedingly important. Elevating surgeon and sales training through the state-of-the-art education facility. We just opened it up about a month ago. We have a seven-station cadaveric lab. We have an expanded biomechanical lab. We have an expanded what we call technology advancement group or machine shop. And so the facility really is starting to fit in with the very strategic priorities that we've advanced. The other thing is really kind of the greenfield opportunity we have with furthering clinical sophistication through improved information with EOS. So that's very exciting to us. So if you were to kind of look back and just Q4 seems a long way away, but it was a good quarter. Year-over-year U.S. revenue growth at 38%. Thank you for joining us. One thing that you'll find about us is that you're going to hear the same thing over and over as it relates to really the strategic imperatives. And our view is if you're going to make for meaning in this business, you better do something different and you better do something better. And that's what the whole create clinical distinction is all about. And we feel like we're making progress. And we'll delve into each of these priorities and give you a little bit of color. Also, compelling surgeon adoption comes from being better and creating clinical distinction, and we feel like we're doing that, and that really helps us revitalize the sales channel that ultimately translates what we're doing with regard to the procedures. And so just to jump right into creating clinical distinction, you start to think about what the march has been over the past few years, and what we've really kind of had is a reasonably good approach in terms of making sure that we're making the investments at the proper time in terms of building things. So 2020 was reflective of 11 product launches. And more importantly, we start to think about what the effect's been on the procedures. And so when you start to think about what the investment thesis is, you have to say, gosh, the return's been pretty good. And where we've invested, we've made significant progress. And probably the places that I'm most proud of, and it's not just because it's the biggest area of growth, but you start to look at what we call alpha informatics, and that's the AIX part. It includes SAFOP, but you look at SAFOP and Lateral, and it's places of significant experience in the company. I would tell you that we have the industry's best, and not for a moment will I ever back off saying that the new home of Lateral sits up here at ATEC. and also from a posterior fixation perspective there's, suggesting there's significant product development aptitude would be an understatement. And then we're also making progress in the other procedures in ALIF, PLIF and TLIF and this year should be a significant contribution on the cervical and biologic side seeing as we're obviating some of the legacy products that were here when we arrived and so When you start to look at how we think about making the investments and where we make the investments, we think of the world in procedural means. This is really intended to provide you a little bit of a view. When we think about making things better, what we do is we think about what the procedure needs and what we should do and what priority with regard to the specific product development. Some of the elements that I think need to be called out is when you start to look at at sophistication, say, gosh, you know, SafeOp EMG, SafeOp SSEP, maybe not unto themselves the greatest revenue drivers, but they mean so much as it relates to ultimately dominating things like lateral surgery. And then you go over to the right and you start to see, gosh, we break up lateral and lateral transois LTP and prone transois, which is PTP, and start to think of things like positioners as being very meaningful as it relates to the dynamics of being procedurally focused. And so, Love this slide in that really I think that there's different approaches in terms of the way that people think about the business. And our pursuit is really in the perfect procedure. How do we ultimately fulfill the requirements of the perfect procedure? And then what we do is we build solutions from the ground up to address really the unmet specific procedural requirements versus just reactively trying to jam technology into something that candidly may not fit. And so... It's a pursuit that we have that I think is the value creation engine of what we're doing. And ultimately what it does is it compels surgeon adoption. Surgeons get it. And surgeons, I think, very much appreciate this tech because it feels like we're aligned with them in their pursuit to make sure that they're serving the interests of patients. And so if you look at kind of the numeric reflection of success, we keep walking up the product categories per case to 1.9 in aggregate. The year-over-year growth and average revenue per case at 13%. This just means we're doing more and more sophisticated things. And then revenue per surgeon. So we're compelling them better, I guess, in that we just keep seeing the growth. But the reason for that really is what the investment thesis is. And the investment thesis is in things that ultimately make a difference. I remember talking to a surgeon friend not long ago and and we were just prioritizing those things that ultimately make a difference in the success of his treating patients. And oftentimes the implants may be fourth or fifth in terms of importance. And I think so often companies think that spine surgery is implants and it's just not the case. What we are is stewards to the effort and I love the fact that what we're doing is engaging technology in a way that integrates so that people can make objective, actionable decisions during a surgery to better fulfill the requirements of care. You also start to think about adoption and you start to think, gosh, you know, how much of the surgery are we getting and what is the opportunity? One of the quotes around here that I so appreciate is sophistication is in direct relation to the number of distinctions you draw to a subject. When you start to look at what we're doing with regard to lateral, clearly we have LTP and PTP. And then you start to look at the number of products per surgery that we can ultimately fulfill to create the pursuit of the perfect procedure. And you realize that we're literally just, you know, it's the tip of the iceberg, so to speak, with regard to the different ways that we can ultimately influence care for the better. And so we believe that that creates value. And so when you start to think about how we're translating that to the field, and revitalizing our sales channel, it's going very well. Hats off to that group. I will tell you, I think that from a sales management perspective, it's as good as it gets. We have a great team and I'm exceedingly proud of them. The percentage of sales driven by our strategic channel is 95% and the revenue growth from that strategic distribution group is 47%. The great part is that We're growing. The growth in U.S. revenue per distributor is significant and has been, and that's been a big part of the turnaround. We still have a ton of open geographies, and we keep the walk of trying to maximize the number of people on the street and minimize the volume of agents and making sure that those agents continue to grow in size. But with that, I'll turn it over to Jeff Black.

Thank you, Pat, and thank you all for joining us today. I'll just spend a few quick minutes on some color commentary on the results that we announced today. First with revenue. Following the initial COVID impact that the industry saw, we all saw in Q1 and Q2, we did see a robust recovery acceleration in our U.S. product revenue, really on the strength of new and expanding product portfolio that Pat just walked you through. We actually finished the year ahead of our initial 2020 guidance, even though we did see some pressure on volumes in late Q4 from the uptick in COVID cases. On the OUS international front, our international supply agreement for our legacy products is winding down as expected, and that agreement expires in mid-2021. On gross margins, when you look at our gross margins, we're running in the high 70% range on a non-GAAP basis. and that excludes non-cash charges for excess and obsolescence. On a GAAP basis, we're running in the low 70%. So the reason we're stripping out E&O for now is that over the past two years, we've been taking really outsized reserves on our legacy product inventory representing about 800 basis points in 2019, about 500 basis points in 2020. So we'll continue to see Some of this E&O drag in 2021, but by the end of the year, that should be primarily behind us. On a normalized basis, we continue to expect E&O to be somewhere between 300 and 400 basis points and our gap margins in the mid-70% range. A couple of comments on the P&L. Consistent with prior quarters, we focused investments in product development and sales channel. For this view, we strip out stock-based compensation, litigation, restructuring, transaction-related costs, really to provide a sense of our true core investments. And when you look at R&D as a percentage of revenue, it continues to track above peers as we continue to fill the product pipeline. You can expect a similar profile into 2021. SG&A, it's a similar story in that growth in our SG&A It really represents an increase in variable costs associated with the rampant revenue, as well as key investments we're making in our strategic sales channel, going broader into new geographies and also deeper into existing geographies. As the business continues to scale, we'll need to make investments in G&A-related infrastructure, but to date, we've really held the line on G&A and are already beginning to see cost leverage on the G&A line. in the fourth quarter, we shored up the balance sheet pretty significantly. We reduced debt. We secured capital required to fund continued investments in the business as well as the purchase of our pending acquisition with EOS. So we secured $250 million in new capital during the fourth quarter through public and private placements of common stock. And we're better positioned than ever from a balance sheet perspective to execute the business. In terms of cash balance, Thank you for joining us. including the pipe that we secured in December and closed just this past Monday. We have pro forma cash and available cash through our credit facility with Squadron for about $280 million. On to revenue guidance, we are reaffirming guidance that we provided in the fourth quarter, $176 million in U.S. revenue that represents 25% revenue growth. That will continue to be driven by Strong Surgeon Adoption, Expanding Strategic Distribution, and we'll continue to see a ramp up in new products. Our international supply agreement, as I mentioned, will terminate in August of 2021, and so we're seeing that ramp down as expected. And again, as you all know, the EOS transaction, which we expect to close in the second quarter, not including this guidance, and we'll update guidance when that transaction closes. And finally, just to wrap up with an update on EOS, as you likely saw, we expect to file the tender offer tomorrow to execute the transaction. We still expect that we're on track that it'll close in the second quarter. When you look at their 2020 results, they reported a month or two ago up just under 20% year-over-year in revenue. Recurring revenue is strong. They're seeing a strong book of business. Even though they did get impacted by pandemic-related elements on the capital business, they are seeing nice, robust uptake and demand in their new products. So we're excited about bringing them on board. Very significant opportunities for us to take advantage of cross-selling opportunities. Very minimal overlap in the customer bases and real ability to access their installed base with our in-plan business and vice versa. We're excited about that transaction and more on that as that evolves. And with that, I'll turn it back over to Pat.