Alphatec Holdings, Inc.

Good afternoon, everyone, and welcome to the webcast of ASEC's first quarter 2021 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. During the call, you may hear the company refer to reported amounts, which in accordance with 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. Leading today's call will be ATEC's Chairman and CEO, Pat Miles, and CFO, Todd Koning. I will turn the call over to Pat Miles.

Thanks very much and welcome to the Q1 2021 ATEC conference call. We will clearly be making some forward-looking statements, so if you review the forward-looking statement at your leisure, Let me start by saying I'm super proud of the ATEC family. And one of the things we talk about around here is we always say that revenue chases value creation. And so over the last eight quarters, we grew at an average of 33%. And so I would say that we're well positioned for continued industry-leading growth. And we'll talk more about these, but really revolutionizing spine surgery through the launch of PTP. A lot of excitement there. Increasing clinical prowess and progressing towards sales exclusivity. We'll talk more about that. Elevating surgeon and sales education through our new state-of-the-art facility. We have a beautiful facility and are hosting a lot of people, and the traction is palpable. And then really how do we improve information from diagnosis through follow-up? with really a set standard, which is what EOS is going to provide. And so, you know, historically we've provided a bit of a scorecard of leading indicators, and we'll continue to do the same, but expect some evolution in how we view the demographics of our business. So for Q1, strong momentum, 50% year-over-year growth, 10th consecutive quarter of double-digit year-over-year growth, 77% new product revenue contribution, which is clearly up over the previous couple of years, 17% year-over-year growth in revenue per surgeon, 13% year-over-year growth in average revenue per case, and we're seeing a tick up in the average products sold per category. And so the one thing that you're going to find is that our commitments will remain unchanged, and we will accelerate growth by prioritizing these key initiatives. And we will continue to create clinical distinction. That's where we build an organic product development machine and advance our information-based core competence. Through clinical distinction, we will compel surgeon adoption, and we measure that objectively through the increased revenue and product sold per surgery. And then also perpetually revitalize the sales force, making sure that we have the congruence between the inside and the outside of the company and that things are going well. So we'll jump into the scorecard really under each of the commitments. And so I would say that the organic innovation machine will continue to create clinical distinction really through a sophisticated understanding of what approach-based technology compels surgeon adoption. And so probably the thing that is most evident is you're really seeing an adoption of the products that really serve a procedure. And so the interesting thing is clearly we've gone from really nothing in the inception of our turnaround to 22 to 56 to 77%. So I think you would affirm the fact that based upon what we're picking and based upon the reflection of the growth and of the adoption of the new products that we're creating clinical distinction. And so that part is clear. I think when you start to look at examples of relevant additions, so we launched what's called Invictus OCT. And OCT stands for occipital cervical thoracic. And historically, companies would design a posterior cervical system completely separate from a thoracolumbar system. And in doing that, they rarely function elegantly in concert. And so in the short time we've been here, we've launched a completely contiguous system from occiput to ilium. When we say organic innovation machine, I would tell you that that's a reflection of that. When you look at Invictus as a system, it is a completely comprehensive system, really from the head to the alien. It has very consistent instrument design, color coding, nomenclature. The function and the confidence is very much the same, and it really kind of speaks to the development speed. In addition to Invictus OCT, we also launch Invictus Medialized Mod. This adds a cortical screw option for circumstances that surgeons require a medialized trajectory. you'll start to see that influence the posterior fixation number. However, we didn't return to revolutionized spine solely based upon individual products. We designed multiple products based upon the specific requirements of a procedure. And so one of the things that is truly making for a difference in why you're seeing such lateral surgery prowess is because we designed a specific procedure based upon the specific requirements associated with that technique. And so when you start to see the adoption of PTP happening very quickly, it really harkens back to work that we've previously done in terms of designing for the specific requirement. A litmus test always is that what you'll find is people will initially adopt something in a very kind of a simple application. And when you see them start to march more toward complex surgery, what you're realizing is that you're getting significant traction. And so we're seeing this thing applied to more complex surgery. I think the other attractive part is we've directly witnessed and interfaced with surgeons who have tried prone lateral. And candidly, they've struggled. And prone lateral is cobbling together instruments that aren't designed for the specific requirements of. And so these guys have tried prone lateral and candidly had not a very good experience, and only to try PTP and have a great experience. And so we feel very bullish in our firm based upon our lateral prowess. And I think when you have the type of experience and you have the type of of understanding of the technique. These are the types of things that you do. And so as we've shown, where we've invested, we've prospered. And I would say that we're in the very early stages of enjoying a really kind of a long growth profile. And so the technology we're developing is not only moving the needle clinically, but also financially. And so I think when you start to look at the ROI on these investments, I think you have to look into things like SAFOP, which is really part of what we call alpha informatics, and that's the AIX on the slide, but also lateral and posterior fixation. And so when you think about AIX, that's the conduit that we're going to deliver the EOS information through. And so, again, I think what you're going to see is continued enthusiasm on that front. And then you see a growth of 76%, and this is all back since 2018, in the phase two investments in ALIF, PLIF, and TLIF. And then we're starting a lot of investments across the cervical and biologics portfolio that you'll continue to see a growing contribution over time. And so as we look at how we did in Q1 with regard to compelling adoption, I would say we continue to grow in average products categories per surgery, which is clearly the the reflection. Kind of an interesting statistic you can see by this slide, we're slightly above 1.9 average product categories per surgery. The year-over-year growth in average revenue per case is 13%. The year-over-year growth in revenue per surgeon at 17%. I think what's interesting, though, is rarely do you see companies grow sequentially. And so from Q4 to Q1, we had a little bump in the growth of our top line. I think the interesting part is there is a slight dip in the volume of procedures. And when you start to think of convoy sales and the influence it has on the top line number, then I think that you can appreciate the fact of why that is really important. And so I think now to kind of jump into, you know, the thinking around proceduralization and convoy sales, It's also good to reflect on what drives adoption. What ultimately drives adoption is better surgery and better outcomes. One of the things that is interesting to me is that there's still so much opportunity to make spine surgery better and just generally improve spine care. And I think there's some in the business who conflate spine surgery with pedicle screw placement. And spine surgery is much more than placing pedicle screws or mitigating poor screw placement. It is decompression, stabilization, and alignment. And so I love our investment thesis, and it's focused on the prioritized list of procedural requirements and not solely on the specific requirements. And I think that what you'll see is that will continue to differentiate us as a company. I think, too, when you start to look at what drives adoption and what are the core elements of defining the future, and I think that it's things like economics, that will drive a greater position forward in predictive analytics. And I think that really kind of driving clinical and financial decision-making is much about what we're doing with regard to EOS, but it's also about preparing for the best spine procedure. And when we think about that in the near term, we're thinking about convoy sales. And when you look at the convoy sales, you have to look at – them uh not just blended but individually and one of the things that i think is exciting is when you when you create something like ptp what happens is you get to make the rules and you get to make the rules based upon the required number of products that creates uh predictability and so as you can see a disciplined approach to this effort ultimately outputs a more consistent numeric reflection of convoy sales. And so as we start to think about the future and we start to think about economics and we start to think about predictive analytics and we start to think about how EOS rolls in here, the ability to start to understand what type of procedure goes with what pathology and what the economic profile is, is really kind of a game-changing opportunity. So we're very excited about that. The other commitment that we talk about is really the revitalization of our sales force. And we worked out, I think, most of those who are not going the distance with us and And really kind of the march now is toward exclusivity. We want to dominate the very thinking. And you can see the walk over the years from 72% in terms of contribution of revenue up to 95%. And that group grew at 60%. And so the importance there is that what we do is expand geographically. And so I would still consider us a very pocketed group. And when you start to look at 95%, it would suggest, gosh, these guys must be done. But I would say, as all the 95% reflects, is the current sales force in place. And what we have is still a lot of geographical holes that we still need to plug with the type of prowess that exists in many of our markets. One other comment is I'm exceedingly enthusiastic with regard to the maturity and the prowess of our sales management team. I've got to say, for a company this size, they've got a lot going on and a lot of experience and a lot of prowess. As stated, we still have a lot of geographies that remain under or completely without ATIC representation. Our focus is still recruiting those with clinical acumen and that will go the distance with us. Our interest is still kind of a number around 50-ish of distributors and about a $4 million contribution and And clearly, that's a relatively dynamic number. We're running north of that in some and south of it in others. But that's kind of the update as it relates to what's going on in the business. And it's a real pleasure for me to turn the call now over to Todd Corning, our new EVP and CFO. So over to you, Todd.

Thank you, Pat. And good afternoon, everybody. Before I go through the first quarter financial results, I want to express just how delighted I am to be here at ATEC. Having previously worked closely with many on this team, I'm well acquainted with the profound caliber of committed spine expertise that has been assembled here. I've watched from the periphery as ATEC posted quarter after quarter of phenomenal growth. And, in fact, ATEC grew 30% last year, a year in which there was little to no growth from anyone other than ATEC. Needless to say, I wholeheartedly recognize the opportunity for significant value creation that lies ahead, and I'm eager to contribute to that success. As ATEC grows into a much larger spine company, I intend to expand on the strong foundation that has been established to build a world-class finance organization, one capable of scaling the company through rapid domestic growth and eventually expansion outside of the U.S. This inaugural earnings release certainly marks a solid start to an exciting year for ATEC, and I am honored that now, I get to be an instrumental part of it. I'll begin with revenue. We had a great start to the year with the first quarter U.S. revenue of $43.7 million, reflecting growth of 50% compared to the prior year period. Total revenue, which includes the contribution of our international supply agreement, was $44.1 million in the quarter, up 47% compared to the same quarter last year. Increased search and adoption of new products and procedures and the continued revitalization of ATEC's strategic distribution channel offset the pressure we saw on surgical volumes early in the quarter. It is evident that our ability to deliver clinically distinctive procedural solutions is compelling surgeon adoption. Continuing through the remainder of the P&L, non-GAAP U.S. gross margin was 77.9% in the first quarter, roughly in line with the prior year quarter. Excluded from the non-GAAP gross margin number are E&O charges related to legacy products, which were down almost 100 basis points compared to last year as a percent of sales. E&O charges are beginning to normalize and will continue to do so following years of transitioning to new products. Operating expenses continue to reflect consistent, thoughtful investments to support rapid, long-term growth. Non-GAAP R&D was 5.3 million and approximately 12% of sales in the first quarter, compared to 3.8 million and approximately 13% of sales in the prior year quarter. The increase on an absolute dollar basis was driven by continued investment to support organic portfolio expansion. Non-GAAP SG&A was $36.5 million and approximately 83% of sales in the first quarter compared to $24.5 million and approximately 81% of sales in the prior year period. The increase was driven by continued expansion and professionalization of the ATEC distribution network and increased variable selling costs related to strong performance in the quarter. Total non-GAAP operating expense was $42 million and approximately 95% of sales in the first quarter, compared to $28.5 million and 95% of sales in the prior year period. This level of investment in operating expense reflects the priority we have placed on fueling our organic innovation machine and transitioning the sales channel to support our industry-leading sales growth. Turning to the balance sheet, we secured approximately $132 million through the pipe funding that closed in March. As a result, we ended the quarter with just over $190 million in cash, and roughly $100 million of that remains earmarked to fund the EOS transaction. With the remaining balance, plus the $40 million remaining on the squadron credit facility that we have in place, we are well positioned to continue to invest in growth. Cash use of approximately $34 million in the first quarter was driven primarily by CapEx, which continues to account for more than 62% of cash burns. We are investing in the instrument kits and implant inventory to support our strong sales growth through an expanding product portfolio and commercial distribution footprint. The EOS transaction continues to progress as planned. A few weeks ago on March 30th, we secured clearance from the AMF to commence our cash tender offer for EOS's outstanding shares in convertible bonds. On April 1st, the opening of the offer occurred and will close tomorrow, likely to be followed by a second phase of the offer. As a reminder, once we own 90% or more of EOS's share capital and voting rights, it will trigger a squeeze out of any remaining non-tendered EOS shares according to French law and regulation. As of March 31st, we had received tender commitments for 23% of outstanding shares and recently filed with the AMF that we exceeded 25% ownership from our open market purchases. We are pleased with the progress and continue to expect the transaction to close during the current quarter. We will provide updated revenue guidance, including EOS, when we report financial results for the second quarter of 2021. Now turning to our 2021 outlook. As a result of the strength of the first quarter and continued strong momentum, we are increasing full-year 2021 U.S. revenue guidance to approximately $188 million, which implies growth of approximately 33% on a year-over-year basis. Our growth will continue to be driven by the impact of clinical distinction, which is the ultimate catalyst for expanding both surgeon adoption and our strategic sales network. Including the international supply agreement, we now anticipate full year 2021 total revenue to approximate $190 million. This guidance contemplates the termination of our international supply agreement in August of this year. Given the quarter to quarter variability we saw in 2020, I encourage you to assess our revenue results and our full year guidance from a two-year compound annual growth rate basis. And when you do that for our 2021 U.S. revenue guidance, you'll see that we are growing 32% on average over the last two years. We believe this consistent level of growth through the past two years is industry-leading, as you can see in the chart. Now, in summary, I'm a firm believer in the long-term thesis of the company and the mission and vision that Pat has challenged us to achieve. I'm already engaged in ways to meaningfully contribute to ATEC's distinction-fueled evolution into the standard bearer in spines. I'm also eager to establish relationships with the ATEC investor base. So please, feel free to reach out to me directly, either with questions or just to say hello. And with that, I'll turn the call back over to Pat.