Alphatec Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2023

There are 10 speakers on the call.

Operator

Afternoon, everyone, and welcome to the webcast of ATEC's Third Quarter 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 this call, you may hear the company refer to non GAAP, pro form a or adjusted measures.

Operator

Reconciliations of non GAAP measures to U. S. GAAP can be found in the supplemental financial tables included in today's 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 ATEX' Chairman and CEO, Pat Miles and CFO, Todd Koning. Now, I will turn the call over to Pat Miles.

Speaker 1

Thanks, Regina, and welcome everybody to the Q3 2023 financial results. There is going to be some forward looking statements. So if you would read that at your leisure, that would be greatly appreciated. And so, our spine focused momentum continues. So revenue for the quarter was $118,000,000 32 percent revenue growth.

Speaker 1

The surgical revenue growth was also 32% And a positive adjusted EBITDA of $2,000,000 So just a few highlights. We achieved 24% volume growth and 6% growth And revenue per procedure, drove $14,000,000 in EOS revenue, that's a growth rate of 30%, Launched Calibrate LTX, an expandable implant for lateral procedures, so nice to be in the disposable game, Delivered 2nd consecutive quarter of positive adjusted EBITDA with 8 60 basis points of margin expansion, raised $150,000,000 to accelerate Investment in revenue generating assets while executing to profitability and cash flow commitments and enhanced our Board of Directors with deep Spine prowess. So, super excited about adding Keith and Dave to the team from a BOD perspective. So, our commitments haven't changed. We're still applying our 100 percent spine focus, which we think is super important to create clinical distinctions.

Speaker 1

That means we're going to continue to do better and deeper work. We're going to continue to compel surgeon adoptions. We love to continue to do better, more distinctive work. And clearly, the surgeons will apply that to their patients for improved care and just a great opportunity from a market disruption perspective. So we want to continue to elevate Distribution and continue to deliver better solutions.

Speaker 1

And so, I think many see spine as commoditized. And usually when markets are commoditized, the results are predictable. When you think about spine, you see a revision Rate in adult deformity of 25% and in degenerative a 10% to 15% revision rate, that is not In any way predictable nor commoditized. And so we think that minimizing the clinical variables in spine through proceduralization is a very big Part of making something better. And so we design and develop and integrate technology to address the goals of spine surgery, which is decompression, stabilization alignment, specific to each approach.

Speaker 1

And so we design the elements to work together for efficiency sake. And we believe that if Money is tokenized time. Things like PTP that fulfills the surgical goals in less time with a patient under less anesthesia is value Creation immediately. And so when you give surgeons back time and predictability, what you do is you earn their confidence. And so when we earn their confidence, what happens is, they expand ATEC product utilization in more conventional procedures.

Speaker 1

So You start to see PLIF and TLIF and ALIF and ACDF and posterior cervical be utilized in a much more common way. And so We have just really begun our pursuit to increase predictability and reproducibility. And so, our commitments to advanced spine surgery are palpable. And so when you start to think about how you do that, we think about informatics, which is a big part of what we're doing, which is standardizing Imaging or really through standardized imaging, quantifying global alignment, we think is a great opportunity to create objectivity to the greatest correlative of a long term outcome. We think we could inform spine surgery much better and much more widely with automated tools, and we'll start seeing that in full release in mid-twenty 20 We're also very excited about Valence, which is the navigation robotic system.

Speaker 1

We're going to integrate it into the workflow of all of our procedures and that's going to enhance surgical precision while reducing radiation. At NASS this year, we launched Calibrate LTX, so we are expanding the sophistication of our lateral Approach with a lateral expandable implant designed to enable precise control of lordosis and discite restoration. And so, When you start to think about informatics or great influence, we think about EOs and we think about really what we're doing From a design perspective around Catalyst, it is going to be the most relevant system in spine. And You can see a lot's going on. We've gotten several FDA clearances in automated surgical planning as well as our patient specific rod.

Speaker 1

So congrats to our regulatory team who continues to crush it. But we think that things like knowing before surgery Through automated alignment reports and automated three d models that are good to start to preoperatively understand what we're going to do in the operating room and then integrate The pre op elements into the operative experience, again, furthers predictability. And then evaluating that or assessing that against the post op experience It's really going to change the way that spine surgeons think about preoperative planning and interoperative integration. And so we are off and running. We're going to start to evaluate that stuff Late this year and early next and can't be more excited about what's going on with our ecosystem.

Speaker 1

So It is truly end to end. So our ability to understand preoperatively, provide automation to the surgeon, integrate that into the interoperative experience And then inform what's next with regard to the next preoperative plan. So, We feel like that type of distinction continues to compel multifaceted surgeon adoption. And so we had a ton of surgeons through here this quarter. We had greater than 130 trained in Q3 of 'twenty three.

Speaker 1

We continue to earn More of each surgeon's surgeries. And so the surgeon utilization all the way back from 2018 continues to go up into the right, which we love. And the whole convoy sales in terms of proceduralization continues to march up. And so, I think from a demographic perspective, we're totally bullish with regard to what's going And so, we have been one of the fastest growers or the fastest Not one of them, the fastest grower. But we always believe that our best is yet to come.

Speaker 1

And when you start to look at demographically what's going on, We think that not only the stuff where we're driving clinical distinction, but the market dynamics really avails an opportunity that we think is really profoundly unique. And so our opportunity to create distinction within the elements of our distribution is very, very apparent. And so We're going to do 2 things. We're going to expand our footprint. And the first thing we're going to do is we're going to continue to address The third of geographies are un- or under penetrated.

Speaker 1

We are less than a 5% market shareholder. And so Our opportunity is significant to continue to expand our market share. Places where we have distribution and solid distribution, We have approximately 25% share in very focal areas. So we've always talked about us having a focal footprint. Where we have committed, we have grown and We've demanded a significant market share.

Speaker 1

We believe that we can do that across the country more and more readily. I think that the environment provides us that opportunity to capitalize on market uncertainties to improve quality and quantity of our funnel, strategically Filling gaps, some major markets still are greenfield opportunities. So, we feel great about it. So, not only are we going to expand footprint, we're going to increase Our existing team, if you look at same store sales, they're in the 30% range. So you love the growth profile of the people who have been with us for a while.

Speaker 1

So we're going to further penetrate adjacent markets within existing territories, advance teams' clinical aptitude and continue to earn And so, the spine industry has served us up A heck of an opportunity and we are positioned to capitalize on the market disruption. I think those of you who have followed the market since January of 'twenty three have seen disruption With regard to the Orthofix SeaSpine assembly, the Globus Nuva assembly, The change in leadership at Orthofix, we think all of these things are opportunities for us to ultimately capitalize on. And so We've already added 30 professionals and we will continue to be disrupted as it relates to the expansion Of a more informed team. And so we will boldly lean into an unprecedented opportunity and wanted to provide a little bit of Clarity just in terms of historically how we used to have to compete in a more of a conventional market, and it was more of a 1 by 1 by 1. It was a very Gradual linear sales talent on boarding.

Speaker 1

And so and then it was a linear investment in revenue generating assets. With this market disruption, we think it served us up really an unbelievable opportunity. And now the opportunity is completely different and it's nonlinear, Both from a talent on boarding perspective as well as an investment profile of revenue generating assets. So The opportunity is palpable. We cannot be more excited.

Speaker 1

And with that, I will hand it over to Todd.

Speaker 2

Well, thank you, Pat, and good afternoon, everybody. We appreciate you joining us on the call today. So, I'll begin with revenue. The 3rd quarter revenue was 100 $18,000,000 up 32% over the prior year and up 1% compared to the previous quarter. The $118,000,000 in revenue was comprised of $104,000,000 in surgical revenue and $14,000,000 of EOS revenue.

Speaker 2

3rd quarter surgical revenue of 104,000,000 dollars increased 32% compared to the prior year period and was up $1,500,000 sequentially with one less selling day compared to Q3 of 2022 and compared to Q2 of 2023. Additionally, the year over year growth of 32% is on top of a 53% surgical revenue growth comparison in Q3 of last year. Procedural volume grew 24% in the 3rd quarter, reflecting strong surgeons adoption With growth in the number of surgeons utilizing our procedural solutions up 25%. Average revenue per case expanded 6% year over year due to continued mix from the momentum of our lateral franchise, the continued increase of our biologics attach rate, and an increase in case complexity. Lateral performance continued to be strong and drove increases in both procedural volume and revenue per case.

Speaker 2

With the recent update to our cervical procedural offering, Cervical revenue also contributed significantly to growth. Given cervical cases have lower case ASP than our overall average, This was a slight headwind to growth in revenue per case. EOS revenue in the Q3 was $14,000,000 up 30% compared to last year with solid execution on deliveries and installations. Working through the remainder of the P and L, 3rd quarter non GAAP gross margin was 72%, up 130 basis points Compared to the prior year, the year over year increase was primarily driven by the EOS gross margin, which is benefiting from strong execution in addressing the backlog of service needs, In addition to the pricing initiatives we put in place, 3rd quarter non GAAP R and D was $13,000,000 and approximately 11% of sales, compared to $10,000,000 12 percent of sales in the prior year. The increase on an absolute dollar basis was driven by continued investment in organic innovation, Including approximately $1,000,000 of investment associated with Valence, the robotic navigation platform we acquired in April of this year.

Speaker 2

Non GAAP SG and A was $80,000,000 and approximately 68% of sales in the 3rd quarter compared to $67,000,000 and 75% of sales in the prior year period. We delivered 6.80 basis points of improvement year over year. That is noteworthy as we begin to lap the significant leverage gains achieved last year, including SG and A leverage of $860,000,000,000 in the prior year quarter. The majority of the improvement in the Q3 of 2023 was driven by variable selling expense with a balance driven by infrastructure leverage and net of about 90 basis points of investment related to continued efforts establishing our international presence. Total non GAAP operating expense amounted to $94,000,000 and approximately 79% of sales in the 3rd quarter, Compared to $78,000,000 87 percent of sales in the prior year, demonstrating 7.30 basis points of operating leverage year over year.

Speaker 2

Adjusted EBITDA was over $2,000,000 and approximately 2% of sales in the 3rd quarter compared to $6,000,000 loss and negative 7% sales in the prior year period. This represents 8 60 points of margin expansion and the drop through of approximately 30% of the year over year growth in sales dollars. It is worth noting that it was in Q3 of last year that we began to see significant adjusted EBITDA margin expansion. So this quarter's strong operating performance demonstrates our ability to both We are pleased to have achieved the 2nd consecutive quarter of positive adjusted EBITDA performance that reinforces our confidence in We ended the Q3 with $123,000,000 in cash. That along with proceeds from our recent secondary offering positions us with over $260,000,000 on the balance sheet to take full advantage of the opportunities ahead, which I'll cover more in a moment.

Speaker 2

Operating cash used totaled $37,000,000 of which approximately 90% was related to investments to support growth, primarily the inventory and instruments that facilitate our growing distribution footprint and new product launches. Adjusted EBITDA improvements are benefiting operating cash use and we expect that to continue through the balance of this year and into next as we've now inflected to positive adjusted EBITDA. We shared a chart on the bottom of this slide that demonstrates the percentage of free cash used for inventory and instruments. As we've expanded profit margins, A larger portion of cash use is going toward investment in the revenue generating assets that support sales growth. The expansion of profit margins will enable us to achieve cash flow breakeven On schedule as we communicated in our long range plan, debt at carrying value was $523,000,000 inclusive of a $50,000,000 draw on the Braid Well term loan facility.

Speaker 2

Now turning our outlook for the full year 2023. We raised 2023 revenue guidance when we preannounced 3rd quarter ahead of the NAST conference a few weeks ago. We expect full year 2023 total revenue growth of 35% to approximately $472,000,000 That includes 2023 surgical revenue growth of approximately 37 percent to $414,000,000 and EOS revenue growth of approximately 21% to 58,000,000 As sales growth drives leverage across our business, we expect to continue to achieve significant adjusted EBITDA progress this year. In conjunction with increased top line guidance, We are raising full year adjusted EBITDA guidance to $3,000,000 representing 8 60 basis points of margin expansion. The increased guide is in line with the framework we've shared, specifically that we anticipate about 10% of revenue upside relative to previous guidance to flow through to adjusted EBITDA, while the balance will be reinvested to drive long term top line growth.

Speaker 2

The next slide provides additional context for updated 2023 guidance. I'll start by sharing how our expectations for procedural volume and average revenue per surgery growth shape surgical revenue guidance. We continue to train surgeons at a robust rate, which drives both surgeon adoption and utilization. Training surgeons builds loyalty and enables surgeons to work up the procedural complexity curve, both of which increase utilization. In the middle chart is a testament to the consistent ramp in utilization that our surgeon cohorts have demonstrated each year.

Speaker 2

Due to the strong momentum of these dynamics, we now expect mid-20s percent procedural volume growth for the full year 2023 compared to low-20s volume growth expected previously. Average revenue per surgery grows as our mix shift towards procedures that require more products per surgery like PTP and LTP And towards surgeries with greater complexity, all of which feature higher revenue per procedure than our overall average. The gradual addition of expandable implants to our portfolio and increasing biologic attach rate are also contributing. Strong reception to the upgraded cervical procedure offerings We have introduced over the course of the last year offsets the growth in revenue per surgery to some degree as cervical cases feature a lower selling price than our other procedures. Collectively, we continue to expect these dynamics to drive growth in average revenue per surgery at a high single digit percent rate for the full year.

Speaker 2

With respect to the rest of the P and L, revenue growth has continued to fuel not just meaningful operating leverage, But also solid outperformance relative to the profitability commitments we shared as part of our long range financial plan last May. Guidance for adjusted EBITDA of $3,000,000 for this full year has from breakeven expectations at the start of the year and that is net of approximately $4,000,000 related to the Valence R and D investment that we added after acquiring the technology in April. The $3,000,000 of adjusted EBITDA implies 8 60 basis points of improvement and approximately 26% drop through on the year over year dollar sales growth. That inflection to positive adjusted EBITDA has made our path to cash flow breakeven increasingly clear. The components That are delivering leverage have been consistent with what we described in our long range plan.

Speaker 2

At that time, we committed to 2,500 basis points of operating leverage And over the 2021 to 2025 time horizon and our guidance implies we are about halfway there in 2023. The 2,500 basis points of improvement 2025 entails about 300 basis points of contribution from R and D margin, about 1,000 basis points related to variable selling rate Another 1200 basis points contribution from SG and A infrastructure leverage. The improving variable selling rate and the infrastructure leverage that sales growth has enabled over the last several quarters Give us great confidence to continue investing in growth while achieving our profitability commitments. I'll turn next to the secondary offering that closed just over a week ago. Pat walked through where we stand in terms of our U.

Speaker 2

S. Distribution footprint, where roughly 1 third of territories, including some of our country's most populated areas are on or under covered by ATEC representation. Industry disruption has unlocked an extraordinary opportunity for us to onboard entire teams of highly seasoned sales Professionals from disrupted companies and we expect continued recruitment success. These tenured professionals ramp toward productivity much more quickly than a sales professional new to lateral surgery or new to spine. And we need to fully support their transition to ATEC with sets and inventory they will need to serve their surgeon customers.

Speaker 2

The The $150,000,000 we raised will fund investment in those revenue generating assets, not just for the teams as we onboarding today, but for the teams we expect to bring on over this next year. Armed with this capital, we can lean into the opportunity ahead and sustainably expand market share. I would also like to highlight that The asset investment we are funding have an attractive ROI. Dollars 75,000,000 invested in sets and inventory supports $100,000,000 in annual revenues in each of the next 5 to 7 years. That upfront investment generally delivers about $30,000,000 in free cash flow in its 1st year, followed by about $50,000,000 of free cash flow in each of the following years.

Speaker 2

Conservatively assuming the assets are in circulation for 5 years implies a 3x return on investment. So while growing market share in spine is capital intensive, The returns at scale are very strong. I want to be very clear that we remain fully committed to the profitability walk we shared in conjunction with the release of our long range plan in May 2022. This year, we have achieved adjusted EBITDA breakeven ahead of plan and have raised full year guidance from 0 at the start of the year to $3,000,000 today, net of our investment in the Valynce robotic navigation platform. Additionally, we've communicated and are operating to a construct that will drop 10% of Any revenue outperformance compared to revenue guidance through to adjusted EBITDA.

Speaker 2

For example, we have increased revenue guidance by $34,000,000 from the start of the year to today, And in conjunction, adjusted EBITDA guidance has increased by $3,000,000 net of the investment in Valence. We don't expect that to change And our inflection to profitability will enable us to achieve cash flow breakeven in 2025. I'll provide some additional context that supports why we are confident In achieving our profitability commitments for this most recent capital raise, the previous slide depicted that 1200 of the 2,500 basis points of operating margin expansion that we committed to has been and will continue to be driven by infrastructure leverage. Increased revenue growth enables us to lever the infrastructure investment made that are facilitating our expansion into a larger spine company. Accelerated revenue growth will fuel faster than expected infrastructure leverage.

Speaker 2

Another 1,000 basis points of the operating margin expansion that we committed to is from variable cost leverage We have been seeing for the past 5 years quarters now. With respect to our selling organization, we predominantly operate with exclusive sales where the cost profile is variable and contractual over time. Additionally, our long range plan always assumed we would expand our sales footprint as we grow. Therefore, the investment in distribution expansion was contemplated in our profitability commitments. As we onboard new sales agencies, the related spend is variable And at a rate that contractually works lower over time.

Speaker 2

We are structuring the new sales contracts like we have always structured sales contracts with a competitive commission rate that Support their transition to ATEC and incents them to grow their business with contractual step downs on their increasing basis of business over time. In sum, both leveraging the infrastructure and an improving variable selling cost profile will support the profitability improvements we've committed to. That's a good segue to the next slide. We hope you will save the date for ATEC's long range plan update on March 19, 2024. We plan to host an in person event in New York City, which will be webcasted for those who cannot attend.

Speaker 2

The update will add 2 years to the long range plan that we shared last year, Which went out to 2025. We recognize that plan is becoming increasingly stale due to strong business performance. We'll share more about the event as we finalize details, but rest assured our intent is to be increasingly profitable business, funding growth with free cash flow will be clear. We hope you will plan to join us. Now in closing, I'd like to sincerely thank you for your continued support.

Speaker 2

This was an eventful quarter. Exceptional business momentum drove both revenue and adjusted EBITDA outperformance, a continued testament to our belief that good surgery is good business. Our capital raise will enable us to exploit unprecedented industry disruption, and we have begun to onboard new sales professionals and arm them with the revenue generating assets they need to truly Hit the ground running. The market share expansion that we expect to unfold will be very sticky and will power long term profitable growth in the years to come. We have an active IR calendar over the next few months, and I hope to connect with many of you in person.

Speaker 2

With that, I'll turn the call back to Pat.

Speaker 1

Thanks, Todd. So 100 percent spine focus is compelling not only surgeons, but leading sales talent. And as we always say, our best is yet to come, and we're not guessing. So with that, we'll turn it over to the operator for questions.

Operator

We will now open the floor up for questions. In the interest of time, please limit yourself to one question. The first question comes from the line of Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Speaker 3

Good afternoon, guys, and appreciate the update on all the various dimensions. I guess What would be really helpful would be for you guys to talk about your assessment of incremental risks that might You might be taking on as you accelerate growth and increase in investment. Do you are you Are there things that you think might trip you up? Or do you feel like it's full speed ahead and things A rumbling down the train tracks pretty successfully.

Speaker 1

Yes. Let me take the Qualified, let Todd jump on any other part of it. I got to tell you, the opportunities that the disruption has availed are apparent. And I think that one of the things that we've always done has been have been bold in terms of leaning in. And as I see the disruption being reflective of the type of demographic surgically that is reflective of our real StrongSuite from a developmental perspective, what I see is really more opportunity for expedience as it relates to onboarding people And then being familiar with regard to a portfolio they could translate more aggressively and expediently.

Speaker 1

And so, that's how I think about the kind of the core of our business. I think that there's so many different drivers of success, candidly, That I'm very, very bullish. If we're not perfect on one, I still feel great about the others. And so It becomes one of these things where I think it's a multifaceted opportunity whereby I think that there's more of a tailwind than a headwind. And so, I would tell you the history of the company has been one of execution.

Speaker 1

And I think that if you look over the last 5 years and you say, have these guys done what they said, I think that there's a high correlation to that. And so, Again, you're with the most paranoid in terms of making sure that the verification of the performance of the devices are what they are. We always do alphas to make sure that the performance is reflective of what we intend. But I would tell you that we're going to continue to be very, very methodical. But I think that the opportunity for aggressive sales hiring makes tons of sense based upon where we sit from a just a expansion opportunity.

Speaker 1

So

Speaker 2

I think I'd probably reinforce what Pat said, which is the opportunity is to accelerate our sales through the Position of significant competitive sales reps. And I think the point of, these are people who understand lateral surgery, their Customers understand lateral surgery, want lateral surgery. I think our portfolio plays so nicely into the opportunity That relative to our historical acquisition of competitive sales reps, I think this setup is quite favorable.

Speaker 1

Yes, I would add one thing. We've distinguished ourselves in lateral and we've yet to see anything From EOS from an integration into a surgical application whereby what we're doing is planning and integrating into the operating room. And so I think from a There's so much opportunity from a not only a lateral expansion perspective with regard to selling, but also from a deformity perspective. And so anyway, Probably things you've heard before, Brooks, but again, I think there's many reasons to be very bullish and that's why we're leaning in.

Operator

Your next question will come from the line of Matt Blackman with Stifel. Please go ahead.

Speaker 4

Hi, good evening everybody. Thanks for taking my question. Todd, I appreciate you're not prepared to fully address the LRP this evening, but it would be helpful for all, I think, if you could walk As to what, if anything, may have changed following the raise and with the plan for accelerated hiring and set investment, can you just reflect a little bit more on how we We're thinking about your ability to drive new customer acquisitions and same store sales growth with more sets and more reps. And then on profitability, I just want to confirm, I think you said and it was in the slide, you still see free cash flow positive in 2025. Can you just confirm that?

Speaker 4

And then I'm going to throw another one out there. I think in your LRP, you talked about in 2025 something like an $85,000,000 raw adjusted EBITDA number. Depending on what we're assuming for 2025 revenues, is that still the sort of right base to the extent that we wanted to add some of that 10% drop through on revenue upside that model that you've laid out. Just any help on that front would be appreciated. Thank you.

Speaker 2

Yes, Matt, let me try and figure out where to start here. But maybe I'll just kind of start by saying our long range Plan assumed $555,000,000 in revenue in 2025. I think if you use the Street assumptions today, I think Street next year is at 550, and I think in 2026, it's around 650 ish. So in 2025, it's shrinking has Just about, I think, dollars 100,000,000 north of what our long range plan had us baked at. Our long range plan assumes about $80,000,000 of adjusted EBITDA in 2025.

Speaker 2

And so, if you use the construct that we've laid out, You would expect 10% of the $100,000,000 delta on the top line in 2025 straight to LRP to drop through the bottom line. That's about $10,000,000 add to the $80,000,000 that gets you to $90,000,000 less the Valence investment. So $85,000,000 is probably your bogey On 2025 Street numbers today as is. And so, I think that's kind of a consistent way to think about How we've communicated our drop through on revenue beats and relative to where we were at in the long range plan as compared to where the Street is at. And so, clearly, we've kind of over performed relative to where the Street relative to where our long range plan has been.

Speaker 2

And so that's also probably evidenced by the fact that Inkta Street has us at $555,000,000 next year, not in 2025. And so, I think we have driven execution, outsized execution on the top line. We've achieved adjusted EBITDA breakeven, a bit ahead of schedule here as well, Given us in positive territory in 2023. And so, I think the other thing you wanted me to comment on Was free cash flow in 2025. And so, I think the point on the adjusted EBITDA is an important one because it's really the adjusted EBITDA that ultimately then Funds your investment in the growth assets in 2025.

Speaker 2

And that's fundamentally why we have a level of confidence that we do To say will be free cash flow breakeven in 2025, because ultimately the profitability of the business enables us to do that. And so, I think all of that hangs together nicely and is consistent with what we laid out and is consistent with where we're at. Was there another question in there, Matt?

Operator

We'll take our next question from the line of Matthew O'Brien with Piper Sandler. Please go ahead.

Speaker 5

Oh, Afternoon, thanks for taking the question. It's going to be a multi party too, so forgive me. But Pat, I guess the elephant in the room here, Excuse me, it's a capital raise and a lot of people are surprised by it. And so you've talked a little bit about why you decided to do this And it makes sense, but can you just give

Speaker 2

a little bit more as

Speaker 5

far as what kind of changed from maybe a month or 2 ago when you were messaging like, yes, we're not going to do it, we're not going to do it, and All of a sudden you did it. And then can you be a little bit more specific on your expectation for sales rep hiring? Or I guess asked another way, Todd, you mentioned $75,000,000 of sets equals $100,000,000 in incremental revenue. That $150,000,000 raise would imply maybe That amount of sets going forward, so an extra couple of $100,000,000 Is that a way to kind of frame it up or just any kind of color in terms Of the new additions you're expecting over the next couple of years because of this raise? Thanks.

Speaker 1

Yes. I'm going to start, Matt, and then ask Todd to pipe in. But As you start to look at the demographics of the marketplace and you look at the closing time of the Nuva The GMED thing, it was not assured that it was going to go through. And I think that doing anything prior to it being completed would have been Frowned upon as well. And so, I think when that thing closed, I think seeing the disruption, the other disruption in terms of just leadership I'll Orthofix, SeaSpine.

Speaker 1

I think those things presented themselves in a unique time. And when you What I try to do with regard to the presentation is reflect the nonlinear elements of getting sales teams over. And I think if I look back at the history of the company, when we talk about creating clinical distinction and compelling people, It's taken us time to create a portfolio that ultimately would be reflective of the type of sales teams that are coming over today. And now you start to see the sales teams coming over. We had 15 join us in the Northeast.

Speaker 1

And so, when you start to look at what the influence that has on the required instruments and implants, It's significant. And so for us to start to look forward and say, hey, are we going to capitalize on this growth opportunity or not? We said, let's lean in. Our history has been one of execution. And so we felt great about that opportunity and thought to ourselves, The time is now.

Speaker 1

And so I think that as we look back historically, people are going to forget all about this because what you're going to see is us build a behemoth Based upon the type of aggressive perspectives aggressive kind of efforts that we previously made. And so My sense was the time is now. Again, not the perfect market by any stretch of the imagination. That's not lost on us. But again, every time we've raised money, we've created value, and this is going to be no different.

Speaker 1

And so We felt like let's lean in. This is an opportunity.

Speaker 2

And Matt, I think you're totally right in the way you're thinking about the $150,000,000 I mean, If we say $0.75 for every dollar, that implies an incremental $200,000,000 kind of above of where we're at. And so, I totally think That's the way to think about the opportunity of creating value through this raise, which is incremental revenue and incremental adjusted EBITDA sooner relative to expectations. And so, I think that is that's a key component of it. And the point is, how do you do that? It's by attracting the competitive reps and ensuring they've got the assets they need to run the business and drive that And so that fundamentally is the value creation opportunity to be growing faster and delivering more profitability Sooner.

Speaker 2

And so that's fundamentally what we're driving here.

Speaker 5

Got it. Thank you.

Operator

Your next question will come from the line of Joshua Jennings with TD Cowen. Please go ahead.

Speaker 6

Hi, thanks for taking the questions and congratulations on the Strong results in the race. I wanted to just check-in on, see if you can share any trends for LTP And the ramp there since the launch full launch earlier in the year. And also just wanted to just Firm that LTP adoption coming from previous PTP adopters? Are they bringing new ATEC? Is it bringing new ATEC surgeons in?

Speaker 6

And is LTP adding to revenue per case and ATEC products used per case, those metrics? Thanks for taking the question.

Speaker 1

Yes, Josh, yes, great question. And this is why I feel like, gosh, we've never been more fortunate with regard to the demographics of a marketplace. And so you see a company that had a significant laterally positioned patient positioned business Excellent. And then you see our opportunity to launch LTP and then expand its utility. It's reflecting the very demographics that we expected.

Speaker 1

And yes, what it's expanding the average selling price per surgery. And so the very demographics that were Contemplated with regard to the addition of a patient positioner, the ability to do 5.1, the convoy sales associated with the biologic assembly, Like all of those elements are coming to fruition in a way that ultimately is reflective of a growth rate and then you bring in an expertise from a sales force perspective in groups And you love the dynamics. And so, I would tell you that, yes, yes and yes. Like the things are happening as expected. It's expanding the ASP And it's being accepted well accepted.

Speaker 1

We're competing against taping someone to a bid. And so you love the chances when those are the competitive

Operator

Your next question will come from the line of Bill Plovanic with Canaccord Genuity. Please go ahead.

Speaker 7

Hey, this is George on for Bill. Thanks for taking our questions. So the first question we have is, you made a couple of recent Board additions. Can you kind of talk about how these additions have maybe already made an impact and any specifics of what they'll bring long term that ATAC has been They're lacking before their appointments. And then just a quick one, just a point of clarification actually.

Speaker 7

You were talking about how the 3x ROI number from your investments. Did you mention that being shorter than the 5 year span in terms of The industry disruption competitive reps you bring in? Thanks.

Speaker 2

Could you just repeat the last question I got?

Speaker 7

Yes. So just talking about the what you said about the 3x free cash flow return of investments. Really nice chart you guys provided in year 5, But I thought I caught something about you guys saying that that would be more of an accelerated timeline for more of these Competitive rep conversions you're getting from the disruptions.

Speaker 2

Maybe I can just answer that one quickly and then pass it back To Pat speak to the Board of Directors additions that we made. The 3x really is, I think, independent of Which sales reps are using it? So ultimately, it's a function of in you make your investment initially, in this case, 75,000,000 You pay for COGS and then you get you pay for variable commission rates and you drop About $0.30 on that full year in the 1st year. And then in the years afterwards, you drop about $0.50 on the sales dollar, that $100,000,000 And so You look at your revenue of 100, you look at your COGS at 25 and look at your selling expense roughly of 25 and ultimately that drops 50. And that's kind of regardless of which sales rep is there.

Speaker 2

And while there's probably some variation between what The sales agents are and their individual economics, on the whole, it's not much different. And so I think what we showed Would be the same regardless of which selling entity is selling it.

Speaker 6

Want to speak to the

Speaker 1

Board of Directors? Yes. George, I think it's a good question from the standpoint of we always think of companies as assemblies of people that are committed to a And so if I'm committed to a specific goal and I have the opportunity to garner the type of expertise that Keith Valentine and Dave Dinski have, I'm going to take that every day of the week. And so, if you start to think about candidly competencies, I think of Keith as someone who has 30 years of experience in the field, he's got reach that is absolutely outstanding. And so There's not a person in this industry, I think, that doesn't know Keith and doesn't think favorably of him, I guess, other than his old company.

Speaker 1

David, the but Dave is again also I think a maven in the industry, has a ton of experience And it's not that we're trying to shore up things that we didn't have. I think any way to augment things is the ultimate effort and to grow. And so I think Dave has done a great job in terms of leveraging businesses. It's clear that we need to leverage our business. It's clear we need to expand our sales force.

Speaker 1

So all of those things that I think both of these guys bring to the table is valuable to our effort. So I'm thrilled to death to have association with Keith And Dave, I'm thrilled to death that they've decided to join us.

Operator

Your next question will come from the line of Drew Ranieri with Morgan Stanley. Please go ahead.

Speaker 8

Hi. Thanks Pat and Todd for taking the questions. Just maybe Juan and I apologize if I missed this in earlier remarks, but with the sales force that you're bringing over some of the new rep hires, can Can you maybe just talk about your win rate expectations and why this would be a bit more than a typical greenfield rep hire? I'd love to kind of hear your thoughts about that and maybe what productivity ramp you're kind of thinking about for some of these recent On boarded reps.

Speaker 1

Yes, I'll do the Qualify and satisfy if you can. I know these guys candidly. I've known him for 15 years at the previous place of employment. And candidly, when you build a market with someone, it creates a special relationship. And so What happens is, is I think that there becomes a surgical thesis that people buy into that ultimately their customers buy into.

Speaker 1

And so what happens is, is the more of those people that we can get and the more of those people that we could insert into our company, The higher the likelihood for more expedient acceptance of what we put forth as a surgical thesis. And I think that's such a dramatic tailwind and really it's why we went and did the raise as we felt like This is such an opportunity. It's not just because of the lateral guys, but it's just it's the building of the foundation of our company that It is apparent. And so, like this is Spine is a small town. And so, knowing people within the context of geographies that ultimately will Positively affect us, which we're going to be very methodical with regard to prioritizing those geographies that most benefit us that are greenfields for us And where we have hospital access, again, is just such an apparent opportunity.

Speaker 1

And so that's the approach we've taken. And do you want to Coming further, Todd?

Speaker 2

Yes. I think the point is, given the familiarity with really both, I think, The sales folks as well as the surgeon base, given the fact that the demographics of their business are so aligned to our product portfolio, The interval competence we have in essentially achieving the kind of business results Through attracting these sales reps and these customers, the Interval confidence is much higher in this scenario than it would be in our history for all the reasons Pat pointed out.

Speaker 1

Yes. Again, I think the great part is we were going on a history with a linear walk With less confidence and now we're going to more confidence in a nonlinear walk. And so the opportunity I think is For us, we believe to be apparent.

Speaker 8

Thanks for the color. And maybe just on The recent NAST conference, I mean, you highlighted the innovation pipeline. As you look forward and sorry, there's going to be a couple of questions here like normal, but When you are looking at kind of your R and D pipeline looking ahead, are you starting to think more or incorporating more enabling technology in the R and D Pathway from developing to actually commercializing a product and then just remind us on robotic timelines and milestones.

Speaker 1

Thanks for the question. Our plate run us over with opportunity. And so as you start to think about all of the opportunities to ultimately have EOS effectuate what we're doing, not only Preoperatively and interoperatively and postoperatively. It's like we have enough to do with the technology that we've made commitments toward to last us a good while. And so, just cannot be more excited about the next really 5 years as it relates to all of the things from an EOS perspective.

Speaker 1

In the middle of 'twenty four, we're going to launch The whole Catalyst portfolio of goods, which is all of the automation, the automated planning, the interoperative integration, Integrating that to a customized rod, a lot of the analytics with regard to the post operative elements, all that will be done in Q2 of 'twenty four. Following that immediately starts to become the bone quality elements and for us to start to understand, Gosh, what's the underlying tissue as it relates to stabilization? If spine is decompression, stabilization and alignment, then we Quantified alignment and now we're starting to deal with stabilization from an underlying material perspective. We have years to go with regard to playing that out in the marketplace. And so I love what we're doing from an EOS perspective.

Speaker 1

I think it's so opportune. And then when you start to layer in, gosh, how do we get more precise? How do we create This level of execution from a surgical perspective, I think the integration of the workflow with the Valence navigation robotic element is very, very apparent. And so By the end of this year, we'll be doing cases with our fixation elements of placing pedicle screws with a robot. We don't think that that's an endpoint at all.

Speaker 1

I can't believe it's kind of a bore. We think that the opportunity to ultimately create better surgery is through integrating these things into the workflow. And that's what 2024 is going to be our engagement in that. You'll start to see that in the marketplace in 2024, but really launch in 2025 of a fully integrated, more precise PTP, LTP in those procedures. And so Our excitement is, gosh, how do we reflect the value?

Speaker 1

We've created a heck of a conduit with regard to PTP and LTP. You start to see us putting Expandable devices through those procedures in a way that we're absolutely garnering greater precision with regard to the alignment elements. It's just you're starting to see a more a greater sophistication with regard to the interoperative element, and it's just going to be more and more informed by what we're doing from a pre and post op And so anyway, sorry to drum, but I think that there's so much for us to do, so much work to do and so much momentum in the business. I think what we need to do is

Operator

Your next question will come from the line of Sean Lee with H. C. Wainwright. Please go ahead.

Speaker 6

Good afternoon guys. Thanks for taking my questions. So just to expand upon the remarks on the catalyst for EOS, we've seen EOS revenue kind of Holding spend more or less for the last year or so. I was wondering whether with the expected launch of Catalyst in 2024, is that going to set off A period of growth for EOS or is that the benefit of Kyla is going to be more reflected on growth in the rest of the portfolio?

Speaker 1

Yes. Sean, it's a great question. And the question is going to be ultimately where we see the revenue. And I think the near term revenue impact It's going to be on the implants. The long term revenue reflection will be on the placing of capital.

Speaker 1

I think As much as you hate to realize to be true, it's like when people start to understand the value of what we're creating from a catalyst perspective, It will take the capital period to acquire the capital to ultimately start to integrate it into their respective practice. And so, over the next 5 years, you'll start to see an increasing reflection of EO's capital, but you'll see a more immediate reflection Of the implant impact. And so but I think the opportunity is And I think you're going to see it on both fronts. And so our enthusiasm for the technology is both from an interoperative perspective in terms of how it influences as well as the capital. Todd, any

Speaker 2

Yes. I mean, I think if you kind of go back to the full year 2020 and you look at what our CAGR has been on EOS Since we acquired the company, I think you'd see around 20% growth in EOS revenue. And I feel like That's been a good consistent growth. I think it doesn't reflect what Pat has talked about and what we ultimately think it can be and will be and should be. But I do think it's been solid growth on a multiyear CAGR basis.

Speaker 1

And I'm going to drone for one second. But just the opportunity presented by EOS is unique to us. And it's unique to us because we are willing to do the work required to ultimately reflect the value that it brings to the marketplace. And that's where it's like, I think People have profoundly underestimated EOS and the value that it brings. It is unique.

Speaker 1

And so will it be reflected financially? Absolutely. And so we can't be more excited about it.

Speaker 6

Great. Thanks for that.

Operator

Your next question will come from the line of Jason Witz with Roth. Please go ahead.

Speaker 9

Hi. Thanks for taking the questions. Maybe some clarifications. First off, when you talk about Nonlinear sales growth. Just maybe if I can push a little harder, does that mean you what timeline are we talking about?

Speaker 9

Because normally there's a gestation period And there's also even non compete to deal with before these guys are fully up and running. Are you saying that it's going to be a lot quicker and also obviously you're going to get a lot more Pick up a lot more of the business than you normally would or how should we be thinking about this, if I

Speaker 2

could just push

Speaker 9

a little harder on that?

Speaker 1

Yes. Thanks, Jason. The I guess the way that we're thinking about it is really in the pragmatic way that we've experienced it, which is as opposed to one guy coming on And us kind of growing at the linear dynamic, you'll have 3 to 5 to 10 come And so the preparation required for that is more significant. And there's all kinds of depending upon the state and In the non compete dynamics, there's all kinds of considerations. Are they going to switch territories so that they don't Effectuate their non compete agreement or how that can be managed, but the volume of Variables associated with these things is significant.

Speaker 1

But just to, I think, provide its most pragmatic reflection As opposed to a 1x1x1, we're seeing a 3x5x10. And so and we're seeing a 3x5x10 in disrupted companies that ultimately Where the as we talked about, the thesis of our company is more reflective of what they've come from. And so when that's the case, it's not a matter of me understanding or compelling them on lateral Surgery is one that they've already had experience in.

Speaker 9

So, this should have

Speaker 8

a median impact on 2024,

Speaker 9

the hires that you're making right now, correct? And even potentially 4th quarter?

Speaker 1

I'm going to the whip in the first furlong. I hope that they have impact in 2023. It's any way that we can create a level of comfort And make sure that they are well versed on our products and prepare them and provide them support And coverage, whatever is required is candidly, make sure that the surgeons are well prepared through the education program. We have such a great surgeon education program and such a great surgeon group that does education. I think a A lot of these guys know each other from years past.

Speaker 1

And so if they come in and get trained on PTP from Luis Pimenta, they met him when he trained them on excellence. And so that opportunity just perpetuates and it's such a favorable dynamic.

Speaker 2

And I think, Jason, by and large, This really ultimately kind of becomes a meaningful 'twenty four to meaningful 'twenty five opportunity for us.

Speaker 9

And if I could push on that, Todd, who's going to ask this anyway. I think you said you're now pretty comfortable with kind of what consensus is, which is about a year ahead of your original 3 year to 5 year plan, Which is around $550,000,000 and that's largely because of these hires. Did I hear that correctly or am I maintaining a bit?

Speaker 2

Well, I mean consensus has been consensus Before we I think before all of this has transpired. So but I will tell you, I think based on where we're at and I think the The opportunity that we have and the success that we've experienced thus far, we like the setup going into next year relative to where consensus at.

Speaker 9

So there should be upside then.

Speaker 2

Well, we like where we're at. Let's put it that way.

Speaker 9

Fair enough. I'll push you enough. All right. Thank you guys very much.

Operator

I'd now like to hand the conference back over to Pat for any closing remarks.

Speaker 1

Well, my closing remark is thanks everybody for your interest in ATEC. We truly are just getting going, can't be more excited about what's happening at the company And thank everybody for your attention. So thanks very much.

Operator

That will conclude today's meeting. We thank you all for joining. You may now disconnect.

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Earnings Conference Call
Alphatec Q3 2023
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