ALPHATEC HOLDINGS INC (ATEC) FY 2021 Earnings Call Transcript

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ALPHATEC HOLDINGS INC (ATEC -1.36%)
FY 2021 Earnings Call
Nov 30, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Matthew O'Brien -- Analyst

Alright. Good day, everybody. Thanks so much for joining us. It's Matt O'Brien from Piper's MedTech research team on with you. Really excited to have the Alphatec team with us today from the company's Chairman and CEO, Pat Miles, as well as Executive Vice President and Chief Financial Officer, Todd Koning, excuse me, as well as Tina Jacobsen from Investor Relations. Everybody, thanks so much for the time here today.

Patrick S. Miles -- Chairman and Chief Executive Officer

Thanks.

Todd Koning -- Chief Financial Officer

Thanks for having us.

Matthew O'Brien -- Analyst

Of course. So, you know, I guess for starters, just talk a little bit about what you saw in the third quarter from a COVID Delta variant/staffing shortage perspective? Did those accelerate throughout the quarter? Get worse as they're exiting the quarter? Or did any of them start to abate a little bit? And then I'll get a little bit more into the staffing side of things here in a second?

Patrick S. Miles -- Chairman and Chief Executive Officer

I think, that's, kind of, the dynamic is, as we have always said, it's a tale of kind of 5,000 counties. And it's like [Indecipherable] one pops up, the other kind of cools down a little bit. But it seemed to abate, you know, kind of toward the end of the quarter. I think kind of the fallacy is everybody expects kind of this, the immediacy of the return. And I think what happens is, from a staffing perspective or otherwise this is just going to be a longer walk in terms of the recovery. And so we continue to see increased engagement. The increased engagement is typical of people have met their deductibles, they want to be intervened upon in this year. And so what we've seen is candidly, a walk, but not a walk that would be typical of absolute swing back to normalcy.

Todd Koning -- Chief Financial Officer

Yes, Matt. I think when you look at our total Q3, we did $63 million in revenue, growing 53% year-over-year, a $11 million of that was EOS related that kind of left us with $51.6 million in organic revenue growing 29%, that's on a comp that grew 43%. So we had a 36% growth on a two year CAGR basis. And I think the comparison, a lot of our competitors like to say is, we grew in absolute dollars over 2019, 84%. So not a whole lot of people doing that -- in the space.

But when we sized up the COVID impact in the quarter, we sized up to about $4 million and we did it in a couple of different ways. I think, the most meaningful way was to kind of look at sequential trends by distributor, match that up against you can go on the COVID esteem website, the John Hopkins hosted and kind of go -- kind of county-by-county and match up where those distributors were. And you can really kind of see the curve of COVID prevalence timed with kind of the disruption in sales sequentially and its recovery.

And so we feel pretty good that, that was about $4 million in the third quarter. When you looked at how that played out, August really was the trough. September got sequentially better than August and October was sequentially better than September. And even when you look at on a -- and you can imagine, I've got a spreadsheet that's got weekly average daily sales and so...

Patrick S. Miles -- Chairman and Chief Executive Officer

Hourly, Hourly.

Todd Koning -- Chief Financial Officer

And so, really post the Labor Day weekend, you really saw that recovery began and start to walk up. And so as we kind of looked at the sequential, kind of, a sawtooth of recovery going up, definitely not as steep as maybe the 2020 recovery, but still pretty meaningful. And when you think about and put that in context of our $57 million US organic guide in the fourth quarter, we don't need the same kind of steepness that we've seen thus far to achieve our guidance. And so ultimately, we feel like that was the right place to put the guidance given our philosophy of putting the number out there and that we believe we can achieve, and have a reasonable opportunity to exceed.

Matthew O'Brien -- Analyst

Interesting. Okay, so this is that $4 million that you lost in Q3 expected to come back in Q4? And then how are these facilities starting to adjust, especially in patient lumbar side? With the lack of hospital beds in some situations, how are they getting around that?

Patrick S. Miles -- Chairman and Chief Executive Officer

Yes. I got to tell, like what we're like -- if you look at the demographics of Q3, you saw you know what -- we saw a great growth in the new surgeon volume. But the growth in average case revenue was not as big as is what we've seen in years past. And so, our view of that was, there's less complex things going on. It's fascinating to sit back here -- having sit through this for as many years as is candidly I have is, you know, every case used to go to the ICU. So if you do a two level surgery, you'd go to the ICU in years past, that's not the case anymore. And I think that, so what you're seeing is a little bit of a kind of striation of, hey, what kind of cases would be relatively safe to go ahead and do such that I can get people back on the floor at the very worst, or out of the hospital at the very best.

And so I think what they're trying to do is, at least it seems to us in terms of the reflected demographics of the complexity of surgery. In terms of our numeric reflection, it just seems like less complex cases are going on right now. And what they're doing is trying to say, gosh, how I continue? Keep billing, because clearly that's the revenue source of the hospital. But do so in a way that doesn't put me in a position whereby, I don't have any ICU beds.

Matthew O'Brien -- Analyst

Got it. That makes total sense. So let's transition over to the environment that we're in right now. I mean, you've got a lot of things going on. Competitively, right now there's a new leader at Medtronic. I think they was just announced yesterday. And there's spine division, you've got Stryker, it got some turnover at the top there. J&J is splitting in two, I'm not sure how much that's really going to affect you guys, because the device business is still going to be in place at J&J. But Zimmer is obviously spinning off their spine and dental business. How ripe is it right now for share taking for Alphatec? Is it as good as it's ever been? Is it better than it's ever been? Or is it just the same or even worse than it has been?

Patrick S. Miles -- Chairman and Chief Executive Officer

Yes, you know the -- as you appreciate over the years, it's like, I think that the advantages of being a pure play player is significant. And I think that, when someone's existence is dependent upon their capacity to understand and to engage in a marketplace, we've never been in a better place. And so I look at the dynamics around and again, this is not me taking shots at anybody. But when you have multiple divisions, you know, the -- all of the complexity around how you invest and when you invest becomes difficult.

I'm going to tell you, you know, I'm more comfortable in the operating room than I am, as it relates to these discussions. And I think that our understanding of the business at a profound level, at every level in the organization is profoundly advantageous. And so, I look at what our job is, and our job is to create and steward better spine surgery. Its not -- that's it. I wish, its more cosmic. But the beauty of that creates a simplicity for us to invest in a prioritized fashion aggressively in ways that we know how to make something better.

And so I think we're being rewarded for that. And you can look at multiple different avenues, be it SafeOp and our ability to invest in that and to make it better and have unique feature sets that ultimate drive better surgery. You could build on PTP and say the same. And you could look at what's forthcoming, which is going to be EOS and our ability to translate that. And so, I love the whole pure play and I love our existence being dependent upon our ability to ultimately access and proliferate the market, especially one as big as this.

Matthew O'Brien -- Analyst

Got it. Okay, that's helpful Pat, appreciate that. On the competitive dynamics side of things, there's a company down the road from you guys that you know well. It's been seeding some share in lateral and likely it's going to seed even more to you guys next year. Is there anything they can do to slow down the pace of share loss, or is PTP just better? Is there anything that Pulse will bring to the table that can help them kind of defend themselves or again, is PTP just that much better?

Patrick S. Miles -- Chairman and Chief Executive Officer

Yes. You know, like one of the great lessons that we learned, you know, at the other place candidly, is unless you're willing to design and develop for the specific requirements. And so, could you imagine if you're a surgical patient and it's like, I'm going to use all my old stuff that I used to work on something else and I'm going to apply it to this. And that's no way to ultimately create sophistication. And so what we've done is, designed and developed for the specific utility of PTP and that's why we say a lot gosh, you know, PTP is not prone lateral because, years ago when we did XLIF, Medtronic's said, gosh, we have a retractor and we have an implant and our EMP division has neurophysiology.

You know what, Medtronic never even came close to fulfilling the clinical requirements to ultimately create a business. And so, I think that where we are with regard to PTP is light years ahead of everybody. And it's all we did is, applied our learnings through the experience of having done this. And so I think that they're going to have a tough load ahead. And that's not being arrogant, it's just a matter of, we will continue to apply our learnings from now until the [Indecipherable] moment. And I think it gets back to the whole thesis as it relates to a pure play spine company and our ability to do that.

As it relates to Pulse, you known pulse is just the assembly of stuff that's been around for a long time. It's like, you know, cheese, when I was here, we did rod bending, we did -- which is a key part of the Pulse platform. We acquired the image guidance platform. And so unless you're doing distinct things, it's the same neurophysiology platform. Candidly, ours is profoundly more sophisticated. And so when you start to say, gosh, we've assembled a lot of things, those things existed before. And so the fact that it's in a single big piece of capital doesn't change anything surgically. And so what happens is, you have to change things surgical and that's what we did.

And again, I could point to multiple features in terms of I think the clearest one is like things like neurophysiology in terms of how are you the purveyor of the only one that has a system that's automated and us to kind of take over that -- to me, I think is a grave mess. And so anyway, I think the assembly of all technology doesn't ultimately get you to a better place surgically, and where we are surgically is adding feature sets that ultimate reflect in value, and that's why you're seeing a run.

Todd Koning -- Chief Financial Officer

And I think you have to kind of go back to like, what did Pat and [Indecipherable] fermented, try and answer and do when they showed up here? And it was really fundamentally to answer the question, why did lateral surgery for all of its benefits of being less blood loss, faster recovery, less morbid, all these good things. Why didn't it get better than 25% or 30% adoption? And ultimately, I think the point is, it was good surgery in the hands of good surgeons, but the less comfortable you were with it for whatever reason, the less better -- less good the outcomes were in the end.

And so that's when Pat says, we designed for all the requirements necessary, it's to improve and to create predictability and reproducibility in the hands of the masses. And so, when you look at the surgical approach from the patient positioner to the very specifically designed retractors, to how they interplay with one another. And you can understand if you're orthogonal or not, when you snap your floral [Phonetic]. When you take into account all the neurophysiology advantages that SafeOp affords and that we've developed, all of those are meant to drive predictable outcomes and reproducible outcomes by the broad set of surgeons in the field.

And so as you understand, our opportunity is to take share in an existing billion dollar lateral market, but also to grow that market as we penetrate the $2 billion PLIF and TLIF market. And so we do that by convincing those surgeons to utilize the lateral platform. And there's a whole pile of benefits and that we can talk about and why they would do that, but that's kind of the point.

Matthew O'Brien -- Analyst

Okay. I appreciate that, guys. And I'm glad, I'm the one asking the questions here. Because if you ask me to spell orthogonal, I'm going to fail miserably. So in a nutshell, I guess, either Pat or Todd, when you're looking at PTP versus XLIF versus TLIF or ALIF or whatever they are all called now. What are the one or two things that really stand out to docs, or they get it? And they are like, OK, you know, what I was hesitant before and now I'm less hesitant, so now we can finally grow this market, which seems like a majority of cases should go this direction eventually. But what are the couple of things that really stand out to them?

Patrick S. Miles -- Chairman and Chief Executive Officer

Yes. I think, if you look at the kind of the history of spine surgery, the vast majority has been prone. Meaning that, patients laying on their stomach. And the reason that is, is because if you think about spine surgery as decompression, meaning, I'm going to push, take something off the nerve, stabilization and alignment. And you start to say, what's the best position to do or fulfill those goals. And if I'm going to decompress somebody, the way surgeons decompresses when the patients on their stomach. The way they most commonly stabilize is the patient on their stomach. The best alignment is when your belly hangs and you get the type of lower doses required for surgery and so for alignment restoration.

And so the ability to say, gosh, if the surgery is decompression stabilization alignment, I can fulfill all of those obligations in a single setting in a position that I'm most comfortable with. And candidly that historically, so if I'm going to change something because, gosh, I like this holding lateral, what I want to -- do I want to change the way I decompress by the way I stabilize and the way I align based upon having them in a lateral position, or do I want to keep it exactly the same and just learn how to place a lateral implant in the prone position. And so I think the ability for us to ultimately reflect that in terms of the way that surgeons engage. I'm going to tell like the volume of surgeons who are interested in prone positioning for all of the reasons that they do PLIF and TLIF are now avail to them in this position.

And we talked at Luis, I think the guys at Maven of innovation and he'll tell you, gosh, we probably blew it in terms of the way that we ultimately went about lateral surgery. And he's just being modest, because the reality is a lot of the technology didn't exist previously. And what happens is, technology catches up and unveils new opportunities. But the whole prone position thing is in the vast majority of pathologies, I think the opportunity to ultimately engage a broader audience to Todd's point.

Matthew O'Brien -- Analyst

Got it.

Todd Koning -- Chief Financial Officer

And I think that also helps for one for workflow. So you can obviously get your posterior fixation, you don't have to take time flipping a patients and all that. So kind of the surgical workflow was beneficial. When you think about the challenges or maybe some of the concerns, historical TLIF or PLIF surgeon might have, which is, well, what's my bail out in the lateral decubitus position. It's -- well, you got to flip it and then go approach. At least in PTP, now you've got what you're trying to do with the lateral. But if you feel uncomfortable, you can easily go and do a TLIF and do something you're comfortable with, in case it doesn't work the way you had hoped. And so the risk profile of adoption is also lowered in that sense.

Matthew O'Brien -- Analyst

Okay. Yes, it sounds like a lot of great things going on with the PTP franchise. I want to make sure we hit a couple of points here, but I could keep going on that all day. But let's flip over to EOS for a second. I was surprised about the build out of the room that's required for that system. Is that a big gating factor? And then can you just talk about the interest level you've had in that technology, since you have acquired it?

Patrick S. Miles -- Chairman and Chief Executive Officer

Yes, the build out is one that is a requirement of the system. You know a lot of places have a room that will accommodate it, but if a bill out is required, we will, in essence assist in the walk toward a build out. And so, yes, I would say, kind of, the more challenging dynamic associated with getting systems in the hospitals has been candidly the financial challenges associated with a stand-alone company as EOS. And when the only way that you can sell one is through a capital allocation. It just takes a long time. And so, the opportunities that we have to get these things in there based upon earn purchase type of rebates and that type of a dynamic.

And not to take you on a long walk, but when we did the previous company, we were late in terms of the type of implant sophistication that in essence surgeons bought into. And so, when we started down the road of doing surgery, there was not the type of enthusiasm around our more conventional type of posterior instrumentation, posterior implants. The great part is, there's such a sophistication here with regard to our implant systems, the attachment to our procedures is very high, but also the ability to utilize that to acquire a EOS is also very high.

And so there's such a sophistication, our ability to ultimately translate that buying process to one that ultimately is candidly very much welcomed as it relates to the utility of our implants. And so, the fun of this for us becomes is, there's almost kind of this whole -- so often things come from the private sector and ultimately from a procedure perspective get welcomed into the academic centers. I got to tell you, this one's going in the opposite direction, which is awesome and gives us access from the academic centers in the private sector. And I can give you a million reasons why every place should have an EOS.

And the great part is, there's no standards in spine care as it relates to imaging. And this is as close to a standard as one can get based upon the value of the information that it provides. And so our excitement around this is not waned at all, if nothing is continued to increase, and that's been driven by candidly, the type of input that the surgeons have had around why this is important to them.

Matthew O'Brien -- Analyst

Okay. So just...

Todd Koning -- Chief Financial Officer

I think that enthusiasm -- I think that enthusiasms been reflected in the fact that, our opportunity funnel is about 20% greater than what it was when we were, excuse me, 25% greater than what it was when we purchased the company. And so, I think that ultimately, kind of, reflects the interest and the engagement we're getting from our customer base. And I think Pat talked about the stand-alone company process was going to sell this to radiology and radiologists had a list that was pretty long. And this would fit somewhere on that list.

Our surgeons are the ones who value the most from the output of the EOS. So the demand, the interest, understanding global alignment, hugely beneficial alignments, the single biggest variable and delivering long-term positive spinal outcome. So all of this is hanging together really nice and we're very, very pleased.

Matthew O'Brien -- Analyst

Okay. So, you know, as I think about the business, there's couple of things I want to make sure we get to. You know lots of momentum with PTP, the US is doing well. Pull through opportunities there. They are growing, what -- 30% plus organically. As I look out into '22, I mean, are there things that we should really think about that could slow down the pace of your growth? And I know, it's not going to be in the 30% again, that's going to be difficult. But is there's something where it's like, hey, you know, there is couple of areas where we could see some headwinds here, you've got to factor in? Or the Street's modeling, kind of, mid-20s growth next year, is that something that seems somewhat realistic or something in that ballpark?

Patrick S. Miles -- Chairman and Chief Executive Officer

Yes, I will let my side, I think you're talking about the specific numeric reflection. I think that the thing that most inspires us is the fact that, we're in the first inning with regard to a lot of the procedural things. And so what happens is, is the way that surgeons approach us is, hey, these guys are new, I'm going to be relatively conservative with regard to the complexity of types of cases that I do, based upon a better understanding of my ability to apply care to my patients.

And so let's say, and not delve too deeply in that kind of the clinical stuff, but they say, they do a single -- grade one single level spinalis thesis, a very simple case. The great part is what's happening is they're walking toward things like corpectomy, and things like long deformity and other types of cases. And so we have yet even see the reflection of those types of advantages.

And so when I start to look at what the foundation for long-term growth is, I become very inspired with regard to, hey, you set the foundation through this in essence approach, spine approach and now you're good to start to walk up the complexity curve is a real competency of our organization and the type of value that a EOS plays and the type of value that are kind of technology platform avails. I think does nothing, but suggest. Gosh, what you're going to do is you're going to expand the number of users and you're going to expand the sophistication of the different types of interventions that they applied with this technique. And so anyway, I have a great confidence in our ability to continue to grow.

Todd Koning -- Chief Financial Officer

Yes, I mean, I think to your point, I think consensus is you know 295 or something along those lines. And if you think about that can kind of be a 20% growth on our 208 gets to I think 250. And then another call out 45 kind of gets to 295, if you add EOS into the mix. And so to your point, I think on average that's kind of mid-20% overall growth against the guide we have for this year.

And so when you try and contemplate that, we're exiting at a 30% PLIF in second half on our organic business. When you consider the fact that as you look at our surgeon -- our revenue per surgeon in aggregate improving and when you kind of dial or dig into it, and you look at our surgeon training metrics and you look at the fact that when you look at cohort by cohort of surgeons that get trained, not only do they adapt PTP, increasingly over time, but they also adopt other revenue drivers of our business, components of our business over time.

And so I think even if you didn't have the same kind of surgeon adoption, you could still get to a very good revenue growth number and I think the past point, our business continues to compel surgeon adoption and so as we look to the future, I think, we think it's bright and are optimistic.

Matthew O'Brien -- Analyst

Got it. Okay. And last one, just in the last minute or so here Todd, for you. Something I get from investors all the time is the loss making position at Alphatec and something that they kind of steer clear, but some of them have to. What do you think about as far as your cash position, your access to capital, and then your burn over the next couple of years? How should investors kind of -- how can you frame that up for investors?

Todd Koning -- Chief Financial Officer

Yes, I think in terms of -- our commitment has been to get to kind of cash flow breakeven as we approach that $500 million to $600 million revenue run rate. In our base case, as we kind of do that at a rate of 20% plus a year. And ultimately, to get there, we're going to need to turn the leverage story and begin to see some of that. And I think you will begin to see some of that going into next year, as we step toward the profile that's required to deliver that.

And as you think about how you get there, I mean, we've invested certainly this year, as compared to last year, I mean, the comparisons are a little bit squirrely, given the fact that a lot of investment was put on hold last year, given the uncertainty and we've caught up. But overall, I think as you look at overall cash burn, the -- I think we'll probably do somewhere on the order of 130 and the full-year this year about 80 that being said, some capital, in particular that sets in capital. Some of that was catch up from last year. And then as you can imagine, as we were making orders for the second half of this year, we were sitting there in Q2 and not a COVID insight, a little bit. And then we're certainly buying for a revenue run rate that was higher than we're exiting this year. So on the cash burn front, I think we probably hit a bit of a high watermark in the year as well.So I think, you'll be able to see some progress toward that in the coming year. Obviously, we're still in the middle of our budget cycle. We're going to continue to invest for growth, and I think that's been the foundation of our success. And there's a ton of opportunity to continue to invest, so that we can continue to do I think special things that compel surgeon adoption. And I think that's all in the pursuit of the perfect spine procedure. And so at the end of the day, I think we can continue to invest in absolute dollars pretty meaningfully and still see overall P&L leverage.

Matthew O'Brien -- Analyst

Got it. Got it. Okay, well, I have kept this long as usual, so I apologize for that. But, guys really do appreciate all the feedback here today it's been fantastic and thanks so much, Tina as well.

Tina Jacobsen -- Investor Relations

Yes. Thanks, Matt.

Patrick S. Miles -- Chairman and Chief Executive Officer

Thanks Matt.

Matthew O'Brien -- Analyst

Thanks everyone.

Questions and Answers:

Duration: 27 minutes

Call participants:

Patrick S. Miles -- Chairman and Chief Executive Officer

Todd Koning -- Chief Financial Officer

Tina Jacobsen -- Investor Relations

Matthew O'Brien -- Piper Jaffray -- Analyst

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