Intuitive Surgical, maker of the da Vinci robotic surgical systems, has been one of the hottest medtech stocks in healthcare lately, with its shares up more than 34% in the past three months. The stock may not be a good buy right now, though, as it is trading for around 84 times earnings.
There are other ways to ride the robotic surgery wave that are less expensive and may have more upside. Alphatec Holdings (ATEC -1.20%) is one such company. Its systems focus solely on spinal surgeries. Over the next few years, the over-65 population is expected to grow to 20% of the total population, according to the U.S. Census.
Let's see why Alphatec could be a good choice for investors now.
Aging brings with it a host of medical difficulties, but one of the most prominent is lower back pain, particularly among obese patients 65 or older. According to a study by the journal Spine, the number of elective lumbar fusion surgeries increased by 62% from 2004 to 2015, with the largest increase -- 138% -- among those 65 or older.
Backed by strong revenue growth
The key to Alphatec's growth is that more surgeons are using its technology. On top of that, the company's purchase of the Robotic-Enabled Minimally Invasive (REMI) robotic surgery system in April for $55 million from Fusion Robotics broadens the number of surgeries Alphatec's systems can perform. The REMI uses a small table-mounted navigation system, with 3D scans and 2D images to help surgeons use their instruments and place implants more accurately.
In the first quarter, Alphatec reported revenue of $109 million, up 54% year over year, due to a 40% growth in surgical volume and 11% growth in revenue per procedure. That continues a strong upward trend in revenue for the company over the past three years.
ATEC Revenue (Annual) data by YCharts
The company isn't profitable yet -- it lost $40 million in the quarter2 -- but there are several tailwinds that could soon make it profitable. These include its ProneTransPsoas (PTP) approach, a minimally invasive spinal procedure; its LateralTransPsoas (LTP) system, which helps reposition a patient during surgery; and its Adolescent Idiopathic Scoliosis (ATEC AIS) approach. The effect of its REMI purchase won't likely be felt until 2025, the company said.
I see the REMI system being nearly as effective in helping the company's bottom line as its $116.9 million purchase of the EOS 3D imaging system in 2021. The company said it expects to see $57 million in revenue from the EOS system this year, up from $48 million in 2022.
Alphatec said it expects 2023 full-year revenue to grow 28% to $450 million and for the company to reach the breakeven mark in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). That puts it on the path toward profitability.
Plenty of competition
Alphatec has plenty of big-name competition in spinal surgery systems, including Intuitive, Medtronic, Johnson & Johnson, Stryker, and Zimmer Biomet, but none of those companies focus exclusively on spinal surgeries.
That specialization is Alphatec's edge, but it doesn't come cheaply. The company spent $44 million on research and development (R&D) last year, up about 37% over its R&D spending in 2021.
Robotic surgeries, which slowed during the height of the COVID-19 pandemic, are on the rise. The company trained 500 surgeons on its systems last year. In its first-quarter earnings call, President and CEO Patrick Miles said Alphatec expects to train another 400 to 500 surgeons on its systems this year. That should have a direct effect on the number of surgeries performed with Alphatec systems.
The company's market share is relatively small, at less than 5%, but that also means there's more opportunity for growth.
Not an easy choice
I like Alphatec's potential, but until the company can trim its losses, it's still a risky stock. While it grew revenue by 44% last year to $351 million, it also lost $147 million, 5.7% more than it did in 2021. Intuitive Surgical, on the other hand, has been profitable for years, so that high valuation the stock has doesn't scare investors away.
Alphatec's goal is to have $555 million in annual revenue by 2025, and that certainly seems attainable. It gave guidance of $438 million in revenue this year in its fourth-quarter report. Many of the costs it is incurring will decrease as the company's sales increase in volume, so within two years, it could certainly be profitable. It is already showing its potential for growth and could reward investors handsomely.
