Good afternoon, everybody. Hope you're enjoying the conference. Matt O'Brien. I cover MedTech here at Piper. Very excited to have the ATEC spine team, not Alphatec, but ATEC Spine team with us today. Todd, CFO, and then Rob, who is the Vice President of SP&A, are with us. Thanks so much for coming all the way across country for us. Appreciate that.
Thanks for having us. Appreciate the invite.
Of course. So let's start with what I'm sure you're sick of talking about, but it's probably the most important question right now, which is the raise, right?
Mm-hmm.
It caught a lot of people off guard, as far as the timing of it. You know, maybe just talk a little bit about the thought process for the raise. And then, you know, let's just start there as far as the timing of the doing the raise now.
Yeah. So I mean, I think really starts with what the opportunity was, and it's a particularly unique opportunity given that the disruption with Globus and NuVasive, and in particular, I think the NuVasive opportunity that this avails us. Given the fact that so much of their business is lateral business, many of the reps and the surgeon customers would be known to us, probably might have hired them in the past and might have been part of training customers or reps in the past as well. And so, you know, I think the quality of that competitive opportunity is distinguished from, you know, what we've seen historically and what we probably have experienced in a more linear fashion. And so I think the high quality opportunity was certainly something that was important.
And then, as we looked at the opportunity and how best to make the most of it, really, you've got kinda, I would say, two ways reps come over. One is kind of linear, and maybe there's a competitive surgeon or a surgeon and rep or two in an area where you already have distribution, and you can kind of bring those in there and make that part of the existing sales agency. And that's reasonably linear and certainly does take some incremental assets. But I think the opportunity to move meaningful groups of people all at once was a very nonlinear sales rep addition. And so I think that also made the opportunity particularly unique and made us think about capitalizing on the opportunity differently.
So what we wanted to do was we wanted to, one, make sure that, you know, the deal closed, and as you recall, there was certainly some regulatory uncertainty there, and so having the deal close. And then we also wanted to prove out our thesis in our ability to actually attract competitive reps and surgeons. And so once we managed those two things, that was ultimately what gave us the confidence to do the deal. And of course, once the deal closes, now you're a bit on the clock as well, and so time absolutely matters.
Clearly, you know, difficult macro environment, but I think ultimately, we felt it was very important to make the most of the opportunity, and really that was the logic on what we wanted to see before we had confidence to essentially do the raise.
Okay, and was there anything incremental from a, you know, once those two got together, that you started hearing very quickly, which decided—you, you decided to make the, the decision, or from an Orthofix perspective with Keith leaving and the team leaving there, where you're like: "Okay, this is, this is just pushing us even farther over to go ahead and do this?
I would just tell you the Orthofix disruption was more, just icing on the cake-
Okay
... or however, whatever else.
That's still a big business, though, right? I mean, that's an $800 million spine business.
Yeah, not small.
So.
I will say, I mean, our approach from a sales distribution standpoint is one of having exclusive sales agencies. And so, you know, we're committed to that. We think it's important for our partners to be committed to us as we are to them. And, you know, the Orthofix model and the C-spine model is a bit mixed there, so it might not be the same type of opportunity as the Globus NuVasive.
Okay.
I would just say that after the deal closed, we talked about the 30 reps that we added, and the preponderance of those came after the deal closed. It's kinda to, to Todd's point, the thesis of, hey, we, we think these guys are going to come, the deal closes, and they come. I think that puts you in a real good spot as far as the confidence to go raise the money now, 'cause they're, they're coming, and they-- That big group came after, after the deal closed.
Okay. How do you think about trying to attract reps from both of those places, both NuVasive and NuVasive GMED and Orthofix ? Because GMEDs got a robot. You guys don't have a fully functioning robot yet, so they've got something that can keep people around with that robot. And then Orthofix is really good at selling biologics, right?
Mm-hmm.
I mean, they had an improving hardware business, but they were really good on the biologics side. I don't think you guys have a, like a monster biologics business by any stretch. So is there a challenge in terms of continuing to attract those folks over because you don't have those two things? Or is the portfolio that you have today enough to really get a lot of these reps over?
When you look at the portfolio, quite frankly, had this disruption happened 18 months ago, I think it'd be a lot more difficult for us to make as much opportunity out of it as we think we can, because our portfolio is where it is. You look at the enabling technology, we've got SafeOp. So all the neural monitoring, the traditional neural monitoring, you need to avoid hitting a nerve, but also the ability to monitor your safeness nerve intraoperatively to avoid the most common complication associated with lateral surgery in SafeOp. So we've got SafeOp as a enabling tech. Obviously, the EOS platform that we have, next year we launch Catalyst, which will be some incremental features there, which we can talk about later.
But you take that from enabling tech, and then you add the Valence system, formerly REMI Robot, and now all of that really begins to become, I think, a very strong enabling technology position. And I would tell you, the acquisition of the robot, I think, definitely spoke to the confidence that big sales agencies have coming to us, because it is something they want to see. And now that we have something there, they know it's coming, and ultimately, not having it today has not been an issue because they know it's coming from that standpoint.
Then I think when you look at the clinical distinction that we've created in the proceduralization of lateral through PTP and now LTP, combined with an ALIF, and our evolving portfolio and deformity, that ultimately I think we can parlay with the existing installed base of EOS. All of that becomes quite a compelling, I think, product story. And then when you think about if you're a sales rep and you want to spend the next 10 or 15 years with somebody, who's growing, who's got new products, you know, we're probably the best game in town to come to and hit your wagon with. And so I think ultimately you've got a lot of good things working in our favor to continue to attract the right kind of sales reps.
Of course, it starts with the surgeon adoption, right? So it's clinical distinction drives surgeon adoption, so surgeons want to ultimately use this. This is why the NuVasive thing is so important, because the fact is, many of those surgeons are lateral surgeons, and they require neuromonitoring, and we're the only other company that has neuromonitoring solutions. So when you think about the opportunity to take the most of the disruption, we're so perfectly positioned to make the most of it. I think that ultimately plays nicely into how we're thinking about it.
Okay, got it. We'll get a little bit more into the financials here in a second, but just to stay on this, you know, disruption opportunity.
Mm-hmm.
Between GMED, NuVasive, and then Orthofix, I'm assuming there's probably 1,000 reps out there that you can go after. I mean, with this extra money that's in the door now, you are already going to target some of those. I mean, how many, how many can you get, you know, would you have gotten already, and then how many more can you get with this extra money in the door?
I think we really frame up the incremental opportunity. You know, we've talked a lot about how it takes $0.75 of investment and sets in inventory to drive $1 of incremental revenue growth. And so if you used all $150 million for the sets in inventory, that would translate to $200 million of incremental revenue. And so if a rep is fully productive at, say, $2 million, that's about 100 incremental reps. And so I think, you know, that's a way to frame up the incremental opportunity.
Do you need more cash then, to add even more reps than that? Or do you think you can get to the point where you're-
Well, I think this bridges us to-
The self-sustaining point.
To the self-sustaining point.
Okay. And I guess kind of along those lines, I guess in the, in the near term, those 30 reps, are they going to all have non-competes, or are you going to be able to place them in places where they can be productive right away?
If you're in California-
Yes.
Non-compete, so that's different. Outside of California, really, you have to respect the non-compete. One way to respect it is to set up cross coverage. And so I think that is one of the benefits of being able to attract a group of people within a territory, so that they can cross-cover cases and still be respectful of the non-compete obligations that they have.
Okay, but a big chunk of those reps you just got are in SoCal, right?
Yeah, I think what we talked about, yeah, maybe 10+ in SoCal, 15 or so here in the Northeast-
Got it.
And the balance gathered around.
Got it. Appreciate that. I guess, to the question I was asking earlier, you know, you've been growing 30%-40% now for the last couple of years. Does the extra capital get you to sustain that level of growth for the next several years or even make it faster?
Yeah. So I think, you know, the core of that question really comes down to our ability to drive profitability and expand, expand operating margins. And we laid out in our long-range plan, going from 2021 to 2025, expanding operating margins by 2,500 basis points, and really getting about 300 basis points to that out of R&D and 2,200 basis points out of that, out of SG&A. About 1,200 basis points come out of leveraging the overhead, the infrastructure that we've built in the company. So you know, the facility we have in Carlsbad, our Memphis distribution facility, we've built out our surgeon training, executive teams in place, sales management teams in place. Much of the infrastructure required to drive this business is in place, so growing on that, on that base allows you to drop leverage.
In addition to that, our ability to drive variable selling expense improvement, about 1,000 basis points over that timeframe, also helps. We're about halfway through that time horizon and are totally on track for delivering. Actually, a little bit ahead of on track for delivering on the Adjusted EBITDA commitments there. And the good thing is, and I think sitting in my shoes, you know, what gives me confidence, our ability to continue to do that, is that we've been doing it in the way that we laid out. And so obviously, first thing is hit the number, but to give you confidence, it's sustainably got to hit it in the way you designed it.
So, you know, ultimately, our hitting the number the way we designed it and developed the organization, gives me confidence that we can continue to do that. So I think ultimately you start to see margin expansion, kind of beyond what we're doing here, this second half of the year, going into next year and then into 2025, and you're generating enough EBITDA to essentially fund your investments necessary to continue to grow on the top line.
Got it. Okay, appreciate that. As far as 2024 goes, the Street's got you growing 20% on the top line, but that absolute year-over-year improvement's $95 million, and you've done 120, you're going to do about 120 this year and 110 in 2022.
Yes.
Why would the absolute number slow down with, you know, this incremental investment that you're doing?
I think that's, that's the right question. I mean, we haven't been public about 2024 numbers at this point, and so I guess I'll defer that till, till later.
Tina's not here.
Tina can't keep me in charge.
Yeah.
But, you know, I think at the end of the day, when you look at the opportunities that we have, what are the tailwinds? I mean, our volume has been consistently strong. We had another 25% more surgeon users in the third quarter than we did the previous year. We also know that surgeons use more every year than they did the previous year. If you look back, all the way back to the 2018 cohort, they continue to adopt more and more of our procedural offering. And so, you know, that's through both lateral, using lateral and more complex applications and pathologies as they get more useful with the portfolio—the platform, adopting our cervical and our posterior solutions as well.
And so you, you're starting to, I think, continue to see a strong underlying volume growth in the business. And I think, I think that is, again, another sustaining driver of, of future growth, because you know that your, your existing cohort of surgeons, even if you didn't add any more, you're still gonna get more volume growth off of the guys that you have, based on our historical experience and the adoption of the full portfolio. And it kind of speaks to, you know, our same-store sales growth. We've all oftentimes talked about the strength of same-store sales, meaning sales agents who've been with us for a year or more, that growth rate being very much in line with the overall growth rate. Essentially, making the point that we're growing in the territories that we're at. We're not just growing by adding territories.
That's important for two reasons. One, it proves the point that you're getting more utilization out of existing surgeons, and you're expanding your overall penetration of the surgeon pool within a territory. Both of those are important for growth and the sustainability of growth.
Got it. Okay, appreciate that. As far as... I was just thinking, that was starting to get me to think about some of the market share that you have. So, I don't know if there's a couple geographies you can mention where you're really strong. What kind of share do you have in some of these better markets? Because as I think about the business today, $500 million-ish in an $11 billion market, you know, and you don't really sell OUS at this point, you know, domestically, that would probably put you, you know, more like 10% penetrated. Are there geographies where you're 30, 40% market share, anything like that?
Yeah. So I think we like to say we're about 5% market share. I mean, say, so say $400 million on, on, you know, $8 million-$10 million in the US, whatever it is. But in the markets where we're well covered, when we mention some markets like a market like Northern California, Houston, Sacramento, where we have good coverage, we're 25% market share in those territories. And so when you look... And that's offset by some territories where we have no presence, right? And we've talked about, or, you know, recently, these recent ads in L.A. and New York, which I think until now, we really had no substantial coverage in. And so there's still open geographies in places like Philadelphia.
The Northeast, we just got on the Providence contract, or sorry, the Northwest in Washington and Oregon. And so I think building out teams in Portland and Seattle is a little bit of white space that we want to take advantage of. And so there's opportunities where we're still close to zero. And, you know, if you think about those close to zero with good coverage, we think those no reason those can't be, you know, 20%+ market share spots when we have the appropriate coverage in those areas.
Do you think you can be a 20% market share of the spine market eventually?
That's it.
Sure.
Okay. And then maybe, Rob, for you, just on the EBIT side, I know you had said that, or maybe Todd had said, but, these sets drop about, I think, $50 million to EBIT line, I think, in year two.
Yeah.
Is that right?
Yeah, yeah.
So as we get out to 2026, 2027, can we expect $100 million of incremental EBIT from the sets that you're putting out from this capital raise?
Well, the 150, yeah, so the 150, I think there may be a timing question, but I think if, if you just look out into the future-
Yeah
... you would on the increment, I think what we basically communicated is, yeah, out in those out years-
Yeah
... there's 50% drop-through. I mean, now, of course, some, will we reinvest in some form or fashion in the business, in R&D or, or in other ways? So maybe some of that gets used to, to invest in the business, to continue to drive growth in the future. But, but certainly just in, in isolation, that $100 million revenue stream, or $200 million of incremental revenue, should have $1 million, or sorry, $100 million of EBIT, EBIT to drop.
Okay, so-
some of that potentially gets reinvested, but-
Yeah
... at the end of the day, there's a significant amount of opportunity-
Right
... to drive drop-through.
What I'm really getting at is that, you know, you got, you know, people were really frustrated about the raise, but the top line benefit is gonna be meaningful, obviously. But then the bottom line, I don't think is fully appreciated either.
Well, completely.
So-
But even if you look at our third quarter, I mean, our third quarter is the first quarter we lapped really kind of our Adjusted EBITDA comp, if you will. Second half last year, we expanded Adjusted EBITDA margins by over 800 basis points, first half, 1,100, 860 basis points now here in the third quarter. So starting to lap that margin expansion. And I think the third quarter implied somewhere around 30% drop-through in terms of absolute dollar drop-through. Second half, I think, implies mid-30s. And so I think you're starting to see more of that-
Okay
... come through in the results and certainly in the fourth quarter guide as well.
Got it. Okay. You've added two people to the company-
Mm-hmm.
that are long tenured, very well respected in the space. What does Keith bring to the business? I mean, what is he gonna be doing as a special advisor? And then where is Dave gonna be focused?
Yeah. So, you know, I think clearly, Keith and Pat, their relationship goes a long way. And I think having somebody as a special advisor that you can talk to, bounce ideas off of, that you trust implicitly, and who has the operating experience that Keith does, just adds context and perspective. And I think that's an important thing as we continue to grow and scale the organization. Their shared history, I think, kind of gives them a lot of leeway to do that. And then when you look at Dave, it's great to have Dave as well on the board. I mean, Dave's been in the industry for a long time. He's a total operator.
I mean, he understands profitability, he understands, you know, enabling technology, robotic platform. And so, I think his, you know, his influence will be seen in multiple parts of the business.
Mm-hmm.
Really appreciative by having both of those guys with that kind of operating experience in the marketplace. And clearly, both have influence in kind of the historical selling organizations as well. And so I think that also gives a bit of credibility to ATEC as we continue to grow and attract competitive hires.
Do they have non-competes where they can't go and try to get some folks out of GMED, get some folks out of Orthofix?
You know, I think ultimately, you know, management's got to run the business and do that. I think just being a part of the story is sufficient.
Okay, fair enough. Talk about the robot then, REMI. Where are we at with that system? How critical is it for you guys going forward? And, you know, we've seen delays in these systems historically. I mean, GMED had a 1.5-year delay, NuVasive never could get theirs, you know, figured out. Why is REMI going to be different?
Yeah. So I, I guess what I'd tell you is, you know, when we, when we did the deal, we, we really kind of, you know, anchored on, on a couple things. One, getting our posterior fixation system cleared on the system within the first, you know, by the end of the year. We did that, I think, in September. So that, that's now cleared. And, and, and so then getting it into the hands of friends and family. So we're in the process of doing that. And really, over the course of this year, end of this year and, and, and into next, as the friends and family kind of utilize the robot with our posterior fixation system, that will help us inform how ultimately we'll integrate this.
And because really the main, we call it the main dish, is really getting this integrated into our lateral procedures. And so our view is 2025, we ultimately have an integrated lateral LTP and PTP procedural offering that has a robotic and navigation-enabled component to it. And so what that looks like as we think about it is how do you ultimately create predictability and precision, and reduce the amount of radiation that a surgeon and a patient have to experience during a lateral procedure? Lateral procedures require a lot of radiation. One of the most complicated parts of a lateral procedure is placing the retractor, and that takes a lot of fluoroscopy to put it in the right spot.
You know, after you've done the dilators and used your neural navigation, so SafeOp, then you place your retractor, and getting that in the right spot takes definitely some time, effort, and energy, and a lot of radiation. And so being able to do that through a navigated approach with a robot adds a lot of benefit. And then really navigating your disc prep and your interbody placement, and your posterior fixation. And then if you think about being able to monitor the position of the retractor, especially for prone, where you've got the vessels on the anterior side of the column, that if that retractor, you know, I guess, sinks a little bit, it can put those at risk. And so being able to monitor that position gives a little more confidence as well.
And so, being able to do all that with a robotic navigation system, allows you to avoid a lot of the radiation as well. So then you've got predictability, you've got precision, and you've got less radiation.
Okay.
Maybe just to speak to the confidence element. You know, one thing you hear Pat talk a lot about is know-how, and I think with the team that was part of Fusion Robotics, you have, Brad Clayton-
Mm-hmm.
and others who were part of the original Surgical Navigation Technologies back in the late nineties, which was acquired by Medtronic, which eventually became Stealth. They were involved with the Mazor integration into Stealth. And so you talk about a group that knows what they're doing.
Yeah.
And it gives us a lot of confidence that, you know, as we're trying to integrate these things that Todd just talked about, we're coming from a place. I say we, but the team is coming from a place of they know what they're doing, they've been there before, and they've kind of seen the rodeo before, so to speak. And so I think that gives us confidence that we can hit the milestones that we're looking at.
You're thinking NASS 25 is when you're going to show it or start selling it?
Say again?
NASA Twenty-five.
Yeah, I think 2025, ATEC is a good-
Okay
Place to put on your calendar.
So later in the year. Got it. Okay. And then, just a minute to go here, but EOS 2.0, how big a deal is that? I mean, what's different there, and is it going to help you get into even more centers going forward?
Yeah, I think it's a really big deal. It really is the beginning of kind of the promise, I think, in some ways. I mean, you know, it gives you automated measurements, and so all of your Spinal Pelvic Parameters be measured automatically. You know that the literature will tell you that alignment is the greatest correlative to positive spine outcomes. And so, you know, part of the challenge today is it just takes time, effort, and energy to do all the measurements and whatnot, and so people typically don't do it. And they don't use the planning software, because the planning software isn't integrated into any of their workflow today. So automated alignment measures, automated 3D surgical plan, then creates a pre-bent patient-specific rod.
Being able to then to take that plan and then do a comparison intraoperatively of how you're achieving your plan. So all of that becomes what we call Catalyst, and that is significant, I think, innovation and moving the ball forward. It's kind of the beginning of the promise that we are delivering on, and I think ultimately it becomes a catalyst for incremental orders in 2025 and 2026, and ultimately deliveries and revenue thereon. You know, I think it's a meaningful addition to what I think truly the system can provide in terms of incremental value to a surgeon's practice.
Got it. Okay, very clear. Well, looks like we're out of time, so I have to cut it there. Todd, Rob, thanks so much for all the feedback. Really do appreciate it.
Thanks, man.