Good afternoon. My name is Craig Bijou. I'm one of the medical device research analysts here at Bank of America. And it's a pleasure to welcome ATEC Spine. And from the company here, we have Todd Koning, Chief Financial Officer. So Todd, thank you.
Thanks for having me, Craig.
So let's— You know, I wanna start big picture. I mean, obviously, I don't cover you guys. So maybe just before we dive into some of the details on Q1 and your business in the spine market, let's just talk about what you guys have done over the last three, four years. You've had an impressive run. Growth has been, you know, well into the double digits, really impressive. Market share taking over the last three years. I think you're at 6% roughly now. So maybe just talk about what's driven that products, you know, rep hiring, procedure development?
Yeah, absolutely. Thanks for the opportunity. You know, I think if you look at the kind of the remake of the company since 2018, I think we've grown at an annual CAGR of about 40% over that time frame. And when you kinda dig in and you look at how we really started with that, I mean, clearly, when we rebuilt the company, there was a big focus on upgrading all of the core components of a spine surgery. So all the posterior fixation, the interbodies and the plates and all of those types of things, 'cause fundamentally, you have to have that.
One of the benefits we had was we were able to attract a very large number of some of the best engineers down the road, California being a right to work state. Ultimately, we're able to do that and fundamentally have one of the—what we think to be one of the best, you know, R&D. We call it the innovation machine, the organic innovation machine at our place to really create some best-in-class posterior fixation and interbody work. Ultimately, we, we've done that, we've kind of perpetuated that and continued to do that. Along the way, we bought a company called SafeOp.
SafeOp was our neural monitoring platform, kind of knowing that we ultimately wanted to set out and answer some of the questions around why did lateral surgery only really penetrate a third of the potential market that it could have? You know, why did it kinda cap out that way? And so really being wanting to answer that through really what we kinda consider a novel lateral procedural offering in the form of PTP, knowing we needed a neuromonitoring platform to do that, to facilitate that. Because if you're gonna do lateral surgery, you have to be able to avoid injuring the nerves when you create your surgical corridor through the retractor placement.
The other thing that we were able to do with SafeOp, which is totally unique to ATEC, is to be able to monitor the health of those nerves intraoperatively. That allows you to essentially avoid the most common complication associated with lateral surgery, which is neural deficit in the, in the legs and the thighs. And so that has been a, a, a strong, strong moat around our lateral offering, and one of the reasons why we see a lot of adoption. Lateral surgery has really been the premier driver of growth of the company. It perpetually grows at a rate faster than our overall rate. We think that we have about 12% of the billion-dollar lateral market today.
We think that $1 billion could actually be $3 billion as we penetrate some of the more traditional posterior approach surgeries, and convert them to lateral surgeries. And so lateral has really been, I would say, since the late 2000, early 2001, the driver of growth of the company. Along the way, we also bought a company called EOS, which had an imaging. Well, it was an imaging company, and it allows for full-body standing imaging. And there's a couple things: One, it's a low-dose radiation, so it's great just from a patient standpoint. Two, it doesn't have any magnification issues.
What that means is you get a standard image, which really has allowed for the comparison of images over time, which is something that spine has lacked forever, an ability to compare a patient longitudinally over time with imaging. So EOS enables that through its unique imaging technology. And then the other thing it's also done is given us an entry into the deformity space. You know, we're very much a degenerative lumbar-focused company. That's where lateral surgery is. Like, that's been a lot of the history of the company.
With EOS being widely accepted clinically by some of the most foremost experts in deformity, like the International Spine Study Group, the Scoliosis Research Society, it tells you that the technology is good from an imaging perspective and helps them understand and treat patients. And so we have developed and'll be launching later this year a suite of products that kind of further that. We can talk more about that. But it's been a part of how ultimately we are gonna start entering and impacting and influencing an adult and a pediatric deformity space as well. And so, that's really been on the technology front and really the procedural. I think the other thing is, you know, we are very focused on procedures rather than widgets, if you will.
And so our focus on helping the surgeon do better surgery from the minute they open the patient to the minute they close them. I think that ultimately helps us create procedures that ultimately help surgeons do better surgery. And we've designed from kind of all the requirements necessary to do that, rather than just the interbody. And we kinda come back to our principles of create clinical distinction, meaning you help surgeons do better surgery. That will compel surgeons to adopt, and once you've done that, you'll be able to track the sales organization. And so if you kind of go back again to 2018, clearly we had people selling our products then. There was a lot of non-exclusive agencies that were out there.
We have really remade the sales organization into an exclusive sales agency model. And that has really been through the improvement in the product portfolio and fundamentally, the, I think just the quality of the company and the quality of our products and procedures that we're selling. And so, you know, we continue to attract some of the best sales folks out there. But what is most important is that we're driving surgeon adoption through clinical distinction, and then ultimately finding the sales support to support that surgeon adoption.
Got it. Thanks for that. Or thanks for the overview. You know, I wanna talk about Q1, but actually, you know, given some of the comments that you just made, maybe, maybe I'll ask first about the lateral market. And obviously, you mentioned the 12% market share in lateral. You know, there's a market leader that's roughly 50% share. So I guess maybe if we can go a little bit deeper into kind of what's driving that. You know, you have PTP, you have LTP, so a couple of different procedures focused on that market specifically. And then what are you bringing to the market that maybe is missing from the market leader and then, you know, the rest of the competitors in the space?
Yeah, great. So, you know, we really started with PTP in a couple of things. Our neuromonitoring platform. So if you look at all lateral procedures, it's really NuVasive, which was the, and or is the NVM5 platform, and SafeOp, which is our neuromonitoring platform. Those are the two monitoring platforms that have surgeon-directed EMGs, which essentially means that you can avoid hitting a nerve when placing the retractor in surgery. That's really important. You don't want to injure a nerve. And that's kind of table stakes. It's why NuVasive was able to hang on to so much of that market share over time, even though so many competitors kind of came in with a lateral offering, because none of them offered a competitive neuromonitoring alternative.
And so we came along, we bought SafeOp, created surgeon-directed EMG, so that allows us to enter the spine or enter the muscle, the psoas muscle, to create a surgical corridor without injuring the nerve. The other thing that we were able to do is monitor the health of those nerves in real time. The most common complication associated with lateral surgery is neural deficit in the thigh. It's because the saphenous nerve can get starved of oxygen. And so ultimately, what we are doing is monitoring that nerve. And so if it seems to be degrading, we can close the retractor, let it rest, let it reperfuse.
You get a green light, and then you can open it back up again, and you can finish your surgery in that, in that sense, without potentially injuring the nerve in that way. So that has been a huge competitive advantage for us, and has also been a moat around the share that we've been able to take because we keep it. From a lateral surgical procedure standpoint, the fact that the patient is in a prone position offers so much versatility. And because from being able to access the posterior spine, you can decompress certain parts of the spine if that's what you want to do, do some direct decompression, and then you can finish your lateral and do some indirect decompression. It gives you more optionality as a surgeon, ultimately.
I think that optionality is appreciated, and surgeons like it because they have those options. So you can do a, you know, an S1 on up. You could do a TLIF at S1, L5, and then you could do laterals L4, L5 on up, if you needed to do that. You do that all in a single position without having to move the patient, and then you can do your posterior fixation in that same setting. So it gives you a lot of flexibility. It also gives the OR and the OR staff a ton of efficiency compared to laying somebody in the lateral side or in the lateral position, lateral decubitus position or on their side.
You know, I guess the other thing I'd say on that is if you look at LTP and its uniqueness, and much like PTP, where you've designed for all of the requirements of the procedure. Maybe let me go back to PTP before I go to LTP. You know, the retractor design that's got some very unique things that were specifically designed to help the surgeon know if they're orthogonal through fluoroscopy. And there's just some very good, elegant design factors associated with that. The weight of the retractor is really important because in the prone position, gravity kind of works against you. And so you had to design the retractor, so you wouldn't have to do that. We've got a two-bladed retractor, which is unique and specific and has some advantages to a three-bladed retractor.
And then, of course, we have the patient positioner. And the patient positioner is specifically designed for PTP, and it's radiolucent, and it's got all sorts of ways that you can, with precision, position your patient in a way that you can't with tape. And so I think from our perspective, when you know that spine surgery, lumbar, even like 1-2-level spine surgery, has a 10%-15% revision rate, when hips and knees have a 1%-3% revision rate, it tells you that spine surgery still has a lot of improvement and opportunity. And so our thought was, how do you bring predictability and precision into the procedural approach? And that's kind of where you see all of this design sophistication in the procedure, not just the interbodies and the screws.
And from an LTP perspective, you kind of have all of that procedural sophistication available to you, but you also have the opportunity in a single position through tilting of the table or the positioner to do an ALIF at L5-S1. And that's just a real elegant way to do an ALIF at L5-S1 and do some laterals above, and then be able to provide your posterior fixation, all without having to flip or stage a patient.
Got it. That's helpful. Maybe just, you know, you mentioned in the beginning, $1 billion lateral market-
Yeah.
-going to $3 billion. So, one, kinda, I guess, maybe explain what expands that market, and when you look at what you guys are doing specifically, yes, there's share capture, but how much of it is actually expanding-
Yeah
The lateral market by pulling in some of those traditionally lumbar procedures?
Totally. So, you know, we sized today's market at $1 billion. There's about $2 billion of PLIF and TLIF business that's out there, so traditional posterior approach surgery. The opportunity is to essentially adopt a lateral approach where you're today using a PLIF or a TLIF. And so the question is, why hadn't they in the past? And so clearly, neural injury was a real cause for concern, and SafeOp addresses that. And fundamentally, kind of positioning and somewhat of a bias towards wanting to be or having the ability to do some posterior decompression. But the beauty of a lateral surgery is you get a much bigger interbody than you do a PLIF or a TLIF, and that should ultimately mean better opportunity for fusion. And that's really what you're trying to accomplish, is a fusion.
And so lateral surgery gives you that opportunity. It gives you some indirect decompression. All of that should lead to less blood loss, and a faster recovery, and, and really, a less muscularly traumatic experience. I think there's also a dynamic that goes on when the patient's in the prone position for PTP. It's a very familiar position for people who do traditional PLIF and TLIF approaches. And just from an adoption standpoint, the bailout procedure is right there.
It's kind of at their fingertips. And so our walk into the lateral market has been very much one of share taking, and essentially, people who have used lateral surgery in the past, really wanting the next gen lateral solution, which is PTP. And so that has been, I think, largely our experience in growing lateral. I will say more and more often, though, you see and you talk to surgeons who primarily are TLIF surgeons, coming in, learning the procedure, and beginning to adopt. So I think we're very much on the thin edge of the wedge there, but starting to see that make a difference.
Got it. That's helpful. Maybe let's kinda shift over to Q1. We're not too far removed from you guys announcing. So maybe a quick recap. You had strong growth, 30% revenue growth on a tough comp. So maybe just talk about some of the highlights on the revenue side from the quarter, and then maybe we can get into some of the profitability.
Yeah, absolutely. So, to your point, our surgical revenue grew 30%, on a 55% comp, toughest comp of the year. Just what we thought was, I think on the surgical revenue, about $2.5 million north of where consensus was at, to your point. Just, I think a strong quarter. I mean, volume growth there was in the low 20s, with revenue per surgery being about 6%. So I think we're 23% volume growth, 26% revenue per procedure growth. Revenue per procedure grew nicely. Our guide's really typically been around mid-single digits for the full year, so kinda right down Main Street there. Relative to that, I think some good tailwinds on, you know, biologics, attach rate, expandables.
Lateral surgery grew faster than any other segment of the business again. Lateral has a revenue per procedure that is twice our overall average. And so, that also kind of benefits the revenue per procedure on average, just from a mix standpoint. From the volume perspective, I think 23% volume growth, that was underpinned by 21% surgeon adoption. And so, you know, oftentimes, like, we like to point to or people like to point to the addition of reps and those types of things for an indicator of future growth, and that certainly is. But fundamentally, it's a little bit of a lagging indicator because typically, you go and grab the sales rep once you've got confidence, the surgeons wanting to adopt your technology.
So the fact that we had 21% surgeon growth is such a leading indicator to future growth. It's a huge thing for us. The other thing I'd tell you is that we talked about 150 surgeon training engagements. If you go back to 2022 and 2023, we have done about 500 trainings a year. The high-water mark is typically in the second quarter at about 150, meaning the other quarters are between 100 and 125. We had a significant step-up in surgeon training in the first quarter, which is really a reflection of the level of interest in what we're doing, and is a great leading indicator for surgeon adoption, which obviously is what drives procedural volume. We raised our guidance.
You know, we beat by 2.5, raised the back half by 3.5. We did that on the basis of incremental volume growth. I think the thesis that we laid out in October of last year when we did our capital raise, which was ultimately to buy forward instruments and inventory so that we can continue to grow the business at significant rates and take advantage of a fertile field for rep conversions to support the surgeon adoption. I think that's playing out exactly as expected. That's evidenced by the surgeon training, the surgeon adoption. I'd also say that 21% surgeon adoption is twice that which we laid out in our long-range plan.
And so, I guess the last point I'll make, and I know I keep saying this last point on surgeon adoption, but the last point I'll make on that is, you know, our surgeons use more and more product, or procedures, or adopt more procedures, every year after they have come and started using ATEC procedures. So their, our penetration in their practice grows every year, and we've seen that going all the way back to the 2018 cohort. And so kind of getting back to a confidence of our ability to continue to grow, on the basis of surgeon adoption, that's already happened, much less to say the surgeon adoption that's to come.
Got it. Profitability is a key to, I'd say, investor debate for you.
Absolutely.
So maybe just talk about kind of those metrics in Q1. You did give a longer-range plan last year, and so, you know, maybe in conjunction with the Q1 performance, just talk about what do you expect for the next couple of years from a profitability perspective?
Absolutely. So, in the quarter, we saw about 450 basis points of operating margin expansion. We had Adjusted EBITDA, excuse me, Adjusted EBITDA margin expansion. We posted a negative $3 million on Adjusted EBITDA in the quarter. Our guidance for the year assumes $23 million. And so, as we continue to expand... Well, the way we expanded our profit margins this quarter was of that 450, about 50 basis points was from gross margin, and so we're getting some volume leverage out of our Memphis operation. We're getting also some operational improvements out of our EOS business that's improving overall margins there. And so, you know, we saw a little bit of a year-over-year tailwind there.
R&D, we saw about 100 basis points of leverage in the quarter. That's kind of where we expect that to be. And then, SG&A, saw about 50 basis points of improvement, but 200 of that was, or excuse me, 100 basis points of improvement, but 200 of that was a headwind due to depreciation. So when you strip depreciation out of there, you get 300 basis points of SG&A expansion that contributes to Adjusted EBITDA.
So if you look at the long-range plan that we laid out, so kind of getting in 2027 at $1 billion, getting to $180 million of Adjusted EBITDA, you know, really, what we modeled over that timeframe was flat gross margins, kind of with the tailwinds of surgical revenue mix, more complex, interbodies and those types of things, to be able to mix out of any kind of low single-digit pricing. So kind of flat gross margin over time, R&D getting better with about 300 basis points, and then SG&A, the balance of that, with variable spending, about 1,000 basis points of that, and then kind of leverage off of the infrastructure we've built.
And so, really, our profitability lever is one of revenue growth. And so as we grow revenue, we get leverage off the fixed cost that we've essentially invested in the company. Because if you think about what we've done in the last 4 or 5 years, we've essentially built this infrastructure, kind of this frame of a company, which we're now hanging more and more revenue off of, but not really building the infrastructure anymore because we've built it. And so if you look at the total drop through, if you will, so incremental revenue dollars dropping through Adjusted EBITDA, it's in the low 30%. So it seems like a very reasonable amount of drop through over that time frame. It implies our operating expenses outside of the variable expense grows at about half the rate of sales.
And so that's a very doable kind of down the road, down the middle of the fairway, you know, growth rate for your spending profile over that time frame. And then from a variable spending or variable selling expense standpoint, we've got essentially contractual walk downs in our commission rate structure. We also have a two-tiered structure where we have a base rate, and then we pay for growth. And so for each individual agent, as they get bigger and the growth dollars get a little bit smaller, just law of large numbers, the averaging effect helps, and then also those rates kind of walk down contractually over time.
So, you know, I think we're, you know, it's the same setup that we've walked over the last 18-24 months on profitability, and I think we've demonstrated an ability to do that, and are, you know, have confidence in our ability to continue to do that, for the reasons I've stated.
Good. Thanks. And so, if I go to the day that you guys reported, you know, the stock sold off, you know, pretty significantly. It's recovered a little bit, but, you know, I am of the view that a lot of that sell-off was likely based on Globus's comments and on their integration with NuVasive. So I wanted to spend some time there, you're a logical beneficiary of that, given pure play. So, you know, from that perspective, I mean, and I think you've talked publicly about you know, the ability to bring on some of the reps from that disruption and other disruption. But maybe just talk about, like, what you've seen recently. So, you know, what was that a 23?...
You know, more of an investment, and then now it's, it's trailed off a little bit and, you know, maybe what are the considerations when you think about what-- how much benefit you can get from some of that disruption?
Yeah, and maybe I just wanna kind of restate the record a little bit for us. I mean, when we did our raise, in October, consensus was 555 for this year. We're now at 601. Six months later, we're $46 million higher. So I think the level of confidence in the execution is, is in being demonstrated, I think that's a proof point one. I think at the time of the raise, we said we were able to attract 30 reps from disrupted companies. And keep in mind, there's disrupted companies and there's competitive companies. The disruptive are a subset of the superset-
... of competitive companies. Third point is the course of our growth, the 40% growth we've demonstrated over the last 5 years, we've been attracting competitive reps to support the surgeon adoption. So all of that's in kind of established. As we came into the year, we gave guidance, and the guidance implied high teens volume growth, mid-single-digit revenue per surgery. And we said we didn't need any more disruption, conversions, if you will, to achieve guidance. So that was kinda how we came into the year. Our long-range plan update, we said we've now attracted 50 people from the disrupted companies, and we've been clear, you know, New York, New Jersey was a big group. Los Angeles was a big group.
On our Q1 call, we said we've seen more, and we gave some geographic description to that. So Southern California, south of Los Angeles, the Northwest, the middle of the country, and then continued success in the Northeast. And so I think we've been giving good updates on our ability to attract talent. Anecdotally, I was in our sales training class last week, and there was 25 men and women in there. Medtronic, Stryker, J&J, Globus, NuVasive, SeaSpine, like, they're all there. So we're clearly attracting the talent and... But make no mistake, it's clinical distinction which drives surgeon adoption. Surgeon adoption is the key, and so hiring is a kind of lagging metric.
The leading indicator is what I was talking about earlier, surgeon adoption at 21% and 150 surgeon trainings, which really is a reflection of the surgeon interest and the support of selling support that is in place.
And-
And so, maybe just finally, you asked, how are we seeing it going forward? The funnel's never been better. And, and I think our ability to cherry-pick the people we want to support the surgeons who are adopting, we feel very good about.
I guess, maybe a follow-up on that is just, you know, the pace of, you know, your hiring and the balancing, you know, some of your profitability goals.
Totally
... with bringing on reps and, you know, essentially not doing it too fast, whether it's disruptive reps or competitive reps.
And so, I mean, the considerations. I'm assuming that's a consideration that you're constantly going through.
Absolutely. I mean, I'll tell you, our head of sales and I, we meet every month. We look at the investments we've made, what was the assumption on the top line, the spend? How are we tracking? How's the funnel looking? And we kind of risk adjust our investments on the forward basis of how big is it, where is it relative to where we wanna be and where we need to be? How quickly and what's our confidence that we can ultimately achieve the goals that we want, from a revenue standpoint?
We only have a minute left, so I don't know if I have enough time to start a new question. I did wanna touch on international.
Yeah.
Just from a high level, I mean, it's kinda new to you. Maybe with the last minute, just talk about your strategy there.
Yeah, narrow and deep, and so I think, I was the international CFO at a previous company. It was a pretty broad footprint with a pretty broad cost basis. I think one of the things that Pat and I agreed on up front in my recruitment was international needs to be narrow and deep. Because ultimately, you wanna sell a clinical procedure to people who can make decisions, and to a health system that values that clinical decision and values the procedure. And so that really allows you then to penetrate a market deeply by going direct. And when you're direct, you control the messaging, and you control the engagement and ensuring that your surgeons get the kind of surgical support they need. And so that led us to Australia, New Zealand, and Japan.
Of course, we've got the U.S. There's so much to do. We got plenty of growth.
Great. With that, I think we're out of time, Todd, so appreciate it.
Thank you.
Thanks, Todd.