All right, good afternoon, everyone. Welcome to day one of the Jefferies New York Healthcare Conference. My name is Yang Li, one of the med tech analysts on the US team. Really pleased to be joined by management from Alphatec. We have Pat Miles, Chairman and CEO, sitting next to me, and Todd Koning, EVP and CFO. So this will be a moderated Q&A session. Gentlemen, welcome, and thanks for coming.
Thanks for having us.
Thanks.
All right, great. I guess to kick off, maybe to start off a little bit high level, you know, Alphatec has been the fastest organic grower in spine in recent years, 40% CAGR since 2018 versus low single-digit growth for the market. You know, what's enabling that strong growth and during that time and also in recent quarters? How sustainable are those growth drivers going forward? And, you know, how would you characterize the overall health of the spine market?
Yeah, I would say that, you know, our thesis has been well aligned with the requirements of a market that needs intervention, and so we like to say that the spine market needs ATEC. And so what we've done is really kinda architected a procedural approach. One of the virtues of being a spine-only company is you're completely aligned with your customer. And so as a spine-only company, we have architected procedures such that if a patient goes into a practice in need of an intervention based upon a specific pathology, the spine surgeon often thinks of: What procedure will I apply to this patient to ultimately eradicate the pathology?
And so when you architect procedures, and that thesis gets an uptake or a demand profile, then what happens is you make progress. And I would just say, in a very plainspoken way, you look at something like our sophistication within lateral surgery, and I think it's clearly demonstrative of a unique sophistication in a way that we've grown a business much more aggressively than anybody else because it reflects the requirements of the environment that we're intending on addressing. And so I would say that when you say why have we grown at such an outpaced reflection, I would say that we've been better stewards of the requirements of the environment. As it relates to the health of the spine market, it feels very normal.
I've been at this a very long time. I think if you look over the time and you say, you look at the, the profile of the patient that gets intervened upon, historically, it's been a patient that's been 70-75 years or younger, and now what we're seeing is based upon, the limited morbidity, the less, time under anesthesia, the opportunity to expand the field of people who can get intervened upon and helped through spine surgery has grown, and, and we're right in the middle of that. I think the thesis of our procedural strategy is reflective of that, and so we're totally bullish on the environment.
I'd add to that, Yang, you asked about the quarter and our top line growth, 27% in total, 30% surgical growth, and, you know, how that kinda compares and lays out to our Long-Range Plan. You know, our Long-Range Plan implied about 20% growth, getting to $1 billion in 2027. Surgical revenue growth kinda grown in the low 20% range over that time horizon. You know, I think underlying that surgical revenue growth is a procedural volume cadence and a revenue per procedure, and that procedural volume was kind of laid out to be in the mid-teens growth rate over that timeline.
And so when you look at a, like, a 23% volume growth here in Q1, I think we're kinda off to a good start, and I think the volume component of the revenue growth reflects the procedural adoption that's driven by the clinical distinction that Pat talked about.
All right, great. Very helpful. Good to hear. I guess, you know, there's some ongoing industry consolidation or disruption, maybe around a third of the U.S. market being impacted. Can you just comment, you know, where do you think you are in that disruptive process, the cadence of competitive hirings? I think some people sort of thought the tone on the recent call was slightly different from prior calls about competitive hirings. You know, have you changed your expectations regarding that recently?
Yeah, I, you know, the, I was gonna joke and say we hadn't noticed the disruption, but that was a joke. You know, I think the, you know, again, I go back to the kinda historical experience within this field, and I look at kinda proxies under the auspices of consolidation. I look at J&J Synthes, and I look at K2M and Stryker, and I think about how long that these things have taken. And so our view is that we're gonna run our play. We're gonna take advantage of market opportunities that present themselves. We already have in some degree, and it's fascinating. I think, you know, the underlying dynamic out there is that there's some expectation of immediacy.
These things take a fair amount of time to ultimately unfold, and again, the proxies of K2M, and Stryker, and Synthes, and J&J, I think, have reflected just that. I think we're in the very, very early innings of a disrupted marketplace. I think that the opportunities are gonna continue to present themselves over time, and I think that we're gonna approach these things in the way that best serves the interest of our company. I think there's no shortage of opportunities for us to do competitive hires.
There is a shortage of ways that we can do it in an extremely effective way, and what we're gonna do, again, is do it very methodically, do it the way that we intend, the way that ultimately is gonna be the most predictable, and I think that that's the way we've managed the company since really the turnaround back in 2018, is we've been very deliberate and done things in a very methodical way.
Maybe just to put some numerical component around that, you know, when we did the raise in October of last year, I think consensus for this year for us was about $555 million, and we're looking at a guide today of about $601 million. So $45 million north of where it was about nine months ago. So, I think clearly, we're seeing strength in the business. The growth indicators that we like to point to in terms of what are the leading indicators to future growth, we like to point to the amount of surgeon training that gets done. In Q1, we did 150 surgeon trainings, which was a seasonally high number, step up from Q3 and Q4.
I think that reflects a level of people coming through the facility. Ultimately, a component to that has been the expanded sales footprint that we have. And then you look at the surgeon adoption at 20% or 21% in Q1, and kinda going back to the long range plan, the surgeon adoption assumption in the long range plan over the timeframe is kinda low double digits, and so we're tracking ahead of that kinda one quarter in, and so feel like ultimately, what we expected in terms of surgeon adoption, the level of interest, and how that gets reflected from a competitive rep hiring is really exactly going the way we had expected it to.
Yeah, just one other point that I think is entertaining is that there's almost a paradox going on. It's one of those things where it's like we're less confident than our tone appears less confident, but we're spending $60 million on instruments and implants, and I think that it can't be both ways. And I would tell you that we're leaning into the business in a hugely confident way. And so our bullishness is not just in words, it's in reflected cash utility.
All right, great. I guess, maybe just on that point, just on cash utilization, I think the cash burn was around $70 million in the first quarter. Can you maybe help us understand if that was in line with your expectations as you continue to invest in trades, and hirings, and instruments? What should we expect for the sort of quarterly cash burn cadence going forward?
When we went into this year, we said about $100 million of cash burn on the full year. Q1, as you said, about $70 million. Expect it, Q2 to be in that $40 million area. Q3 will be a small negative number, and Q4 will be cash flow positive. I think clearly what we said when we did the raise was we were gonna take that money, and we're gonna put it to work in the form of investing in sets and inventory or revenue-generating assets, to drive future revenue growth, and so I think we're doing exactly that. We also said it would be front-end loaded in the year, which I also think is exactly what we're doing. Our view is we're putting the money to work.
To Pat's point, I think it reflects the level of confidence that we know what the competitive opportunities are, where we're headed, and we're essentially preparing to continue to grow in a way that's meaningful.
Mm-hmm. Great. I guess, so you know, your business is mostly focused on the US. It'll remain so in the near future. You know, you have some interest in expanding internationally, a few of the key large, good economic markets, Australia, New Zealand, Japan. Can you maybe talk about, you know, what's attractive about those markets, why the narrow and deep approach, and are there major profitability differences between the US spine market and typical OUS markets?
Yeah, I'll start off, and Todd will, I'm sure, jump on. You know, one of the things that I would expect that people would expect of us is to apply our learnings from our previous experience, and what that means is, when you start to think about engaging different marketplaces, you ultimately think through the effect on the infrastructure requirement, on the profitability impact, and just what you know, kind of the alignment of the surgical thinking is in the different spaces. Europe is a very difficult place. We won't be going into Europe anytime soon surgically. A place that has great alignment with the U.S. is Australia.
So Australia, New Zealand is a very favorable place from a reimbursement perspective. It's a favorable place from a kind of surgical thesis perspective. So, there's great alignment, low regulatory barrier or reasonable regulatory barrier, as we would see it. And then, when you think about another one, Japan's another example of a market that I think is reflective of the same ideals as the US market. There's a lot of alignment in the surgical thinking. The thesis is more procedural, so we have a lot in common, I think, with the Japanese in that regard.
What we don't wanna do is be forced to build a huge infrastructure, operate in a way that ultimately burns cash in marketplaces around the world. The effect it has on the internal organization, as well as, you know, those teams far and wide, is a significant spend and one that all too often doesn't pay for itself. Todd was the CFO of a previous company internationally, and I think he experienced it, you know, immediately. And so, when we jumped into this together, you know, one of the four, kind of foremost thoughts was, let's do this in a way that ultimately serves the interest of our company and our surgical thesis.
Yeah, completely. It was an area of early alignment between Pat and I in terms of how we essentially enter and, and choose which markets to enter internationally. And I think a lot of times smaller companies will choose to have distributor relationships or will go into a lot of countries just to drive top-line growth. And then a couple of years into it they haven't really built sustainable businesses that can penetrate those markets. They've probably created some infrastructure that now is probably not fit for the revenue and certainly not the growth that they're experiencing in those markets.
And so our view was, where do we go into markets where you've got good, reasonable pricing, a good pathway to get through the regulatory or environment and commercialize, and then do that with direct selling organizations? And our belief is if we pick those markets correctly, which we think we have in Australia, New Zealand, and Japan, we can build markets that ultimately can get to a greater penetration than you would otherwise, which ultimately gives you a long pathway for revenue growth, as well as a greater profitability profile over that timeframe. And so, you know, when you look at those markets, and you look at the opportunity we have in the US, we have plenty of runway for growth before you have to really think about other outside the US markets.
Okay, got it. You know, just to follow up, I mean, you probably don't manage the business this way, but in, you know, certain U.S. cities and regions, you have pretty strong market share, 10%-25%. I guess, are you sort of comfortable with the profitability in those markets? And, you know, as you scale and take more share, do you think, you know, that gives you confidence on your LRP or as a leading indicator for profitability?
Yeah, I do, and I think when you look at our LRP, and you look at the profitability walk, really, half of the profitability comes from the leverage you get off of your non-selling expenses, so marketing, all your G&A, your R&D expenses. And so it's growth, and on the top line, dropping through at a greater rate-
Mm-hmm
... because you're not growing your operating expenses at the same rate as your sales. In fact, our LRP for those areas assumed about half the rate of sales growth, and if your sales growth is growing 20%, that means the rest of that group is growing at 10%. Frankly, I've been in a lot of organizations in the past where 10% would feel very, very good. And so I think our ability to operate under that guise is strong confidence. Then, you look at the variable expense walk, and you kinda understand that we get about half of the variable, or excuse me, you get about half of the operating leverage out of your variable selling expenses, and you know that that is contractually stepped down over time.
And so our confidence that we can execute against that variable selling expense expectation and that leverage is quite high. I think the other thing is as you've looked at the leverage and expanding margins that we've had over the last year and a half, two years, it's come from the areas that we expected it to, and so that also gives us a level of confidence that we can continue to walk the margins up and see the operating margins improve in the way that we expect.
Okay, great. Maybe shifting gears a little bit, focusing on procedures. You know, your PTP procedure, that's the biggest growth driver, opens a lot of doors for you, takes share, drives higher implant utilization. You have around 12% of the lateral market now. The market leader NuV asive has maybe around half. Can you maybe talk about the differentiation you have versus the market leader and how much more share it can take in that space?
Yeah, I hope there's some surgical fans in the audience. Really, the guys at ATEC are the same guys that created the lateral franchise at the previous company. You know, there's few things more cathartic than kinda understanding the requirements of an environment and then fulfilling them years down the road. And so, you know, what ultimately that we're competing with at ATEC is a neurophysiology device that was built in 2003 or a retractor that was built in 2011 in an implant system. And so, what we've done is we've kinda redefined lateral surgery with the pioneer of lateral surgery, Luiz Pimenta, who did the original XLIF.
And so the great thing is what we've been able to do is architect a procedure that really provides a wider application of surgery. And so what we found is that a lot of the early adopters were lateral-savvy surgeons, and what we're seeing now is more what historically have been conventional prone position, posterior approach type of surgeons. And so what we're benefiting from is not only the early adopters but the expansive optionality that avails itself to a prone position and an access to the front of the spine, the back of the spine, and, you know, back to the front of the spine. And so it provides a level of optionality that doesn't exist.
What makes our kinda thesis in the surgery most unique is our ability to navigate the number one complication, which is, in essence, neuropraxia. And so when you think about your—from the skin to your spine, the most evident concerning anatomy is neural in nature, and so your ability to understand where the neural anatomy is and what the health of the neural anatomy is, is profoundly important. You don't realize that unless you've done this for years. And so what we've been able to do is build a machine that ultimately understands or gives the surgeon the information of, hey, the nerve is right there, and, hey, there's a degradation in the nerve health, and so that information is profoundly important.
So when you start to think about your ability to ultimately improve a procedure, what the first thing you do is you minimize the potential complications profile, and then you expand the optionality of it, and I think with PTP, we've done both of those. And so what you've seen is you've seen an early adoption of it in a realm of people who have historically done lateral, which is about a third of the surgeons, but now when you start to expand the applicability of it, it opens itself to a much wider audience with much more pathology to ultimately be addressed by this technique.
Mm-hmm. And then, the LTP procedure, you know, it expands your addressable market from the $1 billion lateral market to $3 billion by converting PLIFs and TLIFs or traditional posterior approaches. How has the launch been going for that procedure? Are there interesting trends to call out regarding type of patient or surgeon adoption rather? And are the adopters new or existing surgeons?
Yeah, so, you know, one of the quotes that we love is, "Your sophistication is in relation to the number of distinctions you draw to a subject." Lateral surgery is the growth market in spine, and so to be able to have both a lateral position surgery as well as a prone position surgery is very, very attractive. And so our ability to, again, address different pathologies with each of the different approaches, we believe to be valuable. One of the things that has been a learning is, you know, it's always fascinating to me. People will say, "Gosh, you know, spine's commoditized." And I think what they mean is certain spine devices are commoditized.
But when the surgery has a revision rate of north of 25% in a long construct surgery, you could suggest that the durability of spine surgery needs to be addressed. And so the opportunity to do that based upon an increased sophistication is high. And, like, you think about the craziest things, it's like, because the currency is all in the implants, oftentimes companies don't invest in the requirements of the procedure. And so something that we've invested in is patient positioners. Patient positioners are profoundly more valuable in positioning a patient than tape. And so if we're still taping patients to beds, and you can't figure out a way to make something better, we think it's kinda crazy.
And so a lot of our surgical thesis includes, say, positioners, and so much of the LTP is about positioning the patient properly and availing access to L5-S1, which is a big part of the surgical pathology out there. And so the launch is going very well. The functionality of the devices as designed are what we intended. And so, again, I think it's reflective of a outlandish growth profile that continues on.
All right. Great to hear that. I guess, maybe moving on to some of the new products. You know, you have the EOS Insight launch later this quarter. It's a software upgrade to what you have been working on since you acquired EOS. Can you talk about, you know, what are some of the new and differentiated feature sets, what it can do for system sales, replacements, and, you know, how does EOS support your ability to influence the deformity space?
Yeah, it's, you know, the opportunity to make spine surgery better and make it more durable is totally opportune. I said there's a 25% revision rate in spine surgery in long construct surgery. The literature is very clear that the correlative to durability or long-term outcome is alignment restoration. Today, it's done by gestalt. It's done by, "Hey, I think I'm in the neighborhood of realigning a patient." For us to bring an objective measure to that experience is an evident opportunity to improve a field. And so one of the feature sets associated with the EOS Insight software platform is the automation associated with delivering that information directly to the surgeon.
Today, the surgeon has to measure each of the different areas that he intends to correct, and so to be able to automate that process is evident in terms of how it ultimately informs a surgical plan. The surgical plan then ultimately may include a patient-specific implant. So our ability to make a rod that's reflective of the intended alignment is very straightforward and is part of the EOS Insight package. We also have a alignment tool so that intraoperatively somebody could ultimately in essence effectuate the planned alignment versus what they're getting in the operating room. And then lastly, what it does is it informs what's next.
I think as much as people are talking about AI, the ability to ultimately do a predictive analytical platform that ultimately informs the next surgery is very apparent to us, and it's something that has been nonexistent in spine surgery, but the opportunity to do that in a hugely relevant way is very apparent to us.
All right, great. And, maybe just, kinda touch upon robotics. You know, you have a navigation-enabled robotic platform, the REMI. You acquired it last April. Now you're making some improvements, adding freehand navigation this year, and then PTP workflow integration next year. I guess maybe talk a little bit about how that's going, and when do you expect a meaningful revenue contribution from that?
Yeah, it's going great. The dynamic is we covet assembled technology. I think the ability to ultimately navigate a dilator to the spine in a lateral position with a combined neurophysiologic addition to it is a great opportunity. So the precision to navigate bony landmarks through navigation and neural landmarks through the neurophysiology or SafeOp platform, we think is very, very valuable. The ability to do simultaneous surgery with the robotic element, we think is opportune, and so we're in the design development phase. We expect to be doing an expanded number of alpha cases. We've already done some this year. We'll do some more at the end of this year, and then we'll integrate all of the tools into the procedural workflow in 2025.
We expect a mid-2025 experience.
All right, great. I think that's all the time we have for now. Really appreciate the dialogue, and, thank you for coming.
Thanks so much.