Okay, good afternoon, everyone. My name is Vic Chopra, part of the Medical Device Equity Research Team here at Wells Fargo. I am pleased to introduce management from Alphatec Spine for this session. Joining us for the company are Todd Koning, EVP and CFO, and Robert Judd, VP of Finance and Investor Relations. Thank you both for being here.
Thanks for having us.
Yeah, thanks for having us.
Let's get into it. So congrats on a great quarter. Q2 was, I think, you guys did a pretty nice job on it. I'm just curious what investor feedback you've received and what investors have been focused on since you reported results in Q2.
Yeah, thanks, Vic. I think clearly the sustained revenue growth has been a highlight. I mean, I think clearly as we continue to deliver on our cash flow commitments and the expanded profitability that we're seeing and have been driving now for quite some time, what I think investors are focused on more and more is the durability of the top line as we continue to grow. Because I think as you look at us, there's not a lot of companies that are of our size and scale growing at the rate we're growing with the kind of profitability that we have.
Okay. I'm going to focus on the most important metric, which is obviously your cash usage and your path to cash flow profitability. So Q2 cash usage came in at the high end of your guidance range of $0-$5 million. You continue to expect to be slightly positively free cash flow for this year. What gives you confidence in being able to achieve free cash flow profitability in 2025?
Yeah, well, I think partly we're halfway through the year, and I think we've done better than what we kind of laid out through the first half. So I feel like we're a little bit ahead of the game there. So I think that's good. The cash flow has really kind of come in the way we expected it. And so I think as you look at the measures, if you just kind of take our Adjusted EBITDA profitability, a bit ahead of the game there, you look at our working capital. In fact, we're probably a little bit of a working capital headwind through the first half of the year.
So kind of the fact that we've been able to achieve the level of cash flow that we have in the first half and still absorb some of the working capital headwinds that we have, mainly on AR, I think has been good. And I think that gives us confidence that as we go through the second half of the year, again, I think confidence level in our profitability profile combined with the investments we know we've made in terms of our sets and inventory for the full year, we thought we'd spend about $50 million there. We'd spend about $25 million through the first half. So we know what's coming in the second half because we've put the orders in. We know when they're going to show up. And consequently, we know when we'll be paying them.
So really, I think the plan has come together nicely through the first half, and that gives us confidence in the second half.
Yeah, it's definitely nice to see. Talk about how you see the rest of the year playing out from a cash flow perspective for Q3 and Q4?
Yeah, so you look at Q3, and I think we've talked about +$1-$5 million of free cash flow generation in the third quarter. I think notably, if we do +$1 million, we'll be free cash flow positive on a trailing 12-month basis through the third quarter. So that'll be great for us to achieve. And then I think kind of the high single digits in the fourth quarter, all that kind of rounds out to a nicely positive full year.
Okay, great. You also raised your guidance. I think you're getting to about 21% top line growth this year. Just highlight some of the puts and takes to consider heading into the back half of the year, maybe from a seasonality perspective or anything else you think that's important.
Yeah, the seasonality, I think what we see is a little bit of a step down just from a market standpoint, Q2 to Q3, and then a step back up Q3 to Q4. I think as you look at the full year, clearly in Q2, we saw some very good growth. I think the comp was a little bit easier in the second quarter. I think conversely, the comp in the fourth quarter is a little bit more difficult. So I think you look at some of those year-over-year growth rates in the second half, and you kind of want to normalize the full year. So what we did was we looked at the two-year stack growth. And in Q1, that stack growth rate on a two-year basis is about $31 million a year. In Q2, it's about 33 or 34. Excuse me, it's 34.
34.
Yeah. And then in the second half, it's basically $33 million each quarter on a two-year stack basis. And so from that seasonality standpoint, it really felt appropriate. And then if you look on the full year, 2023, we grew $130 million in total revenue. 2024, we grew $130 million in total revenue. And our guide implies 2025 will also grow $130 million in total revenue. So it just felt like that was the right place to land. And our philosophy hasn't changed. We put numbers out there that we believe we can achieve and have a reasonable opportunity to exceed.
Okay, great. Let's talk about the overall spine market and your recruitment efforts. Can you talk about how you're benefiting from the disruption in spine, and are you onboarding reps at the pace that you expected?
Yeah, so if you look at the environment, we view it as very good, and our philosophy, Vic, as you know, is we want to compel surgeons with unique clinical solutions that drive the surgeon interest. And then you find the reps to support that, and I think if you look at our metrics, you'll see the 21% new surgeon adds in Q2. And if you look back even the past eight quarters or so, you'll see that new surgeon metric has hovered around 20%, give or take. And I think what you can safely assume behind that is we're adding reps to support those surgeon adds. And when we look at the environment, we can go company by company. We won't, but there's either something disruptive or distracting going on in almost every case.
And we love being, one, totally focused on spine, and two, having a long-term view of making spine better. And if you think about surgeons and reps who have dedicated their career and their livelihood to spine, they want to partner with someone who's got a long view and is dedicated to making spine better as the top priority. And I think that unwavering stance on our part has created a destination where people want to come. And so there's a lot of demand from a surgeon standpoint. And fortunate for us, there's a lot of reps that are willing to come and help support that growth.
Are there specific geographies that you're targeting that you think you're lacking in when it comes to rep recruitment?
There's certainly still open territories or some greenfield areas. I mean, you've heard Pat and Todd talk about areas we made a big investment in New York a couple of years ago. There's still spots like in Miami where maybe we don't have as much coverage. I think if you look at the metrics from the last couple of quarters, you also notice that we're getting quite a bit of growth from our existing territories. I mean, existing territories grew at 29% in Q2. I think what that tells you is there's a lot of surgeon interest in territories. You have a surgeon that really is competing another surgeon into doing business with us, and/or the surgeon just sees the solution and is attracted to it, and so we're doing a lot of hiring just in our existing geographies because that's where the demand is.
It happens to be a little more capital efficient because you have assets in the territory already. And so we like that. And at the same time, we're still looking at the handful of white spaces that we need to fill out and looking for the right match there from a surgeon and sales rep perspective.
Okay, great. And what are the key performance metrics that you track that demonstrate the productivity ramp of these recruited sales reps, especially in light of the investment required and the time it takes for new territories to gain momentum?
I think that has largely we have spent a little while since we've spent a lot of time talking about that, but most of these competitive reps come over, and they have some kind of non-compete period of time, so the first year is about ramp up from a cost profile perspective. It's probably a little bit higher just because you're guaranteeing some comp typically, and then we've said that after two years, they kind of get back to maybe what they were doing prior to the switch, and then I think the real opportunity for a lot of these reps and why they want to come to ATEC, because they see an opportunity to take their business past where it was, maybe with whatever the incumbent was, and so by year three, they're typically growing past wherever they were when they left the prior place.
And so that's in general, of course, there's people that ramp faster than that, and there's people that maybe take a little bit longer. And you have some situational dynamics, whether it's access at the hospitals or different things. But as a kind of a law of averages, that's what we see.
Okay.
Vic, I think that plays out from a procedural share standpoint. But one of the things we know is our revenue per procedure is reasonably good and probably 30% better than the average out there. And so if you think about it from a sales rep standpoint, you don't need to bring all your business just to keep your income and your revenue at the same spot. So once you bring all of your procedural business, you naturally get a higher total revenue from that. So frankly, you've got multiple ways to grow your revenue share as a rep coming over.
Okay. I'd love to understand how you balance attracting new sales talent while continuing your progress towards achieving cash flow positivity, especially given the required investment in instrument sets or new sales agencies?
Yeah. So I guess there's two questions there. One is the investment that we make in the sets and the inventory, so the revenue-generating assets, the balance sheet concept that new revenue requires. And so we've laid out a construct that says we spend $0.75 for every $1 of year-over-year growth. If you look over the last two years, 2024 and 2025, I think we spent about $140 million last year in sets and inventory, and we'll do about $50 million this year. That $0.75 ratio yields a number that's essentially greater than what our 2024 revenue growth is and what our guidance would suggest. And so I think we've still a little bit of a forward investment benefit here through 2025.
Then if you think about 2026 and what the level of investment will be to continue to grow, that's why the profitability expansion has been so important for the story and for the company is because as we expand our profitability, we now generate enough Adjusted EBITDA in 2026 to more than pay for the investment required in sets and inventory. And so just to put some numbers around that, if we grow $120 million of surgical revenue next year, it would require about $90 million of investment in sets and inventory. Let's say we do $85 million of Adjusted EBITDA this year, and let's say you get a third of the drop-through from your revenue growth, that puts you at about $125 million of Adjusted EBITDA next year. That's more than enough to cover your investment sets and inventory and interest that you'll have next year.
We feel like we're inflecting to a self-funding entity through 2025 and into 2026. That's how we think about our investment in sets and inventory. From an investment in the sales channel, I mean, clearly, I think over the course of 2021, 2022, and 2023, we invested in the infrastructure of the business. Really, 2024 and 2025 and onwards have been years of, I'll call them, profitable sales growth, where we're seeing more profitability drop through. In the first half of this year, we saw about 45 cents of every dollar growth drop to the bottom line. Our guide for the year implies 40 cents of drop-through on the full year. As you exit this year and get to our long-range plan commitments in 2027, it implies mid-30% drop-through.
And so I think that is, I think, a very fair place to land from a profitability drop-through that allows us to continue to invest in R&D, which is going to drive the sustainable growth opportunities, and continue to invest in the sales channel while meeting our financial commitments.
Okay. And then just staying on 2026, any sort of puts and takes, potential headwinds, tailwinds to consider as you work through your planning process for next year?
Yeah, I think we're excited about the second half of this year. I think we had a strong Q2, obviously. I feel like we're set up for success this year. I think the strong surgeon adoption that we've seen, so again, if I go back to my long-range plan assumptions, we assume 10% surgeon adoption growth. And we've seen high teens, 20s. And so I feel like we've got a good, strong surgeon adoption as a tailwind to our back. We know that those surgeons use more procedural volume every year. And so even with the existing surgeons we have, there is a bit of a flywheel of procedural volume growth. And so I think our confidence next year in terms of tailwinds is the procedural volume growth that we see.
That is really a sustained phenomenon driven by the increased adoption in number of surgeons as well as the penetration of an existing surgeon's business.
Okay. You're in the process of launching a new robot. Talk about kind of where you are with your robot launch plan, any update, and will we see it at the NASS meeting in November?
Yeah. We're excited about the Valence robot. As we've talked about, the launch is upcoming. Everything's on track there for an end-of-year launch, so call it late Q4 launch, and so the way we think about the robot and Valence specifically is we think about how are we solving for the clinical issues in surgery, and so our approach is that solution, when we launch it, will be integrated with, most notably, our PTP procedure, and we're trying to solve clinical problems in our PTP procedure. I mean, there's a huge opportunity to take traditional posterior approach users in lumbar surgery, and we talk about there being $3 billion of business, two of which is traditional business and a billion of which is lateral today, but we're interested in moving that two billion into the one billion, if you will, and making it a three billion addressable market.
We view the robot as an opportunity. If you think about solving clinical problems, what prevents someone from doing lateral today may be something like replacing or placing the retractor and creating the surgical corridor. Having a near-field camera that has a wide angle, has the ability to be moved around without re-registering, allows you now to track instrumentation that's outside of the traditional navigation robotics line of sight with the bigger format solutions today. Now we have something that can help a surgeon place a retractor, which is one of the most, it is the single most time-consuming element of any procedure, let alone for lateral, where it's probably even more so that way.
And so having a solution where we can remove that hurdle from adoption and create a solution that drives people towards a procedure where we kind of feel like we own the space is something that we're really excited about. And that's kind of how we think about that solution is we're solving a problem. How do we solve the problem? And we want to drive people ultimately to our procedure.
Okay.
And I think just to add to that, I think the predictability, the efficiency, the accuracy of your retractor placement clearly is a hurdle to adoption. Plus, it requires a lot less fluoroscopy. And so it just allows the people who may be dabblers in lateral to adopt it with more confidence. And for those folks who don't like all the radiation that a lateral procedure requires, I think it also addresses that hurdle. And so Robert talked about the $2 billion of traditional posterior approach surgery that should be addressed through a lateral approach. Those are some of the hurdles. And so we think it's really an enabler to penetrating that untapped lateral market.
Okay. Maybe just talk about how you think this robot will compare to other robotic platforms. How is it differentiated? What do you bring to the table that others have not yet or cannot bring to the table? And what would success look like with the launch of the robot?
Yeah, just to maybe drill on some of those things we just talked about. One, I think there's integration with our procedure. And you look around at some of the other solutions out there, and are they really integrated with a procedure? I think that's a differentiation point that we want to drive pull-through that's clinical with our hardware, with our implants. And so that's what we believe we can do with the solution. It's, I think, the ease of use. It's smaller footprint, both from just a physical footprint in the OR. You can bring it into the hospital in a Pelican case versus a semi-truck. I think the other element is the cost. I mean, the cost is going to be sub-$500,000. And so if you think about where does surgery happen today, well, on one end, there's ASCs.
On the other end, there's maybe a big, large academic institution and everything in between. We believe there's probably at least half of that spectrum that's not even really a candidate for a robotic or navigation solution just because of the cost and/or the footprint or both. So I think our view is we can address a much broader spectrum of places where you maybe can't afford to, you don't have the volume to pull through enough to pay off a very expensive large robot, or you don't have the space. So the small footprint is advantageous. And again, somewhere both of that's the case. And so I think that's a competitive element. And I think just it's for spine surgery and only spine surgery. And I think it's a simpler interface, easier to use.
I mean, some of the commentary we get from the surgeons that have been using it is this is easier to use than maybe some of the bigger formats, just easier to learn, and therefore much easier for them to adopt. And so I think we like that setup as far as it's the alternative.
Okay. Great. Will we see it in November at NASS?
That's good. We had it at NASS last year. So my expectation is we'll be talking about it, and it'll be out there.
How are we thinking about competition? We've had a couple of large orthopedic players launch spine robots in the last year or so. Do you expect that to have any impact on your ability to sell or develop the spine robot that you're working on?
I think they're just two different products at the end of the day, Vic. I think our view, as Robert has clearly said, is to integrate a robot into a procedural approach. Our company's built on procedures. That's how we view the spine market is how do we help surgeons do better surgery. And ultimately, we think that we're solving some of the more challenging procedural issues through the use of technology, just like we did with SafeOp and lateral. So we're trying to do with Valence and PTP. And so I think that's fundamentally different. I think the other thing is the price point. My hunch is that there's just not that many institutions out there that have enough procedural volume to earn out a $1.5 million piece of equipment. And Globus and Medtronic have been doing that now for a decade.
And so my guess is that they've probably penetrated a good chunk of that opportunity. And so as we think about where we'll be able to have meaningful impact is clearly smaller community hospitals, the ASC setting. And to Robert's point, because of its overall, well, physical footprint and price, I think we're also going to be able to make a play in those institutions where there are large-format robots because at the end of the day, it's a relatively small piece of capital as compared to the other options, and there's meaningful differentiation in it.
Okay.
Maybe just one other point, which is the fact that it's both freehand navigation as well as robotic application. I think that's all, or not. I think it is all with the same set of instrumentation. I think that's also a differentiator to, say, the Medtronic solution where you've got one platform through Stealth. It's got its own set of instrumentation. You got another platform through Mazor, which also has its own set of instrumentation. It's kind of a one-in-all solution.
Okay. Where do you see the market for robotics and spine going over the next five years? You look at what's happened in the orthopedic market. spine, I think, is definitely a few years behind that. Start to get your thoughts on the trajectory of the robotic spine market over the next few years.
I think it all kind of comes down to what the clinical value is. I think we're optimistic that we're solving some clinical challenges. I think as a consequence, we're optimistic that the adoption of our solution will reflect the clinical value that we're delivering. That'll be reflected in, I think, the uptake and the utilization rates.
Okay. Can you talk about your international plans in 2025 and what's in store for 2026? What can we expect?
We've been in three markets. We've been in Australia, New Zealand for a couple of years, and we just did our first surgeries in Q4 of 2024 in Japan. So really just getting started there. Our strategy from an OUS perspective is to be narrow and deep. And we want to be narrow and deep because we want to have places where we can be profitable, where we can scale, own the relationship with the surgeon, where the surgeon can make a decision based on the procedure and where there's a reasonably good margin. And so when we look at things that way, those were the three markets that stood out to us. So I think you'll see us remain narrow and deep there, but I think you're going to see us have growth and scale there.
Our business in Australia, New Zealand that we started a few years ago is profitable. And I think from a Japan perspective, we've made all the investment we need there, and now the revenue growth is starting. And so I think there's not incremental headwind from that going forward. So we like the setup there. Our long-range plan has OUS surgical revenue being $30 million in 2027. So it's still a relatively small piece of the business. I think the exciting thing is as you look beyond 2027, you look at growth drivers for 2028 and beyond. The OUS business is certainly one of those.
In 2027, 2028, and beyond, like you said, is the focus still on those three geographies, or are you considering new countries beyond those?
Right now, that's where we're focused. I mean, when we feel like there's just a ton of opportunity. You look at Japan is the second biggest spine market in the world. Australia is $200 million. There's plenty of opportunity just in those three geographies. Our view is let's be successful there, have scalable, fast-growing, profitable businesses. Maybe we'll look around and see if there's another opportunity. At the moment, you look at some of the hurdles and profitability concerns in some of the other geographies in Europe and other places, and we're going to be measured about our approach and thought process. $30 million on the size of market those are, it's still pretty small. There's plenty of growth to be had.
Right. You recently launched PTP Corpectomy. Can you talk about how this fits into the broader PTP ecosystem and what steps are you taking to drive adoption?
Yeah. So I think what we've seen and have communicated is PTP is really a platform approach that allows you to address a multitude of different pathologies. And so typically, adoption starts with a straightforward pathology. And as the surgeon gets more comfortable with the approach, he or she will apply that approach to different pathologies of increasing complexity anywhere from kind of maybe they start at a 3-4 spondylolisthesis, and then they expand that down to the 4-5 lumbar region. They may apply that to some deformity cases. And I think the natural iteration of optionality, if you will, in terms of bringing more options to the PTP approach was corpectomy. And so corpectomy, while there isn't a ton of volume, it is a very difficult approach. And it's also an opportunity for us to add some clinical value through the PTP procedure.
And so it was, I think, a natural evolution for us to provide the corpectomy option there. In addition to that, from an ASP perspective, I think it's just very beneficial to the company as well. And so the way we've really driven, excuse me, adoption there is clearly launch it, but then train around it and provide support for surgeons to use it.
How should we think about revenue contribution in 2025 and 2026 from corpectomy?
We haven't broken it out specifically. I think as we continue to see corpectomy being adopted, you'll see that come through in clearly procedural volume because that would have been procedural volume we otherwise would not have had, and an increase in revenue per procedure because the ASP of the interbody is so favorable.
Okay.
There's probably an indirect benefit as well. As Todd talked about, corpectomy is something that's a real nice solution for a lateral approach, and so if you're a lateral surgeon who believes in that approach and anterior column guy, doing corpectomy through lateral is a big deal, and so if we're going to try and appeal to a lateral community, you need to have that solution, and so part of the benefit doesn't even show up in the corpectomy revenue, but it's being able to go capture that practice because you have a holistic lateral solution.
Okay. Your lateral franchise has been a core growth engine for the company, but you've also expanded or in the process of expanding into areas like complex and deformity surgery, and you've talked about opportunities in areas like cervical, biologicals, expandable, as well as the ASC setting, so which of these other specific surgical areas or categories do you believe will be the most significant drivers of surgical revenue growth?
We are going to continue to see growth driven by our most differentiated platform and procedures. That's going to be our lateral portfolio. I think we're going to continue to see the benefit of that. We're, what, 15%-16% penetrated into that market today. We believe that we can get greater share of the existing $1 billion-plus and penetrate into that $2 billion of traditional posterior approach surgery. I think that is clearly a driver. What we know about lateral surgery and certainly our sales territories that sell lateral, who have a meaningful share of their business with lateral, are the ones that grow the fastest for the longest periods of time.
That is because lateral, and in particular, how we think about the neural monitoring and SafeOp, it puts a great moat around your business, which means that the share you take is incredibly sticky. I think that's going to continue to be the story for the company. As you think about cervical, and we've definitely made some improvements there and have launched some products, biologics the same, we're going to continue to see share take there as part of the halo approach or the halo effect, if you will, which is where people just give you a broader share of their overall business when you've gained their trust. That's not where we're going to compete. We're going to compete where we're most differentiated and where there's most clinical value. We believe that's in lateral.
Then I think you take our opportunity with EOS, EOS Insight, and how that's given us an entree into this adult and pediatric deformity space. And so we're just at the very early edges of that opportunity. But I see much like SafeOp has been to lateral, EOS and EOS Insight is going to be to the deformity space and the opportunity we have there, and for that to be another leg of growth for years to come along with lateral.
You've talked about surgeon adoption a couple of times. Can you talk about how you track the progression of new surgeon users from their initial training engagement and the first procedures through their increasing utilization of the full portfolio over time?
Yeah. Yeah. Let me talk a little bit about what we do internally. Clearly, as we talked about, the beachhead for us is often lateral. And so getting someone trained on lateral, they do their first cases. Typically, if it's their first cases in lateral, it will be a simple pathology, and they'll want to see how that goes. So there's some training upfront, that first case or two, and some monitoring on the surgeon side. And then you're going to do more and more lateral, likely. And then you expand the halo effect Todd talked about. Then you start getting part of the cervical business, and you start getting some of their other indications that they're solving for because we have a portfolio to address largely all of those things. And so that's how you track it.
I think we also, from a sales execution standpoint, are looking at our information every week. I have a surgeon here. I have all of his or her business in these areas, but I see opportunity here. And so from a sales execution standpoint, monitoring that stuff and making sure if we don't have all of the surgeons' share, why not? And if not, what are we going to do to penetrate that business? And so that's really sales ops, sales execution. And so that's part of the story as well.
Okay. Maybe a question on EOS. You launched EOS Insight, I think, slightly over a year ago in July of 2024. How should we think about the contribution from the launch this year and what's your approach to market and what's sort of the feedback you've received so far?
Yeah. I think the EOS Insight launch has gone well, and I think it's been a deliberate launch and a measured launch. As we kind of get that out, get it into the hands of friends and family, we begin to learn about it, and ultimately, I think we're very pleased with where we're at. I think we've got so much more opportunity in front of us, though, Vic, to really see the benefit of it, and ultimately, as you look at how EOS Insight will be able to or does allow you to do your automated measurements for alignment, creates an automated plan for you, and then allows you to get patient-specific pre-bent rods, and then to be able to reconcile your, I guess, the alignment that you're getting intraoperatively with your plan. That's very unique.
And I think all of that has been very, very nicely accepted, if you will. I think we've got areas where we can improve, and we're working through that. We're working on intraoperative rod bending so you don't have to pre-op, but you can actually do it intraoperatively as a for instance there. And I think the view here is that as you get to follow a patient, so you take that image, you get the planning, and you do your intervention, and then you follow that patient over time, because there's no magnification error within the EOS image, you can measure the correction that you got, and you can measure the changes over time. And that'll ultimately allow us to better understand, hey, based on this pathology, these demographics of the patient, what is my highest likelihood for a good outcome based on my practice.
I think that will better inform surgery as we go and ultimately, I think, really create a moat around a surgeon's practice as they adopt it.
Okay, so we've got just about a minute left. I'd love to get your top three priorities for Alphatec over the next three years.
Yeah. I think it's durable sales growth. We're going to continue to invest in the sales chain or the sales team, continue to, I think, meet the commitments that we've made from a financial standpoint in our long-range plan. So we're totally dialed into that. And I think you've seen the reflection of that over the last couple of quarters. And then continue to innovate. spine needs ATEC. We say that. We really believe it. The revision rates in spine are just, they're very high relative to other joint revision rates. And we know that the literature will tell you that alignment is the greatest correlative to a durable outcome. And so our belief is that we can really do a really, I'd say, advance the field of spine surgery to get more durable outcomes. And that's really where we're placing our bets.
Okay. Great. Thank you so much.
Thank you.
Thank you.