Thanks for joining us for another session today. I'm Drew Ranieri. I'm the medical device analyst here at Morgan Stanley, and it's my pleasure today to have Alphatec with us, CEO Pat Miles and CFO Todd Koning. So before we jump into it, just a quick disclaimer, but for important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your MS sales rep. With that out of the way, thanks again for being here, Pat and Todd. Maybe Pat, for you to start before we get into some of the growth drivers. I think we need some help.
At least from what I can see, you're continuing to take share, you're driving the highest growth in spine, you're on the cusp of- well, you have turned EBITDA profitable. Yet investors look at the chart and see the stock down 25% off its highs. It's trading like the wheels have fallen off. So maybe just talk to us a bit more about your confidence in the business today, your extension of PTP, and just... We'll go from there.
Yeah, you know, I'm one of the largest shareholders individually, and it's from my buying into the company. And so, you know, I share, you know, kind of the interest, which I think is a hugely important piece of looking at companies, is when, you know, the head cheerleader buys in, it's reflective of confidence. And you know, the only shares I've sold is to cover taxes, and I'm bullish on the long run of this company. You know, I think the landscape is an unbelievable opportunity. You know, I look across it, and I see, you know, the potential confusion. We love uncertainty. The uncertainty associated with the Globus-NuVasive thing, we think is an opportunity.
Clearly, there is some shakeup at Orthofix, opportunity. When you look at the big company's commitment to the space, we see it as nothing but opportunity. So independent of what we're doing, the landscape is profoundly opportune for us. Based upon what we're doing, there's a sophistication at ATEC that's unique. The whole being spine-focused is a tremendous opportunity. Our serving the interest of an area that we've been in for a heck of a long time individually is opportune. And so you start to see the tailwinds, as you say, it's like PTP. So the very procedure that we created at a previous place, we made better, and then the company that we were at got acquired.
If you don't think that that's not a tailwind opportunity, I, I think it, it's a miss. And so I, I look at PTP, I look at the continued expansion into the, the more complex surgery with PTP. We just launched the lateral suite in terms of the procedure, LTP, the ability to, to grow that out. We don't have assets to accommodate demand. And so, you know, as, as, as I look at, at kind of the, the landscape, and I just see just the lateral franchise. I look at the demographics, and Todd will go into some of the growth, but, you know, the people who have been with us for a, a period of time are growing at 38%.
So when you start to look at what the demographics of the growth are, the demographics suggest same-store sales continue to grow at least twice anybody in the market space. And so, I look at just even the short-term drivers of growth are completely intact, and there's the tailwinds of the market environment. And that's not to even start to go into the other things that will drive a long-term reflection of growth, which is in the EOS, and then clearly the navigational robotic element. And so I've never been more bullish than I am today. You know, I'm playing long, and so when I see the volatility, I don't like it, but it's one of those things where it's like, you know, I know that this is a short-term phenomenon.
Got it. No, I appreciate the color. And, Todd, maybe for you, we know you're around a 5% market share player today, and to Pat's point, growing well in excess of your peers. You might not necessarily be the barometer for market growth or for the market, but with two-thirds of the quarter really past us, has the third quarter kind of shaped out to be where you wanted it or you expected it? Or anything that you can kind of comment on, on trends from your surgeons or the procedure volumes that you're seeing?
Yeah, Drew, I think... Well, first, thanks for having us. Appreciate the opportunity. When we looked at Q2, you know, we clearly grew 40% in the quarter, 30% volume growth, I think 7% or 8% revenue per procedure growth. We added 25% more surgeons in the second quarter than we did the previous year. So, much to Pat's point, the engine of growth is totally intact, and you know, that hasn't let up. And so we feel very good about where we're at in terms of the business.
Really, you know, I think we're obviously not the market, but I think our perspective on where we're at totally intact in terms of our expectations and where we're driving the business.
Do you feel comfortable where consensus is kind of shaking out to around $112 million for the quarter?
Yeah, very.
Okay. Okay. Maybe getting into kind of the growth drivers of the business, Pat, let's talk about PTP and maybe the lateral side as well. So, you launched PTP back in 2020. How are you kind of thinking about really what's left for PTP? I mean, it's been such a strong driver for the company, but where are you today? Where do you kind of see the procedure 12-24 months from now?
Yeah. You know, I think that it is, it's in its infancy still. Like, I remember years ago when we created the lateral procedure at the other company, you know, we launched it in 2003. It wasn't until 2008, like, you know, at times there, there's almost a bit of a lag. But we've seen tremendous adoption of it. We've seen tremendous enthusiasm. You know, I was not complaining. We have 21 surgeons at the office on Friday. It's like, you know, the volume of interest in what we're doing is significant. And so the great part is PTP is that driver.
You know, the dynamic is that, you know, there's great protection of that procedure, not only in the know-how, but in the technological element. What we acquired several years ago is this neurophysiology platform called SafeOp. The ability to... If you're gonna go in with a small incision, and you're gonna approach the spine, you wanna know where the nerves are. You don't only wanna know where the nerves are, you wanna know what the health of the nerve is as you retract it. You know, much like you would push on a garden hose and slow the water down, you do the same with regard to the vascularity in your neural elements.
And so to not understand that is a big problem. The number one complication in lateral surgery is neural. And so the ability to have this technology on board is high. You'll start to see more and more publications with regard to the value of that. And so people are seeing, gosh, this proprietary element within the context of this proprietary procedure is of great value. And so we've you know attracted a lot of the people who are wanting to understand how they can apply it to a relatively straightforward procedure, and so we're seeing that. But people who learned it in 2021 and 2022 are now doing more complex things with it. And so the opportunity for us is now to design and develop more complex implants.
More complex implants are more expensive. And so the beauty becomes is, we're seeing the complexity of the utility of the procedure continue to grow, and that's a barometer for us to understand it's being... One, it's being well-adopted. Two, it's being accepted in more opportune financial ways. And so we will launch an expandable lateral cage at NASS. We'll launch an expandable corpectomy element next year. And so you start to see just the reflected elegance of this surgery, which is less morbid, tons of other benefits, be applied to more complex surgery. And so that will be a tailwind as it relates to the continued adoption. And we have seen no falloff in whatsoever with regard to the volume of interest in terms of coming in.
And so we look at those things and you say, "Gosh, it's a proxy for future growth." And so, with no change in that, we're highly bullish with regard to what's going on.
Over the last 12 months, we trained over 500 surgeons who have come through the facility. You know, I think leading indicators for adoption and growth, I think that's a great one. When you look at what we're training people on, we're training people on PTP, LTP, but we're also doing, you know, more complex training for more complex pathologies using PTP as well. And so, you know, the courses we're doing are evolving with the utilization.
Yeah, the point's a good one. It's like you build a pipe, and your ability to deliver more things through that pipe is high.
Got it. Got it. No, great, great color. And, let's touch on LTP for a moment. You, you recently launched it first half, of this year, late first quarter, early second quarter. Pat, you've talked about kind of the positive early reception, on the technology, but also your demand is actually outstripping your supply at the moment. So understandably, this could be a bit of a moving target, given some of the demand, but when are you gonna have the adequate field supply that you, that you need? Is that this year? Just how are you kind of thinking about that and, and the feedback from the surgeons?
Yeah. We're getting more and more sets every day, and so it's being alleviated. You know, I hope forever that the demand outpaces the supply, you know. It's not as though we haven't modeled aggressive growth with regard to the tool. The great part is the acceptance of the tool. You know, I think that at times there becomes kind of this negativity around spine. The negativity around spine is wrong, you know, it's misdirected. The dynamic is there's a currency, which is the implant in spine. So many companies, especially the big ones that are so transactional, focus on only the implant.
The opportunity to make spine better outside of the implant is so significant that it's kind of outlandish. So for us to ultimately make spine better by concentrating on things, including the implants, but other things as well, is very apparent. You know, when I was in Brazil in 2001, creating XLIF, we were taping patients to beds. You know what they're doing today? They're taping patients to beds. And if you're taping a patient to a bed, I would suggest that there's better ways that you can ultimately manipulate the patient in a way to create a more predictable experience for the surgeon, in a readily straightforward way. So when people say, "Ah, spine's commoditized," they don't know spine. Spine's still not that good.
When something is not that good, it can't be commoditized. And so when I look at LTP and some of the things that we've done, there's been such a wave of interest in terms of ALIF, in terms of anterior column surgery. Our ability to go from L3 to S1 in a single position and do bilateral screws in the back, so you think of spine as decompression, stabilization, and alignment. Our ability to do those things with regard to LTP are very apparent because we have control of the patient based upon an investment in a bed frame that ultimately holds the patient versus taping them. And so that's why it's kind of laughable to me. It's like, "Ah, spine's commoditized." You don't know spine.
It's, you know, maybe the screw pitch is commoditized. I'll buy that, but the screw pitch is not spine surgery.
Got it, got it. And maybe just on the lateral market in general, the billion-dollar market, just talk about kind of your expectations for competitive conversions, but also pulling surgeons from PLIF and TLIF into the fold. And sorry to add on here, but just—I mean, a billion-dollar market is pretty sizable, but what are you kind of even seeing from the competitive response here?
Yeah, yeah. Like, to me, you know, back to the whole spine surgery, you know, and people not appreciating the opportunities. Like, the goals of spine surgery, which I mentioned, are decompression, stabilization, and alignment. You know, if a patient needs what's called a direct decompression, if there's something on the nerve, so often a surgeon historically would go from the back, and they would do a posterior approach, and they would, in essence, be relegated to a smaller implant based upon the neural aperture that they'd have to place it in.
And so the great part about lateral is you get all the benefits of a huge implant in an anterior reconstruction, but you get to do it while the patient is in the prone position, which is the position that they're used to decompressing in and the position that they're used to stabilizing in. And so PTP is such a profound opportunity because you don't have to, in essence, forgo the limited size of implant. You get to put in a huge implant and reconstruct the anterior column while you also get to do it in a position with which you're familiar. And so many surgeons had dismissed using lateral because lateral was in such a strange position to them. Before XLIF, nobody...
It wasn't a common position to operate in, so a lot of people were never trained in lateral position surgery. And so you have a bunch of surgeons who've been doing PLIF and TLIF for a long time, which is the lion's share of the market and a lion's share of the pathology that a surgeon sees. And now you get to adopt all the benefits of lateral surgery to what historically has been a posterior approach market. And so it's not a $1 billion market, it becomes a $4 billion market because ultimately you get access to the PLIF and TLIF guys. And so it's... But, you know, the, again, I think the opportunity is one of, you know, how do you continue to improve the experience? And I think we're doing that.
That's why you're seeing the growth.
Got it. Let's maybe hit on industry disruption. You mentioned the Globus-NuVasive merger there. But have you actually seen it being a benefit year to date so far? Is there more to come? And we've heard from those parties that there hasn't been elevated attrition, but we also heard from a larger player that they are starting to see a disruption benefit. So just what's the Alphatec view there? Are you seeing it? When do you kind of expect to see any type of industry disruption benefit?
Yeah. I would say we love disruption. You know, it's one of those things where, you know, if you look at the historical reflection of these assemblies, it's not as though Synthes and J&J didn't have great people there. And so to suggest there's going to be a combination like that. That wasn't a great one, would be my nice assessment while I'm here. I can't imagine that the Globus NuVasive thing being significantly different. And it's not as though they're super smart there, and they were less smart here. And so, the challenge of these things is these things take time, and the dynamic becomes is there's a lot going on. It's like the duck on the water.
There's a lot going on underneath the water. There's not a lot going on on top of the water. And what happens oftentimes is, you know, we have specific priorities. We will direct our effort with regard to that disruption to specific spaces where we're in need of representation. The sales opportunity is a good one. The challenge becomes a lot of these guys have non-competes, so they're gonna have to sit out their non-compete. We're gonna have to get the inventory. Like, there becomes a longevity associated with these things. So two years from now, I think a lot of people will say, "Whoa, that was a lot of disruption." It takes a little while to get done. And so do we see a lot of opportunity? We see a ton of opportunity.
Is it gonna take some time? It's gonna take some time. And so, you know... But again, I think you know, every time that there's been disruption, back to the K2M Stryker thing, we've prospered. And so to me, it's a tailwind.
And Drew, like, you know, there's a—these are people that many of whom Pat hired at the other place. It's not like somebody has finally given us a list, and we can start calling people. Like, these are discussions that have been ongoing and relationships that exist and have existed for a while. I think the other thing that is a little bit probably unique here is probably the quality of the candidate and the kind of the probability of sales pull-through once you attract the candidate, as compared to maybe our historical experiences in terms of recruiting new reps and those types of things. And so I think our level of confidence and our ability to kind of deliver on the disruption quite high for those-
Yeah. And just to add to Todd's point, it's like the surgical thesis is the same.
Totally.
Like, you know, we created a surgical thesis at the last place, and so if, if somebody wants the next generation of what they'd previously done, they'll come here. So the great part is, it's... I would suggest that culturally, Globus and NuVasive are different organizations. I would say, you know, having, you know, been part of the leadership of NuVasive, ATEC is a much more, it's a much easier place from a surgical thesis perspective to come to us, you know, seeing as there's a lateral maven dynamic at ATEC.
... kind of maybe one of the emerging themes at ATEC has been enabling technology, kind of, well, maybe started with SafeOp, then EOS, and now you acquired, REMI this year. So let's hit on kind of the enabling tech side. But, maybe one thing with EOS, just kind of help us understand where the installed base is today, where the-- it sounds like there actually could be a replacement cycle that could happen in the US. And one of the things that I've, going back to when you announced the acquisition, was the potential for a bridge of, basically a, you could pull through implants with EOS. So, how are you kind of thinking about all that, on the EOS side?
You know, so SRS, which is, if you're a spine guy, the Scoliosis Research Society is the meeting. It's, you know, the—and so they become the driver and a litmus test. And so, during the meeting, you know, last year, one of the guys said, "How many people have an EOS?" And 70% of the audience raised their hand. And then it was like: "How many have more than one?" And 30% raised their hand. And so, you know, you love when the society that makes the rules and creates, you know, the reflected course of action, when they, in essence, affirm the value of your technology. And so, the opportunity...
So, the way that we see the business is, we see a tailwind and a growth profile with lateral, you know, for as far as the eye can see. The great part about EOS is that the value that it brings in terms of variable mitigation is very apparent to us. And so what we've spent the last, you know, almost two years doing, is completely designing in kind of the automation associated with the imaging modality. And so when somebody gets an image today, and we'll launch it in Q2 2024, but what'll happen is they'll get the image, it'll automate all of the measurements. And so remember we said spine surgery is decompression, stabilization, alignment. They'll get all the alignment parameters.
We will take those alignment parameters, and then we have a tool in the operating room to reconcile what the plan was against what they're getting in the operating room. Alignment is the greatest correlative to a successful long-term outcome for a patient. For us to ultimately create an objective measure of alignment, we think is hugely valuable. Then we have a post-operative image to say, "How did we do against what the plan was and what we did intraoperatively?" All that information goes to a cloud. It will inform what goes on next. And the beauty becomes is, you'll never get that information if I have to ask a patient a million questions every time through the office. I do get that information if I automate the process.
To automate that process, have it go to a cloud, have all the data in the cloud, is phenomenal. We've gone through all the IT stuff. We built the, you know, all the background stuff. We have 8 alpha sites. We have 18,000 images. The great part is all that stuff is going on today. If you want a customized rod, all this... Again, Q2 2024 will be, "I'm gonna check this box, I'll get a customized rod. I'll get a customized rod and a reconciliation." So you say, "Gosh, how are you integrating into the implant stuff?" It's in place. We'll verify it through the end of this year and the beginning of next year, and we'll launch it in the second quarter of 2024.
Then what you see is you say, gosh, the momentum with regard to all of the lateral stuff, you'll start to see the influence of EOS. And then there's also a bone quality measure. And so we said decompression, stabilization. If I'm gonna stabilize the spine, I wanna know what the underlying tissue is. If I could tell you that, gosh, there's a specific bone quality that you're gonna have to ultimately change the stabilization tool, that's valuable. And so then I could start to ultimately reflect the stabilization tools based upon the bone quality. That will be a 2025 phenomenon.
And so as I start to look through what the reflected opportunity is with regard to not only what we're doing on the lateral front, but ultimately how it influences surgery from an alignment and a stabilization perspective, I see the EOS thing being such a great long play. And also, you start to say: Who are we as a company? I would tell you that we've done good getting one and two-level degenerative surgeons totally interested in a less morbid approach with regard to PTP and LTP. We haven't affected the long scoliosis community. The scoliosis community affirms the value of our technology. We've now designed in our implants for our approach to the scoliosis community. So again, I see it as a great opportunity. And I'm not...
I'm sorry for droning, but you asked me. The other piece is, how do you bring more precision to the experience? And I've been totally underwhelmed with robotics. I think it, you know. Again, if you're gonna have a $1.5 million tool that gives you an angle to place a pedicle screw, that's kind of underwhelming. But the opportunity to integrate these things into the workflow, to create the bell curve of surgeons, enable them to do the same work as the great surgeons by creating precision and getting them into the anterior part of the spine and working them through that, that's the opportunity.
From an enabling technology perspective, we feel great about where we are with regard to the long run on EOS and all the navigation robotic elements that will ultimately continue to elevate the precision associated with what we're doing. Sorry.
A few follow-ups in there.
Syllabus guy.
Maybe for Todd, just on the EOS replacement cycle. How should we kind of be thinking about that as a, maybe a growth opportunity for the company?
Yeah, I think if you look at the U.S., you know, we're probably north of 200 in installed base, and frankly, probably around 50 of those are kind of Edge. So there's a sizable replacement opportunity that comes along on the replacement cycle, and I think that'll be multi-year as we go. And so, you know, feel good about that opportunity as a tailwind. I think, you know, what's super exciting is kind of what Pat's talked about in terms of the incremental feature set that's coming out in the middle of next year.
I think really once we deliver that, and I think that gets a little bit of momentum, and people start to internalize and understand, like, I think ultimately, that really is kind of the catalyst for driving, you know-
Those are all EOS Edge feature sets.
Correct.
And so,
It's a good point.
... What's gonna be interesting is you won't be able to get the feature sets without upgrading to the EOS Edge.
Got it. For rod bending and the bone.
Yeah.
Exactly.
Okay.
Exactly.
Okay. Maybe let's touch on Remy. You just mentioned that you've been underwhelmed by robotic systems, so maybe talk about why you bought Remy, what's different about it, and the clear opportunity is pull through for your implant portfolio. Should it be any less of an opportunity than what your peers have been able to do in the field?
Yeah. Yeah, to me, it's a great question, and it's like, you know, we just got a 510(k) to assemble, you know, the Remy robot to our posterior fixation. And so to be able to do what everybody else is doing, we'll do that through the end of this year. And so the great part is, we'll utilize the robot in a very narrow way with a small audience of surgeons to, you know, verify that everything is perfect with regard to the placing of posterior fixation. I think what happens is, people conflate screw placement to spine surgery. It's part of spine surgery, it's just the stabilization part.
And so when we start to think about navigation and robotics, what we think about is the entire procedure. You know, I've been around this stuff since the early 1990s, and I remember we were at Sofamor Danek bought Stealth Surgical Navigation Technologies, and the application was always narrow based upon the whole screw placement. I think when you start to apply the technology to the PTP procedure, and you say, "Hey, I can place this exactly where I want it, limit the radiation that the surgeon is taking on from either the fluoroscope or an O-arm, and be able to...
So radiation-free, be able to place the retractor exactly where I want it, the dilator, exactly where I want it, and then have a fiducial on the retractor system. "Hey, it moved." Like, the last thing you want in a surgery is for the exposure to move. It, you could hurt something. And so the great part is the type of things that we can design in with this technology that ultimately furthers the safety and limits the potential complications, I think is hugely important. But people aren't doing that today. They're using it for screw placement. And again, I think it's a bore if that's all you're utilizing this technology for. The other thing is there's a camera in the operating room. We're gonna have two cameras with regard to ours.
Part of the other camera's gonna be for the reconciliation of the information that's coming out of EOS. And when you start to think about an ecosystem that's been well thought out, that ultimately effectuates the decompression, stabilization, alignment, I feel like we're in a great place. And so anyway, you know, it's gonna take us a little bit of time to design and develop the navigation and the Remy piece that ultimately is well integrated into the surgery. But again, I think the beauty becomes is we have great momentum on the lateral side. The EOS stuff looks unbelievable, and now we get an opportunity to ultimately participate on the navigation robotics front.
Got it. We only have a minute left, but, Todd, really talk about kind of your, like, commitment to EBITDA breakeven this year, and the leverage opportunity you had. I know you're anxious to get into 2024, but I mean, how should we be thinking about just the leverage opportunity from here onwards?
Yeah, you know, I think clearly I think we're kind of in a special spot. We're just, you know, Q2, we grew 40% and expanded our adjusted EBITDA margins over 1,100 basis points. That's, that's kind of the first half story. Coming into the year, our full year assumes about 830 or 840 basis points of EBITDA margin expansion on 30% revenue growth. And so, you know, I think we're starting to become in that special spot of excellent top-line growth, and expanding profitability margins. And so we're super happy to deliver, you know, the breakeven or profitability, adjusted EBITDA profitability in the second quarter, the way we did.
I think as you look at how we're doing that, it's really coming the way we laid it out in our long-range plan. So when we said in our long-range plan, we are gonna, you know, expand operating margins by 2,500 basis points from 2021 to 2025, you know, we said 60% of that's gonna kinda come out of the, the leverage of the infrastructure, the overhead of the business, and 40% of that's gonna come out of our, like, really, our variable selling expenses. So the, the confidence that I have, prospectively is predicated on the performance that we delivered in the second half of last year, where we expanded the EBITDA margins by over 100 basis points, then 1,100 in the first half of this year.
All of that came the way we laid it out and the way we designed it. And so, you know, I think so often companies find themselves in the spot where they need to become profitable, and so they lay a plan and try and cut their way to it. We're delivering profitability because that's the way we built the business. I think the timing was fortuitous in terms of, you know, the environment we are, but ultimately, this is when we were planning on doing it, and it was gonna come after we've built the infrastructure of the business and as we continue to grow our distribution footprint and the way we've laid out and contractually constructed the selling expenses, more or less.
You know, I think our view is we're very much on track to deliver the profitability expansion. It's a commitment that we have. You know, I think we've oftentimes talked about, hey, to the extent that we overachieve on the top line, we drop an extra 10% of that overachievement to EBITDA and continue to invest in the growth engines of the business. That's kind of been the model that we've had. And I think that's, you know, that's how we've kind of laid it out going forward. And so, feel very good about where we are in terms of being able to deliver on the profitability and the top-line growth.
We're unfortunately out of time, but Pat, Todd, really appreciate you joining us today.
Yeah, thanks.
Thanks so much.
Thanks, Drew.