Alphatec Holdings Inc. CEO Hosts Technology Day (Transcript)

Jun. 6.13 | About: Alphatec Holdings, (ATEC)

Alphatec Holdings Inc. (NASDAQ:ATEC)

Technology Day

June 06, 2013 09:00 AM ET

Executives

Mark Francois – Senior Director, Investor Relations

Leslie Cross – Chief Executive Officer

Thomas McLeer – Senior Vice President, U.S. Commercial Operations

Analysts

Mark Francois

Good morning everybody. We're going to officially begin. My name is Mark Francois. I'm the Senior Director of Investor Relations and I just want to welcome you to today's Investor Technology day. I'm pleased to be able to kick this off for you, but unfortunately I get the stuff that sounds like I'm a lawyer. I'm here today to read the forward looking statement, which is I'm sure is really for your help.

Today, you're going to hear from several speakers. We will start off with Les Cross our Chairman and CEO, followed by Tom McLeer our Senior Vice President of U.S. Commercial Operations and I wanted to let you know that the prepared remarks from Les and Tom today are actually being webcast. So that webcast will be available on our website later today. It'll be available for about the next 30 days.

Before we begin with the official program I have to remind you that today's investor technology presentation contains forward looking statements made under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Such statements include statements related to the success of the Company's initiatives to drive global sales growth, the ability to bring new products and new technologies to the marketplace and to achieve surgeon adoption for those products and technologies, the ability to achieve surgeon conversions in connection with the Phygen acquisition, contributions for the Company's revenue and earnings in 2013 from the introduction of new products and sales and marketing strategies, signing of the U.S. FDA and other foreign and domestic governmental agency decisions that impact the commercialization and distribution of our products.

These forward-looking statements are based on company’s current expectations and are subject to a number of risks, uncertainties and assumptions that could cause actual results to materially differ from those forward-looking statements. The company undertakes no obligations to update any forward-looking statements whether as a result of new information, future events or otherwise. Many of these risks, uncertainties and assumptions are discussed in our 2012 Annual Report on Form 10-K for the year ended December 31, 2012, filed on March 5, 2013 with the Securities and Exchange Commission, as well as other filings on our Form 10-Q and periodic filings on Form 8-K. Our SEC documents are readily available on our website at www.alphatecspine.com.

Furthermore I wanted to mention that today we have the privilege of having several surgeons and clinicians available to speak and I've been reminded by our attorneys that we have to say something like the presentations you are going to see from those professionals are actually not part of Alphatec’s presentation. It’s their presentation. So just wanted to make that point clear.

So without further ado I am going to turn the podium over to Les Cross. Les?

Les Cross

Mark gave me a script, like we are going to follow the script. It’s a nice try. So I was in the bathroom when Mark started the introduction. So I really did just get here; and so thank you everybody for joining us here this morning. This is a pretty exciting time for us. I have never done one of these before. We didn’t put on the Technical Day like this and Alphatec did; I think two or three years ago, put one on, it was quite successful; and then formally through the investment community, so the team decided to do it again, and looking at the crowd and some of the people here and the institutions and the power you represent and the analysts who follow the companies, so I am excited about doing this and hope it works well for all of us. So thank you for coming up here and joining us, once you found the place, right?

So I am not going to take too much of the time to go through this presentation with you. Most of you have seen it before, but I just wanted to set the stage and highlight who Alphatec is, what we stand for and where we have been and where we are going.

So as you can see up here it says we're the seventh largest spine company. That may not be true. Of the last quarter we outgrew Zimmer Spine last quarter. If we do that again and I would hope we do, we might have to change the slide to say we are the sixth largest spine company. We have focused on working with our physician partners to develop solutions for patients with spinal disorders.

And I think there is a couple of important thing in that message, physician inspired. In other words the people that deal with the problems all day long now have to solve the problems, and that’s the people we need to work with to deliver better healthcare to the patients with spinal disorders.

But we also don’t say products, we say solutions. Because in the future we may actually be talking about software, case planning software, pain management, physical therapy. Wherever there is a patient suffering a spinal disorder and we can develop a product or a solution, or a technology to help that patient get better and we can make money doing it, we are interested in doing it.

So if you look out on the right, you can see revenues flattened out for us in the 2011–2012 timeframe. So how does that happen? Really what happened; the innovation pipeline slowed. The company had invested in some products they were unable to get through the FDA, and so the products that they developed or working on never really came to the market. So our vitality index really went down quickly.

Since I joined the company just over a year ago, we've really accelerated our R&D to get our vitality index, our new products ratio of revenue back up because that’s really where the growth and the improvement in gross margin, and cash et cetera comes from, those new products. In the last few months we had five 510-Ks approved. We really are starting to see that that flow of new products and that is what’s going to change that revenue line.

So what we are going to showcase today is some of our clinical and physician partners going to talk to you about some of the new products and technology, that’s really going to change the growth profile and the profitability profile of this company in the short term. All the products you see today are FDA approved. And the lesson learnt from the past, don’t show products and don’t invest in products that you aren’t sure you are going to get through the FDA. All the products you see, approved by the FDA. All but Incide (ph) are in the market. Incide (ph) is approved by the FDA. We've just got some final tweaks on the instrumentation, expect to have that sorted out very, very quickly.

You will see EBITDA, last year we didn’t have the new products, but we did focus on profitability, and quite a significant improvement in EBITDA. The Q1 ’13 versus ’12, good EBITDA but flat. That’s thanks to the franchise tax. That’s our tax dollars at work there. But again we will start growing that once the vitality index goes up.

Another important thing I would like to point out down the bottom is the percentage of international business we have, 34% of our business is outside the U.S. Most of our competitors are at single digit or a low double digit. Why is that important? As we launch new products we have a global distribution system to get these new products, not only in the U.S. but outside the U.S. quickly. I would expect that to be almost 40% a year from now.

So, even though we have a large international footprint, our products in Brazil and China have not yet been approved. Based on historical timelines we would expect them to be approved prior to the end of this year. Though international is doing great, there is 16% in Q4, 9% in Q1 and that’s without Brazil and China pipelines. So I am very bullish about where the international business is going to go and can go.

So the investment highlights, when I first joined the company, I sent a survey out to all the managers worldwide. I said what are you most proud of? They said innovation. Historically, Alphatec was known for innovation. Just sadly, a year or two’s works didn’t deliver the innovative products to the market that were expected. So we are turning the company back into an innovative pipeline. That’s what you are going to see here today.

So, the secret of growing a medical device company is a continuous flow of new products. We fail to do that, we are doing it now so that’s one of the secrets. The other is expanding our international global footprint and we are going to do that as well.

Operational excellence, we makes our implants and screws. Most of the competitors outside don’t. It should be a competitive advantage, it should make us the most nimble. The company gets new products to the market the quickest and the product that the company that manages its inventory and the supply chain for the most efficient way.

When I took over, we have a very nice manufacturing facility. It wasn’t world-class. It is on the way to becoming a world-class facility. Our back orders are at an all-time low. Our fill rates are at an all-time high. Our (inaudible) is at an all-time low. So we are really starting to see the impact of lien and we will start to see that in the financial as we move forward.

Experienced management team. We have the team that works for global companies, worked internationally and some of you know I have had experience, good and bad in running a public company. I was telling someone a story here earlier, I took DJO public at $17 a share. A year later I managed to go all the way to $2 a share and so you know I have got to learn how to run a public company. So this isn’t going the right way and I end up selling the company to Blackstone for $15.25 a share few years later. So, I have done what we are trying doing to here. I just created the problem and then I fixed the problem. Here I inherited the problem but looking for the same result.

So, we want to do accretive acquisitions. If we grow at market leading rates, let’s assume we can grow somewhere in the high single digit, that would be industry leading growth rates right now and grow profit fast to the net, I don’t think that’s going to deliver the kind of return we all want as fast as we want it. So we are looking to do these accretive acquisitions, just like I did in my past life.

And how did they become accretive, we buy a company that has the business somewhere between $5 million and $10 million, we shut the company down. All we keep are the products, the sales force and the customers and then we put the manufacturing into our facility that’s helps our overhead and it lowers the cost of that product in going to market.

So these acquisitions can be virtually, instantly accretive, certainly within the first year and that’s the way we are really going to accelerate revenue and profits of this company. We have already done one. We bought a physician owned Spine Company called Phygen, a little bit of a slow start and if you follow the numbers, we guided to do $15 million in revenue.

So after a start Q1 kind of went huddled, decided that we needed a new strategy, we put that strategy in place and I can tell you that business is accelerating and I look forward to talking more about that when we announce our quarter end.

So operational excellence, I talked a little about it. It’s simple. We want to be the lowest cost, most efficient manufacturer and supplier of spinal implants and screws. It’s a competitive event. We all know we are under pressure. We are all under price pressure, our customers, our hospitals and us but we need to drive the cost out of our system and we will do that through operational excellence.

But at the same time we want to have through world-class customer service and I can't tell you the progress we have made in 12 months to get towards it. It’s incredibly impressive. We used to close every week with dozens and dozens and dozens of SKU on backorder every week. Now we are down to a handful every week and our service levels used to be in the 80s, now about 95%. Orders get shipped the same day as they come in. We have made incredible progress.

So there is our strategic roadmap. When I got to the company, it wasn’t clear that we really had a mission or a purpose but we really thought about that, why are we here, why does the world need this company and the answer we came up with is we are very nimble, we are small, we can respond to what physicians want. Physicians want products that allow them to be faster and smoother, deliver better satisfaction to their patients in their community. So we work with them to achieve that goal.

Also, we didn’t we have a value system. To me a value system is a compass. We have to make decisions every day. We need a compass to make sure we are making the right decisions and so we've established a culture and a value system and we also have a metrics. We measure everything. Every Monday we have a staff meeting and we go through scorecard after scorecard every Monday. We really have a sense of continuous improvement, urgency and accountability and that's how you achieve some of the goals that you see below.

Accretive acquisition, someone asked me there; are there are a lot of acquisitions out there? Yes, there is a lot of small spine companies that are running out of financing and running out of financing options. They got a couple of these products that are approved by the FDA and they kind of stopped and if pricing expectations, definitely changes.

It's time to consolidate this market in bad times when valuations are low, it is a good time to look at being a consolidator and these companies are too small to help the Medtronics and the (inaudible) and the J&Js of the world and not big enough for them to do the work. They are perfect for us; $20 million acquisition to a $200 million year company is significant when it is accretive.

So, that's kind of an overview of the company again. Thanks for coming here and it's with great pleasure I introduce someone who knows what he is talking about in Spine; my new partner who joined us about seven or eight months ago, Tom McLeer

Tom McLeer

Thanks everybody, thanks Les. We got a great faculty here; I am going to go through just a little bit on some of the new products. We have the new products at the back and I encourage everybody when we get down to go look at the product ask questions and everything. We also have some time after we get done with the faculty to take any questions anyone would have.

So, talk a little bit just about the U.S. expansion and some of the key efforts we have been making. A lot of this has been really recruiting and retaining the 510 positions. I'll talk briefly about that as Les did. Real key for us is the medical education. We do a lot of training.

We are the number four spine company in Japan and we get a lot of surgeons that come over probably 10 or 15 group every year to come over and train in our facilities. So that's really one of our key strengths with all the new products.

You will some of this on the back, they require a lot of training, some of our deformity system, MIS things like that and it really plays well into what our strengths are at the facility. Got a lot of field specialists out there that help us case coverage. When we incorporated the Phygen surgeons, we also incorporated some of their representatives who weren't familiar with our products and by having our specialists going with them, that enabled a very smooth transition and we continue to grow the sales force across the country.

I'll talk a little bit about the International side of things, obviously some direct markets France, Italy, Germany and Spain and then some big operations in Brazil and Japan and as you will see when I give an overview of the products, OUS and U.S. that we have a lot of opportunity with the new products and some of our existing products in the United States to get those registered overseas. So we are working very hard in Brazil to get approvals, China we are opening things out there, it is a lot of opportunities.

So we talk a little bit about the accretive acquisitions, Phygen being one of the C1s, a lot of great surgeons there and I'll have a graph that will show you there is a core group of surgeons that we have focused on that have been with Phygen for a long time. They have come over very rapidly and then we continue to work and educate the rest of the surgeons that are with Phygen to grow the business there.

We will talk a little bit about Pegasus, which is in a final stages of working through a few instrument issues and then we will get that launched out in the field. That's a very novel anchorage. Cervical antibody product and then next task, we will have a presentation on that, really one of our keys is their biologics. As we try to build per procedure revenue, what we want to try to do is take all our metal and heat products and add the biologics into them because that's the easiest way to grow the business and the revenue.

This is just a quick slide to show you how things are going. As Les mentioned, we have been moving along and I think Q1 has really been a great growth for Phygen. You can see that we have identified 31 surgeons that were really the key drivers within the Phygen organization but things are ramping up nicely and I will discuss that in more detail when we have our quarterly earnings.

So I want to cover just briefly some of the products you will see in the back but also the whole array of products we have here in the United States. We really have a comprehensive offering and we have added to that with some of the new products in the back. Some of those in the back are line extensions which enable us to do minimal invasive surgery up the higher levels, some de-rotation and end block procedures for deformity that allow us to address some of the surgeons needs there and then some brand new products which you will see at the back as well as the biologics. So very broad, strong portfolio and we are continuing to launch new products all the time.

Now if you look at the OUS products, you can see there some of those that Les referred to, which were some of those that would require an IDE or very long clinical pathway to get approval in the United States. So we do have a variety of products outside the United States that we don’t have here in the U.S. At the same time we are taking some of those that you saw on the previous slide, getting regulatory approval into Brazil, China and areas like that so we can continue to expand.

Now I am going to talk just briefly about the some of the new products and turn it over to the clinicians so we can have a discussion and answer any questions. Solus is an anchored ALIF device very, very novel because of the points of fixation that we have there, very, very stable in all areas of motion and Dr. Cheng will be giving a nice presentation on that so you can better understand the advantages of the device.

(Inaudible) which you can see in the past, we’ve always had a very nice MIS system. That’s been expanded with the help of a variety of surgeons throughout this to more easily addressed longer constructs rather than just one or two level MIS procedure.

Epicage is really an interesting product. What it does is it's a flexible cage and you can see it in the back there and it allows you to take a curved implant which you can see on the picture there and direct it through in a straight tube directly into the space into the anterior portion of the disc and place it there and then it curves around as it comes out of the tube.

BridgePoint has been a nice addition to the product line. It allows for some minimally invasive of fixation in the back. So if you’re doing an ALIF and you just want some supplemental fixation in the back you have this is a nice option to control things.

Trestle luxe was our latest offering in the end of last year. This is an improvement on our trestle plate, a little easier to use, very low profile, very well received in the market. Once again this is the case of iterating your product line so it doesn’t become stale and you can continue to grow. We've had great success with that at the end of the Q4 and moving into Q1 and Q2 of this year.

And Pegasus which you can also see in the back, this is an anchored cervical implant. It all inserts in one step. There is no banging which you see with some of the other devices that have to insert it. You just simply place it in there and then you can slowly deploy the pins. If you need to remove it to reposition it you can certainly pull it back out and readjust it. So, we’re working on one instrument change there and that should be out shortly.

NEXoss is one of the whole stable of products we have for the biologics and as I mentioned a lot of these are (inaudible) growing our procedure revenue and very important overall because biologics are becoming a real key growth driver for any spine company. It's one segment of the market that just continues to grow and do very well. So, NEXoss, we’ll have a nice a discussion on that but it's a synthetic material easy to handle. We will whip up bone marrow aspirate very easily and then it can just be placed at the operative site.

So, now I’m going to go ahead and present some of the speakers and have them come up and after that we’ll have everyone up here for a little Q&A. So, I'll go over everybody and then if Dr. Castellvi come up, he'll start things now. Dr. Castellvi is going to discuss the MIS procedure specifically comment on the ILLICO multilevel which you can also see in the back for longer MIS constructs.

Dr. Castellvi is an assistant professor in the Department of Orthopedics and Sports Medicine at the University of South Florida. He was Director of the Spine Fellowship at Florida Orthopedic Institute. Then after Dr. Castellvi gets done, we’ll have Dr. Jeffrey Bash and Joseph Aferzon who will report on the anchored ALIF devices including our new Solus device of which they were a great help in designing it. The strong surgeon feedback for this, it’s really been one of our nice growth drivers. Dr. Bash and Aferzon are Co-directors of the Connecticut Spine Institute for Minimally Invasive Surgery.

[Call ends abruptly]

Question-and-Answer Session

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