Alphatec Holdings' Products Lack Innovation And Losses Are Growing (Target Of $3, 50% Downside)

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  • Alphatec (ATEC) is up 400% over the past year based on 12 new spinal implant product offerings that we show are flawed and are mostly copy cats of the competition.
  • ATEC’s new CEO, Patrick Miles, is alleged to have blocked Nuvasive (while working there as an executive) from buying Alphatec, calling it a “waste of time".
  • To capture customers, ATEC has SG&A expense growing faster than revenues, which is unsustainable.
  • Insiders have sold $2M worth of stock in 2019, mainly by ATEC’s legal counsel while the company is in patent lawsuits.
  • With questionable products and leadership, we give a $3 price target to ATEC.

Executive Summary

Alphatec Holdings, Inc. (NASDAQ:ATEC) is a medical technology company that designs, develops, and markets products for the surgical treatment of spine disorders. The stock has skyrocketed about 400% over the last year predicated on the new management team, mainly its CEO, ex-NuVasive executive Patrick Miles, and its increased product offerings based off of “key” acquisitions i.e. SafeOp Surgical, Inc. (SafeOp). We can see from the chart below that ATEC’s 400% increase in stock price has been a result of multiple expansion that happened after the start of 2019 when ATEC began announcing its intent to pivot towards a new product portfolio and revamp its sales strategy.

We show in this article why the company’s spinal implant products are mostly just copies of the competition. The one product that the company claims is its most innovative one, its SafeOp device, we’ve found to have significant flaws that could make it clinically useless. Patrick Miles, an ex-executive of Nuvasive, had a chance to acquire ATEC in 2016 while at Nuvasive and called it “worthless”, ultimately denying the deal (more on this later). In addition, Miles has already pocketed in total $35M worth of ATEC stock, options, and warrants. We believe ATEC’s low cash, increased SG&A expenses and net losses will ultimately drive the stock price back down to where it belongs in the long term. In the meantime, insiders are exercising their stock options and selling shares. We have a price target of $3 per share for a 50%+ downside.

There Is Formidable Competition in the Spinal Implant Industry

ATEC is up against large, established competitors in the spinal implant industry. As stated in ATEC’s latest 10-K:

Both our currently marketed products and any future products we commercialize are subject to intense competition. We believe that our most significant competitors are Medtronic, Johnson & Johnson (DePuy/Synthes), Stryker, NuVasive, Zimmer Biomet, Globus and others.

These heavy hitting companies won’t let a much smaller rival with a me-too product portfolio like ATEC steal market share without a fight. We believe ATEC needs to differentiate itself from these competitors in order to win a significant amount of market share. Otherwise, the company will likely be a perpetual money loser or barely get above break-even.

Morgan Stanley’s outlook on the spinal implant industry, view report here, predicts that several of the big players will gain market share in 2020. In particular NuVasive (NUVA) (+40 bps), Globus (GMED) (+20 bps), and Stryker (SYK) (+30 bps). Whereas ATEC’s market share is predicted to remain the same at 1% of the North American market.

The Morgan Stanley report also mentions robotics will grow rapidly, and technology offerings will be critical to maintaining/growing share. This is another disadvantage for ATEC. It doesn’t have a surgical robot, nor does acquiring such expensive technology make any sense for a small company performing only 1% of procedures in the US. Larger companies with access to robots do bundling: they can offer a free or discounted robot to a hospital for a commitment to a minimum volume of implants.

Miles said in ATEC’s Q219 earnings call:

We also knew that if we're going to create this growth company what we have to do is distinguish ourselves clinically and hence created a -- an organic innovation machine.

So to delve a little bit more into the SafeOp platform, when we think of clinical distinction, clearly the SafeOp platform comes top of mind.

Miles said in ATEC’s Q319 earnings call:

And so our intention is to revolutionize the approach to spine surgery by creating clinical distinction, and strategically, we believe we're positioned to accelerate growth.

However, we've found that ATEC’s products are far from revolutionary and most are without clinical distinction. They are either similar or copies of what the competitors are selling, or have flaws like we found in the SafeOp platform.

Alphatec’s New Product Introductions Are Minor Improvements With Lacking Or Questionable Clinical Evidence

Since we believe valuing ATEC’s products are the most important part of determining the value of the company, we will start there. ATEC has introduced a whopping 12 new products in 2019. Wall street has applauded the company’s rapid product introduction and have bid the stock way up because of it.

However, ATEC’s new product introductions aren’t impressive upon closer analysis. We’ve found many of ATEC’s products are flawed or are simple iterations of the previously sold models with an occasional insignificant modification, and we believe the company will have a hard time winning additional market share with such a portfolio. The following are ATEC’s 2019 commercially released products:

Source: Dec 2019 Piper Jaffray Conference Slideshow

Evidence Suggests The SafeOp Neuromonitoring System Is Clinically Useless

The recently launched SafeOp Neuromonitoring system (or “EPAD”) is ATEC’s last product launched in 2019. It has been given significant importance by management. In the Q319 earnings call, ATEC’s CEO Patrick Miles stated:

Then we said, gosh, 12 products would fulfill the obligation. We are 11 in year-to-date, and we feel really, really good about our 12.

And probably the one that creates significant enthusiasm is, what we're calling Alpha Informatics, but is the SafeOp part. So, the neurophysiology part of the SafeOp platform, and so, critically excited about that.

Its also been given significant importance by sell-side analysts. On 1/14/20, Lake Street analyst Brooks O’Neil said he “senses that the new Alphatec informatics platform has been well received in its early days.” However, he doesn’t provide evidence to back up this statement.

The SafeOp EPAD device (called the SafeOp Neural InformatiX System by ATEC) has been engineered with electromyography ("EMG") and somatosensory evoked potentials ("SSEP") to provide surgeons with actionable information regarding both the location and the health of nerves at risk during surgery. However, we have found the EPAD is likely clinically useless due to its low specificity.

ATEC acquired SafeOp Surgical in March 2018 for only about $30M in cash and stock. If the EPAD was really a game changer, we believe SafeOp Surgical would’ve likely been sold for much more than that.

Before being acquired by ATEC, it appears that SafeOp Surgical wasn’t doing well on its own. SafeOp’s only product was the EPAD. The FDA clearance for the first generation EPAD was received on 2/26/14. Only on 8/9/16 did SafeOp issue a PR claiming that Abrazo Arizona Hospital will be using this technology – the only hospital we found to be using it.

After receiving FDA approval for the latest generation of the EPAD neuromonitoring device, ATEC recently announced its commercial launch on 11/26/19. This was later than the company anticipated, so one might conclude that there were some issues along the way. From the Q119 earnings call, Miles states regarding the SafeOp device:

And so that soft launch is going on now. And it's going very, very well. And so what we, in essence are guiding toward is, it will launch in Q3 of this year, and we're doing all the proper work to make sure that it is – walks out.

The launch announcement states:

Through a combination of cutting-edge signal amplifiers and filters, proprietary waveform classifiers, and predefined parameters, SafeOp SSEP delivers an unparalleled ability to reproducibly monitor nerve health.

We looked for clinical evidence supporting this statement. ATEC’s SafeOp 510K FDA submission did not include any clinical data, but only the list of substantially equivalent predicates. We also found one peer-reviewed 2017 publication and one 2018 graduate thesis, both from the same clinical group.

The 2018 thesis has much more details and reviews a larger patient sample than the 2017 publication. It identifies some potential problems with the EPAD. The 2018 thesis states that:

Out of the 51 participants, 41 participants provided intraoperative SSEP data while 10 participants failed to do so because of technical problems with the EPAD® device. …The most commonly encountered technical problems associated with SSEP data collection was detachment of C5 electrode. Other problems included displacement of other electrodes, issues with data transfer and hardware problems.

Later, the thesis specifies the performance parameters of the EPAD device:

The sensitivity and specificity of EPAD® to detect clinically symptomatic patients is 100% and 11%, respectively….

11% specificity means there’s an extremely high incidence of false positives. This would render EPAD clinically useless, because most of the “abnormal” signals should not be acted upon and the few that deserve attention cannot be distinguished from the rest.

Later, the Thesis explains:

The presence of false positives, i.e. participants who had abnormal SSEP signals without clinical PNI symptoms, might suggest that mere nerve damage is not enough to cause clinical symptoms; rather, additional insults are required for symptoms to manifest.

Another possibility is that the clinical usability of the EPAD® device has been reported in previous studies, however, sensitivity and specificity of this device has never been investigated. Based on the results of the current study, the EPAD® device may be more sensitive than conventional SSEP devices. As a result, it is possible that this device has a low specificity, and further studies are warranted to investigate its usefulness for its daily use in the operating room.

As the Thesis states above, the clinical validity of the EPAD device is questionable due to very low specificity.

Note that the “previous studies” mentioned in the passage above refers to the 2017 peer-reviewed publication which did not investigate the sensitivity and specificity of the EPAD.

The Thesis was published on 12/12/18 which was after ATEC acquired SafeOp Surgical. We believe that ATEC was too hasty in the acquisition before doing a closer study on the EPAD.

ATEC announced FDA clearance of the EPAD device on 2/25/19, two months after the Thesis was published. The 510K submission was based on using a substantially equivalent predicate, the first generation of the EPAD device, which was FDA approved in 2014.

Is it possible that ATEC solved the issue of low specificity before receiving FDA approval? Logic would indicate that there was limited time to do that which is in alignment with our thinking. There was no statement of such improvement either. Therefore, we believe that clinical utility is likely undermined by the low specificity disclosed in the 2018 Thesis.

ATEC is applying EPAD to the spinal surgery application, not cardiac surgery as described in the 2018 thesis. Depending on the type of surgery, different peripheral nerves are damaged and therefore, EPAD’s electrodes are attached to different parts of the body to measure relevant peripheral nerve signals. In the 2018 Thesis, patients underwent cardiac surgeries and the four nerves used to measure SSEP were the left and right ulnar nerve and the left and right medial nerve. According to ATEC’s PR, the same SSEP signals will be collected as in the cardiac surgery study, but for a different peripheral nerve, called the saphenous nerve, which is a sensory branch of the femoral nerve. This is the nerve that is typically injured in spine procedures, relevant to ATEC’s products.

We did not find any clinical information on the performance of the EPAD device in SSEP monitoring of the saphenous nerve for spinal surgeries. However, this publication suggests that injuries from surgery of the ulnar and median nerves are more frequent than that of the femoral nerve, and there is no reason to believe that mechanisms of injuries are different for different nerves. Therefore, we believe the 2018 Thesis provides the most relevant information on the clinical utility of the EPAD device in detecting peripheral nerve damage.

Alphatec’s Other 2019 Product Introductions Are Either Only A Minor Improvement or Need Clinical Validation

Out of ATEC’s 12 new product launches in 2019, six are differently shaped spacers using the IdentiTi platform. Miles stated in the Q219 earnings call regarding this platform:

Next is, in addition to the SafeOp platform, we also launched approach specific IdentiTi implant systems. These are the currency of our product portfolio. And so these implants are porous titanium. They are made of a proprietary porous structure for -- to better facilitate fusion, a similar stiffness to bone, there's a reduced density so that it images better and are made -- they’re made via a subtractive manufacturing process, which ultimately begets greater predictability.

How important and novel are these spacers? Stryker published animal data on 2/26/18, showing that their porous titanium ("TI") cases integrated better than PEEK cases or Ti coated PEEK cases. All spine companies then jumped into porous Ti. Centinel implanted more than 1000 of such porous devices back in July 2019. Nuvasive’s device Modulus, made of Ti, was also introduced in 2019.

The IdentiTi platform is a me-too porous titanium market response from ATEC. ATEC has not invented it, they just followed the trend and got regular 510K approval without any clinical data. It is interesting, that despite FDA approval of six IdentiTi based products in 2019, none of them are mentioned in product offerings on the ATEC website. ATEC announced 510K approval without any clinical data. Now, they are likely doing a limited launch with their physician consultants to validate and de-risk these products before advertising them on their website.

Another two products introduced in 2019 were of ATEC’s InVictus platform. The InVictus Open Spinal Fixation platform launch was announced on 7/23/19. The InVictus Minimally Invasive, or MIS, SingleStep K-wireless implant delivery system commercial launch was announced on 8/7/19. These are minor improvements on existing tools. For example, InVictus MIS SingleStep is designed to simplify procedures. It is a small evolutionary, not revolutionary, development. This is confirmed in its PR of its SingleStep commercial launch:

“SingleStep represents an evolutionary leap in percutaneous pedicle screw implementation,” stated Tyler G. Smith, MD of Roseville Orthopedic Surgery and Sports Medicine in California.

The remaining 2019 launched products to compare are the AlphaGRAFT DBM Fiber, the AMP LIF Plate, and the Trestle Luxe II Cervical Plate.

ATEC’s AlphaGRAFT DBM (Demineralized Bone Matrix) Fiber, described here, appears to be made exactly the same way as the bone graft substitutes ATEC’s competitors sell. For example, you can see Stryker’s DBM product here, and Nuvasive’s here.

ATEC’s AMP LIF Plate is described as a modular lateral plate with a zero-step screw locking feature. Stryker’s plating system is described similarly, with “anatomically contoured plates” and a “Smartlock technology.” ATEC’s Trestle Luxe II Cervical Plate doesn’t appear much different than Zimmer Biomet’s Trinica Anterior Cervical Plate System.

Increased Revenues Means Increased Losses At Alphatec

Looking at ATEC’s income statement, we’ve found that SG&A expenses are growing faster than revenues. Q319 revenues grew 27% year over year but SG&A expense grew 42% over the same period. SG&A is growing almost twice as fast as revenues. This tells us that it is very expensive to convert accounts over to ATEC, which we believe would not be true if they had truly innovative product offerings. Then the product would sell itself. It’s also evident that ATEC took its biggest loss in Q319 over the past year, losing $15 million.

The following table shows quarter over quarter revenue vs SG&A growth, with SG&A having a higher percentage growth each quarter.

Source: ATEC Financial Statements

Alphatech Announced Preliminary Revenue Results And Guidance But No Other Financial Metric

ATEC announced preliminary 4Q19 revenue results and 2020 revenue outlook on 1/13/20. This was well before announcing the 4Q19 earnings results, which now won’t be until 3/5/20. The only financial numbers that ATEC mentioned was revenues. Preliminary Q419 revenues were $32M-$32.4M, beating consensus, which was $30.43M, by $2M. $2M is not a huge beat. 2020 revenue guidance is expected to be $130M-$134M, with US revenue of $128M-$131M. ATEC expects 2020 US revenue growth to be approximately 20%.

However, there’s no mention of any other financial numbers. Therefore, investors don’t know if the company is taking bigger losses in order to get a revenue beat. Remember, the company took its biggest quarterly loss yet in Q319 - could Q419 be an even bigger loss?

Why did ATEC announce revenues early, and why not mention any other information for the quarter or 2020 guidance such as earnings, cash balance, SG&A, gross margin, or cash burn? We believe the reason is the other financial information is likely weak. Otherwise, the company would share other information as well instead of just showing off their revenue beat.

Other companies have given preliminary revenues for Q419 earlier this month, but they usually give other information as well. We haven’t seen any company this month give only preliminary revenue data and 2020 revenue guidance and nothing else like ATEC did. Some examples:

Integra LifeSciences (IART) gave preliminary Q419 revenues and 2020 revenue guidance, just like ATEC. But they also gave 2020 earnings guidance.

Masimo (MASI) gave preliminary revenues, and also gave preliminary GAAP earnings which are expected to exceed guidance.

Fluidigm (FLDM) gave preliminary revenues and also gave Q419 cash outflow, cash balance, and consumables sales.

Allscripts (MDRX) gave preliminary revenues and also reaffirmed full year 2019 non-GAAP EPS outlook provided on 11/4/19.

AgroFresh Solutions (AGFS) gave preliminary revenues and also gave its Q419 cash balance and reaffirmed EBITA.

Accelerate Diagnostics (AXDX) gave preliminary revenues and also its 2019 gross margin and cash balance.

The preliminary revenue announcement temporarily halted the stock’s downtrend, but then it resumed its downtrend after a short rally. In fact, ATEC is now lower than it was right before the preliminary revenue results and 2020 outlook was announced. As we show in the one-month chart below:

Source: Yahoo Finance

The above one-month chart shows that ATEC is now continuing its downtrend after a bounce from the positive preliminary revenue announcement. This tells us that the company likely is in trouble with a stock that acts so weak. This resumed downtrend has been so vicious, it might continue until the stock reaches $5 or lower.

There Is A Good Chance Alphatec Will Never Reach Profitability

In the Q219 earnings call, ATEC’s CFO Jeffrey Black said:

At scale, we continue to believe that our gross margin will be in line with our peers in the mid 70% range.

Miles said in the Q219 earnings call:

We feel growing at 20% to 24% in the US marketplace is meaningful growth.

From the above statements, let’s assume ATEC’s US growth is 20% and ATEC generates $108M in 2019. That means it will take ATEC about 3.5 years to reach $200M, so under this scenario, it would happen in 2022.

Let’s give ATEC the benefit of the doubt and assume a gross margin of 75% coupled with reaching $200M in annual revenues. That comes to $150M annual gross profit or about $37.5M per quarter. Assuming SG&A grows at 10% annually, starting from about $28M in Q419, that would make quarterly SG&A about $40M when ATEC makes $50M in revenues in 2022. Therefore, we can project quarterly expenses are COGS is $12.5M, SG&A is $40M, R&D is $4M, and interest expense is $1.5M, that would still add up to a quarterly loss for ATEC in 2022 of $8M. And before that happens, we expect ATEC will have to do another equity raise at least once within the next two years. During that time, let’s assume that ATEC has to raise another $80M in equity, that would put its outstanding shares at about 75M. That would make its market cap $225M if the stock trades at $3 per share. We believe a roughly $200M market cap is a more than fair price for a company with little innovation that might never become profitable. And if there are serious stumbling blocks like the company gets sued for a faulty product or gets in trouble for doctor kickbacks, then we could see the stock falling far below $3.

Patrick Miles Called Alphatec A “Waste of Time” When at NuVasive

Talk about mixed signals. Alphatec has had a rough history, beginning with its IPO in June 2006 where HealthPointCapital, the PE firm who owned the company, was hoping to sell their shares at $15 each but was strong armed to lower the price. The stock closed at $8.90 per share (40% below its intended target) on its first day trading on the Nasdaq. The company was plagued with recurring lawsuits and scandals regarding not only its portfolio of products but also misconducts of its board (which is still there today). Lawsuits on their faulty products piled up, scandals were exposed and as a result, Alphatec was down 96% from its peak in October 2017 and it seemed like the company was left for dead.

But on 10/2/17, ATEC found their savior. Patrick Miles was appointed as Executive Chairman and then later as CEO on March 8, 2018. As well, many of ATEC’s workforce, from Regional Business Managers to a VP of Finance & Accounting, also followed his path and jumped ship from their previous employment. The stock shot up 40% the day of the announcement and it seemed like ATEC was rejuvenated with new life. However, through our diligence we have learned that Miles is primarily an opportunistic salesman for his own self interest.

When Miles was an executive at NuVasive, NuVasive had a chance to acquire ATEC in 2016 and he aggressively turned it down. As early as of January 2016, NuVasive claimed in a court document that Miles wrote that the ATEC acquisition opportunity was a “waste of time as far as I am concerned”. NuVasive was shocked when Miles left NuVasive for ATEC, and they initiated a lawsuit against Miles and ATEC for breach of a non-compete clause.

Source: NuVasive, Inc. vs. Patrick Miles court document

Miles was very adamant that ATEC was a poor acquisition target and agreed that it had an “aged, undifferentiated portfolio”.

Source: NuVasive, Inc. vs. Patrick Miles court document

Around the same time, Miles expressed that he wanted more control and say in the strategic direction of NuVasive, which was granted to him. But he then suddenly left NuVasive for ATEC anyways. As stated in the lawsuit:

In 2016, Miles expressed his desire to have more input and control in the “big picture” strategic direction of the Company. Consistent with that desire, NuVasive appointed Miles to the Company’s Board in August 2016. A few weeks later, out of the blue, Miles disclosed that he was considering accepting an employment offer from Alphatec.

With increased control in NuVasive, and his own stated dislike for ATEC’s business, why exactly did Miles leave Nuvasive? We believe Miles had a financial incentive to do so. NuVasive claimed that in March 2017, Miles bought $500K of ATEC stock in a private placement and not long after in September of the same year he accepted an offer from ATEC to serve as executive chairman. Miles was also given stock worth more than $3M as of Oct 2, 2017 in the form of restricted stock units and common shares, agreed to buy shares worth nearly $3M at $2.26/share (over 60% lower than the current price), and was promised warrants that would result in a 23% ownership of ATEC outstanding stock, according to NuVasive, at a $2 strike price. Of course, one could also look at Miles' large position in ATEC as a powerful incentive for him to do all he can to make the company a success.

Miles essential concealed these investments by purchasing the shares through an entity called “MOM”. At the time, ATEC aided this concealment by not disclosing that Miles was the beneficial owner of the shares. To rub salt into the wound, Miles sold 15,000 shares of NuVasive stock for proceeds in excess of $1M four months before purchasing ATEC stock.

Miles disclosed his intentions of leaving the company only after negotiating to secure a massive stake in ATEC. Miles equity investment in ATEC appreciated more that 40% on the day of the announcement that he will be heading the Company. The above paragraph is all stated in the court document link above.

Source: NuVasive, Inc. vs. Patrick Miles court document

Miles was completely aware of the non-compete agreement made between him and NuVasive, but was confident that it wouldn’t be enforceable. The court rejected NuVasive’s claim of non-compete only because California law applied to Miles’ contract with NuVasive, and that the post-employment non-compete restrictions were contrary to “California’s strong public policy interest against non-compete”. Miles managed to win this case in court, and this wasn’t the only time Miles has breached a non-compete contract.

In a lawsuit filed on 3/27/02 between Medtronic and NuVasive it states:

Miles allegedly violated non-compete agreements with Medtronic and Nuvasive. What’s to say that he won’t be doing the same at ATEC?

Alphatec’s Troubled Past Is Filled with Failures, Lawsuits And Missed Expectations Which Could Continue

ATEC’s operational history doesn’t give shareholders much confidence moving forward. ATEC’s story since its IPO is filled with constant litigation and product failures.

In 2013 & 2017, ATEC was sued for its polyaxial pedicle screws malfunction. The screws have had multiple reported incidents of breaking inside of patients beginning as early as 2010 & 2012. The lawsuits alleged that ATEC designed malfunctioning pedicle screws even though the Company was aware of the production inadequacies after being warned by the FDA in an inspection. The stock declined -83.5% from the news coupled with an earnings miss.

As well, in 2017, the FDA recalled 16,959 units of ATEC’s Arsenal Spinal Fixation System Set Screw due to “a trend in set screw postoperative disengagement from the screw body.”

The FDA letter also states: “Alphatec had received eight (8) complaints for disengagement of set screws since introduced to the market on June 14, 2014”.

This wasn’t the only time there was a product recall by the FDA. Between 2006-2012, ATEC had seven product recalls by the FDA.

There was also another lawsuit filed by the United States government against ATEC in September 2016 alleging that unnecessary surgery was performed on patients and that ATEC made “direct payments and concealed kickbacks” to doctors to influence them to use ATEC’s PureGen in surgeries and perpetrated fraud by billing them directly to Medicare. The PureGen was urged by the FDA to be removed due to security concerns, but ATEC kept making patients use the technology even if they didn’t necessarily need it. From the lawsuit:

Alphatec claims to have removed PureGen from the market in February 2013 in response to FDA concerns about its safety, but Plaintiffs allege that Alphatec has nevertheless continued to push to have PureGen used in surgeries since that time.

International Sales Are Going Nowhere

In Q2 2016, ATEC completely sold off its international operations and distribution channel to Globus Medical, a musculoskeletal implant manufacturer. ATEC and Globus entered into a product manufacture and supply agreement. The initial term of the Supply Agreement expired in September 2019, but in the Q319 10-Q, it states that during Q119, Globus notified ATEC that it will exercise the option to extend the agreement for an additional 12 months through August 2020. However, since they've had this supply agreement, Globus' revenues from their international supply segment has been gradually decreasing. This could be either due to lack of demand for ATEC's products outside of the US or new entrants to the market flooding the overseas market and undercutting them. Either way, the declining revenue from their international segment is not promising for the Company. This is shown in ATEC’s financials below:

Furthermore, the disposition of their international business for $80M was related to a desperate move to repay their bourgeoning debt obligations and overcome their liquidity issues. ATEC had problems with meeting their debt covenants in 2016. In Q1 2016, the Company mentioned:

Without modifications to our existing payment obligations or receipt of additional funding, our existing cash and other sources of liquidity may only be sufficient to fund our operations until our Amended Credit Facility with MidCap matures in December 2016, assuming that our creditors continue to waive any breaches under our credit facilities and our debt is not sooner accelerated. These circumstances raise substantial doubt about our ability to continue as a going concern.

International revenues are fading and will not be a growth driver for Alphatec moving forward.

Insider Sales Have Piled Up during the Stock’s Recent Run

Source: SEC Filings

As table shown above, most recently, the biggest insider selling came from Craig Hunsaker, who sold over 20% of his position or $2.07M worth of shares over the past year. Craig Hunsaker is ATEC's general counsel and considering that ATEC is now currently under ongoing litigation with NuVasive regarding patent infringement and employee poaching, it certainly raises an eyebrow.

The table also tells us that over the past year insiders have bought shares at $2.59 and below and have sold shares at $4 and above.

Downgrading of Auditor?

ATEC changed its auditor from Ernst & Young (EY) to Mayer Hoffman McCann (MHM) in Q3 2019. MHM is not the cleanest auditor out there. In 2010, MHM was subjected to a massive scheme of collusion that reached through every layer of California State's government, designed to undermine the audit process and deceive the auditors, which MHM ended up having to pay a $300,000 penalty for in 2012. California was not the only municipality that it had troubles with, there were others too.

SafeOps Management Team Originated At Nuvasive

We also want to note that the Safe Ops management team originated from a company called Impulse Monitoring which was originally acquired by Nuvasive in 2011 under Miles’ watch. As shown below:

Based on our diligence, it seems as though Impulse was related to a kickback scheme with Nuvasive, as described in this class action lawsuit against Nuvasive. Now the same players have sold their new corporation to ATEC.


Leading a start-up public company in today’s bullish market can be very lucrative for insiders and executives, but a disaster for late investors. We believe ATEC is now in that late stage. It had its runup in 2019, insiders are cashing in, and now is the time to fade the rally. We find similarities between ATEC and Conformis (CFMS). CFMS sells customized knee and hip replacements. We published a bearish report on CFMS on 4/11/19.

Like ATEC, CFMS claims to have innovative products that are better than the incumbent competition. But our research found that CFMS knee replacements aren’t proven to be better or worse than competing products. Also like ATEC, CFMS doesn’t sell well outside of the US, and has dropped its international focus to only selling in the US. The company continually reports big quarterly losses with no revenue growth. Its share price is approaching sub $1. We believe ATEC’s future will likely be similar to that of CFMS.

This article was written by

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Disclosure: I am/we are short ATEC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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