Quick Take
Alphatec Holdings (NASDAQ:ATEC) has announced the proposed acquisition of EOS imaging, SA for up to $121.9 million in cash and stock.
EOS has developed full-body diagnostic imaging technologies for improved orthopedic medical conditions.
With the deal, ATEC is making a big move to more vertically integrate its products with the EOS imaging portfolio, with potential for cross-selling and other complementary elements.
However, ATEC stock looks richly valued amid questions about its product portfolio, so my bias is NEUTRAL.
Target Company
Paris, France-based EOS was founded to develop imaging systems that enable full-body evaluation of patients in the standing position to improve understanding for surgical plans.
Management is headed by Chief Executive Officer Mike Lobinsky, who has been with the firm since August of 2017 and was previously Vice President - Robotics at Smith & Nephew Orthopaedics.
Below is an overview video of the firm's EOSedge system:
Source: EOS imaging
EOS’s primary offerings include:
EOS
EOSedge
EOSapps
EOSlink
The company has developed a number of clinical and academic partnerships to further their research and development efforts.
Investors have invested at least $41.1 million in pre- and post-IPO funding and include Fosun Pharma, IPF Partners, NBGI Ventures and Credit Agricole.
Market & Competition
According to a 2019 market research report by MarketsandMarkets, the global market for diagnostic imaging was $25.7 billion in 2019 and is expected to reach $33.5 billion by 2024.
This represents a forecast CAGR (Compound Annual Growth Rate) of 5.5% from 2019 to 2024
The main drivers for this expected growth are a growing demand for early disease diagnoses, increasing elderly patient populations and a broader scope of clinical applications driven by technological innovation.Below is a chart showing market size and growth expectations for diagnostic imaging by region:
Major vendors that provide competitive services include:
GE Healthcare (GE)
Siemens Healthineers (OTCPK:SIEGY)
Koninklijke Philips N.V. (PHG)
Hitachi (OTCPK:HTHIY)
Fujifilm (OTCPK:FUJIF)
Samsung Electronics (OTCPK:SSNLF)
Mindray Medical International
Source: Research Report
Acquisition Terms & Financials
ATEC disclose the acquisition price and terms as up to $88 million plus debt retirement of $33.9 million, paid for with a combination of cash and stock.
In connection with the proposed transaction, ATEC plans to take on an additional net of $70 million in secured debt financing, which may be increased to up to a net of $100 million.
A review of the firm’s most recent published financial results indicate that as of September 30, 2019 ATEC had $57.8 million in cash and equivalents and $97.0 million in total liabilities of which $51.0 million was long-term debt.
Free cash flow for the twelve months ended September 30, 2019 was $19.5 million.
In the past 12 months, ATEC’s stock price has risen 189.1% vs. the U.S. Medical Equipment industry’s rise of 4.3% and the U.S. overall market index’ growth of 4.3%, as the ATEC chart indicates below:
Source: Simply Wall St.
Earnings surprises versus analyst consensus estimates have been positive in only four of the last ten quarters, as the chart shows below:
Source: Seeking Alpha
Valuation Metrics
Below is a table of relevant capitalization and valuation figures for the company:
Measure | Amount |
Market Capitalization | $392,710,000 |
Enterprise Value | $412,930,000 |
Price / Sales | 2.87 |
Enterprise Value / Sales | 3.88 |
Enterprise Value / EBITDA | -13.96 |
Free Cash Flow [TTM] | -$32,990,000 |
Revenue Growth Rate | 14.88% |
Earnings Per Share | -$1.34 |
Source: Company Financials
As a reference, ATEC’s clearest public comparable would be RTI Surgical (RTIX); shown below is a comparison of their primary valuation metrics:
Metric | RTI Surgical (RTIX) | Alphatec (ATEC) | Variance |
Price / Sales | 0.91 | 2.87 | 215.4% |
Enterprise Value / Sales | 1.74 | 3.88 | 123.0% |
Enterprise Value / EBITDA | 25.69 | -13.96 | -154.3% |
Free Cash Flow [TTM] | -$36,160,000 | -$32,990,000 | -8.8% |
Revenue Growth Rate | 6.8% | 14.9% | 120.4% |
Source: Seeking Alpha
Commentary
ATEC is acquiring EOS to capture the front end of the surgical process through EOS various imaging devices and related analytical software products.
As ATEC’s Chairman and CEO Pat Miles stated in the deal announcement,
This is a monumental transaction for ATEC. While spine’s large players are investing in enabling technologies, we are thinking differently. We created a conduit to deliver information into the operating room with AlphaInformatiX. This transaction will integrate spine imaging and anatomical modeling onto the platform to actually inform the operative experience. By pairing ATEC’s approach-based solutions with imaging founded on Nobel Prize-winning technology, we expect to significantly increase demand for ATEC hardware and EOS systems and create a formidable competitive advantage.
So, it’s an interesting move to increase the vertical offering value-add proposition for surgeons.
Management held a transaction conference call and provided a presentation as to its expected benefits.
ATEC believes the acquisition will ‘create significant pull-through and cross-selling opportunities via an expanded sales network and combined customer base.’
Management expects the deal to be ‘accretive to revenue, revenue growth, adjusted EBITDA and free cash flow in the first full year of operations following the transaction close.’
I can’t see a negative from the transaction as a strategic move, as it provides greater integration opportunities and fewer vendors for administrators to deal with.
From the metrics comparison to RTI Surgical, ATEC is certainly growing revenue faster but is generating negative EBITDA; yet, the stock is priced significantly higher than RTIX on Price / Sales and Enterprise Value / Sales bases.
A recent deep-dive article by White Diamond Research questioned the value of ATEC’s portfolio and was strongly bearish on its prospects.
This significant move by ATEC into imaging doesn’t address those assertions but does provide an interesting potential integration differentiation play for the firm.
Given the pricey stock valuation, I’m in the ‘wait-and-see’ camp, so my bias is currently NEUTRAL.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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