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Edited Transcript of ATEC earnings conference call or presentation 7-Mar-19 9:30pm GMT

Q4 2018 Alphatec Holdings Inc Earnings Call

CARLSBAD Mar 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Alphatec Holdings Inc earnings conference call or presentation Thursday, March 7, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey G. Black

Alphatec Holdings, Inc. - Executive VP & CFO

* Patrick S. Miles

Alphatec Holdings, Inc. - Executive Chairman & CEO

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Conference Call Participants

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* Brooks Gregory O'Neil

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Swayampakula Ramakanth

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to Alphatec's Fourth Quarter 2018 Conference Call.

We would like to remind everyone that participants on this call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC.

During this call, you may hear the company refer to reported amounts, which are in accordance with U.S. GAAP as well as non-GAAP or pro forma measures. Reconciliation of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management views of why this information is useful to investors.

Joining us on the call today will be ATEC's Chairman and CEO, Pat Miles; President and CFO, Jeff Black.

Now I will turn the call over to Pat Miles.

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Patrick S. Miles, Alphatec Holdings, Inc. - Executive Chairman & CEO [2]

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Thank you very much, and we're going to try something new. And as opposed to you being forced to deal with my suspect reading skills, we're going to walk through a bit of a presentation. And I got to tell you, I so prefer this just because I could speak to the -- just to the passion that I have with regard to what's going on with the company and really the undercurrent of momentum that's being created.

And so if you'll fly past the forward-looking statements, we've already been through that, but really begin to look at the -- look at Slide #3. And what you'll find is you're going to find some reoccurring themes. And I will tell you, our effort here and really the foundation that we've built in 2018 is about, how do we create clinical distinction, how do we, in essence, reset the sales force, and how do you start to compel surgeon adoption? And so a ton of work has gone on this year to reflect that effort. And I would say, first and foremost, is it's really a key differentiating technology that we acquired in SafeOp. We'll talk more about that later, but that is a distinguishing differentiating technology that will enable us to create the clinical distinction that we speak of.

We had 12 alphas in 2018. And I think what you can't lose sight of is that design development and -- the box down to the left and clearance of a lot of products. What alpha provides you is a confidence in a predictability associated with the performance of these products. And so as we go into '19 and go through the launch of a number of new products, I think we go into '19 with a lot of confidence.

As I stated, 12 FDA 510(k) clearances. And you got to think that we turned over the company. 44% of the people were hired in 2018, and 3/4 of which are really product-facing or pipeline-focused. And these are not people that are first-goers at this. This is an experienced group that has substantial know-how. When you start to think about the effect that, that has on the focus of our sales channel, before we've launched a product, we see a 20% increase in the revenue per distributor, and that's while we lessened the volume of distributors by 20%. The types of people that we're attracting to the company are really high-caliber people. And you can see the effect that they're having. The strategic distribution is growing at around 29%, where the legacy distribution is receding at about 51%. And again, that's without any new product reflected.

So when you start to think about are we compelling surgeons, and I would say that we're attracting a number of great surgeons. And that's reflected in the next page of a 61% increase in revenue from the top 20 surgeons. And I would say that that's significant. And you could start to dissect that and say, "Gosh, are we getting surgeons who do more complex surgery on board?" And if you skip over to 9% increase in the per-case revenue, you can say, "Gosh, there is more product per procedure as well as likely a more sophisticated cadre of surgeons we continue to compel to come [on."] If you go to the lower 2 boxes, it clearly speaks of a lot of interest. So if -- there is a 2x increase in new surgeon revenue growth. And so when you start to say, is there interest in what we're doing, I think there's 2 elements that would suggest as much: that as well as the volume of people who are coming to Carlsbad to better understand what we're doing.

From how is that being reflected financially, one of the statistics that I love is from January through December, we've had a 36% increase in average daily sales. 3 quarters of sequential revenue growth and in the fourth quarter, double digits. So we missed our number. We missed at the low end of the guidance. With all of the puts and takes, and you see the growth of the strategic guys and the falling off of the legacy guys, not thrilled with missing by $300,000, but I think you'd appreciate the puts and takes associated with it.

The other great news, and I know it went out in a press release, but Squadron Capital provided another $30 million today for us to continue to do what we do best. And Jeff will speak more about it, and congratulations to Jeff Black and Tyson Marshall for getting that done. It's -- what it does is it puts in place a financial instrument for us to do what we do best. We have put together an unbelievable team, and what we do is make spine surgery better.

And so if you go to the next slide and you start to look historically, sadly, I have been at this for a long time, and there becomes some undeniable truths associated with how you create double-digit growth. And if you look over history, 2 of the really key elements of the double-digit growers were spine focus and organic innovation. And so when you start to think about why we're so excited about creating an organic product development machine, you realize that if you look over history, K2M, NuVasive and Globus, just to speak of the fast growers in the space, really benefited from the spine focus and again from the organic effort. If you look to the right and you look at the demographics of Alphatec's revenue, you start to see a majority of the revenue generated from products that were 6 years plus. I would tell you, it's very hard to compel surgeons and to attract salespeople when you have an undistinguished portfolio that's old.

And so -- if you'll go to the next slide. So what it requires is, if we believe that clinical distinction compels surgeon utility, what you do is you double down and you take a strategic pivot. And I got to tell you, the strategic pivot that we took is with a monstrous group. And what I mean by that is what we've been able to do is really attract the best of the best. And I mean that from the guys that write the requirements for products, the guys that design the products, the guys that develop the product, the guys that test the products and the guys that make the prototypes.

And what that means ultimately is it means know-how, and so we champion know-how here and the learnings from the experience. It also suggests speed. And we can accelerate innovation, what that means is the translation to a financial performance that makes us very confident in our future.

So if you go to the next slide and you ask yourself, what is the walk to $200 million for us? And that's why, again, the reoccurring themes become creating clinical distinction, revitalizing the sales channel and really compelling surgeon adoption. And that's easier said than done. And as you go to the next slide and you say, "okay, great, you're going to do that," and say, "how are you going to do this?" And the key is you need to start looking at spine surgery in a way that the spine surgeons view the world. And spine surgeons view the world in terms of approaches. And so what you'll hear us refer to ourselves as is spine approach technology, ATEC approach technology. And we must -- we really must create the clinical distinction by spine approach.

And so if you go to the next slide and you say, "gosh, what is our responsibility as a company?" And I would tell you that we're stewards to the surgeons' goals. And not to give you an overt spine lesson, but spine surgery is fundamentally decompression, stabilization and alignment. That's what spine surgeons are trying to accomplish. And there becomes a myriad of different pathologies and then to say, what approach do I take to address this pathology to fulfill these goals? Our job as stewards becomes, what's the technology that we could provide the surgeon and create predictability associated with creating great outcome? So what we do is we look within the approach itself and say, how can we be effectual with regard to the approach?

And this becomes why 2018 was so foundational, is we literally verified the performance of a ton of different products. And if you look at the slide and you see all of the products in white, those are the 12 product launches that are individually attributable to specific approaches, and then the ones in blue are the more ubiquitous ones that go across different spine approaches. So as we start to architect spine procedures, we have the ability to integrate technology not only individually at a specific spine approach but also in a wide way with regard to things like our Alpha Informatix platform.

And so if you believe that approaches are the key to improving spine surgery, what surgeons yearn for -- and I've been quoted in saying this, and I'll say it a million more times, so get comfortable, is what surgeons yearn for is information. And having been in thousands of spine cases over my 20-plus years is what they want is objective, real-time, actionable information. If you appreciate -- surgeons are doing their best to be very efficient and very effective with every move that they make. And the better the information, the more expedient and more effective that they could be, the safer they could be.

And so when we start to talk about our Alpha Informatix platform, think of it as an umbrella of technology of information that we're delivering to the operating room. And that may be in our SafeOp advanced neural monitoring platform that's forthcoming; it may be in preop planning that's going to be later in the year; or intraoperative alignment guidance. And then as you have a camera in the operating room, our capacity to do navigation in the future is high. But when you talk about Alpha Informatix, what we want you to think about is, one, what creates safety and predictability? And that's information. And what type of information can we deliver to the operating room and to approaches?

If you go to the next slide, one of the key elements becomes, how does this thing integrate into techniques and be meaningful to the surgeon? And one of the most attractive aspects of acquiring this technology was not only could we add an EMG element that provided a location of a nerve. If you see spine surgery going to a point to where the incisions are smaller and you have less visibility of the anatomy, the ability to locate where a neural element is becomes profoundly important.

The other one that is completely novel to ATEC is our capacity to do real-time SSEP. So what is the health in a continuum across the entire time period of the spine surgery? A lot of surgeons have shied away from doing L4/L5 in lateral interbody fusion surgery. And they did so just because of the -- all of the neural elements that they're worried about crushing as they retract that -- what's called the plexus. And so the beauty of this technology is it provides objective information such that we can continue to monitor this stuff in real time.

This also really provides a very nice foothold into the operating room because now what we get is the ability to impact surgery through the delivery of information. So I would tell you that the team that sits in Carlsbad is not passive as it relates to the volume of experience that they have with these technologies. And if you notice a cryptic tone, it's intended. This is a technology that we're profoundly familiar with and one that has not been evolved in the 16 years that we've been at this. And so what we're able to do is, as I said, add nerve location, make sure that what we're getting is real information with the validated response threshold, meaning there's -- minimizing the false positives or false negatives. But the real leap here becomes in automating and providing real-time information about nerve health. And when you look at things like outstanding signal-to-noise ratio, that's what enables us to automate this stuff. And when it says it captures quiet signals, that's a proxy for the ability to do different things with this technology, whereby we could integrate it into things like posterior cervical, all kinds of different approaches to the spine.

So we're huge enthusiasts with regard to what we're doing on the Alpha Informatix front. But the last thing we want to do is stop there. And so when we start to say, "gosh, what are the requirements for the different approaches?" What we do is clearly an opportunity to create a distinction in the interbody space is -- has been availed to us. And so we will launch these approach-specific implants this year. The virtue of these is that it's subtractive manufacturing. There is some great solace in traditional manufacturing and the predictability associated with that.

Another element is these porous titanium products are mostly air. And so when a surgeon wants to determine, "hey, have I -- remember when we said, decompression, stabilization, alignment are key. When they want to evaluate, have I decompressed this patient? Is this patient fused?" The type of imaging that's accommodated based upon the majority of this thing being air is a big deal.

The other element is our future potential to start to control the stiffness of these devices based on the size of the porosity. So what it does is just build another foundation for us to ultimately continue to improve or make these things better in surgery.

So another place -- and I think you'd appreciate, this has been a busy year. All of these products forthcoming, all of them have been evaluated. So we are watching this year a comprehensive thoracolumbar system with open MIS and hybrid approach technology. The reason that we've put the Alpha Informatix platform in there is all of our stuff gets integrated procedurally, meaning if you use our thoracolumbar screw system, there will be feature sets on the screwdriver that will enable us to connect it to the Alpha Informatix platform so that you could use EMG technology to avoid nerves. So this becomes just another element of sophistication with regard to our driving approach sophistication. But I will tell you, where people think that items in spine surgery are commoditized, you get the right people around the problem, and I think that they will create great distinction. And so exceedingly excited about the entire thoracolumbar portfolio.

Another product that we're excited about is one -- hats off to our regulatory team. The fact that these guys are able to get this through the FDA and 510(k) this year is a huge deal. This has been tried for many years, and we've not been able to do it. So it's -- I'd say Jeremy and team simply deserve a shout-out for sure, but just can't be more excited. This is a first and only expandable screw. [The] look about the excitement about expandable technology in the market, I would tell you that it is the only fixation product on the market that is interoperably expandable.

So when you start to think about what ATEC looks like and you start saying, "Gosh, the double-digit growers in this marketplace are groups that are spine-focused, are organic product development machines," and you start to see the contribution of this machine as a percentage of revenue moving forward, it makes me very bullish in terms of what we're accomplishing from a portfolio perspective.

So kind of switching gears and talking about revitalizing the sales channel. I will tell you, the -- without the ability to revitalize the product portfolio, compelling and garnering the best of the best salespeople becomes very, very difficult. One of the things that distinguish this company when I came on was their hospital access. And so 9 out of 10 IDNs, or integrated delivery networks, and 21 out of 25, ATEC has access to. As we continue to mature in this market, that will be a hurdle for a lot of companies and one that becomes a real asset to ATEC.

The thing that we have to do, though, is scale distribution. And there becomes not a number of distributors. We've gone from 187 distributors in 2016 to 80 in 2018. I think it speaks volumes to the work that's being done here as it relates to more revenue per distributor, less volume of distributors. And I think when you look at organizations of ATEC's size and you look at a bit of the legacy ATEC or Alphatec distributor, what you see is when you don't have a distinguished portfolio or you can't create clinical distinction, what happens is you end up partnering with a guy and his dog, and then you get 2 surgeon friends. And the challenge becomes is, how do you work yourself out of that when you can't control the volume of commission that the guy and his dog is dictating because you have no distinction to ultimately leverage the relationship?

And so the only legitimate way to ultimately grow becomes is, how do you create strategic distributor-type relationships that incentivize growth, the commission rates become reasonable, they're scalable, and the distributor organizations are valued by the type of service that they provide to the community? And this is one that we're focused on immensely, and we're walking toward exclusivity. We cannot reach our goals as a company unless we have people focused on what we do. And so to me, these things are relatively apparent and I'd presume what you would expect out of this company.

Now that -- compelling a surgeon, to us, this really is the fun of the business. It's, how do you start to inspire someone to engage into your approaches based upon the technical sophistication you're delivering? And if you look historically, Alphatec oftentimes, based upon the distributor network and based upon the lack of distinction, would only sell one product in a spine approach. The spine approach may include 5 or 6 different buckets, but only one would be sold into the surgery. Clearly, that puts a lid on your capacity to generate revenue. So the more clinical distinction will ultimately drive more products per approach.

So the compounding effect of this is significant, and I think you're starting to see a little bit of it in the fourth quarter when you look at the -- some of the results. And so again, I think if you start to look at the route toward $200 million, it's got to be clinical distinction, and it's got to be one of those where the machine is creating -- the organic product development machine is creating clinical distinction in this portfolio. Better technology attracts better salespeople. And approaches in spine include multiple products. And so when you look at the compounding effect of that, I think that we're exceedingly bullish with regard to our direction.

And so now that you've heard the most enthusiastic guy in the house with regard to what we're doing clinically and otherwise, let me turn it over to Jeff and provide you a little bit of color on the financials.

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Jeffrey G. Black, Alphatec Holdings, Inc. - Executive VP & CFO [3]

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Thank you, Pat, and good afternoon, everybody. I want to spend just a couple of minutes walking you through a little more color commentary on the financial results that we released today.

Starting off with revenue. We think it's important to start to get a bit of a deeper dive into the components of our revenue. And as Pat talked about us building out our distribution channel, it was a real focus for us in 2018. We focused on building out a channel of strategic distributors, and we're seeing it deliver. And what we mean by strategic delivery is -- or distributor, is it's someone who's committed to invest and scale their business as we offer them expansive geographies and we fill their bags with innovative products. And ultimately, a strategic distributor is going to be one that is expected to walk to exclusivity over time.

And when you look at how we break up the revenue on a year-over-year basis, we saw nearly 30% increase in revenue growth from that strategic distribution channel. Yet at the same time, we saw revenue from legacy distribution continue to wind down as part of our planned transition. So we think this is masking what we consider real growth in the business. And we're highly encouraged by the contribution we've seen from this group of distributors. It's happening even before the full impact of new products and technologies are launched. So the bottom line is, we're seeing strong growth from the very channels we committed to invest in.

A quick note on margin and margin presentation. So the numbers that we presented earlier today and the numbers you see here for '17 and '18 represent a reclassification. So we are now presenting instruments at depreciation over the line in SG&A, which was previously included in our cost of sales. This is in line with the large majority of our peer group, and we feel that it's a better basis for peer comparisons.

So when you look at 2018 versus 2017 margin, you'll see that gross margin in the fourth quarter of '18 decreased by about 500 basis points to just under 72%. That's compared to about 75% in 2017. At scale, we expect our gross margin to be in line with our peers, right in the mid-70% range. Early to medium term, we expect there will be some puts and takes along the way. And as an example, in the fourth quarter 2018 and, to a lesser extent, for the full year, our margin was pressured by an increase in obsolescence charges for legacy products. And we'll continue to see some margin pressure over the midterm as we introduce new products and obsolete these legacy products.

On the OpEx front, we're continuing to strategically invest in product development, in marketing and in the sales channel to drive adoption of these new products. This was consistent with expectations that we laid out at the beginning of 2018. We doubled our R&D investment in 2018, and the result was 12 alpha launches and an expanding pipeline of products. We increased investment in both product marketing and sales channels to drive surgeon adoption and to continue to build out our strategic distribution network. We made CapEx investments in instrument sets for alpha launches of identity and our next-generation fixation system. And we'll follow that with -- in 2019 with investments in instrument sets to support these commercial launches.

We ended the year with $30 million in cash. And now with the $30 million commitment from Squadron that we announced today, we're well positioned to support continued investment in the business.

A little more color on today's announcement on the capital commitment that we announced today from Squadron. As you may recall, back in November, we executed a $35 million secured loan with Squadron Capital. And that allowed us to refinance our debt with Globus on much more favorable terms. And then importantly, it allowed us to exit a lender relationship with a competitor. Since then, Squadron has been a tremendous partner to us, a strong supporter of management and the entire team, and we're pleased that again, Squadron has stepped up to provide the capital that we required to really scale the business.

So what this $30 million credit facility does is it gives us a runway we need to really begin building long-term value. We no longer have immediate needs to finance the company. The facility gives us the runaway to -- at least into the second half of 2020, which gives us plenty of time to demonstrate the performance of the portfolio and to drive value over the next several quarters. So the bottom line is we now have the people, the technology and the products and the balance sheet to execute the business.

So looking to 2019. We expect to see continued traction from our strategic distribution channel. It'll grow by more than $18 million in the 28% to 33% range in 2018. And our revenue growth that we're projecting here is still somewhat masked by 2 headwinds: the continued and expected transition of our legacy distribution, which you see will decrease again in 2019; and our planned transition of our international supply agreement with Globus. This is a low margin, it's a nonstrategic revenue source that's going to run its course over the next couple of years. And the bottom line is we expect to see growth from the sales channel we've committed to invest in.

So as you look out past 2019, our objectives are pretty clear. First, we're going to continue to invest in getting innovative products to market. We're going to continue to increase our line of sight into the business and deliver predictable results in line with expectations. And third, we have a line of sight to $200 million in revenue by 2022. And this is based on new product introductions, which begin in 2019; continued investments and upgrades to the strategic distribution network; and the compounding effect of driving multiple products in each surgery, increasing our average case ASP.

And with that, I'll turn the call back over to Pat to wrap things up.

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Patrick S. Miles, Alphatec Holdings, Inc. - Executive Chairman & CEO [4]

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Thanks, Jeff. I think 2018 has been a heck of a year for us. Clearly, we'd have loved to come in at guidance, but I will tell you, we've built the foundation for a machine. And so I would tell you that we've created clinical distinction, which I think bodes well for our capacity to continue to evolve our sales channel and continue to compel surgeons. So I would tell you that the best is yet to come, and couldn't be more proud of the ATEC team here in Carlsbad and those out in the field who are carrying the flag with diligence -- vigilance, excuse me.

So with that, I guess we'll take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question from the line of Brooks O'Neil from Lake Street Capital.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

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So I have a couple questions. Historically, Pat, the company's been able to sort of estimate or quantify the transition on the distributor side. And I think the last time I heard it quantified or specified, it was around 57% of revenue from dedicated distributors. Is it possible, given the continuing transformation you're working on, to give us a metric that relates to that or at least helps us to gauge your progress in transitioning that distributor network?

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Patrick S. Miles, Alphatec Holdings, Inc. - Executive Chairman & CEO [3]

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Yes, Brooks. I think it's the right question. It's one of those things that we want the metric to really drive the insight into the business. And what we've found is the dedicated things became a bit mushy. What won't be mushy is exclusivity. And so as we roll forward, we will assemble metrics associated with what our walk is in that effort. One of the challenges is, exclusivity is a two-way street. It's not just a dictum from a company that requires it, it's earning that. And the one thing that we will do is based upon the type of distinction that we're creating clinically, people will want to be exclusive with us because we will have earned their trust and their capacity to build a large business. And so this is going to be a walk together, but it was one of the most profound walks in my previous experience, is making sure that we're all on the same team at every stage at every turn. But -- so a long-winded answer, but yes, we'll provide you more color on that.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

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Okay, great. Let me ask you a little bit about SafeOp. I have a sense of your excitement about the opportunity with SafeOp. I'm just curious if this is an element that we should expect to see revenue and earnings from. Or would you envision it more be a complement or a driver of revenue from the -- more of the product classifications you sell?

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Patrick S. Miles, Alphatec Holdings, Inc. - Executive Chairman & CEO [5]

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Yes. I think it's a great question, Brooks. The issue becomes is -- the real currency items in surgery are going to be the implants. And you're going to see revenue associated with the utility of SafeOp, but the real revenue is going to be in the assembly of products that we can put together in an approach to fulfill the obligations of surgery. So what that means, again, long-winded, is that we're pulling through some of the items that are going to have less of a financial upside. But we feel like that's our opportunity.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [6]

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Yes. That makes sense to me. So just one more. Can you give us some sense for the feedback you're getting from surgeons relative to the 12 alpha launches you have underway at this time?

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Patrick S. Miles, Alphatec Holdings, Inc. - Executive Chairman & CEO [7]

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Yes. If I were to give you the quotes by very renowned guys, you would be exceedingly pleased. And there's a lot of sensitivity toward who's using what, and so what I'll do is reserve the right to stay anonymous. But you have a group here, Brooks, that are not passively good at what they do. And let me speak to a guy, Jim Gharib, who created the neurophysiology system that hasn't changed in 15 years down the road. He's with us up here changing neurophysiology for the better, along with Richard O'Brien and Rob Snow. And those are the most versed guys in the business in that effort. You have a product development team with regard to our thoracolumbar side that's unrivaled, and same with regard to -- on the identity side. And so I got to tell you, it's -- we're not guessing, and we've got a team here that is profoundly good. And so my long-winded answer is the reflection from the surgeons have been consistent with regard to what we would expect.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [8]

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Great. And then just maybe for Jeff, I guess I had one more is, do you feel that the $30 million of incremental capital is sufficient to allow you to complete the transformation of Alphatec? I know you said probably get you into 2020, which is great, but you think you have the money you need to keep driving the business the way you want to drive the business?

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Jeffrey G. Black, Alphatec Holdings, Inc. - Executive VP & CFO [9]

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Yes. Absolutely, Brooks. I think what this does is it gives us the capital we need to execute on these product launches to continue to invest in the sales channel and to really start delivering quarter-over-quarter growth. So it ultimately starts creating the value that ultimately is reflected in the work that's going on behind the scenes.

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Brooks Gregory O'Neil, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [10]

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Yes. Could I just ask one more, I'm sorry. As it relates to the legacy products and the drag of revenue and being able to show that quarter-over-quarter revenue growth, I know you're probably going to try to break out some of this stuff. But do you think before the end of 2019, we'll get to a place where you can have essentially clean, real, observable revenue growth at the top line of your income statement?

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Jeffrey G. Black, Alphatec Holdings, Inc. - Executive VP & CFO [11]

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Yes, Brooks, I think we'll get close. When you look at our outlook for 2019, we expect that the legacy and terminated distribution line will end up being somewhere in the $9 million to $10 million for 2019. So it starts to become a smaller percentage of the overall revenue picture. And we'll continue to see that bleed off over the course of '20, but most of it has really bled off in the last 2 years.

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Operator [12]

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(Operator Instructions) Our next question comes from the line of Swayampakula Ramakanth from H.C. Wainwright.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [13]

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Pat and Jeff, a couple quick questions. The first one being, you outlined 3 big strategies: clinical distinction, revitalizing revenues and compelling surgeon adoption. So how do you see these 3? And at this time, what do you think is your weakest link? And what requires more energy than you're actually putting in at this point?

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Patrick S. Miles, Alphatec Holdings, Inc. - Executive Chairman & CEO [14]

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It's a great question, RK. It's -- one feeds the other, right? It's one of those things where it's like, if I can't do something better or different -- when I say I, I mean the company. If we can't do something better or different, our capacity to compel a sales channel and to inspire surgeons becomes very, very difficult. And so -- look, I thought that one of the interesting slides in the deck was just a percentage of revenue contributed by products that were 6-plus years old. And so -- it said 46% of that was 6-plus years old. I will tell you, the other 45% is a single product, and it's on the 4 to 5 years old. And so when -- based upon my experience in this business, if you're not obsoleting yourself and you're not creating the level of distinction, the ability to have -- garner a following becomes very difficult. I would tell you, hats off to the sales guys who have created momentum prior to our capacity to release a product portfolio that we will ultimately be known for. And so I think what happens is there becomes a lot of momentum based upon the promise of past experience, and it's not something that we're going to let anybody down on. So again, I hope I answered your question. I will tell you, it's 90%, 90% and 90% of my time.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [15]

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Okay. So the other -- the second question, which I was -- which I kind of -- it's interesting that you come out and say your expectation of growth is to get to $200 million revenue range by 2022. And in 2019, the current midpoint guidance is $100 million. So you're -- so I'm trying to figure out or I'm trying to understand, what are the pushes and pulls that you're thinking of when you're talking about growing $100 million in revenues in 3 years from the end of 2019? And also, what do you think are the drivers that people like me are not actually giving any value or is giving little value?

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Jeffrey G. Black, Alphatec Holdings, Inc. - Executive VP & CFO [16]

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Yes. RK, this is Jeff. Great question or, I guess, a couple of questions. But yes, I think the way that you should think about it, and it's the way we think about it, is it's -- there's a compounding effect of what we're doing, right? I think that Pat articulated the importance of ensuring that we've got the right products to market. And right now, less than 10% of our revenue is represented by new products. So the ability to get new products to market in 2019 and begin to see that acceleration, it's going to drive adoption. I think the sales channel then will be fed with a bag of brand-new products. It'll be much, much less challenging to compel distribution to come over in a big way. And when you start to think about reducing the footprint of -- in terms of overall distributors but bringing high-quality distributors that can get to that peer target of $4 million to $5 million a year versus $1 million where we are today, you start to see a real opportunity there. And I think the third is right now, we're selling one product into every case. To the extent that we can just take our existing volume and double the number of products into every case, that's a compelling growth metric there, right? So even with the existing surgeon base, just adding another product into each case will -- it could actually extend or expand the revenue by 30%, 40%.

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Swayampakula Ramakanth, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [17]

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Great. And then I'm going to ask the SafeOp question, but I hope it's not as -- it's not what you just answered. But I'm -- so from where I'm sitting here, it looks like, in your opinion, SafeOp seems to be a platform that could potentially open up a lot of revenues in terms of getting surgeons' attention. So how should we think of this being a driver of sales? And would we see more of SafeOp integrated products coming in 2019 and 2020? Or what's the value of that?

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Patrick S. Miles, Alphatec Holdings, Inc. - Executive Chairman & CEO [18]

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Yes. RK, to me, that becomes the initial line in the sand in terms of our opportunity to enter someone's operating room and provide them information. And so we look at the whole Alpha Informatix as a conduit into the operating room to provide meaningful information. And so the first things you're going to see out of that are the neurophysiology piece. When you look at, like, our thoracolumbar -- our new thoracolumbar system, the pedicle screws and stuff, all of those tools will be integrated into having feature sets that accommodate the integration or the application of the SafeOp platform into, say, pedicle screw placement or our lateral system will have and able to be integrated in there. And so what you'll see is becoming more and more relevant with regard to the different approaches that we are participating in. And so if there is an informatic need that ultimately makes spine surgery better, what we have is a conduit to deliver it through in the whole Alpha Informatix platform. And so I think that what you'll see is that's the whole not guessing thing. We know that we can make lateral surgery better with the type of feature set that exists within SafeOp. And then what it does is just provides us more and more application within the context of an approach that enables us to elevate the sophistication of our portfolio or our approaches into surgery.

So with that, I hope you hear the enthusiasm we have at the new ATEC, and we greatly appreciate everybody's interest in the company. And with that, we'll sign off.

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Operator [19]

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Thank you. This concludes today's conference call. Thank you for joining. Have a wonderful day. You may all disconnect.