Hello, everyone, and welcome to the Goldman Sachs 44th Healthcare Equity Conference. I'm honored to be joined here today by Todd Koning, Chief Financial Officer of Alphatec. With that, we'll dive into some questions. Todd, welcome. Oh, thanks for having me, Q. Absolutely. Let's start with the market, Todd. I'd like to get your perspective and your team's unique view on the spine market. You talk about it being ripe for opportunity. Can you further elaborate and expand on that? Yeah, you know, I think, ultimately, you know, one of our kinda foundational beliefs is that today we are 100% focused on spine, we're gonna continue to be focused on spine. Really, it's about, I think, purpose as a company. Ultimately, we think there's so much opportunity cause spine surgery today really isn't great surgery. There's so much opportunity to kinda improve. I think a statistic we like to point to is that 3-5 years, you got a 15%-25% probability to get a second intervention if you've already had a spinal intervention. You know, that tells me that there is huge opportunity to make that experience better. When there's opportunity to make outcomes better, you can create value in that process. Ultimately, that's why we're in pursuit to the perfect procedure. You know, you can see that through our commitment to innovation and our commitment to doing that with a complete focus on not just the hardware, but it's why we are focused on a procedural approach, because ultimately, the surgeon has to get to the spine, intervene on the spine and get back out again, and all of that is part of the procedural approach. That's why you see us really invest in a full procedural approach and not just in kind of the hardware components of spine surgery. Ultimately, we think that's one of the main ways of being differentiated and delivering better outcomes. Understood. Over the past four years, your growth has outpaced the rest of your spine peers, and congratulations on that. Can you discuss some of the drivers that you believe have allowed you to consistently outpace the peers? Yeah, you know, I think it kinda goes back to our pursuit of the perfect procedure, and I think when you kinda look back and you look at what the industry's done and really what many of the people at ATEC did in a prior experience in creating lateral surgery and really pioneering it. Ultimately, lateral surgery it kind of capped out at maybe a 1/3 penetration of the opportunity to really apply that technique to the appropriate pathologies. The question is, why was it only ever adopted by 1/3 of the people or 1/3 of the procedures that it could have been adopted for? You kinda see us really try to answer that question, ultimately, you see us launch a procedure called PTP. Mm-hmm ...... Prone Transpsoas. You see us now recently launch LTP. Yeah Lateral Transpsoas. All of that is done in a way to really advance lateral surgery, and to address some of the hurdles to adoption. And our view is, how do you make lateral surgery great surgery in the hands of the masses and in a very predictable and reproducible fashion? You know, you look at that experience, and you kind of look at what we've done with PTP, and you look at a lot of the training. So some of the dynamics that go on is really our growth is one of both volume or kind of procedural adoption, as well as one of revenue per procedure growth. Last year, just to put some numbers on it, Q, we grew about 44% in surgical revenue- Yeah delivered $350 million in total, $303 million of surgical revenue. That $303 million grew 44%, 25% growth in procedural volume and kinda mid-teens growth in revenue per procedure. We also added about 20% more surgeons last year than we did the previous year, we're growing our surgeon base. What we also know is that when surgeons trust you in some of the more complex pathologies, they're more willing to give you some of their other procedures as well. You can see the utilization of every surgeon cohort kinda going back to 2018, increase their utilization year after year after year. You know, lateral surgery, PTP in particular, people tend to use it in a straightforward pathology to begin, and as they get more and more comfortable with the procedure, they apply it to more complicated pathologies, and that ultimately results in a greater utilization. That's, you know, so much about what we're doing is helping surgeons do better surgery. I think, the broad adoption and the increasing adoption of more complicated pathologies is a reflection of that. Got it. ATEC has done some nice acquisitions in recent years here, and as consolidation has accelerated in the spine industry, how do you expect it to impact your ability to grow and achieve your growth targets? How are you doing things differently, and how are you seeing some of the recent spine deals impacting ATEC? A little bit on the deals we've done. I mean, you look at SafeOp. SafeOp is all about neuromonitoring. If you're going to be a meaningful, serious player in lateral surgery, you have to have a neuromonitoring platform. We bought SafeOp because not only did it give us access to what we call triggered EMGs, which allows you to go through the psoas muscle without hitting a nerve, but it also allowed us to develop the ability to avoid the most common complication of lateral surgery, which is residual thigh pain. That residual leg pain happens because when you re-expand your retractor, you kind of pinch the femoral nerve and you starve it of oxygen. That creates the complication. We're able to monitor that nerve in real time, so you can avoid that complication. If you get the signal that says, hey, you're compromising the nerve, you can close the retractor, let the nerve rest, reperfuse, and then you can go back and finish your surgery. You know, that was a meaningful innovation. We knew the folks who had created SafeOp, we had high confidence in who was coming over. There was great know-how in the people around the technology. You look at EOS. EOS, the acquisition, it is the accepted or unaccepted standard of imaging for full body standard imaging capability. There's a ton of know-how around that business. You know, we're in the process of really, I think, Well, next year, we'll launch some features that we've developed, the ability to do rod bending, automated measurements, global alignment measurements. We're working on better understanding kind of vertebral bone density. Some of these things will really help us continue to add value to the preoperative planning process. When you look at what we've done with REMI, we bought a navigation and a robotic technology that ultimately allows us to integrate that into a procedural approach. We're gonna integrate that into our lateral approach. You know, we think that one of the opportunities and one of the... I think the misses in industry, is that robots have really not been integrated into a procedural approach. They've really been there to place pedicle screws which I think works certainly from an efficiency standpoint, but probably more evident in longer construct rather than short construct surgeries, just because you've got some setup time that you have to invest in setting up the robot. The efficiency really plays off when you have a multi-level construct. Our view is, how do you take technology, what we believe is Fusion Robotics technology that we purchased, small footprint, relatively lower price point, and ultimately integrate it into a procedural approach to really make answer some of the final barriers to adopting lateral surgery? We can talk more about that later, but, that's kind of been our view, which is, let's find, very, I'd say, relevant technology to address problems that we know that we have to adoption and, apply, that technology in such a way that addresses those. Really, technology there to solve a problem, and that's how we view, the enabling technology. To do that with people who have deep knowledge and expertise in the areas that you've adopted or that you've purchased. I think you can kinda see that both in SafeOp and EOS, and that's what we believe we've done with REMI. You know, from a market perspective, clearly the Globus and NuVasive transaction has gone on. You know, from our perspective, we've been beneficiaries of disruption in the market. We were the beneficiary of kind of the Stryker and K2 transaction. Equally, we think we'll be the beneficiary of this, certainly from a, I think, from access to great sales talent and feel good about where we're at relative to that. That's great. Shifting gears a bit towards lateral and the evolution of lateral in spine. You know, your team developed a pioneer first-generation lateral over two decades ago, and under the ATEC umbrella, the team advanced the procedure with PTP, as you mentioned, and now LTP. What has ATEC done to improve lateral surgery broadly? You touched upon it a little before. Yeah. Any additional comments? Yeah, you know, I think, first and foremost, part of the adoption challenge was position. Ultimately, surgeons learn how to do surgery with the patient either in the prone position, so on their belly or laying on their back in the supine position. When you had to place a patient on their side to do a first-generation lateral, it was an awkward position. There's a lot of training that goes along with that. Placing the patient on their belly in the prone position for PTP was, I think, a great opportunity, one, just from a familiarity standpoint, but two, it gives you direct access to the posterior column. Meaning, if you're a surgeon and you feel like that you need to have some direct decompression, so remember, spine surgery is about decompression, so taking pressure away from the nerves that cause the pain. Stabilization, once you've taken something away, you've destabilized the spine, so you have to you know, you have to stabilize the spine after you've done that, and then alignment. Alignment is really making sure that the sagittal alignment of the spine, you have the right amount of curvature, and really restoring the natural curvature of the spine, so that you have proper global alignment. The PTP position allows you to get... The belly hangs, allows you to get a little bit better natural alignment. Access to the posterior column allows you to do some direct decompression to the extent that you need to, or what they kinda call, you know, loosening the spine. Maybe loosen the facets and allow that spine to then move again to get the kind of alignment that you want in the spine. Additionally, we've developed a patient positioner. You'd think after 20 years of doing lateral surgery, you'd stop using tape. Seems like a very basic observation, but frankly, we've learned a ton over the last three or four years as we've developed our PTP approach and developed the positioner. Now it allows you to manipulate the... I guess, the anatomy of the spine, so you can get the best access to the disc space, through manipulating the spine in a way that is beneficial. I touched on the neurophysiology, but clearly, as we've advanced neuromonitoring, one of the reasons, again, 15 years, 20 years after lateral surgery was started and you ask yourself, "Why, why did NuVasive still have 50% of the market?" It's because they were the really the only one that had surgeon-directed EMGs from a neuromonitoring platform. you know, that was why we needed to have a neuromonitoring platform, and then our ability to innovate on that platform and really find a solution that allowed us to avoid the most common complication through automated SSEPs is an advancement and also addressing a hurdle to adoption. Yeah. I guess finally, I'd just say, you look at what we're doing and what we're going to do with the Fusion Robotics acquisition and ultimately how we view navigating the lateral procedure. Using navigation to place your retractor, to monitor the position of the retractor so it doesn't kind of migrate down due to gravity and put the vessels at the anterior column at risk. Navigating disc prep and interbody placement really addresses the amount of radiation that a lateral procedure ultimately generates through the use of fluoroscopy. As well, gives surgeons who maybe want a bit of a safety net around navigation and... You know, lateral is a technique-heavy approach, and so to the extent that you can use navigation to provide predictability and reproducibility in the surgical experience, I think all of that really addresses many of the hurdles to broader adoption of lateral surgery. On that adoption point, you know, on the first generation, lateral adoptions, it was around 25% began to stall out. With these advancements that you're bringing to the market, where do you think that could go? Yeah, you know, I think we sized the market at a current market about $1 billion. Then there's $2 billion of traditional posterior approach surgery, PLIF and TLIF, kinda for degenerative lumbar surgery. Ultimately, much of that can really be addressed through a lateral approach. Now that we've launched LTP, where you have access to L4-5 and above, excuse me, through a lateral approach, you can also then we've developed a retractor for a midline ALIF approach. Being able to do that in a single position, midline ALIF approach for five one, now you have really all the tools you need, whether you want to use LTP or PTP, to address the pathology from, you know, S1 on up. I think, you know, part of our commitment has been really to chase the perfect procedure, and ultimately implied in that is let the pathology dictate the approach, ultimately giving flexibility, tools, and a choice to the surgeon in terms of what they want to use to address the pathology that the patient presents with. Good. With LTP launching now, is there any overlap between LTP and PTP by usage by doctors? You know, overall, how will the two procedures coexist? Yeah, you know, I think, certainly LTP and PTP both have their unique approaches, and I think from an LTP and a PTP, clearly where they overlap is really lateral access to the disc space L4, 5, and above. Where they differ is clearly LTP, you can do a single position ALIF as well. They both are single position in the sense of you don't have them down and reposition the patient to do your posterior fixation. One of the big advances in our approach has been to do posterior fixation and lateral access all in a single position, and doing that in such a way where you don't have to reposition the patient. The way LTP is different is you've got access to ALIF in a single position. PTP obviously gives you access to the posterior column. Ultimately, I think those are really the two main differences. They both benefit from single position, no repositioning to do your posterior fixation after you've done your interbodies, and access to our neurophysiology platform. Shifting gears a little bit towards enabling technologies, and you touched upon the EOS acquisition. What is EOS capable of today, and what additional uses and capabilities do you expect to emerge out of EOS in kind of medium to longer term? Yeah, you know, today, EOS is great for doing a preoperative image. You get a full body scan and understanding global alignment. We know that alignment is the greatest correlative to long-term positive spine intervention outcomes, so alignment's really important. What we've done is we've automated the global alignment measures. That really, I think, one, gives surgeons a kind of immediate access to those measures, and ultimately, will make use of those because they have access to them, the surgical planning component to that. Really, where we're headed with it is our ability then to take that plan, bring that image to the intraoperative experience, reconcile that plan, and you can take a postoperative assessment, take another EOS scan after the operation. You'll have your preoperative assessment, understand the pathology, make your plan for the procedure that you'll do to address the pathology, bring that plan intraoperatively, understand intraoperatively if you're achieving your plan. Post-operatively, make your assessment and say: Did I get what I expected to, what I planned to? You can kind of follow that patient over time in follow-ups with EOS. EOS is a standardized image, meaning that it's got enough resolution that you can measure a patient pre- and post-op with enough, I guess, accuracy that allows you to compare them in a meaningful way. It's also a standard image, you can begin to tag those images and apply a machine learning tool to that, so that you can ultimately learn from the experience, not just across patients, but longitudinally within a patient. Our view is, like, in 10 years, you'll have a large population of data that will say, pathology, plan, here's what I achieved in my plan, and here's what happened over time. Our ability to learn from that and say, Okay, well, hey, look, if a patient presents with a single-level spondylolisthesis at L4, L5, and if I... Our experience would tell us you should apply this procedural approach to address that pathology. I think ultimately, our ability to understand that should put us in a great position to just, to really kind of evolve the way that you monetize the intervention, and kind of begin to share risk over time. Of course, that's years out. Right. clearly, information in the data relative to EOS is gonna be a huge value driver over time. Understood. You just recently announced an acquisition of a navigation-enabled robotic technology from Fusion Robotics. Can you talk about that functionality, what it adds to your portfolio, and when do you think it might integrate into ATEC procedures? Yes. When you look at Fusion Robotics and what we bought there, I think one of the great things is absolutely phenomenal. They've got deep experience in kinda many of them in the Medtronic Stealth Navigation and Mazor experience. It's a group of people who very much understand navigation and robotic navigation. That's kind of the first thing. The second thing is, what they ultimately set out to do was create a navigation robot that had a lower price point, about a third of what you would have to pay for another robot, and that ultimately addressed some of the workflow challenges that the existing robots have a very large footprint. They come in and ultimately, you have to do sometimes a second or a third spin intraoperatively to recapture your image because the patient has moved, because you've intervened upon them. This technology has the opportunity or the ability to recapture your image just with 2D fluoro. You look at the footprint, the footprint is small. It sits within the sterile field. Really, from a price point, from a footprint, and a workflow standpoint, what they developed is significantly better than what's out there today. Mm-hmm. Our plan is, the first thing we'll do is we'll get our screw system cleared with the platform. That's kinda, you know, a very straightforward experience. We plan to do that by the end of this year, have that clearance by the end of this year. The second thing we'll do is we'll get the freehand navigation capability cleared through FDA. That's an important thing just because virtually every fellow that comes through a fellowship today has access to navigation. For us to be able to have a freehand navigation off is meaningful. The third thing we'll do is we'll integrate the technology into our lateral offering. As I shared before, that really means placing the retractor, doing your disc prep, monitoring the retractor position, placing the interbody, doing all of that kind of in a navigated fashion, which avoids a lot of radiation, creates more efficiency, and ultimately, accuracy in the procedure. Got it. shifting gears now to the P&L and the outlook. You know, your LRP that you've put out publicly suggests significant operating margin expansion from 2021 to 2025, and so far, you're executing really well against that plan. Can you walk us through, you know, what is driving the expansion so far, and what gives you confidence in your ability to get it all the way to achievement in 2025? Yeah. When we set our plan, and we did our long-range plan, last year, early last year, and really said, from 2021 to 2025, we're gonna grow revenues a little bit north of 20% CAGR. And we're gonna essentially break even adjusted EBITDA in 2023. Mm-hmm. deliver about $80 million of adjusted EBITDA in 2025 on $555 million of revenue, and get to cash flow break even in 2025. Really, so far, we've grown faster. We're on our commitments delivering adjusted EBITDA break even this year. The adjusted EBITDA break even assumption implies about 800 basis points of operating leverage this year. Over the course of 2021-2025 is about 2,500 basis- Mm-hmm ... points of operating leverage. That really came in, like, two main chunks. Just a little bit of R&D. We get about 300 bips out of R&D leverage, but 2,200 basis points out of SG&A leverage. Hmm. One-third of that comes from our ability to drive down our variable expenses relative to sales, that's really structuring our sales. We have an exclusive sales agent model where we ultimately pay an industry competitive rate for base sales, which essentially is whatever you sold last year is your base rate, then if you grow above that, we'll pay you extra points for growth. As growth in kind of absolute numbers gets a little bit smaller, your percentage goes down over time. Your effective commission rate will walk down over time. That's the kind of the one-third, that's contractual, so we've got high conviction there. The two-thirds really comes from leveraging the infrastructure that the company built. You know, you think about 2021, our infrastructure investments, you know, we walked into a new facility in Carlsbad, we opened up a Memphis distribution facility, acquired EOS, really scaled up our surgeon education, surgeon training. We've also got the leadership team in place that can run a billion-dollar-plus company. Our sales management team is in place. We really built out a company to be very capable of becoming a much bigger company than it was in 2021. We're getting, probably two-thirds of that walk through, really the leverage of the investments that we've made. When you look at our performance in the second half of 2022, which is really the first time you have a clean comparison, because the 2021 acquisition we did in April of EOS, you saw 800 basis points of operating margin leverage, or excuse me, adjusted EBITDA margin leverage. In the first quarter, we expanded adjusted EBITDA margins over 1,000 basis points. When you look at that experience, the leverage came in the way we expected it to. You know, sitting in my seat, first thing is, hit your number. Second thing is, hit it in the way that you expect and you planned it to. Mm-hmm. The fact that the leverage is coming in the way that we expected it and planned it to, gives us great, I think, comfort and confidence in our ability to continue to deliver on the commitments that we've made from a margin standpoint. Right. You talked about your commitment to reach breakeven, but how do you balance that against your desire to continue to invest in product development, continue to be acquisitive, and how does the REMI acquisition, for example, and the development path affect that plan? Yeah, as I had mentioned, about 300 basis points. Yeah ... of the total margin expansion is in R&D. We've really not levered our R&D at all at this stage. Mm-hmm. You know, there's a couple things. One, to the extent that we overachieve on the top line, we can invest some of that back into the business while still delivering the absolute dollars on adjusted EBITDA, so you kinda see the R&D investment where it's at. And the fact that we acquired REMI, we acquired about $5 million of run rate expense- Mm-hmm in that business. Ultimately, our R&D today is about 10% of sales. We do $450 million this year. That's $45 million of sales. We grow that 10%, I can basically double my investment in REMI. Mm-hmm needed to. My point being is, not that we're gonna double it on REMI alone, but there's plenty of investment dollars to continue to invest in the top-line engine of the business. I think you've seen us grow, you know, 44% last year. We, we grew over 50% in the first quarter. Our, our guide this year is 30% or 28%. You know, you're seeing strong revenue growth that has corresponded and correlated with the investment in R&D. Yeah. You know, obviously, we have our profitability objectives and commitments that we're gonna hit. To the extent that we can continue to support the business with R&D investment, we're gonna do that because we ultimately believe that's the root of the growth of the company. I mean, it's create clinical distinction. Yeah. When you do that, you're gonna compel surgeons to adopt because you're helping them do better surgery. When you do that, you attract a great sales force. Yeah. Happens in that order, and the foundation of that is investing in R&D. Yep, makes sense. The growth really has been remarkable. I want to continue on that theme in the final six minutes, maybe talk about a few other growth drivers, one of which, of course, is international expansion. Would love to hear your thoughts around how international presents additional growth opportunity. You know, I think international is really two things I'd highlight there. One is the top-line opportunity, as well as I think our strategy and how it really supports a profitability profile. Our strategy is to really go narrow and deep. Mm-hmm. I think I've had txperiences in the past where the tendency is, "Hey, let's go to every country that has interest and will buy." Maybe you do a little bit of distributor stocking distributor experience, and you build out some direct businesses. It becomes very difficult to really scale that at a profitable level over time because the distributors tend to cap out because they're not committed. There's a heavy clinical requirement, and ultimately, you have to go to markets that, one, are of size. Two, that have a pricing profile that reflects the value you're bringing. Yeah. And three markets that ultimately kinda respect the input of the surgeons, making the clinical decisions and have an influence on what vendors are chosen. When we looked at that, we said, New Zealand, Australia, and Japan- Mm-hmm ... are three great examples of that. Our strategy is to really build direct businesses in those markets. One, because we believe that we can get to an ultimately a higher penetration rate, and when you do that, then you'll drop down more profitability in the long run. That's really our strategy. And we're just getting started from a sales perspective in Australia and New Zealand. We've got a great team there, a great leader that we hired maybe a year and a half ago, a year ago now. And she's building out a great team there with great know-how. I think you know, businesses are collections of people and, you know, having confidence in the people that you work with, trust, and hiring people who have know-how and expertise in an area. I, you know, I kinda look at that Australia, New Zealand team, and that's exactly that, and we're starting to do the same thing in Japan now as well. Got it. That's great. you know, you've expanded your sales footprint meaningfully. Is there still additional opportunity there? You mentioned with some of the M&A activity, there may be opportunities. How do you think about expanding the sales footprint? Yeah, you know, the first thing I'd say there is oftentimes, people think that the longevity or the sustainability of our growth is capped by geographic expansion. I think the point I'd make there is, we've been purposeful about highlighting, our, what we call same-store sales. Mm-hmm. For the exclusive agents that have been with us for a year or more, what's their growth rate? In the second quarter, it was 48%, and it's the preponderance of our sales. What that tells you is, our growth is coming from the established sales footprint that we have, which really reflects those agencies getting more procedures of their existing surgeons, as well as getting greater overall penetration of surgeons in their area. I think that's the first point I'd make. The second point is more to your question, which is, we have an opportunity to continue to grow our footprint. The answer is absolutely. Mm-hmm. You know, we're totally underrepresented in places like the Twin Cities, in the Northwest, like Seattle. You know, we're just kinda getting started in Chicago, underrepresented in Milwaukee. I mean, the Northeast is a place that we have area to continue to get. Mm-hmm ... stronger and more penetration. There's a ton of opportunity for us to continue to add the right people in the right geographies, as we continue to compel surgeons to adopt the technology. I think to your point, I think the NuVasive and Globus merger is really almost an accelerator for that and gives us an opportunity to, I think, get access to a very high level of quality of individuals. Understood. You know, you talked about bringing on additional surgeons. Can you speak a little bit as to surgeon training and how that's evolving for ATEC? Yep. Last year, I think we did just about 500 surgeon training events. I'd say early on in PTP, it was, "Hey, let's train on PTP and the basics of it." Since we've launched PTP and since people have begun to use it, get more comfortable with it, and what happens is surgeons will use it in a straightforward pathology, and as they get more and more confident in the procedural approach, they'll really leverage the platform to address a wider variety of pathologies and more complicated pathologies. You know, for instance, now we have a course or two that addresses PTP in complex pathologies and how do you do that with PTP. I think it's a great example of how a procedural approach evolves over time as people begin to use it and understand its utility in a broader set of patients. You know, I think patient or excuse me, surgeon training is a great proxy for surgeon adoption. Mm-hmm. You know, I think, again, kind of the longevity and the sustainability of the growth is underpinned by the fact that, you know, we're training a ton of folks. We added 20% surgeons more last year, and we know that each cohort does more every year that they use the products. Feel great about where we're headed. Mm-hmm. That sounds great. I think with that, we're just running out of time. Todd, I wanna thank you for attending and for the answers to the questions. It's very helpful. Thank you, Todd. Thank you.