Good afternoon, everyone, and welcome to Alphatec's Fourth Quarter and Fiscal Year 2019 Financial Results Announcement. We would like to remind everyone that participants on the 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 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. Reconciliations 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's view of why this information is useful to investors.

Joining us on the call today will be ATEC's Chairman and CEO, Pat Miles; and CFO, Jeff Black. Now I will turn the call over to Pat Miles, Chairman and CEO of Alphatec Spine..

Thank you, and welcome to the Q4 and full year 2019 conference call. We are -- I appreciate your interest very much in ATEC, and we are coming to you from Besançon, France, home of EOS Medical's -- EOS' OneFit Medical. We expanded the forward-looking statements this quarter. So we have 2 pages, so please review those at your leisure.

So on Slide 4, 2019 was a great year for ATEC. We really delivered on our commitments. We launched 12 new products. We established an OR footprint with the clearance and launch of our SafeOp Neural Monitoring platform and we increased the percentage of new product revenue from less than 10% in 2018 to 37% in 2019.

We drove revenue growth of -- the original target was 30% within the strategic sales network, and we finished the year at 42% growth within the strategic sales network. The full year growth was initially targeted at the beginning of the year between 12% and 17%, and we finished the year at 30% full year growth.

We also expanded revenue per surgery, 17%, so a very good year. If we peel back a little bit and look at Q4 of 2019 on Slide 5, what you see is you see 35% growth from Q4 '18 to Q4 '19. So a significant amount of growth. Fifth consecutive quarter accelerating double-digit year-over-year U.S.

revenue growth, 11% sequential from Q3 to Q4 and 36% in average daily sales Q4 '18 to Q4 '19. So again, really a very strong year of execution from a financial perspective.

If you go to Slide 6, and we start to say, gosh, we initially started the year and said, if we can create clinical distinction, compel surgeon adoption and revitalize the sales channel, it'd be a very good year. So let's take a look at what the progress was in Q4 on Slide 7.

So when we started the year -- in 2018, we had less than 10% of our revenue come from new products. And I think it speaks to -- when we talk about the organic innovation machine, that Q4, 48% of our revenue came from new products, which is outstanding. We also launched our SafeOp Neural InformatiX System.

It's really going to be the cornerstone of our distinction in the operating room. And additionally, finished out the year fulfilling the obligation of commercially releasing 12 products. If you go to Slide 8, and you say, "Gosh, how do we compel surgeon adoption?" We had a 21% increase in the revenue per case Q4 '19 versus Q4 '18.

It's the highest growth rate since the inception of the new ATEC. We had a 72% revenue growth from the top 20 surgeons Q4 '19 versus Q4 '18. And then we always talked about convoyed sales as being a big part of who we are, how do we get the entire procedure? And so we finished Q4 '19 with 1.7.

So we continue to see a ratchet up of the number of products per surgery use, which, again, I think, is really one of the telling metrics of our success in compelling surgeon adoption. When you start to look at revitalizing the sales channel, we had 58% revenue growth from our top 20 distributors, again, a very significant amount of growth.

47% increase in dollars per -- dollar revenue per distributor, another significant increase. And when you start to look at the overall revenue, 90% of the revenue contribution comes from our strategic network. So it speaks to a solid foundation and then 44% revenue growth within the strategic distribution network. So all in all, 2019 was a great year.

It was a year that was built in 2018 and translated in 2019. So couldn't be more excited with the year that we have. So let's start to look forward into 2020 and look forward as to really what the new ATEC is going to do in 2020. And so what we're going to do is we're going to continue to compel surgeon adoption with clinical distinction.

And what that means is from a vitality index in terms of what amount of our revenue is going to come from new products. So we believe that 60% of our revenue will come from new products in 2020. We will again launch 8 to 10 new products. From a convoyed sales perspective, we expect that we're going to reach 2 unique product categories sold per surgery.

And then another big focus of 2020 is going to be the integration launch of EOS Imaging. We previously talked about a 20% U.S. revenue guidance of $128 million to $131 million. And so again, we look for a continued strong growth and a great year.

If you go to Slide 11, where we are making a big difference in improving clinical decision-making and driving better patient outcomes is really in information. We started it out with SafeOp, which is more physiology based information, and we've recently added Imaging as another source of information to drive better outcomes.

For those of you who are not familiar with EOS Imaging, EOS Imaging is a rapid calibrated weight-bearing full body scan. The virtue is in what it provides you, which is a bi-planer image and 3D patient-specific anatomic modeling, just provides a ton of opportunity. They have 350 units installed globally.

They have significant academic influence with greater than 500 peer-reviewed publications. It enables us to start to customize care and really provides us a technical foundation, and so exceedingly excited.

Part of the sequence of these acquisitions, if you go to Page 13, is that SafeOp really created in a conduit into the operating room for us to deliver information. If we could better inform the operative experience, we can influence better spine surgery. One of the key areas of great focus on Slide 14 is alignment.

Alignment is the most correlative element of a long-term successful clinical outcome. And there's a picture on the slide that shows the source of the image, the 3D reconstruction of the image and ultimately the conduit by which we deliver to the operating room.

The challenge is that alignment has not been objectively delivered to the operating room, so as to effectively manage during surgery. And so now we really get to expand the information really from end-to-end or all stages of care from diagnosis through preop planning, in-surgery, the post-op assessment as well as follow-up.

It makes ATEC a much more important player in this space. And let me give you a little bit about how we inform. And so first thing you're going to do is look in the lower left-hand corner and the ability to create an image, which ultimately influences the diagnosis.

If you could see the little yellow circle, oftentimes there's compensatory dynamics associated with the diagnosis that informs the surgeon, then we can create a 3D reconstruction of that image and input it into the surgical plan.

Our ability to understand the number of levels, the angles that we need from the levels, the type of instrumentation that we need for the surgery becomes significant with this platform. The other thing we can do is start to look at what specific products that we send in the surgery.

I think everybody appreciates that spine surgery is very inefficient with regard to the number of products that they send in for any individual surgery. Our capacity to start to limit the number of products we have to send in to fulfill a specific surgery based upon a preplan is a significant opportunity.

So our ability to start to control the specific dynamics associated with a individual surgery as well as start to peel out of the information, data that will drive our ability to ultimately create patient-specific type of implants.

The ability then to access the cloud and deliver this information in terms of a surgical plan into the OR and reconcile against the surgical plan is a significant opportunity and postoperatively assess how close did we come to the original plan. So the ability to correlate these 2 images is significant.

So when we talk about this technology and we talk about the ability to have a plan that is correlated, it is a significant opportunity to have a 2 calibrated images. And then ultimately, you do that time and time and time and time again, you will then start to inform your surgical planning process in a way that nobody else can do.

And so we cannot be more bullish or excited about the acquisition of EOS Imaging. And if you turn to Slide 17, we believe that it informs improved outcomes, and that's what we're committed to, and that's how you build long-term value.

So we believe that it enhances the clinical -- our clinical prowess, optimizes inventory planning and it lessens the cost to serve, it elevates the ATEC brand, complements both sales channel, meaning we will draft off the 350 units placed and they will draft off the sales areas that we have great strength in.

And additionally, it starts to provide us access to the international marketplace here in the future that we will reenter with a partner that has a significantly positive reputation. And so with that, I will turn it over to Jeff and let him run through the financials..

Thank you, Pat, and thank you, everybody, for participating in the call today. I'll give a quick highlight on revenue, gross margin, some P&L highlights, and talk a bit about the balance sheet. But would encourage you to also take a look at the full set of financials that we released today in the press release.

So on Slide '19, as Pat mentioned, a very strong performance by strategic distribution. We saw more than 40% growth in both the fourth quarter and full year. And this is really on the heels of strong commercial traction from new products. We also expected to see a greater decline in legacy and terminated than we did see.

So we're certainly pleased by 35% growth year-over-year in the fourth quarter and just under 30% year-over-year for the full year. In terms of outlook for 2020, we're expecting about 20% growth in total U.S. product revenue. We expect between 24% and 25% from our strategic distribution channel, and we'll continue to see legacy and terminated decline.

Slide 20, a little bit about margin.

Very consistent with what we've communicated in past quarters, since 90% of our revenue or greater than 90% of our revenue in 2018 was driven by legacy products, and we saw a very significant ramp in 2019 on new product introductions and new product adoption, we began taking a very aggressive write-downs on our legacy products.

So our margins reflect about 800 basis points in noncash E&O. We'll continue to see pressure at about that level in 2020, and then we'll start to see it normalize in '21 and beyond. Slide 21 just some quick P&L highlights.

I think the -- again, a common theme here, we're continuing to make significant investment in R&D and the product portfolio, we're making significant investment in the sales channel. Most of the investment is really in investing in new distribution. We've actually held the line on G&A. In fact, G&A has been flat 2019 to 2018.

And 22, a couple of comments on the balance sheet. We ended the year with $47.1 million in cash.

I think, importantly, around the requirements to fund the potential cash requirements for the proposed acquisition of EOS we announced last week, we've secured up to $160 million in new capital, $60 million of that will be used to refinance our existing term debt, and then up to another -- up to $100 million will be used to fully fund the cash required that might be required to complete the purchase of EOS.

As you all probably know, the tender offer, which we expect will go out in April will be a tender for cash or equity. So it remains to be seen what the cash -- ultimate cash requirement is on the acquisition. And then finally, in terms of the -- that the makeup of the P&L, it's really the same story.

It's continuing accelerated investment in R&D, continued investment in the sales channel to support an accelerating rate of growth that's far above market rates growth.

So we saw a 24% revenue growth in 2019, and that was against the headwinds of declines in our strategic distribution as well as the planned unwinding of our international revenue stream. And with that, I'll turn it back over to Pat..

Thanks, Jeff. 2019 has been a very formidable year for the new ATEC. We just came off our 2019 national sales meeting. And I got to tell you, it's a brand-new company. It is a very fun place to be, and we believe ourselves to be a disruptive force in the field. And so with that, we will now take questions..

[Operator Instructions]. Our first question comes from Brooks O'Neil with Lake Street Capital..

I would like to start, obviously, I'm excited about the EOS acquisition and I'm just curious if you could provide a little color on the initial response to the basic SafeOp launch? And then just talk a little bit about how you see integrating EOS as we move into 2020 and you get past the close of the transaction?.

Thanks, Brooks. This is Pat. I'll go ahead and take that one on. First and foremost, I will tell you that I am thrilled with the SafeOp Surgical launch.

I think if you look across the landscape of all of -- every spine company, every spine company has attempted to enter the lateral surgery space without the interest in participating in really what the availing technology is, which is automated neurophysiology.

And so what we did is, when we started this, we said, what we'll do is we will apply automated information to this surgery in a way that we're able to identify where the nerves are, but we will also add a feature set there and determine what the health of the nerve is.

And I got to tell you, we are well on our way for a very unique device that distinguishes us as a company. And so I think the more clinically sophisticated we can be, the better off we are. We're very early on in the launch. We launched it in November. We're seeing a lot of traction and a lot of enthusiasm around this device.

So this gives me great confidence based upon the fact it reflects really the core competency of the company.

And what I think that is, is our ability to reflect the utility of information to translate better surgery, and that was much of our enthusiasm around EOS was to be able to say, "Gosh, how do we take the information out of EOS and ultimately continue to drive better surgery?" The beauty of it is, as we get information that's really earlier -- much earlier than the interoperative experience, so in the diagnostics.

And so really, the early experience is going to be to inform the EOS surgical planning with all of the ATEC implants.

And then the next relatively immediate phase is start to integrate the surgical planning platform through the AlphaInformatiX platform, which houses SafeOp such that what we can do is start to port the information in the operating room.

But even if we just garner greater access to the 350 units placed and we start to begin to see translation of sales through each other's places of prowess, I think you're going to start to see significant momentum around this acquisition. So we are exceedingly excited..

Great, Pat. Second quick question. I understand it's going to take some time to close the deal.

What are some of the key things that need to happen between here and somewhere in the third quarter to get that transaction closed?.

Yes, Brooks, it's really all regulatory at this point. The plan is that there is a process that will take us to mid-April, what we expect to launch the tender offer in France on Euronext. And then it's really a matter of just getting through that process and jumping through a number of regulatory groups that are all customary closing type conditions.

The expectation is that we would see this close in July or August..

Okay. Great. And then last question for me is just can you talk a little bit -- I know you mentioned in the prepared script, 8 to 10 new products from the organic innovation machine.

But can you just give us some sense of your excitement about the continuing trajectory of new product introductions at ATEC?.

Yes, Brooks, it's really one of the best. I think, we're in the great competencies of our company clearly, I think, if you look at the 2019 growth and you look at all of the attribution to new products, I think that we're getting a lot of traction with regard to the new stuff. Candidly, usually, it takes longer.

And so I'm somewhat pleased about the early traction of a lot of the new stuff. The things that you will see come forward is we've talked a lot about designing the specific requirements for Prone Transpsoas surgery.

And so what you're going to find is you're going to find companies that have no longer -- that are no longer interested in innovation start to apply their previous goods to a surgery that requires specific design and development. And so you will see a design and development effort around PTP that's going to be unique to ATEC.

Additionally, what you're going to see is several new products within the posterior fixation realm as well as TLIF. And so we can't be more excited about the number of things going on this year. You'll see products in the 8 to 10. We opted to go ahead and list them after we launch them just because we feel like it makes more sense strategically.

And so anyway, it should be a great year..

Great. A lot of progress, good for you guys, keep up all the good work..

Thank you so much..

Thanks Brooks..

Our next question comes from Matt O'Brien with Piper Sandler..

This is Drew on for Matt. And congrats on a nice quarter here. I guess clearly a lot of these new products are really starting to pay dividends over the last months and over the last couple of years.

I guess, with that said, it seems like you've been talking a little bit more about going deeper within those accounts that you're currently in today, which, as I'm sure you know can sometimes be just as challenging as sort of getting the door opened in the first place.

So maybe you could kind of talk to your strategy there? I mean is it getting in front of more surgeons, pitching advantages of your products on the top-down at some of these institutions, more bundling, any color there would be helpful..

Yes. Thanks for the question. This is Pat. I look at it really in a couple of ways. I think the more clinical distinction that we can create, the more we will compel the partners of the surgeons whom we're currently doing business.

And so that's why we're so bullish on making an informatic platform that distinguishes us as a company and elevates really our clinical sophistication.

And so as you start to think about how you start to make a meaningful impact on larger groups of surgeons, I think what you have to do is do something better such that what happens is the surgeon's partner folks is heading in the room of the surgeon using our stuff and says -- starts to understand why maybe his patients are getting out of the hospital slightly sooner or he's getting a better result.

And so I believe that it's those types of things that ultimately move surgeons. I think additionally, getting more out of the same surgeon and that's the whole convoyed sales. We look at surgery through the lens of a procedure. And how many products per procedure or per surgery we can sell into.

That means what we've done is we've controlled more of the surgery, we've mitigated more variables based upon the architecture of the entire experience. And so that's really the way we look at expanding into more surgeons that have a relationship with the surgeon utilizing our stuff and then how we go deeper into the accounts..

Okay. That's very helpful. And then, I guess, continuing on the same point here. I mean, looking at the utilization of your existing surgeons, I believe you said that revenue per case increased by 17%, which I think is the same as last quarter.

I mean if you start to look out a couple of years, just wanted to gauge whether you believe your portfolio of products is complete enough for that to continue to keep marching higher? And then if not, are there any gaps you need to fill?.

Yes. It's really a great question. And I will tell you the answer is an unequivocal yes. And I say, yes, because we will continue to chase the requirements of surgery. One of the things that EOS will bring us into is greater complexion.

And so what happens is, is when we gain the confidence of a surgeon, what happens is it gives you a shock and then once you have performed well, and he's had a great experience with your products, what happens is he enters into more and more complex surgery, which means more and more levels and then increase revenue per procedure.

And so that's what you're starting to see. You're starting to see greater confidence availed to us from the surgeon. And then you're seeing him apply our goods to more and more complex surgery.

I think with the ability to start to garner access to the EOS platform, our ability to start to understand surgery and start to collaborate with those surgeons who really are defining the course, especially from a spinal alignment perspective, enables us to continue to participate in more and more complex surgery.

So I think you will continue to see that go up over time. And as we evolve the portfolio, it will be chasing those indications..

Our next question comes from Kyle Rose with Canaccord..

And congrats on a strong Q4 in 2019. So I guess, I just wanted to talk maybe a little bit more on the state of the sales team. Obviously, the investments and the focus on the commercial team that you put in place over the last several years has played out.

But maybe just help us understand how we should think about the pace and the cadence of some of the hiring on a go-forward basis? And then just how are the underlying productivity improvements? As we move into 2020, do you have big hires from the end of 2018 that are now going to roll off non-compete to become more productive? Just help us understand how we should think about that natural productivity in 2020..

Yes. Thanks, Kyle. I think it's a timely question, and that we just came off our national sales meeting this past weekend and had 175 of our closest friends all assembled. And one of the things I've talked a lot about is really the -- kind of the cadence and the discipline that we're creating in our sales entity.

And I think that, that's a reflection of the kind of historical experience that a lot of our sales leadership has. And I'm super pleased with that. I got to tell you, what we're doing is we are creating clinical solutions that require a clinical attitude that I don't think that we have yet. And so I think we have it in pockets.

And so I think our challenge is are we starting to get the right people in the right geographies? I think the answer is yes. And I think we have a lot of people coming off of non-compete. They are very strong contributors. I got to tell you, we're not where we need to be with regard to the clinical proficiency across the entire sales force.

And so I'm looking forward to building that in as we continue to evolve. But we are light years from where we were a year ago. And we will be light years from where we are in -- at the end of 2020 from where we started the year. And so my enthusiasm is the level of confidence increased dramatically.

The level of where we need to get to from a clinical proficiency still needs work. And so I would tell you that I always feel like we're always in the early phase because we can always get better. Sorry for the diatribe..

No, no, no, that was very helpful. I appreciate it. And then when you think about moving from -- I appreciate the commentary earlier about SafeOp.

Just help us understand when we should expect to see that as a meaningful driver of revenues, whether that would be directly or indirectly via opening up accounts and then selling through implant in pull-through? Or do you need EOS and the integration of all of the planning and the other software tools before that can really happen? Or should we expect to see some new accounts come on board just from SafeOp and InformatiX in the first 9 months of this year?.

I think you should expect to see new accounts come on board based upon SafeOp as we know it today. And so you will always see it as a passive contributor. The revenue generated directly from the neurophysiology system is not going to be significant, but the dollar volume of influence will be.

And so we've already started to see significant traction from the system, but we've always thought it could be a conduit for information.

And so when you start to think about the things that we can deliver through there by pulling information out of the cloud, there is so much to do on that front in terms of informing surgeons with objective, actionable information. Surgeons, we've always said they yearn for information.

And what we're doing is providing them timely information that's very, very relevant. And so we're seeing immediate traction with regard to the SafeOp platform. I'm very excited. And when we start to say, "Gosh, we'll see at least 2 new -- or 2 products used per surgery.

That's a significant walk-up." And I look forward to the day that I'm on the call that we're talking about well over 3 products per surgery because what we're really getting is the entire architecture of the procedure. But that really is based upon our capacity to create relevance out of the InformatiX platform.

And I think we're doing that very early. I can't be more excited about what we're doing on the EMG front and the automated SSEP front. And so it's an exciting time with regard to kind of the early phase of our architecture..

And then last question, I want to make sure Jeff gets some attention to.

Just overall thoughts on CapEx this year and investments in sets and inventory? Just how should we think about that as we move through the year?.

Yes, good, Kyle, I think we haven't given any specific guidance, but I think you can expect a similar level of investment that you saw in 2019. We spent roughly $20 million on a new implant sets and instrument kits for new product introductions. I think you can think about at the similar level of investment for 2020..

[Operator Instructions]. Our next question comes from Sean Kang with H.C. Wainwright..

This is Sean Kang for RK at H.C. Wainwright. So my first question is I remember you provided longer term guidance of $200 million by 2022 even before the announcement of the acquisition of EOS.

Based on the expectations or the synergy, how can it positively impact longer term guidance?.

Yes, Sean, this is Jeff. Thanks for the question. We think -- and again, we've not given any specific guidance to -- on the EOS transaction and what that incremental revenue will be. We did indicate last week that it's about a $40 million run rate business.

So I think the short answer to that question is that we absolutely believe that this accelerates our path to $200 million..

I see. That's helpful.

Another question is -- another related question is, so regarding the pull-through effects from the EOS, how easy is it for an institution -- academic institution to transition from non-Alphatec products to Alphatec products, if they chose to do so? Is there any like contractual obligation to disengage it from?.

Yes, Sean, this is Pat. The one thing that you can count on is nothing is easy. And so we realize that there will be a process. I will tell you that there is more distinction in the EOS information than there is in the individual screws and plates and interbody devices.

And so depending upon the type of indication for surgery, we believe that the value will be attributed to the information more so than at times it will for the implant systems. And so we feel like that will drive implant change.

It's not going to be universal and it's not going to be fast, but it ultimately will reflect in how good we do with regard to the integration of that information into our systems..

I'm not showing any further questions at this time. I would now like to turn the call back over to Pat Miles for any further remarks. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..