The Big Idea
Spine health is key to a healthy and active lifestyle. The spine gives our bodies structural support, helps keep us aligned properly and provides the flexibility to contort our bodies as desired.
It also protects our spinal cord, which runs through the column of bones as it travels from our brain down through our spine, into our pelvic region and on to our legs.
At least, that’s what a healthy spine is supposed to do.
The reality is that as age and injuries pile up, the spine takes a beating. Vertebrae are stacked on top of each other. Over time the cushioning disc in the front and bony joints in the back get worn down.
Disease and/or damage to muscles, bones, tendons, ligaments and nerves can also contribute to less-than-perfect spine health.
At some point, there may be enough damage that surgery is the best available option.
When that time comes, surgeons have a lot of options to choose from. Many MedTech players offer a few solutions to assist in spine surgery. Maybe they sell specialized and expensive screws and plates. Or maybe an imaging technology to help doctors determine where to operate and what procedure to do.
Few of them try to cover the full spectrum of solutions needed to be a one-stop shop for spine surgery. And that’s a missed opportunity.
Today we’re looking at a small company that set out five years ago to be the best pure-play spine company in the market.
Not only does it sell the imaging technology that can help diagnose issues and inform treatment options, it has also developed surgical approaches and technology that integrate with its patient body positioners, surgical tools and implant devices.
This means surgeons can turn to this company for almost everything they need to complete procedures that are clinically proven to work with the fewest possible number of variables during surgery.
That leads to more efficient procedures, fewer risks and better patient outcomes.
What’s even more interesting is this little company has less than 5% market share. But it’s gaining momentum as surgeons see the benefits of its holistic approach.
With revenue growth far and away surpassing that of the broader spine market and profitability inching closer, this small company might not be small for much longer.
That’s why we’re jumping in today.
The Company
Alphatec (ATEC) is a MedTech company with a portfolio of surgical solutions for spinal conditions ranging from degenerative disc disease to complex deformity and trauma. It has a market cap of $1.7 billion.
Its offerings include comprehensive procedural solutions, body positioners, surgical tools/access systems, informational systems for pre-, intra-, and post-operative care, implants, fixation systems and biologics.
The entire platform is designed to support the company’s vision to become the standard bearer in spine.
Alphatec stands out from the competition because it has taken a holistic approach to spine care. It’s not just selling a few tools and some implants. The company has an entire portfolio of spine-specific solutions designed to improve patient outcomes by achieving the three goals of spine surgery: decompression, stabilization and alignment.
Management believes Alphatec’s solutions better inform doctors during surgery, make spine surgery more predictable, drive better outcomes and show superior clinical distinction versus other spine care options on the market.
Alphatec came public via IPO in 2006. And it’s had some ups and downs since.
It is a very different (and much better) company today than it was just a few years ago.
In 2018 the company started a journey that ultimately brought in an entirely new executive team and almost an entirely new Board of Directors.
Alphatec also started an in-house design, development and testing team. The goal being to create solutions with clinical distinction (i.e., solutions that rigorous testing showed to be better than the competition) and a top-notch sales force to get the word out.
From 2019 through 2021 Alphatec assembled the building blocks that would help spine surgeons and patients recognize the company as the best in the business.
Critical to this foundation was the 2018 acquisition of SafeOp, which became the informational backbone of the Prone TransPsoas (PTP) approach (more on that in a minute).
The bottom line is that from 2013 through 2018 the “old” Alphatec was a shrinking business. But since business reorganization and renewed focus began in 2018, Alphatec has posted average annual revenue growth of 41%.
In short, this is a great growth story that appears to have legs.
Platform, Approaches & Solutions
Alphatec has taken a holistic approach to spine care.
The company has developed surgical approaches, support structures designed to position patients in the best way possible during surgery, tools to help surgeons complete procedures, implant devices that hold up to the test of time and a host of imaging technology to inform surgery and care decisions and guide surgeons during procedures.
Prone TransPsoas (PTP) Approach
The Prone TransPsoas (PTP) approach is a minimally invasive spinal procedure where the spine is accessed through a small incision in the side of the body while the patient is in the face-down (prone) position. It allows for the correction of the natural curvatures of the spine to improve overall spinal alignment.
Alphatec’s flagship Prone TransPsoas (PTP) approach was released in 2020 to improve upon the standard lateral procedure for spinal fusion, which could have good outcomes but presented positioning challenges.
Because PTP positions the patient in a prone position, the surgeon has easy access to the spine from both the side (laterally) and the back (posteriorly).
This gives the surgeon positioning optionality without having to move a patient, achieves consistent spinal alignment goals across multiple procedures (i.e., the surgeon doesn’t have to try and manipulate every patient to try to align the spine during each procedure) and helps surgery go more efficiently.
The end result is that PTP allows surgeons to consistently achieve the benefits the original lateral procedure was designed for, namely less blood loss, shorter hospital stays, and quicker recovery times.
Since its introduction, over 5,500 PTP procedures have been completed.
Monitoring and Imaging Technology: Alpha InformatiX Platform
Alphatec’s Alpha InformatiX (AIX) product platform includes the SafeOp Advanced Neuromonitoring technology, the VEA alignment mobile application, and most recently, the EOS Imaging System (integration of EOS is ongoing now).
SafeOp Advanced Neuromonitoring: One of the biggest challenges to spine surgery in the lateral position is safely and predictably navigating across the lumbar plexus, a collection of nerves. This is where the SafeOp Advanced Neuromonitoring technology comes in. It aids navigation and gives the surgeon real-time information about the health and location of the patient’s nerves during surgery. The technology integrates with the company’s access, implant, and fixation technologies.
VEA Mobile Alignment Application: VEA is designed to quickly quantify alignment parameters on a mobile device. The company is working on EOS integration.
EOS Imaging: The EOS imaging system gives a precise 3D model of a patient’s skeletal system, helping with both diagnosis and surgical planning. Alphatec is integrating its various approaches into the EOS platform to better inform surgery and enhance the predictability of outcomes.
Positioners, Access Systems, Tools & Implants
Patient Positioners: Alphatec’s PTP Patient Positioning System was designed specifically for the PTP procedure. It’s a bed-mounted support system with adjustable pads and paddles that minimizes undesirable patient movement, permits desirable patient adjustments, and allows better access to the L4 and L5 vertebrae and upper lumbar regions.
Access Systems: Alphatec has designed a range of surgical access instruments that can mount to a surgical table and adjust based on patient positioning and procedure. These tools provide access to the surgical area for drilling, placing implants, etc. while also providing rigidity.
Implants & Fixation Systems: Alphatec has a portfolio of specialized spinal implants and fixation systems available in varying shapes and sizes to suit the needs of each approach. They are available in different materials, some with surface modifications to improve cell adhesion and cell growth. A few of the major brand names are Calibrate PSX (released in 2022), an expandable intervertebral body fusion system, and Invictus, a next-gen comprehensive spinal fixation solution.
Biologics: Alphatec offers a range of biologics (allografts, demineralized human tissue, cellular bone matrix, etc.) designed to facilitate the process of spinal fusion.
Growth Initiatives
Launch New Products: Alphatec is on a mission to create products that are better than the competition to drive surgeon adoption and revenue growth. In 2018, new products (launched since the reorganization in 2017) delivered just 10% of total revenue. Today, products launched since 2017 are driving 91% of revenue. The company has over 90 products currently. Look for eight to ten new product launches in 2023 to keep growth alive.
EOS Acquisition: The $122 million acquisition of EOS (in 2021) brought a capital equipment offering into the Alphatec portfolio. Equally important, it catapulted Alphatec’s visibility at centers where EOS already had placements and opens the door to selling updated EOS equipment in the future. EOS grew by 15% in 2022 to generate $48 million in revenue (13.7% of total) and should grow at about the same pace in 2023.
International Expansion: This is an early-stage initiative, but Alphatec is building the foundation to expand into Japan, Australia and New Zealand.
No Equity Raise Risk: Alphatec entered into a $150 million non-dilutive term loan in January, bringing cash access up to around $275 million. This removes the risk of a dilutive equity raise for some time.
The Business Model
Alphatec generates revenue by selling spinal surgery tools and supports, implants, and medical imaging equipment. Customers are hospitals and surgical centers. The company sells through both independent sales agents and direct sales reps.
The Bottom Line
Since 2018, Alphatec has posted average annual revenue growth of 41%. Revenue grew by 68% (to $243 million) in 2021 and by 44% (to $351 million) in 2022. Surgeons averaged 2.2 product categories per surgery in 2022, up from 2.0 in 2021. And in 2022 average revenue per surgery grew 25% while revenue per surgeon increased 17%.
Revenue was up by 43% in each of the last two quarters (Q3 and Q4 of 2022), beating expectations both times.
Earnings are negative, but losses are getting smaller. EPS was -$1.50 in 2021 and -$1.47 in 2022. In Q3 and Q4 of 2022, EPS was -$0.35 and -$0.33, respectively. Both results beat expectations by $0.07 - $0.09.
Looking forward, Alphatec is expected to grow 2023 revenue by 25% (to $440 million) and 2024 revenue by 20% (to $530 million). EPS loss is expected to improve by 56% in 2023 (to -$0.64) and by another 42% (to -$0.37) in 2024.
Risk
The biggest risk is that the benefits of PTP, and other procedures Alphatec is bringing to market, aren’t shown to exist if/as competitors step up their game.
EOS revenue could be at risk if hospitals and surgical centers tighten their belts.
The pending combination of Globus Medical (GMED) and NuVasive (NUVA) could create a more formidable competitor.
Competition
Medtronic (MDT), Johnson & Johnson (JNJ), Stryker (SYK), NuVasive (NUVA), Zimmer Biomet (ZBH), Globus Medical (GMED).
The Stock
Trading Volume: ATEC averages just under 1 million shares traded daily. We shouldn’t move the stock.
Historical Price: ATEC came public in 2006 but we really care about 2017 onward given the reorganization that kicked off that year. The stock entered 2018 trading around 3 and was getting into gear (trading in high 7s) before the pandemic sent it back down. The bull market lifted ATEC to a multi-year high of 19.3 about two years ago. Shares corrected with the market in 2021 and into mid-2022, with an intra-day dip to 5.73 last July looking like the low. Since then, ATEC has been grinding higher with the pops and dips getting tighter and tighter. The uptrend has been on hold for the last month or so (since around the Q4 earnings report) as shares appear to be regrouping in the 15-16 range.
Valuation: ATEC currently trades with an EV/2024 Estimated Revenue multiple of 3.8, which seems low if expected growth pans out.
Buy Range: In the near term, expect to buy ATEC in a roughly +/- 10% range. That works out to between 14 and 17.
The Next Event: Nothing on the calendar until Q1 2023 earnings in early May.
Current Recommendations
| Stock Name | Date Bought | Price Bought | Price on 4/5/23 | Profit | Rating |
| Enovix (ENVX) | 10/6/22 | 20 | 13 | -37% | Hold |
| Expensify (EXFY) | 2/2/23 | 11 | 8 | -30% | Hold |
| Flywire (FLYW) | 8/4/22 & 11/9/22 | 21.62 | 28 | 27% | Buy |
| Huron Consulting (HURN) | 12/2/22 | 80 | 80 | 1% | Hold |
| Inspire Medical (INSP) | 10/4/19 | 59 | 229 | 290% | Hold 2/3 |
| Intapp (INTA) | 1/4/23 | 26 | 44 | 72% | Hold |
| Rani Therapeutics (RANI) | 10/7/21 & 7/28/22 | 14 | 5 | -63% | Hold |
| Repligen (RGEN) | 11/2/18 & 12/31/18 | 59 | 161 | 172% | Sold 1/4, Hold 3/4 |
| Sprout Social (SPT) | 9/3/20 | 36 | 54 | 47% | Hold 1/2 |
| Terex (TEX) | 3/3/23 | 60 | 43 | -28% | Buy 1/2 |
| TransMedics Group (TMDX) | 7/7/22 | 34 | 73 | 113% | Hold 3/4 |
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
Glossary
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.
Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.
The next Cabot Small-Cap Confidential issue is scheduled for May 4, 2023.
