Alphatec (ATEC) - 2019 Q4 - Annual Report

PART I Item 1. Business Alphatec is a medical technology company revolutionizing spine surgery with distinct products, a strategic sales channel, and the EOS imaging acquisition Company Overview and Mission Alphatec improves spinal disorder treatment by integrating innovative products with the SafeOp Neural InformatiX System for enhanced surgical safety - The company's mission is to revolutionize spine surgery through clinical distinction, leveraging its wholly-owned subsidiaries Alphatec Spine, Inc. and SafeOp Surgical, Inc.[4] - Products and solutions integrate with the SafeOp Neural InformatiX System to provide real-time, objective nerve information, enhancing safety and reproducibility of spine surgery[4] Sales and Distribution Strategy Alphatec markets products in the U.S. via independent distributors and direct sales, strategically shifting to an exclusive sales channel for significant revenue growth - The company markets and sells products in the U.S. through independent distributors and direct sales representatives, aiming for consistent, predictable growth[4] - Revenue from the strategic sales channel grew by more than 40% in 2019, comprising nearly 90% of U.S. revenues, up from approximately 60% in 2017[5][15] - The strategy involves attracting large, experienced distributors seeking partnerships with spine-focused companies offering innovative and robust product portfolios[6][14] Recent Developments: EOS imaging Acquisition Alphatec announced an agreement to acquire EOS imaging, enhancing its AlphaInformatiX platform with advanced surgical planning and alignment capabilities - Alphatec announced an agreement to acquire EOS imaging, SA, a leader in outcome-improving orthopedic medical imaging and software solutions, on February 28, 2020[7] - The EOS technology provides rapid, low-dose, biplanar full-body imaging and 3D modeling, informing the entire surgical process from diagnosis to post-operative assessment[7] - The acquisition is expected to advance Alphatec's AlphaInformatiX platform, adding capabilities in surgical planning, patient-specific implants, and intraoperative alignment reconciliation[7] Strategy Alphatec aims to be the standard-bearer in spine by creating clinically distinct solutions, compelling surgeon adoption, and revitalizing its sales channel - Alphatec's vision is to be the standard bearer in spine by creating clinically distinct solutions that improve surgical outcomes and capture a greater share of the U.S. spine market[9] - The company is committed to attracting and retaining top talent and driving organizational transformation through vital initiatives: creating clinical distinction, compelling surgeon adoption, and revitalizing the sales channel[10] Spine Anatomy This section describes the human spine's structure, regions, and components, highlighting its role in support, movement, and spinal cord protection The Alphatec Solution & Product Portfolio Alphatec offers a broad portfolio of 'Approach Technologies' for spinal disorders, with new products contributing significantly to revenue and enhancing surgical safety - Alphatec's principal procedural offerings, 'Approach Technologies,' aim to improve patient outcomes by achieving decompression, stabilization, and alignment in spine surgery[20] - New products launched since late 2017 accounted for nearly 50% of total revenue in Q4 2019, with full-year 2019 U.S. product revenue growth of nearly 30%[20] - The SafeOp Neural InformatiX System, acquired in 2018, delivers real-time, objective, actionable nerve location and health information, enhancing safety, efficiency, and reproducibility[20] Products and Technologies Under Development Alphatec is expanding its product portfolio with 8-10 new launches in 2020 and integrating EOS imaging technology for advanced surgical planning - Alphatec plans to launch 8-10 new products during 2020 to enhance clinical outcomes across multiple pathologies[36] - The acquisition of EOS imaging, expected to close in Q3 2020, will provide advanced capabilities in surgical planning, patient-specific implants, and intraoperative alignment reconciliation[37][38] - EOS technology offers standing full-body assessment, reduced radiation exposure, and precise 3D measurements, with software solutions for surgical planning and OR integration[37] Research and Development Alphatec's R&D focuses on improving core products and introducing new ones to increase U.S. spine market penetration, collaborating with surgeons for enhanced outcomes - The R&D department aims to continually improve core product offerings and introduce new products to increase U.S. spine market penetration[39] - Development programs focus on technology platforms and products for degenerative and deformity spine pathologies, utilizing integrated teams to reduce time from concept to commercialization[39] - The company collaborates with surgeon partners to design products that enhance the surgeon experience, simplify techniques, reduce costs, and improve patient outcomes[39] Sales and Marketing Alphatec markets products through independent distributors and direct sales, transitioning to a dedicated sales channel and securing hospital access via a national accounts team - Products are marketed and sold through a sales force of dedicated and non-dedicated independent distributors and dedicated employee direct sales representatives[40] - Significant changes are underway to drive a more dedicated sales channel, including eliminating traditional stocking distributors and attracting new, high-quality dedicated distributors for future growth[41] - A national accounts team is responsible for securing access at hospitals and GPOs across the U.S., which is a key differentiator and source of current business[44] Surgeon Training and Education Alphatec emphasizes peer-to-peer surgeon training to impart critical technical skills, drive customer conversion, and promote adoption of its innovative spinal fusion solutions - Surgeon training efforts focus on delivering critical technical skills for the entire spinal fusion procedure through a peer-to-peer approach to qualified surgeon customers[46] - The company believes effective training and education build market demand, increase product use, and promote the merits and distinguishing features of its products[47][49] Manufacture and Supply Alphatec relies on third-party suppliers for manufacturing implants and instruments, managing supply chain risks for raw materials and biologics products - Alphatec relies on third-party suppliers for manufacturing all implants and instruments, which reduces capital investment and operational expenses[50] - Key raw materials include titanium, stainless steel, cobalt chrome, ceramic, allograft, and PEEK, with Invibio being a limited supplier for PEEK[52] - The company's biologics products, processed from human tissue, can face supply challenges, but Alphatec has not experienced significant disruptions[53] - The supply agreement with Globus Medical Ireland, Ltd. for international markets was extended through August 2020[54] Competition The spinal implant industry is highly competitive, driven by rapid technological change, with Alphatec facing larger competitors possessing greater resources - The spinal implant industry is highly competitive, characterized by rapid technological change and new product introductions[55] - Principal competitive factors include improved outcomes, ease of use, product quality, effective sales and marketing, technical leadership, surgeon services, and product price[55] - Significant competitors include Medtronic, Johnson & Johnson (DePuy/Synthes), Stryker, NuVasive, Zimmer, Biomet, Globus, and K2M Medical, many with substantially greater financial resources[56] Intellectual Property Alphatec protects its intellectual property through patents, trademarks, copyrights, trade secrets, and contractual agreements - Alphatec relies on patent, trademark, copyright, trade secret, and other intellectual property laws, along with nondisclosure agreements, to protect its proprietary rights[59] Intellectual Property Portfolio (as of December 31, 2019) | Category | Count | | :------- | :---- | | Issued U.S. Patents | 194 | | Pending U.S. Patent Applications | 39 | | Issued or Pending Foreign Patents | 217 | | Registered U.S. Trademarks | 26 | | Registered Foreign Trademarks | 9 | Government Regulation Alphatec's medical devices and HCT/Ps are subject to extensive FDA and other governmental regulations covering design, manufacturing, labeling, and post-market surveillance - Alphatec's products are subject to extensive regulation by the FDA and other U.S. federal and state regulatory bodies, as well as comparable authorities in other countries[62] - Medical devices require either 510(k) clearance (for most Class