Alphatec Stock: Now Having My Back (NASDAQ:ATEC)

Doctor check and diagnose the human spine on blurred background

Mohammed Haneefa Nizamudeen/iStock via Getty Images

In July of last year, I concluded that momentum for Alphatec (NASDAQ:ATEC) was strong, yet I still had real concerns as the company was in full transformation swing. While sales traction improved, losses kept increasing along the way, raising questions among investors.

The (Former) Thesis

Alphatec is a smaller medtech player which operates in the spine business, a huge $8 billion market in the US alone, dominated by traditional giants like Medtronic (MDT), Stryker (SYK) and Zimmer (ZBH). The company operates in this field as well, aiming to be a smaller innovative and disruptive player, fighting against these names.

The company had some history as it went public at $9 per share back in 2006. Following the offering, the company posted stable revenues around $200 million in the years 2010-2014, albeit accompanied by operating losses.

Lack of progress triggered a big strategic reset, as revenues fell to just $90 million in 2019, with shares falling to $1 per share, as investors were not convinced about the move. In February 2019, things turned for the better as the FDA approved the SafeOp neuromonitoring system for real-time intraoperative nerve location. This triggered a 24% increase in 2019 sales to $113 million, albeit still accompanied by a steep $47 million operating loss.

The company guided for 2020 sales to rise to $130-$140 million, but this outlook went outside the window following the outbreak of the pandemic, as the company furthermore announced a very ill-timed $122 million deal for EOS in February 2020, although that deal was terminated a few weeks later, only to go through late in the year.

As it turned out, the company has seen a big recovery in the results throughout 2020, as the company ended the year with a run rate of $180 million in sales, albeit still accompanied by a big operating loss which was reported at $50 million a year. This triggered a big rally with shares rising to $17 in the spring of 2021, as valuation rose to $1.1 billion depending on which share count one is looking at. This resulted in a complicated setup with commercial traction being strong, revenue multiples at 5 times looking reasonable, yet losses still apparent.

The company guided for 2021 revenues at $178 million as first quarter revenues of $44 million were still accompanied by a big $19 million operating loss. Given the height of the losses, and thus the cash burn rate, I was cautious as expectations had risen a bit. Given all these developments, I was cautious at $14 per share, given the inherent uncertainty of continued cash burn.

What Happened?

Since the summer of last year, shares have gradually been falling towards the $7 per share mark. In January, Alphatec provided preliminary 2021 results with product revenues seen at $242 million, ahead of the original guidance. The company guided for 2020 revenues at $305 million, including a $45 million revenue component from the acquired EOS activities.

On the first day of March, the company posted 2021 revenues at $243 million as the company posted a big operating loss of $128 million, and even if I adjust for litigation, amortization, transaction expenses and restructuring efforts, operating losses still trend around a hundred million which is a huge amount. With 100 million shares trading around the $10 mark, the billion market valuation includes a $187 million cash position, although the company has been incurring some (convertible) debt as well. So, basically, it is the same story all over again, as commercial traction is strong in the sense of sales growth, with no operating leverage demonstrated upon, in fact, the opposite.

In May, the company posted its first quarter results with revenues increasing 61% to $71 million, triggering the company into hiking the full year sales guidance to $316 million. That was about the good news as a GAAP operating loss of $41 million continues to increase in absolute terms, but is not really coming down on a relative basis. Investors realize this as well as shares are down to $7, translating into a $700 million equity valuation, although net debt comes in around $200 million already, for a $900 million enterprise valuation. This valuation reveals a mere 3 times sales multiple is applied to the business yet continued dilution has a big impact as a result of the big operating losses incurred along the way.

While the company claims to become more disciplined with regard to operating leverage in the years following, these are just promises right now. Given these observations, I can only conclude that further and continued commercial traction is seen, unfortunately, not accompanied by operating leverage. This is a real issue as the cash burn is big, and the lower share price makes dilution only more expensive here, with few financing options on the table. After all, a 3 times sales multiple for a medtech player, while this growth profile is quite interesting, there is something wrong with the margin profile, and lack thereof, leaving me to watch the action unfold from the sidelines here.

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