2023-05-08 04:30:43 ET
Summary
- Alphatec continues to see strong growth in the spine market.
- Sales growth is to be applauded, but margins remain the issue, with no progress seen on this front.
- The continued dilution and increasing net debt make me cautious even as investors are upbeat here.
In October, I concluded that shares of Alphatec ( ATEC ) did not have my back yet. The company has seen solid growth in its spine business, and while strong topline sales growth was encouraging, I was a bit hesitant amidst lack of margin developments amidst steep losses being reported.
Given this dynamic, I was anxious to learn more about the margin developments, giving the company a prominent place on my watch list.
All About The Spine
Alphatec is a relatively smaller medtech player which operates in a global spine business, a market dominated by giants like Stryker ( SYK ) , Medtronic ( MDT ) and Zimmer ( ZBH ) , among others. The promise of a small and disruptive player fighting off these incumbent players is interesting to follow of course.
The business went public back in 2006 at just $9 per share. At the time posting revenues around $200 million, the issue was that continued losses were reported, triggering a strategic reset. This was a huge gamble as shares fell to just $1 per share late in the 2010s as revenues fell below the hundred million mark.
The breakthrough came when the FDA approved the SafeOp neuromonitoring system for real-time intraoperative nerve location. That allowed revenues to rise 24% to $113 million, although that an operating loss of $47 million was steep by all means.
Shares rose to a high of $18 per share early in 2021 as momentum was strong. Later it became evident that 2021 revenues rose to $243 million having doubled in just a couple of years, albeit that operating losses of $128 million were substantial. The huge sales growth number in relation to reasonable sales multiples looked interesting, but the burn rate remained significant by all means. This was picked up by other investors as well as shares fell to the $10 mark early in 2022, traded at just $6 in the summer and traded at $9 when I picked up coverage again in October last year.
With a $1.2 billion enterprise valuation at $9, I was a bit cautious even as sales were trending at $360 million a year. Losses continued to be reported at a run rate of around $140 million, still $100 million if we exclude amortization charges and litigation charges. Quite frankly, I need to see some margin improvements before getting upbeat as the loss rate was substantial.
Shares Have Taken Off
Since October shares have seen a big rally from $9 to $15 per share at this point in time, as shares have moved up in a rather gradual fashion. By February shares had risen to the $15 mark already as the company reported a 44% increase in full year sale to $351 million, on which a GAAP operating loss of $147 million was reported.
Fourth quarter revenues rose to nearly $106 million with some operating leverage seen as operating losses improved a bit to $35 million. The company guided for 2023 revenues to rise by about 25% to approximately $438 million. That actually did not look that convincing to me as the fourth quarter revenue number already trended at $424 million, albeit that the fourth quarter is typically seasonally stronger. Continued dilution made that the share count has risen to 106 million shares, which at $15 works down to a $1.6 billion equity valuation.
In April, Alphatec announced the acquisition of the assets associated to REMI Robotic in a $55 million deal. The deal seems to be driven to add more capabilities in the area of deep navigation, integrating this with robotics spine procedures. The company furthermore reported preliminary first quarter sales of $108.0-$109.5 million, seeing full year sales now up to $450 million. In connection to the deal the company announced a $60 million equity issuance at $14 per share to finance the deal (and a little more).
In May the company posted first quarter sales of $109 million which is not a surprise given the pre-announcement. I guess it was discomforting to see operating losses again being posted at $40 million, increasing a bit on a sequential basis. Moreover, no great improvements are seen on this front as the company posted an adjusted EBITDA loss of $5 million for the quarter, while targeting a break-even result for the year. That suggests that investors should still look ¨forward¨ to operating losses in excess of a hundred million this year.
The company has seen continued dilution, now reporting a share count of 110 million shares, set to rise further in the second quarter following the REMI deal, as the company furthermore now has taken on $360 million in net debt as well. At these levels the company has a $1.65 billion equity valuation at $15, and a $2.0 billion enterprise valuation. This still results in a 4.5 times forward sales multiples, which still sounds reasonable given the pace of topline sales growth, but the losses remain very steep.
Not Backing Here
I have to reiterate my October takeaway. While I continue to be impressed with the topline sales momentum, the same cannot be said for the margins, as net debt continues to increase and costs to service debt will increase more rapidly as well. That is still not concerning investors who enjoy and like the topline sales growth, but I continue to be a bit cautious here for the same reasons.
For further details see:
Alphatec: A Balancing Act