All Alphatec Spine needs is Time!

Alphatec Holdings (NASDAQ:ATEC), is a perfect example of a high reward, high risk investment opportunity. There is a ton of debt on the balance sheet, that needs to get refinanced in the next 3-4 months, and the company is still unprofitable on an EPS basis. However, the company is very close to being at breakeven stage and if they get their loan refinanced, it will buy the company more time to continue its cost cutting and restructuring programs. All ATEC needs is time!

ATEC was founded in 1990 and since the founding, they have been working to deliver advancements in spinal fusion technology. Thus they are focused on improving the lives of customers via spinal fusion treatments. More importantly, the company is focused on designing, developing, manufacturing and marketing products for the surgical treatment of spinal disorders. In 2014, domestic and international revenues made up 66% and 34% of consolidated net sales, respectively.

The products ATEC sells are for the cervical, thoracolumbar and intervertebral regions of the spine. Not only do they address these key sections of the spine, but there are also products focused directly on spinal disorders and other spinal surgical procedures. What drives demand for ATEC’s products is that surgeons across the globe are looking for better outcomes from their patients. Thus, if a product such as the Arsenal Spinal Fixation System, can improve a patient’s life after surgery by 1%, surgeons across the globe will drive demand.

If we take a look at the Avalon Occipital Fixation System we can see that it provides surgeons the ability to more accurately place and secure bone graft. The former allows for superior fusion thus providing more stability after the surgery. If you are interested in reading about more of ATEC’s products, I would suggest checking out this link here.

According to Chris Woolston, M.S., ~500,000 Americans undergo back surgery every year, just for lower back problems. Not only that but according to the Agency for Healthcare Research and Quality, America spends ~$11bn each year just to get rid of back pain. If you browse the web, you can see that there are tons of studies that show that individuals across the globe have issues with their back. For an example, it was found that 1/3 of people who are 50+ have an ongoing back or neck pain. Finally, there is a higher chance of an individual getting chronic back pain and thus undergoing surgery if they have a higher BMI. It’s sad to say, but the obesity epidemic in America will continue driving demand for ATEC’s products.

Overall, there will be an ever increasing demand for ATEC’s products as long as spinal issues continue to be a problem in the global society (which in my opinion will continue going forward). Back pain will continue being an epidemic in America and internationally, unless an innovator/entrepreneur comes out with a genius idea, which will most likely be way down the road from now.

What Will Happen Going Forward?

Management is currently focused on launching/already selling new products that will hopefully deliver solid revenues and earnings going forward. These products are; Arsenal Posterior Spinal Fixation system, Arsenal Cortical Bone Fixation, Battalion Titanium-Coated PEEK Interbody System, Deformity and Lateral Products, and the Neocore Osteoconductive Matrix. The markets for these products exist and can become very good contributors to ATEC’s top and bottom line going forward. Marketing these products will be done domestically and internationally. As of the last few quarters, the company has been focused on recruiting very experienced sales reps to enhance its top line (management expects to generate at least $3mm in revenues from new markets, domestically in Q4).

Management is currently focused on the cost structure and balance sheet improvements. If you have been following ATEC for some time now, you should know that they recently restructured the Scient’x operations in France. The restructuring of the Scient’x facility/operations is complete and now they are restructuring its manufacturing facility in California. The end goal is to outsource all manufacturing and distribution.

So far the manufacturing/distribution outsourcing plan is in action. In Q3, there was a 50% reduction in our Arsenal instrument costs due to the outsourcing. Management plans on extending this cost reduction strategy to their Battalion and the new Titanium-Coated Interbody platform in due time. The end goal is a 50% reduction in all instrument costs.

Management plans for the outsourcing and restructuring to be complete by January of 2016. However, investors should realize that as of Q3, the company had ~$42mm in inventory that will need to be sold off before they will realize the full benefits of the outsourcing program. Thus far, the company has come a long way and they broke-even in Q3 (if we leave out impairments on goodwill).

What is holding the company back right now is the debt obligation that is due in 2016. If the company refinances the loan, they will have plenty of time to continue the cost structure, improve the balance sheet and start to post profits. If the company is successful in refinancing, the risks of an investment will lower.

If the debt does get restructured, it is very possible for the company to break-even due to their cost cutting program. Breaking even and continuing to post profits will move the stock price up much further due to the value of the business improving.

SOURCE: Seeking Alpha. Article based on Nicholas Bodnar original Article.