I have discussed Alphatec Holdings, Inc. (NASDAQ:ATEC) previously, so investors should view this article as an update to my earlier coverage of the company.
Introduction / Discussion Of Past Performance
Alphatec Holdings, Inc. or “ATEC” is a medical technology company that designs, develops, and advances technologies for the surgical treatment of spinal disorders.
In recent years, ATEC has outperformed expectations on a regular basis and successfully grown market share.
I have been positive on the company in the past already and while the share price is up nicely since that time, the stock has been very volatile:
In fact, without the 90% rally over the past three months, my advice would have resulted in substantial losses for investors.
Growth Story Continues
2023 has been another year of strong growth for the company, with revenues growing by 37% year-over-year to $482 million, well above management’s initial guidance of $438 million provided in the Q4/2022 earnings release.
Capitalizing On Disruptions At Key Competitors
According to statements made by management on the recent Q3 conference call, the company is benefiting from disruptions currently experienced by key competitors following significant M&A activity over the past year:
- The merger of Orthofix Medical Inc. (OFIX) or “Orthofix” and SeaSpine Holdings Corporation in Q1/2023.
- The acquisition of NuVasive, Inc. by Globus Medical, Inc. (GMED) in Q3/2023.
- The recently announced sale of the ZimVie Inc. (ZIMV) spine operations to private equity firm H.I.G. Capital.
Particularly Orthofix has experienced some major turmoil as of late, with full year 2023 results falling short of initial expectations and a number of senior officers having been terminated for alleged misconduct.
According to management, more than 35% of the U.S. market is currently subject to disruptions from the M&A activity discussed above, thus providing substantial opportunities for ATEC to grab additional market share.
We think all of these things are opportunities for us to ultimately capitalize on. And so we have already added 30 professionals and we will continue to be disrupted as it relates to the expansion of a more informed team. And so we will boldly lean into an unprecedented opportunity and wanted to provide a little bit of clarity just in terms of historically how we used to have to compete in a more of a conventional market, and it was more of a 1 by 1 by 1. It was a very gradual linear sales talent onboarding. And so – and then it was a linear investment in revenue-generating assets.
With this market disruption, we think it served us up really an unbelievable opportunity. And now the opportunity is completely different and it’s non-linear, both from a talent onboarding perspective as well as an investment profile of revenue-generating assets. So the opportunity is palpable. We cannot be more excited.
Persistent Sales Outperformance But Cash Usage Continues
However, based on the company’s initial 2024 guidance, year-over-year growth is expected to moderate from 37% to 24%, but ATEC has a history of beating estimates and raising expectations over the course of the year.
While the company recently achieved profitability on an Adjusted EBITDA basis, cash flow from operations continues to be materially negative:
However, management claims the majority of cash being used for investments in revenue generating assets like instruments and inventory. ATEC expects to turn cash flow positive in 2025:
Debt Obligations Should Not Be An Issue
So far, the company has been able to finance its growth with a combination of equity and debt. In late October, ATEC issued another 14.3 million shares at $10.50 for gross proceeds of $150.1 million in a somewhat ill-timed secondary offering. Over the past two years alone, common equity holders have been diluted by almost 30%.
As a result, I would expect the company’s year-end cash balances to exceed $250 million and while ATEC has outstanding debt principal of approximately $523 million, the company is not facing any near-term maturities.
Approximately 60% of the company’s debt is in the form of 0.75% Convertible Senior Notes, which are convertible into new common stock at the option of the holder at a conversion price of $18.34 per share starting February 2, 2026.
Absent further material acquisitions, ATEC’s existing cash on hand should be sufficient for achieving cash flow break even without further diluting common shareholders.
Should the company continue to outperform expectations, the convertible notes are likely to convert into common stock in 2026 thus leaving ATEC with very manageable debt of slightly above $200 million.
Please note that the company has entered into capped call transactions with certain financial institutions to reduce potential dilution and/or offset any cash payments in excess of the principal amount should ATEC opt for cash redemption of the notes.
Analysts Remain Constructive
With analysts generally positive about prospects for medtech companies this year and ATEC growing fast in an overall stable market, I would expect the stock to outperform peers, particularly with profitability and cash flow metrics expected to improve quite meaningfully over the course of this year.
Last week, Wells Fargo initiated coverage of the company with an “Overweight” rating and $26 price target, based on expectations for the company to deliver growth ahead of competition and upside to initial 2024 projections.
According to TipRanks, the average 12-month price target of recent analyst calls calculates to $23:
Valuation And Price Target
On the Q3 conference call, management projected Adjusted EBITDA to reach $85 million next year. While the resulting Enterprise Value/EBITDA multiple of approximately 30x remains well above the industry average. However, considering the company’s industry-leading growth rate, I would expect profitability metrics to improve considerably over the next couple of years.
In addition, the company’s price/sales multiple of approximately 4x based on 2024 revenue expectations looks very reasonable and actually close to proven industry leaders like Medtronic (MDT) which is far more profitable but on the flip side lacks ATEC’s superior growth rates.
Assigning a still moderate 5x price/sales multiple would yield a $22 price target based on the company’s initial 2024 revenue projections.
ATEC will provide an update on its long-range plan next month, which should help modeling the company’s earnings trajectory going forward.
While I consider ATEC a very promising growth investment, the easy money appears to have been made over the past three months, with shares up 90% from recent lows.
However, I would still consider accumulating the shares on weakness, as I expect the company to continue its streak of beat-and-raise quarters in 2024 and abstain from further equity raises for the time being.
Alphatec Holdings continues to execute well and take share in the $8 billion U.S. spinal disorder treatment market. Going forward, the company expects sales to benefit from recent disruptions at key competitors and ATEC’s substantial investments in instruments and inventories.
However, cash usage is expected to continue in 2024, but following the most recent capital raise, the company should easily bridge the gap to projected free cash flow generation next year.
While ATEC has accumulated more than $500 million in debt in recent years, the company does not face any near-term debt maturities and with 60% of the debt likely to convert to equity in 2026, I do not expect ATEC’s debt obligations to be an issue going forward.
While I am somewhat hesitant to pound the table for the stock following the 90% rally from recent lows, I would consider accumulating shares on any major weakness.
For now, I am reiterating my “Buy” rating on the shares with a twelve-month price target of $22, based on 5x projected 2024 sales.