In May, I urged a few words of caution as continued losses were causing continued dilution in the case of Alphatec Holdings, Inc. (ATEC). A focus on growth rather than margin improvements resulted in continued losses, with no shareholder value to be created as debt kept increasing, while dilution was incurred.
After a relatively non-eventful second quarter, which was accompanied even by a hike in the full-year guidance, shares have sold off some 40% in the time frame of just a few days. While top-line growth and low sales multiples look compelling, it is these losses, cash burn, net debt, and few options to finance this “growth” that make investors rightfully worried.
Growth In The Spine
Alphatec is a smaller medtech player that focuses on the spine, active in many subsegments, competing against huge and established competitors. This includes generic players like Medtronic plc (MDT) and Johnson & Johnson (JNJ) as well as more focused players like Globus Medical, Inc. (GMED), among others.
The company went public at $9 per share in 2006, with the business generating about $200 million in sales at the time. Continued losses made that shares fell to the $1 mark in the 2010s. A reset in the business made those losses shrink, as the same applied to sales. With growth and margins recovering, shares rallied back to the high teens in both 2021 and 2023.
After the strategic reset, the company found some operating momentum again, but this was once more accompanied by substantial losses. For the year 2022, the company grew sales by 44% to $451 million, with operating losses increasing to $147 million. 2023 revenues rose by 37% to $482 million, as operating losses actually rose to $173 million (of which roughly half was generated from stock-based compensation expenses).
While the company guided for 2024 revenues to rise to $595 million, the progress on the bottom line was less impressive. While the company guided for a positive adjusted EBITDA number of around $22 million in 2024, and this would mark a big improvement from a $9 million loss on this metric in 2023, it still yielded a big net loss. This created a tough setup as the company has seen net debt tick up to $327 million, while the shares count has risen to 133 million shares.
In May, shares fell to the $11 mark after first quarter sales rose by 27% to $138 million, with operating losses increasing slightly on an absolute basis to $43 million. This negative share price reaction came as the company increased the full year sales guidance to $601 million, with EBITDA seen at $23 million. This beat was minimal, as continued dilution increased the share count to 141 million shares as net debt ticked up to $402 million.
Even if Alphatec Holdings, Inc. could meet its 2027 targets, calling for a billion in revenues and $180 million in EBITDA, losses would likely still be huge. This observation made me disappointed with management and the shares, as sales growth and low sales multiple looks appealing on paper, yet heavy losses and continued dilution would eat severely from investors here.
A Massive Setback
Investors had to digest a massive setback in July as shares fell from $10 to $6 in just two trading sessions after the company released its second quarter results. Total revenues rose by 25% to nearly $146 million, as GAAP operating losses actually narrowed to $35 million, with the company posting adjusted EBITDA of $5.5 million for the quarter.
The company actually increased the full-year sales guidance by a million to $602 million, while seeing a $2.5 million improvement in adjusted EBITDA to $25.5 million. Frankly, this was quite a typical report for Alphatec, as there were few reasons to explain the massive sell-off based on the report, apart from the company mentioning a need for higher capital spending, to the tune of $25 million.
A current share count of 142 million shares, as well as a net debt load of $431 million, now represents a roughly $1.3 billion enterprise valuation. This is equivalent to just over 2 times sales, which is a low multiple for a medical device name, certainly given the 25% revenue growth.
The issue is that dilution is super expensive at current low share price levels, as net debt continues to increase, even if the company targets free cash flows by 2025.
Some Final Words
Frankly, the share price reaction seems like a gigantic overreaction, with shares down 40% to a news report which was largely in line with expectations. The issue is that the investment story was challenged from the start, as outlined in May.
Moreover, the low share price means that real returns from investors now have to come from execution, or potentially even M&A action (on the sell-side) with capital-raising options here being very limited.
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